As filed with the Securities and Exchange Commission on January 26, 2000
REGISTRATION NO. 333-88017
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDEMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN TISSUE INC.
(Exact name of registrant as specified in its charter)
Delaware 2621 22-3601876
(State or other jurisdiction of (Primary S.I.C. (I.R.S. Employer
Incorporation or organization) Code Number) Identification No.)
and the additional registrants listed on
Schedules A and B hereto, each a Subsidiary Guarantor
135 Engineers Road
Hauppauge, New York 11788
(516) 435-9000
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
------------------------
Edward I. Stein
Executive Vice President
and Chief Financial Officer
135 Engineers Road
Hauppauge, New York 11788
(516) 435-9000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
copies to:
Nicholas J. Kaiser, Esq.
Mandel & Resnik P.C.
220 East 42nd Street
New York, New York 10017
(212) 573-0093
------------------------
<PAGE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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 this registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
SCHEDULE A
Corporate Subsidiary Guarantors
<TABLE>
<CAPTION>
State or Other
Jurisdiction of
Name of Registrant as Specified Incorporation or Primary S.I.C. I.R.S. Employer
in its Charter Organization Code No. Identification No.
- ---------------------------------------------- ---------------- -------------- ------------------
<S> <C> <C> <C>
American Tissue Corporation New York 2679 11-2581696
American Cellulose Mill Corp. New York 2621 14-1662473
American Tissue Mills of New Hampshire, Inc. New York 2621 11-3207742
American Tissue Mills of New York, Inc. New York 2621 11-3237164
American Tissue Mills of Oregon, Inc. New York 2621 11-3128800
American Tissue Mills of Wisconsin, Inc. New York 2621 11-3200361
American Tissue - New Hampshire Electric, Inc. New Hampshire 4911 02-0267018
Berlin Mills Railway, Inc. New Hampshire 6517 38-1906080
Gilpin Realty Corp. New York 6519 11-3307581
Tagsons Papers, Inc. New York 2621 11-3206044
</TABLE>
<PAGE>
SCHEDULE B
Limited Liability Company Guarantors
<TABLE>
<CAPTION>
State or Other
Jurisdiction of
Name of Registrant as Specified Incorporation or Primary S.I.C. I.R.S. Employer
in its Charter Organization Code No. Identification No.
- ---------------------------------------------- ---------------- -------------- ------------------
<S> <C> <C> <C>
American Tissue Mills of Greenwich LLC New York 2621 11-3322564
American Mills of Neenah LLC New York 2621 13-3333241
Calexico Tissue Company LLC New York 2679 11-3358355
Coram Realty LLC New York 6519 11-3351366
Engineers Road, LLC New York 6519 11-3301000
Grand LLC New York 6519 11-3078510
Hydro of America LLC Delaware 4911 11-3486634
Landfill of America LLC Delaware 4953 11-3486638
Markwood LLC New York 6519 11-3507579
100 Realty Management LLC New York 6519 11-3373587
Paper of America LLC Delaware 2621 11-3486633
Pulp & Paper of America LLC New York 2621 11-3485021
Pulp of America LLC Delaware 2611 11-3486632
Railway of America LLC Delaware 6517 02-0509929
Saratoga Realty LLC New York 6519 11-3378103
Unique Financing LLC New York 7359 11-3331213
</TABLE>
<PAGE>
Subject to completion, dated , 2000
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Prospectus
, 2000
American Tissue Inc.
Offer for all outstanding 12 1/2% Series A Senior Secured Notes due 2006 in
exchange for 12 1/2% Series B Senior Secured Notes Due 2006.
The exchange offer will expire at 5:00 p.m., New York City time on _______ 2000,
unless extended.
- --------------------------------------------------------------------------------
We will not receive any proceeds from the exchange of these notes.
The Company:
o We are an integrated manufacturer of tissue and uncoated freesheet
paper products, with a comprehensive product line that includes
finished tissue products, jumbo tissue rolls used in the manufacture
of finished tissue products and and uncoated freesheet paper products
for printing writing and publishing applications.
o American Tissue Inc.
135 Engineers Road
Hauppage, New York 11788
(516) 435-9000
The Exchange Offer:
o Offer for $165,000,000 face amount of outstanding 12 1/2% Series A
Senior Secured Notes due 2006 in exchange for the same face amount of
12 1/2% Series B Senior Secured Notes due 2006.
o The terms of the exchange notes are identical in all material respects
to the terms of the outstanding old notes, except various transfer
restrictions and registration rights relating to the old notes do not
apply to the exchange notes.
Proposed Trading Format:
o The PORTAL MARKET or directly with qualified buyers.
- --------------------------------------------------------------------------------
This investment involves risk. See "Risk Factors" beginning on page 14.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the exchange notes or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
i
<PAGE>
This prospectus incorporates by reference documents that are not contained
in or delivered with this prospectus. These documents are available without
charge from Edward I. Stein, Executive Vice President and Chief Financial
Officer, at American Tissue Inc., 135 Engineers Road, Hauppauge, New York 11788,
telephone number (516) 435-9000. To ensure timely delivery of documents, any
request should be made by ________, 2000.
TABLE OF CONTENTS
Page
Prospectus Summary........................................................... 1
Risk Factors................................................................. 14
The Exchange Offer........................................................... 27
Use of Proceeds.............................................................. 37
Capitalization............................................................... 37
Unaudited Pro Forma Consolidated Financial Data.............................. 38
Selected Historical Financial Data........................................... 41
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 44
Industry Overview............................................................ 58
Business..................................................................... 61
Management................................................................... 75
Principal Stockholders....................................................... 78
Related Party Transactions................................................... 80
Description of Material Indebtedness......................................... 84
Description of Exchange Notes................................................ 87
Material United States Income Tax Consequences...............................141
Plan of Distribution.........................................................144
Legal Matters................................................................145
Experts......................................................................145
Independent Auditors.........................................................146
Available Information........................................................146
Index to Financial Statements................................................F-1
MARKET AND INDUSTRY DATA
Market data and various industry forecasts used throughout this prospectus
were obtained from internal surveys, publicly available information and industry
publications. Industry publications generally state that the information
contained therein has been obtained from sources believed to be reliable, but
that the accuracy and completeness of such information is not guaranteed.
Similarly, internal surveys, industry forecasts and market research, while
believed to be reliable, have not been independently verified.
ii
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of the more detailed information appearing
elsewhere in this prospectus. This prospectus includes the specific terms of the
exchange offer and the exchange notes we are offering, as well as information
regarding our business and detailed financial data. You should read the entire
prospectus, including "Risk Factors" and the financial statements and the notes
to these financial statements.
Unless the context otherwise requires, "we," "our," or "us," as well as
"American Tissue," refer to American Tissue Inc. and all of our consolidated
subsidiaries. References to the "old notes" are to our outstanding 12 1/2%
series A senior secured notes and references to the "exchange notes" are to our
12 1/2% series B senior secured notes offered hereby. References to the "Notes"
are to the old notes and the exchange notes collectively.
THE OLD NOTE OFFERING
Old Notes .......................... We sold the old notes in a private
offering on July 9, 1999. The initial
purchaser of the old notes informed us
that it promptly resold the old notes to
qualified institutional buyers pursuant
to Rule 144A under the Securities Act.
Registration Rights
Agreement........................... We and the initial purchaser of the old
notes entered into a registration rights
agreement on July 9, 1999. This
agreement grants exchange and
registration rights to holders of the
old notes. This exchange offer is
intended to satisfy these rights, which
terminate upon the consummation of the
exchange offer.
THE EXCHANGE OFFER
Securities Offered ................. Up to $165,000,000 principal amount of
12 1/2% series B senior secured notes
due 2006. The terms of the exchange
notes are identical in all material
respects to the old notes, except
various transfer restrictions and
registration rights relating to the old
notes do not apply to the exchange
notes.
The Exchange Offer ................. We are offering to exchange the exchange
notes for the old notes. You may tender
your old notes by following the
procedures described in this prospectus
under the heading "The Exchange Offer."
Expiration Date .................... Our exchange offer will expire at 5:00
p.m., New York City time, on ____, 2000,
unless we extend it.
Withdrawal Rights .................. You may withdraw your tender of old
notes at any time prior to the
expiration date. Any old notes not
accepted by us for exchange for any
reason will be returned to you without
expense as promptly as possible.
Conditions of the
Exchange Offer...................... The exchange offer is subject to
customary conditions, which we may
<PAGE>
waive. Please read "The Exchange Offer--
Conditions to the Exchange Offer"
section of this prospectus for more
information regarding conditions of the
exchange offer.
Procedures for Tendering
Old Notes........................... Each holder of old notes wishing to
accept our exchange offer must either:
(a) complete, sign and date the
accompanying letter of
transmittal, or a facsimile
copy, and mail or otherwise
deliver the letter of
transmittal, or a facsimile
copy, together with your old
notes and any other required
documents, to the exchange
agent at the address shown
under "The Exchange Offer --
Exchange Agent;" or
(b) in connection with a
book-entry transfer of old
notes, arrange for The
Depository Trust Company to
transmit the required
information to our exchange
agent.
By tendering your old notes in this
manner, you will be representing, among
other things, that:
o the exchange notes being
acquired by you in the
exchange offer are being
acquired in the ordinary
course of your business;
o 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 issued to you in our
exchange offer; and
o you are not our "affiliate."
Federal Income Tax
Consequences........................ Your exchange of the old notes for the
exchange notes in accordance with the
exchange offer will not result in any
gain or loss to you for federal income
tax purposes. See the "Material United
States Income Tax Consequences" section
of this prospectus for information as to
the federal income consequences to the
holders of the exchange notes resulting
from the old notes having been issued
with original issue discount.
Consequences of Failure
to Exchange......................... Old notes that are not tendered or that
are tendered, but not accepted, will be
subject to the existing transfer
restrictions on the old notes after the
exchange offer. We will have no further
obligation, subject to the exceptions
discussed under "The Exchange Offer--
Shelf Registration Statement" section of
this prospectus, to register the old
notes. If you do not participate in our
exchange offer, the liquidity of your
old notes could be adversely affected.
See "Risk Factors - You Will Be Subject
To Adverse Consequences If You Do Not
Exchange Your Old Notes."
Procedures for Beneficial
Owners.............................. If you are a beneficial owner of old
notes registered in the name of a
broker, dealer or other nominee and you
wish to tender your old notes, you
should contact the person in whose name
your old notes are registered and
promptly instruct the person to tender
those old notes on your behalf.
Guaranteed Delivery
Procedures.......................... If you wish to tender your old notes and
time will not permit your required
2
<PAGE>
documents to reach our exchange agent by
the expiration date, or the procedure
for book-entry transfer cannot be
completed on time, you may tender your
old notes according to the guaranteed
delivery procedures. See "The Exchange
Offer--Guaranteed Delivery Procedures."
Acceptance of Old Notes;
Delivery of Exchange Notes.......... Subject to the conditions set forth in
"The Exchange Offer-- Conditions to the
Exchange Offer" section of this
prospectus, we will accept old notes
which are properly tendered in our
exchange offer
-3-
<PAGE>
and are not withdrawn before the
expiration date of our exchange offer.
The exchange notes will be delivered as
promptly as practicable following the
expiration date.
Use of Proceeds .................... We will not receive any proceeds from
the exchange offer.
Exchange Agent ..................... The Chase Manhattan Bank is the exchange
agent for our exchange offer.
EXCHANGE NOTES
The terms of the exchange notes are identical in all material respects to
the terms of the old notes, except that various transfer restrictions and
registration rights relating to the old notes do not apply to the exchange
notes.
Total Amount of
Exchange Notes...................... Up to $165,000,000 face amount of our
12 1/2% series B senior secured notes
due 2006.
Maturity Date....................... July 15, 2006.
Interest............................ The exchange notes will bear interest at
the rate of 12 1/2% per annum, payable
every six months in cash on January 15
and July 15, commencing January 15,
2000.
Optional Redemption................. We may redeem the exchange notes, in
whole or in part, on or after July 15,
2004, at the redemption prices set forth
in the "Description of Exchange Notes--
Optional Redemption" section of this
prospectus, plus accrued and unpaid
interest. In addition, before July 15,
2002, we may redeem up to 35% of the
Notes at 113.25% of their principal
amount, plus accrued and unpaid
interest, with the net cash proceeds of
sales of our common stock in one or more
underwritten public offerings of our
common stock. If less than 65% of the
Notes will remain outstanding
immediately after the redemption, we may
not redeem the exchange notes. In
addition, to carryout the redemption
with the net cash proceeds of an
underwritten offering of our common
stock, we must redeem the exchange notes
no later than 90 days after the
consummation of any offering of our
common stock. See "Description of
Exchange Notes--Optional Redemption."
Repurchase Obligations.............. If we sell assets under the
circumstances described in the
"Description of Exchange Notes-- Assets
Sales" section of this prospectus or if
events deemed to be change of control
events occur, each holder of the
exchange notes may require us to
repurchase all or a portion of its
exchange notes at 101%,100%, in the
case of an asset sale, of the principal
amount of its exchange notes, plus
accrued and unpaid interest. See
"Description of Exchange Notes--
Covenants-- Asset Sales" and
"--Change of Control."
Subsidiary Guarantees............... The exchange notes will be fully and
unconditionally guaranteed on a senior
secured basis by each subsidiary
guarantor. Each subsidiary guarantor is
our wholly-owned subsidiary. All of our
subsidiaries, other than one foreign
subsidiary, are subsidiary guarantors.
All of our future domestic subsidiaries,
other than those which we may designate
as a "receivables subsidiary" or an
"unrestricted subsidiary," are
-4-
<PAGE>
required to guarantee the exchange
notes. If we cannot make payments on the
exchange notes, the subsidiary
guarantors must make them instead. See
"Description of Exchange Notes--
Material Covenants-- Additional
Subsidiary Guarantees."
Our subsidiary guarantor, American
Tissue Corporation, and nine of our
other subsidiary guarantors are also
jointly and severally liable on a senior
secured basis for obligations arising
under our new revolving credit facility.
These obligations are secured by a
first priority lien in favor of the
lenders under our new revolving credit
facility in the inventory, accounts
receivable and the related general
intangibles of these subsidiary
guarantors. These assets will also
secure the exchange notes on a second
priority lien basis.
Collateral.......................... The exchange notes will be secured by a
first priority lien on, among other
things, all of the paper mill plant and
property, including the Berlin-Gorham
Mills, substantially all of the
equipment, intellectual property and
related general intangibles of our
subsidiary guarantors and all of the
stock and membership interests of each
of our subsidiary guarantors. In
addition, the exchange notes will be
secured by second priority liens on,
among other things, other real property,
accounts receivable, inventory and
related general intangibles of our
subsidiary guarantors. See "Risk
Factors-- The Value Of Your Security
Interest In The Collateral Is Uncertain"
and "Description of Exchange Notes--
Ranking and Security."
Ranking............................. The exchange notes and the subsidiary
guarantees will be senior secured
obligations as to us and the subsidiary
guarantors, as are the old notes and the
related guarantees.
They rank:
o effectively ahead of all of
our and our subsidiary
guarantors' existing and
future senior unsecured debt
and junior debt;
o to extent permitted by the
indenture relating to the
exchange notes, effectively
behind all of our and our
subsidiary guarantors'
existing and future secured
debt to the extent of any
assets serving as collateral
for such debt;
o equal, in right of payment,
with all of our and our
subsidiary guarantors'
existing and future
unsubordinated debt; and
o ahead, in right of payment, of
any of our or our subsidiary
guarantors' debt that is
subordinated to the exchange
notes.
As of December 31, 1999, our total
consolidated debt, including the old
notes, was approximately $253.7 million,
including approximatley $68.4 million
under our new revolving credit facility,
excluding unused commitments of
approximately $31.6 million, and
approximately $25.6 million of mortgage
and other debt.
Material Covenants.................. The indenture governing the exchange
notes contains covenants that will,
among other things, limit our ability
and the ability of our subsidiaries,
other than those subsidiaries designated
by us as
-5-
<PAGE>
receivables subsidiaries or unrestricted
subsidiaries as permitted by the
indenture, to:
o pay dividends on, redeem or
repurchase our capital stock;
o make specified loans and
investments;
o incur additional indebtedness;
o permit payment or dividend
restrictions on certain of our
subsidiaries that are not
unrestricted subsidiaries;
o sell assets;
o create liens;
o engage in transactions with
affiliates;
o consolidate, merge or sell all
or substantially all of our
assets and the assets of our
subsidiaries; and
o prepay, redeem or purchase
debt.
All of these covenants, including
important exceptions to, and
qualifications of, the terms of these
covenants, are more fully described
under "Description of Exchange Notes --
Covenants."
Transfer Restrictions............... The exchange notes are new securities,
and there is currently no established
market for them. We do not intend to
list the exchange notes on any
securities exchange.
Original Issue Discount............. For U.S. federal income tax purposes,
the exchange notes will be treated as
having been issued with "original issue
discount" equal to the difference
between the face amount of the old notes
and the issue price of the old notes.
See "Material United States Income Tax
Consequences."
-6-
<PAGE>
The following is a diagram of our corporate structure showing our direct
and indirect parents, our direct and indirect subsidiaries and companies that
are our affiliates but are not part of the holding company structure:
<TABLE>
<CAPTION>
Nourollah Elghanayan Mehdi Gabayzadeh
and and
family members family trusts
| |
50% 50%
| |
-----------------------
|
|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
| | | | | | | | | |
| | | | | | | | | |
American American American American Super United American Lakeview Huntington Pheasant
Tissue Tissue Tissue Tissue American States Tissue Real LLC (1) LLC (1)
Mills of Mills de Mills of Mills of Tissue Paper Mills of Estate
Ohio, Mexico Massachusetts, Tennessee Inc. Mills of Maine LLC (1)
Inc.(1) S.A. de Inc. (1) LLC (1) Vermont LLC (1)
C.V.(1) Inc. (1)
| |
88%(2) 100%
| |
Middle American
American Paper
Tissue Mills of
Inc. Vermont
Inc.
|
100%
|
American
Tissue
Inc.
|
100%
|
-----------------------------------------------------------------------------------------------------------------
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
American | American | Tagsons | American | Unique | Gilpin | Grand | Calexico | Saratoga | American
Tissue | Tissue | Papers, | Tissue | Financing | Realty | LLC (3)| Tissue | Realty | Tissue
Corporation | Mills of | Inc.(3)| Mills of | LLC (3) | Corp. | | Company | LLC (3)| Mills of
(3) | Oregon, | | Neenah | | (3) | | LLC (3) | | New
| Inc.(3) | | LLC (3) | | | | | | Hampshire,
| | | | | | | | | Inc.(3)
| | | | | | | | |
| | | | | | | | |
Markwood American American American Pulp & 100 Engineers American Coram
LLC (3) Tissue Tissue Tissue Paper of Realty Road, Celllose Realty
Mills of Mills of Mills of America Management LLC(3) Mill LLC(3)
Wisconsin, New York, Greenwich LLC(3) LLC (3) Corp.(3)
Inc.(3) Inc.(3) LLC(3)
| |
100% ---------------------100%---------------------
| | | | | |
Fabricaciones Railway Paper Pulp Hydro Landfill
Metalicas of of of of of
Mexicanas, America America America America America
S.A. LLC(3) LLC(3) LLC(3) LLC(3) LLC(3)
| |
100% 100%
| |
Berlin American
Mills Tissue-New
Railway, Hampshire
Inc.(3) Electric
Inc.(3)
</TABLE>
- -----------------
(1) These companies are not part of our holding company structure and are
directly owned by our individual and fiduciary stockholders.
(2) See "Principal Stockholders."
(3) These companies are our subsidiary guarantors.
-7-
<PAGE>
An investment in the exchange notes involves a high degree of risk. For a
discussion of various matters that you should consider in connection with the
exchange offer, please read "Risk Factors."
AMERICAN TISSUE
We are an integrated manufacturer of tissue and uncoated freesheet paper
products, with a comprehensive product line that includes finished tissue
products, jumbo tissue rolls used in the manufacture of finished tissue products
and uncoated freesheet paper products for printing, writing and publishing
applications. Since our inception in 1981, we have grown primarily through the
opportunistic acquisition and integration of underperforming paper mills and
converting assets. We currently operate a pulp mill; six paper mills, including
five tissue mills; seven converting facilities; and two printing/packaging
facilities.
Our tissue converting facilities transform jumbo tissue rolls into a wide
range of finished tissue products, such as bath tissue, paper towels, napkins
and facial tissue. We believe that our flexible manufacturing capabilities allow
us to offer a range of products that is broader than that offered by any other
North American tissue producer. We use our internal engineering expertise to
recondition and sell used tissue converting equipment which, in turn, supports
our jumbo roll sales business.
Our principal products and markets are:
o Commercial, "away-from-home," finished tissue products, approximately
35.4% of fiscal 1999 revenues. We sell our away-from-home products
principally to mid-sized paper, foodservice and janitorial supply
distributors, who resell these products to hotels, restaurants,
offices, factories, hospitals, schools and government facilities.
o Consumer, "at-home," finished tissue products, approximately 25.2% of
fiscal 1999 revenues. Our at-home product strategy targets the private
label segment of the at-home market, for which we manufacture products
that range from economy to premium quality grades. "Private label"
refers to products that are marketed under the brand names of
supermarkets or other retail distributors of such products, rather
than the producer of such
-8-
<PAGE>
products.
o Jumbo tissue rolls, approximately 24.1% of fiscal 1999
revenues. We manufacture and sell standard and specialty grades of
jumbo tissue rolls directly to manufacturers of finished tissue
products. The jumbo tissue rolls we sell are generally used by our
domestic customers to manufacture non-competing finished tissue
products. Our strategy is to emphasize stable customer relationships
to sustain a long-term market for our premium quality and specialty
grade jumbo tissue rolls.
o Uncoated freesheet paper products, approximately 9.9% of fiscal 1999
revenues. We manufacture and sell various grades of freesheet paper
for the away-from-home market for printing, writing and publishing
applications to, or through, Crown Paper Co. We also manufacture and
distribute printer, copier and fax paper under our own brand names or
the brand names of our private label away-from-home customers for
resale to small office and home office customers, and specialty papers
for the manufacture of disposable food service papers, such as paper
plates and bags.
o Virgin wood pulp, approximately 4.4% of fiscal 1999 revenues. We
manufacture virgin pulp primarily for our internal use. However, we
sell excess production to other paper companies and, from time to
time, we may opportunistically elect to sell virgin pulp when the
market price for virgin pulp significantly exceeds our cost of
production.
o Reconditioned tissue converting accounted for the remainder of fiscal
1999 revenues.
Acquisition of the Berlin-Gorham Mills
On July 9, 1999, we purchased from Crown Paper the fully integrated pulp
and paper mills located in Berlin and Gorham, New Hampshire and other related
assets, with the exception of cash, cash equivalents, accounts receivable and
other short-term assets. As consideration for this purchase, we paid $45.0
million in cash and assumed contracts with suppliers of raw materials, equipment
maintenance agreements, labor agreements and other ongoing contractual
liabilities related to the assets we acquired.
The Berlin-Gorham Mills include the pulp mill located in Berlin, New
Hampshire, and the paper mill located in Gorham, New Hampshire. The pulp mill
has an annual capacity of approximately 350,000 tons of northern bleached
hardwood and softwood pulp. The paper mill has four paper machines and a
toweling machine. The four paper machines have a total annual capacity of
approximately 179,000 tons of various grades of uncoated freesheet papers. The
toweling machine has an annual capacity of approximately 39,000 tons of
commercial toweling. The Berlin-Gorham Mills also include electric generating
facilities and a solid waste landfill.
-9-
<PAGE>
In connection with the acquisition, we have entered into supply and
marketing agreements with Crown Paper intended to facilitate our entrance into
the uncoated freesheet paper business, facilitate the integration of the pulp
and paper making operations of the Berlin-Gorham Mills with our existing
operations and give us sufficient time to establish our own marketing capability
in the uncoated freesheet paper market. See "Business -- Berlin-Gorham Mills
Acquisition."
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(dollars in thousands)
The following sets forth for American Tissue and the Berlin-Gorham Mills:
o summary consolidated balance sheet data at September 30, 1999; and
o summary unaudited pro forma consolidated operating data for the fiscal
year ended September 30, 1999.
The consolidated balance sheet data at September 30, 1999 reflects a number
of transactions that occurred on July 9,1999. These transactions consisted of
the repayment of our then outstanding debt, our acquisition of the Berlin-Gorham
Mills, the closing of our $100.0 million new revolving credit facility, an
equity contribution from our direct parent and the offering of the old notes.
The pro forma consolidated operating data for the fiscal year ended September
30, 1999 gives effect to these transactions as if they had occurred on October
1, 1998.
The following information should be read in conjunction with "Unaudited Pro
Forma Consolidated Financial Data," "Selected Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of American Tissue and the
notes to these consolidated financial statements and the financial statements of
the Berlin-Gorham Mills and the notes to these financial statements, included
elsewhere in this prospectus.
Fiscal Year Ended
September 30,
1999(1)
----------------------
Pro Forma Statement of Operations Data:
Revenues............................................ $ 419,506
Gross profit........................................ 79,305
Selling general and administrative expenses......... 41,483
Operating income (loss)............................. (119,466)
Net income (loss)................................... (86,193)
At September 30, 1999 (actual)
------------------------------
Balance Sheet Data:
Total assets........................................ $ 406,331
Total debt......................................... 233,069
Stockholder's equity............................... 98,222
Other Data:
Ratio of earnings to fixed charges.................. -- (2)
Cash from operating activities..................... $ (26,000)
Cash flows from investing activities............... (69,839)
Cash flows from financing activities............... 96,165
EBITDA(3)........................................... (104,207)
Adjusted EBITDA(4).................................. 53,732
-10-
<PAGE>
Cash interest expense(5)............................ $ 22,490
Depreciation and amortization....................... 15,206
Capital expenditures(6)............................. 24,786
Capital lease obligations entered into ............. 4,002
Adjusted EBITDA/cash interest expense............... 2.4x
Total debt/Adjusted EBITDA.......................... 4.3x
(1) The summary unaudited pro forma consolidated statement of operations data
for the fiscal year ended September 30, 1999 includes the fiscal year ended
September 30, 1999 of American Tissue, which includes the operations of the
Berlin-Gorham Mills from July 9, 1999 through September 30, 1999 and the
period from October 1, 1998 through July 8, 1999 for the Berlin-Gorham
Mills prior to their acquisition by American Tissue.
(2) Earnings were insufficient to cover fixed charges on an unaudited pro forma
consolidated basis for the year ended September 30, 1999 by $144.3 million,
primarily as a result of the special charges (credits) listed in note (4)
below. Exclusive of the items listed in note (4) below, our earnings, on an
auditited pro forma consolidated basis, would have been able to cover our
fixed charges by approximately 1.5 times.
(3) EBITDA is defined as operating income plus depreciation and amortization.
Information regarding EBITDA is presented because management believes that
some investors use EBITDA as one measure of an issuer's ability to service
its debt. EBITDA should not be considered an alternative to, or more
meaningful than, operating income, net income or cash flow as defined by
generally accepted accounting principles or as an indicator of an issuer's
operating performance. In addition, caution should be used in comparing
EBITDA to similarly titled measures of other companies as the definitions
of these measures may vary. See "Unaudited Pro Forma Consolidated Financial
Data" and the consolidated financial statements of American Tissue and the
notes to these consolidated financial statements and the financial
statements of the Berlin-Gorham Mills and the notes to these financial
statements, included elsewhere in this prospectus.
(4) Pro forma Adjusted EBITDA represents pro forma EBITDA adjusted as follows:
Fiscal Year
Ended September 30,
1999
-----------------
Pro forma EBITDA................................. $(104,207)
Adjustment to net realizable value............... 16,175
Property tax reversal............................ (8,957)
Asset impairment charge.......................... 143,632
Corporate overhead allocation.................... 6,438
Non-continuing employee
compensation expense............................. 738
Property tax savings............................. (87)
---------
Adjusted EBITDA.................................. $ 53,732
=========
Adjusted EBITDA has been presented because management believes that some
investors will use an adjusted measure of EBITDA as one measure of an
issuer's ability to service its debt, since, in this case, Adjusted EBITDA
excludes the significant special charges and credits recorded by the
Berlin-Gorham Mills in the period from October 1, 1998 through July 8,
1999. Adjusted EBITDA should not be considered an alternative to, or more
meaningful than, operating income, net income or cash flow as defined by
generally accepted accounting principles or as an indicator of an issuer's
operating performance. In addition, caution should be used in comparing
Adjusted EBITDA to similarly titled measures of other companies as the
definition of these measures may vary. See "Unaudited Pro Forma
Consolidated Financial Data" and our consolidated financial statements and
the notes to our consolidated financial statements and the financial
statements of the Berlin-Gorham Mills and the notes to these financial
statements included elsewhere in this prospectus.
(5) Cash interest expense represents total interest expense, less amortization
of deferred financing costs and amortization of debt discount, on a pro
forma basis giving effect to the offering of the old notes, borrowings of
$12.0 million under our revolving new credit facility and the application
of the net proceeds of these borrowings.
(6) Capital expenditures exclude portions attributable to capital leases of
American Tissue.
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<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
(dollars in thousands)
Set forth below are summary historical consolidated financial data for
American Tissue and the Berlin-Gorham Mills. The results for the interim periods
set forth below are not necessarily indicative of the results to be expected for
the full year or any other future period.
The summary historical operating data of American Tissue for:
(a) the fiscal year ended September 30, 1995 reflects the unaudited
consolidated operating results of our subsidiaries prior to our formation;
(b) the fiscal years ended September 30, 1996 and 1997 reflect the audited
operating results of our subsidiaries prior to our formation, prepared on
the same consolidated basis as our current holding company structure; and
(c) the fiscal years ended September 30, 1998 and 1999 reflect the audited
consolidated operating results under our current holding company structure.
The summary historical operating data of the Berlin-Gorham Mills for:
(a) the 52 weeks ended December 25, 1994 and December 31, 1995 and the 26
weeks ended June 27, 1999 reflect the unaudited operating results of the
Berlin-Gorham Mills for each such period; and
(b) the 52 weeks ended December 29, 1996, December 28, 1997 and December
27, 1998 reflect the audited operating results of the Berlin-Gorham Mills
for such periods.
You should read this information in conjunction with "Unaudited Pro Forma
Consolidated Financial Data," "Selected Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of American Tissue and the
notes to these consolidated financial statements and the financial statements of
the Berlin-Gorham Mills and the notes to these financial statements included
elsewhere in this prospectus.
AMERICAN TISSUE
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
1995
(unaudited) 1996 1997 1998 1999
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues .......................... $ 138,933 $ 153,224 $ 198,384 $ 215,203 $ 284,340
Gross profit ...................... 22,527 30,951 46,098 42,586 70,875
Operating income .................. 6,593 13,770 19,145 13,198 35,941
Balance Sheet Data:
Cash and cash equivalents ......... $ 1,017 $ 152 $ 870 $ 1,480 $ 1,806
Working capital ................... (18,183) (18,413) (20,892) (48,748) 45,906
Total assets ...................... 136,166 199,201 230,517 270,819 406,331
Total debt ........................ 93,300 123,376 143,690 176,394 233,069
Stockholder's equity .............. 14,010 26,984 33,858 33,644 98,222
<CAPTION>
Other Data: 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges ........................... --(3) 2.3x 1.5x --(3) 1.9x
Cash flows provided by (used in)
Operating activities .............. $ --(4) $ 10,351 $ 21,885 $ 17,037 $ (22,034)
Investing activities .............. --(4) (40,933) (29,172) (27,566) (65,168)
Financing activities .............. --(4) 29,717 8,005 11,139 87,528
EBITDA(1) ......................... 9,281 27,950 27,427 23,783 49,527
Depreciation and amortization ..... 4,092 5,593 8,282 10,585 13,586.
Capital expenditures(2).. ......... 24,192 40,933 29,172 27,566 20,168
Capital lease obligations
entered into ...................... 1,944 8,770 2,021 10,453 4,002
</TABLE>
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<PAGE>
BERLIN-GORHAM MILLS
<TABLE>
<CAPTION>
26
Weeks
52 Weeks Ended December(5) Ended
------------------------------------------------------------- June
1994 1995 1996 1997 1998 1999
---------- ---------- --------- --------- --------- ----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ................... $ 164,733 $ 236,311 $ 177,916 $ 183,398 $ 174,423 $ 86,372
Gross profit (loss) ........ (15,263) 36,895 (11,257) 3,750 (13,329) 3,104
Operating income (loss) .... (23,701) 28,177 (20,367) 5,000 (173,880) (12,590)
</TABLE>
As of
June 27, 1999
-------------
(unaudited)
Balance Sheet Data:
Working capital............. $ 12,561
Total assets................ 81,280
Total debt ................. 30,255
(1) See definition of EBITDA in note (3) of "Summary of Unaudited Pro Forma
Consolidated Financial Data."
(2) Excludes portions attributable to capital leases.
(3) Earnings were insufficient to cover fixed charges during the fiscal years
1995 and 1998 by $1,733 and $2,073, respectively.
(4) Cash flow data on a consolidated basis is not available for this period.
(5) The Berlin-Gorham Mills' fiscal year ends on the last Sunday of the month
of December (i.e., December 25, 1994, December 31, 1995, December 29, 1996,
December 28, 1997 and December 27, 1998).
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<PAGE>
RISK FACTORS
Before you invest in the exchange notes, you should carefully consider the
following factors, in addition to the other information contained in this
prospectus.
If You Do Not Exchange Your Old Notes They Will Continue To Be Subject To
Restrictions On Their Transfer, Your Rights Under The Registration Rights
Agreement Will Terminate And The Trading Market, If Any, For Your Old Notes Will
Be Adversely Affected
If you do not exchange your old notes for exchange notes in
our exchange offer:
o your ability to offer and sell your old notes will continue to be limited
during the period which expires on the later of:
(a) July 9, 2001, and
(b) two years after your old notes were last sold by us or one of our
affiliates, except:
(1) to us;
(2) under a registration statement that has been declared effective
under the Securities Act of 1933;
(3) in the United States, to a "qualified institutional buyer" within the
meaning of Rule 144(A) in reliance upon the exemption from the
registration requirements of the Securities Act provided by Rule
144(A), based upon an opinion of the holder's counsel;
(4) outside the United States, to a foreign person in a transaction that
complies with the provisions of Regulation S under the Securities Act;
or
(5) in reliance upon another available exemption from such registration
requirements, based upon an opinion of the holder's counsel;
and in each case, in accordance with applicable state securities laws.
o you will not have any rights to have your old notes registered under the
Securities Act under the registration rights agreement because we do not
intend to register the old notes under the Securities Act, subject to the
exceptions described under the "Exchange Offer - Shelf Registration
Statement" section of this prospectus.
To the extent old notes are tendered and accepted by us in the exchange
offer, the trading market, if any, for the old notes will be adversely affected
because investors will prefer to acquire exchange notes which will not be
subject the transfer restrictions applicable to the old notes.
If you exchange your old notes in the exchange offer for the purpose of
participating in a distribution of the exchange notes, you may be deemed to have
received restricted securities. If so, you will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer -- Consequences
of Failure to Exchange."
We Have Previously Defaulted In Complying With Financial Covenants Relating To
Our Credit Facilities And We May Not Be Able To Provide You With Financial
Information When We Are Required To Do So
Under a term loan credit facility we entered into in June 1997 to refinance
our then existing indebtedness, we were required to comply with a fixed charge
coverage ratio and other financial covenants and to deliver to the lender under
this facility, within specified time periods, our audited annual financial
statements and quarterly unaudited financial statements. As of September 30,
1998, we were not in compliance with this fixed charge ratio covenant, other
financial covenants and our obligations to timely deliver our fiancial
statements to such lender. In January 1999, we entered into an agreement with
this lender that (1) waived the defaults under these covenants and (2) amended
our financial covenants. We also obtained a waiver from LaSalle National Bank of
the default under our then existing revolving credit facility with this lender
triggered by the default under the term loan credit facility.
While the indenture relating to the Notes does not require us to
affirmatively maintain specified fixed charge ratios, the indenture, subject to
exceptions, restricts us from incurring additional indebtedness, unless at the
time we propose to incur the additional indebtedness, and after giving pro forma
effect to the incurrance of the additional indebtedness, we are maintaining the
fixed charge coverage ratio required by the indenture. Accordingly, if we have
not satisfied the fixed charge ratio test required by the indenture, this
restriction on our ability to incur additional indebtedness may adversely effect
our ability to make capital expenditures for business maintenance and profit
improvement projects, which, may, in turn, adversely affect our operating cash
flow available for the payment interest on the Notes. See "Description of
Exchange Notes -- Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock" and "-- Covenant -- Restricted Payments."
Our inability to timely deliver financial statements to a lender as
required by the relevant credit agreement, as described above, resulted from
deficiencies in our management information and accounting systems.
To remedy these deficiencies, we have restructured our financial and
accounting department, including:
o hiring a new Chief Financial Officer, a Vice President of Finance and
a Corporate Controller;
o retaining consultants to assist us in the installation of new
management information systems; and
o installing a fully integrated, updated version of our accounting
software.
We believe that the changes implemented to date have been helpful in
managing our operations. As a result of these changes, we believe that we are
currently in compliance with the financial reporting requirements under the
indenture relating to the old notes and under our new revolving credit facility.
It is our intention to deliver financial statements and file reports with
the Securities and Exchange Commission within the required time periods and as
required by the indenture governing the exchange notes and our new revolving
credit facility. However, we cannot assure you that we will be able to continue
to comply with these requirements. A material delay in delivering our financial
statements could cause defaults under our senior credit facilities, which, in
turn, could result in the maturities of the indebtedness under these facilities
and foreclosure of the liens on our assets securing this indebtedness.
Our Significant Indebtedness Could Adversely Affect Our Ability To Perform Our
Obligations Under The Exchange Notes
We have a high level of debt. As of December 31, 1999, we had approximately
$253.7 million of indebtedness outstanding, excluding unused commitments of
approximately $68.4 million under our revolving credit facility.
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<PAGE>
Our significant indebtedness could have important consequences to you. For
example, it could:
o require us to dedicate a substantial portion of our cash flow from
operations to make payments of principal and interest on our
indebtedness. Our failure to generate sufficient cash flow to make
required payments could result in a default under such indebtedness,
including under the exchange notes; and
o limit, among other things, our ability to borrow additional funds and
comply with the financial covenants relating to our existing
indebtedness. Our failure to comply with these covenants could result
in an event of default under our new revolving credit facility and
also trigger an event of default under the indenture relating to the
exchange notes with the possible consequences described below.
See "Description of Material Indebtedness" and "Description of Exchange Notes."
Our ability to satisfy our obligations as to this indebtedness, including
the exchange notes, will depend upon our future performance which, in turn, will
be subject to management, financial, business, regulatory and other factors
affecting our business and operations. Many of these factors are not within our
control. We believe, based on our current level of operations, that we will have
sufficient capital to carry on our business and to meet our scheduled debt
service requirements. We cannot assure you, however, that future cash flow will
be sufficient to meet our obligations and commitments. If we are unable to
generate sufficient cash flow to meet our debt obligations we may be required
to:
o reduce or delay capital expenditures;
o restructure or refinance all or a portion of such indebtedness
including indebtedness under the exchange notes and our new revolving
credit facility; or
o sell assets or obtain additional financing.
We may not be able to implement any of these strategies on satisfactory
terms or on a timely basis, if at all. If we cannot satisfy our obligations
related to this indebtedness, substantially all of our long-term indebtedness,
including the exchange notes, could be in default and could be declared
immediately due and payable. If the maturity of our indebtedness is accelerated,
secured creditors may seek to enforce their security interests or liens in the
particular assets securing indebtedness, which might require us to commence a
case under the federal bankruptcy laws. Any bankruptcy case we might commence
could substantially delay the efforts of the trustee under the indenture
relating to the exchange notes to liquidate the collateral securing the exchange
notes and may reduce the amount that might otherwise be realizable by the
trustee upon a sale of the collateral securing the exchange notes. To avoid a
default, we may need waivers from third parties, which may not be granted. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
-15-
<PAGE>
We May Incur Additional Indebtedness To Finance Capital Expenditures, Which
Would Increase The Risks Associated With Our Highly Leveraged Position
We may need to incur additional indebtedness to finance capital
expenditures at the Berlin-Gorham Mills and at our other facilities and to
fulfill our long-term business strategies. Under the terms of the indenture
governing the exchange notes and the terms of our new revolving credit facility,
our subsidiaries may incur additional debt, subject to the limitations described
under the "Description of Exchange Notes -- Covenants -- Incurrence of
Indebtedness and Issuance Preferred Stock" section of this prospectus. If we
incur additional indebtedness, the risks associated with our highly leveraged
condition will increase. See "Capitalization," "Unaudited Pro Forma Consolidated
Financial Data," "Selected Historical Financial Data," "Description of Material
Indebtedness" and "Description of Exchange Notes."
We May Not Be Able To Finance A Change Of Control Offer
Upon the occurrence of various change of control events, including a change
of control resulting from a sale of the shares of our common stock pledged to
the trustee for the senior secured discount notes issued by our immediate
parent, Middle American Tissue Inc., the holders of the exchange notes may
require us to repurchase all of their outstanding exchange notes. However, it is
possible that we will not have sufficient funds at the time of a change of
control to effect a repurchase or that restrictions under our revolving credit
facility or our other debt agreements will not allow a repurchase. In addition,
under our
-16-
<PAGE>
revolving credit facility, various change of control events are events of
default giving the lenders under our revolving credit facility the right to
accelerate the maturity of borrowings under this facility. We cannot assure you
that we will be able to obtain the necessary consents from the lenders under our
new revolving credit facility to permit us to repurchase the exchange notes
pursuant to a change of control offer or to repay or refinance all of the
indebtedness under our new revolving credit facility. If we fail to make a
change of control offer or pay the required repurchase price when due, an event
of default under the exchange notes will occur. See "Description of Material
Indebtedness" and "Description of Exchange Notes -- Covenants -- Change of
Control."
Our Debt Agreements Contain Operating Restrictions And Financial Restrictions
Covenants Which May Adversely Affect Our Operations And The Breach Of Which
Could Have A Material Adverse Effect On Our Ability To Service The Exchange
Notes
The operating and financial covenants under our existing debt agreements,
including our new revolving credit facility and the indenture governing the
Notes, and financing agreements we may enter into in the future, may adversely
affect our ability to finance future operations or working capital or to engage
in other business activities. Specifically, our existing debt agreements require
that we maintain specific financial ratios and restrict our ability to, among
other things:
o make specified loans and investments;
o incur additional indebtedness;
o permit payment or dividend restrictions on our subsidiaries that are
not unrestricted subsidiaries;
o sell assets;
o enter into sale and leaseback transactions;
o create liens;
o engage in transactions with affiliates;
o consolidate, merge or sell all or substantially all of our assets and
the assets of our subsidiaries; or
o prepay, redeem or purchase debt.
Compliance with these operating and financial covenants may adversely
affect our ability to finance future operations or engage in other business
activities. A breach of any of the covenants in our existing debt agreements or
in any future agreement could cause a default under our new revolving credit
facility, other current or future debt and/or or the exchange notes. As a result
of such a default, a significant portion of our indebtedness could be declared
immediately due and payable. We are not certain whether we would have, or be
able to obtain, sufficient funds to make these accelerated payments, including
payments on the exchange notes. See "Description of Material Indebtedness -- New
Revolving Credit Facility" and "Description of Exchange Notes -- Covenants."
The Value Of Your Security Interest In The Collateral Is Uncertain
Our obligations under the exchange notes will be guaranteed by all of our
existing domestic subsidiaries and secured by the collateral described under the
"Description of Exchange Notes -- Ranking
-17-
<PAGE>
and Security" section of this prospectus.
Borrowings under our new revolving credit facility will be secured by the
collateral described under the "Description of Material Indebtedness - New
Revolving Credit Facility" section of this prospectus.
We cannot assure you that the net proceeds of a sale of the collateral
securing the exchange notes would be sufficient to repay all of the exchange
notes following a foreclosure upon the collateral or a liquidation of the assets
of ours or the subsidiary guarantors that have granted these security interests.
If the net proceeds received from the sale of the collateral, after payment of
any creditors having first priority security interests in the collateral and
expenses relating to the sale of the collateral, are insufficient to pay all
amounts due with respect to the exchange notes, you would, to the extent of the
insufficiency, have only an unsecured claim against our remaining assets of
those of our subsidiary guarantors, which assets currently secure indebtedness
under our new revolving credit facility and other indebtedness. Moreover, the
ability of the trustee for the exchange notes to foreclose upon the collateral
securing the exchange notes would be delayed if we or our subsidiary guarantors
were subject to proceedings under applicable bankruptcy law.
We May Not Successfully Integrate The Operations Of The Berlin-Gorham Mills With
Our Existing Operations Or Realize Expected Cost Benefits
The estimated cost savings described under "Unaudited Pro Forma
Consolidated Financial Data" represent the cost savings expected to result from
our acquisition of the Berlin-Gorham Mills and from the implementation of our
business and operating strategy, based on operating results in the fiscal 1999.
These estimated future cost reductions and savings are based upon a number of
assumptions, which may be inaccurate and relate only to estimated cost
reductions and savings on the items described. Accordingly, the expected cost
reductions and savings are not necessarily indicative of our pro forma or future
financial results, including EBITDA and net income, which may be affected by a
number of other factors, including demand and pricing for our products and other
costs associated with our production, distribution and other operations. In
addition, we cannot assure you that we will be able to fully realize any or all
of the operating and economic benefits expected to result from our acquisition
of the Berlin-Gorham Mills.
Our success will depend, in part, on our ability to integrate the acquired
operations of the Berlin-Gorham Mills and to fully implement our business and
operating strategies. We cannot assure you that we will be able to effectively
manage the operations of the Berlin-Gorham Mills or effectively integrate
operations of the Berlin-Gorham Mills with our existing operations. Moreover, we
cannot assure you that we will be successful in rationalizing various functions
and implementing appropriate operational, financial and management systems and
controls to fully achieve the cost savings expected to result from the
acquisition. Our efforts to implement our strategy and to integrate the
operation of the Berlin-Gorham Mills could be affected by a number of factors
beyond our control, such as regulatory developments, general economic conditions
and increased competition. In addition, after gaining experience with the
operations of the Berlin-Gorham Mills, our management may decide to alter or
discontinue particular aspects of the business and operating strategies
discussed in this prospectus and may adopt alternative or additional strategies.
Any failure to integrate the operations of the Berlin-Gorham Mills or to
effectively implement our strategies could have a material adverse effect on our
business, financial condition and results of operations and on our ability to
service our indebtedness, including the exchange notes.
Past Operations of The Berlin-Gorham Mills May Not Reflect Their Future
Operations
We have included historical financial data in this prospectus as to the
operations of the Berlin-Gorham Mills when they were operated by Crown Paper as
a unit of one of its divisions. You should not rely on historical operating
results of the Berlin-Gorham Mills to determine future operations because the
Berlin-Gorham Mills have never operated as a stand-alone entity for financial
reporting purposes and their historical operating results do not reflect their
future operations. See "Management Discussion and Analysis of Financial
Condition and Results of Operations -- Berlin-Gorham Mills."
-18-
<PAGE>
We Are Subject To Cyclical Industry Conditions Which May Have Material Adverse
Effects on Our Business, Financial Condition and Operating Results
Tissue and Paper Products. The markets for our tissue and uncoated
freesheet paper products are characterized by periods of supply and demand
imbalance, with supply being added in large blocks and demand fluctuating with:
o changes in industry capacity;
o changes in economic conditions, including in the overall level of
domestic economic activity; and
o competitive conditions, including, in the case of our uncoated
freesheet paper products, intensified competition from overseas
producers responding to favorable exchange rate fluctuations and/or
unfavorable overseas market conditions.
Other factors may increase the cyclical nature of our industry, including:
o the substantial capital investment and high fixed costs required to
manufacture tissue and other paper products and convert tissue
products, and
o the significant costs associated with reductions in manufacturing
capacity.
We and other manufacturers strive to maintain high levels of usage of
manufacturing capacity, i.e., operating rates, to cover fixed costs because of
high fixed costs. Relatively small changes in operating rates due to changes in
domestic demand, capacity, levels of imports or other circumstances may
significantly effect prices. Substantially all of these conditions are beyond
our control.
Adverse changes in these conditions could have a material adverse effect on
our ability to maintain sales and pricing levels. Prices for our products may
fluctuate substantially in the future. A significant downturn in our prices
could have a material adverse effect on our business, financial condition and
results of operations.
Raw Materials. Wood pulp, chemicals, recycled paper pulp and waste paper
are the principal raw materials used in the manufacture of our tissue and
uncoated freesheet paper products. These materials are purchased in highly
competitive, price-sensitive markets. While we anticipate that wood pulp
produced by the pulp mill at the Berlin-Gorham Mills should be sufficient to
satisfy our requirements for wood pulp for our uncoated freesheet paper
operations and a significant portion of our tissue operations, the cost of
recycled pulp and chemicals have historically exhibited price and demand
cyclicality similar to the cycles for paper products. In addition, increased
demand for paper and wood products has resulted in greater demand for raw
materials, which has recently translated into higher raw material prices for the
paper industry. Historically, price increases for our paper products have lagged
behind increases in raw material costs.
Wood fiber is the principal raw material used in the production of pulp at
the Berlin-Gorham Mills. In connection with our acquisition of the Berlin-Gorham
Mills, we have effectively become a party to various long-term supply contracts
with suppliers of wood fiber located in close proximity to the Berlin-Gorham
Mills. If for any reason these agreements are determined not to have been
assigned to us or are
-19-
<PAGE>
terminated by these suppliers, we would also be subject to the cyclicality of
the wood fiber market. The supply and price of wood fiber is dependent upon a
variety of factors, including environmental and conservation regulations,
natural disasters and weather, over which we have no control. We can not assure
you that we will not have difficulty obtaining wood fiber in economic proximity
to the Berlin-Gorham Mills.
We cannot assure you that prices for any such raw materials will fluctuate
in a similar cycle to our tissue and other paper products or that all or any
part of such increased costs can be passed along to consumers of our products or
in a timely manner. Our inability to pass along such costs to our customers or
in a timely manner could have a material adverse effect on our results of
operations and financial condition.
We Have No Experience In Manufacturing And Selling Uncoated Freesheet Paper
Products And Crown Paper May Not Have The Financial Resources To Perform Its
Purchase And Marketing Agreements With Us
Historically, the four freesheet paper machines at the Berlin-Gorham Mills
have been used by Crown Paper for the manufacture of uncoated freesheet paper
products, primarily for printing and publishing end-uses. We did not acquire
either assets or marketing and distribution organizations from Crown Paper to
permit us to market and distribute these paper products and we do not have the
knowledge, experience or organization to permit us to successfully market and
distribute these products. Consequently, we are, and during the three-year
period following the acquisition we will be, substantially dependent on Crown
Paper, pursuant to our paper purchase and marketing agreements with them, to
market and distribute uncoated freesheet paper products produced at the
Berlin-Gorham Mills. Crown Paper will receive specified discounts and
commissions for marketing and distributing our uncoated freesheet paper
products.
According to Crown Paper's Annual Report on Form 10-K for its fiscal year
ended December 27, 1998 and its Quarterly Report on Form 10-Q for its fiscal
quarter ended September 26, 1999, Crown Paper had a high level of debt, net
losses and declining operating cash flows. Accordingly, there is a risk that
Crown Paper may not have the financial resources to permit it to perform its
obligations under our paper purchase and marketing agreements. In addition, in
order to conserve cash to satisfy its debt service requirements, Crown Paper may
be required to restructure its operations or reduce or eliminate funding for
various marketing and distribution activities, all of which could materially
adversely affect Crown Paper's ability to perform its obligations under our
paper purchase and marketing agreements. Any failure by Crown Paper to perform
its obligations under our paper purchase and marketing agreements could have a
material adverse effect on our ability to profitably market and distribute these
products.
Crown Paper May Not Be Able To Perform Its Obligations Under The Acquisition
Agreement
Under the asset purchase agreement relating to the Berlin-Gorham Mills,
Crown Paper made representations and warranties, which we believe are typical in
similar transactions, concerning its assets, liabilities, business and affairs.
Crown Paper also agreed, subject to specified limitations, to indemnify and hold
us harmless from liabilities, losses or damages that we may suffer or incur as a
result of Crown Paper's breach of any of these representations and warranties.
Crown Paper's financial situation may significantly impair its ability to meet
its indemnification obligations under the asset purchase agreement in the event
we assert a claim for indemnification. To the extent that we are unable to
recover from Crown Paper for any loss or damages that we may suffer or incur, we
will be required to bear the loss or damage, which could have a material adverse
effect on our ability to pay interest on the exchange notes and on our business,
financial condition and operating results.
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We May Be Unable To Implement Our Development And Acquisition Strategy
Our ability to successfully implement our growth strategy is subject to a
variety of risks, including changes in the competitive climate in which we
operate and our ability to obtain financing in a timely manner at reasonable
costs and on terms and conditions acceptable to us. We cannot assure you that
any planned capital investment program will take place as planned or that our
plan to expand products and services will generate positive cash flows or result
in profits.
Our capital investment program involves strategic acquisitions of
underperforming and underutilized facilities. We cannot assure you that we will
be able to turn around any facilities that we may acquire.
Our ability to integrate acquired businesses may be affected by a number of
factors, including the ability of our existing management and systems
infrastructure to absorb the increased operations, the response of competition
and general economic conditions, many of which are not within our control. For
example, we cannot assure you that we will be able to integrate successfully the
operations of the Berlin-Gorham Mills with our existing operations. Acquisitions
may also substantially increase our indebtedness and obligations to make
payments of interest and principal in respect of our indebtedness. While growth
through acquisitions is part of our capital investment program, we cannot assure
you that:
o suitable acquisitions will be available to us on acceptable terms;
o financing for future acquisitions will be available on acceptable
terms, or on any terms at all;
o future acquisitions will be advantageous to us; or
o the anticipated benefits of such acquisitions will occur.
See "-- We May Not Successfully Integrate The Operations Of The Berlin-Gorham
Mills With Our Existing Operations Or Realize Expected Cost Benefits."
We Operate In A Highly Competitive Industry
Tissue. The North American tissue industry is highly competitive. We
believe that competition is based principally on price, although product quality
and customer service are often determining factors in the choice of a supplier.
Our competitors include Kimberly-Clark, Fort James, Procter & Gamble,
Georgia-Pacific and Global Tissue, a subsidiary of Kruger, Inc. Based on
estimates from the American Forest and Paper Association, for the year ended
December 31, 1998, Kimberly-Clark's share of the North American market was
approximately 18.6%, Fort James' share was approximately 29.0%, Proctor &
Gamble's share was
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approximately 14.5%, Georgia-Pacific's share was approximately 9.4%, Global
Tissue's share was approximately 5.1% and our share was approximately 3.2%. Some
of our competitors are lower cost producers of tissue products. Additionally,
many of our competitors are large vertically integrated companies that are more
strongly capitalized than we are. Any of the foregoing factors may enable these
competitors to be able to withstand periods of declining prices and adverse
operating conditions in the tissue industry.
Uncoated Freesheet Papers. We compete principally in the
printing/writing/publishing sector of the market for uncoated freesheets paper
in North America, primarily with U.S. and Canadian paper producers. We also
compete with overseas producers. Our principal U.S. and Canadian competitors in
this segment of the market include Neenah Paper Company, E.B. Eddy Forest
Products Limited, Domtar Inc. and Williamette Industiries Inc. Based on
estimates from the American Forest and Paper Associates, for the year ended
December 31, 1998, Neenah Paper's share of the North America market was
approximately less than 0.1%, E.B. Eddy's share was approximately less than
0.1%, Domtar's share was approximately 6.2%, Williamette's share was
approximately 7.3% and our share would have been approximately 0.9% based solely
upon the production capacity of the Berlin-Gorham Mills.
Similar to the tissue market, we compete primarily on the basis of price,
although quality and service are often the determining factors in the choice of
a supplier. In addition, we are competing with integrated and non-integrated
producers of paper products. We believe we are a fully-integrated manufacturer.
Fully-integrated manufacturers, i.e., those whose requirements for pulp or other
fiber are met fully from their internal sources, may have competitive advantages
relative to those that are not fully-integrated manufacturers in periods of
relatively high prices for raw materials, in that the former are able to ensure
a steady source of such raw materials at costs that may be lower than prices in
the prevailing market. However, competitors which are less integrated than we
are may have certain cost advantages in periods of relatively low pulp prices in
that they may be able to purchase pulp at prices lower than our production
costs. In addtion, some of our competitors are lower-cost producers than we are
and some of our competitors have greater financial resources than we have. In
addition, many end-users of printing/writing/publishing products in recent years
have responded to changing economic conditions and paper prices by substituting
less expensive paper grades for use in their products, and this tendency may
benefit some of our competitors which produce lower priced paper products.
We cannot assure you that we will be able to successfully compete in the
tissue or uncoated freesheet papers industry or that increased competition will
not have a material adverse effect on our business, financial condition and
results of operations.
We Are Controlled By A Few Of Our Parent's Stockholders
Mr. Nourollah Elghanayan, our Chairman of the Board, and various members of
Mr. Elghanayan's family, and Mr. Mehdi Gabayzadeh, our President and Chief
Executive Officer, and trusts for the benefit of various members of Mr.
Gabayzadeh's family, collectively, indirectly beneficially own 100% of the
outstanding shares of our common stock, without giving effect to any warrants to
purchase common stock of our direct parent. As a result, Messrs. Elghanayan and
Gabayzadeh and their respective family members control, and are expected to
continue to control, our management, policies and financing decisions. In
addition, collectively, these stockholders have the power to elect a majority of
the members of our board of directors and control the vote on any matter
requiring the approval of our stockholders, including the adoption of amendments
to our certificate of incorporation and approval of mergers or the sale of all
or a substantial part of our assets. As a result, circumstances could arise in
which the interests of these stockholders could conflict with your interests as
holders of the exchange notes. In addition, these stockholders may have an
interest in pursuing acquisitions, divestitures or other transactions that, in
their judgment, could enhance their equity investment, even though these
transactions might involve risks to you, as holders of the exchange notes. See
"Principal Stockholders."
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Additionally, in connection with their purchase of senior secured discount
notes of Middle American Tissue Inc., our direct parent, affiliates of the
initial purchaser of the old notes, received, among other things, warrants to
purchase up to 12% of Middle American Tissue's common stock as of the issue date
of the old notes and the right to appoint one member of our board of directors.
The trustee for the Middle American Tissue senior secured discount notes was
granted a pledge of all of the common stock of American Tissue. Under the
circumstances described under "Description of Material Indebtedness -- Middle
American Tissue Notes," such affiliates of the initial purchaser or their
transferees could cause the trustee for these senior secured discount notes to
exercise its rights under the pledge agreement regarding the pledge of common
stock and these affiliates could thereby obtain control of American Tissue.
Some of Our Stockholders and Companies Controlled By Them Are Significantly
Indebted To Some of Our Subsidiaries Without Any Fixed Obligation To Pay
Interest Or Repay Such Debt
In fiscal 1999, and in prior fiscal years, there were a significant number
of transactions among our stockholders and companies controlled by them that are
not part of our holding company structure or our subsidiaries. As a result of
some of these transactions, as of December 31, 1999, our stockholders and their
affiliated companies owed our subsidiaries an aggregate of approximately $23.7
million. This indebtedness does not bear interest and has no fixed maturity.
Accordingly, we are not being compensated for the use of such money by these
affiliated companies. In addition, there is a risk that we or our creditors,
including the trustee under the indenture relating to the exchange notes, will
not be able to legally require these affiliated companies, or require our
stockholders to cause these affiliated companies, to repay this indebtedness to
us at a time when we might require these funds in the operation of our business
or to reduce or repay our indebtedness to third parties. See "Related Party
Transactions" and "Description of Exchange Notes -- Covenants -- Transactions
with Affiliates."
Failure By Us Or Boise Cascade To Renegotiate Labor Agreements Covering
Unionized Employees At Some Of Our Facilities Could Result In Strikes Or Other
Disruptions Of Our Operations
We have collective bargaining agreements with the Paper, Allied-Industrial,
Chemical and Energy Workers International Union covering most of our employees
at our mill in Neenah, Wisconsin, which expires in May 2002, and the hourly
production employees at the Berlin-Gorham Mills, which expires in June 2002. We
also have a collective bargaining agreement with the Office and Professional
Employees International Union covering our hourly staff employees at the
Berlin-Gorham Mills, which agreement expires in July, 2002. Our tissue-making
operation in St. Helens, Oregon, which is operated for us by Boise Cascade, is
staffed with Boise Cascade employees, most of whom are represented by the
Association of Western Pulp and Paper Workers. The collective bargaining
agreement between Boise Cascade and such union expires in March 2005.
We cannot assure you that we will be successful in renegotiating the
agreements relating to unionized employees at any of our facilities, or that
Boise Cascade will be successful in renegotiating its agreement with the
Association of Western Pulp and Paper Workers upon its expiration.
A failure to renegotiate a labor agreement with our employees or those of
Boise Cascade could result in strikes or other interruptions of our operations.
An interruption of operations at any of our facilities could have a material
adverse effect on our ability to pay interest on the exchange notes, as well as
on our business, financial condition and results of operation. In addition, we
cannot assure you that we will not incur increased costs as a result of any
union negotiations.
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We Are Dependent On The Continuing Operations Of Our Manufacturing Facilities
Our revenues depend on the continuing operations of our paper mills and
tissue converting facilities. The operations of these facilities involve many
risks, including:
o the breakdown, failure or substandard performance of equipment;
o power outages;
o the improper installation or operation of equipment;
o natural disasters; and
o the need to comply with directives of governmental agencies.
The occurrence of material operational problems could have a material
adverse effect on our business, financial condition and results of operations.
Additionally, under our agreement with Boise Cascade, they operate, for our
account, a tissue machine we purchased from them, which is located on property
that we lease from Boise Cascade at their mill facility in St. Helens, Oregon.
Under this agreement, Boise Cascade makes available to us for purchase, wood
pulp produced at their adjacent pulp mill and uses such pulp in their operation
of our tissue machine. This agreement expires on December 31, 2022. A default by
Boise Cascade or the early termination of the agreement with Boise Cascade could
have a material adverse effect on our business, financial condition and results
of operations.
Our Operations Are Subject To Comprehensive Environmental Regulation And Involve
Expenditures Which May Be Material In Relation To Our Operating Cash Flow
Our operations are subject to comprehensive and frequently changing
federal, state and local environmental laws and regulations, including laws and
regulations governing:
o emissions of air pollutants and discharges of waste water and storm
water, including final rules known as the "Cluster Rules" issued by
the U.S. Environmental Protection Agency, which require changes in
pulp manufacturing operations at the Berlin-Gorham Mills;
o storage, treatment and disposal of hazardous materials and waste; and
o liability for damages to natural resources.
Compliance with these laws and regulations is an increasingly important factor
in our business.
