As filed with the Securities and Exchange Commission on February ___, 2000
REGISTRATION NO. 333-90829
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------------
MIDDLE AMERICAN TISSUE INC.
(Exact name of registrant as specified in its charter)
Delaware 2621 52-2181338
(State or other (Primary S.I.C. (I.R.S. Employer
jurisdiction of Code Number) Identification No.)
Incorporation or
organization)
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 & Kaiser P.C.
220 East 42nd Street
New York, New York 10017
(212) 573-0093
-----------------------------------
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 the 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 the date as the Commission, acting pursuant to said section 8(a),
may determine.
Subject to completion, dated ____________, 2000
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Prospectus __________ ___, 2000
Middle American Tissue Inc.
Offer for all outstanding 15% Series A Senior Secured Discount Notes due 2007 in
exchange for 15% Series B Senior Secured Discount Notes Due 2007
The exchange offer will expire at 5:00 p.m., New York City time on _______,
2000 unless extended.
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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 uncoated freesheet paper products for printing, writing and
publishing applications.
o Middle American Tissue Inc.
135 Engineers Road
Hauppauge, New York 11788
(516) 435-9000
The Exchange Offer:
o Offer for $35,755,788 face amount of outstanding 15% Series A Senior
Secured Discount Notes due 2007 in exchange for the same face amount of
Series B Senior Secured Discount Notes due 2007.
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.
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This investment involves risk. See "Risk Factors" beginning on page 14.
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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.
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-i-
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 Middle 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
The Exchange Offer............................................................1
Risk Factors.................................................................14
Use Of Proceeds..............................................................43
Capitalization...............................................................43
Unaudited Pro Forma Consolidated Financial Data..............................44
Selected Historical Financial Data...........................................48
Management's Discussion and Analysis of Financial Condition
and Results of Operations. ................................................51
Industry Overview............................................................65
Business.....................................................................69
Management...................................................................85
Principal Stockholders.......................................................87
Related Party Transactions...................................................90
Description of Material Indebtedness.........................................96
Description of Exchange Notes................................................99
Material United States Income Tax Consequences..............................149
Plan of Distribution........................................................152
Legal Matters...............................................................155
Experts.....................................................................155
Available Information.......................................................155
Index to Financial Statements.................................................1
MARKET AND INDUSTRY DATA
Market data and 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 this information is not guaranteed.
Similarly, internal surveys, industry forecasts and market research, while
believed to be reliable, have not been independently verified.
-ii-
PROSPECTUS SUMMARY
The following is a summary of the more detailed information appearing
elsewhere in this prospectus. This prospectus includes 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 the financial statements.
Unless the context otherwise requires, "we," "our," or "us," as well as
"Middle American Tissue," refer to Middle American Tissue Inc. and all of our
consolidated subsidiaries and "American Tissue" refers to our subsidiary,
American Tissue Inc. References to the "old notes," are to our outstanding 15%
series A senior secured discount notes and references to the "exchange notes"
are to our 15% series B senior secured discount notes offered by this
prospectus. References to the "Notes" are to the old notes and the exchange
notes, collectively. References to the "American Tissue notes" are to the 12
1/2% series A senior secured notes of American Tissue.
THE OLD NOTE OFFERING
Old Notes................................... We sold the old notes in a
private offering on July 9,
1999.
Registration Rights Agreement............... We and the initial purchasers
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 $35,755,788 face amount
of 15% series B senior secured
discount notes due 2007. 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.
1
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 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 old notes for
exchange notes in accordance
with the exchange offer will
not result in any gain or loss
to you for federal income tax
2
purposes. See the "Material
United States Income Tax
Consequences" section of this
prospectus for information as
to the federal income tax
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 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
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.
3
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 $35,755,788 face amount
of our 15% series B senior
secured discount notes due
2007.
Maturity Date ............................. July 15, 2007.
Interest.................................... The exchange notes will accrete
interest at the rate of 15% per
annum, compounded
semi-annually, from July 9,
1999 until July 15, 2003 and
will accrue cash interest at
the rate of 15% per annum from
July 15, 2003, payable every
six months in cash on January
15 and July 15, commencing
January 15, 2004.
Optional Redemption......................... We may redeem the exchange
notes:
o in whole, but not in part,
on or after July 9, 2000
through July 9, 2001, at
105.0% of their Accreted
Value, as defined under
"Description of Exchange
Notes--Defined Terms," as
of the redemption date;
o in whole or in part, on or
after July 15, 2003, at
the redemption prices set
forth in the "Description
of Exchange Notes --
Optional Redemption"
section of this
prospectus, plus accrued
and unpaid interest as of
the applicable redemption
date.
In addition, before July 15,
2002, we may redeem up to 35%
of the exchange notes at 115.0%
of their accreted value, as of
the redemption date, 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 exchange notes
will remain outstanding
immediately after we redeem the
exchange notes, we may not
effect the redemption. In
addition, to carry out 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
4
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--Asset 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 accreted
value of the exchange notes as
of the redemption date or the
outstanding principal amount of
the exchange notes as of the
redemption date depending on
when the repurchase occurs,
plus accrued and unpaid
interest if any. See
"Description of Exchange
Notes--Covenants--Asset Sales"
and "--Change of Control."
Mandatory Redemption........................ We may be required to redeem
all of the exchange notes at
105.0% of their accreted value
as of the redemption date if,
prior to July 9, 2001, one of
the initial purchasers of the
old notes exercises its option,
under the stockholders
agreement among us, our direct
parent, the stockholders of our
direct parent and the initial
purchasers of the old notes, to
require us to repurchase the
common stock purchase warrants
sold to these initial
purchasers in connection with
their purchase of the old notes
and the option is not withdrawn
as permitted by the
stockholders agreement.
Collateral.................................. The exchange notes will be
secured by a first priority
lien on all of the common stock
of our subsidiary, American
Tissue. 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 will be
senior secured obligations as
to us and will be structurally
subordinated to the
indebtedness of our
subsidiaries and any assets of
our subsidiaries securing the
indebtedness, as are the old
notes.
They rank:
o effectively ahead of all
of our existing and future
senior unsecured debt and
junior debt to
5
the extent of the assets
securing the exchange
notes;
o equal, in right of
payment, with all of our
existing and future
unsubordinated debt; and
o ahead, in right of
payment, of any of our
debt that is subordinated
to the exchange notes.
As of December 31, 1999, our
total consolidated debt,
including the old notes, would
have been approximately $271.7
million, including $68.4
million under American Tissue's
new credit facility, excluding
unused commitments of
approximately $31.6 million,
approximately $159.5 million
under the American Tissue notes
and approximately $25.6 million
of mortgage and other debt.
Material Covenants.......................... The indenture governing the
exchange notes contains
covenants that, among other
things, will limit our ability
and the ability of our
subsidiaries 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 some of
our 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
repurchase 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
6
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 excess
of the accreted value amount of
the old notes at July 15, 2003
and the issue price of the old
notes. See "Material United
States Income Tax
Consequences."
An investment in the exchange notes involves a high degree of risk. For a
discussion of some matters that you should consider in connection with the
exchange offer, please read "Risk Factors."
7
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:
Nourollah Elghanayan Mehdi Gabayzadeh
and and
family members family trusts
| |
50% 50%
----------------------------------
|
|
- ------------------------------------------------------------------------------------------------------------------------------------
| | | | | | | | | | |
American American American American American Super United States American Lakeview Huntington Pheasant
Tissue Tissue Tissue Tissue Kraft Mills American Paper Mills Tissue Real LLC LLC (1)
Aviation Mills Mills Mills of of Tissue of Vermont Mills Estate (1)
LLC (1) of Ohio, de Mexico Massachusetts, Tennessee Inc. Inc. (1) of LLC (1)
Inc. (1) S.A. de Inc. (1) LLC (1) 88% | Maine
C.V. (1) | | LLC (1)
(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 | Tissue | Realty | Tissue
Corporation | Mills of | Inc. | Mills of | LLC | Corp. | | Company | LLC | Mills of
| Oregon, | | Neenah | | | | LLC | | New
| Inc. | | LLC | | | | | | Hampshire
| | | | | | | | | Inc.
Markwood LLC American American American Pulp & 100 Engineers American Coram
| Tissue Tissue Tissue Paper Realty Road, Cellulose Realty
| Mills of Mills of Mills of of Management LLC Mill LLC
| Wisconsin, New York, Greenwich America LLC Corp.
| Inc. Inc. LLC LLC
| | |
100% | 100%
| | |
------------- -----------------------------------------------------------
| | | | | |
Fabricaciones Railway of Paper of Pulp of Hydro of Landfill
Metalicas America America LLC America America of
Mexicanas, S.A. LLC LLC LLC America
| | LLC
| |
100% 100%
| |
Berlin American
Mills Tissue -
Railway, New
Inc. Hampshire
Electric
Inc.
(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."
8
MIDDLE 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 tissue 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 tissue roll sales business.
Our principal tissue 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 these products, rather
than the producer of these 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 manes 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
9
companies and, from time to time, we may opportunistically elect to
sell virgin pulp when the market price for virgin pulp significant
exceeds our cost of production.
o Reconditioned tissue converting equipment 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 and
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.
In connection with the acquisition, we 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 Middle 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 revolving credit facility, an equity
contribution from our direct parent and the sale of the old notes and the
American Tissue 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
10
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of Middle 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 herein.
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............... 41,501
Operating income (loss)................................... (119,484)
Net income (loss)......................................... (89,714)
At September 30, 1999
(actual)
---------------------
Balance Sheet Data:
Total assets.............................................. $ 406,863
Total debt................................................ 250,142
Stockholder's equity...................................... 77,900
Other Data:
Ratio of earnings to fixed charges(2)..................... --
Cash flows from in operating activities................... (22,034)
Cash flows used in investing activities................... (65,168)
Cash flows from financing activities...................... 87,528
EBITDA(3)................................................. (104,207)
Adjusted EBITDA(4)........................................ 53,732
Cash interest expense(5).................................. 22,490
Depreciation and amortization............................. 14,458
Capital expenditures(6)................................... 24,786
Capital lease obligations entered into.................... 4,002
Adjusted EBITDA/cash interest expense..................... 2.4x
Total debt/Adjusted EBITDA................................ 4.7x
(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 Middle 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 us.
(2) Earnings were insufficient to cover fixed charges on an unaudited pro forma
consolidated basis for the year ended September 30, 1999 by $148.8 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, an
unaudited pro forma consolidated basis, would have been able to cover our
fixed charges by approximately 1.3 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 Middle 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 thereto, included elsewhere in this prospectus.
11
(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
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 sale of the old notes, and the American
Tissue notes, borrowings of $12.0 million under our revolving credit
facility and the application of the net proceeds from these borrowings.
(6) Capital expenditures exclude portions attributable to our capital leases.
SUMMARY HISTORICAL FINANCIAL DATA
(dollars in thousands)
Set forth below are summary historical consolidated financial data for
Middle 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 Middle American Tissue for:
(a) the fiscal year ended September 30, 1995 reflects the unaudited
operating results of our subsidiaries prior to our formation, prepared on the
same consolidated basis as our current holding company structure;
(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;
(c) the fiscal years ended September 30, 1998 and 1999 reflect the audited
consolidated operating results under our current holding company structure; and
(d) the quarterly-periods ended December 31, 1998 and 1999 reflect the
unaudited consolidated operating results under our current holding company
structure.
12
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 of these periods; 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
each of these 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 Middle 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.
MIDDLE AMERICAN TISSUE
Three Months Ended
Fiscal Year Ended September 30, December 31
1995 1996 1997 1998 1999 1999 1998
--------- --------- --------- --------- ---------- --------- ---------
(unaudited) (unaudited) (unaudited)
Statement of Operations
Data:
Revenues ............................... $ 138,933 $ 153,224 $ 198,384 $ 215,203 $ 284,340 $ 110,315 $ 60,400
Gross profit ........................... 22,527 30,951 46,098 42,586 70,875 28,519 11,864
Operating income ....................... 6,593 13,770 19,145 13,198 35,923 15,761 4,400
Balance Sheet Data:
Cash and cash equivalents .............. $ 1,017 $ 152 $ 870 $ 1,480 $ 1,806 $ 818
Working capital ........................ (18,183) (18,413) (20,892) (48,748) 45,906 48,326
Total assets ........................... 136,166 199,201 230,517 270,819 406,863 434,513
Total debt ............................. 93,300 123,376 143,690 176,394 250,142 271,665
Stockholder's equity ................... 14,010 26,984 33,858 33,644 77,900 85,858
Other Data: ............................ 1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges ..... --(3) 2.3x 1.5x --(3) 1.8x 1.9x 1.3x
Cash flows provided by (used in)
Operating activities ................... --(4) $ 10,351 $ 21,885 $ 17,037 $ (22,034) $ (8,350) $ 4,261
Investing activities ................... --(4) (40,933) (29,172) (27,566) (65,168) (10,152) (3,170)
Financing activities ................... --(4) 29,717 8,005 11,139 87,528 17,514 (2,571)
EBITDA(1) .............................. $ 9,281 27,950 27,427 23,783 49,527 20,902 7,453
Depreciation and amortization .......... 4,092 5,593 8,282 10,585 14,458 5,141 3,053
Capital expenditures(2) ................ 24,192 40,933 29,172 27,566 20,168 10,152 3,170
Capital lease obligations entered into . 1,944 8,770 2,021 10,453 4,002 3,003 --
13
BERLIN-GORHAM MILLS
52 Weeks Ended December(5) 26 Weeks Ended June
-------------------------------------- ---------------------------------------
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- --------- ----------
(unaudited) (unaudited) (unaudited)
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)
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) under "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).
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 July 9, 2001, or 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;
14
(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 each of these
registration requirements, based upon an opinion of the holder's
counsel;
and in each case, in accordance with applicable state securities laws; and
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.
The trading market, if any, for the old notes will be adversely affected,
to the extent old notes are tendered and accepted by us in the exchange offer,
because investors will prefer to acquire exchange notes which will not be
subject to 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 the fixed charge ratio, maximum leverage
ratio and minimum tangible net worth covenants, and our obligations to deliver
our financial statements to this 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 so that we would be in compliance with
these 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
15
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.
The key module of our accounting software upgrade implemented during the
last quarter of fiscal 1999 was the latest version (version 6.0) of the General
Ledger Module of the BPCS accounting software. This module enabled us to
complete the implementation and interface of the Sale and Billing, Costing and
Accounts Payable modules, already placed in service earlier in fiscal 1999. As a
result of these final stages of implementation, sales invoices, accounts payable
vouchers, cost of production and cost of sales information were automatically
interfaced into the general ledger on a real-time basis. This final stage of the
process enabled us to consolidate reporting for all of our operating
subsidiaries and provide real-time access to information.
The next stage of our software upgrade involves our purchase of GEAC
Computer Systems accounting software. This software is currently installed at
the Berlin-Gorham Mills and is being purchased for use at all of our other
facilities. The modules to be implemented during this phase of our upgrade
include general ledger, accounts payable, cash receipts, accounts receivable,
fixed assets, and allocations. These modules will be interfaced to manufacturing
software systems existing at our other manufacturing facilities. The fixed asset
and allocation modules will provide us with additional functionality not
currently present in the BPCS software.
Additionally, new purchasing and manufacturing software systems from
Maximo-PSDI and Honeywell-Measurex have been purchased and will be implemented
on a facility-by basis over the coming months.
These additional software purchases will give us consistency of systems
across all of our facilities and provide us with a consistent interface into the
various accounting modules.
We expect that the installation of these newly purchased accounting and
manufacturing systems will begin in March 2000 and will be completed by
September 2000.
16
We believe that these new software systems will provide a stronger backbone for
information processing and accounting procedures throughout the holding company
structure in the future.
As a result of the changes implemented to date, 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
$271.7 million of indebtedness outstanding, excluding unused commitments of
approximately $68.4 million under our revolving credit facility.
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 this 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;
17
o restructure or refinance all or a portion of this 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."
