AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SF HOLDINGS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 2656, 2676 13-3990796
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
115 STEVENS AVENUE
VALHALLA, NY 10595-1252
(914) 749-3274
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------
MICHAEL S. NELSON
KRAMER, LEVIN, NAFTALIS & FRANKEL
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 715-9100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the registration statement becomes effective and all other
conditions to the exchange offer (the "Exchange Offer") pursuant to the
registration rights agreement (the "Registration Rights Agreement") described
in the enclosed Prospectus have been satisfied or waived.
If any of the securities being registered on this Form are to be offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
PROPOSED
AMOUNT MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE REGISTRATION FEE
12 3/4% Series B Senior Secured
Discount Notes due 2008 ......... $144,000,000 100%(1) $144,000,000(1) $ 42,480.00
- --------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(f)(2) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------
- --------------------------------------------------------------------
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED APRIL 22, 1998
SF HOLDINGS GROUP, INC.
OFFER TO EXCHANGE ITS
12 3/4% SERIES B SENIOR SECURED DISCOUNT NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
ANY AND ALL OF ITS OUTSTANDING
12 3/4% SERIES A SENIOR SECURED DISCOUNT NOTES DUE 2008
($144,000,000 PRINCIPAL AMOUNT AT MATURITY OUTSTANDING)
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON , 1998 (AS SUCH DATE MAY BE EXTENDED, THE "EXPIRATION
DATE").
SF Holdings Group, Inc. (the "Company") hereby offers (the "Exchange
Offer"), upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange an aggregate of up to $144,000,000 principal amount
at maturity of 12 3/4% Series B Senior Secured Discount Notes due 2008 (the
"New Notes") for an identical face amount of the outstanding 12 3/4% Series A
Senior Secured Discount Notes due 2008 (the "Old Notes" and, with the New
Notes, the "Notes"). The terms of the New Notes are identical in all material
respects to the terms of the Old Notes except that the registration and other
rights relating to the exchange of Old Notes for New Notes and the restrictions
on transfer set forth on the Old Notes will not appear on the New Notes. See
"The Exchange Offer." The New Notes are being offered hereunder in order to
satisfy certain obligations of the Company under a Registration Rights
Agreement dated as of March 12, 1998 (the "Registration Rights Agreement")
among the Company, Bear, Stearns & Co. Inc. and SBC Warburg Dillon Read Inc.
(the "Initial Purchasers"). Based on an interpretation by the staff of the
Securities and Exchange Commission (the "Commission") set forth in no-action
letters issued to third parties unrelated to the Company, New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold, and otherwise transferred by a holder thereof (other than a
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act of 1933, as amended (the "Securities Act")), without
compliance with the registration and the prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangement with any
person to participate in or is engaged in or is planning to be engaged in the
distribution of such New Notes.
The New Notes will mature on March 15, 2008. Until March 15, 2003, no
interest will accrue on the New Notes, but the Accreted Value (as defined
herein) will increase between the date of original issuance of the Old Notes
and March 15, 2003. Beginning on March 15, 2003, interest on the New Notes will
accrue at the rate of 12 3/4% per annum and will be payable in cash
semi-annually in arrears on September 15 and March 15 of each year, commencing
on September 15, 2003. The New Notes will be redeemable at the option of the
Company at any time on and after March 15, 2003 at the redemption prices set
forth herein. In addition, prior to March 15, 2001, the Company may redeem up
to one-third of the aggregate principal amount of Notes at a redemption price
equal to 112.75% of the Accreted Value thereof, plus Liquidated Damages (as
defined herein) thereon, if any, with the net cash proceeds of an Equity
Offering (as defined herein); provided that at least two-thirds of the original
aggregate principal amount of Notes remains outstanding immediately after the
occurrence of such redemption. Upon the occurrence of a Change of Control, the
Company will be required to make an offer to repurchase each holder's New Notes
at an offer price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of repurchase (or, in the case of repurchases of New Notes prior to March 15,
2003, at a purchase price equal to 101% of the Accreted Value thereof, plus
Liquidated Damages thereon, if any, as of the date of repurchase). See
"Description of New Notes."
The New Notes will rank senior in right of payment to any subordinated
indebtedness of the Company incurred in the future, and will rank pari passu in
right of payment with any other senior indebtedness of the Company incurred in
the future. The New Notes will be effectively subordinated, however, to all
indebtedness and other liabilities and commitments of the Company's
subsidiaries, which, as of January 25, 1998, after giving pro forma effect to
the Transactions (as defined herein), would have totaled $767.7 million. See
"Risk Factors--Holding Company Structure and Related Considerations." The New
Notes will be secured by a first priority pledge of all of the Capital Stock
(as defined herein) owned by the Company of Sweetheart Holdings Inc.
("Sweetheart") and The Fonda Group, Inc. ("Fonda"), and all intercompany notes
issued by the Company in favor of Sweetheart and Fonda. See "Description of New
Notes--Security."
The Company will accept for exchange from an Eligible Holder any and all
Old Notes that are validly tendered prior to 5:00 p.m., New York City time, on
the Expiration Date. For purposes of the Exchange Offer, "Eligible Holder"
shall mean the registered owner of any Old Notes that remain Transfer
Restricted Securities, as reflected on the records of The Bank of New York, as
registrar for the Old Notes (in such capacity, the "Registrar"), or any person
whose Old Notes are held of record by the depository of the Old Notes. Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. For purposes of the Exchange Offer, "Transfer
Restricted Securities" means each Old Note until the earliest to occur of (i)
the date on which such Old Note is exchanged in this Exchange Offer and
entitled to be resold to the public by the holder thereof without complying
with the prospectus delivery provisions of the Securities Act, (ii) the date on
which such Old Note is registered under the Securities Act and is disposed of
in a shelf registration statement, if applicable, or (iii) the date on which
such Old Note has been distributed to the public pursuant to Rule 144 under the
Securities Act or by a broker-dealer pursuant to the plan of distribution
described herein. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer and will
pay all the expenses incident to the Exchange Offer. If the Company terminates
the Exchange Offer and does not accept for exchange any Old Notes, it will
promptly return the Old Notes to the holders thereof. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. Any broker-dealer that acquired Old Notes directly from the Company
and not as a result of market-making activities, or other trading activities,
in the absence of an exemption from the registration requirements of the
Securities Act, must comply with such registration requirements and the
Prospectus delivery requirements of the Securities Act in connection with any
secondary resales of New Notes received in exchange for such Old Notes. The
Company has agreed that, for a period of 270 days after the effective date
hereof, it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "The Exchange Offer" and "Plan of
Distribution."