We will continue to incur capital and operating expenditures, which
expenditures may be material in relation to our cash flow from operations, to
comply with applicable federal, state and local environmental laws and
regulations and to meet new regulatory requirements. Based on our understanding
of the Cluster Rules, and after consultations with independent environmental
consultants, we estimate that approximately $13 million of capital expenditures,
within a range of plus or minus 25%, may be required for our operations at the
Berlin-Gurham Mills to comply with the Cluster Rules, with compliance dates
commencing in 1999 and extending out over the next three to five years. We
currently estimate that for our fiscal year ending September 30, 2000, our total
expenditures for environmental compliance, including Cluster Rule compliance,
will be approximately $16.2 million.
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There are risks and uncertainties associated with our estimates that could
cause total capital expenditures and the timing of capital expenditures to be
materially different from current estimates, including changes in technology and
interpretations of the environmental laws and regulations by government agencies
that are substantially different from our interpretations or other matters. The
EPA has also proposed additional requirements for the pulp and paper industry,
which, if and when adopted, may require additional material expenditures.
We are subject to strict, and under specific circumstances, joint and
several, liability for the investigation and remediation of the contamination of
soil, surface and ground water, including contamination caused by other parties,
at properties that we own or operate and at properties where we or our
predecessors have arranged for the disposal of regulated materials. As a result,
we are involved from time to time in administrative and judicial proceedings and
inquiries relating to environmental matters. We cannot assure you that we will
not be involved in additional proceedings in the future and that the total
amount of future costs and other environmental liabilities will not be material.
We cannot predict what environmental legislation or regulations will be
enacted in the future, how existing or future laws or regulations will be
administered or interpreted or what environmental conditions may be found to
exist. Enactment of more stringent laws or regulations, or more strict
interpretation or enforcement of existing laws and regulations, could require us
to make additional expenditures, some or all of which could be material. See
"Business -- Environmental Regulation."
We Are Dependent On Our Key Personnel
We are dependent on the retention of, and continued performance by, our
senior managers, including Mr. Mehdi Gabayzadeh, our President and Chief
Executive Officer, and Mr. Nicholas T. Galante, III, one of our Executive Vice
Presidents and President and Chief Executive Officer of our subsidiary, Pulp &
Paper of America LLC, which operates the Berlin-Gorham Mills. We believe that
the loss of the services of either Mr. Gabayzadeh or Mr. Galante could have a
material adverse effect on us. We do not have employment contracts with any of
our senior managers.
There Is A Risk Under Federal And State Fraudulent Transfer Law That The
Guarantees Of The Exchange Notes May Be Subordinated To Other Indebtedness Of
Our Subsidiary Guarantors And The Liens In The Collateral Securing The Exchange
Notes May Be Void
Under federal and state fraudulent transfer laws, if a court were to find
that, at the time the subsidiary guarantees were issued, and the security
interests in their assets securing the subsidiary guarantees were granted, a
subsidiary guarantor issued its subsidiary guarantee:
(1) with the intent of hindering, delaying or defrauding creditors, or
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(2) received less than a reasonably equivalent value or fair consideration
in exchange for such obligation and:
o was insolvent, or became insolvent, by reason of the sale of the
Notes or its subsidiary guarantee and the application of the
proceeds of such sale;
o was left with an unreasonably small amount of capital; or
o believed that it would incur debts beyond its ability to pay such
debts as they matured, or, irrespective of any consideration
received or its solvency at such time, actually intended to
hinder, delay or defraud its present or future creditors,
the court could void the subsidiary guarantee and the security interest securing
such subsidiary guarantee, or subordinate the subsidiary guarantee to all other
indebtedness of the guarantor. If the subsidiary guaranties and the security
interests in the assets securing the exchange notes were voided, we can not
assure you that you would be able to recover the principal amount or interest on
the exchange notes upon the occurrence of a default under the exchange notes.
Holders Of The Exchange Notes May Suffer Adverse Tax Consequences Because The
Old Notes Were Issued With Original Issue Discount
Each old note was issued at a discount from its face amount. This discount,
for federal income tax purposes, is referred to as "original issue discount" or
"OID." Under the Internal Revenue Code, each exchange note will also be deemed
to have been issued with the same original issue discount as the old notes.
Holders of the exchange notes will be required to include in their income in
each year, for the purpose of computing their federal income taxes for that
year, that portion of the OID attributable to each day during the year in which
they held exchange notes regardless of whether they are a cash or accrual basis
taxpayer and before the time when they will receive cash payments on the
exchange notes attributable to the OID. By way of contrast, holders of old notes
will not experience a gain or loss for federal income tax purposes by reason of
exchanging their old notes for exchange notes. See "Material United States
Income Tax Consequences."
If a bankruptcy case is commenced by or against us under the U.S.
Bankruptcy Code after the issuance of the exchange notes, your claim for the
principal amount of your exchange notes due at maturity may be limited to an
amount equal to the sum of the initial offering price of the old notes, the face
amount less discount, plus that portion of the OID that is not deemed to
constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code. Any
portion of the OID that was not amortized as of the bankruptcy filing would
constitute "unmatured interest." To the extent that the U.S. Bankruptcy Code
differs from the Internal Revenue Code in determining the method of amortizing
OID, you may realize taxable gain or loss upon payment of your bankruptcy claim.
The above statements are based on the Internal Revenue Code of 1986,
applicable treasury regulations and interpretations of such laws and regulations
by the Internal Revenue Service, as in effect on the date of this prospectus.
The Exchange Notes Have No Public Market And You Cannot Be Sure That An Active
Trading Market Will Develop
The exchange notes are a new issue of securities with no established
trading market and will not be listed on any securities exchange. We have been
informed by the initial purchaser that it intends to make a market in the
exchange notes following the completion of this offering of the exchange notes.
The initial purchaser is not obligated to make a market in the exchange notes
and may discontinue its market-making activities at any time without notice. In
addition, the liquidity of the trading market in the exchange notes, and the
market price quoted for these exchange notes, may be adversely
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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 can not be sure that an
active trading market will develop for these exchange notes.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements including, in
particular, the statements about our plans, strategies and prospects under the
headings "Prospectus Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business." Although we
believe that our plans, intentions and expectations reflected in or suggested by
such forward-looking statements are reasonable, we cannot assure you that we
will achieve the plans, intentions or expectations. Important factors that could
cause actual results to differ materially from the forward-looking statements we
make in this prospectus are set forth below and elsewhere in this prospectus.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements
contained in this "Risk Factors" section.
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
We sold the old notes to the initial purchaser on July 9, 1999 in a private
placement. The old notes were not registered under the Securities Act of 1933.
The initial purchaser has informed us that it promptly resold the old notes to
"qualified institutional buyers" in reliance on Rule 144A under the Securities
Act of 1933. When we sold the old notes to the initial purchaser, we entered
into the registration rights agreement, which requires that we file a
registration statement under the Securities Act of 1933 with respect to the
exchange notes to be issued in the exchange offer and, upon the effectiveness of
the registration statement, offer to you and all other holders of the old notes
the opportunity to exchange your old notes for a like principal amount of
exchange notes. These exchange notes will be issued without a restrictive legend
and, except as set forth below, may be reoffered and resold without restrictions
or limitations under the Securities Act. After we complete the exchange offer,
our obligations with respect to the registration of the old notes will
terminate, except as provided in the last paragraph of this section.
Under existing interpretations of the staff of the Securities and Exchange
Commission contained in several no action letters to third parties, we believe
that the exchange notes to be issued in the exchange offer will be freely
transferable by a holder who receives them in exchange for the old notes,
without further registration under the Securities Act, provided that the holder
represents to us that:
(1) it is not an "affiliate" of American Tissue, such as a director,
executive officer or controlling stockholder of American Tissue or our
parent companies,
(2) it will be acquiring the exchange notes in the ordinary course of its
business; and
(3) it has not engaged in, does not intend to engage in, and has no
arrangement or understanding with any other person to participate in,
a distribution of the exchange notes.
However, we have not sought a no-action letter from the Securities and
Exchange Commission with respect to this exchange offer and we cannot assure you
that the Securities and Exchange Commission's staff would make a similar
determination with respect to this exchange offer. Any holder of the old notes
who is an "affiliate" of our company or who intends to participate in the
exchange offer for the purpose of distributing the exchange notes:
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(1) will not be able to validly tender old notes in the exchange offer;
(2) will not be able to rely on the interpretations of the staff of the
Securities and Exchange Commission; and
(3) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any offer or sale of its the
old notes, unless such offer or sale is made pursuant to an exemption
from those requirements.
In addition, 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 those notes. The letter of transmittal
accompanying this prospectus states that, by so acknowledging and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is acting in
the capacity of an "underwriter" within the meaning of Section 2(11) 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 old notes acquired by that broker-dealer as a
result of market-making or other trading activities. Pursuant to the
registration rights agreement, we have agreed to make this prospectus available
to any broker-dealer for use in connection with any such resale.
If you are not eligible to participate in the exchange offer, you can
elect, by so indicating on the letter of transmittal and providing additional
necessary information, to have your old notes included within the coverage of a
shelf registration statement pursuant to Rule 415 under the Securities Act. If
we have to file a shelf registration statement, we will be required to keep it
effective for a period of two years or a shorter period that will terminate when
all of the old notes covered by that shelf registration statement have been
resold. Other than as set forth in this paragraph, holders of the old notes will
not have the right to require us to register their old notes under the
Securities Act.
Terms of the Exchange Offer
Upon satisfaction or waiver of the conditions of our exchange offer set
forth in this prospectus and in the accompanying letter of transmittal, we will
accept all the old notes that are validly tendered and not withdrawn prior to
5:00 p.m., New York City time, on the expiration date. After authentication of
the exchange notes by the trustee, we will issue and deliver $1,000 principal
amount of exchange notes in exchange for each $1,000 principal amount of
outstanding old notes accepted in the exchange offer. You may tender some or all
of your old notes pursuant to the exchange offer in denominations of $1,000 and
integral multiples thereof.
By tendering the old notes in exchange for exchange notes and by executing
the letter of transmittal, you will be required to represent that:
(1) you are not an "affiliate" of our company;
(2) any exchange notes that you receive in the exchange offer will be
acquired by you in the ordinary course of your business; and
(3) you have no intention to distribute, and have no arrangement or
understanding with any person to participate in the distribution of,
the exchange notes you acquire.
The form and terms of the exchange notes will be identical in all material
respects to the form and terms of the old notes, except that:
(1) the offering of the exchange notes has been registered under the
Securities Act;
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(2) the exchange notes will not be subject to restrictions on resale; and
(3) provisions of the registration rights agreement relating to our
obligation to pay liquidated damages to holders of the old notes under
specified circumstances will become ineffective.
The exchange notes will evidence the same debt as the old notes and will be
issued under and entitled to the benefits of, the same indenture as the old
notes.
As of the date of this Prospectus, $165,000,000 aggregate principal amount
of old notes is outstanding. In connection with the issuance of the old notes,
we arranged for the old notes to be issued and transferable in book-entry form
through the facilities of The Depository Trust Company, acting as a depository.
The exchange notes will also be issuable and transferable in book-entry form
through DTC.
Copies of this prospectus, together with the accompanying letter of
transmittal, are initially being sent to all registered holders of old notes as
of the close of business on ________________, 2000. The exchange offer is not
conditioned upon any minimum aggregate principal amount of the old notes being
tendered. However, the exchange offer is subject to customary conditions which
may be waived by us, and to the terms and provisions of the registration rights
agreement. See "-- Conditions to the Exchange Offer" for a detailed description
of those conditions.
We will be deemed to have accepted validly tendered old notes when, as and
if we have given oral or written notice of acceptance to the exchange agent. The
exchange agent will receive the exchange notes from us for authentication and
will deliver them to the tendering holders.
If we do not accept any tendered old notes for exchange because of an
invalid tender or because the conditions to the exchange offer have not been
met, certificates for any such unaccepted old notes will be returned, at our
cost, to the tendering holder of the old notes as promptly as practicable after
the expiration date of our exchange offer.
Holders who tender old notes in our exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of their old notes
pursuant to the exchange offer. We will pay all charges and expenses, other than
particular taxes, in connection with our exchange offer.
Expiration Date; Extensions; Amendments
The term "expiration date," as used in this prospectus, means 5:00 p.m.,
New York City time, on ______________, 2000, unless we, in our sole discretion,
extend our exchange offer. If we extend our exchange offer, the term "expiration
date" will mean the latest date to which our exchange offer is extended. We may
extend our exchange offer at any time and from time to time by giving oral or
written notice to the exchange agent and by timely public announcement.
We reserve the right, in our sole discretion:
(1) to delay accepting any old notes for exchange;
(2) to extend our exchange offer;
(3) to terminate our exchange offer if the conditions set forth below
under "-- Conditions to the Exchange Offer" have not been satisfied;
and
(4) to amend the terms of our exchange offer in any manner.
We will notify the exchange agent of any delay, extension, termination or
amendment by oral or
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written notice. In addition, we will promptly notify each registered holder of
old notes of any amendment. We will give to the exchange agent written
confirmation of any oral notice.
We acknowledge and undertake to comply with the provisions of Rule 14e-l(c)
under the Securities Exchange Act of 1934, which requires us to pay the
consideration offered, or return the old notes surrendered for exchange,
promptly after the termination or withdrawal of the exchange offer.
Interest on the Exchange Notes
Interest on the exchange notes will accrue from the last interest payment
date on which interest was paid on the old notes surrendered in exchange
therefor or, if no interest has been paid on the old notes, from July 9, 1999.
Procedures for Tendering Old Notes
To tender old notes in our exchange offer, you must complete, sign and date
the letter of transmittal, or a facsimile of such letter of transmittal, in
accordance with the instructions contained below. You must then mail or
otherwise deliver the letter of transmittal, or a facsimile copy, together with
the old notes to be exchanged and any other required documents, to the exchange
agent, at its address set forth herein under "-- Exchange Agent" and in the
letter of transmittal. You may also effect a tender of old notes pursuant to the
procedures for book-entry transfer described in this section and in the letter
of transmittal.
We understand that, promptly after the date of this prospectus, the
exchange agent will make a request to establish accounts at DTC for the purpose
of facilitating the exchange offer. Subject to the establishment of those
accounts, any financial institution that is a participant in DTC's Book-Entry
Transfer Facility System may make book-entry delivery of its old notes by
causing DTC to transfer those old notes into the exchange agent's account in
accordance with DTC'S procedure for such transfer. Although delivery of old
notes may be effected through book-entry transfer into the exchange agent's
account at DTC, a letter of transmittal, or a facsimile copy, properly completed
and signed with any required signature guarantees, or, in the case if a book
entry transfer an "Agent's Message," as discussed below, in lieu of a letter of
transmittal, and any other required documents, must, in any case, be transmitted
to and received by the exchange agent at its address set forth herein (under "--
Exchange Agent") prior to 5:00 p.m., New York City time, on the expiration date.
Delivery of documents to DTC in accordance with its procedures does not
constitute delivery to the exchange agent.
The exchange agent and DTC have confirmed that our exchange offer is
eligible for DTC's Automated Tender Offer Program. Accordingly, DTC participants
may electronically transmit their acceptance of the exchange offer by causing
DTC to transfer old notes to the exchange agent in accordance with DTC's
Automated Tender Offer Program procedures for transfer. DTC will then send an
"Agent's Message" to the exchange agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the exchange agent and forming part of the confirmation of a book-entry
transfer, which states that:
(1) DTC has received an express acknowledgement from the DTC participant
that is tendering the old notes which are the subject of the
book-entry transfer;
(2) the DTC participant has received and agreed to be bound by the terms
of the letter of transmittal; and
(3) we may enforce the terms of the letter of transmittal against the DTC
participant.
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In the case of an "Agent's Message" relating to guaranteed delivery, the
term means a message transmitted by DTC and received by the exchange agent,
which states that DTC has received an express acknowledgement from the DTC
participant tendering old notes that such participant has received and agrees to
be bound by the notice of guaranteed delivery.
By the authority granted by DTC, any DTC participant which has old notes
credited to its DTC account at any time, and held of record by DTC's nominee,
may directly provide a tender as though it were the registered holder by
completing, executing and delivering the applicable letter of transmittal to the
exchange agent. Delivery of documents to DTC does not constitute delivery to the
Exchange Agent.
The tender by a holder and the acceptance of the tender by us will
constitute an agreement between the holder and us upon the terms, and subject to
the conditions, set forth in this prospectus and in the letter of transmittal.
Trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity
should indicate their capacities when signing the letter of transmittal or any
old notes or bond powers. Evidence satisfactory to us of their authority to so
act must be submitted with the letter of transmittal.
Only a holder in whose name old notes are registered may tender those old
notes in the exchange offer. To tender in the exchange offer, a holder must:
(1) complete, sign and date the letter of transmittal, or a facsimile
copy;
(2) have the signatures thereon guaranteed if required by the letter of
transmittal; and
(3) unless the tender is being effected pursuant to the procedure for
book-entry transfer, mail or otherwise deliver the letter of
transmittal (or a facsimile thereof), together with the old notes and
other required documents, to the exchange agent, prior to 5:00 p.m.,
New York City time, on the expiration date.
If less than all of your old notes are tendered, you should fill in the
principal amount of the old notes being tendered in the appropriate box on the
letter of transmittal. The entire principal amount of the old notes delivered to
the exchange agent will be deemed to have been tendered unless otherwise
indicated.
The method of delivery of the old notes and the letter of transmittal and
all other required documents to the exchange agent 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. In all cases, sufficient time should be
allowed to ensure delivery to the exchange agent prior to the expiration date.
No letter of transmittal or old notes should be sent to us. You may request that
your broker, or a commercial bank, trust company or nominee, effect the tender
on your behalf, as set forth in this prospectus and in the letter of
transmittal.
If your old notes are registered in the name of a broker, commercial bank,
trust company or other nominee and you wish to tender those old notes, you
should contact the registered holder promptly and instruct the registered holder
to tender on your behalf. If you wish to tender on your own behalf, prior to
completing and executing the letter of transmittal and delivering your old
notes, you must either make appropriate arrangements to register ownership of
the old notes in your own name or obtain a properly
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<PAGE>
completed bond power from the registered holder. The transfer of record
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 financial institution, including most
commercial banks, savings and loan associations and brokerage houses, that is a
participant in the Security Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange
Medallion Program, referred to in the following discussion as an "Eligible
Institution," unless the old notes are tendered:
(1) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" of the
letter of transmittal, or
(2) for the account of an Eligible Institution.
If the letter of transmittal is signed by a person other than the
registered holder listed therein, the old notes that are the subject of that
letter of transmittal must be endorsed or accompanied by appropriate bond powers
that authorize that person to tender the old notes on behalf of the registered
holder. The endorsement or bond powers must be signed in the name of the
registered holder as it appears on the old notes.
All questions as to:
o validity;
o form;
o eligibility (including time of receipt);
o acceptance of the tendered old notes; and
o withdrawal of the tendered old notes,
will be determined by us in our sole discretion. Our determination will be final
and binding. We reserve the absolute right to reject any and all old notes which
would be unlawful if accepted, in the opinion of our counsel. We also reserve
the right, in our sole discretion, to waive any defects, irregularities or
conditions of tender as to particular old notes. Our 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.
We intend to notify holders of defects or irregularities with respect to
tenders of old notes. However, neither we, the exchange agent nor any other
person will incur any liability for failure to give such notification. Tenders
of old notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
Any old notes received by the exchange agent that we determine are not
properly tendered or as to which the defects or irregularities have not been
cured or waived, will be returned by the exchange agent to the tendering holder,
as soon as practicable following the expiration date.
In addition, we reserve the right, in our sole discretion:
(1) to purchase or make offers for any old notes that remain outstanding
subsequent to the expiration date; and
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(2) to the extent permitted by applicable law, to purchase old notes in
the open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers may differ from the terms of the
exchange offer.
Guaranteed Delivery Procedures
Holders who wish to tender their old notes and
(1) deliver their old notes, the letter of transmittal or, in case of
book-entry transfer, an Agent's Message, and any other required
documents to the exchange agent prior to the expiration date; or
(2) who cannot complete the procedures for book-entry transfer, including
delivery of an Agent's Message prior to the expiration date,
may effect a tender if:
o they tender through an Eligible Institution;
o prior to the expiration date, the exchange agent receives from an
Eligible Institution a properly completed and duly executed notice of
guaranteed delivery by facsimile transmission, mail or hand delivery,
setting forth the name and address of the holder, the certificate
number(s) of the old notes being tendered and the principal amount of
those old notes, stating that the tender is being made and
guaranteeing that, within five New York Stock Exchange trading days
after the expiration date, the letter of transmittal, or a facsimile
copy, together with the certificate(s) representing those old notes,
or a confirmation of book-entry transfer of those old notes into the
exchange agent's account at DTC, and any other documents required by
the letter of transmittal, will be deposited by the member firm with
the exchange agent; and
o the exchange agent receives within five New York Stock Exchange
trading days after the expiration date:
(1) the properly completed and executed letter of transmittal, or a
facsimile copy;
(2) the certificate(s) representing all tendered old notes in proper form
for transfer or a confirmation of book-entry transfer of those old
notes into the exchange agent's account at DTC; and
(3) all other documents required by the letter of transmittal.
Upon request to the exchange agent, we will send a notice of guaranteed
delivery to holders who wish to tender their old notes according to the
guaranteed delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, holders may withdraw
tenders of old notes at any time prior to 5:00 p.m., New York City time, on the
expiration date. To withdraw a tender of old notes in the exchange offer, the
exchange agent must receive, by a telegram, telex, letter or facsimile
transmission, notice of withdrawal at its address set forth in this prospectus
prior to 5:00 p.m., New York City time, on the expiration date. A notice of
withdrawal must:
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(1) specify the name of the person that deposited the old notes to be
withdrawn;
(2) identify the old notes to be withdrawn (including the certificate
number(s) and principal amount of those old notes, or, in the case of
old notes transferred by book-entry transfer, the name and number of
the account at DTC to be credited);
(3) be signed by the holder of those old notes in the same manner as the
original signature on the letter of transmittal by which those old
notes were tendered (including any required signature guarantees) or
be accompanied by documents of transfer sufficient to have the trustee
with respect to the old notes register the transfer of those old notes
into the name of the person withdrawing the tender; and
(4) specify the name in which any of those old notes are to be registered,
if different from that of the person who deposited those old notes.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of notices of withdrawal. Our determination will be
final and binding on all parties. We will not deem old notes so withdrawn to
have been validly tendered for purposes of the exchange offer. We will not issue
exchange notes for withdrawn old notes, unless you validly retender the
withdrawn old notes. We will return any old notes which have been tendered but
which are not accepted for exchange to the holder of the old notes at our cost
as soon as practicable after withdrawal, rejection of tender or termination of
the exchange offer.
You may retender properly withdrawn old notes by following one of the
procedures described above under the heading "Procedures for Tendering Old
Notes."
Conditions to The Exchange Offer
Notwithstanding any other term of the exchange offer, we will not be
required to accept any old notes for exchange, or to exchange any exchange notes
for any old notes, and we may terminate or amend the exchange offer before our
acceptance of tenders of the old notes if:
(1) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the exchange
offer which, in our sole judgment, might materially impair our ability
to proceed with the exchange offer or any development has occurred in
any existing action or proceeding which may be harmful to us or any of
our subsidiaries; or
(2) any law, statute, rule, regulation or interpretation by the staff of
the Securities and Exchange Commission is proposed, adopted or
enacted, which, in our sole judgment, might impair our ability to
proceed with the exchange offer or impair the contemplated benefits of
the exchange offer to us; or
(3) any governmental approval has not been obtained, which we believe, in
our sole discretion, is necessary for the consummation of the exchange
offer as outlined in this prospectus.
If we determine, in our sole discretion, that any of the conditions are not
satisfied, we may:
(1) refuse to accept any old notes and return to the holders any old notes
that have been tendered, or
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<PAGE>
(2) extend the exchange offer and retain all old notes tendered prior to
the original expiration date of the exchange offer, subject to the
rights of the holders of those notes to withdraw them, or
(3) waive the condition and accept all properly tendered old notes that
have not been withdrawn.
The exchange offer is not conditioned on any minimum aggregate principal
amount of the old notes being tendered for exchange.
Exchange Agent
The Chase Manhattan Bank, the trustee under the indenture, has been
appointed as exchange agent for the exchange offer. In that capacity, the
exchange agent has no fiduciary duties and will be acting solely on the basis of
our directions. Completed and executed letters of transmittal 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 registered or certified mail
or by overnight courier
or by hand delivery: The Chase Manhattan Bank
Corporate Trust Securities Window
Room 234, North Building
55 Water Street
New York, New York 10004
Facsimile transmission: (212) 638-7380 or (212) 638-7381
Information or confirmation by telephone: Mr. Carlos Esteves, (212) 638-0828
or (212) 638-0454
Delivery to an address or facsimile number other than those listed above will
not constitute a valid delivery.
Fees and Expenses
We will bear the expenses of soliciting tenders. We are mailing the
principal solicitation. However, our officers and regular employees and those of
our affiliates may make additional solicitation by telegraph, telecopy,
telephone or in person.
We have not retained any dealer-manager in connection with the exchange
offer. We will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. However, we will pay the exchange agent
reasonable and customary fees for its services and reimburse it for its
reasonable out-of-pocket expenses.
We will pay the cash expenses incurred in connection with the exchange
offer. These expenses include fees and expenses of the exchange agent and
trustee, accounting and legal fees and printing costs, among others.
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<PAGE>
Transfer Taxes
Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes in connection with the exchange. However, holders who
instruct us to register exchange notes in the name of, or returned to, a person
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax on that transfer.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the old
notes, as reflected in our accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by us as
a result of the consummation of the exchange offer. The expenses of the exchange
offer will be amortized by us over the remaining term of the exchange notes
issued in the exchange offer.
Consequences of Failure to Exchange
All old notes that are not tendered will continue to be restricted securities.
Accordingly, prior to the later of July 9, 2001, two years from the date of
original issue of the old notes, and two years after those old notes were last
sold by us or one of our affiliates, those old notes may be offered and resold
only:
(1) to us;
(2) pursuant to a registration statement that has been declared effective
under the Securities Act;
(3) in the United States to a "qualified institutional buyer" within the
meaning of Rule 144A in reliance upon the exemption from the
registration requirements of the Securities Act provided by Rule 144A,
based upon an opinion of counsel;
(4) outside the United States to a foreign person in a transaction that
complied with the provisions of Regulation S under the Securities Act;
or
(5) pursuant to another available exemption from the registration
requirements of the Securities Act, based upon an opinion of counsel,
and
in each case in accordance with applicable state securities laws.
To the extent that old notes are tendered and accepted in the exchange
offer, the liquidity of the trading market for untendered old notes will be
adversely affected.
Shelf Registration Statement
If either of the following occur:
(1) the exchange offer is not permitted by applicable law or policy of the
Securities and Exchange Commission; or
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(2) a holder of old notes notifies us that:
(A) the holder was prohibited by law or Securities and Exchange
Commission policy from participating in the exchange offer;
(B) the holder cannot resell the exchange notes acquired by it in the
exchange offer to the public without delivering a prospectus and
this prospectus is not appropriate or available for such resales
by the holder; or
(C) the holder is a broker-dealer and holds old notes acquired
directly from us or any of our affiliates,
then, we will take the following actions:
o we will file a shelf registration statement under Rule 415 of the
Securities Act of 1933 relating to the notes on or prior to 60 days
after the earlier to occur of the event specified in (1) above and the
date we receive the notice specified in (2) above; and
o use our commercially reasonable best efforts to cause such shelf
registration statement to become effective on or prior to the 60th day
after the above filing deadline.
USE OF PROCEEDS
We will not receive any proceeds from the exchange of the exchange notes
for your old notes. We used the net proceeds of the offering of the old notes,
together with borrowings under our new revolving credit facility and the equity
contribution from our direct parent, to repay indebtedness (including accrued
interest through the date of repayment), to consummate our acquisition of the
Berlin-Gorham Mills and to pay related fees and expenses.
CAPITALIZATION
The following table sets forth our actual consolidated cash and
capitalization as of September 30, 1999. This table should be read in
conjunction with "Selected Historical Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and the notes to our consolidated financial
statements, included elsewhere in this prospectus.
As of
September 30,
1999
----------------------
(dollars in thousands)
Cash and Cash Equivalents ............................. $ 1.8
======
Debt (including current portion):
Old Notes ............................................. $159.6
Revolving Credit Facility(1) .......................... 50.1
Mortgage and Other Debt(2) ............................ 22.5
Capital Lease Obligations ............................. 0.9
------
Total Debt .................................. 233.1
Stockholder's Equity:
Common Stock .......................................... 1.6
Additional Paid-In Capital ............................ 57.1
Retained Earnings ..................................... 39.5
------
Total Stockholder's Equity .................. 98.2
------
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Total Capitalization .................................. $331.3
======
- ----------
(1) Our revolving credit facility consists of a five year $100.0 million
revolving loan and letter of credit facility with various lenders, for
which Lasalle Bank National Association acts as agent. See
"Description of Material Indebtedness."
(2) See "Description of Material Indebtedness - Mortgage Loans and Other
Indebtedness" and note (7) of the notes to our consolidated financial
statements included in this prospectus.
UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA
The unaudited pro forma consolidated financial data have been derived by
giving effect to the pro forma adjustments to our historical consolidated
financial statements and the historical financial statements of the
Berlin-Gorham Mills appearing elsewhere in this prospectus. The unaudited pro
forma consolidated statements of operations for the fiscal year ended September
30, 1999 gives effect to the transactions which occurred on July 9, 1999 as if
they were consummated at October 1, 1998. Accordingly, the pro forma adjustments
presented reflect the estimated impact of these items as a result of our
acquisition of the Berlin-Gorham Mills and the offering of the old notes that
would have occurred during the nine month period ended June 30, 1999. The impact
of the period from July 1 through July 8, 1999 is not deemed material for
purposes of these adjustments.
The pro forma adjustments are described in the accompanying notes to the
unaudited pro forma statements and are based upon the available information and
upon specified assumptions that management believes are reasonable. The
unaudited pro forma consolidated financial data and the notes to the unaudited
pro forma consolidated financial data should be read in conjunction with our
historical consolidated financial statements and the notes to our historical
consolidated financial statements and the notes to the historical financial
statements of, and other financial information pertaining to us, the
Berlin-Gorham Mills, including "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
The following unaudited pro forma consolidated financial data and
accompanying notes are provided for informational purposes only and are not
necessarily indicative of the operating results that would have occurred had the
transactions been consummated on the date described above, nor are they
necessarily indicative of our future results of operations.
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<PAGE>
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
Fiscal Year Ended September 30, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Berlin-
American Gorham Adjustments Adjustments
Tissue (1) Mills(2) for the for the
(audited) (unaudited) Acquisition Offering Pro Forma(5)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales ..................................... $ 284,340 $ 135,166 $ -- $ -- $ 419,506
Cost of sales ................................. 213,465 133,818 (7,082)(3) -- 340,201
--------- --------- --------- --------- ---------
Gross profit .................................. 70,875 1,348 7,082 -- 79,305
Property tax accrual reversal ................. -- (8,957) -- -- (8,957)
Asset impairment charge ....................... -- 143,632 -- -- 143,632
Adjustment to net realizable value ........... -- 16,175 -- -- 16,175
Selling, general and administrative
expenses ...................................... 34,934 6,549 -- -- 41,483
Corporate overhead allocation ................. -- 6,438 -- -- 6,438
--------- --------- --------- --------- ---------
Operating profit .............................. 35,941 (162,489) 7,082 -- (119,466)
Interest expense .............................. 17,058 1,966 -- 5,865(4) 24,889
Other income/expense .......................... -- (53) -- -- (53)
Income tax benefit ............................ -- (62,273) -- -- (62,273)
--------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item ............................ 18,883 (102,129) 7,082 (5,865) (82,029)
Loss on early extinguishment
of debt ....................................... 4,164 -- -- -- 4,164
--------- --------- --------- --------- ---------
Net income (loss) ............................. $ 14,719 $(102,129) $ 7,082 $ (5,865) $ (86,193)
========= ========= ========= ========= =========
</TABLE>
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<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended September 30, 1999
(dollars in thousands)
(1) The American Tissue financial data represents our audited results of
operations for the fiscal year ended September 30, 1999, which includes the
operating results of the Berlin-Gorham Mills from July 9, 1999 through
September 30, 1999.
(2) The Berlin-Gorham Mills financial data represents their unaudited results
of operations for the period from October 1, 1998 through July 9, 1999.
(3) Savings resulting from decrease in depreciation expense as a result of the
purchase price allocation to fixed assets of the Berlin-Gorham Mills were
$7,082.
(4) Adjustment to reflect the increase in interest on long-term debt as a
result of the issuance of the Notes on the following:
Nine Months Ended
June 30, 1999
-----------------
Interest on the old notes issued at 12 1/2% coupon ........ $ 15,469
Interest on our revolving credit facility*................. 678
Amortization of debt costs over seven-year term ........... 1,017
Amortization of debt discount ............................. 392
Interest on the borrowings repaid ......................... (11,691)
--------
Net increase in interest .................................. $ 5,865
========
* Interest on our new revolving credit facility was calculated using the
agreement rate of LIBOR plus 225 basis points per annum. If this rate
changed by 1/8%, the amount of interest would change by $11 for the
pro forma nine month period ended June 30, 1999.
(5) In addition to the pro forma adjustments presented above, we believe that
we will achieve specific synergies as a result of our acquisition of the
Berlin-Gorham Mills. The following is a summary of the estimated pro forma
impact on earnings during the nine month period ended June 30, 1999 that we
believe would have resulted if the identified synergies were implemented as
of October 1, 1998:
(a) Increase in net sales as a result of the pulp
purchase agreement between American Tissue and
Crown Vantage $ 1,701
(b) Savings on salaries and fringe benefits from
workforce reductions and integration of employee
benefits 2,983
(c) Substitution of lower cost raw materials, using
double lined kraft paper and paper manufacturing
by-products instead of internally manufactured
slush pulp from the Berlin-Gorham Mills 4,616
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(d) Savings resulting from increased wet lap pulp
production capacity by the repairs of an existing
wet lap machine as required by the asset purchase
agreement 2,835
(e) Savings resulting from American Tissue purchasing
pulp from Berlin-Gorham Mills as compared to third
party suppliers 1,654
(f) Cost savings resulting from the termination of
sludge hauling contract 60
(g) Incremental American Tissue corporate overhead to
support the Berlin-Gorham Mills operations (1,275)
(h) Marketing expense savings resulting from paper
brokerage agreement between American Tissue and
Crown Paper 595
(i) Cost savings resulting from the elimination of
Crown Paper corporate overhead allocation 6,438
--------
Total estimated synergies $ 19,607
========
Had these synergies been realized in the nine month period ended June 30,
1999, unaudited pro forma consolidated EBITDA for the year ended September 30,
1999 would have been $(84,600) and unaudited pro forma consolidated adjusted
EBITDA for the year ended September 30, 1999 would have been $66,901. Unaudited
pro forma consolidated net loss for the year ended September 30, 1999 would have
been $(66,586).
SELECTED HISTORICAL FINANCIAL DATA
(dollars in thousands)
AMERICAN TISSUE
Set forth below are selected historical financial data for American Tissue
for the five fiscal years ended September 30, 1999. The data as of and for:
o fiscal years ended September 30, 1997, 1998 and 1999 are derived from,
and should be read in conjunction with, our consolidated financial
statements audited by Arthur Andersen LLP, independent auditors, whose
report with respect to such financial statements, as well as such
financial statements, are included elsewhere in this prospectus;
o fiscal year ended September 30, 1996 are derived from, and should be
read in conjunction with, our consolidated financial statements, which
were audited by Holtz Rubenstein & Co., LLP, independent auditors; and
o fiscal year ended September 30, 1995, is derived from our unaudited
consolidated financial statements.
The financial statements as of September 30, 1995 and 1996 are not included in
this prospectus.
In the opinion of our management, these unaudited financial statements
include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the information set forth in these
unaudited financial statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and the notes to our consolidated financial statements,
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included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year
Ended September 30,
-----------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ...................................... $ 138,933 $ 153,224 $ 198,384 $ 215,203 $ 284,340
Cost of sales ................................. 116,406 122,273 152,286 172,617 213,465
--------- --------- --------- --------- ---------
Gross profit .................................. 22,527 30,951 46,098 42,586 70,875
Selling, general and
administrative expenses ....................... 15,934 17,181 26,953 29,388 34,934
--------- --------- --------- --------- ---------
Operating income .............................. 6,593 13,770 19,145 13,198 35,941
Interest expense and
other income, net ............................. 8,326 588 12,272 14,672 17,058
--------- --------- --------- --------- ---------
Net income (loss) before
Extraordinary items ........................... (1,733) 13,182 6,873 (1,474) 18,883
--------- --------- --------- --------- ---------
Extraordinary items ........................... -- -- -- -- 4,164
--------- --------- --------- --------- ---------
Net income (loss) ............................. $ (1,733) $ 13,182 $ 6,873 $ (1,474) $ 14,719
========= ========= ========= ========= =========
Balance Sheet Data:
Cash and cash equivalents ..................... $ 1,017 $ 152 $ 870 $ 1,480 $ 1,806
Working capital (deficiency) .................. (18,183) (18,413) (20,892) (48,748) 45,906
Total assets .................................. 136,166 199,201 230,517 270,819 406,331
Total debt .................................... 93,300 123,376 143,690 176,394 233,069
Stockholder's equity .......................... 14,010 26,984 33,858 33,644 98,222
Other Data:
Ratio of earnings to
fixed charges(1) .............................. --(4) 2.3x 1.5x --(4) 1.9x
Cash flows provided by (used in):
Operating activities .......................... $ --(5) $ 10,351 $ 21,885 $ 17,037 $ (22,034)
Investing activities .......................... --(5) (40,933) (29,172) (27,566) (65,168)
Financing activities .......................... --(5) 29,717 8,005 11,139 87,528
EBITDA(2) ..................................... 9,281 27,950 27,427 23,783 49,527
Interest expense .............................. 6,922 9,175 12,272 14,672 17,058
Depreciation and amortization ................. 4,092 5,593 8,282 10,585 13,586
Capital expenditures(3) ....................... 24,192 40,933 29,172 27,566 20,168
Capital lease obligations
entered into .................................. 1,944 8,770 2,021 10,453 4,002
</TABLE>
- ----------
(1) Reference is made to Exhibit 12.1 to the registration statement of
which this prospectus is a part, for the calculation of this ratio.
(2) EBITDA is defined as operating income plus depreciation and
amortization. Information regarding EBITDA is presented because
management believes that some investors use EBITDA as one measure of
an issuer's ability to service its debt. EBITDA should not be
considered an alternative to, or more meaningful than, operating
income, net income or cash flow as defined by generally accepted
accounting principles or as an indicator of an issuer's operating
performance. Furthermore, caution should be used in comparing EBITDA
to similarly titled measures of other companies as the definitions of
these measures may vary. See "Unaudited Pro Forma Consolidated
Financial Data" and the consolidated financial statements of American
Tissue and the notes to our consolidated financial statements, and the
financial statements and of the Berlin-Gorham Mills and the notes to
these financial statements, included elsewhere in this prospectus.
(3) Excludes portions attributable to capital leases.
(4) Earnings in fiscal 1995 and 1998 were insufficient to cover fixed
charges by $1,733 and $2,073, respectively.
(5) Consolidated cash flow data for this period is not available.
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BERLIN-GORHAM MILLS
Set forth below are selected historical financial data of the Berlin-Gorham
Mills for the five fiscal years ended 1998. The operating data and the other
financial data for:
o the 52 weeks ended December 29, 1996, December 28, 1997 and December
27, 1998 are derived from, and should be read in conjunction with, the
financial statements for the Berlin-Gorham Mills audited by Ernst &
Young LLP, independent auditors, whose report with respect to such
financial statements, as well as such financial statements, are
included elsewhere herein; and
o the 52 weeks ended December 25, 1994 and December 31, 1995 and for the
26 weeks ended June 27, 1999, respectively, are derived from unaudited
financial statements for the Berlin-Gorham Mills.
The unaudited financial statements for the 26 week period ended June 27,
1999 are included in this prospectus. The financial statements for the 52 weeks
ended December 25, 1994 and December 31, 1995 are not included in this
prospectus. Results of operations for the interim period ended June 27, 1999 are
not necessarily indicative of the results to be expected for the full year or
any other future period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Berlin-Gorham Mills" and the historical
financial statements and the notes to the historical financial statements of the
Berlin-Gorham Mills included elsewhere in this prospectus.
<TABLE>
<CAPTION>
26 Weeks
Ended
52 Weeks Ended December(1) June(2)
------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- --------- ---------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales ....................................... $ 164,733 $ 236,311 $ 177,916 $ 183,398 $ 174,423 $ 86,372
Cost of sales ................................... 179,996 199,416 189,173 179,648 185,820 83,268
Severance charge ................................ -- -- -- -- 1,932 --
--------- --------- --------- --------- --------- ---------
Gross profit (loss) ............................. (15,263) 36,895 (11,257) 3,750 (13,329) 3,104
Adjustment to net realizable value .............. -- -- -- -- -- 16,175
Selling and administrative expenses ............. 5,353 4,838 3,698 6,542 9,155 4,693
Property tax accrual reversal ................... -- -- -- -- -- (8,957)
Gain on timberland sale ......................... -- -- -- (13,518) -- --
Asset impairment charge ......................... -- -- -- -- 143,632 --
Corporate overhead allocation(3) ................ 3,085 3,880 5,412 5,726 7,764 3,783
--------- --------- --------- --------- --------- ---------
Operating income (loss) ......................... (23,701) 28,177 (20,367) 5,000 (173,880) (12,590)
Interest expense and other income, net .......... 1,195 609 1,474 2,472 2,462 1,240
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ............... (24,896) 27,568 (21,841) 2,528 (176,342) (13,830)
Income tax provision (benefit)(4) ............... (8,992) 10,958 (8,303) 1,077 (68,287) (5,366)
--------- --------- --------- --------- --------- ---------
Net income (loss)................................ $ (15,904) $ 16,610 $ (13,538) $ 1,451 $(108,055) $ (8,464)
========= ========= ========= ========= ========= =========
</TABLE>
As of
June 27, 1999
--------------
(unaudited)
Balance Sheet Data:
Working capital .................................. $ 12,561
Total assets ..................................... 81,280
Total debt ....................................... 30,255
- ----------
(1) The Berlin-Gorham Mills' fiscal year ends on the last Sunday of
December (i.e., December 25, 1994, December 31, 1995, December 29,
1996, December 28, 1997 and December 27, 1998).
-43-
<PAGE>
(2) The Berlin-Gorham Mills' second fiscal quarter ends on the last Sunday
of the month of June (i.e., June 27, 1999).
(3) Corporate overhead allocation represents a pro rata allocation of
Crown Paper's corporate administrative costs, which are not directly
attributable to the Berlin-Gorham Mills. Such costs include such items
as accounting and tax services, particular human resources services,
computer services and general corporate administrative costs.
(4) The Berlin-Gorham Mills have historically been included in the
consolidated tax returns of Crown Paper. Income taxes are presented as
if the Berlin-Gorham Mills filed its taxes on a separate return basis.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AMERICAN TISSUE
The following discussion should be read in conjunction with "Unaudited Pro
Forma Consolidated Financial Data," "Selected Historical Financial Data" and our
historical audited and unaudited financial statements and related notes included
elsewhere in this prospectus.
Overview
We are an integrated manufacturer of tissue and uncoated freesheet paper
products, with a comprehensive product line that includes jumbo tissue rolls
used in the manufacture of finished tissue products, finished tissue products
and uncoated freesheet paper products for printing and publishing applications.
We recently entered the uncoated freesheet paper business through our
acquisition of the Berlin-Gorham Mills. Our finished products are sold in the
away-from-home and at-home markets, and our jumbo tissue rolls are sold to other
manufacturers of finished tissue products. A substantial portion of our net
sales are derived from the manufacture and sale of finished tissue products,
jumbo tissue rolls, uncoated freesheet paper and virgin pulp. We also generate a
small portion of our net sales from the sale of converting equipment for the
manufacture of finished tissue products.
We utilize our tissue mills on an integrated company basis to maximize
jumbo tissue roll production at our lowest cost mills. For example, upon the
acquisition of our Neenah, Wisconsin facility from Kimberly-Clark in November
1996, we were able to consolidate tissue production by shifting manufacturing
from three of our smaller tissue mills to our largest facilities in Neenah,
Wisconsin and St. Helens, Oregon. As a result of shifting production to these
facilities, we were better able to absorb manufacturing overhead costs.
Since fiscal 1997, demand for our products has increased. Accordingly, we
have increased production at our operating tissue mills, re-opened two of our
smaller mills, and consolidated the operations of our Tomahawk, Wisconsin and
Winchester, New Hampshire facilities by moving one of our Tomahawk facility
tissue machines to Winchester. We closed our Tomahawk facility, which
manufactured jumbo tissue rolls, in February 1998, and have no current plans to
recommence production at that facility. We closed our Tomahawk facility because
we believed that by consolidating the operations of our Tomahawk and Winchester
facilities we would be able to increase the production of jumbo tissue and
reduce manufacturing overhead costs. In fiscal 1997, our Tomahawk facility
produced approximately 7,303 tons of jumbo tissue rolls. In fiscal 1999, we
reduced manufacturing overhead costs by $0.5 million as a result of closing our
Tomahawk, Wisconsin facility.
-44-
<PAGE>
In each of our last three fiscal years, we have experienced growth in net
sales of finished tissue products and jumbo tissue rolls. The acquisition of our
integrated tissue mill/converting facility in Neenah, Wisconsin from
Kimberly-Clark, resulting from the merger of Kimberly-Clark and Scott Paper, has
significantly contributed to the growth of revenues from sales of our finished
tissue products and jumbo tissue rolls in the away-from-home market. We believe
that this growth results from the fact that many distributors and other major
purchasers of jumbo tissue rolls and finished tissue products have diversified
their sources of supply so as not to become dependent on one or two sources of
supply as a result of the continuing consolidation of the largest tissue
manufacturers. Shipments of premium and value grades of tissue products remained
strong through fiscal 1999 due to our marketing efforts. Our at-home products
experienced increased product penetration, because we offered our existing
customers a broader mix of tissue products, including premium grades of bath and
towel tissue. Our away-from-home sales have experienced strong growth resulting
from the addition to our product line of products manufactured at our Neenah
mill.
The following is a summary of our revenues for the fiscal years indicated
(dollars in millions):
Fiscal Years
Ended September 30,
--------------------------------------
1997 1998 1999
------- ------- ------
Paper products .................. $ 196.4 $ 208.3 $281.4
Equipment sales ................. 2.0 6.9 2.9
------- ------- ------
Total revenues .................. $ 198.4 $ 215.2 $284.3
======= ======= ======
We were incorporated in August 1998 for the purpose of reorganizing the
ownership interests of the stockholders of American Tissue Corporation and some
of its affiliates into us. In October 1998, we completed the reorganization of
these ownership interests, which consist of the outstanding capital stock of our
corporate subsidiaries and the outstanding membership interests in our
subsidiaries formed as limited liability companies. We and our corporate
subsidiaries have elected S corporation status under the Internal Revenue Code
of 1986, as amended. As a result, we and such subsidiaries are not subject to
U.S. federal income taxes and state and local income taxes in some states.
Results of Operations
The following table sets forth specific data as a percentage of our
revenues for the fiscal years indicated:
Fiscal Years
Ended September 30,
--------------------------------
1997 1998 1999
------ ------ ------
Revenues ................................ 100.0% 100.0% 100.0%
Cost of sales ........................... 76.6 80.2 75.1
Gross profit ............................ 23.6 19.8 24.9
Selling, general and
administrative expenses (1) ............. 13.6 13.7 12.3
Operating income ........................ 9.7 6.1 12.6
Interest expense, net ................... 6.2 6.8 6.0
EBITDA (2) .............................. 13.8 8.4 17.4
- ----------
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<PAGE>
(1) It is our policy to include freight expense in this category as a
selling expense.
(2) See the definition of EBITDA in footnote 1 under "Selected
Historical Financial Data -- American Tissue."
Fiscal 1999 Compared to Fiscal 1998
Revenues. Revenues are comprised of net sales of paper products, equipment
sales and rental income. Our revenues increased $69.1 million, or 32.1%, from
$215.2 million in fiscal 1998 to $284.3 million in fiscal 1999.
Net sales of finished tissue products increased $11.1 million, or 6.8%,
from $161.1 million in fiscal 1998 to $172.2 million in fiscal 1999. This
increase was due primarily to our strategy of increasing our sales efforts to
take advantage of competitor consolidation and the implementation of our new
private label program. During fiscal 1999, we were able to increase our sales of
at-home products despite competitive pricing in this segment. Increases in net
sales of finished tissue products attributed to volume were $20.0 million,
offset by decreases in sales prices amounting to $8.9 million.
Net sales of jumbo tissue rolls increased $21.3 million, or 45.1%, from
$47.2 million in fiscal 1998 to $68.5 million in fiscal 1999. We secured long
term contracts to sell jumbo tissue rolls to Kimberly-Clark, National Packaging
and Linters, which focus on premium and specialty grades of jumbo tissue rolls.
This resulted in stronger pricing and higher volume in fiscal 1999.
Specifically, increases attributed to volume were $19.8 million, and increases
attributable to pricing increases accounted for $1.5 million of the increase in
net sales of jumbo tissue rolls. Despite decreases in jumbo tissue roll pricing
by Great Lakes Tissue and City Forest, we believe that our average selling price
increased because of our mix of higher quality specialty grades of jumbo tissue
rolls which command higher selling prices.
The Berlin-Gorham Mills generated net sales of uncoated freesheet paper
products of $28.2 million for the period July 9, 1999 to September 30, 1999. Net
sales of virgin pulp were $12.5 million for the period July 9, 1999 to September
30, 1999. Because we acquired the Berlin-Gorham Mills on July 9, 1999, we have
no comparable figures in our historical results. However, for comparison
purposes, sales of uncoated freesheet and pulp for the three months ended
September 28, 1998 for the Berlin-Gorham Mills, as a business unit of Crown
Paper Co., were $28.9 million and $9.4 million, respectively.
Net sales of equipment decreased $3.9 million from $5.7 million in fiscal
1998 to $1.8 million in fiscal 1999. Equipment sales continue to be intermittent
as a result of our recent entry into this business. Rental income remained
constant at $1.1 million in fiscal 1999 as compared to $1.2 million in fiscal
1998.
Gross Profit. Our gross profit increased $28.3 million, or 66.4%, from
$42.6 million in fiscal 1998 to $70.9 million in fiscal 1999. Gross profit, as a
percentage of net sales, increased from 19.8% in fiscal 1998 to 24.9% in fiscal
1999. This increase in gross profit, as a percentage of net sales, was a result
of higher sales volumes without a commensurate increase in fixed costs and an
increased production of jumbo tissue rolls, which lowered per unit costs of
finished tissue products. Additionally, sales for the Berlin-Gorham Mills since
July 9, 1999, provided higher gross profit as a percentage of net sales relative
to historical rates prior to our acquisition of the Berlin-Gorham Mills.
Depreciation and amortization increased $3.0 million, or 28.4%, from $10.6
million in fiscal 1998 to $13.6 million in fiscal 1999.
Selling, General and Administrative Expenses. A significant portion of our
selling expenses are freight expenses incurred in shipping our products to our
customers. It is our policy to include freight expense incurred in shipping our
products in this category as selling expense. Freight expense increased $2.3
million from $13.3 million in fiscal 1998 to $15.6 million in fiscal 1999.
Selling, general and administrative expenses, excluding freight, increased $3.2
million, or 20.2%, from $16.1 million in fiscal 1998 to $19.3 million in fiscal
1999. Selling, general and administrative expense, excluding freight, was 6.8%,
as a percentage of net sales, in fiscal 1999 as compared to 7.4% in fiscal 1998.
This percentage decrease was due to net sales increasing at a faster rate
-46-
<PAGE>
than selling, general and administrative expenses, excluding freight, between
fiscal 1998 and fiscal 1999 and our continuing efforts to reduce overhead.
Operating Income. Operating income increased $22.7 million, or 172.3%, from
$13.2 million for fiscal 1998 to $35.9 million for the fiscal 1999. Operating
income, as a percentage of net sales, was 12.6% for fiscal 1999, as compared to
6.1% for fiscal 1998. This increase was due to the reasons stated above.
Interest Expense. Interest expense increased $2.4 million, or 16.3%, from
$14.7 million for fiscal 1998 to $17.1 million for fiscal 1999. This increase
reflects higher short-term debt levels during fiscal 1999, as compared to fiscal
1998.
Fiscal 1998 Compared to Fiscal 1997
Revenues. Revenues are comprised of net sales of paper products, sales of
equipment and rental income. Our revenues increased $16.9 million, or 8.4%, from
$198.4 million in fiscal 1997 to $215.2 million in fiscal 1998. The increase was
attributable to greater sales volume in most product lines.
Net sales of finished tissue products increased $6.7 million, or 4.3%, from
$154.4 million in fiscal 1997 to $161.1 million in fiscal 1998. We maintained
our historic price levels in the away-from-home market while seeking to increase
the number of distributors we sell our products to, through an increase in
number of sales personnel calling on regional distributors. In anticipation of
the opening of our Calexico, California converting facility, we pursued West
Coast at-home business with aggressive pricing.
Net sales of jumbo tissue rolls increased $5.2 million, or 12.6%, from
$42.0 million in fiscal 1997 to $47.2 million in fiscal 1998. We experienced an
increase in tons sold because of an increase in production of premium grades of
tissue from our Neenah, Wisconsin mill and our St. Helens, Oregon tissue
operation.
Net sales of equipment increased $4.5 million, or 360.4%, from $1.2 million
in fiscal 1997 to $5.7 million in fiscal 1998. Equipment sales are intermittent,
and vary as a result of our recent entry into this business. Rental income
increased $0.4 million, or 50.0%, from $0.8 million in fiscal 1997 to $1.2
million in fiscal 1998.
Gross Profit. Gross profit decreased $3.5 million, or 7.6%, from $46.1
million in fiscal 1997 to $42.6 million in fiscal 1998. Gross profit, as a
percentage of net sales, decreased from 23.2% in fiscal 1997 to 19.7% in fiscal
1998. This decrease in gross profit as a percentage of net sales was the result
of increased overhead due to the purchase and start-up of our Neenah, Wisconsin
mill and our Waterford, New York tissue converting facility in the second half
of fiscal 1998. Depreciation and amortization expense relating to these
facilities as well as other capital spending increased by $2.3 million, or
27.8%, from $8.3 million in fiscal 1997 to $10.6 million in fiscal 1998.
Selling, General and Administrative Expenses. It is our policy to include
freight expense in this category as a selling expense. Freight expense increased
$2.8 million, or 26.6%, from $10.6 million in fiscal 1997 to $13.4 million in
fiscal 1998. This resulted from our increased volume of finished tissue
products, which increased 10.6%, and an increase in sales to West Coast
customers, in anticipation of the start-up of our Calexico, California tissue
converting facility. Selling, general and administrative expenses, exclusive of
freight, decreased $0.4 million, or 2.3%, from $16.4 million in fiscal 1997 to
$16.0 million in fiscal 1998. Selling, general and administrative expenses,
excluding freight, were 7.5%, as a percentage of net sales, in fiscal 1998, as
compared to 8.3%, as a percentage of net sales, in fiscal 1997.
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<PAGE>
Operating Income. Operating income decreased $5.9 million, or 31.0%, from
$19.1 million in fiscal 1997, to $13.2 million in fiscal 1998. Operating income
as a percentage of net sales was 6.1% in fiscal 1998, as compared to 9.6% in
fiscal 1997. This decrease was due to the reasons stated above.
Interest Expense. Interest expense increased $2.4 million, or 19.6%, from
$12.3 million in fiscal 1997 to $14.7 million in fiscal 1998. This increase was
due to acquisition financing, capital spending and higher working capital needs.
Fiscal 1998 interest expense includes $1.3 million of non-cash expense for
related party debt.
BERLIN-GORHAM MILLS
The following discussion and analysis of financial condition and results of
operations covers periods before our acquisition of the Berlin-Gorham Mills. The
results of operations and financial condition for the periods subsequent to our
acquisition of the Berlin-Gorham Mills will not necessarily be comparable to
prior periods. The following should be read in conjunction with the "Unaudited
Pro Forma Consolidated Financial Data," "Selected Historical Financial Data" and
the historical audited and unaudited financial statements and related notes of
the Berlin-Gorham Mills included elsewhere in this prospectus.
Overview
The Berlin-Gorham Mills are fully integrated pulp and paper mills. The pulp
mill has an annual capacity of approximately 350,000 tons of bleached northern
hardwood and softwood pulp. Of the pulp produced at this mill in 1998,
approximately 47% of the hardwood pulp and 100% of the softwood pulp was used by
the paper mill in the production of paper and toweling and the remaining
approximately 53% of the hardwood pulp was dried and either sold to other Crown
Paper mills or as market pulp. Prior to the acquisition, at our request, Crown
Paper commenced operation of an existing wet lap machine previously idled for
which it was reimbursed by us in the amount of approximately $313,000. This wet
lap machine has added approximately 26,000 tons of annual capacity.
The four paper machines located in the paper mill have an annual capacity
of approximately 179,000 tons of uncoated freesheet paper annually, and the
toweling machine located in the paper mill has an annual production capacity of
approximately 39,000 tons of toweling. The four paper machines produce uncoated
freesheet paper products for the printing and publishing markets, including
premium text and cover grades, book papers, opaques and forms bond. The toweling
machine produces primarily away-from-home towel and wiper grades. Following its
spinoff in 1995 from James River, the predecessor of Fort James, Crown Paper
redirected its production at the Berlin-Gorham Mills to increase its focus on
the premium text and cover sector of the printing and publishing market.
-48-
<PAGE>
The following is a summary of Berlin-Gorham Mills' net sales for the
periods indicated (dollars in millions):
<TABLE>
<CAPTION>
52 Weeks 26 Weeks
Ended December Ended June
------------------------------------------- -------------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Uncoated free sheet ...................... $ 123.0 $ 119.9 $ 119.3 $ 62.5 $ 57.7
Towel .................................... 22.5 26.5 15.6 6.2 11.2
Market pulp .............................. 32.4 37.0 39.5 18.7 17.5
------- ------- ------- ------- -------
Total net sales .......................... $ 177.9 $ 183.4 $ 174.4 $ 87.4 $ 86.4
======= ======= ======= ======= =======
</TABLE>
The Berlin-Gorham Mills historically operated as part of an operating
division of Crown Paper, and not as a stand-alone entity. As a result, the
historical financial information included in this prospectus does not
necessarily reflect what the Berlin-Gorham Mills' financial position and results
of operations would have been had the Berlin-Gorham Mills been operated as a
stand-alone entity during the periods presented.
As part of an operating division of Crown Paper, the Berlin-Gorham Mills
were allocated selling and administrative expenses and Crown Paper corporate
overhead expenses in the combined amounts of $12.3 million and $16.9 million for
the 52 weeks ended December 28, 1997 and December 27, 1998, respectively, and
$8.5 million for the 26 weeks ended June 27, 1999. The selling and
administrative expense allocations were based on sales efforts made with respect
to the Berlin-Gorham Mills, and the corporate overhead expense allocations were
based on the Berlin-Gorham Mills' projected proportion of Crown Paper's
projected tons sold. All of the Berlin-Gorham Mills' selling and administrative
costs are reported as fixed costs and are included in cost of goods sold. For
comparative purposes, Crown Paper's corporate, general and administrative costs
are reported as separate items. We estimate that the corporate overhead expenses
that will be allocated by us to the Berlin-Gorham Mills will be $1.7 million for
the first year, on a stand-alone basis, based on a detailed analysis of
compensation benefits for employees employed by us and related non-payroll costs
incurred, following the acquisition. Future operating results are expected to be
affected by changes in depreciation and amortization expense related to impaired
assets, reduced selling and administrative expenses, elimination of some lease
financing costs and intercompany transactions with our other affiliates and
other items resulting from the July 9, 1999 transactions. We cannot assure you
that we will be able to realize all of the benefits we expect by reason of the
acquisition. See "Unaudited Pro Forma Consolidated Financial Data."
Interest expense represents interest expense on the industrial revenue
bonds, the proceeds of which are specifically restricted for use in funding
certain environmental improvements at the Berlin-Gorham Mills. American Tissue
did not assume the industrial revenue bonds. Liability for the industrial
revenue bonds was retained by Crown Paper.
Crown Paper took a $143.6 million charge, which was recorded in the fourth
quarter of 1998 to write down the book value of Berlin-Gorham Mills. In
connection with the acquisition, Crown Paper took an adjustment to net book
value of the Berlin-Gorham Mills totaling $16.2 million, which was recorded in
the first quarter of 1999 in order to record the Berlin-Gorham Mills' assets at
their estimated net realizable value.
Generally, we manufacture the same mix of uncoated freesheet products that
were manufactured by the Berlin-Gorham Mills prior to July 9, 1999, the date we
acquired the Berlin-Gorham Mills from Crown Paper. However, we have reduced or
eliminated, and will continue to seek to reduce or eliminate, the production of
products which we find to have less demand and generally lower sales prices, and
we have increased, and
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<PAGE>
will continue to seek to increase in the future, the production of those
products as to which we perceive a significant increase in demand or higher
sales value.
Results of Operations
The following sets forth specified data as a percentage of the
Berlin-Gorham Mills' net sales:
<TABLE>
<CAPTION>
52 Weeks 26 Weeks
Ended December Ended June
----------------------------- ------------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales ................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ........................ 106.3 98.0 107.6 114.7 96.4
------ ------ ------ ------ ------
Gross profit (loss) ....................... (6.3) 2.0 (7.6) (14.7) 3.6
Adjustment to net realizable value ........ -- -- -- -- 18.7
Property tax accrual reversal ............. -- -- -- -- (10.4)
Selling and administrative expenses ....... 2.1 3.6 5.2 5.9 5.4
Asset impairment charge ................... -- -- (82.3) -- --
Gain on timberlands sale .................. -- 7.4 -- -- --
Corporate allocation ...................... 3.0 3.1 4.5 3.8 4.4
------ ------ ------ ------ ------
Operating income (loss) ................... (11.4) 2.7 (99.6) (24.4) (14.5)
Interest expense and other income ......... 0.8 1.3 1.4 1.4 1.4
EBITDA* ................................... 5.1 11.7 2.0 (5.0) 1.3
</TABLE>
*See definition of EBITDA in footnote 1 under "Selected Historical
Financial Data-American Tissue."
26 Weeks Ended June 27, 1999, "1999 26 weeks," Compared to the 26 Weeks
Ended June 28, 1998, "1998 26 weeks"
Net Sales. Net sales decreased $1.0 million, or 1.2%, from $87.4 million in
the 1998 26 weeks to $86.4 million in the 1999 26 weeks.
Net sales of uncoated freesheet papers decreased $4.9 million, or 7.8%,
from $62.5 million in the 1998 26 weeks to $57.7 million in the 1999 26 weeks.
Despite improvements in premium printing grades, poor market pricing for target
bond grades contributed to an overall price decrease of 11.2%.