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 indentures
governing the exchange notes and the American Tissue notes and the terms of our
revolving credit facility, our subsidiaries may incur additional debt, subject
to the limitations described under the "Description of Exchange Notes -
Covenants - Insurance of Indebtedness and Issuance of Prefixed Stock" sector 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, in the
case of the American Tissue notes, a change of control resulting from a sale of
the shares of common stock of American Tissue we pledged to the trustee for
exchange notes, the holders of the American Tissue notes or the exchange notes,
as applicable, may require us to repurchase all of their outstanding 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 revolving credit facility, various change of
control events are events of default giving the lenders under our revolving
credit faulty the right to accelerate the maturity of borrowings under this
faulty. 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 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."
18
Our Debt Agreements Contain Operating Restrictions And Financial 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 revolving credit facility and the indentures governing the
American Tissue notes and 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 indentures and debt
agreements or in any future agreement could cause a default under our revolving
credit facility, the American Tissue notes, other current or future debt and/or
or the exchange notes. As a result of 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 American Tissue notes and the
exchange notes. See "Description of Material Indebtedness -- Revolving Credit
Facility" and "Description of Exchange Notes -- Covenants."
The Value Of Your Security Interest In The Collateral Securing The Exchange
Notes Is Uncertain
The significant indebtedness of our subsidiaries and the fact that
substantially all of their assets secure the payment of a substantial portion of
their indebtedness may negatively affect the value of the shares of American
Tissue's common stock securing the exchange notes, especially if American Tissue
defaults on the payment of its secured debt and the holders of this debt
19
foreclose their liens on the assets securing this debt. Accordingly, we cannot
assure you that the net proceeds of a sale of the shares of the common stock of
American Tissue securing the exchange notes would be sufficient to repay all of
the exchange notes following sale of the collateral. If the net proceeds
received from the sale of the collateral, after expenses relating to the sale of
this 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, if any. In addition, the ability
of the trustee for the exchange notes to sell the shares of the common stock of
American Tissue securing the exchange notes would be delayed if we were subject
to proceedings under applicable bankruptcy law.
The Exchange Notes Will Be Structurally Subordinated To The Indebtedness And
Assets Of Our Subsidiaries.
We are a holding company and do not have any significant operations, other
than the ownership of the outstanding shares of common stock of American Tissue,
which is also a holding company. The only significant assets of American Tissue
are the shares of capital stock and membership interests of our other
subsidiaries. Our obligations under the exchange notes and the related indenture
have not been guaranteed by any of our subsidiaries and none of the assets of
our subsidiaries secure the payment or performance of these obligations.
Accordingly, you will not have any recourse to our subsidiaries or their assets
if an event of default occurs under the exchange notes and we do not have the
financial resources to pay the exchange notes or the trustee for the exchange
notes is not able to realize sufficient proceeds from the sale of the shares of
common stock of American Tissue which we pledged as collateral for the exchange
notes.
We May Not Be Able To Pay Cash On The Exchange Notes When Due Or Repay The
Exchange Notes If We Are Required To Redeem Them.
The old notes were issued with warrants to purchase up to 12% of our common
stock at a nominal exercise price. The holders of the old notes and warrants
have entered into a stockholders agreement which contains various rights and
obligations of Middle American Tissue and the direct and beneficial holders of
our common stock. The stockholders agreement and the indenture relating to the
Notes contain provisions permitting the initial purchasers of the old notes (and
in some instances, their transferees) to require redemption of the Notes or the
warrants, or both, at various times prior to the maturity of the Notes. When we
are required to pay cash interest on the Notes, or if we are required by the
holders of the Notes or the warrants, or both, to redeem these securities, we
may be unable to make the payment. The restricted payment covenant of the
American Tissue notes does not contain any express provision permitting American
Tissue to pay dividends to us or to pay the interest on, or principal of, the
Notes or finance a redemption of the Notes. Accordingly, in these circumstances,
unless we are able to refinance the Notes, of which we can give you no
assurance, we might be required to seek the protection of federal bankruptcy
law, which might delay the trustee from liquidating the collateral securing the
Notes and significantly affect the amount you would be able to collect on any
exchange notes you then hold.
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
20
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."
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
21
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.
Because of high fixed costs, we and other manufacturers strive to maintain
high levels of manufacturing capacity, i.e., operating rates, to cover these
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 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 of these raw materials will
fluctuate in a similar cycle to our tissue and other paper products or that all
or any part of these increased costs can be passed along to consumers of our
products or in a timely manner. Our inability to pass along
22
these 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, writing 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, under 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 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 damage that we may suffer or incur, we
will be required to bear the loss or damages, 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.
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
23
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 these 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, Proctor & 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, 1999, 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 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 freesheet paper products 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.
24
Eddy Forest Products Limited, Domtar Inc., and Williamette Industries Inc. Based
on estimates from the American Forest and Paper Associates, for the year ended
December 31, 1999, 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 the Berlin-Gorham Mills' share would have been, based
solely upon production capacity, approximately 0.9%.
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 these 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 some 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. 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 shareholders 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."
Additionally, in connection with their purchase of the old notes, the
initial purchasers of these notes received, among other things, warrants to
purchase up to 12% of our common stock as of
25
the issue date of the old notes and the right to appoint one member of our board
of directors and one member of the board of directors of American Tissue. The
trustee for the Notes was granted a pledge of all of the common stock of
American Tissue. Upon the occurrence of an event of default under the exchange
notes, the initial purchasers or their transferees could cause the trustee for
the Notes to exercise its rights under the pledge agreement relating to the
pledge of American Tissue common stock and these persons 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 This 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 and 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 this money by our
stockholders and their affiliated companies. In addition, there is a risk that
we or our creditors, including the trustee for the exchange notes, will not be
able to legally require our stockholders and their affiliated companies, or
require our stockholders to cause their 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 agreement expires in May 2002 and the
hourly production employees at the Berlin-Gorham Mills, which agreement 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 this 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
26
addition, we cannot assure you that we will not incur increased costs as a
result of any union negotiations.
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 this 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.
27
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-Gorham 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.
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 also 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:
28
(1) with the intent of hindering, delaying or defrauding creditors, or
(2) received less than a reasonably equivalent value or fair consideration
in exchange for this 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 the sale;
o was left with an unreasonably small amount of capital; or
o believed that it would incur debts beyond its ability to pay
these debts as they matured, or, irrespective of any
consideration received or its solvency at that 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
the 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 old notes will not experience a gain or loss for federal income
tax purposes by reason of exchanging their old notes for exchange notes. Each
holder of the Notes is required to include in its income in each year, for the
purpose of computing its federal income taxes for that year, that portion of the
OID attributable to each day during the year in which it held the Notes
regardless of whether the holder is a cash or accrual basis taxpayer and before
the time when it will receive cash payments on the Notes attributable to the
OID. 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
the 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 these laws and
regulations by the Internal Revenue Service, as in effect on the date of this
prospectus.
29
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. The initial
purchaser has informed us 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 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
these 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.
When we sold the old notes to the initial purchasers, we entered into the
registration rights agreement with them, 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:
30
(1) it is not an "affiliate" of Middle American Tissue, such as a
director, executive officer or controlling stockholder of Middle
American Tissue or our parent company;
(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:
(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 old
notes, unless the 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 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
31
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;
(2) the exchange notes will not be subject to restrictions on resale; and
(3) some 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, approximately $35.8 million aggregate
face 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 depositary. 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 various 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
32
because the conditions to the exchange offer have not been met, certificates for
any 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
some applicable taxes, in connection with our exchange offer.
33
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 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.
Accreted Interest on the Exchange Notes
Interest on the exchange notes will accrete 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 the letter of transmittal, in
accordance with the instructions contained below. You must then mail or
otherwise deliver the letter of transmittal or a facsimile, 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 as provided for herein 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 a transfer. Although delivery of old notes
may be effected through book-entry
34
transfer into the exchange agent's account at DTC, the letter of transmittal, or
a facsimile copy, properly completed and signed with any required signature
guarantees, or, in the case of a book entry transfer, an "Agents' 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.
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 the 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.
35
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 copy, 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 courier 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 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 firm or financial institution, including
most commercial banks, savings and loan associations and brokerage houses, that
is a member in good standing of the Securities Transfer Association Medallion
Program, the New York Stock Exchange. Medallion Signature Guarantee Program or
the Stock Exchange Medallion Program, relevant to in the following discussion as
each, an "Eligible Institution", unless the old notes are tendered by:
(1) 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 a member firm 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
36
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 the:
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 this notification. Tenders
of old notes will not be deemed to have been made until these 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
(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 of these purchases or offers may differ from the terms of the
exchange offer.
Guaranteed Delivery Procedures
Holders who wish to tender their old notes but who cannot, prior to the
expiration date:
(1) deliver their old notes, the letter of transmittal or, in the case of
book entry transfer, an Agent's Message, any other required documents
to the exchange agent or
(2) complete the procedures for book-entry transfer, including delivery of
an Agent's
37
Message,
38
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:
(A) 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;
(B) stating that the tender is being made; and
(C) 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 agents, and
o the exchange agent receives within five New York Stock Exchange
trading days after the expiration date:
(A) the properly completed and executed letter of transmittal,
or a facsimile copy;
(B) 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
(C) 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:
(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;
39
(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
(2) any development has occurred in any existing action or proceeding
which may be harmful to us or any of our subsidiaries; or
(3) 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
(4) 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 foregoing
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
40
(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 and collateral agent under the
indenture relating to the Notes, 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.
41
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 of 1933 provided by
Rule 144A, based upon an opinion of 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) 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
42
(2) If a holder of old notes notifies us that:
(A) the holder was prohibited by law or the 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 these 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 old 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 a 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 a $5.0 million equity contribution from Super American Tissue
Inc., our direct parent, to make an equity contribution to our subsidiary,
American Tissue. American Tissue, in turn, used the proceeds of our equity
contribution, together with the proceeds from the sale of the American Tissue
notes and borrowings under its revolving credit facility, to repay indebtedness,
including accrued interest through the date of repayment, to consummate the
acquisition of the Berlin-Gorham Mills and to pay related fees and expenses.
CAPITALIZATION
The following table sets forth our consolidated cash and capitalization as
of December 31, 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 December 31, 1999
-----------------------
(dollars in thousands)
Cash and cash equivalents $ 0.8
======
Debt (including current portion):
Old notes $ 17.9
American Tissue notes 159.2
Revolving credit facility(1) 67.8
Mortgage and other debt(2) 23.0
Capital lease obligations 3.8
------
Total debt 271.7
------
Common stock purchase warrants 3.8
------
Stockholders' equity:
Common stock 1.6
Additional paid-in capital 37.7
Retained earnings 46.6
======
Total stockholder's equity 85.9
------
Total capitalization $361.4
======
43
(1) Our revolving credit facility consists of a five-year $100 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 elsewhere 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 statement 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 on 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, our repayment of then outstanding
indebtedness, the closing of our $100.0 million revolving credit facility, an
equity contribution from our direct parent and the sale of the old notes and the
American Tissue 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 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 consolidated financial
statements, and other financial information pertaining to us, and the historical
financial statements of the Berlin-Gorham Mills and the notes to the historical
financial statements, and other financial information pertaining to the
Berlin-Gorham Mills, including "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
these transactions been consummated on the dates described above, nor are they
necessarily indicative of our future results of operations.
44
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
Fiscal Year Ended September 30, 1999
(dollars in thousands)
Middle Berlin
American Gorham Adjustments Adjustments
Tissue(1) Mills(2) for the for the
(audited) (unaudited) Acquisition Offering Pro Forma(5)
------- -------- -------- ------------- ------------
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 34,952 6,549 -- -- 41,501
Corporate overhead allocation -- 6,438 -- -- 6,438
--------- --------- --------- --------- ---------
Operating profit 35,923 (162,489) 7,082 -- (119,484)
Interest expense 17,912 1,966 -- 8,514 28,392
Other income/expense -- (53) -- -- (53)
Income tax benefit -- (62,273) -- -- (62,273)
--------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item 18,011 (102,129) 7,082 (8,514) (85,550)
Loss on early extinguishment
of debt 4,164 -- -- -- 4,164
--------- --------- --------- --------- ---------
Net income (loss) $ 13,847 $(102,129) $ 7,082 $ (8,514) $ (89,714)
========= ========= ========= ========= =========
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended September 30, 1999
(dollars in thousands)
(1) The Middle 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.
45
(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 American Tissue notes issued
at 12 1/2% coupon $ 15,469
Interest on our revolving credit facility* 678
Amortization of American Tissue notes deferred
costs over seven-year term 1,017
Amortization of discount on American Tissue notes 392
Amortization of discount on old notes 2,358
Amortization of warrants 240
Amortization of old notes deferred costs over
eight year term 51
Interest on the borrowings repaid (11,691)
--------
Net increase in interest $ 8,514
========
* 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
(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
46
(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 $(70,107).
47
SELECTED HISTORICAL FINANCIAL DATA
(dollars in thousands)
MIDDLE AMERICAN TISSUE
Set forth below are selected historical financial data for Middle American
Tissue for the five fiscal years ended September 30, 1999 and the fiscal
quarters ended December 31, 1998 and 1999. The data as of and for:
o the 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 these financial statements, as
well as these financial statements, are included elsewhere in this
prospectus;
o the fiscal year ended September 30, 1996 are derived from, and should
be read in conjunction with, our consolidated financial statements
audited by Holtz Rubenstein & Co., LLP, independent auditors;
o the fiscal years ended September 30, 1995 are derived from our
unaudited consolidated financial statements; and
o the fiscal quarters ended December 31, 1998 and 1999 are derived from
our unaudited consolidated financial statements included elsewhere in
this prospectus.
The financial statements as of September 30, 1995 and 1996 are not included in
this prospectus.
In the opinion of our management, the unaudited financial statements
include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the information set forth therein. 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 included elsewhere in this prospectus.
Fiscal Year Three Months Ended
Ended September 30, December 31,
----------------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(unaudited) (unaudited) (unaudited)
Statement of Operations Data:
Revenues ............................. $ 138,933 $ 153,224 $ 198,384 $ 215,203 $ 284,340 $ 110,315 $ 60,400
Cost of sales ........................ 116,406 122,273 152,286 172,617 213,465 81,796 48,536
--------- --------- --------- --------- --------- --------- ---------
Gross profit ......................... 22,527 30,951 46,098 42,586 70,875 28,519 11,864
Selling, general and
administrative expenses .............. 15,934 17,181 26,953 29,388 34,952 12,758 7,464
--------- --------- --------- --------- --------- --------- ---------
Operating income ..................... 6,593 13,770 19,145 13,198 35,923 15,761 4,400
Interest expense and
other income, net .................... 8,326 588 12,272 14,672 17,912 7,803 3,249
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before
Extraordinary items .................. (1,733) 13,182 6,873 (1,474) 18,011 7,958 1,151
--------- --------- --------- --------- --------- --------- ---------
Extraordinary items .................. -- -- -- -- 4,164 -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) .................... $ (1,733) $ 13,182 $ 6,873 $ (1,474) $ 13,847 $ 7,958 1,151
========= ========= ========= ========= ========= ========= =========
September 30, December 31,
----------------------------------------------------------------- -------------
1995 1996 1997 1998 1999 1999
--------- --------- --------- --------- --------- ---------
(unaudited) (unaudited)
Balance Sheet Data:
Cash and cash equivalents ............ $ 1,017 $ 152 $ 870 $ 1,480 $ 1,806 $ 818
Working capital (deficiency) ......... (18,183) (18,413) (20,892) (48,748) 45,906 48,326
Total assets ......................... 136,166 199,201 230,517 270,819 406,863 434,513
Total debt ........................... 93,300 123,376 143,690 176,394 250,142 271,665
Stockholder's equity ................. 14,010 26,984 33,858 33,644 77,900 85,858
Fiscal Year
Ended September 30, December 31,
----------------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(unaudited) (unaudited) (unaudited)
Other Data:
Ratio of earnings to
fixed charges(1) ..................... --(4) 2.3x 1.5x --(4) 1.8x 1.9x 1.3x
Cash flows provided by (used in)(3):
Operating activities ................. --(5) $ 10,351 $ 21,885 $ 17,037 $ (22,034) $ (8,350) $ 4,261
Investing activities ................. --(5) (40,933) (29,172) (27,566) (65,168) (10,152) (3,170)
Financing activities ................. --(5) 29,717 8,005 11,139 87,528 17,514 (2,571)
EBITDA(2) ............................ $ 9,281 27,950 27,427 23,783 49,527 20,902 7,453
Interest expense ..................... 6,922 9,175 12,272 14,672 17,058 7,803 3,249
Depreciation and amortization ........ 4,092 5,593 8,282 10,585 14,458 5,141 3,053
Capital expenditures(3) .............. 24,192 40,933 29,172 27,566 20,168 10,152 3,170
Capital lease obligations entered into 1,944 8,770 2,021 10,453 4,002 3,003 --
48
- --------
(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 of the Berlin-Gorham Mills and the notes to these
financial statements, included elsewhere herein.