Prior to this Exchange Offer, there has been no public market for the
Notes. To the extent that Old Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Old Notes could be adversely
affected. If a market for the New Notes should develop, the New Notes could
trade at a discount from their principal amount. The Company does not currently
intend to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. There can be no assurance
that an active public market for the New Notes will develop.
The Exchange Agent for the Exchange Offer is The Bank of New York.
--------------
SEE "RISK FACTORS" BEGINNING ON PAGE 20 HEREIN FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN EVALUATING THE EXCHANGE
OFFER.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------------
THE DATE OF THIS PROSPECTUS IS , 1998.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include any amendments thereto) on Form S-4 under the Securities Act
with respect to the securities offered by this Prospectus. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules thereto, to which reference is hereby made. Each statement made in
this Prospectus referring to a document filed as an exhibit or schedule to the
Registration Statement is qualified in its entirety by reference to the exhibit
or schedule for a complete statement of its terms and conditions, although all
of the material terms of the Company's contracts and agreements that would be
material to an investor have been summarized in this Prospectus. In addition,
upon the effectiveness of the Registration Statement filed with the Commission,
the Company will be subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith the Company will file periodic reports and other information with the
Commission relating to its business, financial statements and other matters.
Any interested parties may inspect and/or copy the Registration Statement, its
schedules and exhibits, and the periodic reports and other information filed in
connection therewith, at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at Citicorp Center,
500 W. Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such materials can be
obtained at prescribed rates by addressing written requests for such copies to
the Public Reference Section of the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants. The
Commission's Web site can be accessed on the World Wide Web at
http://www.sec.gov. The obligations of the Company under the Exchange Act to
file periodic reports and other information with the Commission may be
suspended, under certain circumstances, if the New Notes are held of record by
fewer than 300 holders at the beginning of any fiscal year and are not listed
on a national securities exchange. The Company has agreed that, whether or not
it is required to do so by the rules and regulations of the Commission, for so
long as any of the Notes remain outstanding it will furnish to the holders of
the Notes, and if required by the Exchange Act, file with the Commission all
annual, quarterly and current reports that the Company is or would be required
to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange
Act. In addition, for so long as any of the Old Notes remain outstanding, the
Company has agreed to make available to any prospective purchaser of the Old
Notes or beneficial owner of the Old Notes in connection with any sale thereof
the information required by Rule 144A(d)(4) under the Securities Act.
Sweetheart and Fonda are subject to the periodic reporting and other
informational requirements of the Exchange Act and the rules and regulations
thereunder, and in accordance therewith file periodic reports, proxy and
information statements, and other information with the Commission. All reports,
proxy and information statements, and other information filed by Sweetheart and
Fonda with the Commission may be inspected at the public reference facilities
maintained by the Commission at the address set forth above, and at the
regional offices of the Commission located at the addresses set forth above.
Copies of such materials may also be obtained from The Public Reference Section
of the Commission at the address set forth above, at prescribed rates. The
Commission also maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements regarding registrants, such as the
Company's subsidiaries that file electronically with the Commission. The
Company's subsidiaries furnish to the respective holders of the Fonda Notes (as
defined herein) and the Sweetheart Notes (as defined herein) all such filings
with the Commission. In addition, for so long as any of such securities remain
outstanding, each company has agreed to make available to any prospective
purchaser of such securities or respective beneficial owner of such securities
in connection with any sale thereof the information required by Rule 144(d)(4)
under the Securities Act.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENT
HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS FILED BY THE
COMPANY, INCLUDING EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE TO ANY REGISTERED
HOLDER OR BENEFICIAL OWNER OF THE OLD NOTES UPON WRITTEN OR ORAL REQUEST AND
2
WITHOUT CHARGE FROM SF HOLDINGS GROUP, INC., 115 STEVENS AVENUE, VALHALLA, NEW
YORK 10595-1252, ATTENTION: CHIEF FINANCIAL OFFICER. TELEPHONE REQUESTS MAY BE
DIRECTED TO THE COMPANY AT (914) 749-3274. IN ORDER TO ENSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY , 1998.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. References to a fiscal year of SF Holdings or
Fonda are to the year ended on the last Sunday in July of such year. References
to a fiscal year of Sweetheart are to the year ended on September 30 of such
year. Unless otherwise stated or the context otherwise requires, (a) references
to the "Company" are to SF Holdings and its subsidiaries, including Fonda and
Sweetheart and their respective subsidiaries, after giving effect to the
Transactions and (b) references to "SF Holdings" are to SF Holdings Group,
Inc., excluding its subsidiaries. See "The Sweetheart Investment." Unless
otherwise indicated, all information in this Prospectus assumes the
Transactions have been consummated. Certain information in the Prospectus with
respect to Sweetheart and Fonda is derived from their respective reports on
Forms 10-K and 10-Q as filed with the Commission. See "Available Information."
Portions of this Prospectus may constitute forward-looking statements for
purposes of the Securities Act and the Exchange Act. See "Risk
Factors--Forward-Looking Statements."