Net sales of jumbo rolls of towel increased $5.0 million, or 80.3%, from
$6.2 million in the 1998 26 weeks to $11.2 million in the 1999 26 weeks. The
increase in net sales was primarily due to a 8,185 ton increase in tons sold,
which was partially offset by a 7.0% decrease in average net sales price per
ton. The increase in tons sold was due to the efforts of the Berlin-Gorham Mills
to regain market share lost near the end of 1997 and increased production.
Net sales of pulp declined $1.2 million, or 6.3%, from $18.7 million in the
1998 26 weeks to $17.5 million in the 1999 26 weeks. The decline was primarily
due to a 9.8% decrease in average net sales price per ton that was partially
offset by a 2,038 ton, or 3.9%, increase in tons sold from 52,444 tons in the
1998 26 weeks to 54,482 tons in the 1999 26 weeks. Although difficult market
conditions prevailed, some upward movement in price was seen at the end of the
1999 26 weeks.
Gross Profit. Gross profit increased $16.0 million, from $(12.9) million in
the 1998 26 weeks to $3.1 million in the 1999 26 weeks. Gross profit, as a
percentage of net sales, increased from (14.7)% in the 1998 26 weeks to 3.6% in
the 1999 26 weeks. This increase in gross profit was the a result of lower
employee
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<PAGE>
compensation expense, depreciation and amortization and wood costs and improved
operating efficiencies, and was partially offset by a decline in average net
sales price per ton. Depreciation and amortization decreased $9.0 million, or
77%, from $11.7 million in the 1998 26 weeks to $2.7 million in the 1999 26
weeks.
Selling and Administrative Expenses. Selling and administrative expenses
decreased $0.4 million, or 7.8%, from $5.1 million in the 1998 26 weeks to $4.7
million in the 1999 26 weeks.
Operating Loss. Operating loss decreased $8.7 million, or 40.8%, from
$(21.3) million in the 1998 26 weeks to $(12.6) million in the 1999 26 weeks.
Included in the 1999 26 weeks operating loss was a $16.2 million downward
adjustment resulting from the sale of the Berlin-Gorham Mills, which was
partially offset by the $9.0 million property tax accrual reversal. Operating
loss before these special charges decreased $15.9 million, from $(21.3) in 1998
26 weeks to $(5.4) million in 1999 26 weeks.
Crown Paper Corporate Overhead Allocation. Crown Paper corporate overhead
allocation increased $0.4 million, or 13.2%, from $3.3 million in the 1998 26
weeks to $3.8 million in the 1999 26 weeks.
Interest Expense. Interest expense remained materially unchanged in the
1999 26 weeks, as compared to the 1998 26 weeks, at $1.2 million.
Year Ended December 27, 1998 Compared to Year Ended December 28, 1997
Net Sales. Net sales decreased $9.0 million, or 4.9%, from $183.4 million
in 1997 to $174.4 million in 1998.
Net sales of uncoated freesheet papers decreased $0.5 million, or 0.4%,
from $119.9 million in 1997 to $119.3 million in 1998. However, average net
selling price per ton decreased by $29, or 4.2%, during the same period. Net
sales price for premium printing papers declined $23 per ton, or 2.1%, in 1998
as compared to 1997. Average net selling price of web publishing grades
increased $4 per ton, or 0.5%.
Net sales of jumbo tissue rolls of towel declined $10.9 million, or 41.1%,
during 1998 as compared to 1997. The decline was primarily due to a reduction in
tons sold of 9,867 tons, or 29.3%, from 33,635 in 1997 to 23,768 in 1998, due
primarily to a decision by a customer to use their own internal resources. Also
contributing to the decline in net sales was a 16.6% decline in average net
sales prices per ton as the Berlin-Gorham Mills discounted toweling pricing to
regain market share.
Net sales of pulp increased $2.5 million, or 6.6%, from $37.0 million in
1997 to $39.5 million in 1998. The increase in tons sold was due to increased
operating efficiencies that led to increased production during 1998 and,
therefore, more pulp being made available for sale to external markets. The
effect of the increase in tons sold during 1998 was partially offset by a 10.4%
decrease in average net sales price per ton during 1998, as compared to 1997,
which was reflective of pricing in the global pulp markets.
Gross Profit. Gross profit decreased $17.1 million, from $3.8 million in
1997 to a loss of $(13.3) million in 1998. Gross profit, as a percentage of net
sales, decreased from 2.0% in 1997 to (7.6)% in 1998. This decrease in gross
profit is a result of the decline in average net selling price per ton and
decreased sales of jumbo tissue rolls of towels. Gross profit in 1998 included a
severance charge of $1.9 million. Depreciation and amortization decreased $0.2
million, or 0.9%, from $24.2 million in 1997 to $24.0 million in 1998. For
information as to the $1.9 million severance charge, see note 9 to the notes to
the audited financial statements of the Berlin-Gorham Mills included elsewhere
in this prospectus.
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<PAGE>
Selling and Administrative Expenses. Selling and administrative expenses
increased $2.6 million, or 39.9%, from $6.5 million in 1997 to $9.2 million in
1998. The increase was primarily due to increased sales and marketing expenses,
comprised primarily of additional personnel costs and warehousing costs, in
order to expand the Berlin-Gorham Mills' premium printing and publishing papers
market share.
Operating Loss. Operating income decreased from $5.0 million in 1997 to a
loss of $(173.9) million in 1998. Operating loss in 1998 included an asset
impairment charge of $143.6 million. Operating income in 1997 included a $13.5
million gain on timberlands sale. Operating loss, before this extraordinary gain
impairment charge, increased $21.8 million, from $(8.5) million in 1997 to
$(30.3) million in 1998.
Crown Paper Corporate Overhead Allocation. Crown Paper corporate overhead
allocation increased $2.0 million, or 36.8%, from $5.7 million in 1997 to $7.8
million in 1998.
Interest Expense. Interest expense remained materially unchanged in 1998,
as compared to 1997, at $2.5 million.
Year Ended December 28, 1997 as Compared to Year Ended December 29, 1996
Net Sales. Net sales increased $5.5 million, or 3.1%, from $177.9 million
in 1996 to $183.4 million in 1997.
Net sales of uncoated freesheet papers declined $3.2 million, or 2.6%, from
$123.0 million in 1996 to $119.9 in 1997, primarily as a result of a 2.4%
decrease in net sales price per ton on substantially the same tonnage volume.
Although total net sales price per ton of uncoated freesheet paper declined,
sales of premium printing papers, including text and cover grades, increased
2,412 tons, or 44.5%, from 5,425 tons in 1996 to 7,837 tons in 1997, as a result
of the Berlin-Gorham Mill's continued strategy to focus on this market. Net
sales price for premium printing papers increased $102 per ton, or 10.2%. Sales
grades increased 5,288 tons, or 9.8% from 53,858 tons in 1996 to 59,146 tons in
1997. Net selling price of web publishing decreased by $4 per ton, or 0.5%. Net
sales price per ton and sales volume of other grades of uncoated freesheet paper
declined.
Net sales of jumbo rolls of towel increased 5,062 tons, or 17.7%, in 1997,
from 28,573 tons in 1996 to 33,635 tons in 1997. Average net sales price per ton
was materially unchanged between 1997 and 1996. The increase in tons sold was
due to favorable market conditions that allowed the Berlin-Gorham Mills to
increase sales. Net sales increased $4.0 million, or 18.0%, from $22.5 million
in 1996 to $26.5 million in 1997.
Net sales of pulp increased $4.6 million, or 14.2%, from $32.4 million in
1996 to $37.0 million in 1997. The increase in tons sold was due to increased
operating efficiencies that led to increased production during 1997 as compared
to 1996.
Gross Profit. Gross profit increased $15.0 million from $(11.3) million in
1996 to $3.8 million in 1997. Gross profit, as a percentage of net sales,
increased from (6.3)% in 1996 to 2.0% in 1997. This increase in gross profit, as
a percentage of net sales, is a result of improved operating efficiencies and
lower wood and pulp costs in 1997, as compared to 1996.
Selling and Administrative Expenses. Selling and administrative expenses
increased $2.8 million from $3.7 million in 1996 to $6.5 million in 1997. The
increase was primarily due to increased sales and marketing expenses as Crown
Paper implemented a marketing program to support production at the Berlin-Gorham
Mills of premium text and cover papers.
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<PAGE>
Operating Income. Operating income increased $25.4 million, from $(20.4)
million in 1996 to $5.0 million in 1997. Operating income in 1997 included a
$13.5 million gain on timberlands sale. Operating income before this charge
increased $11.9 million, from $(20.4) million in 1998 to $(8.5) million in 1997.
Crown Paper Corporate Overhead Allocation. Crown Paper corporate overhead
allocation increased $0.3 million from $5.4 million in 1996 to $5.7 million in
1997.
Interest Expense. Interest expense increased $1.0 million from $1.5 million
in 1996 to $2.5 million in 1997, as a result of the $12.3 million industrial
revenue bond offering, which occurred in August of 1996.
Liquidity and Capital Resources
American Tissue
Historically, our growth has been financed through cash flow from
operations, borrowings under our bank credit facilities and other financings.
Net cash provided by operating activities was $21.9 million and $17.0 million in
fiscal 1997 and 1998. In fiscal 1999, net cash used in operating activities was
$22.0 million, primarily due to increased inventory levels. Of the increase in
inventory, approximately $17.9 million is the result of our acquisition of the
Berlin-Gorham Mills. The remainder of the increase was due to a planned increase
in production in response to higher demand and our desire to create a
competitive advantage by providing quicker fulfillment of customer orders by
maintaining a consistently available supply of products. Our capital
expenditures were $29.2 million, $27.6 million and $20.2 million in fiscal 1997,
1998 and 1999, respectively. We expect to spend approximately $35.0 million in
fiscal 2000 for capital expenditures for business maintenance and profit
improvement projects, exclusive of amounts expected to be paid with respect to
the Berlin-Gorham Mills. A substantial portion of our capital expenditures have
been for acquisitions and capacity growth and profit improvement projects, such
as the acquisition of our Neenah and Greenwich tissue mills in fiscal 1997 and
1996, respectively, and the construction and installation of converting assets
at our Calexico, California tissue converting facility and the acquisition
Berlin-Gorham Mills in fiscal 1999. Our capital expenditures for fiscal 1999
included the replacement of a damaged Yankee dryer at our Mechanicville tissue
mill, repairs and upgrades to our paper machines at our Neenah and Greenwich
mills and the relocation of a tissue machine from our closed Tomahawk mill to
our Winchester mill. For information as to other financings used by us
historically to finance our growth, see notes 7, 8, 9, 10 and 11 of the notes to
our consolidated financial statements included elsewhere in this prospectus.
In 1997, we entered into a financing agreement with General Electric
Capital Corporation. Such financing agreement provided for two term loans in the
aggregate principal amount of $40,000,000. The financing agreement required,
among other things, the maintenance of minimum tangible net worth, a fixed
charge coverage ratio and a maximum leverage ratio. As of September 30, 1998, we
were not in compliance with such financial covenants. However, subsequent to
such date, we and GECC amended the agreement, resulting in our compliance with
such financial covenants. On July 9, 1999, we repaid these term loans, together
with accrued interest, in full.
At September 30, 1999, we held $7.8 million of tissue converting equipment
that we intend to sell to third parties. As of December 31, 1999, we completed
sales of $3.4 million of this equipment.
Berlin-Gorham Mills
The Berlin-Gorham Mills has historically funded its growth through cash
flow from operations and borrowings under various Crown Paper credit facilities.
Net cash provided by operating activities was $9.5 million, $(8.7) million and
$(5.3) million in 1997, 1998 and the 1999 26 weeks, respectively. The
Berlin-Gorham Mills' capital expenditures were $13.1 million, $9.1 million and
$3.2 million in 1997, 1998 and the 1999 26 weeks, respectively.
Combined
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<PAGE>
As a result of our acquisition of the Berlin-Gorham Mills, our repayment of
outstanding indebtedness and the consummation of the related financing
transactions on July 9, 1999, we have a substantial amount of indebtedness. As
of December 31, 1999, we had consolidated debt of $253.7 million, consisting
of approximately:
(1) $25.6 million of mortgage and other indebtedness;
(2) $68.4 million outstanding under our new revolving credit facility,
exclusive of unused commitments of $31.6, subject to borrowing base
limitations; and
(3) $165.0 million on the old notes, net of unamortized discount of
approximately $5.3 million.
For information as to the interest rates and maturities of this indebtedness and
the portion of such indebtedness subject to "floating" interest rates, see
"Description of Material Indebtedness." See also "Capitalization."
Our primary capital requirements are for working capital, capital
expenditures and payments of interest expense. We expect combined capital
expenditures for American Tissue and the Berlin-Gorham Mills business
maintenance, excluding environmental expenditures, and profit improvement
projects of approximately $25 million in fiscal 2000 and ranging from
approximately $22.0 million to approximately $27.0 million in fiscal 2001, of
which we believe approximately $12.0 million will be for equipment maintenance
in each of fiscal 2000 and fiscal 2001. See "-Environmental Matters" for
information as to estimated environmental expenditures.
We believe, based on current levels of operations and anticipated internal
growth and price increases, anticipated reductions in capital expenditures, cash
flow from operations, together with other available sources of funds including
the availability of borrowings under our new revolving credit facility, will be
adequate for the foreseeable future to make required payments of principal and
interest on our indebtedness and to fund anticipated capital expenditures and
working capital requirements. Our ability to meet our debt service obligations
and reduce our total debt will be dependent, however, upon our future
performance, which, in turn, will be subject to general economic conditions and
to financial, business and other factors, including factors beyond our control.
A portion of our debt bears interest at floating rates. Therefore, our financial
condition is and will continue to be affected by changes in prevailing interest
rates.
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<PAGE>
Environmental Matters
Our operations are subject to comprehensive and frequently changing
federal, state and local environmental laws and regulations, including laws and
regulations governing emissions of air pollutants, discharges of waste water and
storm water, storage, treatment and disposal of materials and waste, remediation
of soil, surface water and ground water contamination, and liability for damages
to natural resources. Compliance with these laws and regulations is an
increasingly important factor in our business. We will continue to incur capital
and operating expenditures in order to maintain compliance with applicable
federal, state and local environmental laws and regulations and to meet new
regulatory requirements.
We are subject to strict, and under certain circumstances, joint and
several, liability for the investigation and remediation of environmental
contamination (including contamination caused by other parties) at properties
that we own or operate and at properties where we or our predecessors have
arranged for the disposal of regulated materials. As a result, we are involved
from time to time in administrative and judicial proceedings and inquiries
relating to environmental matters. We may be involved in additional proceedings
in the future and the total amount of such future costs and other environmental
liabilities may be material.
On April 15, 1998, the U.S. Environmental Protection Agency issued final
rules known as the "Cluster Rules" affecting pulp and paper industry discharges
of wastewater and gaseous emissions. The Cluster Rules apply to pulping from the
initial feedstock of wood and certain bleaching processes. The Cluster Rules
require changes in the pulping, bleaching and/or air emission and wastewater
treatment processes presently used in some U.S. pulp and paper mills, including
the Berlin-Gorham Mills.
Based on our understanding of the Cluster Rules, after consultation with
independent environmental consultants, we believe that approximately $13 million
of capital expenditures, within a range of plus or minus approximately 25%, may
be required to comply with the Cluster Rules, with compliance dates beginning in
1999 and extending over the next two to five years. Environmental capital
spending for the fiscal 1999 includes $0.2 million for compliance with the
Cluster Rules. We currently estimate that for fiscal 2000, our total
expenditures expenditures for environmental compliance, including Cluster Rules
compliance, will be approximately $16.2 million. There are risks and
uncertainties associated with the estimate that could cause total capital
expenditures and the timing of such expenditures to be materially different from
current estimates, including changes in technology, interpretation of the rules
by government agencies that may be substantially different from management's
interpretation or other matters. The EPA has also proposed additional
requirements for the pulp and paper industry, which, if and when adopted, may
require additional material expenditure.
The Berlin-Gorham Mills have been in operation for many years and, over
such time, Crown Paper and other prior operators at the Berlin-Gorham Mills have
generated and disposed of wastes which are or may be considered hazardous. The
soil, groundwater and adjacent area remediation which is currently under
consideration with respect to the Berlin-Gorham Mills could, based upon
available information, cost up to $400,000 over the next two years. In addition,
various maintenance and repairs to the wastewater treatment plants at the
Berlin-Gorham Mills have been identified which are estimated to cost up to $2.1
million.
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<PAGE>
The discovery of previously unknown contamination of property underlying,
or in the vicinity of, the Berlin-Gorham Mills could require us to incur
material unforeseen expenses for which we may not have any recourse against
Crown Paper or other prior operators. Occurrences of any of these events could
have a material adverse effect on our financial condition.
The Berlin-Gorham Mills have systems which process and treat large amounts
of wastewater primarily generated by their operations. Due to aging of the
treatment systems and to the evolution of mill operations, it is anticipated
that the related treatment systems and equipment will require replacement and/or
upgrading. In addition, there is evidence that effluent in connection with the
wastewater treatment processes has, over time, resulted in accumulations of
sediment and other buildup in adjacent lagoons and watercourses. It is
anticipated that changes in the applicable processes and the related technology
and equipment may be necessary in the future both to remediate such buildups and
to accommodate expansion of mill production schedules. The foregoing changes may
require additional material capital expenditures.
Changes in Our Finance and Accounting Department.
Historically, we have not always completed our fiscal year audited
financial statements or our fiscal quarter unaudited financial statements in a
timely manner. For instance, our audited financial statements for the fiscal
year ended September 30, 1998 were not issued until February 19, 1999 and our
unaudited financial statements for the fiscal quarters ended December 31, 1998
and March 31, 1999 were not issued until February 22, 1999 and May 21, 1999,
respectively. However, our unaudited financial statements for our fiscal quarter
ended June 30, 1999 and our audited financial statements for the fiscal year
ended September 30, 1999 were timely delivered to the trustee under the
indenture for the old notes and the record holder of the old notes as required
by the indenture. The failure to complete and deliver our financial statements
in the past has caused defaults under our then existing credit facilities. See
"Risk Factors -- We Have Previously Defaulted In Complying With Financial
Covenants Relating To Our Credit Facilities And We May Not Be Able To Provide
You With Financial Information When We Are Required To Do So."
To address deficiencies in our management information systems and
accounting systems, we have restructured our financial and accounting
department, including hiring a new chief financial officer, a Vice President of
Finance and a Corporate Controller. Additionally, we have retained consultants
who are working with us to install new management information systems. As a
result, in the fourth quarter of fiscal 1999, we completed the installation of a
fully integrated, updated version of our accounting software. We believe that
the changes implemented to date have been helpful in managing our operations. As
a result of these changes, we believe that we are currently in compliance with
the financial reporting requirements under the indenture relating to our old
notes and under our revolving credit facility.
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<PAGE>
It is our intention to deliver financial statements and file reports with
the Securities and Exchange Commission within the required time periods of the
Securities Exchange Commission and as required by the indenture governing the
Notes and our new revolving credit facility. However, we can give you no
assurance that we will be able to or that any delay will not have a material
adverse effect on our business, financial condition and results of operations.
Inflation and Cyclicality
Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had, or is likely in the
foreseeable future to have, a material impact on our results of operations.
The markets for the tissue and uncoated freesheet paper products produced
by American Tissue and the Berlin-Gorham Mills are characterized by periods of
supply and demand imbalance, with supply being added in large blocks and demand
fluctuating with changes in industry capacity, economic conditions, including in
the case of our uncoated freesheet paper products, the overall level of domestic
economic activity, and competitive conditions, including, in the case of our
uncoated freesheet paper products, intensified competition from overseas
producers responding to favorable exchange rate fluctuations and/or unfavorable
overseas market conditions. All of such conditions are beyond our control.
Seasonality
Historically, net sales for American Tissue have been somewhat stronger
during our third and fourth fiscal quarters, due to increased seasonal usage by
consumers in our at-home business and inventory and usage patterns in our
away-from-home business.
Statement of Financial Accounting Standards No. 121
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires management to assess the recoverability of its investments in
long-lived assets to be held and used in operations whenever events or
circumstances indicate that their carrying amounts may be impaired. This
assessment requires that the future cash flows expected to result from use of
the assets are estimated and an impairment loss recognized when future cash
flows are less than the carrying value of such assets. Estimating future cash
flows requires an estimate of useful lives of its long-lived assets, future
production volumes and costs, future sales volumes, demand for the product mix
and prices of the Berlin-Gorham Mills that reflect the use of its long-lived
assets and market conditions.
Based on this assessment, Crown Paper took a $143.6 million charge which
was recorded during the fourth quarter of 1998 to write down the carrying value
of the Berlin-Gorham Mills. Statement of Financial Accounting Standards No. 121
also requires that assets held for sale be stated at the lower of cost or net
realizable value. In connection with the acquisition, Crown Paper took an
adjustment to net book value of the Berlin-Gorham Mills totaling $16.2 million,
which was recorded in the first quarter of 1999 in order to record the assets at
their estimated net realizable value. Although management of Crown
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Paper believes it had a reasonable basis for its estimates, it is reasonably
possible that American Tissue may change its estimate of future cash flows
and/or net realizable values.
INDUSTRY OVERVIEW
Tissue Industry
Information as to the U.S. tissue industry presented in this section of the
prospectus is derived from the "Paper Grades -- Tissue" section of the Pulp &
Paper 1999 - 2000 North American Factbook.
Tissue is used principally in products such as bath tissue, facial tissue,
napkins and paper towels and is typically sold into two key market segments: (1)
the consumer, or "at-home," sector; and (2) the commercial and industrial, or
"away-from-home," sector. In general, at-home tissue products are sold to
grocery stores and supermarkets, retail mass merchandisers, warehouse club
stores and drug stores for direct purchase by the consumer end-user.
Away-from-home tissue products are usually sold to paper, foodservice and
janitorial supply distributors, who, in turn, re-sell these products for use in
hotels, restaurants, factories, schools and other commercial, government and
industrial institutions. Tissue is generally manufactured in jumbo roll form and
is then converted into finished product for consumer end-use. A small quantity
of tissue, however, is also used in consumer hygienic and absorbent products
such as diapers, wipes and feminine hygiene products.
Approximately 42% of all U.S. tissue is produced from purchased waste
fiber, approximately 21% is produced from purchased virgin pulp, with the
remainder produced on-site at integrated pulp and paper mills.
The U.S. tissue industry is highly concentrated due to the recent merger
activity between some of the largest industry participants. In 1995,
Kimberly-Clark acquired Scott Paper, and in 1997, Fort Howard merged with James
River, creating Fort James, the industry leader in terms of tissue capacity.
Based on estimated 1998 capacity data for U.S. manufactures, the top five tissue
producers accounted for approximately 76.6% of total industry capacity.
The U.S. tissue industry has among the most stable growth rates in the U.S.
paper industry. Over the 15 year period from 1984 through 1998, total annual
shipments of tissue increased from approximately 4.9 million tons to
approximately 6.6 million tons, a compound annual growth rate of approximately
2.0%. Since 1984, total annual shipments have declined only once.
Tissue is a mature industry and growth in shipments for the overall
industry is correlated to increases in the general population. However, certain
segments of the overall tissue industry, such as the at-home private label
market, are experiencing significantly higher growth rates.
Capacity growth in the tissue industry averaged approximately 1.4% over the
period 1992 through 1998. Over the same period, operating rates averaged
approximately 93.8%. After significant new capacity coming on-line during 1998
and early 1999, growth in capacity for 2000 is expected to be approximately
2.0%. However, some of this new capacity was effectively offset by mill closures
announced in 1997 and 1998 by major industry participants, such as
Kimberly-Clark and Fort James. Imports, except a modest amount of tonnage from
Canada, are not a significant factor since shipping relatively bulky tissue
products long distances is usually economically inefficient.
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U.S. Tissue Industry Statistics
(000 tons)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998 1999e
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shipments .... 5,781 6,008 6,098 6,210 6,264 6,429 6,603 6,765
% change 2.0% 3.9% 1.5% 1.8% 0.9% 2.6% 2.7% 2.5%
Capacity ..... 6,413 6,532 6,539 6,552 6,654 6,882 6,937 7,122
% change 2.7% 1.9% 0.1% 0.2% 1.6% 3.4% 0.8% 3.8%
Utilization .. 90.1% 92.0% 93.3% 94.8% 94.1% 94.3% 95.2% 93.6%
</TABLE>
- ----------
e=estimate
Source: Resource Information Systems, Inc.
While pricing remained competitive during 1998, pricing for tissue products
increased in 1999 and we believe that prices for tissue products will continue
to increase in 2000 as a result of: (1) rising pulp prices and (2) announced
price increases by major jumbo tissue roll manufacturers.
The At-Home Market
Since the mid-1990s, shipments in the approximately $8.0 billion at-home
market based on estimated 1998 total sales, have been growing at an annual rate
of just over 2.0%. Finished tissue products for this segment range from branded
value grades, approximately 40.0% of the market, to branded specialty and
premium grades, approximately 44.0% of the market. An increasingly important
segment of the at-home market is private label, approximatly 16.0% of the
market. Within the at-home sector, bath tissue represents approximately 47.0% of
the market, towels make up approximately 31.0% and facial tissue and paper
napkins represent approximately the remaining 22.0%. In general, at-home tissue
products are sold to grocery stores and supermarkets, retail mass merchandisers,
warehouse club stores and drug stores for direct purchase by the consumer
end-user.
The approximately 16.0% private label share of the at-home market is
significantly stronger in the western U.S., with an approximate 21.8% market
share. Growth in 1998 within the U.S. private label sector was estimated to
be 4.0%. In our opinion, the higher growth rate seen within the private label
segment versus the overall tissue industry is representative of:
(1) increased recognition by consumers that private label tissue can offer
reasonable quality at consistently attractive prices;
(2) product line extension by tissue manufacturers within the private
label segment, from traditional economy and value brands into premium
brands;
(3) increased emphasis by retailers who generally receive higher margins
on private label tissue products than on branded national tissue
products; and
(4) the growth of retail mass merchandisers and warehouse club stores
which generally emphasize private label tissue products.
The Away-From-Home Market
The approximately $4.0 billion away-from-home market, based on estimated
1998 total sales, has experienced modestly lower growth in shipments since the
mid-1990s versus the at-home market. Shipments are estimated to grow at the
average annual rate of approximately 1.5%. Despite positive
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trends regarding dining outside the home and a growing travel market, the slower
growth in shipments seen over the past few years within the away-from-home
versus the at-home markets is likely a result of cost cutting by businesses and
lower growth rates in traditional manufacturing and industrial job markets
versus the increasing service economy.
We believe, based on our marketing experience, that paper, foodservice and
janitorial supply distributors, the primary customers for away-from-home tissue
products, tend to favor manufacturers that can provide a broad line of various
tissue products. Moreover, we believe that many of these same customers are
increasingly concerned regarding industry consolidation within the
away-from-home market, and are looking for alternatives to the large national
suppliers.
Within the away-from-home market, towels represents approximately 44% of
the market, bath tissue makes up approximately 30% and facial tissue and napkins
represent approximately the remaining 26%.
Uncoated Freesheet Papers
Information as to the uncoated freesheet segment of the printing/writing/
publishing paper sector of the U.S. paper industry is derived from the "Paper
Grades -- Uncoated Free-sheet" section of the Pulp & Paper 1999 - 2000 North
American Factbook.
Uncoated freesheet paper constitutes the largest segment of the
printing/writing/publishing paper sector in the United States, with estimated
1999 capacity of 16.5 million tons.
The primary use for uncoated freesheet paper is in office reprographic or
communication papers, i.e., copier and printer papers, approximately 33% of
total shipments; followed by offset papers for commercial printing and book
publishing applications, approximately 25% of total shipments; business forms
bond and computer forms, approximately 15% of shipments; and envelopes,
approximately 10% of total shipments. Uncoated freesheet is also used for
premium value application, such as text and cover fine printing grades used for
financial printing, fine stationary and promotional brochures, greeting cards
and technical specialty papers.
Commodity grades of uncoated freesheet, such as offset papers and forms
bond, are generally manufactured on larger machines that often have lower
production costs than smaller machines. Many manufacturers with large machines
often have kraft pulp mills onsite, enabling the lowest cost production of
uncoated freesheet paper. Smaller machines, which may include machines not
integrated to the production of kraft pulp, are typically dedicated to more
value added grades of uncoated freesheet in order to offset their generally
higher cost of production.
Despite merger activity during 1998, e.g., Weyerhauser's purchase of
Bowater's Dryden, Ontario mill and International Paper's merger with Union Camp,
the uncoated freesheet industry remains relatively unconcentrated as compared to
tissue paper industry. Based on estimated 1998 capacity data for U.S
manufacturers, the top five uncoated freesheet producers accounted for
approximately 59% of industry capacity.
Demand for uncoated freesheet papers is correlated to strength in the
general economy and changing technology. U.S. uncoated freesheet capacity had a
compound annual growth rate of approximately 1.5% over the period 1992 through
1999. Over the same period, total annual shipments increased from approximately
12.3 million tons to 14.2 million tons, a compound annual growth rate of
approximately 2.1%. However, various grades of uncoated freesheet, such as cut
size reprographic paper,
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continue to be in high demand as a result of the increased use of computer desk
top printers and the growth of the small office/home office market. As the table
below indicates, year-to-year growth was much more cyclical, resulting in
significant volatility in pricing over the same seven-year period.
U.S. Uncoated Freesheet Industry Statistics
(000 tons)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998 1999e
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shipments ............... 12,348 12,355 13,304 12,996 13,161 13,687 13,605 14,200
% change .......... 5.5% 1.5% 7.7% -2.3% 1.3% 3.9% -0.6% 4.4%
Capacity ................ 13,617 13,437 13,806 14,060 14,488 14,701 14,946 15,163
% change .......... 3.1% 0.6% 2.7% 1.8% 3.0% 1.5% 1.7% 1.5%
Utilization ............. 90.7% 91.2% 96.4% 92.4% 90.8% 93.1% 91.0% 93.6%
Imports, net ............ 228 566 394 565 483 544 670 763
Apparent U.S. consumption 12,576 12,921 13,698 13,561 13,644 14,231 14,275 14,963
Price ($/ton)* .......... $ 696 $ 733 $ 766 $ 1,100 $ 864 $ 768 $ 777 $ 750
</TABLE>
- ----------
e = estimate
Source: Resource Information Systems, Inc.
* 20 lb. reprographic bond communication paper.
Average historical pricing for benchmark 20 lb. communication paper
exhibits the cyclical nature of the uncoated freesheet market. Transaction
prices were at their last cyclical low in 1992, at approximately $696 per ton,
and peaked in 1995 at approximately $1,100 per ton, a 51% increase in price.
Uncoated freesheet apparent U.S. consumption has increased 3-5% in 1999 as
compared to 1998, substantially above the 1998 increase in apparent U.S.
consumption. The increase in demand has prompted a number of major U.S.
producers, including Georgia-Pacific and Boise Cascade, to announce price
increases for various grades of uncoated freesheet, although there can be no
assurance that these price increase announcements will hold.
BUSINESS
Overview
We are an integrated manufacturer of tissue and uncoated freesheet paper
products in North America, with a comprehensive product line that includes jumbo
tissue rolls used in the manufacture of finished tissue products, finished
tissue products and uncoated freesheet paper products for the printing, writing
and publishing applications. We recently entered the uncoated freesheet paper
business through our acquisition of the Berlin-Gorham Mills. Since our inception
in 1981, we have grown primarily through the opportunistic acquisition and
integration of underperforming tissue mills and converting assets. We currently
operate six paper mills, including five tissue mills, seven converting
facilities, two printing/packaging facilities and 11 distribution centers.
During fiscal 1999, we derived approximately:
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o 60.6% of our revenues from finished tissue products;
o 24.1% of our revenues from sales of jumbo tissue rolls;
o 9.9% of our revenues from sales of uncoated freesheet paper products;
o 4.4% of our revenues from sales of wood pulp; and
o the remainder from sales of reconditioned tissue converting equipment.
Our tissue converting facilities transform jumbo tissue rolls into a wide
range of finished tissue products, such as bath tissue, paper towels, napkins
and facial tissue. We believe that our flexible manufacturing capabilities allow
us to offer a range of products that is broader than that offered by any other
North American tissue producer. We sell converted tissue products in the
away-from-home and at-home markets. During fiscal 1999, our tissue mills
produced approximately 114,000 tons of jumbo tissue rolls for our own converting
operations and approximately 80,000 tons for sale to other tissue producers. In
addition to tissue products, we use our internal engineering expertise to
recondition and sell used tissue converting equipment to support our jumbo roll
business. With the acquisition of the Berlin-Gorham Mills, we became effectively
100% vertically integrated with respect to virgin pulp, increased our toweling
capacity by approximately 17.7% and extended our product offering in the
away-from-home market with uncoated freesheet papers.
Our finished tissue products are sold throughout the United States and in
several regions of Canada and Mexico. We sell premium, specialty and commodity
grades of jumbo tissue rolls to both domestic and international markets. Our
total net sales have increased every year since our inception.
We were founded in 1981 as a manufacturer of finished tissue products for
the at-home market, principally in the eastern United States. Since then, we
have become more vertically integrated through the acquisition of various mill
facilities. We began selling jumbo tissue rolls to third parties in 1990. We
entered the away-from-home market in 1992 and expanded our presence in that
market in 1994 with the acquisition of Tagsons Papers, Inc., which included a
paper mill and converting assets in upstate New York. Since 1992, we have sought
to expand our presence throughout North America. We commenced our western
expansion strategy with the acquisition of our tissue machine in St. Helens,
Oregon in 1992. We opened our tissue converting/distribution facility in
Mexicali, Mexico in 1995 and we acquired our tissue manufacturing and converting
facility in Neenah, Wisconsin in 1996. To further support such expansion, we
established a tissue converting/distribution facility in Calexico, California in
November 1998. In July 1999, we entered the uncoated freesheet paper market with
our acquisition of th Berlin-Gurham Mills.
Business Strategy and Competitive Advantages
Our business strategy and competitive advantages include the following:
o Opportunistic Acquisitions of Underperforming Assets. We benefit from
a senior management team experienced in acquiring underperforming
paper mills and converting assets at a substantial discount to
replacement costs, implementing strict cost reduction programs and
selectively making capital expenditures to increase capacity and
improve operating efficiency. In November 1996, for example, pursuant
to an opportunity created by the merger of Kimberly-Clark and Scott
Paper, we acquired our Neenah, Wisconsin facility from Kimberly-Clark
at an attractive price. The Neenah facility then had 372 employees and
five tissue machines, of which two were operating full-time, two were
operating part-time and one was idled. These
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machines produced a total of approximately 43,000 tons annually.
Shortly thereafter, we implemented a number of initiatives to improve
the efficiency of the Neenah facility, including personnel reductions
and selective capital investments to improve the operation of these
tissue machines. As of December 1, 1999, the Neenah facility had 279
employees and five tissue machines in full-time operation. We estimate
that these five full-time tissue machines will produce approximately
70,000 tons in fiscal 2000, based on production of approximately
68,000 tons in fiscal 1999. Net sales at our Neenah facility have
grown from approximately $39.2 million in fiscal 1997 to approximately
$69.1 million in fiscal 1999, a compound annual growth rate of
approximately 33.0%.
o Capitalize on Flexible, Efficient Manufacturing Capability. We
maintain a diverse array of manufacturing, converting and packaging
equipment and a skilled workforce, which we believe enable us to
respond to changes in market conditions and customer requirements more
rapidly than our competitors. Our 11 tissue machines, excluding the
toweling machine at the Berlin-Gorham Mills, have an annual capacity
ranging from approximately 12,000 tons to approximately 50,000 tons,
and our highest capacity machine is among the largest capacity tissue
machines in the industry. In addition, we are able to vary the raw
material input on most of our tissue machines to produce tissue from
virgin pulp, recycled paper or paper manufacturing by-products. These
flexibilities enable us to economically manufacture a broad range of
products, utilizing the most efficiently configured machine for each
product.
o Capitalize on Competitor Consolidation. We believe the continuing
trend of competitor consolidation has created marketing opportunities
for us. For example, Kimberly-Clark's merger with Scott Paper and
James River's merger with Fort Howard have increased the concentration
of suppliers, which is a concern of many customers. In addition,
certain niche opportunities have been created by our competitors'
consolidations, where they have chosen to discontinue or de-emphasize
certain value or economy product categories. To capitalize on this
trend and strengthen our position as an alternative supplier in
certain product areas, we have built a comprehensive product line of
premium, value and economy grades in each product category and have
increased our away-from-home salesforce.
o Strategically Locate Our Tissue Manufacturing Facilities. We believe
that our tissue mills, tissue converting facilities and distribution
centers are strategically located across North America, including:
o five tissue mills, with three in the Northeast, one in the
Midwest and one on the West Coast;
o seven converting facilities, with four in the Northeast, one in
the Midwest, one on the West Coast and one in Mexico; and
o 11 distribution centers, with eight in the Northeast and Middle
Atlantic States, one in the Midwest, one on the West Coast and
one in Mexico.
We believe that the geographic diversity of our locations allows us to
service both national and regional accounts economically and
efficiently. Since our inception, we have had a strong presence in the
Northeast, and more recently, we have expanded our business westward.
Our Mexicali, Mexico converting facility, which opened in fiscal 1995,
and our Calexico, California converting facility, which opened in
fiscal 1998, enable us to take advantage of the geographic diversity
of our tissue mill operations in Neenah, Wisconsin and St. Helens,
Oregon.
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o Continue To Expand Our Diverse and Broad Product Line. We believe that
our diverse product line, with over 200 product categories and over
780 SKUs, is the broadest in North America and represents a key
competitive advantage. Our broad line of finished tissue products,
which are available in a wide range of grades, designs and package
configurations, and our ability to respond quickly to customer
requirements for multiple-product orders, allow us to offer "one-stop
shopping" to our customers. This is particularly important given the
trend toward supplier consolidation. By offering a wide range of
products, we can provide our customers with more frequent shipments of
a larger mix of products, which lowers the minimum efficient order
quantity per product, which facilitates "just-in-time" and
"cross-docking" inventory practices. Just in time inventory practices
involve supplying inventory to customers at the time or shortly before
the time the inventory is required to be used by these customers.
Cross-docking inventory practices involve timing and coordinating the
delivery of inventory items to distributors so that these distributors
can promptly supply the items to their customers. Our strategy is to
continue to expand our product line through the introduction of new or
enhanced products. Recent additions to our product line include
polycoated tablecovers, printed table napkins, pizza boxes,
center-pull towels, straws and stirrers and split-core bath tissue.
o Diverse Customer Base For Tissue Products. The customer base for our
tissue products is broadly diversified across industries and
geographic locations, greatly reducing our dependence on any single
customer or market. During fiscal 1999, no single customer for our
tissue products represented more than 10.0% of our net sales and our
top 10 customers represented approximately 30.0% of our net sales.
o Grow Jumbo Tissue Roll Sales by Leveraging Equipment Sales Business.
We intend to leverage our expertise in buying, reconditioning and
selling used tissue converting equipment to increase our sales of
jumbo tissue rolls. For example, we generally sell our tissue
converting equipment to tissue products manufacturers who sign
multi-year jumbo roll purchase contracts with us. Our third-party
jumbo tissue rolls are generally used by domestic customers to
manufacture non-competing finished tissue products, such as branded
at-home and niche tissue products, including disposable diapers,
feminine sanitary napkins and disposable medical products or are sold
to overseas converters. During fiscal 1999, our equipment sales
business generated net sales of approximately $1.8 million.
o Favorable Supply and Service Agreements. We have entered into supply
and service agreements which we believe are favorable to us. We
entered into a supply agreement with Boise-Cascade, expiring in 2022,
under which we purchase slush pulp, at a price which is substantially
below the market price for baled virgin pulp, from the integrated
Boise Cascade pulp and paper mill in St. Helens, Oregon that houses
our tissue machine. During fiscal 1999, we purchased approximately
48,000 tons under this agreement, which represented approximately
96.0% of the total pulp requirements of our St. Helens, Oregon
operation. Also, in connection with our acquisition of the
Berlin-Gorham Mills, we entered into agreements with Crown Paper,
under which Crown Paper will purchase from us annually 40,000 tons of
pulp produced at the Berlin-Gorham Mills. We have also agreed to
outsource the sales and marketing of certain grades of our uncoated
freesheet papers to the established salesforce of Crown Paper, which
we believe will afford us substantial savings over the Berlin-Gorham
Mills' historical selling expense.
Products, Marketing and Customers
We manufacture and sell a full line of finished tissue products varying by
weight, softness, size, grade, package configuration and price for both the
away-from-home and at-home markets. We have four
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major product lines: bath tissue, paper towels, napkins and facial tissue. We
also manufacture tablecovers, paper plates, pizza boxes and straws and stirrers.
Towel, napkin and tablecover products are available in occasional and seasonal
prints for parties and holiday seasons. Potential new products now being
evaluated include printed paper plates, hot and cold beverage cups and paper
bags. In addition, we manufacture and sell jumbo tissue rolls to other tissue
converters.
The following table sets forth our net sales by market for the periods
shown (dollars in millions):
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
--------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------- --------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Away-from-home products .................. $ 53.0 38.2% $ 69.9 45.8% $ 85.8 43.4% $ 89.2 41.5% 100.7 35.4%
At-home products ......................... 61.3 44.1 63.2 41.4% 68.6 34.7 71.9 33.4 71.5 25.2
------ ----- ------ ----- ------ ----- ------ ----- ----- -----
Total finished products .............. 114.3 82.3 133.1 87.2% 154.4 78.1 161.1 74.9 172.2 60.6
Jumbo tissue rolls ....................... 24.7 17.7 19.4* 12.7% 42.0 21.3 47.2 21.9 68.5 24.1
Uncoated freesheet products .............. -- -- -- -- -- -- -- -- 28.2 9.9
Pulp ..................................... -- -- -- -- -- -- -- -- 12.5 4.4
Converting equipment ..................... -- -- 0.2 0.1% 1.2 0.6 5.7 2.6 1.8 0.6
------ ----- ------ ----- ------ ----- ------ ----- ----- -----
Total net sales ...................... 139.0 100.0 152.7 99.7 197.6 99.6 214.0 99.4 283.2 99.6
Rental income ........................ 0.0 -- 0.5 0.3 0.8 0.4 1.2 0.6 1.1 0.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Revenues ........................... $139.0 100.0% $153.2 100.0% $198.4 100.0% $215.2 100.0% $284.3 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- ----------
Away-from-home finished tissue products, approximately 35.4% of fiscal 1999
revenues. We manufacture and market a broad line of finished tissue products
for the estimated $4.0 billion U.S. away-from-home market. We sell our
away-from-home products principally to paper, foodservice and janitorial supply
distributors, such as, Bunzl, Burke, Restaurant Depot and Sweet Paper, who
resell these products to hotels, restaurants, offices, factories, hospitals,
schools and government facilities, including:
o restaurants, such as Sbarro, Bertucci's and Chili's;
o hospitality companies, such as Caesars Palace, Carnival Cruise Lines
and Holiday Inn;
o corporations, such as AT&T and General Electric; and
o educational institutions, such as Dartmouth College, Johns Hopkins
University and the University of North Carolina.
Our 15 regionally based away-from-home sales managers are responsible for
coordinating our sales efforts to these distributors. Additionally, we seek to
create demand for our away-from-home products from distributors of our products
by marketing directly to their customers. We are not subject to any non-compete
covenants or agreements with distributors that would prevent these marketing
efforts. We also sell our away-from-home products directly to national accounts,
such as Burger King and Wendy's. Kimberly-Clark's merger with Scott Paper and
James River's merger with Fort Howard have resulted in a concentration of supply
base, a concern of customers. We believe the continuing trend of competitor
consolidation has created marketing opportunities for us, and we have become an
alternative supplier to give our customers a choice of products.
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Since we entered the away-from-home market in 1992, we have built our
away-from-home product line to include 141 product categories and 299 SKUs,
ranging from economy and value grades to premium grades. Certain niche areas
have been created by our competitors' consolidations, where they have chosen to
withdraw or de-emphasize certain value or economy product categories. We believe
we are the only tissue supplier in North America to offer premium, value and
economy grades in each category for combined shipment in a truckload order. This
has enabled us to provide our customers with what we believe to be the broadest
product offering in the industry, which we believe is an increasingly critical
selling point with customers who are seeking "one-stop shopping." Our
away-from-home finished tissue products include folded and roll towels, bulk and
dispenser napkins and bath and facial tissues. While we have historically
concentrated on value-priced and economy products in this market, we have
introduced our Manhattan(TM) line of premium quality away-from-home products to
take advantage of the growing demand for premium away-from-home products. During
fiscal 1999, approximately 85% of our away-from-home products were sold under
our brand names, with private label products, under distributor label, and
products manufactured for particular, national accounts, under corporate label,
constituting the remainder.
Our net sales in the away-from-home market have grown from approximately
$53.0 million in fiscal 1995 to approximately $100.7 million in fiscal 1999, a
compound annual growth rate of approximately 17.0%. This growth was due to,
among other things:
o acquiring assets;
o expanding product lines; and
o increasing market share in certain segments.
At-home finished tissue products, approximately 25.2% of fiscal 1999
revenues. We manufacture and market a broad line of finished tissue products for
the estimated $8.0 billion U.S. at-home market. Our at-home products are sold
through a network of more than 60 independent brokers and agents that sell
throughout the United States and in certain regions of Canada and Mexico. Our
four regional sales managers are responsible for coordinating the sales efforts
of these independent brokers and agents. These sales managers focus on
maintaining close relationships with independent food brokers and retailers in
their territories by emphasizing our traditional strengths:
o value;
o competitive pricing;
o enhanced margins for retailers; and
o the flexibility to manufacture short runs of products at prices
attractive to retailers and margins acceptable to us.
In particular, we target the estimated $1.1 billion private label segment
of the at-home market, for which we manufacture products that range from economy
to premium quality grades. As a private label manufacturer, we generally seek to
avoid direct competition with larger branded consumer product companies, such as
Procter & Gamble and Kimberly-Clark. During fiscal 1999, approximately 88.0% of
our at-home products were manufactured for specific retailers for sale under
private labels, with the remainder manufactured for sale under our own brand
names.
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Our core at-home products include a broad line of bath tissue, paper
towels, napkins and facial tissue. Over the past several years, the at-home
market has expanded from economy products to an assortment of quality grades,
and we have responded by expanding the range and variety of printing, coloring
and embossing applied to our at-home products. We produce our branded at-home
tissue products principally under our Magnolia(TM), Sterling(TM), Magic Soft(TM)
and Elan(TM) brand names. We sell our brand name products principally to smaller
retailers that do not have their own private label brands, as well as large
retailers that wish to offer tissue across a wide price continuum.
We focus our marketing efforts for at-home products on trade promotion and
incentive programs targeted to major food store chains, mass merchandisers and
drug retailers. Consistent with our focus on the private label and branded value
segments of the at-home market, our use of advertising and promotion focused on
the end-users is minimal. We currently estimate private label penetration to be
only approximately 16.0% of the at-home market and industry sources estimate
that the growth of this segment was approximately 4.0% in 1998, as retailers
continue to extend their lines of tissue products from economy and value grades
to premium grades. We believe that this trend will continue. Our customers
include:
o grocery stores and supermarkets, such as Aldi, Pathmark, Winn Dixie,
Ralphs, Loblaws and Stop & Shop;
o mass merchandisers, such as Dollar General;
o drug stores, such as Rite Aid and Walgreens; and
o buying "co-ops" and wholesalers, such as Super Value and Wakefern.
Our net sales in the at-home market have grown from approximately $61.3
million in fiscal 1995 to approximately $71.5 million in fiscal 1999, a compound
annual growth rate of approximately 4.0%.
Jumbo tissue rolls, approximately 24.1% of fiscal 1999 revenues. In
addition to supplying the internal needs of our finished tissue products
manufacturing facilities, we manufacture and sell standard and specialty grades
of jumbo tissue rolls directly to manufacturers of finished tissue products,
such as Kimberly-Clark, Fort James and Georgia-Pacific. These customers
accounted for approximately 40%, 9% and 4% respectively, of fiscal 1999 net
sales of jumbo tissue rolls. The jumbo tissue rolls we sell are generally used
by our domestic customers to manufacture non-competing finished tissue products,
such as branded at-home and niche tissue products, including disposable diapers,
feminine sanitary napkins and disposable medical products. Our strategy is to
emphasize stable customer relationships to sustain a long-term market for our
specialty jumbo tissue rolls, which often sell at a higher price per ton than
our finished tissue products. Our net sales of jumbo tissue rolls have grown
from approximately $24.7 million in fiscal 1995 to approximately $68.5 million
in the fiscal 1999, a compound annual growth rate of approximately 29.0%,
reflecting our strategy of emphasizing jumbo roll sales.
Uncoated freesheet paper products, approximately 9.9% of fiscal 1999
revenues. We manufacture and sell uncoated freesheet papers for printing,
writing and publishing applications to, or through, Crown Paper pursuant to our
purchase and marketing agreements with them. In addition, we manufacture and
distribute freesheet reprographic papers, including printer, copier and fax
papers, under our own brand names or the brand names of our private label
away-from-home customers for resale to small office and home office customers,
and specialty papers for manufacture into disposable food service papers, such
as paper plates and bags. The Berlin-Gorham Mills generated net sales of
uncoated freesheet paper of approximately $28.2 million for the period of July
9, 1999 to September 30, 1999. We have no comparable figures in our historical
results because we purchased the Berlin-Gorham Mills on July 9, 1999. However,
for comparison purposes the sales of uncoated freesheet papers for the 12 weeks
ended September 28, 1998 for the Berlin-Gorham Mills as a business unit of Crown
Paper Co., were approximately $28.9 million and $9.4 million, respectively.
Virgin wood pulp, approximately 4.4% of fiscal 1999 revenues. We
manufacture virgin pulp primarily for our internal use. However, we sell excess
production to other paper companies and, from time to time, we may
opportunistically elect to sell virgin pulp when the market price for virgin
pulp significantly exceeds our costs of production. The Berlin-Gorham Mills
generated net sales of approximately $12.5 million for the period July 9, 1999
to September 30, 1999. We have no comparable figures in our historical results
because we purchased the Berlin-Gorham Mills on July 9, 1999. However for
comparison purpose, net sales of virgin pulp for the 12 weeks ended September
28, 1999 by the Berlin-Gorham Mills, as a business unit of Crown Paper, were
approximately $12.0.
Converting Equipment Sales
In addition to our lines of tissue products, we have two machine shops in
Hauppauge, New York which are dedicated to refurbishing and reconditioning
converting equipment that we either use internally
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or sell to other tissue converters. In fiscal 1996, 1997, 1998 and 1999, we had
net equipment sales of approximately $0.2 million, $1.2 million, $5.7 million
and $1.8 million, respectively, achieving gross profits of approximately $0.1
million, $0.9 million, $4.1 million and $1.4 million, respectively. We have
initiated a strategy of bundling future jumbo roll sales with equipment sales,
which has resulted in strengthening our long-term jumbo roll business.
Pricing Trends
We believe favorable industry tissue pricing conditions exist, particularly
in the jumbo tissue roll market. All of our tissue mills are operating at full
capacity and jumbo tissue roll pricing announcements by us and our principal
competitors, such as Kimberly Clark, Georgia-Pacific and Fort James, indicate a
tightness of supply throughout the industry will support increased prices.
Manufacturing
Jumbo Tissue Roll Manufacturing. Our jumbo tissue roll manufacturing
process begins with wood pulp, recycled paper and waste paper. These raw
materials typically are pulped in large blenders or pulpers and moved via
networks of pipes and pumps to a tissue machine where sheets of tissue paper are
formed according to customer or grade specifications. The tissue paper is then
drawn through the machine, being formed on wires as it travels through various
press rolls. Once the sheets are formed, they are transferred to a dryer section
of the machine that dries the tissue. Following the drying process, the tissue
paper is removed from the drying cylinders and wound into jumbo tissue rolls.
Jumbo rolls are either used internally for our converting operations or sold to
third-party purchasers.
Converting. Converting involves loading jumbo tissue rolls onto converting
machines which unwind, perforate, emboss and print tissue as needed. The
machines then roll or fold the processed tissue into finished tissue products
such as bath tissue, napkins or paper towels.
Packaging. We carton, wrap and pack our converted products into cases.
Consistent with our emphasis on vertical integration, we also manufacture our
own corrugated boxes, folding cartons, printed poly wrap and printed paper wrap.
Our packaging capabilities complement our flexible manufacturing strength by
enabling us to offer our products in a wider range of package configurations, an
especially important consideration in the at-home market, and to respond quickly
and efficiently to our customer needs.
Quality Control
Our tissue mills and converting facilities are subject to rigorous quality
control standards. We require our production facilities to adhere to strict
technical specification guidelines. For example, we require that the tissue we
produce meet standards such as basis weight, tensile strength, absorbency and
brightness. Our five tissue mills use the Measurex Open Network System, a
process control system which helps provide consistent quality and compatibility
with existing systems. Our converting facilities use an acceptance grading
system/statistical process control, which requires that plant managers and floor
supervisors be responsible for our product specifications. All quality control
processes are monitored on a daily basis and the results are forwarded for
plotting and graphing to our centralized quality assurance department.
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Raw Materials and Suppliers
The principal raw materials for our tissue manufacturing operations are
wood pulp, recycled paper pulp and waste paper. Under our agreement with Boise
Cascade, as recently amended, we are currently required to purchase a minimum of
57,000 tons per year from Boise Cascade. Additionally, Boise Cascade is
currently required to make available to us a minimum of 62,000 tons of pulp per
year. All of the pulp tonnage made available to us by Boise Cascade is currently
used at our St. Helens, Oregon tissue-making operation. This tonnage is
currently sufficient to satisfy our requirements at our St. Helens facility. In
addition, Boise Cascade is required to make available to us a minimum of 20 tons
per day of blended pulp. Pricing is calculated by a formula referencing
particular market prices. Our agreement with Boise Cascade is effective through
December 31, 2022. We also purchase pulp from a number of other suppliers. We
purchase wastepaper under a combination of supply arrangements with brokers
located in the Midwest and Northeast United States. In order to minimize freight
costs, we focus on maintaining and establishing relationships with wastepaper
dealers located near our manufacturing facilities and in close proximity to
urban areas where a majority of waste is generated. We believe our current
sources of supply are adequate to meet our requirements for our tissue
manufacturing operations and that with our acquisition of the Berlin-Gorham
Mills, we are effectively 100% vertically integrated with respect to virgin
pulp.
The principal raw materials for our tissue converting operations are
standard and specialty grade jumbo tissue rolls. We believe our ability to
supply our converting operations with a range of tissue grades manufactured at
our mills is a competitive advantage, as we can supply all of our tissue needs
from internal production.
Competition
The tissue industry is highly competitive. We believe that competition is
based principally on product quality, price and customer service. Our
competitors include Kimberly-Clark, Fort James, Procter & Gamble,
Georgia-Pacific and Global Tissue, a subsidiary of Kruger, Inc. Many of our
competitors are larger and more strongly capitalized than we are, which may
enable them to better withstand periods of declining prices and adverse
operating conditions in the tissue industry.
In the uncoated freesheet paper market, we compete principally in North
America, primarily with U.S. and Canadian paper producers, but also with
overseas producers. Similar to the tissue market, we compete primarily on the
basis of price, although quality and service are often the determining factors
in the choice of a supplier. In addition, we compete with integrated and
non-integrated producers of paper products. Fully-integrated manufacturers,
i.e., those whose requirements for pulp or other fiber are met fully from their
internal sources, may have certain competitive advantages relative to those that
are not fully-integrated manufacturers in periods of relatively high prices for
raw materials, in that the former are able to ensure a steady source of such raw
materials at costs that may be lower than prices in the prevailing market. In
contrast, competitors which are less integrated than we are may have certain
cost advantages in periods of relatively low pulp prices in that they may be
able to purchase pulp at prices lower than our production costs. In addition,
some of our competitors are lower-cost producers than we are and some of our
competitors have greater financial resources than we have. Our competitors
include Neenah Paper Company, E.B. Eddy Forest Products Limited, Domtar Inc. and
Williamette Industries Inc. In addition, many end-users of printing/writing/
publishing products in recent years have responded to changing economic
conditions and paper prices by substituting less expensive paper grades for use
in their products, and this tendency may benefit certain of our competitors
which produce lower priced paper products.
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We cannot assure you that we will be able to successfully compete in the
tissue or uncoated freesheet papers industry or that increased competition will
not have a material adverse effect on our business, financial condition and
results of operations.
Berlin-Gorham Mills Acquisition
On July 9, 1999, we purchased the Berlin-Gorham Mills from Crown Paper,
through Pulp & Paper of America LLC, a wholly-owned subsidiary of ours and one
or more of its subsidiaries. As consideration for the purchase of these assets,
we paid $45 million in cash and assumed ongoing contractual liabilities related
to the assets being acquired, such as raw materials supply contracts, equipment
maintenance agreements and labor agreements.
The cash portion of the purchase price included $2.1 million relating to
mill costs and the wet lap machine and other repair costs and reimbursement of
property taxes in the amount of $0.9 million, which taxes were prepaid for us by
Crown Paper.
In addition to the property, plant and equipment which we acquired pursuant
to the asset purchase agreement, Crown Paper transferred certain inventory to us
at the closing comprised of raw materials, finished goods, supplies and spare
parts.
In connection with our acquisition of the Berlin-Gorham Mills, we have
entered into a number of agreements with Crown Paper. Under these agreements,
Crown Paper will, for a period of three years from July 9, 1999:
o purchase from us annually, 40,000 tons of virgin pulp at a
contractually determined market-based price, less specified discounts;
o purchase orders for a minimum of 20,000 tons of specified publishing
grades of uncoated freesheet paper manufactured at the Berlin-Gorham
Mills. If we accept these orders, we will be obligated to manufacture
and sell these products to Crown Paper, under its trademarks, for
resale by Crown Paper to its customers, at agreed-upon selling prices,
less a discount; and
o be engaged as our exclusive sales representative for specified grades
of uncoated freesheet paper, other than some publishing grades, with
the obligation to use its best efforts to sell a minimum of 130,000
tons of such papers annually for a specified commission.
Under these uncoated freesheet paper marketing agreements, Crown Paper
bears all marketing costs and selling responsibility. In addition, under the
asset purchase agreement, Crown Paper has agreed not to compete with us in the
manufacture and marketing of tissue, toweling and specified grades of uncoated
freesheet papers for a period of three years following the consummation of the
acquisition.
The Berlin-Gorham Mills have been in continuous operation since 1904 and
were acquired by Crown Paper in 1995 as part of its spin-off from James River,
the predecessor to Fort James. The Berlin-Gorham Mills are a fully integrated
pulp and paper manufacturing facility consisting of a kraft pulp mill in Berlin,
New Hampshire and a paper mill in Gorham, New Hampshire which is comprised of
four paper machines and a towel machine. The four paper machines were dedicated
by Crown Paper to the manufacture of uncoated freesheet papers primarily for
printing, writing and publishing applications. The toweling machine was
dedicated by Crown Paper to the manufacture of jumbo tissue rolls of towel for
converting into commercial towel products. The Berlin-Gorham Mills also include
six hydroelectric generating facilities, six steam turbines for the generation
of electricity and a solid waste landfill. The
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<PAGE>
mills and the hydroelectric generating facilities are located on the
Androscoggin River, which provides water for operation of the mills and the
hydroelectric generating facilities.
The four paper machines have an aggregate annual production capacity of
approximately 180,000 tons and produced approximately 153,000 tons of uncoated
freesheet paper products in the 52 weeks ended June 27, 1999, sales of which
generated revenues of approximately $114.0 million in the 52 weeks ended June
27, 1999. We believe that the machines are well suited for the production of
specialty grade papers and, together, produce grades ranging from 26 to 150
pounds in basis weight. The independent manufacturing systems of the four
machines allow the Gorham paper mill to simultaneously produce papers with
different colors, characteristics and mixtures of pulp and additives. In
addition to producing various grades of freesheet paper for sale to or through
Crown Paper pursuant to our marketing agreement with Crown Paper, we are
currently using the paper machines to manufacture freesheet reprographic papers,
i.e., computer printer, copier and fax papers, under our own brands or the
brands of our private label away-from-home customers for resale to small
office/home office customers and specialty papers for converting into certain
disposable food service papers such as paper plates and bags.
The toweling machine manufactures jumbo tissue rolls of towel for
converting into away-from-home towel products, such as C-fold and multi-fold
towels. This machine has the potential for producing toweling for converting
jumbo tissue rolls into at-home towel products, masking tape base, surgical,
medical, disposables and filtration products.
The Berlin pulp mill consists of nine batch digesters, three washer lines,
separate hardwood and softwood elemental chlorine bleach plants and a chemical
recovery unit capable of simultaneously producing hardwood and softwood pulp.
The pulp mill is connected to the Gorham paper mill via two gravity-fed
pipelines. In the 52 weeks ended June 27, 1999, the pulp mill supplied 83% of
the paper mill's wood pulp requirements. In the 52 weeks ended June 27, 1999,
the Berlin pulp mill dried and sold approximately 116,000 tons of hardwood as
market pulp, including sales to other Crown Paper mills.
Reports filed by Crown Paper with the Securities and Exchange Commission
state that from 1992 to 1994, Fort James invested approximately $87.0 million to
rebuild and expand the chemical recovery unit, which Crown Paper believes
extended the life of such unit by approximately 20 to 25 years. Through the
implementation of various strategies, including the startup of an existing wet
lap pulp machine at the Berlin pulp mill and the use of recycled paper and
certain paper manufacturing by-products that would otherwise be discarded, we
are seeking to significantly increase the amount of virgin pulp available for
sale to our tissue mills and as market pulp to third party purchasers. We cannot
assure you that we will be able to successfully implement such strategies or
that the implementation of such strategies will result in any anticipated cost
benefits or increased revenues.
Wood fiber is the largest single material cost for the Berlin-Gorham Mills.
Wood chips, which are used in kraft pulp making, are either produced at the
Berlin pulp mill from timber purchased under long term supply contracts or
purchased from local suppliers. Raw materials required by the Berlin-Gorham
Mills are clay and chemicals used in pulp and paper production, which are
supplied under contracts with certain suppliers. We believe that the
Berlin-Gorham Mills currently have adequate sources of raw materials and that
adequate alternative sources of supply are available.
The six hydroelectric generating facilities located on the Androscoggin
River and six steam turbines generate approximately 31 megawatt hours of
electricity in the aggregate. In 1998, the Berlin-Gorham Mills generated
approximately 82% of their power requirements and their average cost of
internally generated power was approximately 31% of the cost of purchased power.
The Berlin-Gorham Mills sell a small amount of power to the local public utility
when internal demand is less than internal generation.
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<PAGE>
The Gorham paper mill principally produces uncoated freesheet papers for
custom business forms, book and opaque papers for hard cover books and manuals
and premium grade papers for annual reports and other printing applications.