(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.
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 these
financial statements, as well as these 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 of the Berlin-Gorham Mills and the notes to the historical
financial statements, included elsewhere in this prospectus.
26 Weeks
Ended
52 Weeks Ended December(1) June(2)
-------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
--------- --------- ---------- --------- --------- ----------
(unaudited) (unaudited) (unaudited)
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)
========= ========= ========= ========= ========= =========
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).
(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. These costs include items
such 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.
50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MIDDLE 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,
such as towels, napkins and bath tissue, and uncoated freesheet paper products
for printing, writing 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 rolls and
reduce manufacturing overhead costs. In fiscal 1997, we reduced manufacturing
overhead costs by $0.5 million as a result of closing the Tomahawk facility.
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 concentration of the
51
largest tissue manufacturers. Shipments of premium and value grades of tissue
products remained strong through fiscal 1999 due to our marketing efforts and
the offering to our existing at-home customers of 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 Three Months Ended
Ended September 30, December 31,
------------------------------------------------------------------
1997 1998 1999 1999 1998
------ ------ ------ ------ ------
(unaudited) (unaudited)
Paper products .................... $196.4 $208.3 $281.4 $106.0 $ 60.4
Equipment sales ................... 2.0 6.9 2.9 4.3 --
------ ------ ------ ------ ------
Total revenues .................... $198.4 $215.2 $284.3 $110.3 $ 60.4
====== ====== ====== ====== ======
We were incorporated by the stockholders of Super American Tissue Inc. in
July 1999 for the purpose of acquiring all of the outstanding capital stock of
American Tissue from Super American Tissue in exchange for our capital stock. As
a result of the exchange, we became a wholly-owned subsidiary of Super American
Tissue and American Tissue became our wholly-owned subsidiary. We and our
corporate subsidiaries have elected S corporation status under the Internal
Revenue Code of 1986, as amended. Our limited liability company subsidiaries are
treated as a partnerships for U.S. federal income tax and most state income tax
purposes. As a result, we and our subsidiaries are not subject to U.S. federal
income taxes and income taxes in a number of states.
As a result of a fire at our headquarters in November 1995, which destroyed
detailed accounts receivable records, the issuance of specific credits for sales
allowances and the write-off of bad debts were delayed into fiscal 1998.
Adequate provisions to the reserves were recorded for these subsequent specific
credits in each of the years subsequent to the fire to maintain sufficient
reserve levels to cover anticipated write-offs. We did not experience
significant liquidity problems as a result of these reserves, however, timely
processing of credits against allowance for doubtful accounts were not charged
to the allowance until individual customer account balances could be reconciled
with the respective customer.
Results of Operations
The following table sets forth data as a percentage of our revenues for the
fiscal years indicated:
Fiscal Years Three Months Ended
Ended September 30, December 31,
---------------------------- ----------------------
1997 1998 1999 1999 1998
---- ---- ---- ---- ----
(unaudited) (unaudited)
Revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 76.6 80.2 75.1 74.1 80.4
Gross profit......................... 23.4 19.8 24.9 25.9 19.6
Selling, general and
administrative expenses(1)........... 13.7 13.7 12.3 11.6 12.4
Operating income..................... 9.7 6.1 12.6 14.3 7.3
Interest expense..................... 6.2 6.8 6.3 7.1 5.4
EBITDA(2)............................ 13.8 8.4 17.4 18.9 12.3
52
- ---------
(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."
Three Months Ended December 31, 1999 "the first quarter of fiscal 2000" Compared
To The Three Months Ended December 31, 1998 "the first quarter of fiscal 1999".
Revenues. Net sales of tissue products decreased approximately $2.0
million, or 3.3%, from approximately $60.1 million for the first quarter of
fiscal 1999 to approximately $58.1 million for the first quarter of fiscal 2000.
This decrease was primarily due to the rebuild of our tissue machine at St.
Helens, Oregon, which decreased our production of jumbo tissue rolls by
approximately 1,500 tons during the first quarter of fiscal 2000, as compared to
the first quarter of fiscal 1999.
Net sales of uncoated freesheet paper products were approximately $32.4
million for the first quarter of fiscal 2000. Net sales of woodpulp were
approximately $15.2 million for the same period. We have no comparable sales
figures for the first quarter of fiscal 1999, as these products are produced by
our subsidiary, Nip & Paper of America) at the Berlin-Gorham Mills. However, for
comparison purposes only, the net sales of uncoated freesheet and woodpulp for
the first quarter of fiscal 1999 for the Berlin-Gorham Mills, as a business unit
of Crown Paper Co., were approximately $30.6 million and approximately $12.5
million, respectively.
Net sales of equipment were approximately $4.3 million for the first
quarter of fiscal 2000. We had no sales of equipment in the first quarter of
fiscal 1999.
Gross Profit. Gross profit increased approximately $16.6 million, or
139.5%, from approximately $11.9 million for the first quarter of fiscal 1999 to
approximately $28.5 million for the first quarter of fiscal 2000. Gross profit,
as a percentage of net sales, increased from 19.6% for the first quarter of
fiscal 1999 to 25.9% for the first quarter of fiscal 2000. 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 increased production and
sales of jumbo tissue rolls, which lowered per unit costs of finished tissue
products. Additionally, sales for the Berlin-Gorham Mills provided higher gross
profit as a percentage of net sales, relative to historical rates prior to our
acquisition of the Berlin-Gorham Mills.
Selling General and Administrative Expenses. A significant portion of our
selling expenses are freight expenses incurred in shipping products to our
customers. It is our policy to include freight expense in this category as
selling expense. Selling, general and administrative expenses, exclusive of
freight, increased approximately $3.5 million, or 83.3%, from approximately $4.2
million for the first quarter of fiscal 1999 to approximately $7.7 million for
the first quarter of fiscal 2000. Selling, general and administrative expenses,
excluding freight, were 7.0% of net sales for the first quarter of fiscal 1999,
as compared to 6.9% forte first quarter of fiscal 2000. This percentage decrease
was due to net sales increasing a: a faster rate than selling, general and
administrative expenses, excluding freight, between the first quarter of fiscal
1999 and the first quarter of fiscal 2000. Freight expense increased
approximately $1.8 million, or 54.5%, from approximately $3.3 million in the
first quarter of fiscal 1999 to approximately $5.1 million for the first quarter
of fiscal 2000. This increase was a result of increased shipments of uncoated
freesheet, woodpulp and jumbo rolls during this period.
Operating Income. Operating income increased approximately $11.4 million,
or 259.1%, (torn approximately $4.4 million for the first quarter of fiscal 1999
to approximately $15.8 million for the first quarter of fiscal 2000. Operating
income, as a percentage of net sales, was 142% for the first quarter of fiscal
2000, as compared to 7.3% for the first quarter of fiscal 1999. This increase
was due to the reasons stated above.
Interest Expense. Interest expense increased approximately $4.6 million, or
143.7%, from approximately $3.2 million in the first quarter of fiscal 1999 to
$7.8 million for the first quarter of fiscal 2000. This increase reflects higher
debt levels during the first quarter of fiscal 2000, as compared to the first
quarter of fiscal 1999.
EBITDA. Earnings before interest, taxes, depreciation and amortization,
known as "EBITDA", is defined as operating income plus depreciation and
amortization. EBITDA increased approximately $13.4 million, or 178.7%, from
approximately $7.5 million for the first quarter of fiscal 1999 to approximately
$20.9 million for the first quarter of fiscal 2000. This increase in EBITDA was
due primarily to the realization of synergies resulting from the integration of
the Berlin-Gorham Mills into our company, favorable operating conditions that
allowed us to run at near full capacity in our tissue business and price
increases in uncoated freesheet, woodpulp and jumbo rolls of tissue.
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.
Fiscal 1999 Compared to Fiscal 1998
Revenues. Revenues are comprised of net sales of paper products, pulp,
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 sales 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, offsets 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, with 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 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
53
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 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 a 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 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 $3.2 million, or 22.1%, from
$14.7 million for fiscal 1998 to $17.9 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
54
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.
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 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
55
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 operated 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 papers market.
The following is a summary of Berlin-Gorham Mills' net sales for the
periods indicated (dollars in millions):
52 Weeks 26 Weeks
Ended December Ended June
------------------------------------------ -----------------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
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
====== ====== ====== ====== ======
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 of paper 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
56
from the July 9, 1999 transactions. We cannot assure you that we will be able to
realize all of the benefits we expect from the Berlin-Gorham Mills as a
stand-alone entity after the acquisition. See "Unaudited Pro Forma Consolidated
Financial Data" included elsewhere in this prospectus.
Interest expense represents interest expense on the industrial revenue
bonds, the proceeds of which are specifically restricted for use in funding
various 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 feesheet paper 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 paper products which we find to have less demand and generally
lower sales prices, and we have increased, and will continued to seek to
increase in the future, the production of tissue paper products as to which we
perceive a significant increase in demand or higher sales volume.
Results of Operations
The following sets forth data as a percentage of the Berlin-Gorham Mills'
net sales:
52 Weeks 26 Weeks
Ended December Ended June
------------------------------------ -----------------------
1996 1997 1998 1998 1999
------ ----- ----- ----- -------
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 overhead 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
- ----------
* See the definition of EBITDA in note 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"
57
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 sales of our premium printing grades, poor market
pricing for our 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 is a result of lower employee
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
58
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. Average net selling price
per ton decreased by $29, or 4.2%, during the same period. Shipments of premium
printing papers tons sold, including text and cover grades, increased 3,857, or
49.2%, from 7,837 in 1997 to 11,694 in 1998, as a result of the Berlin-Gorham
Mills continuing strategy to focus on this market. Net sales price for premium
printing papers declined $23 per ton, or 2.1%, in 1998 as compared to 1997.
Average net selling price increased $4 per ton, or 0.5%.
Net sales of jumbo 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 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.
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
and 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
59
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
of web publishing grades increased 5,288 tons, or 9.8% from 53,858 tons in 1996
to 59,146 tons in 1997, with net selling price decreasing 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 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.
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.
60
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, 11 and 12 of the
notes to our consolidated financial statements included elsewhere in this
prospectus.
Cash provided by operations in the first quarter of fiscal 2000 decreased
by approximately $12.1 million, as compared to the first quarter of fiscal 1999.
There was a significant increase in net income for the first quarter of fiscal
2000, as compared to the first quarter of fiscal 1999. This increase was offset
by increases in inventories during the first quarter of fiscal 2000, as
compared to the first quarter of fiscal 1999, due to increases in sales levels
during fiscal 2000. Cash used for capital expenditures in the first quarter of
fiscal 2000 was approximately $10.1 million, as compared to approximately $3.2
million for the first quarter of fiscal 1999. All of the above necessitated the
need for additional net borrowings of approximately $17.8 million under our
revolving credit facility in the first quarter of fiscal 2000.
In 1997, we entered into a financing agreement with General Electric
Capital Corporation. This 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 these financial covenants. However, we and GECC
subsequently amended the agreement, resulting in our compliance with these
financial covenants. On July 9, 1999, we repaid these term loans, together with
accrued interest, in full.
At December 31, 1999, we held $6.1 million of tissue converting equipment
that we intend to sell to third parties.
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. 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.
61
Combined
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 $271.7 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;
(3) $20.0 million on our old notes, net of unamortized discount of
approximately $2.1 million; and
(4) $165.0 million on the American Tissue 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 this 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 "Business--Environmental
Regulations" 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.
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
62
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. See "Business -
Environmental Regulations" for information as to estimated environmental
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. 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 remedy these deficiencies, we have restructured our financial and
accounting department, including hiring a new Chief Financial Officer, a Vice
President of Finance and a Corporate Controller all of whom are certified public
accountants. 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.
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 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. As a
result of these improvements, 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.
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 us 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
63
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 these conditions are beyond our control.
Seasonality
Historically, our net sales of tissue products have been somewhat stronger
during our third and fourth fiscal quarters, due to increased seasonal usage by
consumers in our at-home tissue business and inventory and usage patterns in our
away-from-home tissue 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 these 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 Paper
believes it had a reasonable basis for its estimates, it is reasonably possible
that we may change our 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,
64
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 products 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, in 1997, Fort Howard merged with James
River, creating Fort James, the industry leader in terms of tissue capacity.
Based on estimated 1999 capacity data for U.S. manufacturers, 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 1985 through 1999, 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, some
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 1.2% over the
period 1993 through 1999. Over the same period, operating rates averaged
approximately 93.8%. After significant new capacity coming on-line during 1998
and 1999, growth in capacity for 2000 is estimated 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.
U.S. Tissue Industry Statistics
(000 tons)
1992 1993 1994 1995 1996 1997 1998 1999e
------- ------- ------- ------- ------- ------- ------- -------
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%
e=estimate
Source: 1999-2000 North American Pulp & Paper Factbook
65
While pricing remained competitive during 1998, we believe that prices for
tissue products may increase in 1999 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 1997 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, approximately 16.0% of this
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 national 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 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
66
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 25.0% of total shipments; business forms
bond and computer forms, approximately 15.0% of shipments; and envelopes,
approximately 10% of total shipments. Uncoated freesheet is also used for
premium value applications, 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 59.0% 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, 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.
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U.S. Uncoated Freesheet Industry Statistics
(000 tons)
1992 1993 1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------ ------- ------- --------
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
- ------------
e = estimate
Source: 1999-2000 North American Pulp & Paper Factbook * 20 lb. communication
paper (reprographic bond).
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, 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 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:
o 60.6% of our revenues from sales of finished tissue products;
o 24.1% from sales of jumbo tissue rolls;
o 9.9% of our revenues from sales of uncoated freesheet paper products;
o 4.4% from our revenues from sales of wood pulp; and
o the remainder from sales of tissue converting equipment.
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Our 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 this 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 the Berlin-Gorham 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 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
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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%.
70
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 12 tissue machines have an annual
capacity ranging from approximately 24,000 tons to approximately
72,000 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,
various niche opportunities have been created by our competitors'
consolidations, where they have chosen to discontinue or de-emphasize
some value or economy product categories. To capitalize on this trend
and strengthen our position as an alternative supplier in these
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.
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 individual products, 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
71
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 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 specified 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.
72
We have four 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):
Fiscal Years Ended September 30,
-----------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------------- ----------------- ---------------- --------------- ---------------
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%
* This decrease from fiscal 1995 was due primarily to the fire at our
Hauppauge, New York facility in November, 1995.
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
73
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.
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 individual
products, ranging from economy and value grades to premium grades. Several niche
areas have been created by our competitors' consolidations, where they have
chosen to withdraw or de-emphasize some 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 various segments.
At-home finished tissue products, approximately 24.0% 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 several 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.
74
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.
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, including 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 accounted for 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
75
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 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.
Tissue Manufacturing
Jumbo Tissue Roll Manufacturing. Our jumbo tissue roll manufacturing
process begins with
76
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 wrap and pack our finished tissue 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.
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
77
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 a number of large diversified paper and consumer products
companies, such as Kimberly-Clark, Fort James, Proctor & Gamble, Georgia-Pacific
and Global Tissue, a subsidiary of Kruger, Inc. We compete primarily on the
basis of price, although product quality and performance, product development
effectiveness, service and sales and distribution support are often determining
factors in the choice of a supplier. Aggressive competitive pricing actions,
which may become more intense due to changing industry conditions, could reduce
revenues and adversely affect our operating results or financial condition. 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. Due to the high bulk, low density
of tissue products, their markets are generally regional or national, with
limited imports and exports.