THE COMPANY
The Company is one of the three largest converters and marketers of
disposable food service and food packaging products in North America. The
Company sells a broad line of disposable paper, plastic and foam food service
and food packaging products under both branded and private labels to the
consumer and institutional markets, including large national accounts, and
participates at all major price points. The Company conducts its business
through two principal operating subsidiaries, Sweetheart and Fonda, and has
marketed its products under its well recognized Lily (Registered Trademark),
Sweetheart (Registered Trademark) and Trophy (Registered Trademark) brands
for over 85, 45 and 15 years, respectively. In addition, the Company's
Sensations and Hoffmaster (Registered Trademark) brands are well recognized in
the industry. After giving pro forma effect to the Transactions, the Company
would have had net sales, net income and EBITDA (as defined herein) of $1.1
billion, $34.4 million and $79.8 million, respectively, for the twelve months
ended January 25, 1998.
The Company's product offerings are among the broadest in the industry,
enabling it to offer its customers "one-stop" shopping for their disposable
food service and food packaging product needs. The Company's principal products
include (i) paperboard, plastic and foam food service products, primarily cups,
lids, plates, bowls, plastic cutlery and food containers; (ii) tissue and
specialty food service products, primarily napkins and placemats; and (iii)
food packaging products, primarily containers for the dairy and food processing
industries.
The Company sells its products to more than 5,000 customers and serves the
institutional and consumer markets, including large national accounts, located
throughout the United States and Canada. In addition, the Company has developed
and maintained long-term relationships with many of its customers. The
Company's institutional customers, which are served by Sweetheart and Fonda,
include (i) major food service distributors, (ii) national accounts, including
fast-food chains and catering services, and (iii) schools, hospitals and other
major institutions. The Company's consumer customers, which are served by
Fonda, include supermarkets, mass merchandisers, warehouse clubs and other
retailers. The Company's food packaging customers, which are served by
Sweetheart, include national and regional dairy and food companies.
COMPETITIVE STRENGTHS
The Company believes that it has a leading competitive position in the
disposable food service products industry for the following reasons:
o Leading Market Position. The Company serves all markets in the
industry. The Company believes that it holds one of the top three market
positions in each major market segment it serves and for each of its
major product categories. The Company's well recognized brands and long
history in the industry have allowed it to gain its leading market
positions. In those institutional markets served by both of Sweetheart
and Fonda, the Company experiences minimal product
4
redundancy because Sweetheart and Fonda primarily sell different products
to shared customers. The Company also believes that its multiple
distribution channels will enable it to further penetrate existing
markets by cross-marketing new products through existing channels.
o Brand Recognition. The Company's brands are well recognized in the
industry. The Company's products have been marketed under its Sweetheart
(Registered trademark) and Lily (Registered trademark) brands for over
45 years. Upon consummation of the Sweetheart Investment (as defined
herein), the Company believes that it will be able to leverage the
strength of Sweetheart's brands to further penetrate already existing
markets. The Company's Sweetheart (Registered trademark), Lily
(Registered trademark), Trophy (Registered trademark), Jazz (Registered
trademark), Preference (Registered trademark), Silent Service
(Registered trademark), Centerpiece (Registered trademark), Guildware
(Registered trademark), Simple Elegance (Registered trademark) and
Hoffmaster (Registered trademark) brands are well recognized in the
institutional market; and its Sensations, Splash (Registered Trademark)
and Party Creations (Registered trademark) brands are well recognized in
the consumer market.
o Broad Product Offering. The Company believes that its product offering
is one of the broadest in the industry, competing across all major price
points of the markets it serves, and that the Company is the only company
that offers a full selection of premium products as well as a full line
of private label products. The Company offers its products in paper,
plastic and foam and in a wide range of colors, designs and graphics
which are often printed to the customer's specifications.
The Company's diverse and expansive product offering allows it to better
serve its customers with "one-stop" shopping and enables both the Company
and its customers to differentiate themselves from their respective
competitors. As the industry continues to experience greater customer
concentration resulting from a consolidation of distributors and retail
outlets, as well as an increase in sales to the mass merchandiser and
discount retailer distribution channels, the Company believes that its
broad product offering will continue to provide a competitive advantage.
In addition, the Company believes that its broad product offering enables
it to increase shelf space with its customers. The Company also maintains
facilities for the development of new products and product line
extensions to support a continued broad product offering.
o Extensive Distribution. The Company has 27 manufacturing and
distribution facilities located throughout the United States and Canada.
The Company's extensive geographic coverage enables it to serve large
institutional and consumer accounts on a national basis and to respond to
customers' product needs in an effective and timely manner.
o Experienced Management Team. The Company's senior operating managers
average over 15 years of experience in the food service industry and have
a proven track record in operating companies efficiently and realizing
cost savings from the integration of acquisitions. Certain of Fonda's
senior officers became executive officers of Sweetheart upon consummation
of the Sweetheart Investment.
BUSINESS STRATEGY
The Company believes that its ownership of Fonda and investment in
Sweetheart will provide it with significant benefits and synergies which it
expects to realize over the next several years. The Company also believes that
it can improve its leading position in the disposable food service products
industry by (i) achieving cost savings from the Transactions, (ii) achieving
operating efficiencies and other synergies from the relationship between
Sweetheart and Fonda and (iii) cross-marketing its products. The Company will
pursue its business strategy through:
o Cost Savings. The Company intends to focus on reducing its costs,
eliminating redundancies and realizing cost efficiencies. The Company
believes that opportunities for cost reductions can be realized through
(i) eliminating the outsourcing of products which will be manufactured
within the Company, (ii) capitalizing on the Company's combined
purchasing leverage with respect to raw materials and other procured
items, such as packaging materials, (iii) eliminating duplicative
administration, sales and marketing expenses and (iv) making selective
capital expenditures intended to realize manufacturing and distribution
savings.
5
o Operating Efficiencies and Other Synergies. The Company intends to
focus on achieving operating efficiencies and other synergies from the
relationship between Sweetheart and Fonda. The Company believes that it
can operate more efficiently by (i) rationalizing its facilities through
a more efficient use of its manufacturing equipment, (ii) eliminating
duplicative product offerings and (iii) improving customer service as a
result of its geographic diversification. In addition, the Company
intends to evaluate potential benefits, including cost savings, operating
efficiencies and additional synergies, which may be obtained from other
transactions, including certain business combinations, among the
affiliated group.
o Sales and Marketing. The Company seeks to maintain a balanced presence
in the markets it serves by cross-marketing Sweetheart and Fonda's
respective products to further penetrate their distribution channels. In
addition, in order to better serve its customers, the Company also
focuses on developing new product designs, increasing brand awareness and
channel marketing. The Company believes that new product designs provide
customers recognized value by offering alternatives in color and style.