Paper products from the Berlin-Gorham Mills include:
Products Markets
-------- ---------
Text and Cover, Writing and Opaque Commercial Printing
Publishing Papers Book and Magazine
Business Papers Communication
Technical Specialties Specialty Converting
Facilities
In addition to the Berlin-Gorham Mills, we operate:
o five tissue mills, with a total annual capacity of 220,000 tons, one
in New Hampshire, two in New York, one in Oregon and one in Wisconsin;
o seven converting facilities, one in California, one in Mexico, four in
New York and one in Wisconsin;
o two packaging/printing facilities, both in New York; and
o 11 distribution facilities, one in California, one in Mexico, one in
New Jersey, seven in New York and one in Wisconsin.
Some of the mills and facilities discussed above are located on the same real
property sites. We also own a tissue mill facility in Tomahawk, Wisconsin, which
has been closed since February, 1998. See "--Berlin-Gorham Mills Acquisition"
for information as to these facilities.
The following table summarizes the location of, classes of products
manufactured by, and fiscal 1999 production volumes of, each of our factlities.
The old notes and our revolving credit facility are collateralized by
substantially all of our assets, including the facilites listed below.
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<PAGE>
<TABLE>
<CAPTION>
Annual Production
Tissue Mills Products Capacity(1)
------------ -------- -----------
<S> <C> <C>
Winchester, New Hampshire 100% recycled and
100% virgin tissue 24,000 tons
Greenwich, New York 100% recycled and
100% virgin tissue 24,000 tons
Mechanicville, New York 100% recycled and
100% virgin tissue 50,000 tons
St. Helens, Oregon(2) 20% recycled and
100% virgin tissue 50,000 tons
Neenah, Wisconsin 100% recycled and
100% virgin tissue 72,000 tons
Gorham, New Hampshire 100% recycled and
100% virgin tissue 39,000 tons
----------------
Total Tonnage 259,000 tons
================
Uncoated Freesheet Mill
-----------------------
Gorham, New Hampshire uncoated freesheet papers 179,000 tons
================
Pulp Mill
---------
Berlin, New Hampshire virgin wood pulp 350,000 tons
================
Tissue Converting Facilities
- ----------------------------
Calexico, California Finished tissue products 1,500,000 cases
Mexicali, Mexico Finished tissue products 1,000,000 cases
Coram, New York Finished tissue products 2,000,000 cases
Hauppauge, New York(3) Finished tissue and plastic
products 4,000,000 cases
Waterford, New York(4) Finished tissue products 4,000,000 cases
Neenah, Wisconsin Finished tissue products 2,500,000 cases
----------------
Total Cases 15,000,000 cases
================
</TABLE>
- ----------
(1) All annual capacity amounts are approximate.
(2) We have leased a portion of Boise Cascade's St. Helens, Oregon facility
from Boise Cascade pursuant to a lease expiring in December 31, 2022 in
connection with the operation of a tissue machine which we purchased from
Boise Cascade in November 1992. Boise Cascade operates such tissue machine
for us on a cost-sharing basis and, pursuant to its agreement with us,
retains an option to repurchase the machine under the circumstances
described in our agreement with Boise Cascade.
(3) We operate two tissue converting facilities in Hauppauge, New York, one of
which is leased.
(4) This distribution center is held in the form of a leasehold estate granted
by the Town of Waterford Industrial Development Agency, and, upon the
expiration of the related lease, January 1, 2009, will be reacquired in fee
by us for nominal consideration.
Legal Proceedings
From time to time we are subject to a number of legal proceedings and other
claims arising in the ordinary course of our business. We do not believe that
any pending or threatened legal proceedings or other claims will have,
individually or in the aggregate, a material adverse effect on our financial
condition or results of operations.
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<PAGE>
Environmental Regulation
Our operations are subject to comprehensive and frequently changing
federal, state and local environmental laws and regulations, including laws and
regulations governing emissions of air pollutants, discharges of waste water and
storm water, storage, treatment and disposal of materials and waste, remediation
of soil, surface water and ground water contamination, and liability for damages
to natural resources. Compliance with these laws and regulations is an
increasingly important factor in our business. We will continue to incur capital
and operating expenditures in order to maintain compliance with applicable
federal, state and local environmental laws and regulations and to meet new
regulatory requirements.
We are subject to strict, and under some circumstances, joint and several,
liability for the investigation and remediation of environmental contamination,
including contamination caused by other parties, at properties that we own or
operate and at properties where we or our predecessors have arranged for the
disposal of regulated materials. As a result, we are involved from time to time
in administrative and judicial proceedings and inquiries relating to
environmental matters. We may be involved in additional proceedings in the
future and the total amount of these future costs and other environmental
liabilities may be material.
On April 15, 1998, the U.S. Environmental Protection Agency issued final
rules known as the "Cluster Rules" affecting pulp and paper industry discharges
of wastewater and gaseous emissions. The Cluster Rules apply to pulping from the
initial feedstock of wood and certain bleaching processes. The Cluster Rules
require changes in the pulping, bleaching and/or air emission and wastewater
treatment processes presently used in some U.S. pulp and paper mills, including
the Berlin-Gorham Mills. Based upon our understanding of the Cluster Rules, and
after consultation with independent environmental consultants, we estimate that
approximately $13 million of capital expenditures, within a range of
approximately plus or minus 25%, may be required to comply with the Cluster
Rules, with compliance dates beginning in 1999 and extending over the next two
to five years. There are risks and uncertainties associated with our estimate
that could cause total capital expenditures and timing of such expenditures to
be materially different from current estimates. The EPA has also proposed
additional requirements for the pulp and paper industry, which, if and when
adopted, may require additional material expenditures.
The Berlin-Gorham Mills have been in operation for many years and, over
such time, Crown Paper and other prior operators at the Berlin-Gorham Mills have
generated and disposed of wastes which are or may be considered hazardous. The
soil, groundwater and adjacent area remediation which is currently under
consideration with respect to the Berlin-Gorham Mills could, based upon
available information, cost up to $400,000 over the next two years. The
discovery of previously unknown contamination of property underlying, or in the
vicinity of, the Berlin-Gorham Mills could require us to incur material
unforeseen expenses for which we may not have any recourse against Crown Paper
or other prior operators.
The Berlin-Gorham Mills have systems which process and treat large amounts
of wastewater primarily generated by their operations. Maintenance and repairs
to the wastewater treatment plant at the Berlin-Gorham Mills have been
identified, which are estimated to cost up to $2.1 million. Due to aging of the
treatment systems and to the evolution of mill operations, it is anticipated
that the related treatment systems and equipment will require replacement and/or
upgrading. In addition, there is evidence that effluent in connection with the
wastewater treatment
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<PAGE>
processes has, over time, resulted in accumulations of sediment and other
buildup in adjacent lagoons and watercourses. It is anticipated that changes in
the applicable processes and the related technology and equipment may be
necessary in the future both to remediate such buildups and to accommodate
expansion of mill production schedules. The foregoing changes may require
additional material capital expenditures.
Employees
As of December 31, 1999, we employed 2,324 persons, consisting of 1,939
hourly and 385 salaried employees. We have collective bargaining agreements with
the Paper, Allied-Industrial, Chemical and Energy Workers International Union
covering approximately 935 of our hourly employees, 245 of which are employed at
our mill in Neenah, Wisconsin and 690 of which are employed at the Berlin-Gorham
Mills. We also have a collective bargaining agreement with the Office and
Professional Employees International Union covering 22 clerical employees at the
Berlin-Gorham Mills. Our agreement relating to the Neenah hourly employees
expires on May 31, 2002, subject to automatic annual renewals unless either
party objects. Our agreements relating to the Berlin-Gorham employees expire in
June 2002, as to hourly employees, and in July 2002, as to clerical employees.
Our St. Helens, Oregon paper machine is operated for us by employees of
Boise Cascade on a cost-sharing basis. The Boise Cascade employees are
represented by the Association of Western Pulp and Paper Workers. Boise
Cascade's collective bargaining agreement expires on March 14, 2004, subject to
automatic yearly renewals unless either party notifies the other to the
contrary.
We believe that relations with our employees are satisfactory.
MANAGEMENT
Directors and Executive Officers
The following table sets forth, as of December 31, 1999, certain
information as to our directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------- ----- ----------------------------------------
<S> <C> <C>
Nourollah Elghanayan 83 Chairman of the Board and a Director
Mehdi Gabayzadeh 55 President, Chief Executive Officer and a Director
Edward I. Stein 54 Executive Vice President and Chief Financial Officer
Nicholas T. Galante, III 43 Executive Vice President and President and Chief Executive
Officer of Pulp & Paper of America LLC
Steven C. Catalfamo 39 First Vice President-Tissue Converting
John J. Jackmore 61 First Vice President-Away-From-Home Division
Donald A. MacIntyre 56 First Vice President-At-Home Division
Mark J. Smith 38 First Vice President-Tissue Manufacturing
Andrew H. Rush 40 Director
</TABLE>
Directors are elected by the stockholders to one-year terms. Officers serve
at the discretion of the board of directors.
Nourollah Elghanayan has served as our Chairman of the Board and a director
since October 1998. He served as President, Chief Operating Officer and Director
of our subsidiary, American Tissue Corporation, from 1982 until October 1998.
Mr. Elghanayan is also an investor in commercial real estate.
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<PAGE>
Mehdi Gabayzadeh has served as our President, Chief Executive Officer and a
director since October 1998. He served as Executive Vice President and Director
of our subsidiary, American Tissue Corporation, from 1982 to October 1998.
Edward I. Stein has served as our Executive Vice President and Chief
Financial Officer since May 1999. Prior to joining us, Mr. Stein served as Chief
Financial Officer of Perry H. Koplik & Sons, Inc., a pulp and paper broker, from
1976 to May 1999.
Nicholas T. Galante, III has served as our Executive Vice President and
President of our subsidiary, Pulp & Paper of America LLC, since April 1999. Mr.
Galante has also served as Director of Jumbo Rolls and Fast Food Restaurants of
our subsidiary, American Tissue Corporation, since 1994. Prior to joining
American Tissue Corporation, Mr. Galante served an Executive Vice President of
Tagsons Papers, Inc. from 1977 to 1994. Tagsons Papers, Inc. filed a petition
seeking relief under Chapter 11 of the Federal Bankruptcy Code in 1994.
Steven C. Catalfamo has served as our First Vice President-Tissue
Converting since April 1999 and Vice President-Engineering of our subsidiary,
American Tissue Corporation, since 1994. He served as our Vice President of
Engineering and Quality Control from 1989 to 1994, having joined American Tissue
Corporation as a plant manager in 1986.
John J. Jackmore has served as our First Vice President-Away-From Home
Division since April 1999 and has served as Vice President-Commercial and
Industrial Sales of our subsidiary, American Tissue Corporation, since 1992.
From 1990 to 1992, he served as Sales Manager for Tagsons Papers, Inc. From 1985
to 1990, he served as President of Rhem-Sofco, a paper distributor.
Donald A. MacIntyre has served as our First Vice President-At-Home Division
since April 1999 and as Director of Consumer and Private Label Sales of our
subsidiary, American Tissue Corporation, since 1991. From 1969 to 1991, he held
various sales positions with Fort Howard and Sweetheart Cup Company Inc.,
including as National Sales Manager from 1989 to 1991.
Mark J. Smith has served as our First Vice President-Tissue Manufacturing
since April 1999 and as Vice President-Tissue and Kraft Manufacturing of our
subsidiary, American Tissue Corporation, since 1994.
Andrew H. Rush became one of our directors on July 9, 1999. Mr. Rush has
been a Managing Director of DLJ Merchant Banking Partners, L.P. since January
1997. From 1992 to 1997, Mr. Rush was an officer of DLJ Merchant Banking
Partners, L.P. and its predecessors. Mr. Rush currently serves as a member of
the advisory board of Triax Midwest Associates, L.P. and as a member of the
board of directors of Societe d'Ethanol de Synthese and Nextel Partners Inc. Mr.
Rush previously served as a director of Doane Products Company.
Executive Compensation
The following table sets forth the compensation earned, whether paid or
deferred, by our Chief Executive Officer and by our other most highly
compensated executive officers during fiscal 1997, 1998 and 1999 for services
rendered in all capacities to us and our predecessor during such fiscal years.
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<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------
Other
Annual All Other
Fiscal Compen- Compen-
Name and Principal Position Year Salary ($) Bonus($) sation($)(1) sation($)(2)
- ---------------------------- ------ ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Mehdi Gabayzadeh 1999 240,000 -- 660 --
President and Chief Executive 1998 240,000 -- 691 --
Officer 1997 240,000 -- 749 --
Nicholas T. Galante, III(3) 1999 225,769(3) 48 2,133
Executive Vice President, 1998 210,000(3) -- 259 1,835
President and Chief Executive 1997 200,000(3) -- 281 1,600
Officer of Pulp & Paper
America LLC
Roland L. Gasper(4) 1999 141,731 -- 959 2,880
Chief Financial Officer 1998 130,000 -- 1,814 1,350
1997 120,000 -- 1,094 --
Steven C. Catalfamo 1999 106,923 8,500 465 --
First Vice President- 1998 95,192 12,000 259 --
Tissue Converting 1997 82,000 18,500 258 --
John J. Jackmore 1999 104,380 34,050 399 2,714
First Vice President- 1998 101,724 31,493 293 1,912
Away-From-Home Division 1997 92,000 27,821 287 1,917
</TABLE>
- ----------
(1) Reflects life insurance premiums and car allowances paid or reimbursed
by us.
(2) Reflects matching contributions under our 401(k) Plan.
(3) Mr. Galante's salary includes an annual consulting fee of $120,000
which has been paid to Six Gees, Inc., a corporation wholly owned by
Mr. Galante.
(4) Mr. Gasper resigned as of May 31, 1999.
Edward I. Stein, our Executive Vice President and Chief Financial Officer,
began his employment with us on May 31, 1999. He will receive from us annually a
salary of $275,000, entertainment reimbursement of up to $20,000 and a personal
usage and company car allowance of up to $7,500, plus reimbursement for
insurance related thereto.
401(k) Plan
Substantially all of our non-union salaried employees, including our
executive officers, participate in our 401(k) savings plan. Employees are
permitted to defer up to 20% of their annual compensation each calendar year not
to exceed $10,000 per year, which we contribute to the plan and we will make a
matching contribution of up to 50.0% of the first 6.0% of the employee's
contribution. We may also make discretionary contributions to the plan which
would be allocated among participants based on the ratio of each participant's
compensation to the total compensation of all participants for a plan year.
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<PAGE>
Director Compensation
None of our directors receives any compensation or fees for service on our
board of directors.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of December 31, 1999,
with respect to the beneficial ownership, fully diluted, of our common stock by
(a) each stockholder known by us to own beneficially 5% or more of the
outstanding shares of our common stock; (b) each of our directors; (c) each of
our executive officers named in "Management -- Executive Compensation;" and (d)
all of our executive officers and directors as a group.
Number of Percentage
Shares of of
Name of Beneficial Owner(1) Common Stock Total
- ------------------------------ ------- -------
Middle American Tissue Inc.(2) ............... 200.000 100.000%
Super American Tissue Inc.(3) ................ 176.000 88.000
Donaldson, Lufkin & Jenrette
Securities Corporation(4) .................... 176.000 88.000
LJMB Funds(5) ................................ 24.000 12.000
Nourollah Elghanayan ......................... 53.474(6) 26.737
Victoria Elghanayan .......................... 35.057(7) 17.529
Mehdi Gabayzadeh ............................. 88.000(8) 44.000
Mehdi Gabayzadeh and Joseph Neissany
as trustees for Diane Gabayzadeh Trust ....... 17.327(8) 8.664
Mehdi Gabayzadeh and Joseph Neissany
as trustees for Deborah Gabayzadeh Trust ..... 17.327(8) 8.664
Mehdi Gabayzadeh and Joseph Neissany
as trustees for John Gabayzadeh Trust ........ 20.103(8) 10.051
Jeffrey Elghanayan ........................... 25.773 12.887
Edward I. Stein .............................. -- --
Nicholas T. Galante, III ..................... -- --
Steven C. Catalfamo .......................... -- --
John J. Jackmore ............................. -- --
Donald A. MacIntyre .......................... -- --
Mark J. Smith ................................ -- --
Andrew H. Rush ............................... --(9) --
All directors and executive officers
as a group (9 persons)........................ 141.474(6)(8)(9) 70.737
- ----------
(1) The address of each of these stockholders (other than DLJMB Funds) is
c/o American Tissue Corporation, 135 Engineers Road, Hauppauge, New
York 11788.
(2) Middle American Tissue Inc. directly owns 100% of our issued and
outstanding shares.
(3) Super American Tissue Inc. directly owns 88% of the issued and
outstanding shares of Middle American Tissue Inc., our direct parent,
after giving effect to the exercise of warrants to purchase up to 12%
of Middle American Tissue's common stock to be issued to affiliates of
the Initial Purchaser. Each of the persons or entities listed in this
table beneficially owns their shares in American Tissue through their
ownership interest in either Middle American Tissue Inc. or Super
American Tissue Inc.
(4) Donaldson, Lufkin & Jenrette Securities Corporation directly or
indirectly controls the general partner of each partnership or the
voting securities of each corporation included in the DLJMB Funds. The
address of Donaldson, Lufkin & Jenrette Securities Corporation is 277
Park Avenue, New York New York 10172.
(5) The DLJMB Fund consists of DLJ Merchant Banking Partners II, L.P. and
the following related investors: DLJ Merchant Banking Partners II-A,
L.P.; DLJ Offshore Partners II, C.V.; DLJ Diversified Partners, L.P.;
DLJ Diversified Partners-A, L.P.; DLJ Millennium Partners, L.P.; DLJ
Millennium Partners-A, L.P.; DLJMB
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<PAGE>
Funding II, Inc.; DLJ EAB Partners, L.P.; DLJ First ESC, L.P. and DLJ
ESC II, L.P., hold directly warrants to purchase up to 12% of the
common stock of Middle American Tissue as of July 9, 1999. The address
of each of these entities, other than DLJ Offshore Partners II, C.V.,
is 277 Park Avenue, New York, New York 10172. The address of DLJ
Offshore Partners II, C.V., is care of John B. Gorsiraweg, 14,
Willemstad, Curacao, Netherlands Antilles.
(6) The shares of our common stock beneficially owned by Mr. Elghanayan
include 35.057 shares owned directly by his wife, Victoria Elghanayan.
Mr. Elghanayan disclaims beneficial ownership of the shares held by
his wife.
(7) The shares of our common stock beneficially owned by Mrs. Elghanayan
do not include 18.417 shares owned directly by her husband, Nourollah
Elghanayan. Mrs. Elghanayan disclaims beneficial ownership of the
shares owned by her husband.
(8) The shares of our common stock beneficially owned by Mr. Gabayzadeh
include 20.103 shares owned by the John Gabayzadeh Trust, 17.327
shares owned by the Diane Gabayzadeh Trust and 17.327 shares owned by
the Deborah Gabayzadeh Trust, over which he has shared voting and
dispositive power.
(9) Does not include warrants to purchase up to 12% of Middle American
Tissue's common stock, issued, beneficially owned by the Donaldson,
Lufkin & Jenrette Securities Corporation through the DLJMB Funds. Mr.
Rush is a Managing Director of DLJ Merchant Banking Partners II, L.P.
and, as a result, may be deemed to beneficially own the warrants owned
by the DLJMB Funds. Mr. Rush disclaims beneficial ownership of the
warrants beneficially owned by the DLJMB Funds.
Super American Tissue Inc., Mr. Elghanayan and the other shareholders of
Super American Tissue affiliated with him, Mr. Gabayzadeh and the other
shareholders of Super American Tissue affiliated with him, and certain other
companies controlled by Messrs. Elghanayan and Gabayzadeh that are not
subsidiaries of Super American Tissue, have entered into a shareholders
agreement. The shareholders agreement provides that the board of directors of
Super American Tissue is to consist of an equal number of directors designated
by each of Messrs. Elghanayan and Gabayzadeh and that each subsidiary of Super
American Tissue, including American Tissue and its subsidiaries, shall be
directly or indirectly managed by them, provided that if any financing
arrangement requires that the board of directors of Super American Tissue or any
of its subsidiaries consist of one or more directors not appointed by Messrs.
Elghanayan and Gabayzadeh,
o such outside directors shall constitute no more than one third of the
board of directors of Super American Tisssue or the applicable
subsidiary and
o any action by such board will require the consent of a majority of the
directors designated by each of Messrs. Elghanayan and Gabayzadeh.
Under the shareholders agreement, Messrs. Elghanayan and Gabayzadeh, or
upon the incapacity or death of either of them, the remaining shareholder and
the designee of such incapacitated or deceased shareholder, have the right to
cause Super American Tissue or any of its subsidiaries to effect an initial
public offering of its capital stock or any capital stock of its subsidiaries
and certain other financial transactions. However, if the purpose of an initial
public offering of the capital stock of Super American Tissue or any of its
subsidiaries or other financial transaction, including a sale of all or
substantially all of the assets of Super American Tissue or one of its
subsidiaries, is the facilitation of payment of indebtedness owing by Super
American Tissue or any of its subsidiaries to a shareholder of Super American
Tissue then the authorization of such transaction is subject to the prior
satisfaction of specified conditions. The most significant of these conditions
is the requirement that the receipt by the shareholder proposing the transaction
or the applicable company receive an opinion of an investment banking firm of
nationally recognized standing to the effect that the proposed transaction is
fair to all of the companies that are parties to the shareholders agreement and
their respective shareholders. Super American Tissue is not required to redeem
any of its capital stock from the estate of a deceased shareholder.
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<PAGE>
For information as to the stockholders agreement relating to Middle
American Tissue, see "Description of Material Indebtedness -- Middle American
Tissue Notes."
RELATED PARTY TRANSACTIONS
Super American Tissue Inc., a Delaware corporation, beneficially owns all
of the outstanding common stock of Middle American Tissue Inc., other than
warrants issued to affiliates of the initial purchaser of the old notes to
purchase up to 12% of Middle American Tissue's common stock as of the issue date
of the old notes. Middle American Tissue owns 100% of our outstanding capital
stock. Mr. Nourollah Elghanayan, our Chairman of the Board and a director,
together with members of his family, owns 50.0% of the outstanding common stock
of Super American Tissue. Mr. Mehdi Gabayzadeh, our President, Chief Executive
Officer and a director, together with trusts for the benefit of Mr. Gabayzadeh's
children, of which he is one of the trustees, owns the other 50.0% of the
outstanding common stock of Super American Tissue. See "Principal Shareholders"
and "Description of Certain Indebtedness -- Middle American Tissue Notes."
In September 1998, Messrs. Elghanayan and Gabayzadeh and the other
stockholders of Super American Tissue caused American Tissue to be incorporated
as a Delaware corporation. As of October 1, 1998, these stockholders also
beneficially owned, all of the outstanding capital stock or membership
interests, as the case may be, of all of the corporations and limited liability
companies, which are now our wholly owned subsidiaries. See Note 1 to our
historical consolidated financial statements. Effective as of October 1, 1998,
these stockholders caused us to issue 200 shares of our common stock to them, on
a pro rata basis, in exchange for the shares of common stock and membership
interests they owned, constituting all of the outstanding equity interests in
these corporations and limited liability companies. As a result of this
exchange, these corporations and limited liability companies became our
subsidiaries.
Thereafter, on March 26, 1999, these stockholders caused Super American
Tissue to be formed as a Delaware corporation. Effective June 1, 1999, these
stockholders exchanged, on a pro rata basis, the shares of our outstanding
common stock they owned for pro rata shares of the common stock of Super
American Tissue. As a result of this exchange, we became a wholly-owned direct
subsidiary of Super American Tissue. On July 1, 1999, these stockholders caused
Middle American Tissue to be formed as a Delaware corporation. Middle American
Tissue is a wholly-owned subsidiary of Super American Tissue, and we are a
wholly-owned subsidiary of Middle American Tissue, in each case without giving
effect to warrants issued to affiliates of the initial purchaser of the old
notes in connection with the purchase by such affiliates for $20.0 million of
senior secured discount notes of Middle American Tissue. See "Principal
Shareholders" and "Description of Certain Indebtedness -- Middle American Tissue
Notes."
These stockholders also collectively own all of the outstanding shares of
common stock or membership interests, as the case may be, of the following
corporations and limited liability companies (the "Affiliated Companies"):
American Kraft Mills of Tennessee LLC, American Paper Mills of Vermont Inc.,
United States Paper Mills of Vermont Inc., American Tissue Mills of
Massachusetts Inc., American Tissue Mills of Maine LLC, American Tissue Mills de
Mexico S.A. de C.V., American Tissue Mills of Ohio Inc., United States Paper
Mills of Vermont Inc., American Paper Mills of Vermont Inc., American Tissue
Mills of Maine LLC, Huntington LLC, Lakeview Real Estate LLC and Pheasant LLC.
Each of the Affiliated Companies is owned 50.0% by Mr. Elghanayan and
members of his family and 50.0% by Mr. Gabayzadeh and trusts for the benefit of
Mr. Gabayzadeh's children, of which he is one of the trustees. Mr. Elghanayan
serves as Chairman, Chief Executive Officer, Treasurer and a director of each of
the Affiliated Companies. Mr. Gabayzadeh serves as President, Chief Operating
Officer, Secretary and a director of each of the Affiliated Companies. The
Affiliated Companies do not have any other officers or directors.
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<PAGE>
Transactions with the Affiliated Companies
Some of the Affiliated Companies are indebted to some of our subsidiaries.
This indebtedness was incurred since October 1, 1998, the first day of fiscal
1999, or was incurred prior thereto and has been outstanding since the date of
incurrence of the indebtedness. All of the amounts receivable by our
subsidiaries from the Affiliated Companies have no definite maturity date and do
not bear interest.
The following table sets forth information as to the indebtedness as of
December 31, 1999 and as to the highest amount of the indebtedness outstanding
since October 1, 1998:
<TABLE>
<CAPTION>
Highest Amount
Amount Outstanding at Outstanding Since
Creditor Debtor December 31, 1999 October 1, 1998
----------------------- ------------------------ ------------------ ---------------
<S> <C> <C> <C>
American Tissue Corporation American Kraft Mills of Tennessee $ 4,850,718(1) $ 6,392,735(1)
American Tissue Corporation Huntington -- 420,000(2)
American Tissue Corporation American Tissue Mills of Ohio 3,733,547(3) 4,223,273(3)
American Tissue Corporation American Tissue Mills of Massachusetts 6,005,784(4) 6,005,784(4)
American Tissue Corporation American Tissue Mills de Mexico 1,661,365(5) 2,067,773(5)
American Tissue Mills of Greenwich American Tissue Mills of Massachusetts 197,000(4) 197,000(4)
Grand American Tissue Mills of Ohio 1,044,132(3) 1,044,132(3)
Grand American Tissue Mills of Massachusetts 1,442,278(4) 1,442,278(4)
American Tissue Corporation Lakeview Real Estate 2,859,221(6) 2,859,221(6)
100 Realty Management Pheasant 316,302(7) 316,302(7)
Unique Financing American Tissue Mills of Ohio 290,000(3) 290,000(3)
American Tissue Mills of New York American Tissue Mills of Massachusetts 183,229(4) 183,229(4)
----------- -----------
Total $22,583,576 $25,441,727
=========== ===========
</TABLE>
- --------
(1) Represents indebtedness arising from loans made from time to time to
finance the purchase of assets by American Kraft Mills of Tennessee,
consisting of a kraft paper mill and related startup costs, capital
improvements and working capital needs.
(2) Represents indebtedness arising from loans made to finance the cost of
improvements of real property owned by Huntington.
(3) Represents indebtedness for advances made from time to time to finance
continuing costs of maintaining the tissue mill owned by American
Tissue Mills of Ohio.
(4) Represents indebtedness for advances made from time to time to finance
continuing costs relating to a tissue mill formerly operated by
American Tissue Mills of Massachusetts which has discontinued
operations.
(5) Represents indebtedness for working capital loans made from time to
time to finance the converting operations conducted by American Tissue
Mills de Mexico at our converting facility in Mexicali, Mexico.
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<PAGE>
(6) Represents indebtedness arising from working capital loans made from
time to time to finance the costs of repairs and improvements of real
property owned by Lakeview.
(7) Represents indebtedness arising from working capital loans made from
time to time to finance the acquisition of undeveloped land owned by
Pheasant which is proposed to be leased to American Tissue Corporation
following the development and construction of a warehouse.
Some of our subsidiaries were indebted to some of the Affiliated Companies
for money borrowed by these subsidiaries from such Affiliated Companies during
fiscal 1998 to finance the working capital requirements of such subsidiaries.
Such indebtedness was not evidenced by any promissory notes, was payable on
demand and did not accrue interest. On July 9, 1999, Super American Tissue
assumed all of this indebtedness and these Affiliated Companies released our
subsidiaries from liability for such indebtedness.
The details of such indebtedness are as follows:
Amount Payable
Debtor Creditor as of July 9, 1999
---------------------- ------------------- ------------------
American Tissue Corporation Lakeview Real Estate $1,228,867
American Tissue Mills of Neenah Lakeview Real Estate 814,684
100 Realty Management Huntington 1,310,848
----------
Total $3,354,399
==========
Our subsidiary, American Tissue Mills of Neenah, has entered into a lease,
dated August 1, 1998, with Lakeview Real Estate under which American Tissue
Mills of Neenah leases our Neenah, Wisconsin distribution facility from Lakeview
for a 20-year term expiring on July 31, 2018. The annual rental under such lease
is currently approximately $1,270,000, and increases from time to time to a
maximum annual rent of approximately $1,460,000. In addition, the tenant pays as
additional rent to Lakeview all taxes, insurance and maintenance costs of this
facility. American Tissue Mills of Neenah has made aggregate rental payments to
Lakeview from the beginning of the lease term, August 1, 1998, through December
31, 1999, of $1,472,380.
Our subsidiary, American Tissue Corporation, leases a warehouse facility
located in Huntington, New York from Huntington LLC under a lease dated June 1,
1998, for a 20-year term expiring on May 29, 2018. The current annual rental
under this lease is approximately $520,000 and increases from time to time to a
maximum of approximately $883,000. In addition, the tenant pays as additional
rent to Huntington all taxes, insurance and maintenance costs of this facility.
American Tissue Corporation has made aggregate rental payments to Huntington
from the beginning of the lease term, June 1, 1998, through December 31, 1999,
of $806,820.
American Tissue Corporation purchases corrugating medium, a material used
to manufacture corrugated containers, and core stock from American Kraft Mills
of Tennessee at market prices. For the 15 months ended December 31, 1999,
American Tissue Corporation purchased approximately 9,395 tons of corrugating
medium and core stock from American Kraft Mills of Tennessee for which it paid
an aggregate of approximately $3,679,628.
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Under an agreement dated December 12, 1994, our subsidiary, American Tissue
Corporation, reimburses American Tissue Mills de Mexico for all operating
expenses, including payroll costs, incurred by American Tissue Mills de Mexico
for converting jumbo tissue rolls of tissue supplied by American Tissue
Corporation into finished tissue products at our converting facility in
Mexicali, Mexico. American Tissue Corporation also pays American Tissue Mills de
Mexico a fee equal to 5.0% of these operating expenses, net of any losses
resulting from currency fluctuations. For the 22 months ended December 31, 1999,
American Tissue Corporation reimbursed American Tissue Mills de Mexico for
$1,851,011 of operating expenses and paid American Tissue Mills de Mexico
$92,550 in converting fees.
Three of our subsidiaries, Engineers Road, Gilpin Realty and Coram Realty,
together with Huntington, an Affiliated Company, have entered into a mortgage
loan with Roslyn Savings Bank in the principal amount of $14.3 million, at an
annual rate of 7.5%, which matures on August 1, 2008. The aggregate principal
amount we allocated to our subsidiaries was approximately $7,628,009.
Transactions with Executive Officer
During fiscal 1999, American Tissue Corporation paid fees consulting fee of
$120,000 to Six Gees, Inc., of which Nicholas T. Galante, III, one of our
Executive Vice Presidents, is the sole stockholder. This consulting fee is in
addition to compensation paid to Mr. Galante as one of our executive officers.
Transactions with Our Stockholders
Messrs. Elghanayan and Gabayzadeh have borrowed money from some of our
subsidiaries in the aggregate amount of $1.2 million as of December 31, 1999.
Such loans have no definite repayment date and do not bear interest. The
following table sets forth the details of such transactions:
<TABLE>
<CAPTION>
Highest Amount Amount Outstanding
Outstanding Since at
Debtor Creditor October 1, 1998 December 31, 1999
------ -------- ----------------- -----------------
<S> <C> <C> <C>
N. Elghanayan Unique Financing $ 566,000 $ 566,000
M. Gabayzadeh Unique Financing 566,000 566,000
N. Elghanayan American Tissue Mills of Oregon 947,000 --
</TABLE>
Some of our subsidiaries were indebted to the beneficial owners of our
common stock on account of loans made by these stockholders to our subsidiaries
to finance their working capital requirements. The aggregate amount of the
indebtedness was $21.6 million as of July 9, 1999 and each item of indebtedness
was evidenced by a demand promissory note and bears interest at 10.0% per annum.
As of July 9, 1999:
o all of this indebtedness was assumed by Super American Tissue;
o this indebtedness is evidenced by a seven year note of Super American
Tissue, which bears interest at 10.0% per annum, and requires no
interest payments prior to maturity; and
o each beneficial holder released our subsidiaries from liability for
this indebtedness.
In addition, some of the beneficial holders of our common stock loaned
Super American Tissue $5.0 million on July 9, 1999, on the same terms.
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<PAGE>
DESCRIPTION OF MATERIAL INDEBTEDNESS
The Old Notes
On July 9, 1999, we sold, in a private placement, approximately $165.0
million face amount of the old notes. After deduction of an original issue
discount, we received net proceeds of approximately $159.4 million. See
"Description of Exchange Notes" for a detailed description of the terms of the
old notes, which old notes are identical in all material respects to the
exchange notes.
Revolving Credit Facility
General. On July 9, 1999, we, our subsidiary, American Tissue Corporation,
and nine of our other subsidiaries, various lenders and LaSalle Bank National
Association, as agent for these lenders (the "Agent"), entered into a revolving
credit and security agreement, establishing a $100.0 million revolving credit
faciltiy. As of December 31, 1999, $68.4 million principal amount of revolving
credit loans were outstanding under this facility.
Our revolving credit facility provides for the making of revolving credit
loans to, and the issuance of letters of credit on behalf of, one or more of our
subsidiaries that are parties to the revolving credit and security agreement,
subject to the following limitations:
o the aggregate amount of loans outstanding at any one time to any
borrower will be limited to a maximum of the sum of:
(1) 85% of the face amount of the borrower's accounts receivable
assigned to, and accepted by, the lenders, plus
(2) 75% of the lower of the cost or market value of the borrower's
jumbo roll inventory assigned to, and accepted by, the lenders,
plus
(3) 65% of the lower of the cost or market value of the borrower's
inventory, other than jumbo tissue rolls, assigned to, and
accepted by the lenders, minus
(4) any reserves as the Agent may establish from time to time;
o the aggregate sum of all loans outstanding to all borrowers at any one
time on the basis of the borrowers' eligible inventory may not exceed
$50.0 million;
o the face amount of all issued and undrawn letters of credit may not
exceed $15.0 million; and
o the aggregate amount of all loans and letters of credit may not exceed
$100.0 million.
Interest Rates. Borrowings under our revolving credit facility, including
amounts reimbursable following drawings under letters of credit, bear interest,
at our election, at an annual rate equal to either 30-, 60- or 90-day LIBOR plus
2.25% or the Agent's prime rate, as publicly announced from time to time. As of
December 31, 1999 borrowings under our revolving credit facility bore interest
at an effective median rate of approximately 7.8% per annum.
Prepayments. Borrowings under our revolving credit facility may be prepaid
by us at any time without penalty.
Covenants. The obligations of the lenders who are parties to our revolving
credit facility to advance funds are subject to conditions customary for
facilities of similar size and nature. In addition, we and our subsidiaries are
subject to affirmative and negative covenants customarily contained in
agreements of this type, including, without limitation, covenants that restrict,
subject to specified exceptions:
o mergers, consolidations, assets sales or changes in capital structure;
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o creation or acquisition of subsidiaries;
o purchase or redemption of our capital stock or declaration or payment
of dividends or distributions on our capital stock;
o incurrence of additional indebtedness;
o investment activities;
o granting or incurrence of liens to secure other indebtedness, other
than the Notes;
o prepayment or modification of the terms of subordinated indebtedness;
and
o engaging in transactions with affiliates.
In addition, our revolving credit facility requires us to satisfy specified
financial covenants customary for facilities of similar size and nature and also
provides for customary events of default.
Collateral. Our obligations under our revolving credit facility are secured
by a first priority lien on all of accounts receivable, inventory, chattel
paper, instruments, investment property, documents, all related general
intangibles of the foregoing, other than any intellectual property collateral,
of those of our subsidiaries that are parties to our revolving credit facility
and all proceeds of the foregoing. In addition, our obligations under our
revolving credit facility are secured by a security interest that is junior to
that of the trustee for the Notes on all of the collateral securing the Notes in
which the trustee has a first priority security interest.
Other Indebtedness
Some of our subsidiaries have entered into financing arrangements in
connection with the purchase of, or the construction of improvements on, of real
property for our facilities, in the aggregate principal amount of approximately
$21.1 million as of December 31, 1999, as follows:
<TABLE>
<CAPTION>
Annual
Principal Interest
Amount Rate Maturity Lender Real Property Collateral
--------- ------ ----------- ----------------- ----------------------
<S> <C> <C> <C> <C>
$ 284,000(1) -- September 30, 2004 Community Converting/distribution facility
Redevelopment Agency Calexico, CA
166,000 3.00% September 30, 2013 Community Converting/distribution facility
Redevelopment Agency Calexico, CA
3,944,000 8.00% April 15, 2004 Bank United Converting/distribution facility,
Calexico, CA
6,184,617 8.05% October 17, 2007 Bank United Converting/distribution facility,
Waterford, NY
2,726,676 7.75% January 1, 2008 Bank United Distribution center, Saratoga Springs,
NY
7,581,407(2) 7.50% August 1, 2008 Roslyn Savings Bank Distribution center, executive
offices and machine shop, Hauppauge,
NY and converting facility, Coram, NY
780,498 7.50% November 1, 2008 Security Mutual Life Distribution center, Halfmoon,
Insurance Company of NY(3)
New York
</TABLE>
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<PAGE>
- ----------
(1) This is a reimbursement loan with the Community Redevelopment Agency of the
City of Calexico, which by its terms will be forgiven five years after the
filing of an employment report by our subsidiary, Calexico Tissue Company,
stating that it has hired 100 employees
(2) This sum is a part of a larger mortgage loan of approximately $14.1 million
with respect to which three of our subsidiaries, Engineers Road, Gilpin
Realty and Coram Realty, as well as an unconsolidated affiliate,
Huntington, are obligors. The outstanding principal amount of additional
indebtedness outstanding under the mortgage loan and attributable to
Huntington as of September 30, 1999 was approximately $6.3 million. See
"Certain Related Party Transactions."
(3) This distribution center is held in the form of a leasehold estate granted
by the Town of Waterford Industrial Development Agency and, upon the
expiration of the related lease on January 1, 2009, will be reacquired in
fee, for a nominal consideration.
In addition, as of December 31, 1999, we had outstanding indebtedness in
the principal amount of approximately $684,000 payable to Curtiss-Wright. This
indebtedness bears interest at an annual rate of 8% and matures on August 1,
2006.
Middle American Tissue Notes
Middle American Tissue Inc., our direct parent, raised approximately $20.0
million of the funds necessary to consummate the acquisition of the
Berlin-Gorham Mills and the repayment of our outstanding indebtedness as a of
July 9, 1999, through the issuance of senior secured discount notes to
affiliates of the initial purchaser of the old notes in a private transaction.
As of December 31, 1999, $21.7 million principal amount of indebtedness was
outstanding under the Middle American Tissue notes. The Middle American Tissue
notes mature on July 15, 2007 and $35,755,788 face amount is payable at
maturity. The Middle American Tissue notes were issued with warrants to purchase
up to 12% of Middle American Tissue's common stock at a nominal exercise price.
The holders of these notes and warrants and Super American Tissue have executed
a stockholders agreement which contains various rights and obligations of Middle
American Tissue and the holders of the equity securities of Middle American
Tissue. As long as affiliates of the initial purchaser of the old notes
collectively own a majority of the Middle American Tissue notes or warrants,
they will have the right to appoint one member of the board of directors of
Middle American Tissue and of our board of directors.
The Middle American Tissue notes:
o are structurally subordinate to our revolving credit facility and the
Notes because the Middle American Tissue notes have been issued by our
parent and are not guaranteed by us;
o accrue, but do not pay, interest at the rate of 15% per year for the
first four years;
o pay interest in cash at the rate of 15% per year semi-annually in
arrears on each January 15 and July 15, commencing January 15, 2004;
o together with specified obligations under the stockholders agreement,
are secured by a pledge of our outstanding common stock; and
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o subject Middle American Tissue and its subsidiaries to customary
covenants for this type of financing, including restrictions on
indebtedness, dividends, liens, affiliate transactions, stock
repurchases, assets sales and mergers.
The stockholders agreement contains provisions providing for each of Middle
American Tissue and the initial purchasers of the Middle American Tissue notes,
and, in some instances, their transferees, to require redemption of the Middle
American Tissue notes or warrants, or both, at various times, prior to the
maturity of the Notes. When Middle American Tissue is required to pay interest
in cash, or if Middle American Tissue is required by the holders of the Middle
American Tissue notes or warrants, or both, to redeem the Middle American Tissue
notes or warrants, or both, Middle American Tissue may be unable to make the
payment. The restricted payment covenant of the indenture relating to the Notes
does not contain any express provision permitting us to pay dividends to Middle
American Tissue or to pay interest or principal or finance a redemption of the
Middle American Tissue notes. See "Description of Notes -- Covenants --
Restricted Payments." If Middle American Tissue defaults under its obligations
set forth above, the trustee for the Middle American Tissue notes could exercise
its rights under the pledge agreement regarding the pledge of our common stock,
and thereby obtain control of us and the right to sell our common stock. If an
affiliate of the initial purchaser of the old notes obtains control of us, no
change of control will occur under the Notes. However, a sale by the trustee of
our common stock to a non-affiliate would likely result in a change of control
under the Notes which would require us to make a change of control offer for the
Notes. See "Risk Factors -- We May Not Be Able To Finance A Change of Control
Offering," "Description of Exchange Notes -- Covenants -- Change of Control" and
"Description of Exchange Notes -- Defined Terms -- Permitted Holders."
DESCRIPTION OF EXCHANGE NOTES
General
The exchange notes will be issued under an indenture among American Tissue,
the subsidiary guarantors and The Chase Manhattan Bank, as trustee, which is
also the indenture under which the old notes were issued. The terms of the
exchange notes are identical in all material respects to the terms of the old
notes, except that the exchange notes will have been registered under the
Securities Act of 1933 and, therefore, will not bear legends restricting their
transfer. Moreover, the provisions of the registration rights agreement,
including those respecting payment of liquidated damages, will not apply to the
exchange notes. 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 exchange notes are subject to all of those terms, and
holders of the exchange notes and the related subsidiary guarantees are referred
to the indenture and the Trust Indenture Act for a complete statement of them.
The following summary of the material provisions of the indenture and
certain material provisions of the collateral documents is not complete. For a
complete understanding of the indenture and the collateral documents, you should
read each of these documents in its entirety, including the definitions stated
in the indenture of the defined terms used in it. Copies of the indenture, the
collateral documents and the registration rights agreement were filed as
exhibits to the exchange offer registration statement and are available as set
forth under the caption "Available Information." The definitions of some of the
terms used in this description are stated below under "Certain Definitions." For
purposes of this summary, the terms "American Tissue", "we", "our" or "us"
refers only to American Tissue and not to any of our subsidiaries.
Under specified circumstances, American Tissue will be able to designate
current or future subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not guarantee the exchange notes
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<PAGE>
or be subject to any of the restrictive covenants set forth in the indenture. As
of the date of this prospectus, none of our subsidiaries is an Unrestricted
Subsidiary. See "-- Covenants -- Restricted Payments."
Principal, Maturity and Interest
The exchange notes will be limited in aggregate principal amount to $165.0
million and will mature on July 15, 2006. The exchange notes will be issued in
denominations of $1,000 and integral multiples thereof.
The exchange notes will accrue interest at the annual rate of 12 1/2% and
will be payable semi-annually in arrears on January 15 and July 15, commencing
on Janury 15, 2000. We will make each interest payment to the holders of record
of these exchange notes on the immediately preceding January 1 and July 1.
Interest on the exchange notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
issuance thereof. Interest will be computed on the basis of a 360-day year
comprised of twelve 30- day months.
Principal, premium, if any, and interest on the exchange notes will be
payable at the office or agency of American Tissue maintained for such purpose
within the City and State of New York. Until otherwise designated by us, our
office or agency in New York City will be the office of the trustee maintained
for such purpose. At our option, payment of interest may be made by check mailed
to the holders of the exchange notes at their respective addresses set forth in
the register of holders of these exchange notes. However, payments of the
principal, premium, if any, and interest on exchange notes, will be required to
be made by wire transfer of immediately available funds to the accounts of those
holders of exchange notes that have given wire transfer instructions to us.
Ranking and Security
The exchange notes will be senior obligations of American Tissue and will
rank:
o equally in right of payment with all of our current and future
unsubordinated Indebtedness, and
o senior in right of payment to any of our Indebtedness that is
subordinated to the exchange notes.
Our obligations under the exchange notes will be unconditionally guaranteed
on a senior basis, jointly and severally, by each of our subsidiary guarantors.
See "-- Subsidiary Guarantees." All of our domestic subsidiaries (other than a
Receivables Subsidiary or an Unrestricted Subsidiary) are subsidiary guarantors.
The subsidiary guarantees will be senior obligations of our subsidiary
guarantors and will rank:
o equal in right of payment with all existing and future unsubordinated
Indebtedness of our subsidiary guarantors, and
o senior in right of payment to any Indebtedness of our subsidiary
guarantors that is subordinated to such subsidiary guarantees.
Under the collateral documents, the exchange notes and the subsidiary
guarantees will be secured by a first priority lien on:
o the Primary Collateral (as defined below); and
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<PAGE>
o the Boise Collateral (as defined below), except that Boise Cascade
will have a right to share in specified proceeds of such collateral,
as limited by the Boise Intercreditor Agreement (as defined below);
and
in accordance with the Existing Lien Intercreditor Agreement (as defined below),
by a lien on the Secondary Collateral (as defined below) that is junior to the
lien on such collateral securing Indebtedness under our new Revolving Credit
Facility and other Indebtedness. See "-- Intercreditor Agreements."
American Tissue is a holding company and has, and as of the issue date of
the exchange notes will have, no material assets other than the Capital Stock of
its subsidiaries, and all of its consolidated operations are conducted through
its subsidiaries.
Under the collateral documents, we and each of our subsidiary guarantors,
as applicable, except as otherwise indicated below, has assigned, granted and
pledged as collateral to the trustee for the benefit of the trustee and the
holders of the exchange notes:
(1) a first priority lien on all of the following assets constituting the
"Primary Collateral":
o substantially all paper mill plant and property, which as of the
date of this prospectus consists of the owned and leased
facilities described under "Business -- Facilities", and,
substantially all of our equipment, excluding any equipment
located outside the United States, owned by any subsidiary
guarantor, together with all additions, accessions, improvements,
alterations, replacements and repairs thereto, excluding, however
the Existing Mortgage Collateral;
o all outstanding Capital Stock of each of our domestic
subsidiaries and 65% of the outstanding Capital Stock of each of
our foreign subsidiaries;
o all assets deposited or required to be deposited in the
Collateral Account as required by the indenture;
o the Intellectual Property Collateral;
o any and all other property or assets of ours and of any of our
subsidiary guarantors, other than the Boise Collateral and the
Secondary Collateral;
o all general intangibles relating to any of the foregoing; and
o all proceeds of the foregoing;
(2) a first priority lien on all of the following assets constituting the
"Boise Collateral", subject to the Boise Intercreditor Agreement:
o certain tissue manufacturing equipment located at Boise Cascade's
St. Helens, Oregon mill facility, including all future
improvements thereof and additions and replacements thereto; and
o all proceeds of the foregoing;
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<PAGE>
(3) a second priority lien on all of the following assets, constituting
the "Secondary Collateral", subject to the Existing Lien Intercreditor
Agreement:
o the Existing Mortgage Collateral; and
o all inventory, accounts receivable, chattel paper, instruments,
investment property, documents, all related general intangibles
(other than Intellectual Property Collateral) and all proceeds of
the foregoing of those subsidiary guarantors that are parties to
our new Revolving Credit Facility (the "Revolving Credit
Collateral").
Collateral consisting of real property will be mortgaged by the relevant
subsidiary guarantors, pursuant to mortgages or deeds of trust, subject to
certain Permitted Collateral Liens. Collateral consisting of personal property
will be pledged by American Tissue and our subsidiary guarantors, pursuant to a
security agreement, subject to certain Permitted Collateral Liens.
The indenture and the relevant collateral documents require that we and our
subsidiary guarantors pledge, subject to Permitted Collateral Liens, all
(1) After-Acquired Property of the types described in the preceding
paragraph, and
(2) as soon as practicable after the issue date of the old notes, the
plant and property owned by Calexico Tissue Company LLC located at
Parcels 5 and 6 of the Kloke Tract, Calexico, California,
in each case as collateral under the indenture and the relevant collateral
documents. However, Calexico Tissue will not be required to grant a lien on
Parcel 5 of the Kloke Tract until such time as it undertakes to improve such
property.
To the extent specifically permitted pursuant to the terms of the
indenture:
o the exchange notes will be effectively subordinated to existing and
future secured Indebtedness to the extent of any of our assets serving
as collateral for such Indebtedness; and
o each subsidiary guarantee, likewise, will be effectively subordinated
to existing and future secured Indebtedness of the relevant subsidiary
guarantors to the extent of any assets serving as collateral for such
Indebtedness.
For example, to the extent that the agent for the lenders under our new
Revolving Credit Facility has a first priority lien on the Revolving Credit
Collateral, and therefore, the first right to liquidate such collateral
following the occurrence of an event of default under the exchange notes and the
subsidiary guaranties, the exchange notes will be effectively subordinated to
indebtedness under the Revolving Credit Facility to the extent that the proceeds
of the Revolving Credit Collateral, in which the trustee for the exchange notes
has a second priority lien, are used satisfy the indebtedness under the
Revolving Credit Facility. In such case, the Revolving Credit Collateral would
no longer be available to secure obligations under the exchange notes and those
of our subsididiary guarantors under their subsidiary guaranties.
Specifically, the obligations:
o of our subsidiary guarantors, American Tissue Mills of Oregon, Inc.
and American Tissue Corporation, under the Boise Agreement, are
secured by a lien on the Boise Collateral which is junior in priority
to the lien securing repayment of the exchange notes and the
subsidiary guarantees of these subsidiary guarantors; provided,
however, that notwithstanding such lien priority, the Boise
Intercreditor Agreement provides that:
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o Boise Cascade and the trustee have the right to share, on a
dollar-for-dollar basis, up to the first $20.0 million in
proceeds derived from the Boise Collateral and
o thereafter, all such proceeds are to be used exclusively to
satisfy the outstanding obligations under the exchange notes and
the subsidiary guarantees of these subsidiary guarantors;
o under the Existing Mortgage Loans of those subsidiary guarantors that
are parties to such loans are secured by liens on the Existing
Mortgage Collateral that are senior in priority to the lien securing
the exchange notes and the subsidiary guarantees, and the exchange
notes and the subsidiary guarantees will be secured by a lien on
certain of such collateral that is junior in priority to the liens
securing the Existing Mortgage Loans; and
o under our new Revolving Credit Facility of those of our subsidiary
guarantors that are parties to such Revolving Credit Facility will be
secured by a first priority lien on the Revolving Credit Collateral
that is senior in priority to the liens securing the exchange notes
and the subsidiary guarantees thereof, and by a second priority lien
on the Primary Collateral of those subsidiary guarantors, and the
exchange notes and the subsidiary guarantees will be secured by a lien
on the Revolving Credit Collateral that is junior in priority to the
lien securing the Revolving Credit Facility.
In addition, the indenture permits us and our subsidiary guarantors to create
Purchase Money Liens securing Purchase Money Obligations, and the exchange notes
and the subsidiary guarantees thereof will also be effectively subordinated to
such Purchase Money Obligations to the extent of any assets serving as
collateral for such Purchase Money Obligations.
If an event of default occurs under the indenture, the trustee, on behalf
of the holders of the exchange notes, in addition to any rights or remedies
available to it under the indenture, may take such actions as the trustee deems
advisable to protect and enforce its rights in the collateral for the exchange
notes and the subsidiary guarantees thereof, including, without limitation, the
institution of foreclosure proceedings in accordance with the collateral
documents and applicable law. However, the rights and remedies available to the
trustee under the collateral documents and the actions permitted to be taken by
it thereunder with respect to the collateral securing the exchange notes and the
subsidiary guarantees thereof will be subject to the provisions of the
Intercreditor Agreements.
The proceeds received by the trustee from any foreclosure of such
collateral will be applied by the trustee,
o first, to pay the expenses of such foreclosure and fees and other
amounts then payable to the trustee under the indenture and the
collateral documents, and
o thereafter, to pay the principal of, premium, if any, and accrued
interest on the exchange notes.
Until such time, however, as all of the obligations under the Existing Mortgage
Loans and the Revolving Credit Facility are paid in full, the proceeds from any
foreclosure or other realization upon the Existing Mortgage Collateral and the
Revolving Credit Collateral will be applied
o first, to pay the lenders under such facilities all amounts then
payable under the Existing Mortgage Loans and the Revolving Credit
Facility, respectively, and
o thereafter, in the manner described in the immediately preceding
sentence.
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Proceeds from any foreclosure or other realization on the Boise Collateral will
be shared with Boise Cascade in the manner and to the extent described above.
Under the terms of the indenture and the collateral documents, the trustee
will determine the circumstances under, and manner in, which to dispose of the
Primary Collateral and, subject to the Boise Intercreditor Agreement, the Boise
Collateral, including, without limitation, the determination of whether to
release all or any portion of such collateral from the liens created by the
collateral documents and whether to foreclose on such collateral following an
event of default. The trustee will have no vote on any decisions with respect to
the Secondary Collateral (including, without limitation, the time or method of
foreclosure), until such time as the Indebtedness constituting the Existing
Mortgage Loans and/or under the Revolving Credit Facility, as the case may be,
is satisfied in full. See "--Intercreditor Agreements."
The right of the trustee to repossess and dispose of collateral upon the
occurrence of an event of default under the indenture is, in the case of Boise
Collateral and the Secondary Collateral, subject to the provisions of the
Intercreditor Agreements. With respect to any of the collateral, such right is
likely to be significantly impaired by applicable bankruptcy law if a bankruptcy
case were to be commenced by or against us or any of our subsidiary guarantors
prior to the trustee having repossessed and disposed of the collateral. In the
case of real property collateral, such right could be significantly impaired by
restrictions under state law.
The indenture permits the release of collateral without the substitution of
additional collateral under the circumstances described under "-- Covenants --
Asset Sales." See "- Possession, Use and Release of Collateral." As a result, we
and our subsidiaries will be permitted to sell specific assets without
compliance with the covenant of the indenture concerning "Asset Sales".
Collateral will also be released as security for the exchange notes and the
subsidiary guarantees upon the release of a subsidiary guarantor as described in
the last paragraph under "Subsidiary Guarantees" below.
The amounts realizable by the trustee in respect of the collateral in the
event of a liquidation will depend upon market and economic conditions at such
time, the availability of buyers, certain existing liens and similar factors.
The Boise Collateral and the Existing Mortgage Collateral are necessary to
continue the operation of our business in the ordinary course. However, the
trustee and the holders of the exchange notes will not have an exclusive right
to receive proceeds from the Boise Collateral or the benefit of a first priority
lien on the Existing Mortgage Collateral. In addition, the fact that Boise
Cascade has a right to receive proceeds from the Boise Collateral and the
lenders under the Existing Mortgage Loans and our new Revolving Credit Facility,
as the case may be, have a first priority lien on the Secondary Collateral could
have a material adverse effect on the amount that would be realized upon a
liquidation of the collateral. Accordingly, we cannot assure you that proceeds
of any sale of the collateral pursuant to the indenture and the related
collateral documents following an event of default would be sufficient to
satisfy, or would not be substantially less than, amounts due under the exchange
notes. See "Risk Factors -- The Value Of Your Security Interest In The
Collateral Is Uncertain." If the proceeds of any of the collateral are not
sufficient to repay all amounts due on the exchange notes, the holders of the
exchange notes (to the extent not repaid from the proceeds of the sale of the
collateral) would have only an unsecured claim against the remaining assets, if
any, of American Tissue and our subsidiary guarantors. See "-- Intercreditor
Agreements."
Some or all of the collateral will be illiquid and may have no readily
ascertainable market value. Likewise, there can be no assurance that the
collateral will be saleable, or, if saleable, that there will not be substantial
delays in its liquidation. To the extent that liens, rights or easements granted
to third parties encumber assets owned by these subsidiary guarantors, including
the Boise Collateral and the
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Secondary Collateral, such third parties have or may exercise rights and
remedies with respect to the property subject to such liens that could adversely
affect the value of the collateral and the ability of the trustee or the holders
of the exchange notes to realize or foreclose on such collateral.
Intercreditor Agreements
The trustee has entered into the Existing Lien Intercreditor Agreement with
some of the lenders under Existing Mortgage Loans, the agent for the lenders
under our new Revolving Credit Facility, us and our subsidiary guarantors. The
Existing Lien Intercreditor Agreement provides for the allocation of rights
among the trustee, these lenders with respect to their respective interests in
the collateral, excluding the Boise Collateral, and the related enforcement
provisions. Until such time as any of the Existing Mortgage Loans or
indebtedness under our new Revolving Credit Facility (including permitted
refinancings), or both, have been satisfied in full, the relevant lenders under
such facilities will have the exclusive right to determine the circumstances and
manner in which the Existing Mortgage Collateral and the Revolving Credit
Collateral, respectively, may be disposed of. This includes, without limitation,
the right to determine whether to foreclose on the Existing Mortgage Collateral
and the Revolving Credit Collateral, respectively, following an event of default
under the Indebtedness secured thereby. At such time as the Existing Mortgage
Loans or the Revolving Credit Facility, or both, have been satisfied in full,
the trustee will have a first priority lien on such portion of the Existing
Mortgage Collateral or the Revolving Credit Collateral which no longer secures
such Indebtedness.
The Existing Lien Intercreditor Agreement provides, among other things,
that until such time as the Existing Mortgage Loans and the Revolving Credit
Facility, or both, have been satisfied in full:
(1) during any insolvency proceeding, the lenders under such facilities
and the trustee will coordinate their efforts to give effect to the
relative priorities of their respective liens in the collateral;
(2) the trustee and such lenders will provide notices to each other with
respect to the occurrence of an event of default under the indenture,
the Existing Mortgage Loans or the Revolving Credit Facility, as the
case may be, and the commencement of any action to enforce rights of
the trustee, the holders of the exchange notes or such lenders;
(3) upon the occurrence of an event of default, all decisions with respect
to (a) the Primary Collateral, including the time and method of any
disposition thereof, will be made by the trustee, (b) the Existing
Mortgage Collateral, including the time and method of any disposition
thereof, will be made by the applicable lender under the Existing
Mortgage Loans and (c) the Revolving Credit Collateral, including the
time and method of any disposition thereof, will be made by the agent
for the lenders under the Revolving Credit Facility;
(4) for a period up to 120 days following the date of receipt by the agent
for the lenders under the Revolving Credit Facility of written notice
from the trustee or a lender under an Existing Mortgage Loan, as
applicable, directing removal by the agent for the lenders under the
Revolving Credit Facility of Revolving Credit Collateral from the
applicable mortgaged property, the Revolving Credit Lender may enter
and use the Existing Mortgage Collateral or the Primary Collateral, as
appropriate, to the extent necessary to complete the manufacture of
inventory, collect accounts receivable and repossess, remove, sell or
otherwise dispose of the Revolving Credit Collateral;
(5) proceeds of the Primary Collateral will be applied,
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o first, to the outstanding obligations of American Tissue and the
subsidiary guarantors under the indenture, these exchange notes,
the subsidiary guarantees and the collateral documents, and
o second, any remaining Primary Collateral (including proceeds
thereof) will be delivered to the agent for the lenders under the
Revolving Credit Facility for application to the outstanding
obligations under the Revolving Credit Facility;
(6) proceeds of the Existing Mortgage Collateral will be applied,
o first, to the outstanding obligations of the applicable
subsidiary guarantors under the applicable Existing Mortgage
Loans,
o second, any remaining Existing Mortgage Collateral (including
proceeds thereof) will be delivered to the trustee for
application in accordance with the provisions of the indenture,
and
o third, any remaining Existing Mortgage Collateral (including
proceeds thereof), will be delivered to the Revolving Credit
Lender for application to the outstanding obligations under the
Revolving Credit Facility;
(7) proceeds of the Revolving Credit Collateral will be applied,
o first, to the outstanding obligations under the Revolving Credit
Facility of American Tissue and those subsidiary guarantors that
are parties to such facility, and
o second, any remaining Revolving Credit Collateral (including
proceeds thereof) will be delivered to the trustee for
application in accordance with the provisions of the indenture;
(8) after the payment or other satisfaction in full of these exchange
notes, the subsidiary guarantees, the Existing Mortgage Loans and
Indebtedness under the Revolving Credit Facility, the balance of
proceeds of the collateral, if any, shall be paid to or at the
direction of American Tissue and the subsidiary guarantors or as
otherwise required by law; and
(9) neither the trustee nor any of the lenders under the Existing Mortgage
Loans or the Revolving Credit Facility will directly or indirectly
seek to foreclose or realize upon, judicially or non-judicially, any
collateral upon which it does not have a senior lien or take any other
enforcement action against or in respect of the collateral upon which
it does not have a senior lien, without the consent of the party
having such senior lien.
Some holders of Indebtedness of our subsidiary guarantors are not parties
to the Existing Lien Intercreditor Agreement and, therefore, the trustee will
not have a lien on any assets of American Tissue or such subsidiary guarantor
securing such Indebtednesss. However, under the indenture, American Tissue and
the subsidiary guarantors are required to grant a lien in favor of the trustee
on such assets at such time as such Indebtedness has been satisfied in full.
The trustee has entered into an intercreditor agreement with Boise Cascade
Corporation (the "Boise Intercreditor Agreement"), under which, among other
things:
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(1) Boise Cascade (a) consents to the granting of a lien by the applicable
subsidiary guarantors in favor of the trustee on the Boise Collateral
and certain agreements, including, without limitation, the Boise
Agreement, relating to the use and operation thereof and (b) agrees to
subordinate its lien on such collateral to the lien in favor of the
trustee;
(2) upon commencement of foreclosure upon the Boise Collateral by the
trustee, Boise Cascade will have a right of first refusal to purchase
the Boise Collateral if the trustee elects to sell such collateral to
a third party;
(3) upon commencement of a foreclosure of the contract rights of the
applicable subsidiary guarantors under the Boise Agreement by the
trustee, the trustee is not permitted to sell or otherwise transfer
such rights to certain competitors of Boise Cascade; and
(4) Boise Cascade and the trustee will share proceeds of a disposition of
the Boise Collateral, on a dollar-for-dollar basis, up to the first
$20.0 million of proceeds therefrom.