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 some 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 these 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 some 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 those 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. See "Risk Factors -- We Operate In A Highly Competitive
Industry."
Berlin-Gorham Mills Acquisition
78
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 for 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 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 these 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 mills and the hydroelectric
generating facilities are located on the Androscoggin River, which provides
water for operation of the mills
79
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 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 this 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 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 these strategies or that the
implementation of these 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 various 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
80
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.
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 our mills and facilities described 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 volumes of, each of our facilities. The
American Tissue notes and our revolving credit facility are collateralized by
substantially all of our assets, including the facilities listed below.
Annual Production
Tissue Mills Products Capacity(1)
--------- --------- -----------------
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
========
81
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
==========
- ---------------
(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 this 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. See Note 14 of the Notes to
our Consolidated Financial Statements.
(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.
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
82
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 various 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 these 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
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 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
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 these 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 686 of which are employed at the Berlin-Gorham
83
Mills. We also have an 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 tissue 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, information as to
our directors and executive officers and a key employee of our subsidiary,
American Tissue:
Name Age Position
- --------- ------- ------------------------------------
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 of American
Tissue and President and Chief
Executive Officer of Pulp & Paper of
America LLC
Andrew H. Rush 40 Director
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 our acquisition of American Tissue in July 1999 and has served in the same
positions with American Tissue 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.
Mehdi Gabayzadeh has served as our President, Chief Executive Officer and a
director since our acquisition of American Tissue in July 1999 and has served in
the same positions with American Tissue 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 our acquisition of American Tissue in July 1999 and has
served in the same positions with
84
American Tissue since May 1999. Prior to joining American Tissue, 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 an Executive Vice President of
American Tissue and as President and Chief Executive Officer 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.
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 Nicholas T. Galante, III, an
executive officer and key employee of our subsidiary, American Tissue, during
fiscal 1997, 1998, and 1999 for services rendered in all capacities to our
predecessors during these fiscal years. Mr. Nourollah Elghanayan, an executive
officer of Middle American Tissue, did not receive any compensation from our
predecessors during these fiscal years.
Annual Compensation
-----------------------------------------------------------------------------
Other Annual All Other
Annual All Other Compen- Compen-
Name and Principal Position Fiscal Year Salary($) Bonus($) sation($)(1) sation($)(2)
- --------------------------- ----------- ---------- --------- ----------- ------------
Mehdi Gabayzadeh 1999 240,000 -- 660 --
President and Chief Executive Officer 1998 240,000 -- 691 --
1997 240,000 -- 749 --
Nicholas T. Galante, III
Executive Vice President of American Tissue,
President and Chief Executive Officer of Pulp 1999 225,769(3) -- 248 2,133
& Paper of America LLC 1998 210,000(3) -- 259 1,835
1997 200,000(3) -- 281 1,600
- ----------
(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.
Edward I. Stein, our Executive Vice President and Chief Financial Officer,
began his employment with American Tissue on May 31, 1999. He receives an annual
salary of $275,000,
85
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.
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.
Director Compensation
None of our directors receives any compensation or fees for service on the
Board of Directors.
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of January 14, 2000, 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
- ---------------------- --------------- -----------
Super American Tissue Inc.(2) .................................. 176.000 88.000
Donaldson, Lufkin & Jenrette Inc.(3) ........................... 24.000 12.000
DLJMB Funds(5) ................................................. 24.000 12.000
Nourollah Elghanayan ........................................... 53.474(5) 26.737
Victoria Elghanayan ............................................ 35.057(6) 17.529
Mehdi Gabayzadeh ............................................... 88.000(7) 44.000
Mehdi Gabayzadeh and Joseph Neissany
as trustees for Diane Gabayzadeh Trust ......................... 17.327(7) 8.664
Mehdi Gabayzadeh and Joseph Neissany
as trustees for Deborah Gabayzadeh Trust ....................... 17.327(7) 8.664
Mehdi Gabayzadeh and Joseph Neissany
as trustees for John Gabayzadeh Trust .......................... 20.103(7) 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 ................................................. --(8) --
All directors and executive officers
as a group (9 persons) ......................................... 141.474(5)(7)(8) 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) 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.
(3) Donaldson, Lufkin & Jenrette Inc. 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 Inc. is 277 Park Avenue, New York New York 10172.
86
(4) 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 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.
(5) The shares of 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.
(6) 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.
(7) 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.
(8) Does not include warrants to purchase up to 12% of our common stock issued
as of July 9, 1999, beneficially owned by Donaldson, Lufkin & Janrette Inc.
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 Shareholders Agreement
Super American Tissue, Mr. Elghanayan and the other stockholders of Super
American Tissue affiliated with him, Mr. Gabayzadeh and the other stockholders
of Super American Tissue affiliated with him, and 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 these outside directors shall constitute no more than one third of the
board of directors of Super American Tissue or the applicable
subsidiary; and
o any action by the 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 the 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 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 the payment of indebtedness owing by Super
American Tissue or any of its subsidiaries to a shareholder of Super American
Tissue, then the authorization of these transaction is subject to the prior
satisfaction of specified conditions. The
87
most significant of these conditions is that 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.
Middle American Tissue Stockholders Agreement
Under a stockholders agreement among us, Super American Tissue, the initial
purchasers of the old notes and the stockholders of Super American Tissue,
including Messrs. Elghanayan and Gabayzadeh, DLJ Merchant Banking Partners II,
L.P. ("DLJMB Funds"), on behalf of the initial purchasers of the old notes and
the warrants issued by us with the old notes, has the right, for so long as the
initial purchasers own a majority of the warrants and the shares of our common
stock issuable upon exercise of the warrants or more than 50.0% in aggregate
principal of the Notes, to nominate one person for election as a member of our
board of directors and one person for election as a member of the board of
directors of American Tissue.
In addition, Super American Tissue agreed to vote its shares of our common
stock, and we have agreed to vote our shares of the common stock of American
Tissue, to cause this nominee to be elected to our board or American Tissue's
board, as applicable.
Under this agreement, any "affiliate transaction" between us and one of our
subsidiaries, on the one hand, and any of our affiliates that is not one of our
subsidiaries, on the other, must be approved by the director nominated by DLJMB
Funds. An "affiliate transaction" is defined in this agreement as:
(1) any lease or transfer of assets to, or purchase or acquisition of
assets from, one of our affiliates, or
(2) any indebtedness or guarantee to, from or for the benefit of one of
our affiliates,
in each case, involving aggregate consideration in excess of $1.0 million.
This agreement also provides for various "call" options in our favor, and
"put" options in favor of, the initial purchasers of the old notes and the
warrants. We have a "Year Two Call Option" to redeem all of the warrants, and
any shares of our common stock issuable upon exercise of any of the warrants
("warrant shares"), in connection with a redemption by us of all of the Notes as
permitted by the indenture relating to the Notes, during the period commencing
on July 9, 2000 and ending on July 9, 2001. The aggregate redemption price for
the warrants, any outstanding warrant shares and the Notes must equal an amount
which represents a 42.5% simple annual return on the total investment of the
initial purchasers in the old notes and the warrants, adjusted pro rata for a
portion of a year. For example, based on an initial investment of $20.0 million,
the redemption price on July 1, 2000 would be $28.5 million, on July 1, 2001
would be $37.0 million and on an interim date would be $28.5 million plus a pro
rata portion of the assumed $8.5 million annual return.
We must give the trustee for the Notes and the holders of the warrants and
any outstanding warrant shares, notice of exercise of the Year Two Call Option
at least 60 days before the redemption date specified in our notice of exercise.
The redemption price is payable by us in
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immediately available funds against our receipt of the warrants, any warrant
shares and the Notes.
If we do not exercise the Year Two Call Option as of the 60th day prior to
July 9, 2001, the initial purchasers of the old notes, if they own more than 50%
of the warrants and warrant shares at that time, will have a "Year Two Put
Option," which option must be exercised at least 45 days before July 9, 2001 by
giving written notice of exercise to us. If the Year Two Put Option is
exercised, we must give notice to the trustee for the Notes of our intention to
redeem the Notes as permitted by the indenture relating to the Notes, and we
must repurchase the Notes, the warrants and any warrant shares by October 9,
2001, unless the deadline is extended by DLJMB, but not later than October 9,
2002. On or prior to the date that we notify the trustee of the date of
redemption of the Notes, DLJMB may withdraw the Year Two Put Option, in which
case the Year Two Put Option will terminate. If we default in performing our
obligations upon exercise of the Year Two Put Option, the redemption price
continues to accrue until paid in full.
Our obligations upon exercise of the Year Two Put Option are secured by a
security interest in favor of the trustee for the Notes in the outstanding
shares of common stock of American Tissue. If we default in the performance of
our obligations to purchase the Notes, the warrants and any warrant shares, the
initial purchasers of the old notes are entitled to cause the trustee to
foreclose its security interest in our shares of common stock of American
Tissue.
Unless previously exercised, the put and call rights and obligations of the
parties under this agreement terminate on the earlier to occur of:
(1) a sale by us or American Tissue in an underwritten public offering of
our or its common stock for at least $50.0 million of gross proceeds,
resulting in at least 50 holders of the common stock sold, with the
common stock being listed on a major national securities exchange or
quoted on the Nasdaq National Market, or
(2) the sale by us or American Tissue of substantially all of our or its
assets.
This agreement also grants demand and piggy-back registration rights to the
holders of the warrants and warrant shares and requires us to pay expenses
incident to the performance of our registration obligations under this
agreement.
This agreement also requires us to furnish quarterly and annual financial
reports to the holders of the warrants and warrant shares and to indemnify each
holder of warrants and warrant shares, as holder of our equity or debt
securities, against liabilities, damages, claims and expenses imposed on,
incurred by, or asserted against, any holder arising out of or resulting from
the holder being a holder of our debt or equity securities, except for
liabilities or expenses caused by the gross negligence or willful misconduct of
any indemnified holder and violations by the holder of federal and state
securities laws.
RELATED PARTY TRANSACTIONS
Super American Tissue Inc., a Delaware corporation, beneficially owns all
of our outstanding common stock, other than warrants issued to the initial
purchasers of our senior secured discount notes to purchase up to 12% of our
common stock as of the issue date of these notes. We own 100% of American
Tissue's outstanding capital stock. Mr. Nourollah Elghanayan, our Chairman
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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.
In August 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. Effective as of October 1, 1998,
these stockholders caused American Tissue to issue 200 shares of its 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 the
wholly owed subsidiaries of American Tissue subsidiaries. See note 1 of the
notes to our consolidated financial statements included elsewhere in this
prospectus.
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 American Tissue's
outstanding common stock they owned for pro rata shares of the common stock of
Super American Tissue. As a result of this exchange, American Tissue became a
wholly-owned direct subsidiary of Super American Tissue. On July 2, 1999, these
stockholders caused us to be formed as a Delaware corporation. Effective July 2,
1999, these shareholders caused us to issue shares of our common stock to Super
American Tissue in exchange for shares of the common stock of American Tissue
held by Super American Tissue. As a result, we became a wholly-owned subsidiary
of Super American Tissue, and American Tissue became our wholly-owned
subsidiary, in each case without giving effect to warrants issued to the initial
purchasers of our senior secured discount notes in connection with the purchase
by these affiliates for $20.0 million of senior secured discount notes of Middle
American Tissue. See "Principal Shareholders."
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.,
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., American Tissue Mills of Maine LLC, Huntington LLC, Lakeview Real Estate
LLC Pheasant LLC and United States Paper Mills of Vermont Inc.,.
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.
Transactions with the Affiliated Companies
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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 this 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 this indebtedness as of
December 31, 1999 and as to the highest amount of this indebtedness outstanding
since October 1, 1998:
Highest Amount
Amount Outstanding at Outstanding Since
Creditor Debtor December 31, 1999 October 1, 1998
-------- ------ --------------------- -----------------
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
=========== ===========
- --------
(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.
(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 these Affiliated Companies during
fiscal 1998 to finance the working capital requirements of these subsidiaries.
This 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 the indebtedness and these Affiliated Companies and released
our subsidiaries from liability for this indebtedness.
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The details of this 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 to 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 this 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 our last fiscal year October 1, 1998, through
December 31, 1999, of $1,362,933.
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 our last fiscal year October 1, 1998, through December 31,
1999 of $846,417.
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. From the beginning of our last fiscal year
October 1, 1998, through 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 $2,679,628.
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 its operating expenses, net of any losses
resulting from currency fluctuations. From the beginning of our last fiscal year
October 1, 1998, through December 31, 1999, American Tissue Corporation
reimbursed American Tissue Mills de Mexico for $1,318,176 of operating expenses
and paid American Tissue Mills de Mexico $65,909 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
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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 Stockholders
Messrs. Elghanayan and Gabayzadeh have borrowed money from some of our
subsidiaries in the aggregate amount of $2.1 million as of December 31, 1999.
These loans have no definite repayment date and do not bear interest. The
following table sets forth the details of these transactions:
Highest Amount Amount Outstanding
Outstanding Since at
Debtor Creditor October 1, 1998 December 31, 1999
- ------------- ------------------ ----------------- ------------------
N. Elghanayan Unique Financing $566,000 $566,000
M. Gabayzadeh Unique Financing 566,000 566,000
N. Elghanayan American Tissue Mills of 947,000 --
Oregon
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 this
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 holders 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 the issue date of the old notes, on the
same terms.
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DESCRIPTION OF MATERIAL INDEBTEDNESS
The Old Notes
On July 9, 1999, we sold, in a private placement, approximately $35.8
million face amount of the old notes. After deduction of an original issue
discount, we received net proceeds of approximately $17.1 million. See
"Description of Exchange Notes" for a detailed description of the terms of the
old notes.
American Tissue Notes
On July 9, 1999, our subsidiary, American Tissue, sold, in a private
placement, $165.0 million face amount of senior secured notes. After deduction
of an original issue discount, American Tissue received net proceeds of
approximately $159.4 million. The American Tissue notes bear interest at the
annual rate of 12 1/2%, payable every six months in cash on January 15 and July
15, commencing January 15, 2000, and mature on July 15, 2006. The American
Tissue notes are fully and unconditionally guaranteed by all of our domestic
subsidiaries and these notes and guarantees are secured by:
o a first priority lien on all of the paper mill plant and property of
American Tissue's subsidiary guarantors, substantially all of the
equipment, intellectual property and related general intangibles
American Tissue's of subsidiary guarantors and all of the stock and
membership interests of each of American Tissue's subsidiary
guarantors; and
o second priority liens on, other real property, accounts receivable,
inventory and related general intangibles of American Tissue's
subsidiary guarantors.
The indenture governing the American Tissue notes contains covenants that
will, among other things, limit the ability of American Tissue and the ability
of American Tissue's subsidiaries, other than those subsidiaries designated by
American Tissue as receivables subsidiaries or unrestricted subsidiaries as
permitted by the indenture, to:
o pay dividends on, redeem or repurchase its capital stock;
o make specified loans and investments;
o incur additional indebtedness;
o permit payment or dividend restrictions on these of its subsidiaries
that are not unrestricted subsidiaries;
o sell assets;
o create specified liens;
o engage in specified transactions with affiliates;
o consolidate, merge or sell all or substantially all of its
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assets and the assets of its subsidiaries; and
o prepay, redeem or purchase debt.
The American Tissue notes are redeemable by American Tissue in whole or in
part after July 15, 2004 at specified redemption prices. Up to 35% of these
notes may be redeemed by it at a redemption price of 113.25% of their face
mount, together with accrued interest unpaid, before July 15, 2002 out of the
cash proceeds of an underwritten public offering of its common stock. Each
holder of American Tissue notes can require American Tissue to repurchase his or
its notes out of the proceeds of sales of American Tissue's assets or upon the
occurrence of a change of control event at a price of 101.0% of the face amount
of his or its notes, 100%, in case of an asset sale, under the circumstances set
forth in the indenture relating to the American Tissue notes.
Revolving Credit Facility
General. On July 9, 1999, American Tissue, 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.