The Company supports its brand identity and private label program through
enhanced packaging and promotion. Additionally, the Company seeks,
through its direct sales force, to create "pull-through" demand by
marketing directly to end-users in order to create additional demand from
institutional distributors for the Company's products. Sweetheart and
Fonda also intend to enter into joint marketing and sales agreements
which will be designed to eliminate duplicative marketing and sales
expenses at both companies.
The Company conducts its business through two principal operating
subsidiaries, Sweetheart and Fonda:
SWEETHEART HOLDINGS INC.
Sweetheart is one of the largest producers of paper, plastic and foam
disposable food service and food packaging products, including hot and cold
drink cups, lids, food containers, plates and bowls, and cutlery. Sweetheart
sells its food service products primarily to (i) major food service
distributors who serve national and regional institutional food service
customers such as Sysco Corporation and Alliant Foodservice Inc. and (ii)
national accounts, including fast-food chains, such as McDonald's Corporation
("McDonald's") and Wendy's International, Inc., and catering services, such as
ARAMARK Corporation.
Sweetheart's food packaging operations sell paper and plastic containers
and lids for products such as ice cream, frozen novelty products and cultured
foods, and also lease filling and lidding equipment to customers. Sweetheart's
food packaging customers include national and regional dairy and food
companies, such as Ben and Jerry's Homemade, Inc., Blue Bell Creameries, L.P.,
Borden, Inc. and Prairie Farms Dairy, Inc.
After giving pro forma effect to the Transactions, Sweetheart would have
had net sales, net loss and EBITDA of $855.3 million, $31.2 million and $55.6
million, respectively, for the twelve months ended December 31, 1997.
THE FONDA GROUP, INC.
Fonda is a leading producer of (i) private label paper plates, bowls and
cups for the consumer market and (ii) premium tissue products including white,
colored and custom-printed napkins, placemats, tablecovers and food trays for
the institutional and consumer markets. Fonda's consumer market customers
include (i) supermarkets, such as The Great Atlantic & Pacific Tea Company,
Inc., The Kroger Co. and The Stop & Shop Companies, Inc., (ii) mass
merchandisers, such as Target Stores (a division of Dayton Hudson Corp.),
Wal-Mart Stores, Inc. and Kmart Corporation and (iii) warehouse clubs, such as
Price-Costco, Inc., and other retailers. Fonda's institutional customers
include Sysco Corporation, Rykoff-Sexton, Inc./U.S. Foodservice Inc., Bunzl
USA, Inc. and Alliant Foodservice Inc.
6
After giving pro forma effect to the Transactions, Fonda would have had
net sales, net income and EBITDA of $263.2 million, $4.4 million and $23.4
million, respectively, for the twelve months ended January 25, 1998.
RECENT DEVELOPMENTS
On February 11, 1998, Fonda reached an agreement with Kamine Besicorp
Natural Dam L.P. ("Kamine"), the owner of the co-generation facility hosted by
Fonda at the Natural Dam mill, whereby Kamine will terminate its obligations to
supply steam to Natural Dam and to make certain land lease payments in return
for a lump sum cash payment and the delivery of certain equipment. The
consummation of this agreement is subject to various conditions, including the
negotiation and execution of a definitive agreement and the consummation of a
master restructuring agreement among Niagara Mohawk Power Corporation
("Niagara") and sixteen independent power producers, including Kamine. The
Company expects Fonda to record a gain upon the consummation of the transaction
contemplated by this agreement, however, there can be no assurance that such
transaction will be consummated.
On March 12, 1998, Fonda entered into a five-year licensing agreement with
its affiliate, Creative Expressions Group, Inc. ("CEG"), subject to extension,
whereby CEG will manufacture and distribute certain party goods products
currently manufactured by Fonda. In connection therewith, Fonda will receive a
royalty equal to 5% of CEG's cash flow, as determined in accordance with a
formula specified in such agreement. In Fiscal 1997, Fonda's net sales of such
party goods products were approximately $30 million.The Company expects Fonda's
fixed and variable costs to decrease and it expects to reduce Fonda's accounts
receivable and inventory by approximately $9 million as a result of such
licensing agreement. The Company believes that such transaction will have a
favorable impact on Fonda's results of operations.
On March 24, 1998, Fonda consummated an agreement with Cellu Tissue
Holdings, Inc. ("Cellu"), whereby Cellu acquired substantially all of the fixed
assets and certain related working capital of the Natural Dam mill in
Gouverneur, New York, and Fonda realized net proceeds, after expenses, of
approximately $25 million, subject to a post-closing adjustment for working
capital (the "Natural Dam Mill Disposition"). The Natural Dam mill produced
tissue mill products, primarily specialty "jumbo" rolls of tissue.
In connection with the consummation of the Sweetheart Investment,
Sweetheart incurred $4.4 million of financial advisory and legal expenses and
$2.6 million of severance expenses as a result of the termination of certain
officers of Sweetheart pursuant to executive separation agreements (such
expenses are collectively defined herein as the "Sweetheart Reduction"). See
"Unaudited Pro Forma Financial Information." For the three month period ended
March 31, 1998, Sweetheart also expects to recognize additional one time
charges of approximately $15 million related to further cost cutting
initiatives including work force reduction and facility rationalization. Such
charges will consequently have an adverse impact on Sweetheart's results of
operations for such period. As a result of the applications of purchase
accounting by SF Holdings for the Sweetheart Investment, the expenses described
above will have no effect on SF Holdings' results of operations.
THE SWEETHEART INVESTMENT
In connection with the Sweetheart Investment, SF Holdings acquired all of
the outstanding capital stock of Fonda in a merger of a subsidiary of SF
Holdings into Fonda, and the stockholders of Fonda became the stockholders of
the Company (the "Fonda Stockholders Exchange").