Thereafter, Boise Cascade will be subordinated to the rights of the trustee with
respect to all remaining proceeds of the Boise Collateral until such time as the
outstanding obligations of the applicable subsidiary guarantors in respect of
the exchange notes and their subsidiary guarantees thereof have been paid or
otherwise satisfied in full.
Possession, Use and Release of Collateral
Subject to and in accordance with the provisions of the collateral
documents and the indenture, so long as the trustee has not exercised its rights
with respect to the collateral upon the occurrence and during the continuance of
an event of default, we and our subsidiary guarantors will have the right to
remain in possession and retain exclusive control of the collateral, to operate
the collateral, to alter or repair the collateral and to collect, invest and
dispose of any income therefrom, subject, in the case of the Boise Collateral,
the Existing Mortgage Collateral and the Revolving Credit Collateral, to the
provisions of the Intercreditor Agreements and the Boise Agreement, the Existing
Mortgage Loans and the Revolving Credit Facility, as applicable.
Release of Collateral. We or any of our subsidiary guarantors, as the case
may be, will have the right to obtain a release of items of collateral (other
than certain Trust Monies) subject to an Asset Sale, and the trustee will
release such collateral from the lien of the relevant collateral document and
reconvey such collateral to us or any such subsidiary guarantor upon compliance
with the condition that we deliver to the trustee the following:
(a) a notice from us requesting the release of specified collateral, which
notice:
(1) specifically describes the collateral requested to be released,
(2) specifies the fair market value of such collateral as of a date
within 60 days of such notice,
(3) states that the consideration to be received in respect of such
collateral is at least equal to the fair market value of such
collateral,
(4) states that the release of such collateral will not materially
and adversely impair the value of the remaining collateral, taken
as a whole, or interfere with the trustee's ability to realize
such value and will not impair the maintenance and operation of
the remaining collateral, taken as a whole,
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(5) confirms the sale of, or an agreement to sell, the collateral
requested to be released in a bona fide sale to a person that is
not our Affiliate or, in the event that such sale is to a person
that is an Affiliate of ours, confirming that such sale is made
in compliance with the provisions set forth in "-- Covenants --
Affiliate Transactions,"
(6) certifies that if the sale of the collateral requested to be
released constitutes an Asset Sale, such Asset Sale complies with
the terms and conditions of the indenture with respect thereto,
including, without limitation, the provisions set forth in "-
Covenants -- Asset Sales," and
(7) in the event there is to be a substitution of property for such
collateral subject to the Asset Sale, specifies the property
intended to be substituted for the collateral to be disposed of;
(b) an officers' certificate from us stating that:
(1) such sale covers only the collateral requested to be released (or
other property which is not Primary Collateral),
(2) all Net Proceeds, if any, from the sale of any of such collateral
will be applied pursuant to the provisions of the indenture in
respect of Asset Sales,
(3) to the extent any of such collateral is comprised of any Boise
Collateral or Secondary Collateral, Boise Cascade, the applicable
lender under the Existing Mortgage Loans or the lenders under the
Revolving Credit Facility, as applicable, to the extent such
Indebtedness remains outstanding, shall have authorized the
release of the same,
(4) there is no default or event of default under the indenture in
effect or continuing on the date thereof or the valuation date
referred to in clause (a)(ii) above,
(5) the release of such collateral will not result in a default or
event of default under the indenture, and
(6) all conditions precedent in the indenture relating to the release
in question have been complied with; and
(c) all documentation required by the Trust Indenture Act, if any, prior
to the release of the collateral requested to be released by the
trustee and, in the event that there is to be a substitution of
property for such collateral subject to the Asset Sale, all
documentation necessary to effect the substitution of such new
collateral and to subject such new collateral to the lien of the
relevant collateral documents.
The indenture provides that:
o we will be entitled, subject to compliance with the conditions set
forth therein, to obtain the release of collateral which has been
taken by eminent domain, condemnation or in similar circumstances;
o we will be entitled to obtain a full release of all of the collateral
following legal defeasance or covenant defeasance of the indenture as
described below under "-- Legal Defeasance and Covenant Defeasance;"
and
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o upon the release of any subsidiary guarantor from its obligations
under the indenture and its subsidiary guarantee as described in the
last paragraph under "-- Subsidiary Guarantees," such subsidiary
guarantor shall be entitled to obtain the release of all of its
collateral.
Disposition of Collateral Without Release. Notwithstanding the provisions
of "-- Release of Collateral" above, so long as no default or event of default
under the indenture shall have occurred and be continuing or would result
therefrom, we and our subsidiary guarantors may, among other things, without any
release or consent by the trustee, conduct ordinary course activities with
respect to collateral, including selling or otherwise disposing of, in any
transaction or series of related transactions, any property subject to the lien
of the collateral documents which has become worn out, defective or obsolete or
not used or useful in the business and which either has an aggregate fair market
value of $500,000 or less, or which is replaced by property of substantially
equivalent or greater value which becomes subject to the lien of the collateral
documents as After-Acquired Property; abandoning, terminating, cancelling,
releasing or making alterations in or substitutions of any leases or contracts
subject to the lien of the indenture or any of the collateral documents;
surrendering or modifying any franchise, license or permit subject to the lien
of the indenture or any of the collateral documents which it may own or under
which it may be operating; altering, repairing, replacing, changing the location
or position of and adding to its structures, machinery, systems, equipment,
fixtures and appurtenances; granting a nonexclusive license of any intellectual
property; and abandoning intellectual property which is no longer used or useful
in our business.
Use of Trust Monies
All Trust Monies, including, without limitation, all Net Proceeds that
become part of the Available Amount under the covenant entitled "Asset Sales"
and Net Insurance Proceeds required to be deposited with the trustee, shall be
held by the trustee as a part of the collateral securing the exchange notes and,
so long as no default or event of default under the indenture shall have
occurred and be continuing, may either:
(1) be released as contemplated by "- Covenants -- Asset Sales" if
such Trust Monies represent Available Amounts in respect of an Asset
Sale; or
(2) at our direction applied by the trustee from time to time to the
payment of the principal of, premium, if any, and interest on any
exchange notes at maturity or upon redemption or retirement, or to the
purchase of exchange notes upon tender or in the open market or
otherwise, in each case in compliance with the indenture.
We may also withdraw Trust Monies constituting Net Insurance Proceeds to
repair or replace the relevant Collateral, subject to certain conditions set
forth in the indenture.
The trustee will be entitled to apply any Trust Monies to cure any event of
default under the indenture. Trust Monies deposited with the trustee shall be
invested in Cash Equivalents pursuant to our direction and, so long as no
default or event of default shall have occurred and be continuing, we will be
entitled to any interest or dividends accrued, earned or paid on such Cash
Equivalents.
Subsidiary Guarantees
Our payment obligations under the exchange notes will be, jointly and
severally, guaranteed on an unconditional basis by each of our subsidiary
guarantors. The obligations of each subsidiary guarantor under its subsidiary
guarantee, and the grant by each subsidiary guarantor of liens on its assets to
secure
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its obligations under its subsidiary guarantee, will be subject to various laws
for the protection of creditors, including, without limitation, laws governing
fraudulent conveyances and transfers. To the extent that the obligations of each
subsidiary guarantor under its subsidiary guarantee, or the lien granted by the
subsidiary guarantor on its collateral, were held to be unenforceable as a
fraudulent conveyance or transfer or for other reasons,
o the holders of the exchange notes would cease to have any direct claim
against such subsidiary guarantor,
o the trustee would cease to have a lien on the assets of such
subsidiary guarantor, or
o both, as appropriate.
In an attempt to avoid this result, the subsidiary guarantees will provide that
the obligations of each subsidiary guarantor thereunder will be limited to the
maximum amount as will not constitute a fraudulent conveyance or fraudulent
transfer under applicable law. Such amount could be substantially less than the
obligations under the exchange notes. In addition, any limitation on the amounts
payable by a subsidiary guarantor under its subsidiary guarantee pursuant to
such provision will result in a corresponding limitation on the ability of the
trustee to realize upon the collateral pledged by such subsidiary guarantor. See
"Risk Factors -- We May Be Subject To Federal And State Fraudulent Transfer
Laws."
The indenture provides that no subsidiary guarantor may consolidate with or
merge with or into another corporation or other person (whether or not that
subsidiary guarantor is the surviving entity), whether or not affiliated with
that subsidiary guarantor, unless:
(1) subject to the provisions of the following paragraph, the person
formed by or surviving any such consolidation or merger (if other than
that subsidiary guarantor) assumes all the obligations of that
subsidiary guarantor under its subsidiary guarantee, the indenture and
the collateral documents pursuant to a supplemental indenture and
other agreements in form and substance reasonably satisfactory to the
trustee;
(2) immediately after giving effect to such transaction, no default or
event of default under the indenture exists;
(3) such subsidiary guarantor, or any entity formed by or surviving any
such consolidation or merger, would have a Consolidated Net Worth
(immediately after giving effect to such transaction), equal to or
greater than the Consolidated Net Worth of such subsidiary guarantor
immediately preceding the transaction;
(4) we, at the time of such transaction and after giving pro forma effect
thereto as if the transaction had occurred at the beginning of the
applicable four-quarter period, would be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the covenant described under the caption "-
Covenants -- Incurrence Of Indebtedness And Issuance Of Preferred
Stock;"
(5) the collateral owned by that subsidiary guarantor or surviving entity,
as the case may be:
(a) shall be subject to a lien in favor of the trustee for the
benefit of the holders of the exchange notes; and
(b) shall not be subject to any lien, other than Permitted Collateral
Liens; and
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(6) the assets of the entity which is merged or consolidated with or into
such subsidiary guarantor, to the extent that they are assets of the
types which would constitute collateral under the collateral
documents, shall be treated as After-Acquired Property and such
subsidiary guarantor or the surviving person, as the case may be,
shall take such actions as may be reasonably necessary in accordance
with the provisions of the collateral documents to cause such assets
to be made subject to the lien of the collateral documents in the
manner and to the extent required by the indenture;
provided, that the provisions of clauses (2) through (4) above shall not apply
to the merger of two or more subsidiary guarantors into another subsidiary
guarantor or the merger of a subsidiary guarantor into American Tissue.
The indenture provides that in the event of:
(x) a sale or other disposition of all or substantially all of the assets
of a subsidiary guarantor, by way of merger, consolidation or
otherwise; or
(y) a sale or other disposition of all of the Capital Stock of a
subsidiary guarantor, to a person which is not American Tissue or a
subsidiary or an affiliate of American Tissue;
then such subsidiary guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the Capital Stock of
such subsidiary guarantor) or the person acquiring the property (in the event of
a sale or other disposition of all or substantially all of the assets of such
subsidiary guarantor) will be released and relieved of any obligations under its
subsidiary guarantee, the indenture and the collateral documents, provided that:
(1) the Net Proceeds of such sale or other disposition are applied in
accordance with the provisions of the indenture described under "-
Covenants -- Asset Sales;" and
(2) all obligations of such subsidiary guarantor under all of its
guarantees of, and under all of its pledges of assets or other Liens
which secure, Indebtedness of American Tissue or any of our
subsidiaries, shall also terminate.
Optional Redemption
At any time prior to July 15, 2002, we may, on any one or more occasions,
redeem up to 35% in aggregate principal amount of exchange notes originally
issued under the indenture, with the net cash proceeds of one or more Equity
Offerings, at a redemption price equal to 113.25% of the principal amount
thereof, plus accrued and unpaid interest thereon to the date of redemption,
provided that:
o at least 65% of the aggregate principal amount of exchange notes
originally issued under the indenture would remain outstanding
immediately after giving effect to any such redemption; and
o such redemption must occur within 90 days after the consummation of
any such Equity Offering.
Except as described in the preceding paragraph, we will not have the option
of redeeming the exchange notes prior to July 15, 2004.
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On or after July 15, 2004, we may redeem all or part of these exchange
notes, upon not less than 30 nor more than 60 days' notice, at the redemption
prices, expressed as percentages of principal amount, set forth below, plus
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed beginning on July 15 of each of the years indicated below:
Date Percentage
------ -----------
2004 106.625 %
2005 and thereafter 100.000
Selection and Notice
If less than all of the exchange notes are to be redeemed at any time, the
trustee will select exchange notes for redemption:
(1) if the exchange notes are listed, in compliance with the requirements
of the principal national securities exchange on which the exchange
notes are listed; or
(2) if the exchange notes are not so listed, on a pro rata basis, by lot
or by such method as the trustee deems fair and appropriate.
No exchange notes of $1,000 or less will be redeemed in part. Notices of
redemption will be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each holder of exchange notes to be redeemed
at its registered address. Notices of redemption may not be conditional. If any
exchange note is to be redeemed in part only, the notice of redemption that
relates to such exchange note will state the portion of the principal amount
thereof to be redeemed. A new exchange note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
cancellation of the original exchange note. Exchange notes called for redemption
become due on the date fixed for redemption. On and after the redemption date,
interest ceases to accrue on exchange notes or portions thereof called for
redemption.
Mandatory Redemption
We are not required to make mandatory redemption or sinking fund payments
with respect to the exchange notes, other than pursuant to a Change of Control
Offer or an Asset Sale Offer.
Covenants
Change of Control
If a Change of Control occurs, each holder of exchange notes will have the
right to require us to repurchase all or any part, equal to $1,000 or an
integral multiple thereof, of such holder's exchange notes pursuant to a Change
of Control Offer. In the Change of Control Offer, we will offer a Change of
Control Payment in cash equal to 101% of the aggregate principal amount of the
exchange notes repurchased, plus accrued and unpaid interest thereon to the date
of purchase. Within 30 days following any Change of Control, we will mail a
notice to each holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase exchange notes on the Change of
Control Purchase Date pursuant to the procedures required by the indenture and
described in such notice. We will comply with the requirements of Rule 14e-1
under the Securities Exchange Act of 1934 and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the exchange notes as a result of a Change of
Control. To the extent
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that the provisions of any securities laws and regulations conflict with
provisions of the indenture relating to such Change of Control Offer, we will
comply with the applicable securities laws and regulations and will not be
deemed to have breached our obligations in the indenture by virtue thereof.
The Change of Control Offer Period will be 20 business days following the
commencement of the Change of Control Offer and no longer, except to the extent
that a longer period is required by applicable law. No later than five business
days after the termination of the Change of Control Offer Period (the "Change of
Control Purchase Date"), we will purchase all exchange notes tendered in
response to the Change of Control Offer. Payment for any exchange notes so
purchased will be made in the same manner as interest payments are made.
If the Change of Control Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the person in whose name an exchange note is registered
at the close of business on such record date, and no additional interest will be
payable to holders who tender exchange notes pursuant to the Change of Control
Offer.
On the Change of Control Purchase Date, we will, to the extent lawful:
(1) accept for payment all exchange notes or portions thereof properly
tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all exchange notes or portions thereof so
tendered; and
(3) deliver or cause to be delivered to the trustee the exchange notes so
accepted together with an officers' certificate stating the aggregate
principal amount of exchange notes or portions thereof being purchased
by American Tissue.
The paying agent will promptly mail to each holder of exchange notes so
tendered the Change of Control Payment for such exchange notes, and the trustee
will promptly authenticate and mail (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, if any; provided that each such new
exchange note will be in a principal amount of $1,000 or an integral multiple
thereof.
We will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Purchase Date.
The provisions described above that require us to make a Change of Control
Offer will be applicable whether or not any other provisions of the indenture
are applicable. Except as described above with respect to a Change of Control,
the indenture does not contain provisions that permit the holders of the
exchange notes to require that we repurchase or redeem the exchange notes in the
event of a takeover, recapitalization or similar transaction.
Our ability to repurchase exchange notes pursuant to a Change of Control
Offer may be limited by a number of factors. Our new Revolving Credit Facility
currently prohibits us from purchasing exchange notes and also provides that
certain change of control events with respect to us would constitute a default
thereunder. In that event, we would have to seek consent to purchase exchange
notes or attempt to refinance the borrowings that contain such provision. If we
do not obtain such consent or repay such borrowings, our failure to purchase
tendered exchange notes would constitute a default under the indenture, which,
in turn, would constitute a default under the Revolving Credit Facility.
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The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of American Tissue and its subsidiaries taken as a whole. Although
there is a limited body of case law interpreting the phrase "substantially all,"
there is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a holder of exchange notes to require American
Tissue to repurchase such exchange notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of American
Tissue and its subsidiaries taken as a whole to another Person or group may be
uncertain.
We will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by us and purchases all
exchange notes validly tendered and not withdrawn under such Change of Control
Offer.
Asset Sales
The indenture provides that we will not, and will not permit any of our
subsidiaries to, engage in an Asset Sale unless:
(1) we or the subsidiary, as the case may be, receive consideration at the
time of such Asset Sale at least equal to the fair market value of the
assets or Equity Interests sold or otherwise disposed of in such Asset
Sale, evidenced, in each case by
o a resolution of the board of directors of such entity set forth
in an officers' certificate delivered to the trustee and
o with respect to an Asset Sale involving Primary Collateral in
excess of $1.0 million, an appraisal report of an independent
appraiser);
(2) at least 80% of the consideration therefor received by us or such
subsidiary is in the form of cash or Cash Equivalents;
(3) if such Asset Sale involves the disposition of collateral, subject to
the Intercreditor Agreements, we or such subsidiary have complied with
the provisions described under"--Possession, Use and Release of
Collateral;"
(4) if such Asset Sale involves the disposition of collateral (other than
Secondary Collateral), subject to the Intercreditor Agreements, the
cash Net Proceeds thereof remaining after repayment (including a
corresponding commitment reduction, if applicable) of any indebtedness
secured by a Permitted Collateral Lien on such asset (the "Available
Amount") shall be paid directly by the purchaser of the collateral to
the trustee for deposit into the Collateral Account, and, if any
property other than cash or Cash Equivalents is included in such Net
Proceeds, such property shall be made subject to the lien of the
applicable collateral documents;
(5) if such Asset Sale involves the disposition of Secondary Collateral,
subject to the Intercreditor Agreements, the Available Amount shall be
paid directly by the lender who holds a lien on the applicable
Secondary Collateral to the trustee for deposit into the Collateral
Account, and, if any property other than cash or Cash Equivalents is
included in the Net Proceeds constituting such Available Amount, such
property shall be made subject to the lien of the applicable
collateral documents; and
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(6) we or such subsidiary, as the case may be, applies the Net Proceeds as
provided in the following paragraph.
For purposes of clause (2) above, each of the following shall be deemed to be
cash:
(a) the amount of any liabilities (as shown on our or such
subsidiary's most recent balance sheet or in the notes thereto,
excluding contingent liabilities and trade payables) of us or any
subsidiary (other than liabilities that are by their terms
subordinated to, or equal in right of payment with, the exchange
notes or any subsidiary guarantee thereof) that are assumed by
the transferee of any such assets; and
(b) any securities, notes or other obligations received by us or any
subsidiary from such transferee that are converted by us or such
subsidiary into cash within 60 days.
We or the applicable subsidiary may, at our or its option, apply any such
Net Proceeds within 360 days of the related Asset Sale as follows:
(1) to the acquisition of "Replacement Assets," which shall be another
business or other long-term assets, in each case, in the same or a
similar, complementary, ancillary or related line of business as us or
any of our subsidiaries was engaged in on the issue date of the old
notes or any reasonable extensions or expansions thereof, provided,
that:
o any Replacement Assets acquired with any Available Amount shall
be owned by us or by our subsidiary guarantor that made the Asset
Sale and shall not be subject to any liens, other than Permitted
Collateral Liens, and
o we or our subsidiary guarantor, as the case may be, shall,
subject to any applicable Intercreditor Agreement, execute and
deliver to the trustee such collateral documents or other
instruments as shall be reasonably necessary to cause such
Replacement Assets to become subject to a lien in favor of the
trustee, for the benefit of the holders of the exchange notes,
securing its obligations under the exchange notes or its
subsidiary guarantee, as the case may be, and otherwise shall
comply with the provisions of the indenture applicable to
After-Acquired Property; or
(2) to reimburse us or any of our subsidiaries for expenditures made, and
costs incurred, to repair, rebuild, replace or restore property
subject to loss, damage or taking to the extent that the Net Proceeds
consist of Net Insurance Proceeds received on account of such loss,
damage or taking.
If we do not use any portion of the Net Proceeds as described above within
such 360-day period, such unused portion of the Net Proceeds period shall
constitute "Excess Proceeds" subject to disposition as provided below. When the
aggregate amount of Excess Proceeds exceeds $10.0 million, we will be required
to make an Asset Sale Offer to all holders of exchange notes to purchase the
maximum principal amount of exchange notes that may be purchased out of the
aggregate amount of Excess Proceeds. The Asset Sale Offer Price will be equal to
100% of the principal amount thereof, plus accrued and unpaid interest thereon,
if any, to the date of purchase, and will be payable in cash in accordance with
the procedures set forth in the indenture. To the extent that the aggregate
amount of exchange notes tendered pursuant to an Asset Sale Offer is less than
the Excess Proceeds, remaining Excess Proceeds shall be released to us and may
be used free and clear of the lien of the collateral documents for general
corporate purposes. Upon completion of each Asset Sale Offer, the amount of
Excess Proceeds shall be reset at zero.
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Subject to the Intercreditor Agreements, all Available Amounts shall,
pending their application in accordance with this covenant or the release
thereof in accordance with the provisions described under "--Possession, Use and
Release of Collateral" and "-- Use of Trust Monies," be deposited in the
Collateral Account under the indenture.
The Asset Sale Offer Period will be a period of 20 business days following
the commencement of the Asset Sale Offer and no longer, except to the extent
that a longer period is required by applicable law. No later than five business
days after the termination of the Asset Sale Offer Period (the "Asset Sale
Purchase Date"), we will purchase the principal amount of exchange notes
required to be purchased pursuant to this covenant (the "Asset Sale Offer
Amount") or, if less than the Asset Sale Offer Amount has been tendered, all
exchange notes tendered in response to the Asset Sale Offer. Payment for any
exchange notes so purchased will be made in the same manner as interest payments
are made.
If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
will be paid to the holder in whose name an exchange note is registered at the
close of business on such record date, and no additional interest will be
payable to holders who tender exchange notes pursuant to the Asset Sale Offer.
On or before the Asset Sale Purchase Date, we will, to the extent lawful,
accept for payment, on a pro rata basis to the extent necessary, the Asset Sale
Offer Amount of exchange notes or portions thereof tendered pursuant to the
Asset Sale Offer, or if less than the Asset Sale Offer Amount has been tendered,
all exchange notes tendered, and will deliver to the trustee an officers'
certificate stating that such exchange notes or portions thereof were accepted
for payment by us in accordance with the terms of this covenant. We, the
Depositary or the paying agent, as the case may be, will promptly (but in any
case not later than five days after the Asset Sale Purchase Date) mail or
deliver to each tendering holder an amount equal to the purchase price of the
exchange notes tendered by such holder and accepted by us for purchase, and we
will promptly issue a new exchange note, and the trustee, upon delivery of an
officers' certificate from us, will authenticate and mail or deliver such new
exchange note to such holder, in a principal amount equal to any unpurchased
portion of the exchange note surrendered. Any exchange note not so accepted will
be promptly mailed or delivered by us to the holder thereof. We will publicly
announce the results of the Asset Sale Offer on the Asset Sale Purchase Date.
We will comply with the requirements of Rule 14e-1 under the Securities
Exchange Act of 1934 and any other securities laws and regulations thereunder to
the extent such laws and regulations are applicable in connection with the
repurchase of the exchange notes as a result of an Asset Sale. To the extent
that the provisions of any securities laws or regulations conflict with the
Asset Sale provisions of the indenture, we shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached our
obligations under the Asset Sale provisions by virtue thereof.
Restricted Payments
The indenture provides that we will not, and will not permit any of our
subsidiaries to, directly or indirectly, make any of the following Restricted
Payments:
(1) declare or pay any dividend or make any distribution on account of our
or any of our subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving us), other than dividends or distributions payable in our
Equity Interests (other than Disqualified Stock) or dividends or
distributions payable to us or any of our wholly owned subsidiaries;
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(2) purchase, redeem or otherwise acquire or retire for value any of our
Equity Interests or Equity Interests of any direct or indirect parent
of ours or of any of our subsidiaries, other than any such Equity
Interests owned by us or any of our wholly owned subsidiaries that is
a subsidiary guarantor;
(3) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment or scheduled sinking fund payment, any
indebtedness that is subordinated to the exchange notes, other than
through the purchase or acquisition by us of indebtedness through the
issuance in exchange therefor of Equity Interests (other than
Disqualified Stock); or
(4) make any Restricted Investment,
unless, at the time of and after giving effect to such Restricted Payment:
(a) no default or event of default will have occurred and be
continuing or would occur as a consequence thereof;
(b) we would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have
been permitted to incur at least $1.00 of additional indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by us and our subsidiaries after the
Issue Date (excluding Restricted Payments permitted by clauses
(2), (3) and (4) of the next succeeding paragraph), is less than
the sum of:
(1) 50% of our Consolidated Net Income for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the Issue Date, to the end of our most recently ended
fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (or, if such Consolidated Net
Income for such period is a deficit, less 100% of such deficit); plus
(2) to the extent not included in the amount described in clause (i)
above, 100% of the aggregate net cash proceeds received after the
Issue Date by us:
o from the issue or sale of, or from additional capital
contributions in respect of, our Equity Interests or of debt
securities of ours or of any of our subsidiary guarantors that
have been converted into, or canceled in exchange for, Equity
Interests of ours or of any direct or indirect parent of ours, or
o from the issue or sale of convertible or exchangeable
Disqualified Stock that has been converted into or exchanged for
such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a subsidiary of ours and
other than Disqualified Stock or debt securities that have been
converted into Disqualified Stock),
plus the aggregate net cash proceeds received by us upon any such
conversion or exchange; plus
(3) 100% of the cash proceeds realized upon the sale of any Unrestricted
Subsidiary (less the amount of any reserve established for purchase
price adjustments and less the maximum
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amount of any indemnification or similar contingent obligation for the
benefit of the purchaser, any of its Affiliates or any other third
party in such sale, in each case as adjusted for any permanent
reduction in any such amount on or after the date of such sale, other
than by virtue of a payment made to such Person) following the issue
date of the old notes not in excess of the original amount of the
Investment in such Unrestricted Subsidiary; plus
(4) without duplication of amounts in clause (iii) above, to the extent
that any Restricted Investment that was made after the issue date of
the old notes is sold for cash or otherwise liquidated or repaid for
cash, the amount of net cash proceeds received with respect to such
Restricted Investment not in excess of the original amount of such
Restricted Investment.
The foregoing provisions do not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would
have complied with the provisions of the indenture;
(2) the making of any Restricted Investment in exchange for, or out of the
proceeds of, the substantially concurrent sale, other than to a
subsidiary of ours, of, or from substantially concurrent additional
capital contributions in respect of, Equity Interests of ours, other
than Disqualified Stock; provided, that any net cash proceeds that
are utilized for any such Restricted Investment, and any Net Income
resulting therefrom, will be excluded from clauses (c)(i) and (c)(ii)
of the preceding paragraph;
(3) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of ours or of our direct or indirect parent in
exchange for, or out of the proceeds of, the substantially concurrent
sale, other than to a subsidiary of ours, of, or from substantially
concurrent capital contributions in respect of, other Equity Interests
of ours, other than any Disqualified Stock; provided that any net
cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition, and any Net Income resulting
therefrom, will be excluded from clauses (c)(i) and (c)(ii) of the
preceding paragraph;
(4) the defeasance, redemption or repurchase of subordinated Indebtedness
with the net cash proceeds from an incurrence of Permitted Refinancing
Indebtedness or the substantially concurrent sale, other than to a
Subsidiary of ours, of, or from substantially concurrent additional
capital contributions in respect of, our Equity Interests, other than
Disqualified Stock; provided, that any net cash proceeds that are
utilized for any such defeasance, redemption or repurchase, and any
Net Income resulting therefrom, will be excluded from clauses (c)(i)
and (c)(ii) of the preceding paragraph;
(5) Permitted Tax Payments;
(6) the acquisition by a Receivables Subsidiary in connection with a
Qualified Receivables Transaction of Equity Interests of a trust or
other Person established by such Receivables Subsidiary to effect such
Qualified Receivables Transaction;
(7) the repurchase, redemption, retirement for value or other acquisition
of any of our Equity Interests or Equity Interests of any of our
subsidiaries from employees, officers or directors (or their nominees)
of ours or any of our subsidiaries or their authorized representatives
upon such Person's cessation of employment with us or any such
subsidiary or death pursuant to the terms of an employee benefit,
employment agreement or similar arrangement in an aggregate amount not
to exceed $500,000 in any fiscal year, plus the aggregate net cash
proceeds from any
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issuance during such fiscal year of Equity Interests by us or any of
our subsidiaries to employees, officers or directors thereof;
(8) pro rata dividends or other distributions made by a subsidiary of ours
to minority shareholders (or owners of an equivalent interest in the
case of a subsidiary that is not a corporation);
(9) the acquisition by us or a wholly owned subsidiary of ours of any
Equity Interest in a subsidiary of ours from a minority shareholder of
such subsidiary; and
(10) the repurchase of our Equity Interests deemed to occur upon the
exercise of stock options if such Equity Interests represent a portion
of the exercise price thereof.
Our board of directors may designate any of our subsidiaries, including a
newly acquired subsidiary, to be an Unrestricted Subsidiary if such designation
would not cause a default. For purposes of making such determination, all
outstanding Investments by us and our subsidiaries in the Unrestricted
Subsidiary so designated will be deemed to be Restricted Payments at the time of
such designation and will reduce the amount available for Restricted Payments
under the first paragraph of this covenant. All such outstanding Investments
will be deemed to constitute Investments in an amount equal to the fair market
value of such Investments at the time of such designation. Such designation will
only be permitted if such Restricted Payment would be permitted at such time and
if such subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments, other than cash, will be the fair
market value (evidenced by a resolution of our board of directors set forth in
an officers' certificate delivered to the trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by us or such subsidiary, as
the case may be, pursuant to the Restricted Payment. Not later than the date of
making any Restricted Payment, we will deliver to the trustee an officers'
certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this covenant were computed,
which calculations may be based upon our latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The indenture provides that we will not, and will not permit any of our
subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness, including Acquired
Indebtedness, and we will not issue any Disqualified Stock and will not permit
any of our subsidiaries to issue any shares of preferred stock; provided,
however, that we may incur indebtedness (including Acquired Indebtedness) or
issue shares of preferred stock or Disqualified Stock and our subsidiaries that
are subsidiary guarantors may incur Indebtedness and issue shares of preferred
stock if:
(1) the Fixed Charge Coverage Ratio for our most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness
is incurred or such preferred stock or Disqualified Stock is issued
would have been at least 2.25 to 1 on or prior July 9, 2001 and 2.5 to
1 at any time thereafter, determined on a pro forma basis, including a
pro forma application of the net proceeds therefrom, as if the
additional Indebtedness had been incurred, or the preferred stock or
Disqualified Stock had been issued, as the case may be, at the
beginning of such four-quarter period; and
(2) no default or event of default will have occurred and be continuing or
would occur as a consequence thereof;
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provided, that no guarantee may be incurred pursuant to this paragraph unless
the guaranteed Indebtedness is incurred by us or our subsidiary in compliance
with this paragraph.
The foregoing provisions will not apply to the following types of
"Permitted Indebtedness":
(1) the incurrence by us or any of our subsidiaries of Indebtedness under
the Revolving Credit Facility and reimbursement obligations in respect
of letters of credit (and guarantees thereof by subsidiaries that are
subsidiary guarantors) in an aggregate principal amount at any time
outstanding (with letter of credit obligations being deemed to have a
principal amount equal to the maximum potential liability of us and
our subsidiaries that are subsidiary guarantors with respect thereto)
not to exceed an amount equal to $100.0 million less any mandatory
repayments or prepayments of the Revolving Credit Facility with the
proceeds of Asset Sales;
(2) Existing Indebtedness;
(3) Indebtedness represented by the exchange notes, the subsidiary
guarantees and the indenture;
(4) the incurrence by us or any of our subsidiaries of Indebtedness
represented by capital lease obligations or Purchase Money
Obligations, in each case incurred for the purpose of financing all or
any part of the purchase price or cost of construction or improvement
of property used in our business or in the business of such
subsidiary, in an aggregate principal amount not to exceed $20.0
million at one time outstanding;
(5) the incurrence by us or any of our subsidiaries of Permitted
Refinancing Indebtedness;
(6) the incurrence by us or any of our wholly owned subsidiaries of
intercompany Indebtedness between or among us and any of our wholly
owned subsidiaries or between or among any wholly owned subsidiaries
and the issuance of preferred stock by any of our wholly owned
subsidiaries to us or any other of our wholly owned subsidiaries;
provided, however, that (a) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness or preferred
stock being held by a person other than us or any wholly owned
subsidiary of ours and (b) any sale or other transfer of any such
Indebtedness or preferred stock to a person that is not either
American Tissue or a wholly owned subsidiary of ours will be deemed,
in each case, to constitute an incurrence of Indebtedness by us or
such subsidiary, as the case may be, not permitted pursuant to this
clause (6);
(7) the incurrence by us or any of our subsidiaries that are subsidiary
guarantors of Hedging Obligations;
(8) Non-Recourse Debt;
(9) Indebtedness by us or any of our subsidiaries solely in respect of
bankers' acceptances, letters of credit and performance bonds or
similar arrangements, in each case in the ordinary course of business;
(10) Indebtedness arising from agreements of ours or our 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 a Subsidiary, other than
guarantees of Indebtedness incurred by any person acquiring all or any
portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; provided, however, that:
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(a) such Indebtedness is not reflected on our balance sheet or the
balance sheet of any of our subsidiaries (contingent obligations
referred to in a footnote to financial statements and not
otherwise reflected on the balance sheet will not be deemed to be
reflected on such balance sheet for purposes of this clause (a));
and
(b) the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds including
non-cash proceeds (the fair market value of such non-cash
proceeds being measured at the time it is received and without
giving effect to any subsequent changes in value) actually
received by us and our subsidiaries in connection with such
disposition;
(11) the incurrence by us or any of our subsidiaries that are subsidiary
guarantors of Indebtedness (in addition to Indebtedness permitted by
any other clause of this paragraph) in an aggregate principal amount
at any time outstanding not to exceed the sum of $10.0 million; and
(12) the incurrence by a Receivables Subsidiary of Indebtedness in an
amount not to exceed $25.0 million in a Qualified Receivables
Transaction that is without recourse to us or to any of our
subsidiaries or their assets (other than such Receivables Subsidiary
and its assets), and is not guaranteed by any such person.
Notwithstanding any other provision of this covenant, a guarantee of
Indebtedness permitted by the terms of the indenture at the time such
Indebtedness was incurred will not constitute a separate incurrence of
Indebtedness.
Indebtedness or preferred stock of any person which is outstanding at the
time such person becomes a subsidiary of ours or is merged with or into or
consolidated with us or a subsidiary of ours shall be deemed to have been
incurred at the time such person becomes such a subsidiary of ours or is merged
with or into or consolidated with us or any of our subsidiaries, as applicable.
Notwithstanding any other provisions of this covenant, the maximum amount
of Indebtedness that we or a subsidiary of ours may incur shall not be deemed to
be exceeded solely as a result of fluctuations in the exchange rates of
currencies.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of Indebtedness meets the criteria of more than one of the categories of
Permitted Indebtedness described in clauses (1) through (12) above or is
entitled to be incurred pursuant to the Fixed Charge Coverage Ratio provisions
of this covenant, we may, in our sole discretion, classify such item of
Indebtedness in any manner that complies with this covenant. Accrual of
interest, accretion or amortization of original issue discount, the payment of
interest on any Indebtedness in the form of additional Indebtedness with the
same terms, and the payment of dividends on Disqualified Stock in the form of
additional shares of the same class of Disqualified Stock will not be deemed to
be an incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this "Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant.
Liens
The indenture provides that we will not, and will not permit any of our
subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any lien, except:
(1) with respect to any property or asset constituting collateral, liens
created by the indenture or the collateral documents and Permitted
Collateral Liens, or
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(2) with respect to any property or asset (other than collateral) now
owned or hereafter acquired, Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The indenture will provide that we will not, and will not permit any of our
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
of our Subsidiaries to:
(1) (a) pay dividends or make any other distributions to us or any of our
other subsidiaries (x) on its Capital Stock or (y) with respect to any
other interest or participation in, or measured by, its profits, or
(b) pay any Indebtedness owed to us or any of our other subsidiaries;
(2) make loans or advances to us or any of our other Subsidiaries; or
(3) transfer any of its properties or assets to us or any of our other
subsidiaries,
except for such encumbrances or restrictions existing under or by reason of:
(a) Existing Indebtedness (including, without limitation, pursuant to the
Boise Agreement and the Existing Mortgage Loans)and any documents or
agreements entered into pursuant thereto or securing obligations
thereunder, all as in effect on the issue date of the old notes;
(b) the Revolving Credit Facility and any documents or agreements entered
into pursuant thereto or securing obligations thereunder, all as in
effect as of the issue date of the old notes, and any amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof; provided that such
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more
restrictive with respect to such dividend and other payment
restrictions than those contained in the agreements governing the
Revolving Credit Facility as in effect on the issue date of the old
notes;
(c) the indenture, the exchange notes, the subsidiary guarantees and the
collateral documents;
(d) applicable law;
(e) any instrument governing Acquired Indebtedness or Capital Stock of a
Person acquired by us or any of our subsidiaries as in effect at the
time of such acquisition (except to the extent such Acquired
Indebtedness was incurred in connection with or in contemplation of
such acquisition), which encumbrance or restriction is not applicable
to any Person, or the properties or assets of any person, other than
the person, or the assets of the person, so acquired;
(f) by reason of customary non-assignment or subletting provisions in
leases and licenses entered into in the ordinary course of business
and consistent with past practices;
(g) Purchase Money Obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in
clause (3) above on the property so acquired;
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(h) agreements relating to the financing of the acquisition of real or
tangible personal property acquired after the issue date of the old
notes; provided that such encumbrance or restriction relates only to
the property which is acquired and in the case of any encumbrance or
restriction that constitutes a Lien, such Lien constitutes a Purchase
Money Lien;
(i) Indebtedness or other contractual requirements of a Receivables
Subsidiary in connection with a Qualified Receivables Transaction;
provided that such restrictions apply only to such Receivables
Subsidiary;
(j) any restriction or encumbrance contained in contracts for sale or
other conveyance of assets permitted by the indenture in respect of
the assets being sold or conveyed pursuant to such contract;
(k) Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced; or
(l) contracts with customers entered into in the ordinary course of
business in the nature of restrictions on cash, other deposits or net
worth, which restrictions are imposed by such customers.
Nothing contained in the foregoing covenant entitled "Dividend and Other
Payment Restrictions Affecting Subsidiaries" shall prevent us or any of our
subsidiaries from creating, incurring, assuming or suffering to exist any Liens
otherwise not prohibited by the covenant entitled "Liens."
Transactions with Affiliates
The indenture provides that we will not, and will not permit any of our
subsidiaries to, sell, lease, transfer or otherwise dispose of, as applicable,
any of our or such subsidiary's assets to, or purchase any property or assets
from, or enter into or make any contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
us or the relevant subsidiary than those that would have been obtained
in a comparable transaction by us or such subsidiary with an unrelated
person; and
(2) we deliver to the trustee (a) with respect to any Affiliate
Transaction entered into after the issue date of the old notes
involving aggregate consideration in excess of $1.0 million, a
resolution of the board of directors set forth in an officers'
certificate certifying that such Affiliate Transaction complies with
clause (1) above and that such Affiliate Transaction has been approved
by a majority of the disinterested members of the board of directors
and (b) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $5.0 million, an opinion as to the fairness
to us or such subsidiary of such Affiliate Transaction from a
financial point of view issued by an independent accounting, appraisal
or investment banking firm of recognized standing;
provided that the following will not be deemed to be Affiliate Transactions:
(a) the provision of administrative or management services by us or any of
our officers or directors to any of our subsidiaries in the ordinary
course of business consistent with past practice;
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(b) any employment agreement entered into by us or any of our subsidiaries
in the ordinary course of business and consistent with our past
practice or the past practice of such subsidiary;
(c) transactions between or among us and/or our wholly owned subsidiaries
or transactions between a Receivables Subsidiary and any person in
which the Receivables Subsidiary has an Investment;
(d) transactions not restricted by the covenant entitled "Restricted
Payments" (including, without limitation, Permitted Investments);
(e) reasonable fees and compensation paid to, and indemnity provided on
behalf of, our or any of our subsidiaries' officers, directors,
employees, agents or consultants as determined in good faith by the
board of directors; and
(f) any sale or other issuance of our Equity Interests (other than
Disqualified Stock).
Additional Subsidiary Guarantees
The indenture provides that all of our domestic subsidiaries, other than a
Receivables Subsidiary or an Unrestricted Subsidiary, will be subsidiary
guarantors. In addition, the indenture provides that we will not, and will not
permit any of our subsidiary guarantors to, make any Investment in any of our
other subsidiaries that is not a subsidiary guarantor, unless such Investment is
permitted by the covenant entitled "Restricted Payments", including any
Restricted Payment or Permitted Investment permitted or not restricted by such
covenant.
Impairment of Security Interests
The indenture provides that neither we nor any of our subsidiaries will
take or omit to take any action which action or omission could reasonably be
expected to have the result of adversely affecting or impairing the lien in
favor of the trustee for the benefit of the holders of the exchange notes in the
Collateral, other than as expressly contemplated by the indenture, the
collateral documents or the Intercreditor Agreements.
Line of Business
The indenture provides that we will not, and will not permit any of our
subsidiaries to, engage in any business, other than the business of owning,
operating or managing of pulp and paper manufacturing and converting businesses,
the purchase, refurbishment and sale of pulp, paper and converting equipment and
similar, complementary, ancillary or related lines of business.
Payments for Consent
The indenture provides that neither we nor any of our subsidiaries will,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any holder of exchange notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the indenture or the exchange notes, unless such consideration is offered to
be paid or is paid to all holders of the exchange notes that consent, waive or
agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
Reports
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The indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission, so long as any exchange
notes are outstanding, we will furnish to the trustee and all holders of
exchange notes (1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by our certified
independent accountants and (2) all current reports that would be required to be
filed with the Commission on Form 8-K if we were required to file such reports,
in each case within the time periods specified in the Commission's rules and
regulations.
In addition, following the consummation of the Exchange Offer, whether or
not required by the rules and regulations of the Commission, we will file a copy
of all such information and reports with the Commission for public availability
within the time periods specified in the Commission's rules and regulations
(unless the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, we and our subsidiary guarantors have agreed that, for so long as any
exchange notes remain outstanding, they will furnish to the trustee, holders of
exchange notes and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
Merger, Consolidation or Sale of Assets
The indenture provides that we will not, in a single transaction or series
of related transactions, consolidate or merge with or into (whether or not we
are the surviving entity), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of our properties or assets in one or more
related transactions, to another corporation, person or entity unless:
(1) either
o we are the surviving entity or
o the person formed by or surviving any such consolidation or
merger, if other than us, or to which such sale, assignment,
transfer, lease, conveyance or other disposition will have been
made, is an entity organized or existing under the laws of the
United States, any state thereof or the District of Columbia;
(2) the surviving entity assumes all of our obligations under the exchange
notes, the indenture and the collateral documents pursuant to a
supplemental indenture in a form reasonably satisfactory to the
trustee;
(3) the surviving entity causes such amendments, supplements or other
instruments to be filed and recorded in such jurisdictions as may be
required by applicable law to preserve and protect the lien of the
collateral documents on the collateral owned by or transferred to the
surviving entity, together with such financing statements as may be
required to perfect any security interests in such collateral which
maybe perfected by the filing of a financing statement under the
Uniform Commercial Code of the relevant states;
(4) the collateral owned by or transferred to the surviving entity will:
(a) continue to constitute collateral under the indenture and the
collateral documents,
(b) will be subject to the lien in favor of the trustee for the
benefit of the holders of the
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exchange notes, and
(c) will not be subject to any lien, other than Permitted Collateral
Liens;
(5) the assets of the person which is merged or consolidated with or into
the surviving entity, to the extent that such assets are assets of the
types which would constitute collateral under the collateral
documents, shall be treated as After-Acquired Property and the
surviving entity will take such action as may be reasonably necessary
to cause such property and assets to be made subject to the lien of
the collateral documents in the manner and to the extent required in
the indenture;
(6) immediately after giving pro forma effect to such transaction, no
default or event of default exists;
(7) we or the surviving entity:
(a) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth
of the Company immediately preceding the transaction and
(b) will, at the time of such transaction and after giving pro forma
effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph
of the covenant entitled "Incurrence of Indebtedness and Issuance
of Preferred Stock;" and
(8) we will have delivered to the trustee an officers' certificate and an
opinion of counsel addressed to the trustee, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance
or disposition and such supplemental indenture, if any, comply with
the indenture and that such supplemental indenture is enforceable.
Events of Default and Remedies
The indenture provides that each of the following constitutes an event of
default:
(1) default for 30 days in the payment when due of interest on the
exchange notes;
(2) default in payment when due of the principal of or premium, if any, on
the exchange notes;
(3) failure by us or any of our subsidiaries to comply with the provisions
described under the captions "-- Covenants -- Change of Control," "--
Covenants Asset Sales," "-- Covenants -- Restricted Payments" or "--
Covenants --Incurrence of Indebtedness and Issuance of Preferred
Stock;"
(4) continuance of a default in the performance, or breach, of any of our
other covenants or warranties in the indenture for a period of 30 days
after there has been given to us by the trustee, or to us and the
trustee by the holders of at least 25% in principal amount of the
outstanding exchange notes, a written notice specifying such default
or breach and requiring it to be remedied and stating that such notice
is a "Notice of Default" under the indenture;
(5) default under any mortgage, security agreement, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed
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by us or any of our Significant Subsidiaries (or the payment of which
is guaranteed by us or any of our subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the issue
date of the old notes, which default:
(a) is caused by a failure to pay principal of, premium, if any, or
interest on such Indebtedness, after the expiration of any grace
period provided in such Indebtedness on the date of such default
(referred to below as a "payment default"), or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$10.0 million or more;
(6) failure by us or any of our Significant Subsidiaries to pay final
judgments aggregating in excess of $10.0 million, which judgments are
not paid, discharged or stayed for a period of 60 days;
(7) except as permitted by the indenture, default by us or any of our
subsidiary guarantors in the performance of the collateral documents
which adversely affects the enforceability or the validity of the
trustee's lien on the collateral or which adversely affects the
condition or value of the collateral, taken as a whole, in any
material respect, repudiation or disaffirmation by us or any of our
subsidiaries of its obligations under the collateral documents or the
determination in a judicial proceeding that the collateral documents
are unenforceable or invalid against us or any of our subsidiaries for
any reason;
(8) except as permitted by the indenture, any subsidiary guarantee is held
in any judicial proceeding to be unenforceable or invalid or ceases
for any reason to be in full force and effect or any subsidiary
guarantor, or any duly authorized person acting on behalf of any
subsidiary guarantor, denies or disaffirms its obligations under its
subsidiary guarantee; and
(9) certain events of bankruptcy or insolvency with respect to us or any
of our Significant Subsidiaries or any group of our subsidiaries that,
taken together, would constitute a Significant Subsidiary.
If any event of default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding exchange
notes may declare all the exchange notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an event of default arising from
certain events of bankruptcy or insolvency with respect to us, any Significant
Subsidiary of ours or any group of our subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding exchange notes will become
due and payable without further action or notice. In addition to acceleration of
the maturity of the exchange notes, if an event of default occurs and is
continuing, the trustee will have the right, subject, in the case of the Boise
Collateral and the Secondary Collateral, to the Intercreditor Agreements, to
exercise remedies with respect to the collateral, such as foreclosure, as are
available under the indenture, the collateral documents and at law. Holders of
the exchange notes may not enforce the indenture or the exchange notes or
exercise remedies with respect to the collateral, except as expressly provided
in the indenture. Subject to limitations, holders of a majority in principal
amount of the then outstanding exchange notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
exchange notes notice of any continuing default or event of default, except a
default or event of default relating to the payment of principal or interest, if
it determines that withholding notice is in their interest.
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The holders of a majority in aggregate principal amount of the exchange
notes then outstanding by notice to the trustee may on behalf of the holders of
all of the exchange notes waive any existing default or event of default and its
consequences under the indenture, the exchange notes, the subsidiary guarantees
and the collateral documents, except a continuing default or event of default in
the payment of interest on, or the principal of, the exchange notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture. In addition, we are required upon becoming aware
of any default or event of default under the indenture, to deliver to the
trustee a statement specifying such default or event of default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of ours or any
of our subsidiaries, as such, will have any liability for any obligations of
ours under the exchange notes, the subsidiary guarantees, the indenture, or the
collateral documents or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each holder of exchange notes by accepting a
exchange 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 Securities and Exchange Commission that such a waiver is
against public policy.
Legal Defeasance and Covenant Defeasance
We may, at our option and at any time, elect to have all of its obligations
discharged with respect to the outstanding exchange notes (referred to below as
legal defeasance), except for:
(1) the rights of holders of outstanding exchange notes to receive
payments in respect of the principal of, premium, if any, and interest
on such exchange notes when such payments are due from the trust
referred to below;
(2) our obligations with respect to the exchange notes concerning issuing
temporary exchange notes, registration of exchange notes, mutilated,
destroyed, lost or stolen exchange notes and the maintenance of an
office or agency for payment and money for security payments held in
trust;
(3) the rights, powers, trusts, duties and immunities of the trustee, and
our obligations in connection therewith; and
(4) the legal defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our
obligations released with respect to certain covenants that are described in the
indenture (referred to below as covenant defeasance) and thereafter any failure
or omission to comply or default in complying with such obligations will not
constitute a default or event of default with respect to the exchange notes.
In the event covenant defeasance occurs, certain events (not including
non-payment, bankruptcy, receivership, rehabilitation and insolvency events)
described under "-- Events of Default" will no longer constitute an event of
default with respect to the exchange notes.
In order to exercise either legal defeasance or covenant defeasance,
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(1) we must irrevocably deposit with the trustee, in trust, for the
benefit of the holders of the exchange notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding
exchange notes on the stated maturity or on the applicable redemption
date, as the case may be, and we must specify whether the exchange
notes are being defeased to maturity or to a particular redemption
date;
(2) in the case of legal defeasance, we will have delivered to the trustee
an opinion of counsel in the United States reasonably acceptable to
the trustee confirming that (a) we have received from, or there has
been published by, the Internal Revenue Service a ruling or (b) since
the issue date of the old notes, there has been a change in the
applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel will confirm that, the
holders of the outstanding exchange notes will not recognize income,
gain or loss for federal income tax purposes as a result of such legal
defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such legal defeasance had not occurred;
(3) in the case of covenant defeasance, we will have delivered to the
trustee an opinion of counsel in the United States reasonably
acceptable to the trustee confirming that the holders of the
outstanding exchange notes will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance
and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such
covenant defeasance had not occurred;
(4) no default or event of default under the indenture will have occurred
and be continuing on the date of such deposit (other than a default or
event of default resulting from the borrowing of funds to be applied
to such deposit) or insofar as events of default from bankruptcy or
insolvency events are concerned, at any time in the period ending on
the 91st day after the date of deposit;
(5) such legal defeasance or covenant defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the indenture) to which we or any
of our subsidiaries is a party or by which we or any of our
subsidiaries is bound;
(6) we must have delivered to the trustee an opinion of counsel to the
effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(7) we must deliver to the trustee an officers' certificate stating that
the deposit was not made by us with the intent of preferring the
holders of exchange notes over our other creditors with the intent of
defeating, hindering, delaying or defrauding our creditors or others;
and
(8) we must deliver to the trustee an officers' certificate and an opinion
of counsel, each stating that all conditions precedent relating to
legal defeasance or covenant defeasance have been complied with.
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Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of
exchange notes) as to all outstanding exchange notes when either:
(1) all such exchange notes theretofore authenticated and delivered
(except lost, stolen or destroyed exchange notes which have been
replaced or paid and exchange notes for whose payment money has
theretofore been deposited in trust or segregated and held in trust by
us and thereafter repaid to us or discharged from such trust) have
been delivered to the trustee for cancellation; or
(2) (a) all such exchange notes not theretofore delivered to the trustee
for cancellation have or will (upon the mailing of a notice or notices
deposited with the trustee together with irrevocable instructions to
mail such notice or notices to holders of the exchange notes) become
due and payable and we have irrevocably deposited or caused to be
deposited with the trustee as trust funds in the trust for the purpose
an amount of money sufficient to pay and discharge the entire
indebtedness on the exchange notes not theretofore delivered to the
trustee for cancellation, for principal, premium, if any, and accrued
interest to the date of such deposit; (b) we have paid all sums
payable by us under the indenture; and (c) we have delivered
irrevocable instructions to the trustee to apply the deposited money
toward the payment of the exchange notes at maturity or the redemption
date, as the case may be.
In addition, we must deliver to the trustee an officers' certificate and an
opinion of counsel stating that all conditions precedent to satisfaction and
discharge have been complied with.
Transfer and Exchange
A holder may exchange or transfer exchange notes in accordance with the
indenture. The registrar for the exchange notes and the trustee may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents and we may require a holder to pay any taxes and fees required by law
or permitted by the indenture.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the indenture,
the exchange notes, the subsidiary guarantees, or the collateral documents may
be amended or supplemented with the consent of the holders of at least a
majority in aggregate principal amount of the exchange notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, exchange notes), and any existing
default or compliance with any provision of the indenture, the exchange notes,
the subsidiary guarantees, or the collateral documents may be waived with the
consent of the holders of a majority in principal amount of the then outstanding
exchange notes (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, exchange notes).
Without the consent of each holder of exchange notes affected thereby, an
amendment or waiver may not:
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(1) reduce the principal amount of exchange notes whose holders must
consent to an amendment, supplement or waiver of the indenture,
exchange notes, subsidiary guarantees, or collateral documents;
(2) reduce the principal of or change the fixed maturity of any exchange
note or alter the provisions with respect to the redemption of the
exchange notes (other than the covenants described above under the
captions "Change of Control" or "Asset Sales");
(3) reduce the rate of or change the time for payment of interest on any
exchange note;
(4) waive a default or event of default in the payment of principal of,
premium, if any, or interest on the exchange notes (except a
rescission of acceleration of the exchange notes by the holders of at
least a majority in aggregate principal amount of the exchange notes
and a waiver of the payment default that resulted from such
acceleration);
(5) make any exchange note payable in money other than that stated in the
exchange notes;
(6) make any change in the provisions of the indenture, exchange notes,
subsidiary guarantees or collateral documents relating to waivers of
past defaults or the rights of holders of exchange notes to receive
payments of principal of or premium, if any, or interest on the
exchange notes;
(7) waive a redemption payment with respect to any exchange note (other
than a payment required by one of the covenants described in clause
(2) above or under the caption "Optional Redemption"); or
(8) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of the holders of the
exchange notes, we and the trustee may, from time to time, amend or supplement
the indenture, the exchange notes, the subsidiary guarantees, or the collateral
documents to:
(1) cure any ambiguity, defect or inconsistency;
(2) provide for uncertificated exchange notes in addition to or in place
of certificated exchange notes;
(3) provide for the assumption of our or any of our subsidiary guarantors'
obligations to holders of exchange notes in the case of a merger or
consolidation or sale of all or substantially all of our or any of our
subsidiary guarantors' assets;
(4) provide for additional subsidiary guarantors as set forth in the
indenture or to provide for the release of a subsidiary guarantor
pursuant to the indenture;
(5) make any change that would provide any additional rights or benefits
to the holders of exchange notes or that does not adversely affect the
legal rights under the indenture of any such holder; or
(6) comply with requirements of the Securities and Exchange Commission in
order to effect or maintain the qualification of the indenture under
the Trustee Indenture Act.
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Notwithstanding the foregoing, collateral may be released with the consent
of the holders of at least 75% in aggregate principal amount of the then
outstanding exchange notes in addition to releases of collateral expressly
permitted by the collateral documents.
Concerning the Trustee
The indenture contains certain limitations on the rights of the trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Securities and Exchange Commission
for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding
exchange notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the trustee,
subject to certain exceptions. The indenture provides that in case an event of
default occurs (which is not cured or waived), the trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the trustee will be
under no obligation to exercise any of its rights or powers under the indenture
at the request of any holder of exchange notes, unless such holder has offered
to the trustee security and indemnity satisfactory to the trustee against any
loss, liability or expense.
Book-Entry, Delivery and Form
The exchange notes to be exchanged for the old notes that were sold to
qualified institutional buyers under Rule 144A in the United States initially
will be in the form of one registered global note without interest coupons. Upon
issuance, the global note will be deposited on the date of consummation of the
Exchange Offer with the trustee, as custodian for The Depository Trust Company
("DTC") and registered in the name of Cede & Co., as nominee of DTC, in each
case for credit to an account of a direct or indirect participant in DTC as
described below.
The global note may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee. Beneficial
interests in the global note may not be exchanged for exchange notes in
certificated form, except in the limited circumstances described below. See "--
Transfer of Interests in the Global Note for Certificated Exchange Notes."
Except in the limited circumstances described below, owners of beneficial
interests in the global note will not be entitled to receive physical delivery
of certificated notes. Transfers of beneficial interests in the global note will
be subject to the applicable rules and procedures of DTC and its direct or
indirect participants, which may change from time to time.
Initially, the trustee will act as paying agent and registrar for the
exchange notes. Exchange notes may be presented for registration of transfer and
exchange at the offices of the registrar.
Depository Procedures
The following description of the operations and procedures of DTC is
provided solely as a matter of convenience. These operations and procedures are
solely within the control of DTC and are subject to changes by them from time to
time. We take no responsibility for these operations and procedures and urge
investors to contact DTC or its participants directly to discuss these matters.
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DTC has informed us that it is a limited-purpose trust company created to
hold securities for its participant organizations and to facilitate the
clearance and settlement of transactions in those securities between those
participants through electronic book-entry changes in accounts of the
participants. The participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to indirect participants such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Persons other
than participants or indirect participants may beneficially own securities held
by or on behalf of DTC only through its participants or the indirect
participants.
We expect that, pursuant to procedures established by DTC,
o (1) upon deposit of the global notes, DTC will credit the accounts of
participants with portions of the principal amount of the global note
and
o (2) ownership of such interests in the global note will be shown on,
and the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the participants) or by the
participants and the indirect participants (with respect to other
owners of beneficial interests in the global note).
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in the global note to such persons will be limited
to that extent.
So long as the global note holder is the registered holder of any exchange
notes, the global note holder will be considered the sole owner of such exchange
notes. Except as described below, owners of beneficial interests in the global
note will not have exchange notes registered in their names, will not receive
physical delivery of exchange notes in certificated form and will not be
considered the registered owners or "holders" thereof under the indenture for
any purpose. As a result, the ability of a person having a beneficial interest
in the global note to pledge such interest to persons or entities that do not
participate in the DTC system or otherwise take actions in respect of such
interests may be affected by the lack of a physical certificate evidencing such
interest.
Payments in respect of the principal of, premium, if any, and interest and
liquidated damages, if any, on the global note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered holder
under the indenture. Under the terms of the indenture, we and the trustee will
treat the persons in whose names the exchange notes, including the global note,
are registered as the owners thereof for the purpose of receiving such payments
and for any and all other purposes whatsoever. Consequently, none of us, our
subsidiary guarantors, the trustee or any agent of any of the foregoing has or
will have any responsibility or liability for:
(1) any aspect of DTC's records or any participant's or indirect
participant's records relating to or payments made on account of
beneficial ownership interest in the global note, or for maintaining,
supervising or reviewing any of DTC's records or any participant's or
indirect participant's records relating to the beneficial ownership
interests in the global note or
(2) any other matter relating to the actions and practices of DTC or any
of its participants or indirect participants.
DTC has advised us that its current practice, upon receipt of any payment
in respect of securities, such as the exchange notes (including principal and
interest), is to credit the accounts of the relevant
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participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interest in the
relevant security as shown on the records of DTC, unless DTC has reason to
believe it will not receive payment on such payment date. Payments by
participants and indirect participants to the beneficial owners of exchange
notes will be governed by standing instructions and customary practices and will
be the responsibility of the participants or the indirect participants and will
not be the responsibility of DTC, the trustee or us. None of us, our subsidiary
guarantors, the trustee or any agent of any of the foregoing will be liable for
any delay by DTC or any of its participants in identifying the beneficial owners
of the exchange notes, and we and the trustee may conclusively rely on and will
be protected in relying on instructions from DTC or its nominee for all
purposes.
Interests in the global note will trade in DTC's Same-Day Funds Settlement
System and, therefore, transfers between participants in DTC will be effected in
accordance with DTC's procedures and will be settled in immediately available
funds.
DTC has advised us that it will take any action permitted to be taken by a
holder of exchange notes only at the direction of one or more participants to
whose account DTC has credited the interests in the global note and only in
respect of such portion of the aggregate principal amount of the exchange notes
as to which such participant or participants has or have given such direction.
However, if there is an event of default under the exchange notes, DTC reserves
the right to exchange the global note for legended exchange notes in
certificated form, and to distribute such exchange notes to its participants.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that we believe to be reliable, but we take no
responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the global note among participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of us, our subsidiary
guarantors, the trustee nor any of their respective agents will have any
responsibility for the performance by DTC, its participants or indirect
participants of their obligations under the rules and procedures governing any
of their operations.
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Transfers of Interests in the Global Note for Certificated Exchange Notes
The global note is exchangeable for definitive exchange notes in registered
certificated form if:
(1) DTC
(x) notifies us that it is unwilling or unable to continue as
depositary for the global note and we thereupon fail to appoint a
successor depositary within 120 days thereafter, or
(y) has ceased to be a clearing agency registered under the
Securities Exchange Act of 1934,
(2) we, at our option, notify the trustee in writing that we elect to
cause the issuance of the certificated exchange notes or
(3) a default or event of default with respect to the exchange notes shall
have occurred and be continuing.
In addition, beneficial interests in the global note may be exchanged for
certificated exchange notes upon request, but only upon prior written notice
given to the trustee by or on behalf of DTC in accordance with the indenture. In
all cases, certificated exchange notes delivered in exchange for the global note
or beneficial interests therein will be registered in the names, and issued in
any approved denominations, requested by or on behalf of the Depositary (in
accordance with its customary procedures).
Same-Day Settlement and Payment
The indenture requires that payments in respect of the exchange notes
represented by the global note, including principal, premium, if any, and
interest, be made by wire transfer of immediately available funds to the
accounts specified by the global note holder. With respect to certificated
exchange notes, we will make all payments of principal, premium, if any, and
interest, by wire transfer of immediately available funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. Exchange notes represented by
the global note are expected to be eligible to trade in the PORTAL market and to
trade in DTC's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such exchange notes will, therefore, be required by
DTC to be settled in immediately available funds. We expect that secondary
trading in any Certificated Notes will also be settled in immediately available
funds.