American Tissue 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 American Tissue's revolving credit
facility, including amounts reimbursable following drawings under letters of
credit, bear interest, at American
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Tissue's 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 American Tissue's revolving credit
facility bore interest at an effective median rate of approximately 7.8% per
annum.
Prepayments. Borrowings under American Tissue's revolving credit facility
may be prepaid by American Tissue at any time without penalty.
Covenants. The obligations of the lenders who are parties to American
Tissue's revolving credit facility to advance funds are subject to conditions
customary for facilities of similar size and nature. In addition, American
Tissue 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;
o creation or acquisition of subsidiaries;
o purchase or redemption of American Tissue's capital stock or
declaration or payment of dividends or distributions on American
Tissue's 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, American Tissue's revolving credit facility requires American
Tissue to satisfy specified financial covenants customary for facilities of
similar size and nature and also provides for customary events of default.
Collateral. American Tissue's obligations under its 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 American
Tissue's revolving credit facility and all proceeds of the foregoing. In
addition, American Tissue's obligations under its 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, real
property for our facilities, in the aggregate principal amount of approximately
$21.1 million as of December 31, 1999 as follows:
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Annual
Principal Interest
Amount Rate Maturity Lender Real Property Collateral
--------- -------- --------- -------- ------------------------
$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
(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
"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. The
indebtedness bears interest at an annual rate of 8% and matures on August 1,
2006.
DESCRIPTION OF EXCHANGE NOTES
General
The exchange notes will be issued under an indenture between Middle
American Tissue and The Chase Manhattan Bank, as trustee and collateral agent,
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 are referred to the indenture and the Trust
Indenture Act for a complete statement of them.
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The following summary of the material provisions of the indenture and
material provisions of the securities pledge agreement is not complete. For a
complete understanding of the indenture and securities pledge agreement, 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 securities pledge agreement 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
"-- Defined Terms." For purposes of this summary, the terms "Middle American
Tissue", "we", "our" or "us" refer only to Middle American Tissue and not to any
of our subsidiaries, and the term "American Tissue" refers only to American
Tissue Inc. and not to any of our other subsidiaries.
Under specified circumstances, we will be able to designate current or
future subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will
not 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
$35,755,788 and will mature on July 15, 2007. The exchange notes will be issued
in denominations of $1,000 and integral multiples thereof.
The exchange notes will accrete interest at the rate of 15% per annum
compounded semi-annually from July 9, 1999 until July 15, 2003, and will accrue
cash interest at the rate of 15% per annum from the most recent date to which
cash interest has been paid or, if no cash interest has been paid, from July 15,
2003, payable semi-annually in arrears on January 15 and July 15, commencing on
January 15, 2004. We will make each cash interest payment to the holders of
record of the exchange notes on the immediately preceding January 1 and July 1.
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 our office or agency 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 the 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 our senior secured obligations, and will be
structurally subordinated to the indebtedness of our subsidiaries and any assets
of our subsidiaries securing such indebtedness.
The exchange notes will rank:
o effectively ahead of our existing and future senior unsecured
Indebtedness and junior
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debt to the extent of our assets securing the exchange notes;
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.
Middle 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 securities pledge agreement, we will have pledged to the
collateral agent for the benefit of the trustee and the holders of the Notes, a
first priority lien on the following assets constituting the "Securities
Collateral":
o all outstanding capital stock of our subsidiary, American Tissue,
owned by us and all additional shares of such capital stock we may
acquire in the future;
o all options, warrants, rights, agreements or other interests relating
to American Tissue capital stock, including any right relating to
equity in American Tissue acquired by us;
o all dividends, options, warrants, rights, returns of capital, income,
profits or other amounts in the nature of distributions distributed
to, or receivable by us, in respect of such capital stock; and
o all proceeds of the foregoing.
The indenture permits us to create specified Permitted Liens, including
Purchase Money Liens and liens securing Acquired Indebtedness and up to $10.0
million of other Indebtedness. The exchange notes will be effectively
subordinated to such Purchase Money Obligations and other Indebtedness to the
extent of the assets serving as collateral for Purchase Money Obligations and
other Indebtedness.
If an event of default occurs under the indenture, the collateral agent 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
collateral agent deems advisable to protect and enforce its rights in the
collateral for the exchange notes, including, without limitation, the
disposition of the Securities Collateral in accordance with the securities
pledge agreement and applicable law.
The proceeds received by the collateral agent from the disposition of such
collateral will be applied by the collateral agent:
o first, to pay the expenses of such disposition and fees and other
amounts then payable to the trustee under the indenture and the
securities pledge agreement; and
o thereafter, to pay the principal of, premium, if any, and accrued
interest on the exchange notes (or, if prior to July 15, 2003, the
Accreted Value of the exchange notes).
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Under the terms of the indenture and the securities pledge agreement, the
collateral agent will determine:
(1) whether to dispose of Securities Collateral following the
occurrence of an Event of Default and, if it determines to dispose of such
collateral, the circumstances under, and the manner in, which to dispose of
the collateral; and
(2) whether to release all or any portion of such collateral from the
lien created by the securities pledge agreement.
The right of the collateral agent to dispose of Securities Collateral upon
the occurrence of an event of default under the indenture is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy case were to
be commenced by or against us prior to the collateral agent having disposed of
the Securities Collateral.
The amounts realizable by the collateral agent in respect of the Securities
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. Accordingly, we cannot assure you that proceeds of any sale of
the Securities Collateral pursuant to the securities pledge agreement 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 the Securities 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 Securities Collateral) would have
only an unsecured claim against our remaining assets.
The Securities Collateral will be illiquid and may have no readily
ascertainable market value. Likewise, there can be no assurance that the
Securities Collateral will be saleable, or, if saleable, that there will not be
substantial delays in its liquidation.
Possession, Use and Release of Securities Collateral
Subject to the provisions of the indenture and the stockholders agreement,
and in accordance with the provisions of the securities pledge agreement, so
long as no event of default has occurred and be continuing, we will have the
right to receive, retain and utilize all distributions on the capital stock of
American Tissue pledged to the collateral agent and to exercise all voting and
other consensual rights pertaining to such capital stock.
The indenture provides that we will be entitled to obtain a full release of
the Securities Collateral:
o upon the payment in full of the exchange notes and all other
obligations owing to the trustee, the collateral agent and the holders
of the exchange notes; or
o following legal defeasance or covenant defeasance of the indenture as
described below under "-- Legal Defeasance and Covenant Defeasance."
Use of Trust Monies
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All Trust Monies will be held by the collateral agent as a part of the
collateral securing the exchange notes so long as no default or event of default
under the indenture shall have occurred and be continuing. Upon the occurrence
and during the continuance on an event of default under the indenture, the
collateral agent may apply Trust Monies in the same manner as the collateral
agent is required to apply proceeds received from the disposition of Securities
Collateral. See "--Ranking and Security."
The Trust Monies deposited with the collateral agent will be invested in
Cash Equivalents pursuant to our direction.
Optional Redemption
At any time prior to July 15, 2003, we may, on any one or more occasions,
redeem up to 35.0% in aggregate face amount of exchange notes and old notes
originally issued under the indenture, with the net cash proceeds of one or more
Equity Offerings, at a redemption price equal to 115.0% of the Accreted Value as
of the date of redemption, provided that:
o at least 65.0% of the aggregate face amount of exchange notes and old
notes originally issued under the indenture would remain outstanding
immediately after giving effect to any such redemption; and
o such redemption occurs within 90 days after the consummation of any
such Equity Offering.
We also may redeem the exchange notes, in whole but not in part, on or
after July 9, 2000, through July 9, 2001, at 105.0% of the Accreted Value
thereof as of the date of redemption.
On or after July 15, 2003, 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 the principal amount of the exchange notes)
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
---- ---------
2003....................................................... 107.5%
2004....................................................... 105.0%
2005....................................................... 102.5%
2006 and thereafter........................................ 100.0%
Mandatory Redemption
Upon receipt of a notice from DLJ Merchant Banking Partners II, L.P., one
of the initial purchasers of the old notes, stating that it is exercising its
option under the stockholders agreement to require us to purchase certain common
stock purchase warrants sold to the initial purchasers together with the old
notes, we will be required to redeem all of the then outstanding exchange notes
at a price equal to 105.0% of the Accreted Value thereof on the date of
redemption. Any such redemption must be effected by us no later than October 9,
2002. We will not be required to effect such redemption if the option is
withdrawn in accordance with the terms
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of the stockholders agreement.
Other than as provided in the preceding paragraph, 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.
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.
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 Accreted Value of the exchange
notes repurchased on the Change of Control Purchase Date, or if the Change of
Control Purchase Date is after July 15, 2003, 101% of the principal amount, 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 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.
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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
Middle 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. See "-- Mandatory
Redemption" for information as to circumstances under which the initial
purchasers of the old notes can require use to repurchase the exchange notes.
Our ability to repurchase exchange notes pursuant to a Change of Control
Offer may be limited by a number of factors. The New Credit Facility currently
provides that certain change of control events with respect to various of our
subsidiaries would constitute a default thereunder. In that event, we might have
to seek consent from the lenders or attempt to refinance the borrowings under
the New Credit Facility. If we do not obtain such consent or repay such
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borrowings, a default under the New Credit Facility could result.
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 Middle 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 us to repurchase such exchange notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of our assets and
those of our 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 engage in any Asset Sales. The
indentures further provides that we will not permit any of our subsidiaries to
engage in an Asset Sale, unless:
(1) such subsidiary receives 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 a resolution of the board of directors of such subsidiary set
forth in an officers' certificate delivered to the trustee;
(2) at least 80.0% of the consideration therefor received by such
subsidiary is in the form of cash or Cash Equivalents; and
(3) such subsidiary 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 such subsidiary's
most recent balance sheet or in the notes thereto, excluding
contingent liabilities and trade payables, of such subsidiary, other
than liabilities that are by their terms subordinated to, or equal in
right of payment with, the exchange notes, that are assumed by the
transferee of any such assets; and
(b) any securities, notes or other obligations received by such
subsidiary from such transferee that are converted by such subsidiary
into cash within 60 days.
The applicable subsidiary may, 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 any of our
subsidiaries was engaged in on the issue date of the old notes or
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any reasonable extensions or expansions thereof;
(2) to the repayment of qualifying indebtedness of any subsidiary of
ours permitted under the indenture; or
(3) 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 such subsidiary does 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 cause such subsidiary 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 Accreted Value
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 such subsidiary 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.
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 cause the applicable subsidiary to 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,
cause such subsidiary to 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 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 our subsidiary for
purchase, and we will promptly issue a new exchange note, and the trustee, upon
delivery of an
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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;
(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"
as defined under "-- Defined Terms";
(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
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(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:
(i) 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 of the old notes 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
(ii) 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 of the old notes 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 subsidiaries
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
(iii) 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
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
(iv) 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,
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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 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
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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. See -- "Defined Terms."
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 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 2.00 to 1 on or prior to July 9, 2001 of the Issue Date and
2.25 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;
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) in an
aggregate principal amount at any time outstanding, with letter
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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 indenture, the
American Tissue notes, the subsidiary guarantees with respect to the
American Tissue notes and the indenture governing the American Tissue
notes;
(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
Middle 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 any 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:
(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
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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 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 will 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 Securities
Collateral, liens created
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by the indenture or the securities, or
(2) with respect to any property or asset (other than Securities
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 our or their 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 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 (the New 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 American Tissue notes, the
indenture governing the American Tissue notes and the subsidiary guarantees
and collateral documents relating to the American Tissue notes;
(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
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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;
(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
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(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:
(i) 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;
(ii)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;
(iii) 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;
(iv)transactions not restricted by the covenant entitled
"Restricted Payments" (including, without limitation, Permitted
Investments);
(v) 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
(vi)any sale or other issuance of our Equity Interests (other
than Disqualified Stock).
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
Securities Collateral, other than as expressly contemplated by the indenture or
the securities pledge agreement.
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,
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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
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 we 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 Securities and Exchange
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 have agreed that, for so
long as any exchange notes remain outstanding, we 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
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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
securities pledge agreement on the Securities 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 Securities Collateral owned by or transferred to the surviving
entity will:
(a) continue to constitute collateral under the indenture and the
securities pledge agreement;
(b) be subject to the lien in favor of the trustee for the
benefit of the holders of the exchange notes; and
(c) not be subject to any lien;
(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 Securities Collateral under the securities
pledge agreement, shall be treated as such collateral 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 securities pledge
agreement 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 a Consolidated Net Worth immediately after the
transaction equal to or greater than our Consolidated Net Worth
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;"
(8) we will have delivered to the trustee an officers' certificate and
an opinion of counsel
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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 Accreted Value or the principal
of or premium, if any, on the exchange notes (including, without
limitation, pursuant to the optional redemption provisions of the
indenture);
(3) failure by us or any of our subsidiaries to comply with the
provisions described under the captions "-- Certain 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 of, 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 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 in the
performance of the securities pledge agreement or any other collateral
document which adversely affects the enforceability or the validity of the
collateral agent's lien on the collateral or which adversely affects the
condition or value of the collateral, taken as a whole, in any material
respect,
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repudiation or disaffirmation by us of our obligations under the securities
pledge agreement or any other collateral document or the determination in a
judicial proceeding that the securities pledge agreement or any other
collateral documents is unenforceable or invalid against us for any reason;
and
(8) 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 by
written notice to us, and to the trustee, if notice is given by the holders.
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 collateral agent, as applicable, will have the right to exercise
remedies with respect to the Securities Collateral, such as sale of the
Securities Collateral, as are available under the indenture, the securities
pledge agreement 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.
The holders of a majority in aggregate principal amount of the outstanding
exchange notes by written notice to the trustee may rescind an acceleration of
the maturity of the exchange notes and the consequences thereof if:
o the rescission would not conflict with a judgment or decree;
o we have paid or deposited with the trustee a sum sufficient to pay all
sums paid or advanced by the trustee and the reasonable compensation,
expenses, disbursements, advances of the trustee, it's agents and
counsel; and
o all existing events of default, except nonpayment of Accreted Value or
principal or interest that has become due solely because of the
acceleration, have been waived or cured.
Moreover, the holders of a majority in aggregate principal amount of the
exchange notes at the time 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 and the
securities pledge agreement, except a continuing default or event of default:
o in the payment of the principal of, premium and other amounts, if any,
or interest on, the exchange notes, including in connection with an
offer to purchase, provided, however,
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that the holders of a majority in aggregate principal amount of the
then outstanding exchange notes may rescind an acceleration and its
consequences, including any related payment default that resulted from
such acceleration; or
o in respect of a covenant or provision hereof which under applicable
provisions of the indenture cannot be modified or amended without the
consent of the holder of each outstanding exchange note.
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 of
any of our subsidiaries, as such, will have any liability for:
o any obligations of ours under the exchange notes, the indenture or the
securities pledge agreement; or
o for any claim based on, in respect of, or by reason of, such
obligations or their creation.
Each holder of exchange notes by accepting an 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 our 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
solely from the trust referred to below payments in respect of the
principal of, premium, if any, and interest on such exchange notes when
such payments are due;
(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 described in the
indenture (referred to below as covenant defeasance)
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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:
(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 must deliver 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 must deliver 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 deliver 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;
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(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.
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) 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:
(a) 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
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Except as provided in the next two succeeding paragraphs, the indenture and
the exchange notes 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 event of default (other than a default or
event of default in the payment of the principal of premium, if any, or interest
on the exchange notes, except for a default resulting from an acceleration that
has been rescinded) or compliance with any provision of the indenture or the
exchange notes, may be waived with the consent of the holders of a majority in
agreement 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:
(1) reduce the principal amount of exchange notes whose holders must
consent to an amendment of, supplement to or waiver under the indenture,
the exchange notes or the securities pledge agreement;
(2) reduce the Accreted Value or 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 "--Covenants-Change of Control" or "-- Covenants--Asset
Sales");
(3) reduce the rate of or change the time for payment of interest on
any exchange note or change or have the effect of changing Accreted Value;
(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
or securities pledge agreement 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 or the exchange
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notes 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 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's assets;
(4) 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
(5) comply with requirements of the Securities and Exchange Commission
in order to effect or maintain the qualification of the indenture under the
Trust Indenture Act.