On March 12, 1998, the stockholders of Sweetheart as of December 29, 1997
(the "Sweetheart Stockholders") consummated an Investment Agreement dated
December 29, 1997 with SF Holdings and CEG (the "Investment Agreement"),
pursuant to which SF Holdings acquired 48% of the total
7
outstanding voting common stock, par value $.01 per share, of Sweetheart (the
"Sweetheart Class A Common Stock") and 100% of the total outstanding non-voting
common stock, par value $.01 per share, of Sweetheart (the "Sweetheart Class B
Common Stock" and together with the Sweetheart Class A Common Stock the
"Sweetheart Common Stock"), representing 90% of the total outstanding common
stock of Sweetheart (the "Sweetheart Investment"). The aggregate purchase price
consisted of $88.0 million in cash, a demand promissory note (the "Demand
Note") of SF Holdings in the amount of $7.0 million (which was satisfied
immediately following the consummation of the Sweetheart Investment) and an
aggregate of $30.0 million of a series of exchangeable preferred stock, par
value $.001 per share, of SF Holdings (the "Exchangeable Preferred Stock"). See
"Description of Capital Stock."
Pursuant to the Investment Agreement, immediately prior to the
consummation of the Sweetheart Investment, Sweetheart amended its by-laws,
including its subsidiaries' by-laws, to provide for certain matters, and to
appoint certain executive officers of Fonda as executive officers of
Sweetheart. Upon consummation of the Sweetheart Investment, the Company entered
into the Sweetheart Stockholders' Agreement, the SF Holdings Registration
Rights Agreement and the Management Services Agreement (each as defined
herein). See "The Sweetheart Investment."
SF Holdings, which was formed in December 1997 to facilitate the
Sweetheart Investment, is incorporated under the laws of Delaware. The
principal executive office of SF Holdings is located at 115 Stevens Avenue,
Valhalla, New York 10595-1252 and its telephone number is (914) 749-3274.
ISSUANCE OF THE OLD NOTES
Units (the "Units") consisting of $144.0 million principal amount at
maturity of 12 3/4% Series A Senior Secured Discount Notes due 2008 (the "Old
Notes") and 288,000 shares of Class C Common Stock of the Company (the
"Shares") were sold by the Company to Bear, Stearns & Co. Inc. and SBC Warburg
Dillon Read Inc. (the "Initial Purchasers") on March 12, 1998 (the "Closing
Date") pursuant to a Purchase Agreement, dated as of March 5, 1998 (the
"Purchase Agreement"), among the Company and the Initial Purchasers. The
Initial Purchasers subsequently resold the Units in reliance on Rule 144A under
the Securities Act and other available exemptions under the Securities Act on
or about March 12, 1998. The Company and the Initial Purchasers also entered
into a Registration Rights Agreement, dated as of March 12, 1998 (the
"Registration Rights Agreement"), among the Company and the Initial Purchasers,
pursuant to which the Company granted certain registration rights for the
benefit of the holders of the Old Notes. The Exchange Offer is intended to
satisfy certain of the Company's obligations under the Registration Rights
Agreement with respect to the Old Notes. See "The Exchange Offer--Purpose and
Effects."
The Old Notes were issued under an indenture, dated as of March 12, 1998
(the "Indenture"), between the Company and The Bank of New York as trustee (in
such capacity, the "Trustee"). The New Notes are also being issued under the
Indenture and are entitled to the benefits of the Indenture. The form and terms
of the New Notes will be identical in all material respects to the form and
terms of the Old Notes except that (i) the New Notes have been registered under
the Securities Act and, therefore, will not bear legends restricting the
transfer thereof, (ii) holders of New Notes will not be entitled to the
liquidated damages otherwise payable under the terms of the Registration Rights
Agreement in respect of Old Notes constituting Transfer Restricted Securities
held by such holders during any period in which a Registration Default (as
defined) is continuing (the "Liquidated Damages") and (iii) holders of New
Notes will not be, and upon the consummation of the Exchange Offer, Eligible
Holders of Old Notes will no longer be, entitled to certain rights under the
Registration Rights Agreement intended for the holders of unregistered
securities. The Exchange Offer shall be deemed consummated upon the delivery of
the Company to the Exchange Agent under the Indenture of New Notes in the same
aggregate principal amount as the aggregate principal amount of Old Notes that
are validly tendered by holders thereof pursuant to the Exchange Offer. See
"The Exchange Offer--Termination of Certain Rights" and "--Procedures for
Tendering" and "Description of New Notes--Registration Rights; Liquidated
Damages."
8
The proceeds received by the Company from the issuance of the Units were
used to fund a portion of the cash required by the Company to consummate the
Sweetheart Investment and to pay certain fees and expenses associated with the
issuance of the Units. There will be no proceeds to the Company from any
exchange pursuant to the Exchange Offer.
THE EXCHANGE OFFER
THE EXCHANGE OFFER.......... The Company is offering, upon the terms and
subject to the conditions set forth herein and in
the accompanying letter of transmittal (the
"Letter of Transmittal"), to exchange its 12 3/4%
Series B Senior Secured Discount Notes due 2008
(the "New Notes," and with the Old Notes, the
"Notes") for an identical face amount of the
outstanding Old Notes (the "Exchange Offer"). As
of the date of this Prospectus, $144.0 million in
aggregate principal amount at maturity of the Old
Notes is outstanding, the maximum amount
authorized by the Indenture for all Notes. As of
, 1998, there was one registered holder of
the Old Notes, Cede & Co. ("Cede"), which held
$144.0 million of aggregate principal amount at
maturity of the Old Notes. See "The Exchange
Offer--Terms of the Exchange Offer."
EXPIRATION DATE............. 5:00 p.m., New York City time, on ,
1998, as the same may be extended. See "The
Exchange Offer--Expiration Date; Extension;
Termination; Amendments."
CONDITIONS OF THE
EXCHANGE OFFER.............. The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange
Offer is subject to certain customary conditions,
which may be waived by the Company. See "The
Exchange Offer--Conditions of the Exchange
Offer."