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Defined Terms
Set forth below are some of the defined terms used in the indenture.
Reference is made to the indenture for a full disclosure of all such terms, as
well as any other capitalized or uncapitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person:
(1) Indebtedness of any other person existing at the time such other
person is merged with or into, or became a subsidiary of, such
specified person, including, without limitation, Indebtedness incurred
in connection with, or in contemplation of, such other person merging
with or into, or becoming a subsidiary of, such specified person, and
(2) Indebtedness secured by a lien encumbering any asset acquired by such
specified person.
"Affiliate" of any specified person, means any other person, directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person will be
deemed to be control. Notwithstanding the foregoing, no Person (other than us or
any subsidiary of ours) in which a Receivables Subsidiary makes an Investment in
connection with a Qualified Receivables Transaction will be deemed to be an
Affiliate of ours or any of our subsidiaries solely by reason of such
Investment.
"After-Acquired Property" means any and all assets or property acquired
after the issue date of the old notes including any assets or property acquired
by us or any subsidiary guarantor from a transfer from us or a wholly owned
subsidiary of ours that is a subsidiary guarantor.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any non-cash
assets (including, without limitation, by way of a sale and leaseback
and including the issuance, sale or other transfer of any of the
capital stock of any subsidiary of such person) other than to us or to
any of our wholly owned subsidiaries that is a subsidiary guarantor
and other than directors' qualifying shares, in each case in excess of
$250,000;
(2) the issuance of Equity Interests in any subsidiaries or the sale of
any Equity Interests in any subsidiaries, in each case, in one or a
series of related transactions (x) that have a fair market value in
excess of $250,000 or (y) with respect to which we shall have received
net proceeds in excess of $250,000; and
(3) the damage or destruction of all or any portion of the collateral or
the taking of all or any portion of the collateral by eminent domain;
provided, that notwithstanding the foregoing, the term "Asset Sale" will not
include:
(a) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of our assets or the assets of any of our
subsidiaries, as permitted pursuant to the covenant entitled "Merger,
Consolidation or Sale of Assets;"
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(b) the sale or lease of equipment, inventory, accounts receivable or
other assets in the ordinary course of business consistent with past
practice and to the extent that such sales or leases are not part of a
sale of the business in which such equipment was used or in which such
inventory or accounts receivable arose;
(c) a transfer of assets by us to a wholly owned subsidiary of ours that
is a subsidiary guarantor or by a wholly owned subsidiary of ours to
us or to another of our wholly owned subsidiaries that is a subsidiary
guarantor;
(d) an issuance of Equity Interests by a wholly owned subsidiary of ours
to us or to another of our wholly owned subsidiaries that is a
subsidiary guarantor;
(e) the surrender or waiver of contract rights or the settlement, release
or surrender of contract, tort or other claims of any kind;
(f) the grant in the ordinary course of business of any non-exclusive
license of patents, trademarks, registrations therefor and other
similar intellectual property;
(g) sales or transfers of accounts receivable and related assets pursuant
to a Qualified Receivables Transaction to a Receivables Subsidiary for
the fair market value thereof, including cash in an amount at least
equal to 75% of the book value thereof as determined in accordance
with GAAP; provided that such sales shall not exceed the lesser of
$25.0 million or the outstanding balance under the Revolving Credit
Facility; provided further that the entire proceeds of any such sale
are used to repay outstanding indebtedness under the Revolving Credit
Facility and permanently reduce commitments thereunder;
(h) Permitted Investments; or
(i) a Restricted Payment that is permitted by the covenant entitled
"Restricted Payments."
For the purposes of clause (g), notes received in exchange for the transfer of
accounts receivable and related assets will be deemed cash if the Receivables
Subsidiary or other payor is required to repay said notes as soon as practicable
from available cash collections less amounts required to be established as
reserves pursuant to contractual agreements with entities that are not
Affiliates of us entered into as part of a Qualified Receivables Transaction.
"Boise Agreement" means that certain agreement dated November 23, 1992,
among Boise Cascade Corporation, American Tissue Mills of Oregon, Inc. and
American Tissue Corporation, as amended on January 1, 1999 and as same may be
further amended, modified, extended, renewed, amended and restated or
supplemented from time to time.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
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(2) in the case of an association, limited liability company or other
business entity, any and all shares, membership interests or other
interests, participations, rights or other equivalents, however
designated, of corporate stock;
(3) in the case of a partnership, partnership interests (whether general
or limited); and
(4) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) securities issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is
pledged in support thereof) having maturities not more than 12 months
from the date of acquisition;
(2) U.S. dollar denominated (or foreign currency fully hedged) (a) time
deposits, money-market deposits or accounts, certificates of deposit,
Eurodollar time deposits or Eurodollar certificates of deposit and
bankers' acceptance of (i) any domestic commercial bank of recognized
standing having capital and surplus in excess of $500.0 million or
(ii) any bank whose short-term commercial paper rating from S&P is at
least A-1 or the equivalent thereof or from Moody's is at least P-1 or
the equivalent thereof (any such bank being an "Approved Lender"), in
each case with maturities of not more than 12 months from the date of
acquisition, and (b) overnight bank deposits and federal funds
transactions with a bank meeting the qualifications specified in
clauses (a)(i)or (a)(ii)above;
(3) commercial paper and variable or fixed rate notes issued by any
Approved Lender (or by the parent company thereof) or any variable
rate notes issued by, or guaranteed by, any domestic corporation rated
A-2 (or the equivalent thereof) or better by S&P or P-2 (or the
equivalent thereof) or better by Moody's and maturing within 12 months
of the date of acquisition;
(4) repurchase agreements with a term of not more than 60 days with a bank
or trust company or recognized securities dealer having capital and
surplus in excess of $500.0 million for underlying securities of the
types described in subparagraphs (1), (2), or (3) above, in which the
Company will have a perfected first priority security interest
(subject to no other Liens) and having, on the date of purchase
thereof, a fair market value of at least 100% of the amount of
repurchase obligations;
(5) investments in securities with maturities of 12 months or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof; and
(6) interests in money market mutual funds which invest solely in assets
or securities of the types described in subparagraphs (1) through (5)
hereof, inclusive.
"Change of Control" means such time as:
(1) a "person" or "group" (within the meaning of Section 13(d) of the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after
the passage of time, a "Group"), other than any of the Permitted
Holders, has become, directly or indirectly, the
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"beneficial owner," of 35% or more of the voting power of our voting
Capital Stock and the Permitted Holders beneficially own, directly or
indirectly, a lesser percentage of the voting power of our voting
Capital Stock than the percentage beneficially owned by such person or
Group; or
(2) the sale, lease or transfer of all or substantially all of the assets
of American Tissue and our subsidiaries to any person or Group (other
than a subsidiary guarantor of ours or any of the Permitted Holders);
or
(3) during any period of two consecutive calendar years, individuals who
at the beginning of such period constituted our board of directors
(together with any new directors whose election by our board of
directors or whose nomination for election by our stockholders was
approved by a vote of a majority of the directors then still in office
who either were directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease
for any reason (other than as a result of death) to constitute a
majority of our directors, as the case may be, then in office.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Collateral Account" means the collateral account established pursuant to
the indenture relating to the exchange notes.
"Collateral" means collectively, all of the property and assets (including,
without limitation, Primary Collateral, Boise Collateral and Secondary
Collateral) that are from time to time subject to the lien of the collateral
documents, including the liens, if any, required to be granted pursuant to the
Indenture.
"Consolidated EBITDA" means, with respect to us and our subsidiaries for
any period, the sum of, without duplication:
(1) the Consolidated Net Income for such period; plus
(2) the Fixed Charges for such period; plus
(3) provision for consolidated taxes based on income or profits for such
period (to the extent such income or profits were included in
computing Consolidated Net Income for such period); plus
(4) consolidated depreciation, amortization and other non-cash charges of
ours and our subsidiaries required to be reflected as expenses on our
books and records, minus
(5) cash payments with respect to any non-recurring, non-cash charges
previously added back pursuant to clause (4); and
(6) excluding the impact of foreign currency translations.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and other non-cash charges of,
a subsidiary of a person will be added to Consolidated Net Income to compute
Consolidated EBITDA only to the extent (and in the same proportion) that the Net
Income of such subsidiary was included in calculating the Consolidated Net
Income of such person and only if a corresponding amount would be permitted at
the date of determination to be dividended or distributed, directly or
indirectly, to us by such subsidiary without prior approval pursuant to the
terms of
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its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that subsidiary or
its stockholders.
"Consolidated Net Income" means, with respect to any person for any period,
the aggregate of the Net Income of such person and its subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that:
(1) the Net Income (but not loss) of any person that is not a subsidiary
or that is accounted for by the equity method of accounting will be
included only to the extent of the amount of dividends or
distributions paid in cash to the referent person or a wholly owned
subsidiary thereof that is a subsidiary guarantor;
(2) the Net Income of any subsidiary will be excluded to the extent that
the declaration or payment of dividends or similar distributions by
that subsidiary of that Net Income is not at the date of determination
permitted without any prior governmental approval or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that subsidiary or its stockholders;
(3) the Net Income of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will
be excluded;
(4) the cumulative effect of a change in accounting principles will be
excluded; and
(5) all other extraordinary gains and extraordinary losses will be
excluded.
"Consolidated Net Worth" means, with respect to any person as of any date,
the sum of:
(1) the consolidated equity of the common stockholders of such person and
its consolidated subsidiaries as of such date, plus
(2) the respective amounts reported on such person's balance sheet as of
such date with respect to any series of preferred stock (other than
Disqualified Stock) that by its terms is not entitled to the payment
of dividends unless such dividends may be declared and paid only out
of net earnings in respect of the year of such declaration and
payment, but only to the extent of any cash received by such Person
upon issuance of such preferred stock, less (x) all write-ups (other
than write-ups resulting from foreign currency translations and
write-ups of tangible assets of a going concern business made within
12 months after the acquisition of such business) subsequent to the
issue date of the old notes in the book value of any asset owned by
such Person or a consolidated subsidiary of such Person, (y) all
investments as of such date in unconsolidated subsidiaries of such
Person and in other Persons that are not subsidiaries (except, in each
case, Permitted Investments), and (z) all unamortized debt discount
and expense and unamortized deferred charges as of such date, all of
the foregoing determined in accordance with GAAP.
"Depositary" means, with respect to the exchange notes issuable or issued
in whole or in part in global form, the person specified in the indenture for
the exchange notes as the Depositary with respect to the Notes, until a
successor will have been appointed and become such Depositary pursuant to the
applicable provision of the indenture, and, thereafter, "Depositary" will mean
or include such successor.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures
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or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or redeemable at the option of the holder thereof, in whole or in
part, on or prior to 91 days after the final maturity date of the exchange
notes. Notwithstanding the preceding sentence, any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require us to repurchase such Capital Stock upon the occurrence of a change
of control or an asset sale shall not constitute Disqualified Stock if the terms
of such Capital Stock are not more favorable to the holders of such Capital
Stock than the covenants entitled "-- Change of Control" and "-- Asset Sales;"
provided that we may not repurchase or redeem any such Capital Stock pursuant to
such provisions unless such repurchase or redemption complies with the covenant
entitled "Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means an underwritten public offering pursuant to a
registration statement filed with the SEC in accordance with the Securities Act
of
(1) our Equity Interests (other than Disqualified Stock) or
(2) Equity Interests (other than Disqualified Stock) of our parent or
indirect parent corporation to the extent that the cash proceeds
therefrom are contributed to our equity capital or are used to
purchase our Equity Interests (other than Disqualified Stock).
"Existing Indebtedness" means the Indebtedness of ours and our subsidiaries
in existence on the issue date of the old notes, until such amounts are repaid.
"Existing Mortgage Collateral" means (1) the property owned or leased by
(i) Coram Realty LLC located at 466-468 Coram-Yaphank Road, Coram, NY, (ii)
Gilpin Realty Corporation located at 45 Gilpin Avenue, Hauppauge, NY, (iii)
Grand LLC located at Route 4 and Bells Lane, Waterford, NY, (iv) Engineers Road
LLC located at 135 Engineers Road, Hauppauge, NY and (v) Saratoga Realty LLC
located at 3 Duplainville Road, Saratoga Springs, NY, (2) the equipment located
at such property described in clause (1) which is encumbered by the Existing
Mortgage Loans, (3) certain documents and intangibles relating to the foregoing
and (4) any and all proceeds relating to the foregoing.
"Existing Mortgage Loans" means the documents or instruments, including any
related notes, guarantees, collateral documents and agreements executed in
connection therewith, and in each case as amended, modified, renewed, extended,
replaced, restated or refinanced from time to time which creates
(1) an obligation of ours or a subsidiary guarantor of ours and
(2) a security interest in any Existing Mortgage Collateral, in each case,
in favor of a lender under the Existing Mortgage Loans.
"Fixed Charges" means, with respect to any person for any period, the sum,
without duplication, of:
(1) the consolidated interest incurred by such person and its subsidiaries
for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges
incurred in respect of letters of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging
Obligations);
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(2) the consolidated interest incurred by such person and our subsidiaries
that was capitalized during such period;
(3) any interest expense on Indebtedness of another person that is
guaranteed by such person or one of our subsidiaries or secured by a
lien on assets of such person or one of our subsidiaries (whether or
not such guarantee or lien is called upon); and
(4) the product of (a) all cash dividend payments (and non-cash dividend
payments in the case of a person that is a subsidiary) on any series
of preferred stock of such person payable to a party other than to us
or a wholly owned subsidiary of ours, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus
the then current combined federal, state and local statutory tax rate
of such person, expressed as a decimal, on a consolidated basis and in
accordance with GAAP.
"Fixed Charge Coverage Ratio" means, for any period, the ratio of the
Consolidated EBITDA of American Tissue and our subsidiaries for such period to
the Fixed Charges of American Tissue and our subsidiaries for such period. In
the event that we or any of our subsidiaries incurs, assumes, guarantees or
redeems any Indebtedness or issues preferred stock subsequent to the
commencement of the four-quarter reference period for which the Fixed Charge
Coverage Ratio is being calculated but prior to the date on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio will be calculated,
giving pro forma effect to such incurrence, assumption, guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. For purposes of making the computation referred to above:
(1) acquisitions that have been made by us or any of our subsidiaries,
including through mergers or consolidations and including any related
financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation
Date will be deemed to have occurred on the first day of the
four-quarter reference period;
(2) the Consolidated EBITDA attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded, but only
to the extent that the obligations giving rise to such Fixed Charges
will not be obligations of the referent person or any of its
subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the issue date of the old notes.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Hedging Obligations" means, with respect to any person, the obligations of
such person under (1) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (2)
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other agreements or arrangements, in each case designed to protect such person
against fluctuations in interest rates, currency rates or the prices of
commodities actually at that time used in the ordinary course of business of
such person.
"Holdco" means Middle American Tissue Inc., a Delaware corporation, and the
direct parent of the Company.
"Holdco Notes" means the senior secured discount notes in an aggregate
principal amount of $20.0 million issued on the issue date of the old notes to
DLJ Merchant Banking Partners II, L.P. and certain of its affiliates.
"Indebtedness" means, with respect to any person, any indebtedness of such
person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or bankers' acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property (except any such balance that constitutes an
accrued expense or trade payable) or representing any Hedging Obligations if and
to the extent any of the foregoing indebtedness (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of
such person prepared in accordance with GAAP, as well as all indebtedness of
others secured by a lien on any asset of such person (whether or not such
indebtedness is assumed by such person) and, to the extent not otherwise
included, the guarantee by such person of any indebtedness of any other person.
"Independent Appraiser" means a person who in the course of its business
appraises property and
(1) where real property is involved, who is a member in good standing of
the American Institute of Real Estate Appraisers, recognized and
licensed to do business in the jurisdiction where the applicable real
property is situated,
(2) who does not have a direct or indirect financial interest in the
Company and
(3) who, in the judgment of our board of directors, is otherwise
independent and qualified to perform the tasks for which it is
engaged.
"Intellectual Property Collateral" means all intellectual property owned by
us or any of our subsidiary guarantors, including, without limitations, all
trademarks, services marks, patents, copyrights, trade secrets and other
proprietary information.
"Intercreditor Agreements" means the Existing Lien Intercreditor Agreement
and the Boise Intercreditor Agreement.
"Investments" means, with respect to any person, all investments by such
person in other persons (including Affiliates) in the form of direct or indirect
loans (including guarantees of Indebtedness or other obligations), advances
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business) or capital contributions, purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or other
securities and all other items that are or would be classified as investments on
a balance sheet prepared in accordance with GAAP.
"Moody's" means Moody's Investor Services.
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"Net Income" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for taxes
on such gain (but not loss), realized in connection with
(a)any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions) or
(b)the disposition of any securities by such person or any of our
subsidiaries or the extinguishment of any Indebtedness of such person
or any of our subsidiaries; and
(2) any extraordinary or non-recurring gain (but not loss), together with
any related provision for taxes on such extraordinary or non-recurring
gain (but not loss).
"Net Insurance Proceeds" means collectively
(1) all insurance proceeds (excluding liability insurance proceeds payable
to the trustee for the exchange notes for any loss, liability or
expense incurred by it) actually received by the trustee or us or any
of our subsidiaries as a result of damage to, or the loss or
destruction of, all or any portion of the collateral, less collection
costs, including fees and expenses of attorneys and insurance
adjusters paid or incurred by us or any of our subsidiaries, and
(2) all proceeds, awards or payments for any collateral which is taken by
eminent domain, expropriation or similar governmental actions or sold
pursuant to the exercise by the United States of America or any state,
municipality, province or other governmental authority of any right
which it may have to purchase, or to designate a purchaser or to order
a sale of, all or any part of the collateral, in each case less
collection costs, including fees and expenses of attorneys paid or
incurred by us or any of our subsidiaries.
"Net Proceeds" means the aggregate cash proceeds received by us or any of
our subsidiaries in respect of any Asset Sale (including, without limitation,
any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees and expenses, and sales and brokerage commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable by us or
any of our subsidiaries as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), amounts
required to be applied to the repayment of Indebtedness (other than the exchange
notes or the subsidiary guarantees thereof) secured by a lien on the asset or
assets that were the subject of such Asset Sale and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither we nor any of our subsidiaries
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable (as a guarantor or otherwise),
or
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(c) constitutes the lender; and
(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 ours or any of our
subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated
maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of ours or of any of our
subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Parent" means Super American Tissue Inc., a Delaware corporation, our
indirect parent and the direct parent of Holdco.
"Permitted Collateral Liens" means the liens expressly permitted by the
applicable Collateral Documents.
"Permitted Holders" means (x) Nourollah Elghanayan, Mehdi Gabayzadeh and
their respective spouses, lineal descendants and adopted children and spouses of
their respective lineal descendants and adopted children, siblings and lineal
descendants of such siblings and spouses of such persons, any foundation
controlled by any of the foregoing persons, any trusts for the benefit of any of
the foregoing persons, (y) DLJ Merchant Banking Partners II, L.P. and (z) any
Affiliates of the foregoing persons.
"Permitted Investments" means:
(1) any Investments in us or in a wholly owned subsidiary of ours that is
a subsidiary guarantor and that is engaged in the same or a similar,
complementary, ancillary or related line of business as us and our
subsidiaries were engaged in on the issue date of the old notes and
reasonable extensions or expansions thereof;
(2) any Investment by us or a wholly owned subsidiary of ours in a
Receivables Subsidiary or any Investment by a Receivables Subsidiary
in any other person in connection with a Qualified Receivables
Transaction; provided, that the foregoing Investment is in the form of
a note that the Receivables Subsidiary or other person is required to
repay as soon as practicable from available cash collections less
amounts required to be established as reserves pursuant to contractual
agreements with entities that are not our Affiliates entered into as
part of a Qualified Receivables Transaction;
(3) any Investments in cash and Cash Equivalents;
(4) Investments by us or any of our subsidiaries in a person if as a
result of such Investment (a)such person becomes a wholly owned
subsidiary of ours that is engaged in the same or a similar line of
business as we and our subsidiaries were engaged in on the issue date
of the old notes and reasonable extensions or expansions thereof 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, us or a wholly owned subsidiary of ours that is a
subsidiary guarantor and that is engaged in the same or a similar,
complementary, ancillary or related line of business as we and
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our subsidiaries were engaged in on the issue date of the old notes
and reasonable extensions or expansions thereof;
(5) 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 entitled "Asset Sales;"
(6) Investments outstanding as of the issue date of the old notes;
(7) Investments which constitute Existing Indebtedness of ours or of any
of our subsidiaries;
(8) any payments made in connection with the acquisition of the
Berlin-Gorham Mills pursuant to the related asset purchase agreement;
(9) Investments, the payment for which consists exclusively of our Equity
Interests (other than Disqualified Stock);
(10) loans or advances to officers and employees of ours or any of our
subsidiaries in an aggregate amount not exceeding $1.5 million at any
one time outstanding;
(11) Investments in the form of intercompany Indebtedness to the extent
permitted under the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock;"
(12) Hedging Obligations;
(13) Investments received in connection with the bankruptcy or
reorganization of suppliers and customers and in settlement of
delinquent obligations of, and other disputes with, suppliers and
customers, in each case arising in the ordinary course of business;
and
(14) other Investments in any person (other than an Affiliate of ours or an
Affiliate of any of our subsidiaries) that do not exceed $10.0 million
at any time outstanding.
"Permitted Liens" means:
(1) liens securing obligations under the indenture, the exchange notes,
the subsidiary guarantees thereof and the Collateral Documents;
(2) liens securing the obligations under the Boise Agreement, the Existing
Mortgage Loans and the Revolving Credit Facility in an aggregate
principal amount at any time outstanding not to exceed applicable
amounts permitted under the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(3) liens in favor of us or any subsidiary guarantor of ours;
(4) liens on property of a person existing at the time such person is
merged into or consolidated with us or any of our subsidiaries in
accordance with the provisions of the indenture; provided that such
liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the
person merged into or consolidated with us;
(5) liens on property existing at the time of acquisition thereof by us or
any of our subsidiaries; provided that such liens were in existence
prior to the contemplation of such acquisition;
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(6) liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(7) liens existing on the issue date of the old notes;
(8) liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted;
provided that any reserve or other appropriate provision as will be
required in conformity with GAAP will have been made therefor;
(9) liens imposed by law or arising by operation of law, including
carriers', warehousemen's, mechanics', materialmen's, vendors',
repairmen's, or other similar liens arising or incurred in the
ordinary course of business;
(10) liens of landlords or of mortgagees of landlords arising by operation
of law; provided that the rental payments secured thereby are not yet
due and payable;
(11) liens incurred in the ordinary course of our business or the business
of any of our subsidiaries with respect to obligations that do not
exceed $5.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the
value of the property or materially impair the use thereof in the
operation of business by us or such subsidiary;
(12) liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and
other types of social security or public utility obligations;
(13) Purchase Money Liens (including extensions and renewals thereof);
(14) liens securing reimbursement obligations with respect to letters of
credit which encumber only documents and other property relating to
such letters of credit and the products and proceeds thereof;
(15) judgment and attachment liens not giving rise to an event of default
under the indenture;
(16) liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements;
(17) liens arising out of consignment or similar arrangements for the sale
of goods;
(18) any interest or title of a lessor in property subject to any Capital
Lease Obligation or operating lease;
(19) liens arising from filing Uniform Commercial Code financing statements
regarding leases;
(20) liens securing Acquired Indebtedness (and any Permitted Refinancing
Indebtedness which refinances such Acquired Indebtedness) incurred in
accordance with the covenant described under "-- Certain Covenants --
Incurrence of Indebtedness and Issuance of Preferred Stock;" provided
that (a) such liens secured the Acquired Indebtedness at the time of
and prior to the incurrence of such Acquired Indebtedness by us or any
of our subsidiaries and were not granted
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in connection with, or in anticipation of the incurrence of such
Acquired Indebtedness by us or such subsidiary and (b) such liens do
not extend to or cover any property or assets of ours or of any of our
subsidiaries, other than the property or assets that secured the
Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of ours or of such subsidiary;
(21) liens on assets of a Receivables Subsidiary incurred in connection
with a Qualified Receivables Transaction;
(22) zoning restrictions, easements, licenses, covenants, reservations,
restrictions on the use of real property and defects, irregularities
and deficiencies in title to real property that do not, individually
or in the aggregate, materially affect our ability or the ability of
any of our subsidiaries to conduct its business and are incurred in
the ordinary course of business;
(23) liens securing our obligations under Hedging Obligations permitted to
be incurred under the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock" or any collateral for the
Indebtedness to which such Hedging Obligations relate;
(24) liens upon specific items of inventory or other goods and proceeds of
any person securing such person's obligations in respect of bankers'
acceptance issued or credited for the account of such person to
facilitate the purchase, shipment or storage of such inventory or
other goods;
(25) leases or subleases granted to others that do not materially interfere
with the ordinary course of business of American Tissue and our
subsidiaries;
(26) liens encumbering property or other assets under construction arising
from progress or partial payments by a customer or us or any of our
subsidiaries relating to such property or other assets;
(27) liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the
importation of goods; and
(28) liens securing other Indebtedness not exceeding $10.0 million at any
one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of ours or any
of our subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund, Indebtedness of
ours or any of our subsidiaries incurred pursuant to the Fixed Charge Coverage
Ratio test in the first paragraph of, or pursuant to clause (2) or (3) of the
second paragraph of, the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock;" provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal
amount (or accreted value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus
the amount of reasonable expenses incurred in connection therewith);
(2) such Permitted Refinancing Indebtedness has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to
Maturity of the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the
exchange notes, such Permitted Refinancing
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Indebtedness has a final maturity date later than the final maturity
date of, and is subordinated in right of payment to, the exchange
notes on terms at least as favorable to the Holders of the exchange
notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased
or refunded; and
(4) such Indebtedness is incurred either by us or by any subsidiary of our
that is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Permitted Tax Payments" means, for so long as we remain a "qualified
Subchapter S subsidiary" (as defined in Section 1361(b)(3)(B) of the Code),
distributions to Holdco to reimburse the shareholders of Holdco:
(1) for tax liabilities, in an amount (not to exceed $2.0 million) equal
to the product of (i) the previously unpaid interest on the Related
Party Debt that will become taxable to the current holder of such debt
on the issue date of the old notes as a result of the assumption of or
transfer of such debt by or to Parent on the issue date of the old
notes, (ii) the percentage of Parent's stock not owned on the issue
date of the old notes by the current holder of the Related Party Debt,
his spouse or a grantor trust of which either of them is grantor (a
"Related Trust") and (iii) the maximum combined individual federal,
state and local income tax rates in effect on the issue date of the
old notes;
(2) for tax liabilities in respect of each of our taxable years (or
portion of a taxable year) beginning on or after the issue date of the
old notes, in an amount equal to (i) (A) the amount of original issue
discount on the Related Party Debt accrued during such year minus (B)
the product of (I) the percentage of Parent's stock owned during such
time by the current holder of the Related Party Debt, his spouse or a
Related Trust and (II) the amount of original issue discount specified
in clause (A), plus the amount of original issue discount incurred
with respect to the Holdco Notes for such year (the "Annual
Intermediate OID"), plus our taxable loss, if any for such year, minus
our taxable income (to the extent such income does not exceed the sum
of the amount of original issue discount described in clause (A) and
the Annual Intermediate OID for such year), if any, for such year,
multiplied by (ii) the maximum combined individual federal, state, and
local income tax rate for such year; and
(3) for tax liabilities, in an amount equal to the product of (i) (A) the
excess, if any, of
(I) our cumulative net taxable income since April 1, 1999 over
(II) the cumulative interest expense incurred by Holdco with respect
to the Holdco Notes, plus the cumulative interest expense
incurred by Parent with respect to the Related Party Debt since
April 1, 1999 and a percentage of any such unpaid interest
expense incurred prior to April 1, 1999 equal to the percentage
of Parent's stock not owned on the issue date of the old notes by
the current holder of the Related Party Debt, his spouse or a
Related Trust, increased by (B) the cumulative amounts included
in clause (2) (i) (B) that have actually reduced a distribution
under clause (2) and
(ii) the maximum combined individual federal, state and local
income tax rates in effect from time to time (excluding any
state or locality that treats us, Holdco or Parent as a C
corporation), minus
(iii) all prior distributions made under this clause (3) and any
tax payments in respect of any taxable period (or portion
thereof) beginning on or after April 1, 1999 that
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were made prior to the issue date of the old notes by us or
our Parent to or on behalf of any of their shareholders.
If we become taxable as a "C" corporation (as defined in Section 1361(a)(2)
of the Code) and becomes a member (for income tax purposes) of an affiliated,
consolidated, combined or unitary group of which Parent is the common parent (a
"Group Member"), "Permitted Tax Payments" shall mean distributions to Parent for
income tax liabilities imposed on us as a Group Member, in an amount equal to
(a) our cumulative net taxable income from the date on which we
becomes a C corporation and a Group Member, multiplied by the maximum
marginal federal, state and/or local corporate income tax rates in effect
from time to time (excluding any jurisdiction that does not treat us as a
Group Member), minus
(b) all prior distributions made pursuant to this sentence and any
such taxes paid directly by us.
Any combined federal, state and/or local tax rate referred to in this
definition shall be determined taking into account the deductibility of state
and local income taxes for federal income tax purposes.
Notwithstanding the foregoing, no Permitted Tax Payment shall be permitted
if
(x) a default or event of default under the indenture exists or would
result therefrom or
(y) the obligations with respect to any such Permitted Tax Payments are
not subordinated in right of payment to our obligations under the
exchange notes.
"Purchase Money Lien" means a lien granted on an asset or property to
secure a Purchase Money Obligation permitted to be incurred under the Indenture
and incurred solely to finance the purchase, or the cost of construction or
improvement, of such asset or property; provided, however, that such lien
encumbers only such asset or property and is granted within 90 days of such
acquisition.
"Purchase Money Obligations" of any person means any obligations of such
person to any seller or any other person incurred or assumed to finance the
purchase, or the cost of construction or improvement, of real or personal
property to be used in the business of such person or any of our subsidiaries in
an amount that is not more than 100% of the cost, or fair market value, as
appropriate, of such property, and incurred within 90 days after the date of
such acquisition (excluding accounts payable to trade creditors incurred in the
ordinary course of business).
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by us or any of our subsidiaries pursuant
to which we or any of our subsidiaries may sell, convey or otherwise transfer to
(i) a Receivables Subsidiary (in the case of a transfer by us or any of our
subsidiaries) and (ii) any other person (in the case of a transfer by a
Receivables Subsidiary), or may grant a security interest in, any accounts
receivable (whether now existing or arising in the future) of ours or any of our
subsidiaries, 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, proceeds of such
accounts receivable and other assets which are customarily transferred or in
respect of which security interests are customarily granted in connection with
asset securitization transactions involving accounts receivable.
"Receivables Subsidiary" means a wholly owned subsidiary of ours which
engages in no activities other than in connection with the financing of accounts
receivable and which is designated by our board of directors (as provided below)
as a Receivables Subsidiary (1) no portion of the Indebtedness
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or any other Obligations (contingent or otherwise) of which (a) is guaranteed by
us or any of our subsidiaries (excluding guarantees of Obligations (other than
the principal of, and interest on, Indebtedness) pursuant to representations,
warranties, covenants and indemnities entered into in the ordinary course of
business in connection with a Qualified Receivables Transaction), (b) is
recourse to or obligates us or any of our subsidiaries in any way other than
pursuant to representations, warranties, covenants and indemnities entered into
in the ordinary course of business in connection with a Qualified Receivables
Transaction or (c) subjects any property or asset of ours or any of our
subsidiaries, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, other than pursuant to representations, warranties,
covenants and indemnities entered into in the ordinary course of business in
connection with a Qualified Receivables Transaction, (2) with which neither we
nor any of our subsidiaries has any material contract, agreement, arrangement or
understanding other than on terms no less favorable to us or such subsidiary
than those that might be obtained at the time from persons who are not our
Affiliates, other than fees payable in the ordinary course of business in
connection with servicing accounts receivable and (3) with which neither we nor
any of our subsidiaries has any obligation to maintain or preserve such
subsidiary's financial condition or cause such subsidiary to achieve certain
levels of operating results. Any such designation by our board of directors will
be evidenced to the trustee by filing with the trustee a certified copy of the
resolution of our board of directors giving effect to such designation and an
officers' certificate certifying that such designation complied with the
foregoing conditions.
"Related Party Debt" means our debt that is assumed by or otherwise
transferred to our direct parent on the issue date of the old notes in an
aggregate amount not in excess of $33.0 million and accruing interest at not
more than 10% per annum.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Revolving Credit Facility" means the credit agreement among us, certain of
our subsidiary guarantors, certain lenders and LaSalle Bank National
Association, as lender and agent for the other lenders, providing for working
capital and other financing, as the same may be amended, amended and restated,
supplemented or otherwise modified, including any refinancing, refunding,
replacement or extension thereof by the same or any other lender or group of
lenders.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Rule 1-02 of Regulation S-X, promulgated pursuant to
the Act, as such Regulation is in effect on the date hereof.
"S&P" means Standard & Poor's Financial Information Services.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
Sections 77aaa- 77bbbb) as in effect on the date on which the Indenture is
qualified under the TIA.
"Trust Monies" means, subject to the Intercreditor Agreements, all cash and
Cash Equivalents received by the Trustee:
(1) upon the release of collateral from the Lien of the Indenture or the
collateral documents, including all Available Amounts and all moneys
received in respect of the principal of all purchase money,
governmental and other obligations;
(2) as Net Insurance Proceeds;
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(3) pursuant to the collateral documents;
(4) as proceeds of any sale or other disposition of all or any part of the
collateral by or on behalf of the trustee or any collection, recovery,
receipt, appropriation or other realization of or from all or any part
of the collateral pursuant to the indenture or any of the collateral
documents or otherwise; or
(5) for application as provided in the relevant provisions of the
indenture or any collateral document for which disposition is not
otherwise specifically provided for in the indenture or in any
collateral document;
provided, however, that Trust Monies shall in no event include any property
deposited with the Trustee for any redemption, legal defeasance or covenant
defeasance of exchange notes, for the satisfaction and discharge of the
indenture or to pay the purchase price of exchange notes pursuant to a Change of
Control Offer or Asset Sale Offer.
"Unrestricted Subsidiary" means any of our subsidiaries that is designated
by our board of directors as an Unrestricted Subsidiary pursuant to a board
resolution; but only to the extent that such subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with us or any of our other subsidiaries unless the terms of any such
agreement, contract, arrangement or understanding are no less
favorable to us or such subsidiary than those that might be obtained
at the time from persons who are not our Affiliates;
(3) is a person with respect to which neither we nor any of our
subsidiaries has any direct or indirect obligation (x) to subscribe
for additional Equity Interests or (y) to maintain or preserve such
person's financial condition or to cause such person to achieve any
specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of ours or any of our subsidiaries.
Any such designation by our board of directors will be evidenced to the trustee
by filing with the trustee a certified copy of the board resolution giving
effect to such designation and an officers' certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant entitled "Restricted Payments" hereof. If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it will thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of such subsidiary
will be deemed to be incurred by a subsidiary of ours as of such date (and, if
such Indebtedness is not permitted to be incurred as of such date under the
covenant entitled "--Incurrence of Indebtedness and Issuance of Preferred Stock"
hereof, we will be in default of such covenant). Our board of directors may at
any time designate any Unrestricted Subsidiary to be a subsidiary; provided that
such designation will be deemed to be an incurrence of Indebtedness by a
subsidiary of ours of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation will only be permitted if (a) such Indebtedness
is permitted under the covenant entitled "-- Incurrence of Indebtedness and
Issuance of Preferred Stock," and (b) no default or event of default under the
indenture would be in existence following such designation.
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"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of each
then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity,
in respect thereof, by (b) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making
of such payment, by
(2) the then outstanding principal amount of such Indebtedness.
MATERIAL UNITED STATES INCOME TAX CONSEQUENCES
General
The following is a summary of the material U.S. federal income tax
consequences relevant to U.S. Holders, as defined below, of the acquisition,
ownership and disposition of the exchange notes acquired in and under the terms
of our exchange offer by holders of old notes that acquired their old notes on
original issuance and for the original offering price, but does not purport to
be complete. It applies only if you are a holder that acquires exchange notes
under our exchange offer. The discussion is based on current provisions of the
Internal Revenue Code of 1986, applicable U.S. Treasury regulations, judicial
authority and administrative rulings and pronouncements of the Internal Revenue
Service, all as in effect as of the date of this prospectus. We cannot assure
that the IRS will not take a contrary view, and we have not sought, and will not
seek, a ruling from the IRS. Legislative, judicial, or administrative changes or
interpretations may be forthcoming that could alter or modify the following
statements and conclusions. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to holders of the exchange
notes.
We assume in our discussion below that the exchange notes are held as
capital assets. This discussion is for general information only, and does not
address all of the tax consequences that may be relevant to particular holders
of the exchange notes in light of their specific circumstances. Moreover, this
discussion does not address U.S. federal tax laws applicable to holders that may
be subject to special tax rules, including, without limitation:
o banks and other financial institutions;
o real estate investment trusts;
o regulated investment companies;
o insurance companies;
o tax-exempt organizations;
o custodians, nominees or similar intermediaries holding the exchange
notes for others;
o persons who own exchange notes through partnerships, S corporations,
limited liability companies or other pass through entities;
o dealers in securities;
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o persons that hold a exchange note as part of a "straddle," or as part
of a "hedging," "conversion" or "integrated" transaction for U.S.
federal income tax purposes;
o persons whose functional currency is not the U.S. dollar;
o persons subject to the alternative minimum tax;
o Non-U.S. Holders that are entitled to claim the benefits of tax
treaties to which the United States is a party; or
o Non-U.S. Holders that are engaged in a U.S. trade or business.
Finally, this discussion does not consider the effect of the tax laws of any
foreign, state, local or other tax laws or estate or gift tax considerations
that may be applicable to a particular holder.
When we use the term "U.S. Holder," we mean an initial beneficial owner of
exchange notes who, for U.S. federal income tax purposes:
o is an individual who is a citizen or resident of the United States as
determined under U.S. federal income tax laws;
o is a corporation organized or formed in or under the laws of the
United States or any political subdivision thereof;
o is an estate whose income is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
o is a trust if (1) a U.S. court is able to exercise primary supervision
over the administration of the trust and (2) one or more U.S. trustees
or fiduciaries have the authority to control all substantial decisions
of the trust.
We advise you to consult with your own tax advisors regarding the tax
consequences to you of the acquisition, ownership and sale of the exchange
notes, including the federal, state, local, foreign and other tax consequences
of such acquisition, ownership and sale and of potential changes in applicable
tax laws.
Interest and Original Issue Discount
Each old note was issued with original issue discount ("OID"), and,
accordingly, each exchange note will also have OID. You are required to include
in income, in each year, regardless of whether you are a cash or accrual basis
taxpayer, in advance of the receipt of cash payments on such exchange notes,
that portion of the OID, computed on a constant yield-to-maturity basis,
attributable to each day during such year on which you held the exchange notes.
The amount of OID with respect to each exchange note is equal to the excess
of (1) its "stated redemption price at maturity" over (2) its "issue price."
Under OID Regulations, the "issue price" of the exchange notes is the initial
offering price (not including any bond house, broker or similar person or
organization acting in the capacity of an underwriter, placement agent or
wholesaler) at which a substantial amount of the old notes were sold. The
"stated redemption price at maturity" of each exchange note is the sum of all
cash payments, whether denominated as principal or interest, provided by the
exchange note, other than payments of "qualified stated interest". Qualified
stated interest is stated
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interest that is unconditionally payable at least annually at a single fixed
rate that appropriately takes into account the length of the interval between
payments. Accordingly, the 12 1/2% current interest payable on an exchange note
will constitute qualified stated interest. All other amounts payable on the
exchange notes will be included in the exchange note's stated redemption price
at maturity.
As a U.S. Holder of a debt instrument issued with OID, you will be required
to include in gross income (generally as ordinary interest income) for U.S.
federal income tax purposes an amount equal to the sum of the "daily portions"
of such OID for all days during the taxable year on which you hold the debt
instrument. The daily portions of OID are determined on a constant
yield-to-maturity basis by allocating to each day on which you hold the debt
instrument a pro rata portion of the OID on such debt instrument which is
attributable to the "accrual period" (generally the period between interest
payment or compounding dates) in which such day is included. The amount of the
OID attributable to each "accrual period" is
the product of:
(1) the "adjusted issue price" at the beginning of such accrual period and
(2) the "yield to maturity" of the debt instrument (stated in a manner
appropriately taking into account the length of the accrual period),
less any qualified stated interest attributable to that accrual period.
The "adjusted issue price" of an exchange note at the beginning of an
accrual period generally will be equal to the issue price of the old note you
exchanged for the exchange note plus the aggregate amount of OID that accrued in
all prior accrual periods, less any cash payments that have been made on the
exchange note other than payments of qualified stated interest.
Qualified stated interest paid on an exchange note generally will be
taxable to you as ordinary income at the time it accrues or is received, in
accordance with your method of accounting for federal income tax purposes. Other
payments on the exchange notes are not separately included in your income as
interest, but rather are treated first as payments of previously accrued and
unpaid OID and then as payments of principal.
Disposition of the Exchange Notes.
You must recognize taxable gain or loss on the sale, exchange, redemption,
retirement or other taxable disposition of an exchange note. The amount of your
gain or loss generally equals the amount you receive for the exchange note (less
any amounts attributable to accrued and unpaid qualified stated interest) minus
your adjusted tax basis in the exchange notes. Your adjusted tax basis in an
exchange note generally will equal the cost to you of the old notes you
exchanged for the exchange notes, increased by the amount of OID previously
included in your income with respect to such old notes and such exchange notes,
and decreased by the amount of any principal or interest payments previously
received by you on the exchange notes (other than payments of qualified stated
interest).
Your gain or loss will generally be a long-term capital gain or loss if you
have held the old note and the exchange note you received in the exchange offer
for more than one year. Otherwise, it will be short-term capital gain or loss.
The deductibility of capital losses is subject to limitation.
-143-
<PAGE>
Information Reporting and Backup Withholding.
We will report to U.S. Holders of the exchange notes and the IRS the amount
of any "reportable payments" and any amount withheld with respect to the
exchange notes during the calendar year.
A noncorporate U.S. Holder may, under certain circumstances, be subject to
"backup withholding" unless such U.S. Holder provides to us a correct taxpayer
identification number and otherwise complies with applicable requirements of the
backup withholding rules. In addition, a U.S. Holder will be subject to backup
withholding if we have been notified by the IRS that backup withholding is
required for such U.S. Holder due to a failure to properly report interest and
dividend payments. The backup withholding rate is 31% of "reportable payments,"
which include interest and, under certain circumstances, principal payments.
PLAN OF DISTRIBUTION
Each holder desiring to participate in the exchange offer will be required
to represent, among other things, that:
(1) it is not an "affiliate" (as defined in Rule 405 of the Securities
Act) of American Tissue,
(2) it is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a
distribution of the exchange notes, and
(3) it is acquiring the exchange notes in the ordinary course of its
business.
A holder that cannot make such representation will not be able to
participate in the exchange offer, and may only sell its old notes under a
registration statement containing the selling securityholder information
required by Item 507 of Regulation S-K under the Securities Act or under an
exemption from the registration requirements of the Securities Act.
Each broker-dealer who holds old notes that were acquired for its own
account as a result of market-making activities or other trading activities,
other than old notes acquired directly from American Tissue, may exchange such
old notes under the exchange offer. However, such participating broker-dealer
may be deemed to be an "underwriter" within the meaning of the Securities Act
and must, therefore, deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of the exchange notes received by
the broker-dealer in the exchange offer. Such prospectus delivery requirement
may be satisfied by the delivery by such broker-dealer of this prospectus, as it
may be amended or supplemented from time to time.
Based upon interpretations by the staff of the Securities and Exchange
Commission, we believe that exchange notes issued under the exchange offer to
participating broker-dealers may be offered for resale, resold, and otherwise
transferred by a participating broker-dealer upon compliance with the prospectus
delivery requirements, but without compliance with the registration
requirements, of the Securities Act. We and our subsidiary guarantors have
agreed that for a period of not less than one year following the consummation of
the exchange offer, to make this prospectus, as amended or supplemented,
available to participating broker-dealers for use in connection with any such
resale. During such period of time, delivery of this prospectus, as it may be
amended or supplemented, will satisfy the prospectus delivery requirements of a
participating broker-dealer engaged in market making or other trading
activities. In addition, until ______________, all dealers effecting
transactions in the exchange notes may be required to deliver a prospectus.
-144-
<PAGE>
Based upon interpretations by the staff of the Securities and Exchange
Commission, we believe that exchange notes issued under the exchange offer may
be offered for resale, resold and otherwise transferred by a holder thereof,
other than a participating broker-dealer, without compliance with the
registration and prospectus delivery requirements of the Securities Act.
Neither we nor our subsidiary guarantors will receive any proceeds from any
sale of the 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:
o in the over-the-counter market;
o in negotiated transactions;
o through the writing of options on the exchange notes or a combination
of such methods of resale;
o at market prices prevailing at the time of resale;
o at prices related to such prevailing market prices; or
o 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 participating broker-dealer and/or the purchasers of
any such exchange notes. Any participating broker-dealer that resells exchange
notes that were received by it for its own account under the exchange offer and
any broker or dealer that participates in a distribution of such new notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of exchange notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that by
acknowledging that it will deliver, and by delivering, a prospectus, a
participating broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We and our subsidiary guarantors have agreed to pay all expenses incidental
to the exchange offer, other than commissions and concessions of any brokers or
dealers, and will indemnify holders of the exchange notes, including any
broker-dealers, against specified liabilities, including liabilities under the
Securities Act, as set forth in the registration rights agreement.
LEGAL MATTERS
Mandel Resnik & Kaiser P.C., New York, New York will issue an opinion for
us and our subsidiary guarantors with respect to the issuance of the exchange
notes offered hereby, including
(1) our existence and good standing under our state of incorporation,
(2) our authorization of the sale and issuance of the exchange notes and
(3) the enforceability of the exchange notes.
-145-
<PAGE>
EXPERTS
Our consolidated financial statements as of and for the fiscal years ended
September 30, 1998 and 1999 included in this prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as stated in their report
appearing herein, and are included herein in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
Our consolidated financial information as of and for the fiscal year ended
September 30, 1996 included in this prospectus have been audited by Holtz
Rubenstein & Co., LLP, independent public accountants, as stated in their
report, and is included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the financial
statements of the Berlin-Gorham Pulp and Paper Mill at December 27, 1998 and
December 28, 1997 and for each of the three years in the period ended December
27, 1998, as set forth in their report. We have included the financial
statements of the Berlin-Gorham Pulp and Paper Mill in this prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We and our subsidiary guarantors have filed with the Securities and
Exchange Commission a Registration Statement on Form S-4, the "Exchange Offer
Registration Statement," which term encompasses all amendments, exhibits,
annexes and schedules thereto, pursuant to the Securities Act of 1933, and the
rules and regulations promulgated thereunder, covering the exchange notes being
offered. This prospectus does not contain all the information set forth in the
Exchange Offer Registration Statement. For further information with respect to
American Tissue, our subsidiary guarantors and the exchange offer, reference is
made to the Exchange Offer Registration Statement. Statements made in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the exchange offer
registration statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Exchange Offer Registration Statement, including the exhibits thereto,
can be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Securities and
-146-
<PAGE>
Exchange Commission at Seven World Trade Center, Suite 1300, New York, New York
10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, the Securities and Exchange
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission. The address of such Web site is:
http://www.sec.gov.
As a result of the filing of the Exchange Offer Registration Statement, we
will become subject to the informational requirements of the Securities Exchange
Act of 1934, and in accordance therewith will be required to file periodic
reports and other information with the Securities and Exchange Commission. Our
obligation to file periodic reports and other information with the Securities
and Exchange Commission will be suspended if the exchange notes are held of
record by fewer than 300 holders as of the beginning of our fiscal year other
than the fiscal year in which the exchange offer registration statement is
declared effective.
We will, nevertheless, be required to continue to file reports with the
Securities and Exchange Commission if the exchange notes are listed on a
national securities exchange. In the event we cease to be subject to the
informational requirements of the Securities Exchange Act of 1934, we will be
required under the indenture relating to the exchange notes to continue to file
with the Securities and Exchange Commission the annual and quarterly reports,
information, documents or other reports, including, without limitation, reports
on Forms 10-K, 10-Q and 8-K, which would be required pursuant to the
informational requirements of the Securities Exchange Act of 1934.
Under the indenture, we will furnish the holders of exchange notes with
annual, quarterly and other reports after we file such reports with the
Securities and Exchange Commission.
Annual reports delivered to the trustee and the holders of exchange notes
will contain financial information that has been examined and reported upon,
with an opinion expressed by a firm of independent public accountants. We will
also furnish such other reports as may be required by law.
-147-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
American Tissue Inc.
<TABLE>
<S> <C>
Report of Independent Public Accountants ...................................... F-2
Consolidated Balance Sheets at September 30, 1999, September 30, 1998 ......... F-3
Consolidated Statements of Operations for the Years Ended September 30, 1999,
1998 and 1997 ................................................................. F-4
Consolidated Statements of Stockholder's Equity at September 30, 1999, 1998
and 1997 ...................................................................... F-5
Consolidated Statements of Cash Flows for the Years ended September 30, 1999,
1998 and 1997 ................................................................. F-6
Notes to Consolidated Financial Statements .................................... F-8
Berlin-Gorham Mills
Berlin-Gorham Mills Report of Independent Auditors ............................ F-27
Balance Sheets at December 27, 1998 and December 28, 1997 ..................... F-28
Statements of Operations for the 52 Weeks Ended December 27, 1998, December 28,
1997 and December 29, 1996 .................................................... F-29
Statements of Changes in Crown Vantage's Investment ........................... F-30
Statements of Cash Flows ...................................................... F-31
Notes to Financial Statements ................................................. F-32
Balance Sheet at June 27, 1999 (unaudited) and December 27, 1998 .............. F-42
Statements Of Operations for the 26 Weeks Ended June 27, 1999 and June 28,
1998 (unaudited) .............................................................. F-43
Statements of Cash Flows for the 26 Weeks Ended June 27, 1999 and June 28,
1998 (unaudited) .............................................................. F-44
Notes to Interim Financial Statements ......................................... F-45
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of American Tissue Inc.:
We have audited the accompanying consolidated balance sheets of American
Tissue Inc. (a Delaware corporation) and subsidiaries (the "Company") as of
September 30, 1999 and 1998, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the three years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Tissue Inc. and
subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Melville, New York
December 10, 1999
F-2
<PAGE>
AMERICAN TISSUE INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 1,806 $ 1,480
Accounts receivable, net of allowance for doubtful accounts of
$613 and $83, respectively .................................. 52,555 33,229
Inventories (Note 4) ......................................... 94,664 51,988
Equipment held for sale ...................................... 7,825 393
Prepaid expenses and other current assets .................... 3,866 2,872
-------- --------
Total current assets ................................... 160,716 89,962
PROPERTY, PLANT AND EQUIPMENT, net (Note 5) .................. 212,530 157,705
DUE FROM RELATED PARTIES (Note 11) ........................... 23,054 19,879
DEFERRED COSTS, net .......................................... 9,876 3,148
OTHER ASSETS ................................................. 155 125
-------- --------
$406,331 $270,819
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable (Note 7) ....................................... $ 50,054 $ 66,317
Current portion of long-term debt (Note 9) ................... 648 6,553
Current portion of capital lease and financing
obligations (Note 10) ........................................ 558 5,059
Accounts payable ............................................. 42,043 50,153
Accrued expenses ............................................. 21,507 10,628
-------- --------
Total current liabilities .............................. 114,810 138,710
DUE TO RELATED PARTIES (Note 11) ............................. -- 22,743
SENIOR SECURED NOTES PAYABLE (Note 8) ........................ 159,562 --
LONG-TERM DEBT (Note 9) ...................................... 21,815 51,280
CAPITAL LEASE AND FINANCING
OBLIGATIONS (Note 10) ........................................ 432 24,442
OTHER LONG TERM LIABILITIES .................................. 11,490 --
-------- --------
Total liabilities ...................................... 308,109 237,175
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDER'S EQUITY (Note 1):
Common stock, no par value; 200 shares authorized, 200
shares issued and outstanding ............................... 1,605 1,605
Additional paid-in capital ................................... 57,125 7,266
Retained earnings ............................................ 39,492 24,773
-------- --------
98,222 33,644
-------- --------
$406,331 $270,819
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
AMERICAN TISSUE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUES .................................. $ 284,340 $ 215,203 $ 198,384
COST OF SALES ............................. 213,465 172,617 152,286
--------- --------- ---------
Gross profit ...................... 70,875 42,586 46,098
--------- --------- ---------
OPERATING EXPENSES:
Selling ................................... 24,592 20,373 15,311
General and administrative ................ 10,342 9,015 11,642
--------- --------- ---------
34,934 29,388 26,953
--------- --------- ---------
Operating income .................. 35,941 13,198 19,145
--------- --------- ---------
INTEREST EXPENSE:
Interest forgiven by related party . 990 1,260 --
Other interest expense ............. 16,068 13,412 12,272
--------- --------- ---------
17,058 14,672 12,272
--------- --------- ---------
Net income (loss)
before extraordinary item ................ 18,883 (1,474) 6,873
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt
(Note 14) ................................. 4,164 -- --
--------- --------- ---------
NET INCOME (LOSS) ......................... $ 14,719 $ (1,474) $ 6,873
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
AMERICAN TISSUE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Common Stock
----------------------
Additional Retained
Shares Amount Paid-in Capital Earnings Total
-------- -------- --------------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 ......................... 200 $ 1,605 $ 6,006 $ 19,374 $ 26,985
Net income ............................................ -- -- -- 6,873 6,873
-------- -------- -------- -------- --------
Balance at September 30, 1997 ......................... 200 1,605 6,006 26,247 33,858
Net loss .............................................. -- -- -- (1,474) (1,474)
Interest forgiven (Note 11) ........................... -- -- 1,260 -- 1,260
-------- -------- -------- -------- --------
Balance at September 30, 1998 ......................... 200 1,605 7,266 24,773 33,644
Interest forgiven (Note 11) ........................... -- -- 990 -- 990
Capital contribution (Note 11) ........................ -- -- 24,450 -- 24,450
Transfer of related party debt (Note 11) .............. -- -- 24,419 -- 24,419
Net income ............................................ -- -- -- 14,719 14,719
-------- -------- -------- -------- --------
Balance at September 30, 1999 ......................... 200 $ 1,605 $ 57,125 $ 39,492 $ 98,222
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated statements.
F-5
<PAGE>
AMERICAN TISSUE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 14,719 $ (1,474) $ 6,873
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization .................................... 13,586 10,585 8,282
Non-cash portion of loss on early
extinguishment of debt ........................................ 1,314 -- --
Provision for bad debts .......................................... 915 560 1,120
Forgiveness of interest .......................................... 990 1,260 --
Changes in operating assets and liabilities:
Accounts receivable .............................................. (19,021) (4,323) 23,452
Inventories ...................................................... (24,781) (2) (21,995)
Equipment held for sale .......................................... (7,432) 1,575 310
Prepaid expenses and other current assets ........................ (994) 748 (1,644)
Other assets ..................................................... (29) 26 (138)
Accounts payable and accrued expenses ............................ (1,301) 8,082 5,625
--------- --------- ---------
Net cash (used in) provided by operating
activities ................................................ (22,034) 17,037 21,885
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Berlin-Gorham Mills ............................... (45,000) -- --
Capital expenditures ............................................. (20,168) (27,566) (29,172)
--------- --------- ---------
Net cash used in investing activities ........................ (65,168) (27,566) (29,172)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior secured notes ............................... 159,446 -- --
Capital contribution ............................................. 24,450 -- --
Net borrowings (payments)
on revolving lines of credit ..................................... (16,263) 16,944 5,462
Proceeds from notes payable ...................................... -- 3,195 8,487
Proceeds from long-term debt ..................................... 4,616 13,800 45,277
Proceeds from capital leases and financing obligations ........... 4,575 5,091 --
Principal payments on notes payable .............................. -- (1,102) (2,035)
Principal payments on long-term debt ............................. (36,986) (5,617) (3,535)
Principal payments upon
refinancing of mortgages ........................................ (3,000) (9,137) (25,016)
Principal payments on capital leases and
financing obligations ........................................... (37,088) (3,660) (20,201)
Increase in deferred costs ....................................... (9,503) (2,297) (1,114)
Advances and repayments to
related parties, net ......................................... (2,719) (6,078) 680
--------- --------- ---------
</TABLE>
F-6
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net cash provided by
financing activities ...................................... 87,528 11,139 8,005
--------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS ............................................................ 326 610 718
CASH AND CASH EQUIVALENTS, beginning
of period .............................................................. 1,480 870 152
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end
of period .............................................................. $ 1,806 $ 1,480 $ 870
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid .................................................... $ 16,068 $ 13,574 $ 10,672
--------- --------- ---------
Non-cash financing transactions relating to
capital lease obligations entered into ................................. $ 4,002 $ 10,453 $ 2,021
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
AMERICAN TISSUE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. DESCRIPTION OF BUSINESS:
American Tissue Inc. (the "Company"), a Delaware corporation, is a
wholly-owned subsidiary of Middle American Tissue Inc. ("MATI"). MATI is a
wholly-owned subsidiary of Super American Tissue Inc. ("SATI"). The Company was
formed in 1998 and is the parent of various affiliated entities that were
previously owned by, and were under the common management and control of, the
same stockholders. In October 1998, the stockholders of the affiliated entities
transferred their ownership interests in those entities to the Company in
exchange for 200 shares of our common stock. In July 1999, the Company's
stockholders transferred their ownership in the Company to SATI, its ultimate
parent, in exchange for stock of SATI. SATI subsequently formed MATI and
transferred its ownership in the Company to MATI.
The following describes the activities of our subsidiaries:
Paper Manufacturing and Converting Entities:
American Tissue Corporation ("ATC") Engaged in the manufacture and sale of
finished tissue products (see below).
American Tissue Mills of Oregon, Inc.
("ATM-Oregon") Owns a tissue machine in St. Helens,
Oregon that is used in the
manufacturing of jumbo tissue rolls
from virgin pulp. The tissue machine
is located in space leased from and
located within, a facility owned and
operated by Boise Cascade Corporation
(Note 13).
American Tissue Mills of New
Hampshire, Inc. Engaged in the manufacture of recycled
("ATM-New Hampshire") paper.
American Tissue Mills of New York, Inc.
("ATM-New York") Engaged in the manufacture of jumbo
tissue rolls from recycled paper.
American Tissue Mills of Neenah LLC
("ATM-Neenah) Engaged in the manufacture of jumbo
tissue rolls from virgin pulp and
recycled paper, jumbo tissue rolls and
manufacture of finished tissue
products.
American Tissue Mills of Wisconsin, Inc. Engaged in the manufacture of jumbo
("ATM-Wisconsin") tissue rolls from recycled paper. This
facility closed during fiscal 1998 and
is transferring all of its equipment
assets to American Tissue Mills of New
Hampshire, Inc. (Note 13).
F-8
<PAGE>
American Tissue Mills of Greenwich LLC Engaged in the manufacture of
("ATM-Greenwich") jumbo tissue rolls from virgin pulp
and recycled paper.
Pulp and Paper of America LLC ("PPA") Intermediate holding company for
subsidiaries engaged in pulp and paper
manufacture and the holding of
landfill, hydroelectric generation and
railway assets.
Pulp of America LLC Engaged in the manufacture of virgin
wood pulp.
Paper of America LLC Engaged in the manufacture of uncoated
freesheet paper products and jumbo
tissue rolls from virgin pulp.
Hydro of America LLC and subsidiary Owns and manages hydroelectric
generation facilities through its
subsidiary, American Tissue-New
Hampshire Electric, Inc.
Landfill of America LLC Owns and manages a solid waste
disposal site.
Railway of America LLC and subsidiary Owns short-haul railway through its
subsidiary, Berlin Mills Railway, Inc.
Real Estate Operations:
100 Realty Management LLC Serves to coordinate payments made to
the real estate companies listed below
by the operating companies listed
above and make payments on behalf of
the real estate companies to outside
vendors.
Engineers Road, LLC Owns and operates a facility located
at 135 Engineers Road, Hauppauge, New
York.
Coram Realty LLC Owns and operates a facility located
at 468 Mill Road, Coram, New York.
Gilpin Realty Corp. Owns and operates
a facility located at 45 Gilpin
Avenue, Hauppauge, New York.
Grand LLC Owns and operates a facility located
at 148 Hudson River Road, Waterford,
New York.
Saratoga Realty LLC Owns and operates a facility located
at 3 Duplainville Road, Saratoga
Springs, New York.
F-9
<PAGE>
Markwood LLC and subsidiary Markwood LLC is the parent company of
Fabricaciones Metalicas Mexicanas,
S.A. ("FMMSA"). FMMSA owns and
operates an industrial park in Mexico
with multiple facilities, of which two
are leased to outside third parties
and the remaining facilities are
leased to American Tissue Mills de
Mexico, an affiliate of our
stockholder.
Calexico Tissue Company LLC Owns and operates a facility located
at 2361 Portico Blvd., Calexico,
California.
Other Entities:
Unique Financing LLC Engaged in the business of financing
the acquisition of certain used
machinery and equipment.
American Cellulose Mill Corp. Provides trucking services to our
paper manufacturing and converting
entities.
In addition to the above listed operations, the Company engages in the
acquisition, refurbishment and resale of various tissue converting equipment
through its ATC subsidiary.
The real estate operations of the Company primarily consist of the lease of
facilities owned by the real estate entities and which are used by several of
the manufacturing entities. These transactions are eliminated in the
consolidated financial statements, with the exception of Markwood LLC, as
described above.
Our stockholders also own, manage and control other entities in similar
lines of business that are not included in the accompanying consolidated
financial statements. Any transactions with these entities are entered into at
"arm's length" and any resulting amounts due from or due to these entities are
recorded as due from related parties and due to related parties respectively.
F-10
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, as described in Note 1. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks, and other
short-term, highly liquid investments with original maturities of three months
or less. The cost of cash equivalents approximates fair value as of September
30, 1999 and 1998.
Accounts Receivable and Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable from
sales. The Company performs ongoing credit evaluations of its customers'
financial condition and payment history. Generally, accounts receivable are due
within 30 days. Credit losses have historically been consistent with
management's expectations. Most of our business activities are with
distributors, retailers, and paper converters located within the eastern United
States and Canada.
The Company reviews its accounts receivable for potential doubtful accounts
and records a provision for the estimated amounts that will be uncollectible.
Write-offs are recorded when the Company completes it analysis and negotiates
the write-off with its customers.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market. In determing the value of its inventories, the Company reviews the
components for potential impairment as a result of obsolescence or damaged
items. The Company writes down the carrying amount of the items to the
appropriate value during the period identified when such values are below the
historical cost of those items.