Concerning the Trustee and the Collateral Agent
The indenture contains certain limitations on the rights of the trustee,
should it become a creditor of Middle American Tissue, 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. In the exercise of its
delegated responsibilities with respect to the Securities Collateral and
otherwise, the collateral agent will be indemnified by us from liability, unless
it performs with gross negligence, bad faith or wilful misconduct.
The holders of 25% 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. Under the securities pledge agreement, the collateral
agent is required, with respect to the custody and preservation of the
Securities Collateral, to exercise a level of care substantially equivalent to
that which the collateral agent accords similar instruments and other property
of its own.
Book-Entry, Delivery and Form
The exchange notes to be exchanged for the old notes 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
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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.
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, under the procedures established by DTC:
(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
(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 particular 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
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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 Accreted Value, 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, the trustee, the collateral agent 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 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, the trustee, the collateral agent 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.
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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, the trustee, the
collateral agent or 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.
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:
(a) 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
(b) has ceased to be a clearing agency registered under the Securities
Exchange Act of 1934; or
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(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 exchange notes will also be settled in immediately
available funds.
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.
"Account Debtor" means any Person who is or who may become obligated to
Middle American Tissue or any Subsidiary under, with respect to, or on account
of, an Account.
"Accreted Value" means, for each $1,000 face amount of exchange notes, as
of any date of determination prior to July 15, 2003 the sum of (i) the initial
offering price of each old note and (ii) that portion of the excess of the face
amount of each exchange note over such initial offering price which shall have
been accreted thereon through such date, such amount to be so accreted on a
daily basis and compounded semi-annually on each January 15 and July 15 at the
rate of 15% per annum from the date of issuance of the old notes through the
date of determination. The Accreted Value will cease to accrete on July 15,
2003.
"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
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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:
(1) 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; and
(2) none of the initial purchasers of the old notes or any of their
Affiliates will be deemed an Affiliate of ours or of any of our
subsidiaries.
"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 a Person), other than to us or to any of our wholly
owned subsidiaries 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 property or
assets of American Tissue or any of its subsidiaries 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;"
(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 a wholly owned subsidiary of ours to
another of our wholly
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owned subsidiaries;
(d) an issuance of Equity Interests by a wholly owned subsidiary of
ours to another of our wholly owned subsidiaries;
(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 such 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 and our subsidiaries, American Tissue Mills of
Oregon, Inc. and American Tissue Corporation, as amended on January 1, 1999 and
as the 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;
(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
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(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 we 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 "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
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beneficially owned by such person or Group; or
(2) the sale, lease or transfer of all or substantially all of the
assets of Middle American Tissue and our subsidiaries to any Person or
Group (other than a subsidiary 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 then in
office; or
(4) American Tissue ceases to be a wholly-owned subsidiary of ours.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Collateral" means "Securities Collateral" as such term is defined in the
securities pledge agreement and all of the property and assets 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.
"Collateral Account" means the collateral account established pursuant to
the indenture relating to the exchange notes.
"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
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
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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 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;
(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:
(a) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going
concern business made within 12 months after the acquisition of such
business) subsequent to the issue date of the old notes in the book
value of any asset owned by such Person or a consolidated Subsidiary
of such Person;
(b) all investments as of such date in unconsolidated
subsidiaries of such Person and in other Persons that are not
subsidiaries (except, in each case, Permitted Investments); and
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(c) 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 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 or American Tissue's Equity Interests (other than Disqualified
Stock); or
(2) Equity Interests (other than Disqualified Stock) of our 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 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 create:
(1) an obligation of American Tissue or a subsidiary guarantor of
American Tissue under the American Tissue notes; and
(2) a security interest in any mortgage collateral, in existence as of
the issue date of the
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American Tissue notes,
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);
(2) the consolidated interest incurred by such Person and its
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 its Subsidiaries or secured by a lien
on assets of such Person or one of its 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 with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its Subsidiaries
for such period to the Fixed Charges of such Person and its 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
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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) 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.
"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 us 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.
"Independent Financial Advisor" means a firm (1) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in us (it being understood that securities of ours
acquired in the ordinary course of trading operations shall not be deemed to
give rise to such direct or indirect financial interest in us) and (2) which, in
the judgment of our board of directors, is otherwise independent and qualified
to perform the task for which it is to be engaged.
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"Initial Purchasers" means the initial purchasers of the old notes.
"Interest Payment Date" means each January 15 and July 15, commencing
January 15, 2004.
"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 or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or other
securities and all other items that are or would be classified as investments on
a balance sheet prepared in accordance with GAAP.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and, except in connection with any Qualified Receivables
Transaction, any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Moody's" means Moody's Investor Services.
"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 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) 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:
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(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 (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, the
indirect parent of American Tissue and our direct parent.
"Permitted Holders" means (a) 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, (b) the principal initial purchasers of the old notes,
and (c) 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 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
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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 and that
is engaged in the same or a similar, complementary, ancillary or related
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;
(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 securities
pledge agreement, the exchange notes, the Stockholders Agreement, the
indenture governing the American Tissue notes, the American Tissue notes
and the related subsidiary guarantees thereof and collateral documents
entered into in connection therewith;
(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;"
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(3) Liens in favor of us or any subsidiary 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;
(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 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;
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(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 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 Middle 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
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(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 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
ours that is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Permitted Tax Payments" means, for so long as we and American Tissue
remain "qualified Subchapter S subsidiaries", as defined in Section
1361(b)(3)(B) of the Code, distributions to Parent to reimburse the
shareholders of Parent:
(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;
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(2) for tax liabilities in respect of each taxable year of American
Tissue (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 exchange notes and/or the old notes for such year (the "Annual
Intermediate OID"), plus American Tissue's taxable loss, if any for
such year, minus American Tissue's 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) the cumulative net taxable income since April 1, 1999 of
American Tissue over
(II) the cumulative interest expense incurred by us with
respect to the exchange notes and/or the old 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, American Tissue 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 were made prior to the issue
date of the old notes by us or Parent to or on behalf of any of their
shareholders.
If American Tissue becomes 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 American Tissue as
a Group Member, in an amount equal to
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(a) the cumulative net taxable income of American Tissue from the date
on which American Tissue 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 American Tissue as a Group Member), minus
(b) all prior distributions made pursuant to this sentence and any
such taxes paid directly by American Tissue.
Notwithstanding the foregoing, no distribution shall qualify as a Permitted
Tax Payment if a default or event of default under the indenture exists or would
result therefrom. 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 the obligations of American Tissue
under the American Tissue notes.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government or agency or political subdivision thereof or any
other entity (including any subdivision or ongoing business of any such entity
or substantially all of the assets of any such entity, subdivision or business).
"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 its 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
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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 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.
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"Related Party Debt" means
(x) the debt of American Tissue that is assumed by or otherwise transferred
to Parent on the issue date of the old notes in an aggregate amount not in
excess of $28.0 million; and
(y) the debt of Parent on the issue date of the old notes in the aggregate
amount not in excess of $5.0 million, in each case 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 American
Tissue, certain of its subsidiaries, 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.
"Stockholders Agreement" means the stockholders agreement dated as of the
issue date of the old notes among, us, the Initial Purchasers, Parent and
certain other parties named therein.
"Subsidiary" means, with respect to any Person: any corporation, limited
liability company, association or other business entity of which more than 50%
of the total voting power of shares of Capital Stock entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (2) any partnership (a) the sole general
partner or the managing general partner of which is such Person or a Subsidiary
of such Person or (b) the only general partners of which are such Person or one
or more Subsidiaries of such Person (or any combination thereof).
Unrestricted Subsidiaries will not be included in the definition of
"Subsidiary" for any purposes of this Indenture (except, as the context may
otherwise require, for purposes of the definition of "Unrestricted Subsidiary").
Unless the context otherwise requires, reference to a Subsidiary in any
provision of this Indenture shall be deemed to mean a Subsidiary of Holdings.
"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 all cash and Cash Equivalents received by the
collateral agent:
(1) pursuant to the securities pledge agreement;
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(2) as proceeds of any sale or other disposition of all or any part of
the Securities Collateral by or on behalf of the collateral agent or any
collection, recovery, receipt, appropriation or other realization of or
from all or any part of the Securities Collateral pursuant to the Indenture
or of the securities pledge agreement or otherwise; or
(3) for application as provided in the relevant provisions of the
securities pledge agreement for which disposition is not otherwise
specifically provided for in any the securities pledge agreement;
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 (other than
American Tissue) 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 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
146
such designation.
"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
(3) 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;
147
o persons who own exchange notes through partnerships, S corporations,
limited liability companies or other pass through entities;
o dealers in securities;
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.
148
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 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
149
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.
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 Middle 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 us, 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.
150
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 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
_________, 2000 all dealers effecting transactions on the exchange notes may be
required to deliver a prospectus.
Based upon interpretations by the staff of the Securities and Exchange
Commission, we believe that exchange notes to be 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.
We will not 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 have agreed to pay all expenses incidental to the exchange offer, other
than commissions
151
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.
152
LEGAL MATTERS
Mandel Resnik & Kaiser P.C., New York, New York will issue an opinion for
us and our subsidiaries 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 issuance and sale of the exchange notes;
and
(3) the enforceability of the exchange notes.
EXPERTS
Our consolidated financial information as of and for the fiscal years ended
September 30, 1997, 1998, and 1999 included in this prospectus have been audited
by Arthur Andersen 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.
Our consolidated financial information as of and for the fiscal year ended
September 30, 1996 included in this prospectus has 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 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 Middle American Tissue, 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
153
Offices of the Securities and 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.
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INDEX TO FINANCIAL STATEMENTS
Middle American Tissue Inc.
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 Stockholders' 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-7
Berlin-Gorham Mills
Berlin-Gorham Mills Report of Independent Auditors ..................... F-26
Balance Sheets at December 27, 1998 and December 28, 1997 .............. F-27
Statements of Operations for the 52 Weeks Ended December 27,
1998, December 28, 1997 and December 29, 1996 .......................... F-28
Statements of Changes in Crown Vantage's Investment .................... F-29
Statements of Cash Flows ............................................... F-30
Notes to Financial Statements .......................................... F-31
Balance Sheet at June 27, 1999 (unaudited) and December 27,
1998 ................................................................... F-41
Statements Of Operations for the 26 Weeks Ended June 27,
1999 and June 28, 1998 (unaudited) ..................................... F-42
Statements of Cash Flows for the 26 Weeks Ended June 27,
1999 and June 28, 1998 (unaudited) ..................................... F-43
Notes to Interim Financial Statements .................................. F-44
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of Middle American Tissue Inc.:
We have audited the accompanying consolidated balance sheets of Middle
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 in
the period ended September 30, 1999. 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
MIDDLE AMERICAN TISSUE INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
December 31, September 30,
----------- -----------------------
1999 1999 1998
---------- ---------- ----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 818 $ 1,806 $ 1,480
Accounts receivable, net of allowance for doubtful accounts of
$717, $613 and $83, respectively ............................ 45,883 52,555 33,229
Inventories (Note 4) ......................................... 120,920 94,664 51,988
Equipment held for sale ...................................... 6,088 7,825 393
Prepaid expenses and other current assets .................... 5,432 3,866 2,872
---------- ---------- ----------
Total current assets ................................... 179,141 160,716 89,962
Property, plant and equipment, net (Note 5) .................. 220,820 212,530 157,705
Due from related parties (Note 12) ........................... 23,713 23,054 19,879
Deferred costs, net .......................................... 10,544 10,408 3,148
Other assets ................................................. 295 155 125
---------- ---------- ----------
$ 434,513 $ 406,863 $ 270,819
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable (Note 7) ....................................... $ 67,839 $ 50,054 $ 66,317
Current portion of long-term debt (Note 10) .................. 534 648 6,553
Current portion of capital lease and financing
obligations (Note 11) ........................................ 978 558 5,059
Accounts payable ............................................. 38,938 42,043 50,153
Accrued expenses ............................................. 22,526 21,507 10,628
---------- ---------- ----------
Total current liabilities .............................. 130,815 114,810 138,710
Due to related parties (Note 12) ............................. 0 -- 22,743
Senior secured discount notes payable (Note 8) ............... 17,927 17,073 --
Senior secured notes payable (Note 9) ........................ 159,689 159,562 --
Long-term debt (Note 10) ..................................... 21,905 21,815 51,280
Capital lease and financing
Obligations (Note 11) ........................................ 2,793 432 24,442
Other long term liabilities .................................. 11,745 11,490 --
---------- ---------- ----------
Total liabilities ...................................... 344,874 325,182 237,175
COMMON STOCK PURCHASE WARRANTS (Note 8) ...................... 3,781 3,781 --
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDER'S EQUITY (Note 1):
Common stock, no par value; 200 shares authorized, 200
shares issued and outstanding ............................... 1,605 1,605 1,605
Additional paid-in capital ................................... 37,675 37,675 7,266
Retained earnings ............................................ 46,578 38,620 24,773
---------- ---------- ----------
85,858 77,900 33,644
---------- ---------- ----------
$ 434,513 $ 406,863 $ 270,819
========== ========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
MIDDLE AMERICAN TISSUE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
For the Three Months Ended
December 31, Year Ended September 30,
--------------------------- -------------------------------------------
1999 1998 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(unaudited)
REVENUES ................................ $ 110,315 60,400 $ 284,340 $ 215,203 $ 198,384
COST OF SALES ........................... 81,796 48,536 213,465 172,617 152,286
------------ ------------ ------------ ------------ ------------
Gross profit .................... 28,519 11,864 70,875 42,586 46,098
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling ................................. 8,966 5,351 24,592 20,373 15,311
General and administrative .............. 3,792 2,113 10,360 9,015 11,642
------------ ------------ ------------ ------------ ------------
12,758 7,464 34,952 29,388 26,953
------------ ------------ ------------ ------------ ------------
Operating income ................ 15,761 4,400 35,923 13,198 19,145
------------ ------------ ------------ ------------ ------------
INTEREST EXPENSE:
Interest forgiven by related party -- 183 990 1,260 --
Other interest expense ........... 7,803 3,066 16,922 13,412 12,272
------------ ------------ ------------ ------------ ------------
7,803 3,249 17,912 14,672 12,272
------------ ------------ ------------ ------------ ------------
Net income (loss)
before extraordinary item .............. 7,958 1,151 18,011 (1,474) 6,873
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt
(Note 15) ............................... -- -- 4,164 -- --
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) ....................... $ 7,958 $ 1,151 $ 13,847 $ (1,474) $ 6,873
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
F-4
MIDDLE AMERICAN TISSUE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(dollars in thousands)
Common Stock
-----------------
Additional Retained
Shares Amount Paid-in Capital Earnings Total
------ ------ --------------- -------- -----
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) ......... -- -- 5,000 -- 5,000
Transfer of related party debt (Note 11) -- -- 24,419 -- 24,419
Net income ............................. -- -- -- 13,847 13,847
-------- -------- -------- -------- --------
Balance at September 30, 1999 .......... 200 1,605 37,675 38,620 77,900
======== ======== ======== ======== ========
Net income (unaudited).................. -- -- -- 7,958 7,958
-------- -------- -------- -------- --------
Balance at December 31, 1999 (unaudited) 200 $ 1,605 $ 37,675 $ 46,578 $ 85,858
======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated statements.