ACCRETED VALUE OF THE
OLD NOTES................... Until March 15, 2003, no interest will accrue on
the New Notes, but the Accreted Value will
increase (representing amortization of original
issue discount) between the date of original
issuance of the Old Notes and March 15, 2003 at a
rate of 12 3/4% per annum of the initial offering
price of the Old Notes. Eligible Holders whose
Old Notes are accepted for exchange will have the
right to receive the increase in Accreted Value
from the date of original issuance of the Old
Notes. Beginning on March 15, 2003, interest on
the New Notes will accrue at the rate of 12 3/4%
per annum.
PROCEDURES FOR TENDERING
OLD NOTES.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with the Old Notes and any other
required documentation to the exchange agent (the
"Exchange Agent") at the address set forth
herein. Old Notes may be physically delivered,
but physical delivery is not re-
9
quired if a confirmation of a book-entry of such
Old Notes to the Exchange Agent's account at The
Depositary Trust Company ("DTC" or the
"Depositary") is delivered in a timely fashion.
By executing the Letter of Transmittal, each
holder will represent to the Company that, among
other things, the New Notes acquired pursuant to
the Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such New Notes, whether or not such
person is the holder, that neither the holder
nor any such other person is engaged in, or
intends to engage in, or has an arrangement or
understanding with any person to participate in,
the distribution of such New Notes and that
neither the holder nor any such other person is
an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company. Each broker or
dealer that receives New Notes for its own
account in exchange for Old Notes, where such
Old Notes were acquired by such broker or dealer
as a result of market-making activities or other
trading activities, must acknowledge that it
will deliver a prospectus in connection with any
resale of such New Notes. See "The Exchange
Offer--Procedures for Tendering" and "Plan of
Distribution."
GUARANTEED DELIVERY
PROCEDURES.................. Eligible Holders of Old Notes who wish to tender
their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver
their Old Notes or any other documents required
by the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date (or complete
the procedure for book-entry transfer on a timely
basis), may tender their Old Notes according to
the guaranteed delivery procedures set forth in
the Letter of Transmittal. See "The Exchange
Guaranteed Delivery Procedures."
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES...... Upon satisfaction or waiver of all conditions
of the Exchange Offer, the Company will accept
any and all Old Notes that are properly tendered
in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The New
Notes issued pursuant to the Exchange Offer will
be delivered promptly after acceptance of the Old
Notes. See "The Exchange Offer--Procedures for
Tendering."
WITHDRAWAL RIGHTS........... Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on
the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
THE EXCHANGE AGENT.......... The Bank of New York is the exchange agent (in
such capacity, the "Exchange Agent"). The address
and telephone number of the Exchange Agent are
set forth in "The Exchange Offer--The Exchange
Agent."
FEES AND EXPENSES........... All expenses incident to the Company's
consummation of the Exchange Offer and compliance
with the Registration Rights
10
Agreement will be borne by the Company. The
Company will also pay certain transfer taxes
applicable to the Exchange Offer. See "The
Exchange Offer--Fees and Expenses."
RESALES OF THE NEW NOTES.... Based on interpretations by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that New
Notes issued pursuant to the Exchange Offer to an
Eligible Holder in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by such Eligible Holder (other than
(i) a broker-dealer who purchased the Old Notes
directly from the Company for resale pursuant to
Rule 144A under the Securities Act or any other
available exemption under the Securities Act, or
(ii) a person that is an affiliate of the Company
within the meaning of Rule 405 under the
Securities Act), without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that the Eligible
Holder is acquiring the New Notes in the ordinary
course of business and is not participating, and
has no arrangement or understanding with any
person to participate, in a distribution of the
New Notes. Each broker-dealer that receives New
Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such
broker as a result of market-making or other
trading activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes. See "The Exchange
Offer--Purposes and Effects" and "Plan of
Distribution."
11
DESCRIPTION OF NEW NOTES
The Exchange Offer applies to $144.0 million aggregate principal amount at
maturity of Old Notes. The terms of the New Notes are identical in all material
respects to the Old Notes, except for certain transfer restrictions and
registration and other rights relating to the exchange of the Old Notes for New
Notes. The New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture under which both the Old Notes were,
and the New Notes will be, issued. See "Description of New Notes."
SECURITIES OFFERED.......... $144.0 million in aggregate principal amount at
maturity of 12 3/4% Series B Senior Secured
Discount Notes due 2008.
MATURITY.................... March 15, 2008.
INTEREST.................... Until March 15, 2003, no interest will accrue
on the New Notes, but the Accreted Value will
increase (representing amortization of original
issue discount) between the date of original
issuance of the Old Notes and March 15, 2003.
Beginning on March 15, 2003, interest on the New
Notes will accrue at the rate of 12 3/4% per
annum and will be payable in cash semi-annually
in arrears on March 15 and September 15 of each
year, commencing on September 15, 2003.
RANKING..................... The New Notes will rank senior in right of
payment to any subordinated indebtedness of the
Company incurred in the future, and will rank
pari passu in right of payment with any other
senior indebtedness of the Company incurred in
the future. The New Notes will be effectively
subordinated, however, to all indebtedness and
other liabilities and commitments of the
Company's subsidiaries, which as of January 25,
1998, after giving pro forma effect to the
Transactions would have totaled $767.7 million.
As of March 31, 1998, the Company had no
indebtedness ranking pari passu with the New
Notes outstanding.
SECURITY.................... The New Notes will be secured by a first
priority pledge of all of the Capital Stock owned
by SF Holdings of Sweetheart and Fonda and all
intercompany notes issued by the Company in favor
of Sweetheart and Fonda. See "Description of New
Notes--Security."
REDEMPTION.................. The New Notes will be redeemable at the option
of SF Holdings at any time on or after March 15,
2003 at the redemption prices set forth herein.