Equipment Held for Sale
Equipment held for sale consists of equipment purchased by us with the
intent of resale. This equipment is not used in our operations and, accordingly,
is not subject to depreciation. The assets are carried at the lower of cost or
their net realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation is computed principally on the
straight-line method over the following estimated useful lives of the related
assets:
Buildings and building improvements 30 - 39.5 years
Machinery and equipment 5 - 20 years
F-11
<PAGE>
Leasehold improvements the lesser of the useful life of the asset or the term of
the lease.
Landfill Closure and Post-Closure Costs
The Company accrues for landfill closure and post-closure costs over the
periods that benefit from the use of the landfills. Management regularly reviews
the adequacy of cost estimates and adjusts the accrued amounts as necessary.
Deferred Costs
Deferred costs primarily represent loan origination and refinancing costs
that are being amortized over the term of the respective debt instrument.
Amortization expense on deferred costs was approximately $1,461, $1,537, and
$1,128 for the years ended September 30, 1999, 1998, and 1997.
Long-Lived Assets
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the assets in
question may not be recoverable. The Company groups its long-lived assets
according to asset class for machinery and equipment and by location for
facilities for purposes of assessment of potential impairment. Impairment is
measured based upon a comparison of the expected future cash flows to the
carrying amount of asset groupings. Any impairment charges will be measured
using discounted cash flows related to the assets that have been assessed as
impaired. No impairment adjustment was required during any of the three years in
the period ended September 30, 1999.
Fair Value of Financial Instruments
The Company complies with SFAS No. 107, "Disclosure about Fair Value of
Financial Instruments," which requires disclosures about the fair value of our
financial instruments. The methods and assumptions used to estimate the fair
value of the following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash,
current receivables and payables and certain other short-term financial
instruments approximate their fair value.
Long-Term Debt: The fair value of our long-term debt, including the current
portion, was estimated using a discounted cash flow analysis, based on our
assumed incremental borrowing rates for similar types of borrowing arrangements.
The carrying amount of variable and fixed rate debt at September 30, 1998 and
1997 approximates fair value.
Revenue
Revenue is recognized upon shipment of our products to our customers,
including independent brokers (Note 13).
Income Taxes
The beneficial holders of our Common Stock have elected to be taxed under
the provisions of Sub-chapter "S" of the Internal Revenue Code of 1986
(corporations subject to Subchapter S of the Internal Revenue Code are referred
to as "S Corporations"). Prior to the transfer of ownership discussed in Note 1,
our subsidiaries were treated as
F-12
<PAGE>
either S Corporations or limited liability companies treated as partnerships
under the Internal Revenue Code. Accordingly, our stockholders include their
respective shares of our net income in their individual income tax returns. The
amount of corporate level minimum taxes and taxes based on income imposed by
state and local authorities is not material.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of financial statements. The Company currently does not have any items
of other comprehensive income. Accordingly, comprehensive income (loss) is the
same as net income (loss) for each of the periods presented in the consolidated
statements of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of Effective Date of FASB Statement No. 133,"
will become effective for the Company as of the quarter ended December 31, 2000
and will not require retroactive restatement of prior period financial
statements. The Company currently does not use derivative instruments or engage
in hedging activities and, accordingly, does not expect that this statement will
have an impact on its consolidated financial statements when adopted.
Reclassifications
Certain prior-year financial statement amounts have been reclassified to
conform to the current year's presentation.
3. ACQUISITION:
On July 9, 1999, the Company acquired certain assets and assumed certain
liabilities of a pulp mill and a paper mill located in Berlin and Gorham, New
Hampshire, from Crown Paper Co., a wholly-owned subsidiary of Crown Vantage Inc.
The total consideration paid for the net assets acquired was $45,000. The
purchase price of the acquisition is subject to adjustment relating to the value
of inventory, for which negotiations are still in process. The Company expects
to complete its negotiations of the purchase price and the resulting allocation
during fiscal 2000. The following summarizes the assets acquired and liabilities
assumed on July 9, 1999:
Assets acquired:
Property, plant and equipment $41,306
Inventories 17,895
-------
$59,201
=======
Liabilities assumed:
Post-retirement medical benefit obligations $ 9,119
Landfill closure reserves 2,128
Employee benefit and other costs 2,954
-------
$14,201
-------
$45,000
=======
F-13
<PAGE>
Inventories purchased consisted of substantially all pulp and related
chemicals and materials necessary for the manufacture of wood pulp on hand as of
the closing date, as well as finished and in-process uncoated freesheet paper.
The value of the facilities and equipment acquired was determined using the fair
market values estimated by independent appraisers, which amount was adjusted to
reflect the amount by which the fair value exceeded the acquisition
consideration for inventories net of liabilities assumed. As part of the
purchase agreement, the Company assumed the liability for post-retirement
medical benefits of the employees at the facilities, as well as other employee
benefits. The Company also assumed responsiblity for the landfill closure and
monitoring activities to be completed on certain property that was acquired
(Note 13).
The Company's consolidated results of operations for fiscal 1999 include
the operations of the acquired mills, conducted through PPA, from July 9, 1999
through September 30, 1999. The Company's pro forma consolidated results of
operations for the full fiscal years ended September 30, 1999 and 1998, had the
acquisition occurred at the beginning of each fiscal year, would have been:
September 30,
-----------------------
1999 1998
--------- ---------
Pro forma revenues ................................... $ 419,506 $ 389,385
Pro forma income (loss) before extraordinary items ... $ (83,246) $ (8,993)
Pro forma net income (loss) .......................... $ (87,410) $ (8,993)
Included in the unaudited pro forma consolidated results of operations for
the fiscal year ended September 30, 1999, are $159,807 of one-time charges
related to asset impairment charges recorded by the Berlin-Gorham Mills prior to
the acquisition by the Company and a $8,957, credit relating to a reversal of
property taxes for the Berlin-Gorham Mills. Exclusive of such items, the
unaudited pro forma consolidated net income for fiscal 1999 would have been
$63,440.
4. INVENTORIES:
Inventories, at cost, consist of the following:
September 30,
---------------------------
1999 1998
------- -------
Raw materials .......................... $40,295 $32,645
Work-in-process ........................ 1,026 56
Finished goods ......................... 53,343 19,287
------- -------
$94,664 $51,988
======= =======
F-14
<PAGE>
5. PROPERTY, PLANT AND EQUIPMENT, NET:
Property, plant and equipment, at cost, consist of the following:
September 30,
-----------------------
1999 1998
--------- ---------
Machinery and equipment ............................ $ 188,174 $ 136,818
Buildings and building improvements ................ 28,506 19,426
Leasehold improvements ............................. 4,825 4,650
Land ............................................... 7,470 4,544
--------- ---------
228,975 165,438
Less: accumulated depreciation and amortization .... (42,650) (30,641)
--------- ---------
186,325 134,797
Projects in progress ............................... 26,205 22,908
--------- ---------
Total property, plant and equipment, net ..... $ 212,530 $ 157,705
========= =========
Depreciation and amortization expense on property, plant and equipment was
approximately $12,009, $9,048, and $7,154 during the years ended September 30,
1999, 1998 and 1997, respectively. Included in the costs of property, plant and
equipment is capitalized interest relating to funding required for various
construction and development projects. Capitalized interest was approximately
$966 and $599 for the years ended September 30, 1999 and 1998, respectively.
Interest related to construction projects in 1997 was not material.
6. ACCRUED EXPENSES:
Accrued expenses consist of the following:
September 30,
------------------------
1999 1998
------- -------
Compensation and benefits .................... $ 8,333 $ 1,939
Promotion and incentives ..................... 873 1,232
Accrued interest payable ..................... 8,311 3,070
Other ........................................ 3,990 4,387
------- -------
$21,507 $10,628
======= =======
F-15
<PAGE>
7. NOTES PAYABLE:
Notes payable consist of the following:
September 30,
-------------------
1999 1998
------- -------
Secured note payable to LaSalle Bank National
Association(a) ......................................... $50,054 $57,531
Secured note payable to Mashreq Bank(b) ................ -- 5,175
Unsecured note payable to A.I. Credit Corp.(c) ......... -- 428
Other(d) ............................................... -- 3,183
------- -------
$50,054 $66,317
======= =======
- ----------
(a) In July 1999, the Company and its subsidiaries amended its existing
agreement and entered into loan and security agreements with LaSalle Bank
National Association and other participating lenders whereby the Company
and its subsidiaries may borrow up to an aggregate of $100,000 based, in
part, on certain levels of accounts receivable and inventory, with
borrowings against inventory limited to $50,000. The prior agreement
provided for aggregate borrowings up to $60,000, also subject to certain
levels of accounts receivable and inventory. Interest on borrowings is
payable monthly and is charged at the bank's prime rate or LIBOR plus 225
basis points per annum. At September 30, 1999, the Company and subsidiary
borrowings under this facility were $35,000 at a LIBOR - based annual rate
equivalent to 7.6% and $15,054 at the prime rate of 8.25% per annum.
Borrowings at September 30, 1998 were based on a per annum rate of prime
plus 3/4%, which was 9% per annum. Borrowings are collateralized by the
Company's accounts receivable, inventory, tangible and intangible assets,
and are guaranteed by the beneficial holders of our common stock. The
agreement expires on July 8, 2004 and can be renewed on an annual basis
thereafter. This agreement requires, among other things, the maintenance of
certain financial covenants including minimum tangible net worth, EBITDA,
leverage ratio, interest coverage, and level of capital expenditures, each
as defined in the agreement. At September 30, 1999, the Company was in
compliance with these covenants. Prior to this new agreement, at September
30, 1998, the default discussed in Note 9 with respect to the GECC
agreement triggered a default under the existing LaSalle agreement for
which the Company obtained a waiver of default.
(b) The Company had a current borrowing facility with this bank for the purpose
of financing machinery and equipment purchases. Borrowings under this
facility have a maximum term of one year from the date of initiation. All
borrowings were collateralized by the assets financed, as well as personal
and corporate guarantees. The facility limit was $5,700, and borrowings
bore interest at an annual rate of prime plus three-quarters of one percent
(9% at September 30, 1998). Borrowings under the facility were paid in full
on July 9, 1999 upon closing of the transaction discussed in Note 8.
(c) This note was issued in connection with the financing of certain insurance
premiums by A.I. Credit Corp. The borrowings outstanding at September 30,
1998 were payable in monthly installments of approximately $76 through
April 1, 1999 and bore interest at a rate of 6.25% per annum. Indebtedness
under this note was paid in full on July 9, 1999.
(d) The Company has also received loans from other unrelated individuals and
entities for periodic working capital needs. Amounts outstanding were
payable upon demand and carried stated rates of interest ranging between
10% and 13% per annum. All of this indebtedness was paid off in connection
with the proceeds received from the transaction discussed in Note 8.
F-16
<PAGE>
8. SENIOR SECURED NOTES PAYABLE:
On July 9, 1999, the Company sold $165,000 aggregate principal amount of
its 12 1/2% senior secured notes due 2006 (the "Notes") in a private placement.
The initial purchaser of the Notes has informed the Company that it promptly
resold the Notes to "qualified institutional buyers" in reliance on Rule 144A
under the Securities Act of 1933. Repayment of the Notes is guaranteed by all of
the Company's subsidiaries. After deduction of an original issue discount, the
Company received net proceeds of $159,446 from the sale of the Notes, excluding
expenses. At September 30, 1999, the amount of the unamortized discount on the
Notes was $5,438.
The Notes are secured by first priority liens on, among other things, all
of the paper mill plant and property, substantially all of the equipment,
intellectual property and related general intangibles of the Company's
subsidiaries and all of the stock and membership interests of each of the
Company's subsidiaries. In addition, the Notes are secured by second priority
liens on, among other things, certain other real property, accounts receivable,
inventory and related general intangibles of the Company's subsidiaries. The
subsidiaries' guarantees are full and unconditional and joint and several.
Financial statements of the Company's guaranteeing subsidiaries have not been
presented as this information is not considered material with respect to the
exchange or future sale of the Notes.
9. LONG-TERM DEBT:
Long-term debt consists of the following:
September 30,
----------------------
1999 1998
-------- --------
General Electric Capital Corporation ("GECC")(a) ..... $ -- $ 34,220
Israel Discount Bank ("IDB")(b) ...................... -- 2,050
Curtiss-Wright Flight Systems/Shelby, Inc.(c) ........ 709 773
Mortgage loans payable(d) ............................ 21,304 20,340
Community Redevelopment Agency of Calexico(e) ........ 450 450
-------- --------
22,463 57,833
Less: current portion of long-term debt .............. (648) (6,553)
-------- --------
$ 21,815 $ 51,280
======== ========
- ----------
(a) On June 1, 1997, the Company entered into a six year financing agreement
with GECC for long-term financing to refinance existing debt. Such
financing agreement provided for two term loans, term loan A in the amount
of $30,000 and term loan B in the amount of $10,000. Borrowings under term
loan A bore interest at a fixed rate of 9.31% per annum. Borrowings under
term loan B bore interest at a rate of 9.01% per annum. A balloon payment
of $12,807 on the two loans was due on June 30, 2000. The financing
agreement required, among other things, the maintenance of minimum tangible
net worth, a fixed charge coverage ratio, and a maximum leverage ratio. At
September 30, 1998, the Company was not in compliance with certain
financial covenant requirements. However, GECC amended the agreement,
resulting in the Company being in compliance with such financial covenants.
The loans outstanding under this agreement were paid in full with proceeds
from the issuance of our senior secured notes in July 1999 (Note 8).
F-17
<PAGE>
(b) The Company had two loans from IDB as of September 30, 1998 that were
collateralized by the assets of ATM-Greenwich and Grand LLC. Interest under
these loans ranged between 9% and 9.75% per annum. These notes were paid in
full as a result of the July 9, 1999 transaction discussed in Note 8.
(c) On July 29, 1996, the Company entered into a term loan with Curtiss-Wright
Flight Systems/Shelby, Inc. ("Curtiss-Wright") in order to borrow funds for
certain renovations to our New Jersey distribution center (the
"Distribution Center"). The Company leases the Distribution Center from
Curtiss-Wright. The principal balance outstanding on this term loan is
being amortized through August 1, 2006 at a fixed interest rate of 8% per
annum and is subordinated to our debt to LaSalle Bank National Association
(Note 7).
(d) Mortgage loans payable consist of several mortgage loans from various
lenders on certain properties owned by the Company and its subsidiaries.
During the fiscal year ended September 30, 1999, the Company obtained an
additional mortgage loan on the property owned by Grand LLC in the amount
of $800, bearing interest at a rate of 7.5% per annum and requiring a
ballon payment at maturity on November 1, 2008. Additionally, in fiscal
1999, the Company refinanced its existing $3,000 mortgage loan on its
Calexico facility by obtaining a $4,000 mortgage with another bank, bearing
interest at a rate of 8% per annum and maturing on June 1, 2004. The
mortgage loans outstanding as of September 30, 1999 had per annum interest
rates ranging from 7.5% to 8.05%. Reference is made to the schedule below
wherein the annual principal maturities of these loans are included.
(e) The loans from the Community Redevelopment Agency of the City of Calexico
are in the principal amounts of $166,000 and $284,000 at September 30,
1998. These loans were obtained to finance certain construction at the
Calexico facility. The promissory note evidencing the $166,000 obligation
is amortized on a quarterly basis over a 15 year period and bears interest
at a rate of 3% per annum. The $284,000 reimbursement loan is due in 2004,
however, this loan may be forgiven as of the fifth year of the loan (2002)
provided that the Company provides certain documentation to the lender
demonstrating that the Company employs at least 100 "Qualified Employees,"
as defined in the loan agreement, for a minimum period of five years. The
reimbursement loan is non-interest bearing, subject to certain provisions
that may require interest in the event of a default by us, as defined in
the relevant agreement.
As of September 30, 1999, annual principal maturities of long-term debt was as
follows:
Year Ending September 30,
- --------------------------
2000 .................................................. $ 648
2001 .................................................. 656
2002 .................................................. 709
2003 .................................................. 765
2004 .................................................. 4,639
Thereafter ............................................ 15,046
-------
Total ................................................. $22,463
=======
10. CAPITAL LEASE AND FINANCING OBLIGATIONS:
Capital lease and financing obligations require future minimum payments as
follows at September 30, 1999:
Year Ending September 30,
- ------------------
2000 .............................................................. 585
2001 .............................................................. 341
2002 .............................................................. 117
-------
1,043
Less: portion attributable to interest ............................ (53)
-------
F-18
<PAGE>
Present value of capital lease and financing obligations at
September 30, 1999 ................................................ $ 990
=======
Additionally, pursuant to the issuance of senior secured notes discussed in
Note 8, certain proceeds from the issuance were used to pay off approximately
$32,900 of the present value of then outstanding capital lease obligations.
These instruments are collateralized by the specific machinery and
equipment covered under each obligation. The balances of assets leased and
financed are as follows:
September 30,
---------------------------
1999 1998
-------- --------
Gross assets .............................. $ 1,943 $ 41,018
Accumulated amortization .................. 1,132 (5,968)
-------- --------
Net book value ...................... $ 811 $ 35,050
======== ========
Amortization relating to these assets has been included in the amounts
reported in Note 5.
11. RELATED PARTY TRANSACTIONS:
Due from related parties consist of the following:
September 30,
-------------------------
1999 1998
------- -------
Affiliated entities ........................ $21,467 $18,659
Stockholders ............................... 1,587 1,220
------- -------
$23,054 $19,879
======= =======
The receivables from affiliated entities have arisen in the normal course
of business, primarily from the funding provided by companies in the
consolidated group to other entities owned by our stockholders. These
receivables have no definite repayment date. Amounts due from stockholders
primarily represent loans made to certain of our stockholders. The loans have no
stated rates of interest and have no definite repayment date.
Due to related parties consist of the following:
September 30,
---------------------------
1999 1998
--------- -------
Affiliated entities ...................... $ -- $ 2,236
Stockholders ............................. -- 20,507
--------- -------
$ -- $22,743
========= =======
The amounts due to affiliated entities have arisen in the ordinary course
of business between the Company and the affiliated entities. At September 30,
1998, the terms of the agreements between the
F-19
<PAGE>
Company and the stockholders of the affiliated entities did not require
repayment prior to September 30, 1999. All amounts due to these affiliated
entities were transferred to SATI as discussed below.
Amounts owed to our stockholders and their families carried original stated
interest rates of 10%. Of this amount, $10,965 was subordinated to other
indebtedness. Effective October 1, 1997, one of our stockholders released the
Company from its obligation to pay interest from October 1, 1997 and forward,
for an indefinite period of time. Accordingly, interest expense of $990 and
$1,260 for the period from October 1, 1998 through July 8, 1999 and the year
ended September 30, 1998, respectively, on the loans from this stockholder has
been imputed at 7.75% per annum and recorded as a capital contribution through
additional paid-in capital. The loan agreements with the stockholders and their
family members did not require any repayment prior to September 30, 1999.
In connection with the transactions discussed in Notes 3 and 8, all amounts
owed to affiliates and stockholders were transferred to, and assumed by SATI as
of July 9, 1999. The following represents the average amounts due from, and owed
to, unconsolidated affiliates and stockholders, which are non-interest bearing,
during the years ended September 30, 1997, 1998 and 1999:
1999 1998 1997
------- ------- -------
Due from:
Affiliated entities $20,063 $14,840 $10,054
Stockholders $ 1,403 $ 767 $ 314
Due to:
Affiliated entities $ 2,795 $ 1,139 $ 20
The average amounts owed to affiliated entities for fiscal 1999 cover only
the period from October 1, 1998 through July 8, 1999. Interest expense on the
outstanding borrowings from the stockholders and their immediate families
approximated $1,052 for the period from October 1, 1998 through July 8, 1999 and
$1,390 and $1,385 for the fiscal years ended September 30, 1998 and 1997,
respectively, and include the interest imputed on certain debt as described
above.
Transfer of Related Party Debt
On July 9, 1999, approximately $24,400 representing all amounts owed by the
Company's subsidiaries to beneficial owners of the Company's common stock and to
certain affiliated entities as of such date were assumed by SATI, the Company's
ultimate parent. This transaction has been treated as an equity contribution
from SATI to MATI and thereafter to the Company. The Company's subsidiaries have
been released from liabilities to such stockholders and affiliated entities.
Middle American Tissue Notes and Equity Investment
On July 9, 1999, the Company's immediate parent, MATI, raised approximately
$20,000 through the sale of senior secured discount notes due 2007 ("Middle
American Notes") in a private transaction. The Middle American Notes have a face
value of $35,756 and were issued with warrants to purchase up to 12% of Middle
American Tissue's common stock at a nominal exercise price. The Middle American
F-20
<PAGE>
Notes are structurally subordinate to the New Credit Facility and the Notes
because such notes were issued by the Company's parent and are not guaranteed by
the Company.
In addition, on July 9, 1999, Super American Tissue Inc., the Company's
indirect parent, made an equity investment in Middle American Tissue Inc. in the
amount of $5,000.
MATI used both this amount and the net proceeds raised in connection with
the sale of the Middle American notes to make a $24.5 million equity
contribution to the Company.
12. EMPLOYEE RETIREMENT PLANS:
The Company, through some of its subsidiaries, offers various retirement
benefits to its employees. The following is a brief summary of the plans offered
by the entities included in the consolidated results of the Company:
401(k) Plans
The Company sponsors two 401(k) plans. One plan covers certain union
employees at one of our facilities. The other plan covers substantially all
other employees of the Company, subject to certain plan eligibility
requirements. Both plans allow for employee contributions based on a percentage
of compensation, ranging between 1% and 15%. We will match employee
contributions to the union plan in amounts equal to 75% of the first 2% and 50%
of the next 3% of employees' compensation. The Company can make matching
contributions to the other plan up to 6% of employee contributions, at the
discretion of the Board of Directors. The discretionary contribution rate for
each of the three years in the period ended September 30, 1999 was 2%. Total
Company contributions made to the 401(k) Plans were approximately $367, $353 and
$305 for the years ended September 30, 1999, 1998 and 1997, respectively.
Pension and Postretirement Benefit Plans
The Company maintains a noncontributory defined benefit pension plan, the
American Tissue Pension Plan for Hourly Employees (the "Plan"). The Plan
provides certain employees of ATM-Neenah with retirement benefits. The Plan's
assets are invested in a money market fund.
The Company also sponsors a post-retirement medical benefit plan, the
Berlin Post-Retirement Medical Benefit Plan, which covers certain employees of
PPA. The Company assumed this liability in connection with the acquisition of
the Berlin-Gorham Mills.
F-21
<PAGE>
The following tables set forth the funded status of the Plans based on
actuarial valuations covering the fiscal years ending September 30, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
Pension Benefits Post-retirement
---------------- Benefits
1999 1998 1997 1999
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Changes in benefit obligation:
Benefit obligation at beginning of year $ 871 $ 312 $ -- $ 9,194
Service cost 562 395 323 73
Interest cost 56 23 -- 145
Net actuarial (gain) loss (333) 141 (11) (900)
------- ------- ------- -------
Benefit obligation at end of year $ 1,156 $ 871 $ 312 $ 8,512
------- ------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year $ 219 $ 25 $ -- $ --
Actual return on plan assets 12 4 -- --
Employer contribution 218 190 25 --
------- ------- ------- -------
Fair value of plan assets at year end $ 449 $ 219 $ 25 $ --
------- ------- ------- -------
Funded status: $ (707) $ (652) $ (287) $(8,512)
Unrecognized actuarial (gain) loss (185) 134 (11) (900)
------- ------- ------- -------
Accrued benefit cost $ (892) $ (518) $ (298) $(9,412)
------- ------- ------- -------
Weighted-average assumptions:
Discount rate 6.75% 7.50% 7.50% 7.75%
Expected return on plan assets 4.5% 4.5% 4.5% --
Rate of compensation increase 4.5% 4.5% 4.5% 4.0%
Components of net periodic benefit cost:
Service cost $ 562 $ 395 $ 323 $ 73
Interest cost 56 23 -- 145
Expected return on plan assets (12) (8) -- --
Recognized net actuarial loss 1 -- -- --
------- ------- ------- -------
Net periodic benefit cost $ 607 $ 410 $ 323 $ 218
------- ------- ------- -------
</TABLE>
With respect to the post-retirement medical plan, for measurement purposes,
a 6.0% health care trend rate was used for 1999. The trend rate was assumed to
decrease to 4.5% in 2001 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one percentage point change in
assumed health care cost trend rates would have the following effects on
expenses and year-end liabilities:
One Percentage Point
--------------------
Increase Decrease
------ ------
Effect on total of service
and interest cost components .................... $ 32 $ (28)
Effect on total post-retirement benefit obligation ... $1,153 $ (991)
F-22
<PAGE>
13. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases facilities under non-cancelable operating leases, with
unrelated parties and affiliated entities, which expire at various dates through
July 31, 2018. These leases require minimum future rental payments as follows:
Year Ending September 30,
- --------------------------
2000 .................................................. $ 3,722
2001 .................................................. 2,851
2002 .................................................. 2,793
2003 .................................................. 2,902
2004 .................................................. 2,972
Thereafter ............................................ 31,374
-------
$46,614
=======
In addition, the Company is obligated to pay certain real estate taxes
under these lease arrangements. Rent expense approximated $3,412, $2,065 and
$2,010 for the years ended September 30, 1999, 1998 and 1997.
Boise Cascade
Concurrent with the purchase of its tissue paper machine from Boise Cascade
Corporation ("Boise"), for $5,000 in November 1992, ATM Oregon entered into an
agreement with Boise whereby Boise agreed to operate and maintain the machine
through December 2022. The acquisition of the machine was made to expand the
Company's operations and to serve the West coast market more efficiently. Boise
has a security interest in the equipment. ATM Oregon will reimburse Boise each
month for the cost of such operations and maintenance. Fees under this agreement
approximated $13,371, $11,911, and $11,782 for the years ended September 30,
1999, 1998 and 1997, including approximately $1,835, $695, and $659 of fees
capitalized relating to fixed asset improvements consisting primarily of
upgrades done to improve the performance and capacity of the machine.
Pursuant to the operating agreement with Boise, certain events may require
Boise to purchase the machinery or may provide Boise with an option to purchase
the machinery. Specifically, Boise may be required to purchase the machinery if
the mill is permanently closed as a result of certain laws and regulations that
may be enacted, or if there is a litigation settlement that prevents the use of
the machinery by ATM-Oregon. In these instances, Boise would be required to
purchase the machinery for a price based upon the existing net book value of the
machinery, plus $5,000, as defined in the agreement. Additionally, Boise may
exercise an option to purchase the machinery if ATM-Oregon defaults on the
agreement prior to contractual termination, or at termination, for a price based
upon the existing net book value of the machine, as defined. If ATM-Oregon
defaults prior to contractual termination, Boise's purchase option is equal to
the net book value of the machine at the date of termination upon default.
Boise's option to purchase the machine at the contractual termination date is
equal to the higher of the net book value on the termination date or the fair
market value of the machine. At no time does the machine automatically revert to
Boise. ATM-Oregon also has a right to renegotiate the agreement during the
six-month period ended December 31, 2008, after which, if Boise and ATM-Oregon
cannot agree upon new terms, ATM-Oregon can terminate the agreement, at which
time Boise has the option to purchase the machine for a price equal to the net
book value at that date, less $5,000, with any resulting negative amount paid by
ATM-Oregon to Boise. As part of the operating agreement between ATM-Oregon and
Boise, ATM-Oregon has agreed to purchase a minimum quantity of pulp from Boise,
which for each of the three fiscal years ended September 30, 1999, was 35,000
tons delivered as "slurry" at the beginning of ATM-Oregon's machine. The
agreement was amended in January 1999 to require minimum purchases of 57,000
tons beginning after December 31, 2002. The prices paid for pulp purchases are
based upon market rates, which are determined with certain agreed to reductions
for costs that do not have to be incurred by Boise since it is delivering the
pulp on its original "slurry" or wet form.
F-23
<PAGE>
At September 30, 1999 and 1998, accounts payable and accrued expenses
included approximately $5,029 and $2,685 due to Boise.
Independent Broker
In November 1996, the Company, through certain of its subsidiaries, entered
into contracts with Perry H. Koplik & Sons, Inc. ("Koplik"), an independent
paper broker, in order to take advantage of volume purchasing and to obtain
marketing assistance for jumbo tissue roll sales. Under these purchase
contracts, the Company utilized Koplik for the supply of a target amount of 70%
of the annual wood pulp and certain other raw material needs of the Company,
exclusive of ATM-Oregon and ATM-Neenah. The supply amounts were reviewed
quarterly to ensure that target is achieved to both parties satisfaction.
Pricing to the Company was based upon market indices and agreed upon by both
parties. The Company also had a contract with Koplik whereby the Company was
obligated to sell to Koplik, a maximum of 40,000 tons of jumbo tissue rolls, on
an annual basis. The Company had sole authority over the pricing for these sales
and pays Koplik a commission of 3% of sales price for all jumbo tissue rolls
sold by Koplik. These agreements expired in November 1999 at contractual
termination.
Jumbo Tissue Roll Contracts
The Company has entered into five jumbo roll supply contracts with various
manufacturers of finished tissue products manufacturers. Under these contracts,
the Company is obligated to supply a certain level of various grades of jumbo
tissue rolls and finished tissue products. All pricing for sales made pursuant
to these contracts is based upon market prices at the time of sale. These
agreements are generally one-year renewable term contracts, with exception of
two agreements. One agreement, which expires in January 2009, requires the
Company to provide 6,000 tons of jumbo tissue rolls on an annual basis. The
other agreement is a combined jumbo tissue roll and finished tissue products
supply contract that expires on September 30, 2001, with an option to extend for
three years. Under this contract, the customer will supply the fiber for
production at no cost and the Company must provide a minimum of 6,000 annual
production hours, and a maximum of 7,800 annual production hours, with respect
to jumbo tissue rolls to be produced, and the Company must produce certain
grades of facial and bath tissue products in the amounts of a minimum level of
facial tissue products of 110,000 cases per month, and a maximum of 30,000 cases
per month for bath tissue. The customer is not complying with the terms of this
contract and the Company is studying its options for remedy. The tons and case
production capacity have been utilized for other customers. With respect to the
other three contracts, the current terms require a combined minimum supply of
jumbo rolls at 35,400 tons on an annual basis.
Pulp Purchase Agreement
In connection the acquisition of the Berlin-Gorham Mills, the Company,
through PPA, entered into a contract with Crown Paper Co. ("Crown"), whereby
PPA will sell 40,000 tons of certain grades of wood pulp per year to Crown.
Pricing under this agreement will be based upon published market prices. The
agreement expires in March 2002. Pursuant to this agreement, Crown will receive
a 6% discount during the first twenty-four months of the agreement and 3%
discount during the last twenty-four-months of the agreement.
Paper Brokerage Agreement
In connection with the acquisition of the Berlin-Gorham Mills, the Company,
through PPA, entered into a contract with Crown whereby Crown provides marketing
and sales services to PPA at Crown's expense, for a three-year period ending in
March 2002. The terms of this agreement also provide that Crown will sell an
annual minimum of 130,000 tons of certain grades of paper produced by
F-24
<PAGE>
PPA at market prices, as specified in the agreement, Crown acts solely as an
agent for selling the paper and is paid a commission of 4.5% on the products
sold by Crown on PPA's behalf.
Environmental Matters
Upon the acquisition of the Berlin-Gorham Mills (Note 3), the Company
assumed the liability for estimated landfill site restoration, post-closure and
monitoring costs on the property acquired. At September 30, 1999, the Company
recorded a liability of $2,151 for such costs. The accured amounts are expected
to be paid during the operation of the landfill, through closure of the
landfill, and over the thirty-year post-closure monitoring period.
The Environmental Protection Agency issued final rules affecting pulp and
paper industry discharges of wastewater and gaseous emissions ("Cluster Rules"),
which became effective on April 15, 1998. These Cluster Rules require changes in
the pulping, bleaching and/or wastewater treatment processes presently used in
some U.S. pulp and paper mills, including the Berlin pulp mill. Management
estimates that approximately $13.0 million of capital expenditures may be
required to comply with the rules with compliance dates beginning in 1999 and
extending over the next two to five years. Environmental capital spending for
compliance with the Cluster Rules was not material for the period from July 9,
1999 through September 30, 1999. There are risks and uncertainties associated
with the estimate that could cause total capital expenditures and timing of such
expenditures to be materially different from current estimates, including
changes in technology and interpretation of the rules by government agencies
that are substantially different from management's interpretation, or other
items.
Wisconsin Facility
The Company closed its facility in Tomahawk, Wisconsin in October 1997. As
discussed in Note 1, all equipment assets at this facility were transferred to
our New Hampshire mill. As of September 30, 1998, the net book value of the
remaining property was not material. There were no material costs incurred in
connection with the closing of this facility.
Litigation
The Company and its subsidiaries are involved in legal proceedings, claims
and litigation arising in the ordinary course of business. The outcome of such
current legal proceedings, claims and litigation could have a material effect on
our operating results or cash flows when resolved in a future period. In August
1999, the Company settled an action that was filed in the United States District
Court for the Eastern District of New York in June 1998 containing various
claims of national origin discrimination brought on behalf of 21 former
employees of ATC, for approximately $10,000 per plaintiff and $405,000 in the
aggregate. Additionally, ATC is a party to an action brought before the National
Labor Relations Board by the Service Employees International Union, Local 339,
AFL-CIO, in August 1996, whereby ATC has been charged with certain violations of
employees' rights under the National Labor Relations Act. In November 1998, an
administrative law judge rendered a decision against ATC and awarded back pay to
the same 21 employees in the case discussed above. No amount for the back pay
award has been determined and it is presently not possible to estimate the
amount of the award.
F-25
<PAGE>
14. EXTRAORDINARY ITEM
In connection with the issuance of its senior secured notes, as discussed
in Note 8, the Company utilized the proceeds from this issuance to repay certain
existing indebtedness. The Company incurred a loss of $4,164 on the early
extinguishment of this debt. The loss extinguishment consisted of $2,850 of cash
payments made in connection with the early termination of long-term capital
lease obligations as well as the long-term notes from GECC, and $1,314 of
non-cash charges representing the unamortized portions of deferred financing
costs related to the GECC facility.
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Management and Board of Directors of
Crown Vantage Inc.
We have audited the accompanying balance sheets of Crown Vantage Inc.'s
Berlin-Gorham Pulp and Paper Mill (the "Berlin-Gorham Mills") as of December 27,
1998 and December 28, 1997 and the related statements of operations, cash flows
and changes in Crown Vantage's investment for the 52 weeks ended December 27,
1998, December 28, 1997 and December 29, 1996. These statements are the
responsibility of the Berlin-Gorham Mills' management. Our responsibility is to
express an opinion on these 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 presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1, the financial statements referred to above include
the historical assets, liabilities and results of operations of the
Berlin-Gorham Mills and are not intended to be a complete presentation of the
Berlin-Gorham Mills' or Crown Vantage Inc.'s historical assets, liabilities and
results of operations. These financial statements were prepared for the purpose
of complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in a Registration Statement Form S-4 of American Tissue
Inc.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Berlin-Gorham Mills as
of December 27, 1998 and December 28, 1997 and the results of its operations and
cash flows for the 52 weeks ended December 27, 1998, December 28, 1997 and
December 29, 1996, in conformity with generally accepted accounting principles.
April 23, 1999
San Francisco, California
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
F-27
<PAGE>
BERLIN-GORHAM MILLS
BALANCE SHEETS
(dollars in thousands)
December 27, December 28,
1998 1997
-------- --------
Assets
Current Assets:
Accounts receivable ............................... $ 6,537 $ 3,564
Inventories ....................................... 27,371 29,913
Prepaid expenses and other current assets ......... 115 679
-------- --------
Total current assets ........................ 34,023 34,156
-------- --------
Property, plant and equipment, net ................ 46,185 202,916
Restricted cash ................................... 1,753 5,166
Other assets ...................................... 19,081 17,228
-------- --------
Total Assets ................................ $101,042 $259,466
======== ========
Liabilities and Equity
Current Liabilities:
Accounts payable .................................. $ 6,912 $ 5,525
Accrued liabilities ............................... 21,180 21,676
-------- --------
Total current liabilities ................... 28,092 27,201
-------- --------
Long-term debt .................................... 30,255 30,255
Accrued post retirement benefits other
than pensions .................................. 30,724 31,389
Other long-term liabilities ....................... 2,033 1,937
-------- --------
Total Liabilities ........................... 91,104 90,782
-------- --------
Crown Vantage's Investment ........................ 9,938 168,684
-------- --------
Total Liabilities and Equity ................ $101,042 $259,466
======== ========
See notes to financial statements.
F-28
<PAGE>
BERLIN-GORHAM MILLS
STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 27, December 28, December 29,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales ..................................................... $ 162,876 $ 167,484 $ 160,777
Net sales to Crown Vantage .................................... 11,547 15,914 17,139
--------- --------- ---------
Total net sales 174,423 183,398 177,916
Cost of goods sold ............................................ 185,820 179,648 189,173
Severance charge .............................................. 1,932 -- --
--------- --------- ---------
Gross margin .................................................. (13,329) 3,750 (11,257)
Selling and administrative expenses ........................... (9,155) (6,542) (3,698)
Asset impairment charge ....................................... (143,632) -- --
Gain on timberlands sale ...................................... -- 13,518 --
Corporate allocation .......................................... (7,764) (5,726) (5,412)
--------- --------- ---------
Operating income (loss) ....................................... (173,880) 5,000 (20,367)
Interest expense .............................................. (2,547) (2,547) (1,573)
Other income, net ............................................. 85 75 99
--------- --------- ---------
Income (loss) before income taxes ............................. (176,342) 2,528 (21,841)
Income tax provision (benefit) ................................ (68,287) 1,077 (8,303)
--------- --------- ---------
Net income (loss) ............................................. $(108,055) $ 1,451 $ (13,538)
========= ========= =========
</TABLE>
See notes to financial statements.
F-29
<PAGE>
BERLIN-GORHAM MILLS
STATEMENTS OF CHANGES IN CROWN VANTAGE'S INVESTMENT
(dollars in thousands)
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 27, December 28, December 29,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Crown Vantage's Investment
Beginning Balance ................................................. $ 168,684 $ 187,420 $ 219,002
Net Income (Loss) ................................................. (108,055) 1,451 (13,538)
Capital investment (withdrawal):
Settlement of income taxes with Crown Vantage ............... (68,287) 1,077 (8,303)
Capital investment (withdrawal) ............................. 17,596 (21,264) (9,741)
--------- --------- ---------
Ending Balance .................................................... $ 9,938 $ 168,684 $ 187,420
========= ========= =========
</TABLE>
See notes to financial statements.
F-30
<PAGE>
BERLIN-GORHAM MILLS
STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
C 52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 27, December 28, December 29,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash provided by (used for) operating activities:
Net income (loss) ...................................................... $(108,055) $ 1,451 $ (13,538)
Items not affecting cash:
Depreciation and cost of timber harvested ................... 23,966 24,179 24,061
Gain on sale of timberlands ................................. -- (13,518) --
Asset impairment charge ..................................... 143,632 -- --
Other, net .................................................. (439) 164 (924)
Tax provision (benefit) ..................................... (68,287) 1,077 (8,303)
Change in current assets and liabilities:
Accounts receivable ......................................... (2,973) 2,759 8,697
Inventories ................................................. 1,042 (5,713) 1,442
Other current assets ........................................ 564 (269) (274)
Accounts payable ............................................ 1,387 (52) (671)
Other current liabilities ................................... (496) 243 3,083
Restricted cash ........................................................ 3,413 921 (6,087)
Other, net ............................................................. (2,471) (1,737) 870
--------- --------- ---------
Cash (used for) provided by operating
activities ........................................ (8,717) 9,505 8,356
--------- --------- ---------
Cash provided by (used for) investing activities:
Expenditures for property, plant and equipment ......................... (9,146) (13,084) (10,872)
Proceeds from sale of property, plant and equipment .................... 488 25,008 56
Other, net ............................................................. (221) (165) 101
--------- --------- ---------
Cash (used for) provided by investing activities ....................... (8,879) 11,759 (10,715)
--------- --------- ---------
Cash provided by (used for) financing activities:
Proceeds from issuance of Industrial
Revenue Bonds, less underwriting costs ................................. -- -- 12,100
Crown Vantage's capital investment (withdrawal) ........................ 17,596 (21,264) (9,741)
--------- --------- ---------
Cash provided by (used for) financing
activites ........................................ 17,596 (21,264) 2,359
Increase (decrease) in cash and cash equivalents ....................... -- -- --
Cash and cash equivalents, beginning of year ........................... -- -- --
--------- --------- ---------
Cash and cash equivalents, end of year ................... $ -- $ -- $ --
========= ========= =========
</TABLE>
See notes to financial statements.
F-31
<PAGE>
BERLIN-GORHAM MILLS
NOTES TO FINANCIAL STATEMENTS
Note 1
The accompanying financial statements comprise the historical assets,
liabilities and operating results of the Berlin-Gorham Mills located in Berlin
and Gorham, New Hampshire, respectively. The Berlin-Gorham Mills are owned by
Crown Paper Co., a wholly-owned subsidiary of Crown Vantage Inc. (collectively
"Crown Vantage"). Subject to the successful consummation of the Asset Purchase
Agreement and related agreements by and between Crown Paper and American Tissue
Inc. ("American Tissue"), the Berlin-Gorham Mills will be sold to Pulp & Paper
of America LLC, an affiliate of American Tissue (the "Sale").
The accompanying financial statements have been prepared as if the
Berlin-Gorham Mills had operated as an independent stand-alone entity for all
periods presented. There are no allocations of Crown Vantage borrowings or
related interest expense in the accompanying financial statements except for
borrowings and interest expense of certain industrial revenue bonds incurred by
Crown Vantage that are restricted to environmental expenditures at the
Berlin-Gorham Mills. The Berlin-Gorham Mills engaged in various transactions
with Crown Vantage and its other mills that are characteristic of a group of
entities under common control. Throughout the period covered by these financial
statements, the Berlin-Gorham Mills participated in Crown Vantage's centralized
cash management system and, as such, its cash funding requirements were met by
Crown Vantage. The Berlin-Gorham Mills' operational transactions resulted in
amounts receivable from and payable to Crown Vantage, which fluctuate over time
and have not been settled through cash transfers. Accordingly, the amounts have
been presented net in the balance sheet as Crown Vantage's Investment.
Crown Vantage general and administrative costs not directly attributable to
the Berlin-Gorham Mills have been allocated based primarily on tons sold.
Management believes the allocation method is reasonable. Such allocations
totaled $6.9 million in 1998, $5.2 million in 1997 and $5.2 million in 1996.
The Berlin-Gorham Mills are fully integrated pulp and paper mills. The
Berlin pulp mill produces approximately 220,000 tons of northern bleached
hardwood kraft pulp and 60,000 tons of northern bleached softwood kraft pulp
annually. Approximately 45% of the hardwood kraft is used by the Gorham mill in
the production of paper and the remaining hardwood kraft is dried and either
sold to other Crown Vantage mills or as market pulp. All of the softwood kraft
pulp is consumed by the Gorham mill in the production of paper. The
Berlin-Gorham Mills purchase a small quantity of pulp (approximately 15,000 tons
annually) to supply pulp grades not produced internally and to supply the paper
mill during the annual pulp mill outage.
The Gorham paper mill operates four paper machines that produce
approximately 150,000 tons of paper annually and one commercial toweling machine
with production capacity of approximately 40,000 tons annually. The four paper
machines produce a variety of printing and publishing papers including premium
text and cover grades, book papers, opaques, and forms bond.
On December 27, 1998, the Berlin-Gorham Mills employed approximately 850
individuals of which approximately 85% were hourly employees and 15% were
salaried employees. All of the hourly employees are represented under
collectively bargained union contracts.
F-32
<PAGE>
Note 2
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements include the results of operations,
assets and liabilities of the Berlin-Gorham Mills for the 52 weeks ended
December 27, 1998, and December 28, 1997. The accompanying financial statements
also include the results of operations of the Berlin-Gorham Mills for the 52
weeks ended December 29, 1996. The Berlin-Gorham Mills' fiscal year includes the
52 or 53 weeks ending on the last Sunday in December.
Inventories
Inventories are stated at the lower of cost or market and include the cost
of materials, labor and manufacturing overhead. The last-in, first-out cost flow
assumption is used for valuing all inventories other than stores and supplies,
which are valued using the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation, including related delivery and installation costs and interest
incurred on significant capital projects during their construction periods.
Expenditures for improvements that increase asset values or extend useful lives
are capitalized. Maintenance and repair costs are expensed as incurred. For
financial reporting purposes, depreciation is computed using the straight-line
method over the estimated useful lives of the respective assets, which range
from 20 to 45 years for buildings and 5 to 20 years for machinery and equipment.
Since Berlin-Gorham is an integrated facility, management considers the
pulp and paper mills as a single asset grouping when assessing and measuring
impairment. Management assesses the recoverability of its investments in
long-lived assets to be held and used in operations whenever events or
circumstances indicate that their carrying amounts may be impaired. The negative
operating cash flows that occurred during 1998 led to management assessing
whether an impairment has occurred. In the fourth quarter of 1998, management
estimated the future cash flows expected to result from use of the assets and an
impairment loss was recognized when the future cash flows were estimated to be
less than the carrying value of the assets. Estimating future cash flows
requires an estimate of useful lives of its long-lived assets, future production
volumes and costs, future sales volumes, demand for the mills' product mix and
prices that reflect the use of its long-lived assets and market conditions.
Based on this assessment, a $143.6 million charge was recorded during the fourth
quarter of 1998 to write down impaired assets to the present value of their
estimated future cash flows. Although management believes it has a reasonable
basis for its estimates, it is reasonably possible that the estimate of future
cash flows could change from current estimates which could result in
recognizing, in future periods, additional material impairment losses on its
long-lived assets at the Berlin-Gorham Mills. (See "Note 11").
Restricted Cash
Restricted cash of approximately $1.8 million and $5.2 million at December
27, 1998 and December 28, 1997, respectively, represents remaining proceeds from
an industrial revenue bond offering that can be used only for qualified
environmental projects.
F-33
<PAGE>
Landfill Closure and Post-Closure Costs
The Berlin-Gorham Mills accrue for landfill closure and post-closure costs
over the periods that benefit from the use of the landfills. Management
regularly reviews the adequacy of cost estimates and adjusts the accrued amounts
as necessary.
Income Taxes
The Berlin-Gorham Mills have historically been included in the consolidated
federal income tax returns and combined/unitary state income tax and value added
tax returns of Crown Vantage. The benefit/provision for income taxes is
management's estimate of the Berlin-Gorham Mills' share of Crown Vantage's
income tax benefit that is intended to approximate the current provision/benefit
that would have been recognized had the Berlin-Gorham Mills filed separate
income tax returns. All taxes are domestic.
Current income taxes payable/receivable and deferred income tax assets and
liabilities have been treated as if settled immediately through Crown Vantage's
investment. Because the Berlin-Gorham Mills are included in the consolidated
Crown Vantage returns, net operating loss carryforwards, investment and other
tax credit carryforwards included in the calculation of the Crown Vantage income
tax benefit cannot be utilized on a standalone basis. As the Berlin-Gorham Mills
are not a separate legal or tax entity they are considered to have no reportable
net operating loss, tax credit carryforwards, or deferred tax assets and
liabilities.
Interest Expense
Interest expense included in the accompanying financial statements
represents interest expense on the industrial revenue bonds specifically
restricted for use in funding certain environmental capital improvements at the
Berlin-Gorham Mills. Interest expense reflected in the statements of operations
and the amount of debt reflected in the balance sheets are not intended to
reflect interest expense that the Berlin-Gorham Mills may have incurred nor the
amount of debt which would have been outstanding had the Berlin-Gorham Mills
been a standalone company for the years presented. As discussed below under
"Crown Vantage's Investment," transactions with Crown Vantage are treated as
settled immediately through the investment account. As a result, there were no
advances from Crown Vantage outstanding that would require recognition of
interest expense.
Sale of Accounts Receivable
In 1996, Crown Vantage entered into a five-year agreement with certain
banks which provides for the sale of undivided interests in a revolving pool of
trade accounts receivable, without recourse, including trade receivables
attributable to the Berlin-Gorham Mills. As collections reduce accounts
receivable included in the pool, Crown Vantage sells undivided interests in new
receivables to bring the amount sold up to the amount permitted. Accounts
receivable reported in the accompanying balance sheets represent the
Berlin-Gorham Mills receivables net of the undivided interests in the
Berlin-Gorham Mills receivables sold ($6.9 million and $8.4 million at December
27, 1998 and December 28, 1997, respectively).
The proceeds from sales are less than the face amount of undivided
interests in accounts receivable sold and this discount ($.9 million in 1998,
$.5 million in 1997, and $.2 million in 1996) is included in corporate
allocations in the statement of operations.
F-34
<PAGE>
Selected Sales Information
During 1998, 1997, and 1996 export sales to foreign markets from the
Berlin-Gorham Mills represented less than 10% of net sales for that year. The
Berlin-Gorham Mills have one significant customer that purchases both pulp and
uncoated paper. Pulp sold to this customer accounted for 13.6% of net sales in
1998, 9.6% in 1997 and 10.0% in 1996. Uncoated papers sold to this customer
accounted for 10.3% of net sales in 1998, 9.3% in 1997 and 3.1% in 1996.
Crown Vantage's Investment
Crown Vantage's Investment reflects the historical intercompany activity
between the Berlin-Gorham Mills and Crown Vantage, and the Berlin-Gorham Mills'
cumulative results of operations. Transactions with Crown Vantage are reflected
as though they were settled immediately as an addition to or reduction of Crown
Vantage's Investment and there are no amounts due to or from Crown Vantage at
December 27, 1998 or December 28, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Note 3
Concentration of Credit Risk
Credit risk represents the accounting loss that would be recognized at the
reporting date if customers failed completely to perform as contracted.
Concentrations of credit risk that arise from financial instruments exist for
groups of customers when they have similar economic characteristics that would
cause their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions. The Berlin-Gorham Mills do not have any
significant concentration of credit risk.
Note 4
Supplemental Balance Sheet Information
1998 1997
-------- --------
(dollars in thousands)
Inventories
Raw Materials .................................. $ 3,950 $ 3,482
Work-in-process ................................ 586 677
Finished goods ................................. 13,031 14,545
Stores and supplies ............................ 11,702 13,391
-------- --------
29,269 32,095
Last-in, first-out reserve ..................... (1,898) (2,182)
-------- --------
Total Inventories ........................ $ 27,371 $ 29,913
======== ========
Valued at lower of cost or market:
Last-in, first-out ............................. $ 15,669 $ 16,522
F-35
<PAGE>
First-in, first-out ............................ 11,702 13,391
-------- --------
Total inventories ........................ $ 27,371 $ 29,913
======== ========
1998 1997
--------- ---------
(dollars in thousands)
Property, Plant and Equipment
Land and improvements ........................ $ 17,499 $ 23,157
Buildings .................................... 35,447 43,716
Machinery and equipment ...................... 280,294 342,106
Construction in progress ..................... 3,633 4,690
--------- ---------
336,873 413,669
Accumulated depreciation ..................... (290,688) (210,753)
--------- ---------
Net property, plant and equipment ............ $ 46,185 $ 202,916
========= =========
1998 1997
------- -------
(dollars in thousands)
Accrued Liabilities
Compensated absences ............................ $ 2,948 $ 3,133
Employee insurance benefits ..................... 3,272 4,950
Accrued interest ................................ 1,154 1,161
Taxes payable, other than income taxes .......... 8,568 7,475
Other accrued liabilities ....................... 5,238 4,957
------- -------
Total accrued liabilities ....................... $21,180 $21,676
======= =======
Note 5
Long-term Debt
Long term debt consists of the following industrial revenue bonds (in
thousands) for both 1998 and 1997:
7.75% Refunding Bonds, due 2022 ............................. $17,955
7.875% Project Bonds, due 2026 .............................. 12,300
-------
$30,255
=======
Proceeds from the sale of the 7.875% Project Bonds are used to finance
eligible environmental project costs. At December 27, 1998 and December 28, 1997
approximately $1.8 million and $5.2 million, respectively had not yet been
spent. At December 27, 1998 and December 28, 1997, the fair value of the
industrial revenue bonds approximated book value. Cash paid for interest totaled
$2.4 million for 1998, $2.4 million for 1997 and $1.2 million for 1996.
F-36
<PAGE>
Note 6
Pension and Other Benefit Plans
In connection with a spin-off transaction in 1995, Crown Vantage and James
River Corporation of Virginia (now "Fort James Corporation") entered into an
agreement with the Pension Benefit Guaranty Corporation (the "PBGC") whereby
U.S. pension plans transferred to Crown Vantage (including the Berlin-Gorham
Mills pension plans) and corresponding accumulated participant benefits were
frozen (the "Frozen Plans"). New pension plans (the "New Plans") were then
established by Crown Vantage that have terms substantially similar to the Frozen
Plans. An agreement exists between Fort James Corporation and the PBGC which
provides that, if the PBGC institutes proceedings to terminate a Frozen Plan,
Fort James Corporation may either assume sponsorship of the plan or will be
responsible for all liabilities arising from the termination of the plan. Fort
James Corporation's contingent obligation with respect to the Frozen Plans will
generally end when there are no unfunded benefit obligations for the Frozen
Plans. Fort James Corporation and Crown Vantage have entered into an agreement
that establishes minimum funding requirements by Crown Vantage for the Frozen
Plans that are at least equal to minimum funding requirements pursuant to
Section 412 of the Internal Revenue Code. All hourly plans at the Berlin-Gorham
Mills are for employees and retirees of that facility. The salary plan is for
all salaried employees of Crown Vantage. The Berlin-Gorham Mills were allocated
a portion of the salaried plan balances and income/expense based on actuarial
calculations.
Hourly employees at the Berlin-Gorham Mills who retire after having
attained at least age 55 with 10 years of service are eligible for post-retiree
medical benefits ("Other Benefits"). Salaried employees hired before January 1,
1993, generally become eligible for retiree medical benefits after reaching age
55 with 15 years of service or after reaching age 65. Salaried employees hired
after January 1, 1993 are not eligible for retiree medical benefits. The retiree
medical plans are unfunded.
The financial statements include the present value of benefit obligations,
related components of pension and other benefit costs, unrecognized net gains,
prior service costs, transition liabilities and plan assets that were derived
from actuarial calculations.
Summary information on the Berlin-Gorham Mills' pension and other benefit
plans is as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year ...... $ 71,224 $ 69,979 $ 19,901 $ 22,117
Service cost ................................. 1,298 1,030 408 371
Interest cost ................................ 5,167 5,586 1,441 1,420
Amendment .................................... 73 -- -- --
Plan participants' contributions ............. 294 249 727 688
Actuarial (gain) loss ........................ 3,201 320 1,125 (2,521)
Benefits paid ................................ (5,936) (5,940) (2,062) (2,174)
-------- -------- -------- --------
Benefit obligation at end of year ............ $ 75,321 $ 71,224 $ 21,540 $ 19,901
======== ======== ======== ========
Change in plan assets
Fair value of plan assets at beginning of year $ 97,907 $ 83,949
Actual return on plan assets ................. 1,667 19,024
Company contributions ........................ 1,095 625
</TABLE>
F-37
<PAGE>
<TABLE>
<S> <C> <C>
Plan participants' contributions ............. 294 249
Benefits paid ................................ (5,936) (5,940)
-------- --------
Fair value of plan assets at end of year ..... $ 95,027 $ 97,907
======== ========
</TABLE>
Plan assets are invested primarily in domestic equity and fixed income
mutual funds. The following table sets forth the funded status of the
Berlin-Gorham Mill's pension plans and other benefit plans at December 27, 1998,
and December 28, 1997:
<TABLE>
<CAPTION>
Pension Plans Other Benefits Plans
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Funded status (over/(under)funded) ... $ 19,706 $ 26,683 $(21,540) $(19,901)
Unrecognized net gain ................ (5,535) (15,356) (3,892) (5,181)
Unrecognized prior service cost (gain) 2,546 3,006 (5,292) (6,307)
Unrecognized net transition liability 1,153 1,635 -- --
-------- -------- -------- --------
Net asset (liability) ................ $ 17,870 $ 15,968 $(30,724) $(31,389)
======== ======== ======== ========
</TABLE>
The components of the Berlin-Gorham Mill's net pension and other benefit
costs, were as follows:
<TABLE>
<CAPTION>
Pension Plans Other Benefit Plans
----------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service cost ................ $ 1,298 $ 1,030 $ 1,804 $ 408 $ 371 $ 469
Interest cost ............... 5,167 5,586 8,073 1,441 1,420 1,655
Net investment income on plan
assets ................. (7,733) (7,546) (9,994) -- -- --
Net amortization ............ 351 518 1,170 (1,179) (1,341) (1,052)
------- ------- ------- ------- ------- -------
Net benefit cost (income) ... $ (917) $ (412) $ 1,053 $ 670 $ 450 $ 1,072
======= ======= ======= ======= ======= =======
</TABLE>
Net amortization of pension and other benefit costs includes amortization
of the net transition assets, net experience gains and losses, and prior service
costs over 15 to 20 years. The actuarial assumptions used in determining net
pension and other benefit costs and related pension and other benefit
obligations were as follows:
Pension Benefits Other Benefits
<TABLE>
<CAPTION>
1998 1997 1998 1997
------ ------ ---- ------
<S> <C> <C> <C> <C>
Discount Rate ............................................. 7.0% 7.5% 7.0% 7.5%
Assumed rate of increase in compensation levels ........... 4.0% 4.0%
Expected long-term rate of return on plan assets .......... 10.0% 10.0%
</TABLE>
Changes in actuarial assumptions for 1998 resulted in an increase to other
benefit costs of $.1 million and the related accumulated benefit obligation of
$1 million. The assumed health care cost trend rate used in measuring the
accumulated benefit obligation for other benefits was 6.5% in 1998, declining by
0.5% per year through 2002 to an ultimate rate of 4.5%. The effect of a 1%
change in the health care cost trend rate assumptions is as follows:
F-38
<PAGE>
<TABLE>
<CAPTION>
1% increase 1% decrease
--------- ---------
(dollars in thousands)
<S> <C> <C>
Service and interest cost .............................. $ 262 $ 215
Accumulated postretirement benefit obligation .......... $2,520 $2,197
</TABLE>
Prepaid pension assets are included in other assets.
Note 7
Commitments and Contingent Liabilities
Leases
As of December 27, 1998, future minimum rental payments under noncancelable
operating leases were as follows:
Minimum
Rentals
-------
(dollars in thousands)
1999 ........................................... $ 748
2000 ........................................... 732
2001 ........................................... 559
2002 ........................................... 471
2003 ........................................... 471
Later years .................................... 579
------
Total future minimum rentals ................... $3,560
======
Rent expense totaled $1.1 million in 1998, $.5 million in 1997 and $.6
million in 1996.
Environmental Matters
The Berlin-Gorham Mills have accrued $2.4 million at December 27, 1998 and
$2.5 million at December 28, 1997 primarily for estimated landfill site
restoration, post-closure and monitoring costs. The accrued amounts are expected
to be paid during the operation of the landfill, through closure of the
landfill, and over the thirty year post-closure monitoring period.
The Environmental Protection Agency signed final rules affecting pulp and
paper industry discharges of wastewater and gaseous emissions ("Cluster Rules")
which became effective on April 15, 1998. These Cluster Rules require changes in
the pulping, bleaching and/or wastewater treatment processes presently used in
some U.S. pulp and paper mills, including the Berlin pulp mill. Management
estimates that approximately $12.9 million of capital expenditures may be
required to comply with the rules with compliance dates beginning in 1999 and
extending over the next two to five years. 1998 environmental capital spending
includes $.2 million for compliance with the Cluster Rules. There are risks and
uncertainties associated with the estimate that could cause total capital
expenditures and timing of such expenditures to be materially different from
current estimates, including changes in technology, interpretation of the rules
by government agencies that is substantially different from Management's
interpretation, or other items.
F-39
<PAGE>
Note 8
Timberland Gain
During the fourth quarter of 1997, the Berlin-Gorham Mills sold
approximately 24,000 acres of timber-producing properties for approximately
$24.5 million and recognized a gain of $13.5 million. Proceeds of the sale were
used to pay down Crown Vantage debt.
Note 9
Severance
During 1998, the Berlin-Gorham Mills accrued $1.9 million relating to a 5%
work force reduction. The accrual is for anticipated expenses resulting from the
work force reduction, primarily for severance and benefit payments to the
approximately 100 affected employees. Both hourly and salaried employees from
manufacturing, maintenance, and office staff were affected. As of December 27,
1998 approximately $1.0 million had been paid and the remainder will be paid
during the first half of 1999.
Note 10
Year 2000 Issue (Unaudited)
The Year 2000 issue concerns the potential inability of computer
applications, information technology systems, and certain software-based
"embedded" control systems to properly recognize and process date-sensitive
information as the Year 2000 approaches and beyond. The Berlin-Gorham Mills
could suffer material adverse impacts on their operations and financial results
if the applications and systems used by the Berlin-Gorham Mills, or by third
parties with whom the Berlin-Gorham Mills do business, do not accurately or
adequately process or manage dates or other information as a result of the Year
2000 issue.
The Berlin-Gorham Mills use a variety of software applications, business
information systems, accounting subsystems, process control systems and related
software, communication devices, and networking and other operating systems. The
Berlin-Gorham Mills have completed an inventory of all such systems and are
currently in the process of testing, upgrading, replacing, or otherwise
modifying these systems to adequately address the Year 2000 issue. The
Berlin-Gorham Mills believe they will be able to timely modify or replace
affected systems to prevent any material detrimental effects on operations and
financial results. However, the Berlin-Gorham Mills can give no assurance that
all critical Year 2000 issues will be resolved in a timely manner or that
potentially unresolved issues would not have a material adverse impact on the
results of operations.
The Berlin-Gorham Mills have certain key relationships with customers,
vendors and outside service providers. Failure by the Berlin-Gorham Mills' key
customers, vendors and outside service providers to adequately address the Year
2000 issue could have a material adverse impact on the Berlin-Gorham Mills'
operations and financial results. The Berlin-Gorham Mills are currently
assessing the Year 2000 readiness of these key customers, vendors and outside
service providers and, at this time, cannot determine what the impact of their
readiness will be on the Berlin-Gorham Mills.
F-40
<PAGE>
Note 11
Subsequent Event
In March 1999, Crown Vantage reached an agreement with American Tissue for
the sale of substantially all of the Berlin-Gorham Mills' assets and certain
liabilities. In connection with Crown Vantage's decision to sell the
Berlin-Gorham Mills, the net assets to be sold will be written down to their net
realizable value in the first quarter of 1999. As a result, a charge will be
recognized in the Berlin-Gorham Mills' 1999 first quarter of approximately $16.2
million.