F-5
MIDDLE AMERICAN TISSUE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Three
Months Ended
December 31, Year Ended September 30,
---------------------- -----------------------------------
1999 1998 1999 1998 1997
--------- --------- --------- --------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................. $ 7,958 $ 1,151 $ 13,847 $ (1,474) $ 6,873
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ................. 5,141 3,053 14,458 10,585 8,282
Non-cash portion of loss on early
extinguishment of debt ..................... 0 -- 1,314 -- --
Provision for bad debts ....................... 165 -- 915 560 1,120
Forgiveness of interest ....................... 0 183 990 1,260 --
Changes in operating assets and liabilities:
Accounts receivable ........................... 6,507 (4) (19,021) (4,323) 23,452
Inventories ................................... (26,256) (6,327) (24,781) (2) (21,995)
Equipment held for sale ....................... 1,737 393 (7,432) 1,575 310
Prepaid expenses and other current assets ..... (1,566) (657) (994) 748 (1,644)
Other assets .................................. (140) -- (29) 26 (138)
Accounts payable and accrued expenses ......... (1,896) 6,469 (1,301) 8,082 5,625
--------- --------- --------- --------- ---------
Net cash (used in) provided by operating
activities ............................. (8,350) 4,261 (22,034) 17,037 21,885
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Berlin-Gorham Mills ............ -- -- (45,000) -- --
Capital expenditures .......................... (10,152) (3,170) (20,168) (27,566) (29,172)
--------- --------- --------- --------- ---------
Net cash used in investing activities ..... (10,152) (3,170) (65,168) (27,566) (29,172)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior secured notes ............ -- -- 159,446 -- --
Capital contribution .......................... -- -- 5,000 -- --
Net borrowings (payments)
on revolving lines of credit .................. 17,785 (7,065) (16,263) 16,944 5,462
Proceeds from notes payable ................... -- -- -- 3,195 8,487
Proceeds from long-term debt .................. -- -- 24,616 13,800 45,277
Proceeds from capital leases and financing
obligations ................................. -- 2,907 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)
Proceeds from real estate financings .......... -- 1,000 -- --
Increase in deferred costs .................... (475) -- (10,053) (2,297) (1,114)
Advances and repayments to
related parties, net ...................... 204 587 (2,719) (6,078) 680
--------- --------- --------- --------- ---------
Net cash provided by
financing activities ................... 17,514 (2,571) 87,528 11,139 8,005
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS ......................................... (988) (1,480) 326 610 718
CASH AND CASH EQUIVALENTS, beginning
of period ........................................... 1,806 1,480 1,480 870 152
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end
of period ........................................... $ 818 $ 0 $ 1,806 $ 1,480 $ 870
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ................................. $ 7,803 $ 3,066 $ 16,068 $ 13,574 $ 10,672
========= ========= ========= ========= =========
Issuance of common stock purchase warrants in
connection with issuance of 15% Senior Secured
Discount Notes (Note 8) ....................... $ -- $ -- $ 3,781 $ -- $ --
========= ========= ========= ========= =========
Non-cash financing transactions relating to
capital lease obligations entered into ........ $ 3,003 $ -- $ 4,002 $ 10,453 $ 2,021
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-6
MIDDLE AMERICAN TISSUE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share information)
1. DESCRIPTION OF BUSINESS:
Middle American Tissue Inc., (the "Company"), a Delaware corporation, was
formed in July 1999. The Company is a wholly-owned subsidiary of Super American
Tissue Inc. (the "Parent") and is the parent of American Tissue Inc. (the
"Subsidiary").
The Subsidiary, a Delaware corporation, was formed in August 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 Subsidiary. In June 1999, the
stockholders transferred their respective stock in the Subsidiary to the Parent
in exchange for pro rata shares of the Parent. In July 1999, the Parent
transferred its stock in the Subsidiary to the Company in exchange for shares of
the Company's stock.
The transactions described above constitute transfers of interests in
commonly controlled entities, and have been accounted for in a manner similar to
a pooling of interests. Accordingly, the accompanying financial statements of
the Company include the accounts of the Subsidiary and its respective
subsidiaries for the periods presented at the historical costs of the assets and
liabilities of such entities. Such financial statements have been presented on a
consolidated basis as if the Company had been in existence throughout the
periods presented.
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. Owns a tissue machine in St.
("ATM-Oregon") 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
("ATM-New Hampshire") recycled paper.
American Tissue Mills of New York, Inc. Engaged in the manufacture of jumbo
("ATM-New York") tissue rolls from recycled paper.
American Tissue Mills of Neenah Engaged in the manufacture of jumbo
LLC ("ATM-Neenah) 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
F-7
equipment assets to American Tissue
Mills of New Hampshire, Inc. (Note
13).
American Tissue Mills of Greenwich LLC Engaged in the manufacture of jumbo
tissue rolls ("ATM-Greenwich") 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 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.
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 stockholders.
F-8
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.
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 and 1997.
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. As a result of a fire at the Company's
headquarters in November 1995, which destroyed certain detailed accounts
receivable records, the issuance of specific credits for sales allowances and
the write-off of bad debts were delayed into fiscal 1998. Adequate provisions to
the reserves were recorded in each of the fiscal years subsequent
F-9
to the fire to maintain sufficient reserve levels to cover subsequent specific
write-offs.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market. In determining 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
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, respectively and
$339 for the three months ended December 31, 1999.
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,"
F-10
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 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.
F-11
Reclassifications
Certain prior-year financial statement amounts have been reclassified to
conform to the current year's presentation.
Unaudited Interim Financial Statements
The unaudited consolidated financial information included herein as of
December 31, 1999 and for the three months ended December 31, 1998 and 1999 have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The results of operations of any interim period
are not necessarily indicative of the results of operations to be expected for
the fiscal year.
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 adjustment to the purchase price is currently expected
to be a reduction of the original amount, ranging between $750 and $1,250. 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
===========
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 responsibility 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
---- ----
(unaudited)
Pro forma revenues................................... $ 419,506 $ 389,385
Pro forma income (loss) before extraordinary items... $ (84,118) $ (8,993)
Pro forma net income (loss) $ (88,282) $ (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
F-12
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 $62,568.
F-13
4. INVENTORIES:
Inventories, at cost, consist of the following:
September 30,
December 31, ------------------------
1999 1999 1998
-------- -------- --------
(unaudited)
Raw materials .................. $ 49,743 $ 40,295 $ 32,645
Supplies inventory ............. 3,811 3,163 --
Work-in-process ................ 1,226 1,026 56
Finished goods ................. 66,140 50,180 19,287
-------- -------- --------
$120,920 $ 94,664 $ 51,988
======== ======== ========
5. PROPERTY, PLANT AND EQUIPMENT, NET:
Property, plant and equipment, at cost, consist of the following:
September 30,
December 31, ----------------------
1999 1999 1998
--------- --------- ---------
(unaudited)
Machinery and equipment ....................... $ 193,014 $ 188,174 $ 136,818
Buildings and building improvements ........... 26,643 28,506 19,426
Leasehold improvements ........................ 4,825 4,825 4,650
Land .......................................... 7,866 7,470 4,544
--------- --------- ---------
232,348 228,975 165,438
Less: accumulated depreciation and amortization (46,919) (42,650) (30,641)
--------- --------- ---------
185,429 186,325 134,797
Projects in progress .......................... 35,391 26,205 22,908
--------- --------- ---------
Total property, plant and equipment, net $ 220,820 $ 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, and $4,675 for the three months ended
December 31, 1999. 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 and $284 for the three
months ended December 31, 1999. Interest related to construction projects in
1997 was not material.
6. ACCRUED EXPENSES:
Accrued expenses consist of the following:
September 30,
December 31, ---------------------
1999 1999 1998
------- ------- -------
(unaudited)
Compensation and benefits ............ $ 7,919 $ 8,333 $ 1,939
Promotion and incentives ............. 807 873 1,232
Accrued interest payable ............. 13,392 8,311 3,070
Other ................................ 408 3,990 4,387
------- ------- -------
$22,526 $21,507 $10,628
======= ======= =======
F-14
7. NOTES PAYABLE:
Notes payable consist of the following:
September 30,
December 31, -----------------
1999 1999 1998
------- ------- -------
(unaudited)
Secured note payable to LaSalle Bank National
Association(a) ................................... $67,839 $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
------- ------- -------
$67,839 $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 December 31, 1999 and September 30, 1999,
the Company was in compliance with these covenants. Prior to this new
agreement, 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.
8. SENIOR SECURED DISCOUNT NOTES PAYABLE:
On July 9, 1999, the Company raised approximately $20,000 through the sale
of 15% Series A Senior Secured Discount Notes due 2007, with a face value of
$35,756 ("Middle American Tissue Notes"), and warrants (the "Warrants") to
purchase up to 12% of the Company's common stock at a nominal exercise
F-15
price.
In connection with the above transaction, the Company has a call right (the
"Year Two Call Option"), to redeem all, but not less than all, of the Middle
American Tissue Notes and the Warrants for a fixed redemption price at any date
beginning with the first anniversary of the date of closing through the second
anniversary of the date of closing. If the Company does not exercise the Year
Two Call Option, and the initial purchasers of the Warrants hold more that 50%
of the Warrant, the holders have the put right (the "Year Two Put Option") to
require the Company to repurchase all, but not less than all, of the Warrants
and the Middle American Tissue Notes at a fixed redemption price.
In the event a qualified IPO (as defined in the Middle American Tissue
Notes and Warrants Purchase Agreement) has not occurred prior to the fifth
anniversary of the date of closing, the Parent shall have the right (the "Year
Five Call Option") at any time following such fifth anniversary to purchase all,
but not less than all, of the Warrants, provided, however, that the holders
shall have the right to postpone consummation of the Year Five Call Option for a
maximum postponement period of three years. In addition, the holders shall have
a right at any time following such fifth anniversary to require the Parent to
purchase all, but not less than all, of the Warrants at a price as defined in
the Warrants agreement.
The gross proceeds from the issuance of the Middle American Tissue Notes of
$20,000 were allocated by the Company to the value of the warrants of $3,781 and
to the discounted notes of $16,219. Expenses of the offering of $550 were
capitalized as deferred financing costs and are being amortized over the term of
the Middle American Tissue Notes. In accordance with the terms of the Middle
American Tissue Notes, cash interest is not payable prior to July 15, 2004. The
Middle American Tissue Notes will accrue interest at a rate of 15% per annum,
commencing on July 15, 2003, payable first on July 15, 2004, and then
semi-annually thereafter on January 15 and July 15. The debt discount related to
the difference between the face value of the Middle American Tissue Notes
($35,756) and the proceeds ($20,000) is being accreted over the period to July
15, 2003. The debt discount related to the portion of the offering allocated to
the value of the warrants of $3,781 is being accreted over the full term of the
Middle American Tissue Notes to July 2007. Discount accretion of $854 has been
recognized as interest expense during the year ended September 30, 1999 and for
the three months ended December 31, 1999.
9. SENIOR SECURED NOTES PAYABLE:
On July 9, 1999, the Subsidiary sold $165.0 million 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 Subsidiary 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 Subsidiary's subsidiaries. After deduction of an original issue
discount, the Subsidiary received net proceeds of $159,446,000 from the sale of
the Notes, excluding expenses. At December 31, 1999 and September 30, 1999, the
amount of the unamortized discount on the Notes were $5,311 and $5,438,
respectively.
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 Subsidiary's
subsidiaries and all of the stock and membership interests of each of the
Subsidiary'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 Subsidiary'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.
F-16
10. LONG-TERM DEBT:
Long-term debt consists of the following:
September 30,
December 31,--------------------
1999 1999 1998
-------- -------- --------
(unaudited)
General Electric Capital Corporation ("GECC")(a) $ -- $ -- $ 34,220
Israel Discount Bank ("IDB")(b) ................ -- -- 2,050
Curtiss-Wright Flight Systems/Shelby, Inc.(c) .. 684 709 773
Mortgage loans payable(d) ...................... 21,305 21,304 20,790
Community Redevelopment Agency of Calexico(e) .. 450 450 450
-------- -------- --------
22,439 22,463 57,833
Less: current portion of long-term debt ........ (534) (648) (6,553)
-------- -------- --------
$ 21,905 $ 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).
(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.
F-17
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
=======
11. CAPITAL LEASE AND FINANCING OBLIGATIONS:
Capital lease and financing obligations require future minimum payments as
follows at December 31, 1999 and September 30, 1999:
December 31, September 30,
1999 1999
------- -------
(unaudited)
2000 ........................................... 927 585
2001 ........................................... 970 341
2002 ........................................... 857 117
2003 ........................................... 828 --
2004 ........................................... 903 --
------- -------
4,485 1,043
Less: portion attributable to interest ......... (714) (53)
------- -------
Present value of capital lease and
financing obligations at December 31, 1999
and September 30, 1999 ......................... $ 3,771 $ 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,
December 31, ----------------------
1999 1999 1998
-------- -------- --------
(unaudited)
Gross assets ........................ $ 5,607 $ 1,943 $ 41,018
Accumulated amortization ............ (1,229) (1,132) (5,968)
-------- -------- --------
Net book value ................ $ 4,378 $ 811 $ 35,050
======== ======== ========
Amortization relating to these assets has been included in the amounts
reported in Note 5.
F-18
12. RELATED PARTY TRANSACTIONS:
Due from related parties consist of the following:
September 30,
December 31, ----------------------
1999 1999 1998
------- ------- -------
(unaudited)
Affiliated entities ............... $22,581 $21,467 $18,659
Stockholders ...................... 1,132 1,587 1,220
------- ------- -------
$23,713 $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,
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 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
F-19
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
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.
13. 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.
F-20
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.
The following tables set forth the funded status of the Plans based on
actuarial valuations covering the fiscal years ending September 30, 1999 and
1998:
Post-retirement
Pension Benefits Benefits
---------------- --------
1999 1998 1997 1999
------- ------- ------- -------
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
------- ------- ------- -------
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-21
14. 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
F-22
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 its
delivering the pulp in its original "slurry" or wet form. In the event that
Boise can not deliver minimum yearly quantities, as defined, ATM-Oregon is
entitled to a credit which approximates the indirect and direct costs to
manufacture any lost tons, in order to allow ATM-Oregon to purchase pulp from
others at similar net prices.
In January 1999 ATM-Oregon amended its agreement with Boise whereby, in
connection with the planned upgrade of the tissue paper machine, ATM-Oregon or
another affiliate of the Company is responsible to construct a building on
Boise's premises for use by ATM-Oregon. The purpose of the building is to serve
as a warehouse for storage to accommodate the increase in production that will
result from the machine upgrade. In connection therewith, ATM-Oregon entered
into a Warehouse Site Lease with Boise, which covers the lease of the property
upon which the building will be constructed. ATM-Oregon will pay an immaterial
amount on an annual basis for the lease of the property. The Warehouse Site
Lease expires on December 31, 2022. Construction has not yet commenced and
financing negotiations for the construction are in process.
Upon completion of the building and all related fixtures and furnishings,
ATM-Oregon has the right to cause Boise to purchase the building and related
fixtures and furnishings at any time after ATM-Oregon is in default of its
financing obligations, provided that the principal amount of the construction
financing shall in no case exceed the lower of the construction costs excluding
capitalized interest or $4,000, and provided that the construction loan is
amortized over a period not to exceed 20 years. If ATM-Oregon exercises this
option, the purchase price shall be the remaining balance outstanding under the
construction loan at that time. Additionally, Boise has the option to purchase
the building and related fixtures and furnishings at the net book value upon
termination of the Warehouse Site Lease.
There are substantial restrictions on ATM Oregon's right assign its
interest in its agreement with Boise, including a prohibition on assignment to a
competitor of Boise's business at this facility.
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 paid Koplik a commission of 3% of sales price for all jumbo tissue rolls
sold by Koplik. Any sales to Koplik on behalf of Koplik were recognized upon
shipment, in accordance with the Company's policy of revenue recognition.
Additionally, the agreement with Koplik provided for a profit sharing
arrangement in the event of certain purchase opportunities. No opportunities
ever arose during the term of the agreement and no profit-sharing ever occurred.
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
F-23
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 term of this contract and the Company is studying its
options for remedy. The ton and case production capacity has 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.
Strategic Alliance Agreement
In connection with the acquisition of the Berlin-Gorham Mills, the Company,
through PPA, entered into a contract with Crown whereby Crown provides certain
marketing and sales services to PPA related to sales of certain grades of paper,
at Crown's expense, for a three-year period ending in March 2002. The terms of
the agreement provide that Crown will use its best efforts to purchase an annual
minimum of 20,000 tons of certain grades of paper manufactured by PPA. The paper
will be sold to Crown at market prices at the time of sale, less a discount of
12% of the sales price, excluding freight and any normal cash discounts, as
compensation for the services provided by Crown to PPA. At the termination of
the three-year period, Crown is required to purchase at the then current market
price, all specified grades of paper remaining in PPA's inventory that were
manufactured by PPA during the agreement term and that are identified by or
contain Crown's trademarks, as defined in the agreement.