In addition, prior to March 15, 2001, SF Holdings
may redeem up to one-third of the aggregate
principal amount of Notes at a redemption price
equal to 112.75% of the Accreted Value thereof,
plus Liquidated Damages thereon, if any, with the
net cash proceeds of an Equity Offering; provided
that at least two-thirds of the original
aggregate principal amount of Notes remains
outstanding immediately after the occurrence of
such redemption. See "Description of New
Notes--Optional Redemption."
12
CHANGE OF CONTROL........... Upon the occurrence of a Change of Control, SF
Holdings will be required to make an offer to
repurchase each holder's New Notes at an offer
price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest
and Liquidated Damages thereon, if any, to the
date of repurchase (or, in the case of
repurchases of New Notes prior to March 15, 2003,
at a purchase price equal to 101% of the Accreted
Value thereof, plus Liquidated Damages thereon,
if any, as of the date of repurchase). There can
be no assurance that SF Holdings will have the
financial resources to repurchase the New Notes
upon a Change of Control. See "Description of New
Notes--Repurchase at the Option of Holders."
COVENANTS................... The indenture pursuant to which the New Notes
will be issued (the "Indenture") will contain
certain covenants that, among other things, limit
the ability of SF Holdings to incur additional
indebtedness, issue additional preferred stock,
pay dividends or make other distributions,
repurchase Equity Interests (as defined herein),
repay subordinated Indebtedness (as defined
herein) or make other Restricted Payments (as
defined herein), create certain liens, enter into
certain transactions with affiliates, sell assets
or enter into certain mergers and consolidations.
See "Description of New Notes--Certain
Covenants."
USE OF PROCEEDS............. There will be no proceeds to the Company from
any exchange pursuant to the Exchange Offer. The
net proceeds from the issuance of the Units were
used to fund a portion of the cash required by
the Company to consummate the Sweetheart
Investment and to pay certain fees and expenses
associated with the issuance of the Units. See
"The Sweetheart Investment" and "Use of
Proceeds."
ABSENCE OF A PUBLIC MARKET
FOR THE NEW NOTES.......... The New Notes are a new issue of securities
with no established market, and the Company does
not expect that an active trading market in the
Notes will develop. Accordingly, there can be no
assurance as to the development or liquidity of
any market for the New Notes. The Initial
Purchasers have advised the Company that they
currently make a market in the Notes. The Company
does not currently intend to apply for listing of
the New Notes on any securities exchange.
RISK FACTORS
See "Risk Factors" for a discussion of factors that should be considered
by Eligible Holders evaluating the Exchange Offer.
13
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA OF THE COMPANY
(DOLLARS IN THOUSANDS)
The following table sets forth summary unaudited pro forma combined
condensed financial data of the Company as of January 25, 1998 and for the
fiscal year ended July 27, 1997 and the six and twelve months ended January 25,
1998. The summary unaudited pro forma combined condensed statement of income
data give effect to (i) the Fonda Stockholders Exchange, (ii) the issuance of
the Units and (iii) the Sweetheart Investment, as if each had occurred on the
first day of the Company's fiscal year ended July 27, 1997. The summary
unaudited pro forma combined condensed balance sheet data as of January 25,
1998 give additional effect to (i) the Leisureway Acquisition (as defined
herein), (ii) the Natural Dam Mill Disposition, (iii) the Fonda Stockholders
Exchange, (iv) the issuance of the Units and (v) the Sweetheart Investment, as
if each had occurred on January 25, 1998. The information contained in the
following table should also be read in conjunction with "Capitalization,"
"Unaudited Pro Forma Combined Condensed Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Pro Forma Financial Data of Sweetheart," "Unaudited Pro Forma
Financial Data of Fonda" and the historical financial statements, including the
notes thereto, contained elsewhere herein.
SIX MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 JANUARY 25, 1998 JANUARY 25, 1998
--------------- ------------------ -----------------
STATEMENT OF INCOME DATA:
Net sales ............................................... $1,117,215 $ 557,816 $1,118,484
Cost of goods sold ...................................... 992,757 494,514 983,587
---------- ---------- ----------
Gross profit ............................................ 124,458 63,302 134,897
Selling, general and administrative expenses ............ 104,700 55,957 106,926
Loss on asset disposal and impairment ................... 24,550 24,550 24,550
Other income, net ....................................... (1,681) (3,514) (5,044)
---------- ---------- ----------
Income (loss) from operations ........................... (3,111) (13,691) 8,465
Interest expense, net ................................... 62,930 32,708 64,137
---------- ---------- ----------
Loss before taxes and minority interest ................. (66,041) (46,399) (55,672)
Income tax benefit ...................................... (26,485) (18,616) (22,341)
Minority interest in loss of subsidiary ................. (3,757) (2,595) (3,119)
---------- ---------- ----------
Loss before cumulative effect of an accounting
change and extraordinary loss .......................... (35,799) (25,188) (30,212)
Dividends on preferred stock ............................ 4,220 2,110 4,220
---------- ---------- ----------
Loss available to common stockholders before
cumulative effect of an accounting change
and extraordinary loss ................................. $ (40,019) $ (27,298) $ (34,432)
========== ========== ==========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (a) ............................... $ 49,761 $ 26,296 $ 51,170
Capital expenditures .................................... 47,951 19,874 47,494
Depreciation and amortization (b) ....................... 50,028 25,249 50,310
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (c) .............................................. $ 71,406 $ 33,319 $ 79,750
Ratio of EBITDA to cash interest expense (c)(a) ......... 1.4x 1.3x 1.6x
AS OF
JANUARY 25, 1998
-----------------
BALANCE SHEET DATA:
Cash and cash equivalents .................. $ 13,432
Cash in escrow ............................. 23,720
Working capital ............................ 172,935
Property, plant and equipment, net ......... 433,273
Total assets ............................... 919,439
Total indebtedness (d) ..................... 604,192
Total stockholders' equity ................. 31,633
(Footnotes on next page)
14
- ----------
(a) Cash interest expense consists of interest expense, excluding
interest on the Notes and amortization of deferred financing costs
of $4,135, $1,791 and $3,877 for Fiscal 1997 and the six and twelve
months ended January 25, 1998, respectively.