Settlement of Berlin Property Tax Case
In 1994, Crown Vantage, through its wholly-owned subsidiary Crown Paper Co.
subsidiary (the "Company") filed a suit against the City of Berlin, New
Hampshire relating to an approximately $107 million increase from 1992 to 1994
of the City's assessed value of the Berlin portion of the Berlin-Gorham
facility. The increased assessed value resulted in an annual increase in
property taxes of approximately $2.5 million. The Company sought abatement of
the tax increase on the grounds that the City's valuations were excessive, and
that New Hampshire law exempted certain income producing equipment, such as the
chemical recovery unit, from property taxation. In April 1996, the trial court
affirmed most of the City's positions, and the Company appealed that decision to
the New Hampshire Supreme Court. On December 31, 1997, the Supreme Court
released an opinion which, in part, resulted in a remand of various issues back
to the trial court. On February 1, 1999, the Company finalized an agreement with
the City, which permanently settles the issue of taxability of factory machinery
and over the next three years significantly reduces the assessed value from
recent valuations of the Company's Berlin pulp mill. Over the three years the
City of Berlin's property taxes are expected to average $3 million annually at
the current assessed rate, which is some $2 million per year less than has been
billed over the past five years. The Company expects to reverse a property tax
accrual of approximately $9 million in the first quarter of 1999.
F-41
<PAGE>
BERLIN-GORHAM MILLS
BALANCE SHEET
(dollars in thousands)
<TABLE>
<CAPTION>
June 27, 1999 December 27, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Accounts receivable ..................................................... 5,759 6,537
Inventories ............................................................. 26,282 27,371
Prepaid expenses and other current assets ............................... 386 115
-------- --------
Total current assets ............................................ 32,427 34,023
-------- --------
Property, plant and equipment, net ...................................... 30,838 46,185
Restricted cash ......................................................... 1,675 1,753
Other assets ............................................................ 16,340 19,081
-------- --------
Total Assets ...................................................... 81,280 $101,042
======== ========
Liabilities and Equity
Current Liabilities:
Accounts payable ........................................................ 6,459 $ 6,912
Accrued liabilities ..................................................... 13,407 21,180
-------- --------
Total current liabilities ......................................... 19,866 28,092
-------- --------
Long-term debt .......................................................... 30,255 30,255
Accrued post retirement benefits other than pensions .................... 24,337 30,724
Other long-term liabilities ............................................. 2,179 2,033
-------- --------
Total Liabilities ...................................... 76,637 91,104
-------- --------
Crown Vantage's Investment .............................................. 4,643 9,938
-------- --------
Total Liabilities and Equity ....................... 81,280 $101,042
======== ========
</TABLE>
See notes to financial statements.
F-42
<PAGE>
BERLIN-GORHAM MILLS
STATEMENTS OF OPERATIONS
(dollars in thousands)
26 Weeks Ended June
June 27, 1999 June 27, 1998
------------- --------------
(unaudited)
Statements of Operations Data:
Net sales ................................. $ 80,724 $ 81,473
Net sales to Crown Vantage ................ 5,648 5,966
-------- --------
Total net sales 86,372 87,439
Cost of sales ............................. 83,268 98,360
Severance charge .......................... -- 1,932
-------- --------
Gross margin .............................. 3,104 (12,853)
Adjustment to net realizable value ........ (16,175) --
Selling and administrative expenses ....... (4,693) (5,136)
Property tax accrual reversal ............. 8,957 --
Gain on timberland sale ................... -- --
Asset impairment charge ................... -- --
Corporate overhead allocation ............. (3,783) (3,342)
-------- --------
Operating income (loss) ................... (12,590) (21,331)
Interest expense and other income, net .... 1,240 1,244
-------- --------
Loss before income taxes .................. (13,830) (22,575)
Income tax benefit ........................ (5,366) (8,759)
-------- --------
Net loss .................................. $ (8,464) $(13,816)
======== ========
F-43
<PAGE>
BERLIN-GORHAM MILLS
STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
-----------------------------------
June 27, 1999 June 28, 1998
------------- -------------
(unaudited)
<S> <C> <C>
Cash provided by (used for) operating activities:
Net loss ..................................................... (8,464) (13,816)
Items not affecting cash:
Depreciation and cost of timber harvested ....... 2,676 12,083
Property tax accrual reversal ................... (8,957) --
Adjustment to net realizable value .............. 16,175 --
Other, net ...................................... 25 25
Tax benefit ..................................... (5,366) (8,759)
Change in current assets and liabilities:
Accounts receivable ............................. 777 298
Inventories ..................................... 1,090 156
Other current assets ............................ (271) (524)
Accounts payable ................................ (452) (28)
Other current liabilities ....................... (2,777) 6,290
Restricted cash .............................................. 78 228
Other, net ................................................... 146 121
-------- --------
Cash used for operating activities ..... (5,320) (3,926)
Cash provided by (used for) investing activities:
Expenditures for property, plant and equipment ............... (3,211) (2,812)
Proceeds from sale of property, plant and equipment .......... -- (212)
Other, net ................................................... (3) 208
-------- --------
Cash used for investing activities ..... (3,214) (2,816)
Cash provided by (used for) financing activities:
Crown Vantage's capital investment ........................... 8,534 6,742
-------- --------
Cash provided by financing activities .. 8,534 6,742
-------- --------
Decrease in cash and cash equivalents ........................ -- --
Cash and cash equivalents, beginning of year ................. -- --
======== ========
Cash and cash equivalents, end of period $ -- $ --
======== ========
</TABLE>
See notes to financial statements.
F-44
<PAGE>
BERLIN-GORHAM MILLS
NOTES TO INTERIM FINANCIAL STATEMENTS
(unaudited)
Note 1-Organization and Basis of Presentation
The Berlin-Gorham Mills are owned by Crown Paper Co., a wholly-owned
subsidiary of Crown Vantage Inc. (collectively "Crown Vantage"). Subject to the
successful consummation of the Asset Purchase Agreement and related agreements
by and between Crown Paper Co. and American Tissue Inc. ("American Tissue"), the
Berlin-Gorham Mills will be sold to Pulp & Paper of America LLC, an affiliate of
American Tissue (the "Sale"). The accompanying condensed financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for annual financial statements. The condensed balance sheet as of December 27,
1998 was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the 26 weeks ended June 27, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 26, 1999. For further information, refer to the Berlin-Gorham Mills'
financial statements and footnotes thereto included in financial statements for
the year ended December 27, 1998.
The accompanying financial statements have been prepared as if the
Berlin-Gorham Mills had operated as an independent stand-alone entity for all
periods presented. There are no allocations of Crown Vantage borrowings or
related interest expense in the accompanying financial statements except for
borrowings and interest expense of certain industrial revenue bonds incurred by
Crown Vantage that are restricted to environmental expenditures at the
Berlin-Gorham Mills. The Berlin-Gorham Mills engaged in various transactions
with Crown Vantage and its other mills that are characteristic of a group of
entities under common control. Throughout the period covered by these financial
statements, the Berlin-Gorham Mills participated in Crown Vantage's centralized
cash management system and, as such, its cash funding requirements were met by
Crown Vantage. The Berlin-Gorham Mills' operational transactions resulted in
amounts receivable from and payable to Crown Vantage, which fluctuate over time
and have not been settled through cash transfers. Accordingly, the amounts have
been presented net in the balance sheet as Crown Vantage's Investment. For a
description of all significant intercompany transactions effecting the
Berlin-Gorham Mills please see the Berlin-Gorham Mills' financial statements for
the year ended December 27, 1998.
Crown Vantage general and administrative costs not directly attributable to
the Berlin-Gorham Mills have been allocated based primarily on tons sold.
Management believes the allocation method is reasonable. Such allocations for
the first six months totaled $3.8 million in 1999, and $3.3 million in 1998.
Note 2-Sale of Accounts Receivable
In 1996, Crown Vantage entered into a five-year agreement with certain
banks which provides for the sale of undivided interests in a revolving pool of
trade accounts receivable without recourse, including trade receivables
attributable to the Berlin-Gorham Mills. As collections reduce accounts
receivable included in the pool, Crown Vantage sells undivided interests in new
receivables to
F-45
<PAGE>
bring the amount sold up to the amount permitted. Accounts receivable reported
in the accompanying balance sheets represent the Berlin-Gorham Mills receivables
net of the undivided interests in the Berlin-Gorham Mills receivables sold ($6.2
million at June 27, 1999 and $6.9 million at December 27, 1998).
The proceeds from sales are less than the face amount of undivided
interests in accounts receivable sold and this discount ($0.4 million in 1999
and 1998) is included in corporate allocations in the statement of operations.
Note 3-Sales to Crown Vantage Locations
Net sales of pulp to other Crown Vantage mills, which are included in the
accompanying Statement of Operations, totaled $5.6 million in 1999, and $6.0
million in 1998.
Note 4-Inventories
(amounts in thousands) June 27, 1999 December 27, 1998
- ---------------------- ------------- ------------------
Raw Materials ...................... $ 2,943 $ 3,950
Work-in-process .................... 615 586
Finished goods ..................... 11,877 13,031
Stores and supplies ................ 11,848 11,702
-------- --------
27,283 29,269
Last-in, first-out reserve ......... (1,001) (1,898)
-------- --------
Total Inventories .................. $ 26,282 $ 27,371
======== ========
Note 5-Long-term Debt
Long term debt consists of the following industrial revenue bonds (in
thousands) for periods presented:
7.75% Refunding Bonds, due 2022 ............................. $17,955
7.875% Project Bonds, due 2026 .............................. 12,300
-------
$30,255
=======
Proceeds from the sale of the 7.875% Project Bonds are used to finance
eligible environmental project costs. At June 27, 1999 and December 27, 1998
approximately $1.7 million and $1.8 million, respectively had not yet been
spent.
Note 6-Environmental Matters
The Berlin-Gorham Mills have accrued $2.8 million at June 27, 1999 and $2.4
million at December 27, 1998 primarily for estimated landfill site restoration,
post-closure and monitoring costs.
The Environmental Protection Agency signed final rules affecting pulp and
paper industry discharges of wastewater and gaseous emissions ("Cluster Rules")
which became effective on April 15, 1998. These Cluster Rules require changes in
the pulping, bleaching and/or wastewater treatment processes presently used in
some U.S. pulp and paper mills, including the Berlin pulp mill. Management
F-46
<PAGE>
estimates that approximately $12.9 million of capital expenditures may be
required to comply with the rules with compliance dates beginning in 1999 and
extending over the next two to five years. As of June 27, 1999, $0.2 million had
been spent in 1999 and Cluster Rule capital spending from inception to date
totals $0.4 million. There are risks and uncertainties associated with the
estimate that could cause total capital expenditures and timing of such
expenditures to be materially different from current estimates, including
changes in technology, interpretation of the rules by government agencies that
is substantially different from Management's interpretation, or other items.
Note 7-Year 2000 Issue (Unaudited)
The Year 2000 issue concerns the potential inability of computer
applications, information technology systems, and certain software-based
"embedded" control systems to properly recognize and process date-sensitive
information as the Year 2000 approaches and beyond. The Berlin-Gorham Mills
could suffer material adverse impacts on its operations and financial results if
the applications and systems used by the Berlin-Gorham Mills, or by third
parties with whom the Berlin-Gorham Mills do business, do not accurately or
adequately process or manage dates or other information as a result of the Year
2000 issue.
The Berlin-Gorham Mills use a variety of software applications, business
information systems, accounting subsystems, process control systems and related
software, communication devices, and networking and other operating systems. The
Berlin-Gorham Mills have completed an inventory of all such systems and are
currently in the process of testing, upgrading, replacing, or otherwise
modifying these systems to adequately address the Year 2000 issue. The
Berlin-Gorham Mills believe they will be able to timely modify or replace its
affected systems to prevent any material detrimental effects on operations and
financial results. However, the Berlin-Gorham Mills can give no assurance that
all critical Year 2000 issues will be resolved in a timely manner or that
potentially unresolved issues would not have a material adverse impact on the
results of operations.
The Berlin-Gorham Mills have certain key relationships with customers,
vendors and outside service providers. Failure by the Berlin-Gorham Mills' key
customers, vendors and outside service providers to adequately address the Year
2000 issue could have a material adverse impact on the Berlin-Gorham Mills'
operations and financial results. The Berlin-Gorham Mills are currently
assessing the Year 2000 readiness of these key customers, vendors and outside
service providers and, at this time, cannot determine what the impact of their
readiness will be on the Berlin-Gorham Mills.
Note 8-Berlin-Gorham Sale
In March 1999, Crown Vantage reached an agreement with American Tissue for
the sale of substantially all of the Berlin-Gorham Mills' assets and certain
liabilities. Management expects to consummate the sale during the second quarter
of 1999. In connection with Crown Vantage's decision to sell the Berlin-Gorham
Mills, a charge for $16.2 million was recorded in the first quarter of 1999 in
order to adjust the Berlin-Gorham Mills' net book value to its net realizable
value. The charge consisted of the following elements:
(amounts in millions)
- ---------------------
Fixed asset write-down ........................................ $16.5
Accrued transaction fees ...................................... 2.5
Loss on curtailment of pension plans .......................... 3.4
F-47
<PAGE>
Gain on curtailment/settlement of other benefit plans ............. (6.2)
-----
Total charge ...................................................... $16.2
=====
Note 9-Settlement of Berlin Property Tax Case
On February 1, 1999, the Berlin-Gorham Mills finalized an agreement with
the City of Berlin, New Hampshire concerning assessed values and taxability of
factory machinery. Over the next three years, the agreement significantly
reduces the assessed value from recent valuations of the Berlin-Gorham Mills'
pulp mill. The Berlin-Gorham Mills reversed a property tax accrual of
approximately $9 million in the first quarter of 1999, which relates to amounts
over-accrued for previous tax years.
F-48
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the Delaware General Corporation Law ("Section 145"), inter alia,
provides that a Delaware corporation may indemnify any persons who were, are or
are threatened to be made, parties 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 such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify any persons who are,
were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reason of the
fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable to
the corporation. Where an officer, director, employee or agent is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
The Company's certificate of incorporation, as amended, provides for the
indemnification of directors and officers of the Company to the fullest extent
permitted by the Delaware General Corporation Law.
Section 145 further authorizes a corporation 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 or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
The Company has applied for insurance covering all of the Company's
directors and officers against certain liabilities for actions taken in such
capacities, including liabilities under the Securities Act of 1933.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) 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
incorporated herein by reference
(b)
SCHEDULE II
AMERICAN TISSUE INC.
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN 000s)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------- ------------ ---------- ------------- -------------
Description Balance at Charged to Write-off of Balance at
beginning of expenses uncollectible end of period
period accounts
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
September 30, 1997 ......................... $ 453 $1,120 $ 193 $1,380
September 30, 1998 ......................... $1,380 $ 560 $1,857 $ 83
September 30, 1999 ......................... $ 83 $ 915 $ 385 $ 613
</TABLE>
ITEM 22. UNDERTAKINGS.
The undersigned registrants undertake:
(1) To file, during any period in which offers or sales are being
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II - 1
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) that, for purposes of determining any liability under the Securities
Act of 1933 (the "Securities Act"), each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) that, for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
(5) 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,
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.
(6) 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.
(7) insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrants pursuant to the provisions described under Item 20 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act 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 such director, officer or controlling person in
connection with the securities being registered, the registrants 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 whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II - 2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and
Stockholder of American Tissue Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of American Tissue Inc. (the "Company")
included in this registration statement and have issued our report thereon dated
December 10,1999. Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The accompanying schedule is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Melville, New York
December 10, 1999
II - 3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the Village of
Hauppauge, State of New York, on January 26, 2000.
AMERICAN TISSUE INC.
By: /s/ Mehdi Gabayzadeh
------------------------------------------------
Name: Mehdi Gabayzadeh
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Nourollah Elghanayan Chairman of the Board and Director January 26, 2000
- -------------------------
Nourollah Elghanayan
/s/ Mehdi Gabayzadeh President and Chief Executive January 26, 2000
- -------------------------- Officer (Principal Executive Officer
Mehdi Gabayzadeh and Director)
/s/ Edward I. Stein Executive Vice President and Chief January 26, 2000
- ------------------------- Financial Officer (Principal
Edward I. Stein Financial and Accounting Officer)
/s/ Andrew Rush Director January 26, 2000
- -------------------------
Andrew Rush
</TABLE>
II - 4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
subsidiary guarantors listed on Schedule A to the cover page of this
registration statement has duly caused this Amendment No. 2 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Village of Hauppauge, State of New York, on January 26, 2000.
On behalf of each Subsidiary Guarantor listed on Schedule A
to the cover page of this registration statement
By: /s/ Mehdi Gabayzadeh
-----------------------------------------------
Name: Mehdi Gabayzadeh
Title: President and Chief Executive Officer
By: /s/ Nourollah Elghanayan
-----------------------------------------------
Name: Nourollah Elghanayan
Title: Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mehdi Gabayzadeh President and Chief Executive January 26, 2000
- ---------------------------- Officer (Principal Executive Officer
Mehdi Gabayzadeh and Director)
/s/ Edward I. Stein Executive Vice President and Chief January 26, 2000
- ---------------------------- Financial Officer(Principal
Edward I. Stein Financial and Accounting Officer)
/s/ Nourollah Elghanayan Chairman of the Board and Director January 26, 2000
- ----------------------------
Nourollah Elghanayan
</TABLE>
II - 5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
subsidiary guarantors listed on Schedule B hereto has duly caused this Amendment
No. 2 to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Village of Hauppauge, State of
New York, on January 26, 2000.
On behalf of each Subsidiary Guarantor listed on
Schedule B hereto
By: /s/ Mehdi Gabayzadeh
-----------------------------------------------
Name: Mehdi Gabayzadeh
Title: Manager
By: /s/ Nourollah Elghanayan
-----------------------------------------------
Name: Nourollah Elghanayan
Title: Manager
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mehdi Gabayzadeh President and Chief Executive January 26, 2000
- ---------------------------- Officer (Principal Executive Officer
Mehdi Gabayzadeh and Director)
/s/ Edward I. Stein Executive Vice President and Chief January 26, 2000
- ---------------------------- Financial Officer(Principal
Edward I. Stein Financial and Accounting Officer)
/s/ Nourollah Elghanayan Chairman of the Board and Director January 26, 2000
- ----------------------------
Nourollah Elghanayan
</TABLE>
II - 6
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of American Tissue Inc., as amended**
3.2 By-Laws of American Tissue Inc.**
3.3 Certificate of Incorporation of American Tissue Corporation, as
amended**
3.4 By-Laws of American Tissue Corporation, as amended**
3.5 Certificate of Incorporation of American Cellulose Mill Corp., as
amended**
3.6 By-Laws of American Cellulose Mill Corp.**
3.7 Articles of Organization of American Tissue Mills of Greenwich LLC**
3.8 Operating Agreement of American Tissue Mills of Greenwich LLC, as
amended**
3.9 Articles of Organization of American Tissue Mills of Neenah LLC**
3.10 Operating Agreement of American Tissue Mills of Neenah LLC, as
amended**
3.11 Certificate of Incorporation of American Tissue Mills of New
Hampshire, Inc., as amended**
3.12 By-Laws of American Tissue Mills of New Hampshire, Inc., as
amended**
3.13 Certificate of Incorporation of American Tissue Mills of New York,
Inc., as amended**
3.14 By-Laws of American Tissue Mills of New York, Inc.**
3.15 Certificate of Incorporation of American Tissue Mills of Oregon,
Inc., as amended**
3.16 By-Laws of American Tissue Mills of Oregon, Inc.**
3.17 Certificate of Incorporation of American Tissue Mills of Wisconsin,
Inc., as amended**
3.18 By-Laws of American Tissue Mills of Wisconsin, Inc.**
3.19 Certificate of Amendment to Record of Organization of Berlin Mills
Railway, Inc.**
3.20 Amendment to By-Laws of Berlin Mills Railway, Inc.**
3.21 Articles of Organization Calexico Tissue Company LLC**
3.22 Operating Agreement of Calexico Tissue Company LLC, as amended**
3.23 Certificate of Incorporation of American Tissue - New Hampshire
Electric Inc., as amended**
3.24 By-Laws of American Tissue - New Hampshire Electric Inc., as
amended**
3.25 Articles of Organization of Coram Realty LLC**
3.26 Operating Agreement with Coram Realty LLC, as amended**
3.27 Articles of Organization of Engineers Road, LLC**
3.28 Operating Agreement of Engineers Road, LLC, as amended**
3.29 Articles of Organization of Grand LLC, as amended**
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.30 Operating Agreement of Grand LLC, as amended**
3.31 Certificate of Incorporation of Gilpin Realty Corp., as amended**
3.32 By-Laws of Gilpin Realty Corp.**
3.33 Certificate of Formation of Hydro of America LLC**
3.34 Operating Agreement of Hydro of America LLC, as amended**
3.35 Certificate of Formation of Landfill of America LLC**
3.36 Operating Agreement of Landfill of America LLC, as amended**
3.37 Articles of Organization of Markwood LLC**
3.38 Operating Agreement of Markwood LLC, as amended**
3.39 Articles of Organization of 100 Realty Management LLC**
3.40 Operating Agreement of 100 Realty Management LLC, as amended**
3.41 Certificate of Formation of Paper of America LLC**
3.42 Operating Agreement of Paper of America LLC, as amended**
3.43 Articles of Organization of Pulp & Paper of America LLC, as
amended**
3.44 Operating Agreement of Pulp & Paper of America LLC, as amended**
3.45 Certificate of Formation of Pulp of America LLC**
3.46 Operating Agreement of Pulp of America LLC, as amended**
3.47 Certificate of Formation of Railway of America LLC**
3.48 Operating Agreement of Railway of America LLC, as amended**
3.49 Articles of Organization of Saratoga Realty LLC**
3.50 Operating Agreement of Saratoga Realty LLC, as amended**
3.51 Certificate of Incorporation of Tagsons Papers, Inc., as amended**
3.52 By-Laws of Tagsons Papers, Inc.**
3.53 Articles of Organization of Unique Financing LLC, as amended**
3.54 Operating Agreement of Unique Financing LLC, as amended**
4.1 Indenture dated as of July 9, 1999 among American Tissue Inc., each
Subsidiary Guarantor and The Chase Manhattan Bank, as Trustee**
4.2 Form of 12 1/2% Series B Senior Secured Notes**
4.3 Form of Subsidiary Guarantees**
4.4 Purchase Rights Agreement dated as of July 9, 1999 among American
Tissue Inc., each Subsidiary Guarantor and Donaldson, Lufkin &
Jenrette Securities Corporation**
4.5 Registration Rights Agreement dated as of July 9, 1999, by and among
American Tissue Inc., each Subsidiary Guarantor and Donaldson,
Lufkin & Jenrette Securities Corporation**
- 2 -
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.6 Security Agreement dated as of July 9, 1999, made by American Tissue
Inc. and each of the Subsidiary Guarantors in favor of the Trustee**
4.7 Form of Mortgage, Assignment of Leases, Security Agreement and
Fixture Filing dated as of July 9, 1999 between each of the
following Subsidiary Guarantors in favor of the Trustee: American
Tissue Mills of Greenwich LLC relating to premises at Mill Road,
Greenwich, New York; America Tissue Mills of New Hampshire, Inc.
relating to premises at 116 Lost Road, Winchester, New Hampshire;
American Tissue Mills of Neenah LLC relating to premises at 249 Lake
Street, Neenah, Wisconsin; American Tissue Mills of New York, Inc.
relating to premises at 510 South Main Street, Mechanicville, New
York; American Tissue Mills of Wisconsin, Inc. relating to premises
at 858 West Leather Avenue, Tomahawk, Wisconsin; Berlin Mills
Railway, Inc. relating to premises in Gorham, New Hampshire; Coram
LLC relating to premises at 466-468 Mill Road, Coram, New York;
Crown Vantage-New Hampshire Electric, Inc., relating to premises in
Berlin and Gorham, New Hampshire; Engineers Road LLC relating to
premises at 135 Engineers Road, Hauppauge, New York; Gilpin Realty
Corp. relating to premises at 45 Gilpin Avenue, Hauppauge, New York;
Landfill of America LLC relating to premises in Success, New
Hampshire; Paper of America LLC relating to premises in Gorham, New
Hampshire; Pulp of America LLC relating to premises in Berlin, New
Hampshire; and Saratoga Realty LLC relating to premises at 3
Duplainville Road, Saratoga Springs, New York**
4.8 Leasehold Mortgage, Assignment of Leases, Security Agreement and
Fixture Filing dated as of July 9, 1999 between Grand LLC, as
mortgagor, and the Trustee, as mortgagee**
4.9 Leasehold Deed of Trust, Assignment of Leases, Security Agreement
and Fixture Filing dated as of July 9, 1999 made by American Tissue
Mills of Oregon, Inc., as grantor, to Ticor Title Insurance Company,
as trustee for the benefit of the Trustee, as beneficiary**
5.1 Opinion of Mandel, Resnik & Kaiser P.C.*
10.1 Amended and Restated Loan and Security Agreement dated July 9, 1999
among American Tissue Inc., certain subsidiaries of American Tissue
Inc., certain lenders and LaSalle Bank National Association, for
itself and as agent for the other lenders**
10.2 Existing Lien Intercreditor Agreement dated as of July 9, 1999 among
American Tissue Inc., each of the Subsidiary Guarantors, the
Trustee, Bank United, The Roslyn Savings Bank and LaSalle Bank
National Association**
10.3 Consent and Intercreditor Agreement dated as of July 9, 1999 among
American Tissue Mills of Oregon, Inc., American Tissue Corporation,
the Trustee and Boise Cascade Corporation**
10.4 Asset Purchase Agreement dated March 24, 1999 by and among Crown
Paper Co., Crown Vantage-New Hampshire Electric, Inc., Berlin Mills
Railway, Inc., as Seller, and American Tissue Holdings Inc. (now
known as American Tissue Inc.) and Pulp & Paper of America LLC, as
Buyer**
10.5 Instrument of Assumption of Liabilities dated July 9, 1999 made by
Pulp & Paper of America LLC and its subsidiaries in favor of Crown
Vantage, Inc. and its subsidiaries**
10.6 Pulp Purchase Agreement dated March 24, 1999 between Crown Paper Co.
and Pulp & Paper of America LLC**
- 3 -
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.7 Paper Brokerage Agreement dated March 24, 1999 between Crown Paper
Co. and Pulp & Paper of America LLC**
10.8 Strategic Alliance Agreement dated March 24, 1999 between Crown
Paper Co. and Pulp & Paper of America LLC**
10.9 Lease dated August 1, 1998 between American Tissue Mills of Neenah
LLC and Lakeview Real Estate LLC relating to premises located at 249
North Lake Street, Neenah, Wisconsin**
10.10 Lease dated June 1, 1998 between American Tissue Corporation and
Huntington LLC relating to premises located 1 Arnold Drive,
Huntington, New York**
10.11 Lease dated January 18, 1996 between American Tissue Corporation and
Reckson Operating Partnership, L.P. relating to premises located at
85 Nicon Court, Hauppauge, New York**
10.12 Lease dated in February 1990 between American Tissue Corporation and
Vanderbilt Associates relating to premises located at 110 Plant
Avenue, Hauppauge, New York**
10.13 NOVATION AGREEMENT dated as of July 9, 1999 among Super American
Tissue Inc., Nourollah Elghanayan, Mehdi Gabayzadeh, Lakeview Real
Estate LLC and Huntington LLC**
10.14 Lease dated August 15, 1996 between American Tissue Corporation and
Swimline Corporation relating to premises located at 56 Vanderbilt
Motor Parkway, Commack, New York**
10.15 Lease Agreement dated as of March 20, 1998 between Waterford
Industrial Development Authority and Grand LLC relating to premises
located in Waterford, New York**
10.16 Agreement dated November 23, 1992 between American Tissue Mills of
Oregon, Inc. and Boise Cascade, as amended by the Amendment dated
January 1, 1999 among the same parties and American Tissue
Corporation**
10.17 Lease Agreement dated December 15, 1995 between American Tissue
Corporation and Curtiss-Wright Flight Systems/Shelby, Inc. relating
to premises located at Passaic Street, Wood-Ridge, New Jersey**
10.18 Loan Agreement dated December 15, 1995 between American Tissue
Corporation and Curtiss-Wright Flight Systems/Shelby, Inc.**
10.19 Lease Agreement dated as of November 1, 1997 between St. Lawrence &
Atlantic Railroad Company and Berlin Mills Railway Inc.**
10.20 Service Agreement dated as of November 1, 1997 between Crown Paper
Co. and St. Lawrence & Atlantic Railroad Company**
10.21 Note and Mortgage dated October 27, 1998 made by Grand LLC in favor
of Security Mutual Life Insurance Company of New York relating to
premises located in Halfmoon, New York**
10.22 Consolidated Mortgage Note and Consolidated Mortgage dated December
29, 1997 made by Saratoga Realty LLC in favor of Bank United
relating to premises located at 3 Duplainville Road, Saratoga
Springs, New York**
- 4 -
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.23 Consolidated Mortgage Note and Consolidated Mortgage dated October
17, 1997 made by Grand LLC in favor of Bank United relating to
premises located at Bell's Lane, Waterford, New York**
10.24 Consolidated Mortgage Note and Consolidated Mortgage dated July 21,
1998 made by Gilpin Realty Corp., Coram Realty LLC, Engineers Road
LLC and Huntington LLC in favor of The Roslyn Savings Bank relating
to premises located at 135 Engineers Road, Hauppauge, New York,
466-468 Mill Road, Coram, New York and 45 Gilpin Avenue, Hauppauge,
New York**
10.25 Mortgage Note and Deed of Trust dated as of April 19, 1999 made by
Calexico Tissue Company LLC in favor of Bank United**
10.26 Agency Loan Promissory Note and Agency Loan Deed of Trust dated in
May 1997 made by Calexico Tissue Company LLC in favor of Community
Development Agency of the City of Calexico**
10.27 Reimbursement Promissory Note and Reimbursement Deed of Trust dated
in July 1997 made by Calexico Tissue Company LLC in favor of
Community Development Agency of the City of Calexico**
10.28 Agreement to Supply Sand and Gravel in Place dated October 30, 1997
between John Hancock Mutual Life Insurance Company and Crown Paper
Co.**
10.29 Roundwood Supply Agreement dated June 28, 1999 between Prime Timber
Company LLC and Crown Paper Co.**
10.30 Northeast Roundwood Supply Agreement dated October 30, 1997 between
John Hancock Mutual Life Insurance Company and Crown Paper Co.**
10.31 Cooperative Agreement dated June 19, 1995 between Kimberly-Clark
Corporation and United Paperworker's International Union, AFL-CIO,
and Local No. 482**
10.32 Labor Agreement dated as of June 24, 1997 between Crown Vantage and
United Paperworkers International Union, AFL-CIO, and its United
Brotherhood Local Union No. 75**
10.33 Labor Agreement dated July 15, 1997 between Crown Paper Co. and
Office and Professional Employees International Union, Local 6**
10.34 Agreement dated December 12, 1994 between American Tissue
Corporation and American Tissue Mills de Mexico S.A. de C.V.**
12.1 Computation of ratio of earnings to fixed charges*
21.1 Subsidiaries of American Tissue Inc.**
23.1 Consent of Arthur Andersen LLP*
23.2 Consent of Holtz Rubenstein & Co., LLP*
- 5 -
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
23.3 Consent of Ernst & Young LLP**
23.4 Consent of Mandel, Resnik & Kaiser P.C. (included in Exhibit 5.1)*
24.1 Powers of Attorney (included in signature pages)**
25.1 Statement of Eligibility of Trustee on Form T-1**
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 Record Holders of Old Notes**
99.4 Form of Letter to Beneficial Holders of Old Notes**
- ------------------
* Filed herewith
** Previously filed
- 6 -
[LETTERHEAD OF MANDEL RESNIK & KAISER P.C.]
January 26, 2000
American Tissue Inc.
135 Engineers Road
Hauppauge, NY 11788
Re: Offer by American Tissue Inc. to exchange any and all of Its
Outstanding Series A 12 1/2% Senior Secured Notes due 2006 for
Its Series B 12 1/2% Senior Secured Notes Due 2006
--------------------------------------------------
Ladies and Gentlemen:
We are acting as counsel to American Tissue Inc., a Delaware corporation
(the "Company"), in connection with the proposed registration by the Company of
up to $165,000,000 in aggregate principal amount of the Company's 12 1/4 %
Series B Senior Secured Notes due 2006 (the "Exchange Notes"), pursuant to a
Registration Statement on Form 5-4 filed with the Securities and Exchange
Commission (the "Commission") on September 29, 1999 under the Securities Act of
1933, as amended (the "Securities Act") (such Registration Statement, as amended
or supplemented, is hereinafter referred to as the "Registration Statement"),
for purpose of effecting an exchange offer (the "Exchange Offer") for the
Company's 12 1/2 % series A Senior Secured Notes due 2006 (the "Old Notes"). The
New Notes are to be issued pursuant to the Indenture (the "Indenture"), dated as
of July 9, 1999, between the Company and The Chase Manhattan Bank, as Trustee,
in exchange for and in replacement of the Company's outstanding Old Notes, of
which $165,000,000 in aggregate principal amount is outstanding.
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we have deemed necessary for the purposes of this
opinion, including (i) the corporate and organizational documents of the
Company, (ii) minutes and records of the corporate proceedings of the Company
with respect to the issuance of the Exchange Notes, (iii) the Registration
Statement and exhibits thereto and (iv) the Registration Rights Agreement, dated
as of July 9 1999, among the Company, the Subsidiary Guarantors and the Initial
<PAGE>
American Tissue Inc.
January 26, 2000
Page 2
Purchasers (the "Registration Rights Agreement") Capitalized terms used but not
defined herein shall have the meanings ascribed to them in the Registration
Rights Agreement.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the genuineness of the
signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto other than the Company, and the due authorization, execution and
delivery of all documents by the parties thereto other than the Company. As to
any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and others.
Based. Upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we are of the opinion
that:
(1) The Company is a corporation existing and in good standing under the
General Corporation Law of the State of Delaware.
(2) The sale and issuance of the Exchange Notes has been validly
authorized by the Company.
(3) When, as and if (i) the Registration Statement shall have become
effective pursuant to the provisions of the Securities Act, (ii) the
Indenture shall have been qualified pursuant to the provisions of the
Trust Indenture Act of 1939, as amended, (iii) the Old Notes shall
have been validly tendered to the Company, and (iv) the Exchange Notes
shall have been duly executed and authenticated in accordance with the
provisions of the Indenture and duly delivered to the purchasers
thereof in exchange for the Old Notes, the Exchange Notes will be
legally issued, and will constitute valid and binding obligations of
the Company.
Our opinions expressed above are subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations which may limit the rights of parties to obtain
certain remedies and (iv) any laws except the laws of the State of New York and
the General Corporation Law of the State of Delaware. We advise you that issued
addressed by this letter may be governed in whole or in part by other laws, but
we express no opinion as to whether any relevant difference exists between the
laws upon which our opinions are based
<PAGE>
American Tissue Inc.
January 26, 2000
Page 3
and any other laws which may actually govern. For purposes of the opinion in
paragraph 1, we have relied exclusively upon recent certificates issued by the
Delaware Secretary of State and such opinion is not intended to provide any
conclusion or assurance beyond that conveyed by such certificates. We have
assumed without investigation that there has been no relevant change or
development between the respective dates of such certificates and the date of
this letter.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement. We also consent to the reference to our firm under the
heading "Legal Matters" in the Registration Statement. In giving this consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act or the rules and regulations of
the Commission.
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance of the Exchange Notes.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the States of Delaware or New York be changed by legislative action,
judicial decision or otherwise.
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purposes.
Very truly yours,
/s/ Mandel Resnik & Kaiser P.C.
--------------------------------
Mandel Resnik & Kaiser P.C.
American Tissue Inc.
Calculation of Ratio of Earnings to Fixed Charges
Amounts in 000s
<TABLE>
<CAPTION>
ADJUSTED
Pro Forma Pro Forma
1995 1996 1997 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Pretax income from
continuing operations .................. (1,733) 13,182 6,873 (1,474) 18,883 (144,302) 13,637(c)
Fixed charges .......................... 7,738 10,077 14,070 17,496 20,305 27,359 27,359
Less: Interest capitalized ............. -- -- -- 599 966 966 966
-------- -------- -------- -------- -------- -------- --------
Earnings ............................... 6,005 23,259 20,943 15,423 38,222 (117,909) 40,030
-------- -------- -------- -------- -------- -------- --------
Fixed charges .......................... 7,738 10,077 14,070 17,496 20,305 27,359 27,359
Ratio .................................. (a) 2.3 1.5 (a) 1.9 (b) 1.5
times times times times
Calculation of Fixed Charges:
Interest expense ....................... 6,922 9,175 12,272 14,672 17,058 23,872 23,872
Capitalized interest ................... -- -- -- 599 966 966 966
Amortization of deferred
debt costs ............................. -- 355 1,128 1,537 1,144 1,017 1,017
Estimated interest portion of
rent expense ........................... 816 547 670 688 1,137 1,504 1,504
-------- -------- -------- -------- -------- -------- --------
7,738 10,077 14,070 17,496 20,305 27,359 27,359
-------- -------- -------- -------- -------- -------- --------
</TABLE>
(a) Earnings during fiscal years 1995 and 1998 were insufficient to cover
fixed charges by $1,733 and $2,073, respectively
(b) Pro forma earnings for fiscal 1999 would have been insufficient to
cover fixed charges by $144,302.
(c) Adjusted pro forma pre-tax income from continuing operations was
calculated as follows:
Pro forma pre-tax income from continuing operations ........... $(144,302)
Adjustment to net realizable value ............................ 16,175
Asset impairment charge ....................................... 143,632
Corporate overhead allocation ................................. 6,438
Property tax reversal ......................................... (8,957)
Non-continuing employee compensation .......................... 738
Property tax savings .......................................... (87)
---------
$ 13,637
=========
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated December 10, 1999 (and to all references to our Firm) included in
or made a part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Melville, New York
January 26, 2000
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated December 23, 1996 and to all references to our Firm included in
or made a part of this registration statement.
/s/ HOLTZ RUBENSTEIN & CO, LLP
HOLTZ RUBENSTEIN & CO, LLP
Melville, New York
January 26, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-END> Sep-30-1999
<CASH> 1,806
<SECURITIES> 0
<RECEIVABLES> 53,168
<ALLOWANCES> 613
<INVENTORY> 94,664
<CURRENT-ASSETS> 160,716
<PP&E> 255,180
<DEPRECIATION> 42,650
<TOTAL-ASSETS> 406,331
<CURRENT-LIABILITIES> 144,351
<BONDS> 0
0
0
<COMMON> 1,605
<OTHER-SE> 98,222
<TOTAL-LIABILITY-AND-EQUITY> 406,331
<SALES> 284,340
<TOTAL-REVENUES> 284,340
<CGS> 213,465
<TOTAL-COSTS> 213,465
<OTHER-EXPENSES> 24,592
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,058
<INCOME-PRETAX> 18,883
<INCOME-TAX> 0
<INCOME-CONTINUING> 18,883
<DISCONTINUED> 0
<EXTRAORDINARY> 4,164
<CHANGES> 0
<NET-INCOME> 14,719
<EPS-BASIC> 73,595
<EPS-DILUTED> 73,595
</TABLE>
American Tissue Inc.
Offer to Exchange
12 1/2% Series B Senior Secured Notes due 2006
for any and all outstanding 12 1/2% Series A Senior Secured Notes due 2006
Pursuant to Its Prospectus Dated
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON
___________________________________, 2000 UNLESS EXTENDED BY THE COMPANY (THE
"EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M, NEW YORK CITY
TIME, ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
Delivery To: The Chase Manhattan Bank, Exchange Agent
By Mail or Hand/Overnight Delivery: By Facsimile Transmission:
The Chase Manhattan Bank
Corporate Trust Securities Window (For Eligible Institutions Only)
Room 234, North Building
55 Water Street (212) 638-7380 or 7381
New York, New York 10041
Confirm by Telephone:
Carlos Esteves: (212) 638-0828
(212) 638-0454
The undersigned acknowledges receipt of the Prospectus dated __________,
2000 (the "Prospectus") of American Tissue Inc. (the "Company") which, together
with this Letter of Transmittal (the "Letter of Transmittal"), describes the
Company's offer (the "Exchange Offer") to exchange its 12 1/2% Series B Senior
Secured Notes due July 15, 2006, (the "Exchange Notes") for an equal principal
amount of the Company's outstanding 12 1/2% Series A Senior Secured Notes due
July 15, 2006 (the "Old Notes").
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE AND FOR ADDITIONAL COPIES OF THE
PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, continue on a separate signed schedule
affixed hereto.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES 1 2 3
- -----------------------------------------------------------------------------------------------------------------------
Name(s) and Address(es) of Registered Holder(s) Certificate Aggregate Principal Principal Amount
(Please fill in, if blank) Number(s)* Amount of Old Notes Tendered**
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
TOTAL
-----------------------
- -----------------------------------------------------------------------------------------------------------------------
* Need not be completed if Old Notes are being tendered by book-entry transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have tendered ALL of the
Old Notes represented by the Old Notes indicated in column 2. See Instruction 2. Old Notes
tendered hereby must be in denominations of principal amount of $1,000 and any integral
multiple thereof. See Instruction 1.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
|_| CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH
THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution _____________________________________________
Account Number ____________________________________________________________
Transaction Code Number ___________________________________________________
By crediting the Old Notes to the Exchange Agent's account at the
Book-Entry Transfer Facility in accordance with the Book Entry Transfer
Facility's Automated Tender Offer Program ("ATOP") and by complying with
applicable ATOP procedures with respect to the Exchange Offer, including
transmitting to the Exchange Agent a computer generated message (an
"Agent's Message") in which the holder of the Old Notes acknowledges and
agrees to be bound by the terms of, and makes the representations and
warranties contained in, this Letter of Transmittal, the participant in the
Book-Entry Transfer Facility confirms on behalf of itself and the
beneficial owners of such Old Notes all provisions of this Letter of
Transmittal (including any representations and warranties) applicable to it
and such beneficial owner as fully as if it had completed the information
required herein and executed and transmitted this Letter of Transmittal to
the Exchange Agent.
|_| CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT
AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s)____________________________________________
Window Ticket Number (if any) _____________________________________________
Date of Execution of Notice of Guaranteed Delivery_________________________
Name of Institution which guaranteed delivery _____________________________
If Delivered by Book-Entry Transfer, Complete the
Following: ________________________________________________________________
Account No. _______________________________________________________________
Transaction Code No. ______________________________________________________
Name of Tendering Institution _____________________________________________
|_| CHECK HERE IF YOU ARE A BROKER-DEALER WHO HOLDS OLD NOTES ACQUIRED FOR
YOUR OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES AND WISH TO RECEIVE COPIES OF THE PROSPECTUS AND COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO FOR USE IN CONNECTION WITH RESALES
OF EXCHANGE NOTES RECEIVED FOR YOUR OWN ACCOUNT IN EXCHANGE FOR SUCH
OLD NOTES.
Name: _____________________________________________________________________
Address: __________________________________________________________________
Aggregate Principal Amount of Old Notes so held: $_________________________
- --------------------------------------------------------------------------------
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE,
OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE,
WELL NOT CONSTITUTE A VALID DELIVERY.
- 2 -
<PAGE>
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer at its sole discretion, in which event the term "Expiration
Date" shall mean the latest time and date to which the Exchange Offer is
extended. The Company shall notify the holders of the Old Notes of any extension
by oral or written notice prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
This Letter of Transmittal is to be completed by a holder of Old Notes
either if certificates are to be forwarded herewith or if a tender of
certificates for Old Notes, if available, is to be made by book-entry transfer
to the account maintained by the Exchange Agent at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedures set forth in
"The Exchange Offer-Procedures for Tendering Old Notes" section of the
Prospectus. Tenders by book-entry transfer may also be made by delivering an
Agent's Message in lieu of this Letter of Transmittal. 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 (as defined below), which states that the Book-Entry Transfer
Facility has received an express acknowledgement from the tendering participant
in the Book-Entry Transfer Facility, which acknowledgment states that such
participant has received and agrees to be bound by, and makes each of the
representations and warranties contained in, this Letter of Transmittal and that
the Company may enforce this Letter of Transmittal against such participant.
Holders of Old Notes whose certificates are not immediately available, or who
are unable to deliver their certificates or confirmation of the book-entry
tender of their Old Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility (a "Book-Entry Confirmation") and all other documents required
by this Letter of Transmittal to the Exchange Agent on or prior to the
Expiration Date, must tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer-Guaranteed Delivery
Procedures" section of the Prospectus. See Instruction 1. DELIVERY OF DOCUMENTS
TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
If any tendered Old Notes are not exchanged pursuant to the Exchange Offer
for any reason, certificates for such nonexchanged or nontendered Old Notes will
be returned (or, in the case of Old Notes tendered by book-entry transfer, such
Old Notes will be credited to an account maintained at the Book-Entry Transfer
Facility), without expense to the tendering holder, promptly following the
expiration Or termination of the Exchange Offer.
- 3 -
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the above-described principal amount
of Old Notes. Subject to, and effective upon, the acceptance for exchange of the
Old Notes tendered hereby, the undersigned hereby sells, assigns and transfers
to, or upon the order of, the Company, all right, title and interest in and to
such Old Notes as are being tendered hereby and hereby irrevocably constitutes
and appoints the Exchange Agent as attorney-in-fact of the undersigned (with
full knowledge that the Exchange Agent is also acting as agent of the Company in
connection with the Exchange Offer) with respect to such Old Notes, with full
power of substitution (such power of attorney being an irrevocable power coupled
with an interest), to:
(a) deliver such Old Notes in registered certificated form, or
transfer ownership of such Old Notes through book-entry transfer at the
Book-Entry Transfer Facility, to or upon the order of the Company, upon
receipt by the Exchange Agent, as the undersigned's agent, of the same
aggregate principal amount of Exchange Notes; and
(b) receive, for the account of the Company, all benefits and
otherwise exercise, for the account of the Company, all rights of
beneficial ownership of the Old Notes tendered hereby in accordance with
the terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that, when the same are accepted for exchange, the Company
will acquire good, marketable and unencumbered tide thereto, free and clear of
all security interests, liens, restrictions, charges, encumbrances, conditional
sale agreements or other obligations relating to their sale or transfer, and not
subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any Exchange Notes acquired in
exchange for Old Notes tendered hereby will have been acquired in the ordinary
course of business of the person receiving such Exchange Notes, whether or not
such person is the undersigned, that neither the holder of such Old Notes nor
any such other person has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes and that neither the
holder of such Old Notes nor any such other person is an "affiliate," as defined
in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"),
of the Company. The undersigned has read and agrees to all of the terms of the
Exchange Offer.
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on interpretations by the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties, that the Exchange Notes issued in exchange for the Old Notes pursuant
to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder (x) that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or (y) who purchased such Old Notes directly from the Company to resell
pursuant to Rule 144A under the Securities Act (or another exemption under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangement with any person to participate in the distribution of such
Exchange Notes. However, the Company does not intend to request the SEC to
consider, and the SEC has not considered, the Exchange Offer in the context of a
no-action letter, and there can be no assurance that the staff of the SEC would
make a similar determination with respect to the Exchange Offer as in other
circumstances.
The undersigned represents that: (i) it is not engaged in, and does not
intend to engage in, a distribution of Exchange Notes and has no arrangement or
understanding to participate in a distribution of Exchange Notes and (ii) it is
not an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act. If any holder is an affiliate of the Company, is engaged in or
intends to engage in or has any arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, such holder (i) could not rely on the applicable interpretations of the
staff of the SEC and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
If the undersigned is a broker-dealer that will receive Exchange Notes for
its own account in exchange for Old Notes acquired as a result of market-making
or other trading activities (a "Participating Broker-Dealer"), it represents
- 4 -
<PAGE>
that the Old Notes to be exchanged for the Exchange Notes were acquired by it as
a result of market-making or other trading activities and acknowledges that it
will deliver a prospectus in connection with any resale of such Exchange Notes,
which contains a plan of distribution with respect to such resale transactions;
however, by so acknowledging and by delivering a prospectus, such Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with any resale of Exchange Notes received for Old Notes where such Old Notes
were acquired by a broker-dealer as a result of market-making or other trading
activities (other than Old Notes acquired directly from the Company).
The Company has agreed that, subject to the provisions of the Registration
Rights Agreement, the Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of Exchange Notes received in exchange for Old Notes which were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities, for a period ending one year after the Expiration Date
or, if earlier, when such Exchange Notes have been disposed of by such
Participating Broker-Dealer. In that regard, each Participating Broker-Dealer,
who acquired Old Notes for its own account as a result of market-making or
trading activities, by tendering such Old Notes and executing this Letter of
Transmittal, agrees that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained in the Prospectus untrue in any material respect or which causes the
Prospectus to omit to state a material fact necessary in order to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading, such Participating Broker-Dealer will suspend the
sale of Exchange Notes pursuant to the Prospectus until the Company has amended
or supplemented the Prospectus to correct such misstatement or omission and has
furnished copies of the amended or supplemented Prospectus to the Participating
Broker-Dealer or the Company has given notice that the sale of the Exchange
Notes may be resumed, as the case may be.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter of Transmittal and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer-Withdrawal of Tenders" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the Exchange Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at the Book-Entry
Transfer Facility. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, please send the Exchange Notes (and, if
applicable, substitute certificates representing Old Notes for any Old Notes not
exchanged) to the undersigned at the address shown above in the box entitled
"Description of Old Notes."
The undersigned understands that tenders of Old Notes pursuant to any one
of the procedures described in "The Exchange Offer-Procedures for Tendering Old
Notes" in the Prospectus and in the instructions attached hereto will, upon the
Company's acceptance for exchange of such tendered Old Notes, constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer. The undersigned recognizes
that, under certain circumstances set forth in the Prospectus, the Company may
not be required to accept for exchange any of the Old Notes tendered thereby.
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED
THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE.
- 5 -
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------------ -------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 3 and 4) (See Instructions 3 and 4)
To be completed ONLY if certificates for Old To be completed ONLY if certificates for
Notes not exchanged and/or Exchange Notes are to Old Notes not exchanged and/or Exchange
be issued in the name of and sent to someone other Notes are to be sent to someone other than
than the person or persons whose signature(s) the person or persons whose signature(s)
appear(s) below on this Letter of Transmittal, or if appear(s) below on this Letter of Transmittal,
Old Notes delivered by book-entry transfer which or such person or persons at an address other
are not accepted for exchange are to be returned by than shown above in the box entitled
credit to an account maintained at the Book-Entry "Description of Old Notes" on this Letter of
Transfer Facility other than the account indicated Transmittal.
above.
Mail: Exchange Notes and/or Old Notes to:
Issue: Exchange Notes and/or Old Notes to:
Name(s) _________________________________________
Name(s) _________________________________________ (Please Type or Print)
(Please Type or Print)
_________________________________________________
_________________________________________________ (Please Type or Print)
(Please Type or Print)
Address _________________________________________ Address _________________________________________
_________________________________________________ _________________________________________________
_________________________________________________ _________________________________________________
(Zip Code) (Zip Code)
Credit unexchanged Old Notes delivered by book-entry
transfer to the Book-Entry Transfer Facility account
set forth below.
(Book-Entry Transfer Facility
Account Number, if applicable)
- ------------------------------------------------------------ -------------------------------------------------------
</TABLE>
- 6 -
<PAGE>
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH
THE CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER
REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE
EXCHANGE AGENT PRIOR TO 5:00 P.M, NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY
BEFORE COMPLETION.
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9 on reverse side)
_____________________________________ ___________________________________
_____________________________________ ___________________________________
_____________________________________ ___________________________________
Signature(s) of Owner Date
Area Code and Telephone Number _________________________
If a holder is tendering any Old Notes, this Letter of Transmittal must be
signed by the registered holder(s) as the name(s) appear(s) on the
certificate(s) for the Old Notes or on a securities position listing or by any
person(s) authorized to become registered holder(s) by endorsements and
documents transmitted herewith. If signature is by a trustee, executor,
administrator, guardian, officer or other person acting in a fiduciary or
representative capacity, please set forth full title. See Instruction 3.
Name(s): _______________________________________________________________________
________________________________________________________________________________
(Please Type or Print)
Capacity: ______________________________________________________________________
Address: _______________________________________________________________________
(Including Zip Code)
SIGNATURE GUARANTEE
(If required by Instruction 3)
Signature(s) Guaranteed by an Eligible Institution: ____________________________
(Authorized Signature)
____________________________
(Title)
____________________________
(Name and Firm)
Dated: _____________________________, 2000
- --------------------------------------------------------------------------------
- 7 -
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Notes
1. Delivery of this Letter of Transmittal and Notes; Guaranteed Delivery
Procedures.
This Letter of Transmittal is to be completed by holders of Old Notes
either if certificates are to be forwarded herewith or if tenders are to be made
pursuant to the procedures for delivery by book-entry transfer set forth in "The
Exchange Offer-Book-Entry Transfer" section of the Prospectus. Certificates for
all physically tendered Old Notes, or Book-Entry Confirmations, as the case may
be, as well as a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at the address set
forth herein on or prior to the Expiration Date, or the tendering holder must
comply with the guaranteed delivery procedures set forth below. Old Notes
tendered hereby must be in denomination of a principal amount of $1,000 and any
integral multiple thereof.
Holders of Old Notes whose certificates for Old Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Old Notes pursuant to the guaranteed delivery procedures set forth
in "The Exchange Offer-Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures, (i) such tender must be made through an
Eligible Institution (as defined below), (ii) prior to the Expiration Date, the
Exchange Agent must receive from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Old Notes and the amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within three business days after the Expiration Date, the certificates for all
physically tendered Old Notes, or a Book-Entry Confirmation, and any other
documents required by this Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for all
physically tendered Old Notes, in proper form for transfer, or Book-Entry
Confirmation, as the case may be, and all other documents required by this
Letter of Transmittal, are received by the Exchange Agent within three business
days after the Expiration Date.
The method of delivery of this Letter of Transmittal, the Old Notes and all
other required documents is at the election and risk of the tendering holders,
but the delivery will be deemed made only when actually received or confirmed by
the Exchange Agent. Instead of delivery by mail, it is recommended that holders
use an overnight or hand delivery service, properly insured. In all cases,
sufficient time should be allowed to assure delivery to the Exchange Agent prior
to 5:00 p.m., New York City time, on the Expiration Date. Do not send this
Letter of Transmittal or any Old Notes to the Company.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender. See "The Exchange Offer" section of the Prospectus.
2. Partial Tenders (not applicable to holders of Old Notes who tender by
book-entry transfer); Withdrawal Rights.
Tender of Old Notes will be accepted only in a principal amount of $1,000
and integral multiples thereof. If less than all of the Old Notes evidenced by a
submitted certificate are to be tendered, the tendering holder(s) should fill in
the aggregate principal amount of Old Notes to be tendered in the boxes above
entitled "Description of Old Notes-Principal Amount Tendered". A reissued
certificate representing the balance of nontendered Old Notes will be sent to
such tendering holder, unless otherwise provided in the appropriate box on this
Letter of Transmittal, promptly after the Expiration Date. All of the Old Notes
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to 5:00 p.m. New York City time on the Expiration Date.
In order for a withdrawal to be effective or prior to that time, a written or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at one of its addresses set forth above on or prior to 5:00
p.m. New York City time on the Expiration Date. Any such notice of withdrawal
must specify the name of the person who tendered the Old Notes to be withdrawn,
the aggregate principal amount of Old Notes to be. withdrawn and (if
certificates for such Old Notes have been tendered) the name of the
- 8 -
<PAGE>
registered holder of the Old Notes as set forth on the certificate for the Old
Notes, if different from that of the person who tendered such Old Notes. If
certificates for the Old Notes have been delivered or otherwise identified to
the Exchange Agent, then prior to the physical release of such certificates for
the Old Notes, the tendering holder must submit the serial numbers shown on the
particular certificates for the Old Notes to be withdrawn and the signature on
the notice of withdrawal must be guaranteed by an Eligible Institution, except
in the case of Old Notes tendered for the account of an Eligible Institution. If
Old Notes have been tendered pursuant to the procedures for book-entry transfer
set forth in "The Exchange Offer-Procedures for Tendering Old Notes" section of
the Prospectus, the notice of withdrawal must specify the name and number of the
account at the Book-Entry Transfer Facility to be credited with the withdrawal
of Old Notes, in which case a notice of withdrawal will be effective if
delivered to the Exchange Agent by written or facsimile transmission.
Withdrawals of tenders of Old Notes may not be rescinded. Old Notes properly
withdrawn will not be deemed to have been validly tendered for purposes of the
Exchange Offer, and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Properly withdrawn Old Notes
may be retendered at any subsequent time on or prior to the Expiration Date by
following the procedures described in the Prospectus under "The Exchange
Offer-Procedures for Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any employees, agents, affiliates or assigns of the
Company, the Exchange Agent nor any other person shall be under any duty to give
any notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give such notification. Any Old Notes which have been
tendered but which are withdrawn will be returned to the holder thereof without
cost to such holder as promptly as practicable after withdrawal.
3. Signatures on this Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures.
If this Letter of Transmittal is signed by the registered holder of the Old
Notes tendered hereby, the signature must correspond exactly with the name as
written on the face of the certificates or on a securities position listing
without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all of such owners must sip this Letter of Transmittal.
If any tendered Old Notes are registered in different names on several
certificates or securities positions listings, it will be necessary to complete,
sign and submit as many separate copies of this Letter of Transmittal as there
are different registrations.
When this Letter of Transmittal is signed by the registered holder or
holders of the Old Notes specified herein and tendered hereby, no endorsements
of certificates or separate bond powers are required. If, however, the Exchange
Notes are to be issued, or any untendered Old Notes are to be reissued, to a
person other than the registered holder, then endorsements of any certificates
transmitted hereby, or separate bond powers, are required. Signatures on such
certificate(s) or bond power(s) must be guaranteed by an Eligible Institution
(as defined below).
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate bond power(s), in
either case, signed exactly as the name or names of the registered holder or
holders appear(s) on the certificate(s), and the signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificates 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,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
Endorsements on certificates for Old Notes or signatures on bond powers
required by this Instruction 3 must be guaranteed by a participant in the
Securities Transfer Agent Medallion Program, the New York Stock Exchange
Medallion Signature Program or the Stock Exchange Medallion Program (an
"Eligible Institution").
Signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution, unless the Old Notes are tendered: (i) by a registered holder of
Old Notes (which term, for purposes of the Exchange Offer, includes any
participant in the Book-Entry Transfer Facility system whose name appears on a
security position listing as the holders of such Old Notes) who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on this letter or (ii) for the account of an Eligible Institution.
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<PAGE>
4. Special Issuance and Delivery Instructions.
Tendering holders of Old Notes should indicate in the applicable box, the
name and address to which Exchange Notes issued pursuant to the Exchange Offer
and/or substitute certificates evidencing Old Notes not exchanged are to be
issued or sent, if different from the name or address of the person signing this
Letter of Transmittal. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated. A holder of Old Notes tendering Old Notes by book-entry transfer may
request that Old Notes not exchanged be credited to such account maintained at
the Book-Entry Transfer Facility as such holder may designate hereon. If no such
instructions are given, such Old Notes not exchanged will be returned to the
name or address of the person signing this Letter of Transmittal.
5. Tax Identification Number.
Federal income tax law generally requires that a tendering holder whose Old
Notes are accepted for exchange must provide the Company (as payor) with such
holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
below, which, in the case of a tendering holder who is an individual, is his or
her social security number. If the Company is not provided with the current or
an adequate basis for an exemption, such tendering holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. In addition, delivery to
such tendering holder of Exchange Notes may be subject to backup withholding in
an amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the Substitute Form W-9 set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder
has not been notified by the Internal Revenue Service that such holder is
subject to backup withholding as a result of a failure to report all interest or
dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Certificate
of Foreign Status. These forms may be obtained from the Exchange Agent. If the
Old Notes are in more than one name or are not in the name of the actual owner,
such holder should consult the W-9 Guidelines for information on which TIN to
report. If such holder does not have a TIN, such holder should consult the W-9
Guidelines for instructions on applying for a TIN, check the box in Part 2 of
the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note:
Checking this box and writing "applied for" on the form means that such holder
has already applied for a TIN or that such holder intends to apply for one in
the near future. If such holder does not provide its TIN to the Company within
60 days, backup withholding will begin and continue until such holder furnishes
its TIN to the Company.
6. Transfer Taxes.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it pursuant to the Exchange Offer. If, however, Exchange Notes
and/or substitute Old Notes not exchanged 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 Old Notes tendered hereby, or if tendered Old Notes are registered in the
name of any person other than the person signing this Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the transfer of Old Notes
to the Company pursuant to the Exchange Offer, 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 herewith, the amount of such
transfer taxes will be billed directly to such tendering holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes specified in this Letter of
Transmittal.
7. Determination of Validity.
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Old Notes, which determination shall be
final and binding on all parties. The Company reserves the absolute right to
reject any and all tenders determined by it not to be in proper form or the
acceptance of which, or exchange for which, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to
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<PAGE>
waive any of the conditions of the Exchange Offer set forth in the Prospectus
under the caption "The Exchange Offer" or any conditions or irregularity in any
tender of Old Notes of any particular holder whether or not similar conditions
or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Old Notes will be deemed to have been validly
made until all irregularities with respect to such tender have been cured or
waived. Although the Company intends to notify holders of defects or
irregularities with respect to tenders of Old Notes, neither the Company, any
employees, agents, affiliates or assigns of the Company, the Exchange Agent, nor
any other person shall be under any duty to give notification of any
irregularities in tenders or incur any liability for failure to give such
notification.
8. No Conditional Tender
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter of
Transmittal, shall waive any right to receive notice of the acceptance of their
Old Notes for exchange.
9. Mutilated, Lost, Stolen or Destroyed Old Notes.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
must contact the Exchange Agent at the address indicated above for further
instructions. This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing mutilated, lost, stolen or
destroyed certificate(s) have been followed.
10. Requests for Assistance or Additional Copies.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent, at the address and telephone number indicated
above.
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<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(See Instruction 5)
PAYER'S NAME: AMERICAN TISSUE INC.
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE Part I-PLEASE PROVIDE TIN: ___________________________________
Form W-9 YOUR TIN IN THE BOX AT Social Security Number or Employer
Department of the RIGHT AND CERTIFY BY Identification Number
Treasury SIGNING AND DATING
Internal Revenue Service BELOW.
Payor's Request for Taxpayer
Identification Number ("TIN")
-----------------------------------------------------------------------------------
Part 2-TIN Applied for:
-----------------------------------------------------------------------------------
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I
CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer Identification Number
(or I am waiting for a number to be issued to me).
(2) I am not subject to backup withholding either because: (a) I am exempt from
backup withholding, or (b) I have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or (c) the IRS has notified me that
I am no longer subject to backup withholding, and
(3) any other information provided on this form is true and correct.
SIGNATURE ______________________ DATE ____________________________
-----------------------------------------------------------------------------------
You must cross out item (2) of the above certification if you have
been notified by the IRS that you are subject to backup withholding
because of underreporting of interest or dividends on your tax return
and you have not been notified by the IRS that you are no longer
subject to backup withholding.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of the exchange, 31 percent
(31%) of all reportable payments made to me thereafter will be withheld until I
provide a number.
SIGNATURE _____________________ DATE __________________, 2000
- --------------------------------------------------------------------------------
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