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 its PPA, entered into a contract with Crown whereby Crown provides
marketing and sales services to PPA to 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
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 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.
F-24
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.
15. EXTRAORDINARY ITEM
In connection with the issuance of its senior secured notes, as discussed
in Note 9, 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 on 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.
16. INSURANCE SETTLEMENTS
During fiscal 1998, the Company suffered losses as a result of two fires at
two of the Company's facilities, and damage to a major piece of equipment at a
third location. The Company was reimbursed through insurance for approximately
$2,200 for claims equal to the amount of these losses. Such charges and
recoveries were recorded during fiscal 1998 as the associated repairs and
related reimbursements were completed by the end of fiscal 1998.
As a result of the equipment damage, the Company incurred other losses
consisting of additional purchase costs for jumbo tissue rolls and other
production materials that otherwise would have been manufactured by the Company
at a lower cost than the amounts paid to third parties to purchase the
F-25
required materials. While the Company is insured for these types of losses,
approximately $2,700 of losses were inquired and charged to operations during
fiscal 1998 that were not covered by the Company's insurance, due to the
deductible provisions of the Company's insurance policies. Approximately $700 of
losses incurred in fiscal 1998 were insured and were reimbursed in early fiscal
1999. Losses relating to these additional costs incurred in operating the
business while the equipment was being repaired continued into fiscal 1999,
until the machine became fully operational in mid-1999. The amount of losses
incurred during this time amounted to $2,400. Such losses were charged against
operations during fiscal 1999 and were offset by insurance recoveries of $2,400
that were received during fiscal 1999.
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 ERNST & YOUNG LLP
F-26
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-27
BERLIN-GORHAM MILLS
STATEMENTS OF OPERATIONS
(dollars in thousands)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 27, December 28, December 29,
1998 1997 1996
--------- --------- ---------
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)
========= ========= =========
See notes to financial statements.
F-28
BERLIN-GORHAM MILLS
STATEMENTS OF CHANGES IN CROWN VANTAGE'S INVESTMENT
(dollars in thousands)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 27, December 28, December 29,
1998 1997 1996
--------- --------- ---------
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
========= ========= =========
See notes to financial statements.
F-29
BERLIN-GORHAM MILLS
STATEMENTS OF CASH FLOWS
(dollars in thousands)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 27, December 28, December 29,
1998 1997 1996
-------- -------- --------
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
activities ......................... 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..... $ -- $ -- $ --
========= ========= =========
See notes to financial statements.
F-30
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. The elements of Berlin-Gorham's capital structure are not
distinguishable from those of Crown Vantage. 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. Only debt and interest related
specifically to these industrial revenue bonds is included in the Berlin-Gorham
financial statements and there is no other debt or interest expense that is
properly allocable to 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 such 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.
Note 2
Summary of Significant Accounting Policies
F-31
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. Berlin-Gorham management
reviews inventories on a continuing to annual basis, depending on the nature and
value of the items involved to determine whether any damaged, excess, or
obsolete items exist. An adjustment is recorded to ensure inventories are stated
at the lower of cost or market when any item is determined to be damaged, excess
or obsolete.
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. Under
Statement of Financial Accounting Standards No. 121 management is to review an
asset for impairment when a trigger event occurs. The trigger event for
Berlin-Gorham occurred during 1998 when it was determined during the fourth
quarter that the facility would generate negative cash flows for the first time
as part of Crown Vantage during the year. These negative cash flows were the
result of price decreases for the products manufactured at Berlin-Gorham. In the
fourth quarter of 1998, management completed its 1999 annual operating plan,
which also indicated negative cash flows were anticipated for Berlin-Gorham
during 1999. In September of 1998 management received an unsolicited bid for
Berlin-Gorham that was substantially below its book value. The combination of
recent operating losses, the negative cash flows in 1998, relatively pessimistic
industry forecasts of pricing in 1999, and fourth quarter due diligence
regarding the unsolicited bid lead management to conclude in the fourth quarter
of 1998 that indicators of impairment existed. 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 required an estimate of future revenues and costs based on expected
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. Once net future cash
flows were estimated, they were discounted to their net present value is an
estimate of fair value and compared to the net book value. 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. Cash flows were projected over twenty years. A twenty-year
life corresponds to the remaining estimated useful life of the mill's chemical
recovery unit, which must be replaced at regular intervals at significant cost.
The replacement of this unit would cause management to evaluate the continued
viability of the mills in light of the required investment at that time.
Although management believes it has a reasonable basis for its
F-32
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.
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 $8.4 million at December
27, 1998 and December 28, 1997,
F-33
respectively).
The proceeds from sales are less than the face amount of undivided
interests in accounts receivable sold and this discount ($.9 million in 1998,
$.5 million in 1997, and $.2 million in 1996) is included in corporate
allocations in the statement of operations.
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. Intercompany activity primarily represents
allocations of corporate expenses that are not specific to any single Crown
Vantage facility. These expenses include the corporate legal, information
technology, accounting departments, corporate senior management expenses and
corporate facility expenses. 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. The average monthly balance due to Crown
Vantage from Berlin-Gorham was $0.8 million for 1998, $14.1 million for 1997 and
$15.8 million for 1996.
F-34
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
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
======== ========
F-35
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.
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.
F-36
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:
Pension Benefits Other Benefits
---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(dollars in thousands)
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
Plan participants' contributions ............. 294 249
Benefits paid ................................ (5,936) (5,940)
-------- --------
Fair value of plan assets at end of year ..... $ 95,027 $ 97,907
======== ========
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:
Pension Benefits Other Benefits
---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(dollars in thousands)
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)
======== ======== ======== ========
The components of the Berlin-Gorham Mill's net pension and other benefit
costs, were as follows:
Pension Plans Other Benefit Plans
------------------------- --------------------------
1998 1997 1996 1998 1997 1996
(dollars in thousands)
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
======= ======= ======= ======= ======= =======
F-37
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
1998 1997 1998 1997
---- ---- ---- ----
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%
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:
1% increase 1% decrease
----------- -----------
(dollars in thousands)
Service and interest cost........................... $ 262 $ 215
Accumulated postretirement benefit obligation....... $2,520 $2,197
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 within long-term
liabilities 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. We developed with the assistance of external engineering
parties a total estimated costs that is approximately $13 million for the
Berlin-Gorham Mills. Costs accrued during 1998, 1997 and 1996 for landfill site
restoration, post closure and monitoring costs were approximately $0.3 million,
$0.3 million and $0.6 million respectively. Management is not aware of any
additional remediation or liability by Crown Vantage that is required as a
result of the sale of the Berlin-Gorham Mills to American Tissue. As is the case
with any estimate, any change in technology, economics concerning waste
disposal, legal requirements or forecasted usage by the Berlin-Gorham Mills of
the landfill closure could result in material changes to the estimates.
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. We developed
with the assistance of external engineering parties a total estimated costs that
is approximately $13 million for the Berlin-Gorham Mills. Costs accrued during
1998, 1997 and 1996 for landfill site restoration, post closure and monitoring
costs were approximately $0.3 million, $0.3 million and $0.6 million
respectively. Management is not aware of any additional remediaten or liability
by Crown Vantage that is required as a result of the sale of Berlin-Gorham Mills
to American Tissue. As is the case with any estimate, any change in technology,
economics concerning waste disposal, legal requirements or forecasted usage by
the Berlin-Gorham Mills of the landfill closure could result in material changes
to the estimates.
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
F-38
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.
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
F-39
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 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 for $45 million 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. Management determined the purchase price was fair
after performing due diligent on the Bid over several months. This analysis of
the offer price included whether Berlin-Gorham continued to fit within Crown
Vantage's strategy, Berlin-Gorham's operating history, management's cash flow
projections for Berlin-Gorham over the next 20 years, and an independent
assessment by professional advisors regarding the purchase price. After
reviewing these factors, management determined that the purchase price of $45
million was a fair and reasonable price.
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-40
BERLIN-GORHAM MILLS
BALANCE SHEET
(dollars in thousands)
June 27, 1999 December 27, 1998
------------- -----------------
(unaudited)
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
======= ========
See notes to financial statements.
F-41
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-42
BERLIN-GORHAM MILLS
STATEMENTS OF CASH FLOWS
(dollars in thousands)
26 Weeks Ended June
June 27, 1999 June 27, 1998
------------- -------------
(unaudited)
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 $ -- $ --
======== ========
See notes to financial statements.
F-43
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 such 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 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).
F-44
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
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)
F-45
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
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-46
================================================================================
________________, 2000
MIDDLE AMERICAN TISSUE INC.
OFFER FOR
ALL OUTSTANDING 15% SERIES A
SENIOR SECURED NOTES DUE 2007
IN EXCHANGE FOR
15% SERIES B SENIOR SECURED NOTES DUE 2007
-------------------------------------
PROSPECTUS
-------------------------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
THAT WOULD NOT BE PERMITTED OR LEGAL. THE INFORMATION IN THIS PROSPECTUS IS
CURRENT AS OF _____________, 2000.
- --------------------------------------------------------------------------------
================================================================================
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) EXHIBITS. A list of exhibits included as part of this Registration
Statement is set forth in the Exhibit Index which immediately precedes
such exhibits and is incorporated herein by reference.
II-1
(b) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN 000s)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Description Balance at Charged to Write-off of Balance at
Beginning of Expenses uncollectable end of period
Period accounts
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
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) 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.
II-2
(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
registrant 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 registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question 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-3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and
Stockholders of Middle American Tissue Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Middle 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.
ARTHUR ANDERSEN LLP
Melville, New York
December 10, 1999
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 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 February 23, 2000.
MIDDLE 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. 1 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Nourollah Elghanayan Chairman of the Board and Director February 23, 2000
- ---------------------------
Nourollah Elghanayan
/s/ Mehdi Gabayzadeh President and Chief Executive February 23, 2000
- --------------------------- Officer (Principal Executive Officer
Mehdi Gabayzadeh and Director)
/s/ Edward I. Stein Executive Vice President and Chief February 23, 2000
- --------------------------- Financial Officer (Principal
Edward I. Stein Financial and Accounting Officer)
/s/ Andrew Rush Director February 23, 2000
- ---------------------------
Andrew Rush
II-5
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1. Certificate of Incorporation of Middle American Tissue Inc. (2)
3.2. By-Laws of Middle American Tissue Inc. (2)
4.1 Indenture dated as of July 9, 1999 among American Tissue Inc.,
each Subsidiary Guarantor and The Chase Manhattan Bank, as
Trustee (2)
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
5.1 Opinion of Mandel Resnik & Kaiser P.C. (1)
10.1 Indenture dated as of July 9, 1999 among American Tissue Inc.,
the subsidiary guarantors named therein and The Chase Manhattan
Bank, as Trustee (3)
10.2 12 1/2% Series A Senior Secured Note due 2006 of American Tissue
Inc. in the face amount of $165.0 million (3)
10.3 Security Agreement dated as of July 9, 1999 made by American
Tissue Inc.; the subsidiary guarantors named therein in favor of
the Trustee (3)
10.4 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 (3)
10.5 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 (3)
10.6 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 (3)
10.7 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 (3)
10.8 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 (3)
10.9 Pulp Purchase Agreement dated March 24, 1999 between Crown Paper
Co. and Pulp & Paper of America LLC (3)
10.10 Paper Brokerage Agreement dated March 24, 1999 between Crown
Paper Co. and Pulp & Paper of America LLC (3)
10.11 Strategic Alliance Agreement dated March 24, 1999 between Crown
Paper Co. and Pulp & Paper of America LLC (3)
10.12 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 (3)
10.13 Lease dated June 1, 1998 between American Tissue Corporation and
Huntington LLC relating to premises located 1 Arnold Drive,
Huntington, New York (3)
II-6
EXHIBIT
NUMBER DESCRIPTION
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10.14 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 (3)
10.15 Lease dated in February 1990 between American Tissue Corporation
and Vanderbilt Associates relating to premises located at 110
Plant Avenue, Hauppauge, New York (3)
10.16 Lease dated January 15, 1995 between Fabricaciones Metalicas
Mexicanas S.A. and American Tissue de Mexico S.A., as amended,
relating to premises located in Mexicali, Mexico (3)
10.17 Lease dated August 15, 1996 between American Tissue Corporation
and Swimline Corporation relating to premises located at 56
Vanderbilt Motor Parkway, Commack, New York (3)
10.18 Lease Agreement dated as of March 20, 1998 between Waterford
Industrial Development Authority and Grand LLC relating to
premises located in Waterford, New York (3)
10.19 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 (3)
10.20 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 (3)
10.21 Loan Agreement dated December 15, 1995 between American Tissue
Corporation and Curtiss-Wright Flight Systems/Shelby, Inc. (3)
10.22 Lease Agreement dated as of November 1, 1997 between St. Lawrence
& Atlantic Railroad Company and Berlin Mills Railway Inc. (3)
10.23 Service Agreement dated as of November 1, 1997 between Crown
Paper Co. and St. Lawrence & Atlantic Railroad Company (3)
10.24 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 (3)
10.25 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 (3)
10.26 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
(3)
10.27 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 (3)
10.28 Mortgage Note and Deed of Trust dated as of April 19, 1999 made
by Calexico Tissue Company LLC in favor of Bank United (3)
10.29 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 (3)
10.30 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 (3)
10.31 Agreement to Supply Sand and Gravel in Place dated October 30,
1997 between John Hancock Mutual Life Insurance Company and Crown
Paper Co. (3)
II-7
EXHIBIT
NUMBER DESCRIPTION
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10.32 Roundwood Supply Agreement dated June 28, 1999 between Prime
Timber Company LLC and Crown Paper Co. (3)
10.33 Northeast Roundwood Supply Agreement dated October 30, 1997
between John Hancock Mutual Life Insurance Company and Crown
Paper Co. (3)
10.34 Cooperative Agreement dated June 19, 1995 between Kimberly-Clark
Corporation and United Paperworker's International Union,
AFL-CIO, and Local No. 482 (3)
10.35 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 (3)
10.36 Labor Agreement dated July 15, 1997 between Crown Paper Co. and
Office and Professional Employees International Union, Local 6
(3)
10.37 Agreement dated December 12, 1994 between American Tissue
Corporation and American Tissue Mills de Mexico S.A. de C.V. (3)
10.38 Assumption and Novation Agreement dated as of July 9, 1999 among
certain subsidiaries of American Tissue Inc., Super American
Tissue Inc., Lakeview Real Estate LLC and Huntington LLC (3)
10.39 Assumption and Novation Agreement dated as of July 9, 1999 among
certain subsidiaries of American Tissue Inc., Super American
Tissue Inc. and Messrs. Nourollah Elghanayan and Mehdi Gabayzadeh
(3)
12.1. Computation of ratio of earnings to fixed charges (1)
21.1. Subsidiaries of Middle American Tissue Inc. (2)
23.1. Consent of Arthur Andersen LLP (1)
23.2. Consent of Holtz Rubenstein & Co., LLP (1)
23.3. Consent of Ernst & Young LLP (1)
23.4. Consent of Mandel Resnik & Kaiser P.C. (included in Exhibit 5.1)
(1)
24.1. Powers of Attorney (included in signature pages) (2)
25.1. Statement of Eligibility of Trustee on Form T-1 (2)
27.1. Financial Data Schedule (1)
99.1. Form of Letter of Transmittal (1)
99.2. Form of Notice of Guaranteed Delivery (1)
99.3. Form of Letter to Record Holders of Old Notes (1)
99.4. Form of Letter to Beneficial Holders of Old Notes (1)
- ----------
(1) Filed herewith
(2) Previously filed
(3) Previously filed as an exhibit to American Tissue Inc. Registration
Statement No. 333-88017 on Form S-4 filed with the Securities and Exchange
Commission on September 29, 1999 and all amendments thereto concerning an offer
to exchange $165.0 million aggregate principal amount of Senior Secured Notes
due 2006 to be issued by American Tissue Inc., which exhibit is incorporated in
this registration statement by reference.
II-8