(b) Depreciation and amortization excludes amortization of deferred
financing costs, which are included in interest expense.
(c) EBITDA represents income from operations before interest expense,
provision for income taxes, Fonda other income, depreciation and
amortization, Sweetheart loss on asset disposal and impairment and
gain on the Sweetheart Bakery Disposition (as defined herein) of
$3,459 in the three and twelve months ended December 31, 1997.
EBITDA is generally accepted as providing information regarding a
company's ability to service debt. EBITDA should not be considered
in isolation or as a substitute for net income, cash flows from
operations, or other income or cash flow data prepared in accordance
with generally accepted accounting principles or as a measure of a
company's profitability or liquidity.
EBITDA does not reflect the elimination of $2.8 million and $1.4
million of fixed costs in Fiscal 1997 and the twelve months ended
January 25, 1998, respectively, that would not have been incurred
had the Three Rivers and Long Beach facilities been closed at the
beginning of Fiscal 1997.
(d) Total indebtedness includes short-term and long-term borrowings and
current maturities, of long-term debt.
15
SUMMARY HISTORICAL FINANCIAL DATA OF THE FONDA GROUP, INC. (1)
(DOLLARS IN THOUSANDS)
SIX MONTHS
FISCAL YEAR ENDED JULY (2) ENDED JANUARY (2)
---------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ------------ ----------- ----------- ----------- -----------
STATEMENT OF INCOME DATA:
Net sales ........................ $ 61,079 $ 61,839 $ 97,074 $ 204,903 $ 252,513 $124,379 $ 136,674
Cost of goods sold ............... 49,776 51,643 76,252 161,304 196,333 96,987 108,077
-------- -------- --------- --------- --------- -------- ---------
Gross profit ..................... 11,303 10,196 20,822 43,599 56,180 27,392 28,597
Selling, general and
administrative expenses ......... 8,686 8,438 14,112 29,735 37,168 19,520 19,814
Other income, net ................ -- -- -- -- (1,608) -- --
-------- -------- --------- --------- --------- -------- ---------
Income from operations ........... 2,617 1,758 6,710 13,864 20,620 7,872 8,783
Interest expense, net ............ 1,201 1,268 2,943 7,934 9,017 4,540 6,003
-------- -------- --------- --------- --------- -------- ---------
Income before taxes and
extraordinary loss .............. 1,416 490 3,767 5,930 11,603 3,332 2,780
Income taxes ..................... 478 239 1,585 2,500 4,872 1,400 1,168
-------- -------- --------- --------- --------- -------- ---------
Income before extraordinary
loss ............................ 938 251 2,182 3,430 6,731 1,932 1,612
Extraordinary loss, net (3) ...... -- -- -- -- 3,495 -- --
-------- -------- --------- --------- --------- -------- ---------
Net income ....................... $ 938 $ 251 $ 2,182 $ 3,430 $ 3,236 $ 1,932 $ 1,612
======== ======== ========= ========= ========= ======== =========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used in)
operating activities(4) ......... $ 2,797 $ 140 $ (4,774) $ 17,673 $ 8,273 $ 4,783 $ 9,324
Net cash (used in) investment
activities ...................... (1,027) (1,272) (29,593) (46,532) (36,006) (2,074) (10,641)
Net cash provided by (used in)
financing activities ............ (1,742) 992 34,262 30,206 32,174 (3,849) (4,067)
Cash interest expense (5) ........ 1,201 1,268 2,383 6,748 8,309 4,000 5,924
Capital expenditures (6) ......... 1,027 1,272 1,608 1,314 10,363 2,074 4,408
Depreciation and amortization 1,248 1,246 1,669 3,450 4,440 2,859 2,694
Ratio of earnings to fixed
charges (7) ..................... 1.9x 1.3x 2.1x 1.7x 2.1x 1.7x 1.4x
OTHER NON-GAAP FINANCIAL
DATA:
EBITDA(8) ........................ $ 3,865 $ 3,004 $ 8,379 $ 17,314 $ 23,942 $ 10,731 $ 11,670
Ratio of EBITDA to cash
interest expense (8)(5) ......... 3.2x 2.4x 3.5x 2.6x 2.9x 2.7x 2.0x
AS OF
JANUARY 25, 1998
-----------------
BALANCE SHEET DATA:
Cash ....................................... $ 524
Working capital ............................ 47,858
Property, plant and equipment, net ......... 61,354
Total assets ............................... 180,837
Total indebtedness (9) ..................... 128,709
Redeemable common stock (10) ............... 2,108
Total stockholders' equity ................. 6,802
(Footnotes on next page)
16
- ----------
(1) The summary statement of income and other financial data include the
results of operations of Fonda and each of the following acquisitions
(the "Fonda Acquisitions") since their respective dates of acquisition as
follows: (i) the net assets of the Scott Foodservice Division
("Hoffmaster") from Scott Paper Company as of March 31, 1995; (ii) the
net assets of Alfred Bleyer & Co., Inc. ("Maspeth") as of November 30,
1995; (iii) all of the outstanding capital stock of the Chesapeake
Consumer Products Company ("Chesapeake") from Chesapeake Corporation as
of December 29, 1995; (iv) the net assets of two divisions of the
Specialties Operations Division of James River Paper Corporation ("James
River California/Natural Dam") as of May 5, 1996; (v) all of the
outstanding capital stock of Heartland Mfg. Corp. ("Heartland") as of
June 2, 1997; (vi) the net assets of the former division of Astro
Valcour, Inc. ("Astro Valcour") from Tenneco Inc. as of June 10, 1997;
and (vii) the net assets of Leisureway, Inc. ("Leisureway") as of January
5, 1998 (the "Leisureway Acquisition"). The acquisitions of Heartland and
Astro Valcour are hereinafter referred to as the "1997 Fonda
Acquisitions." See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction," "Business" and Note 3
of the Notes to the Financial Statements of Fonda.
(2) All fiscal years are 52 weeks, except for Fiscal 1994 which is 53 weeks.
The six month periods are 26 weeks.
(3) Fonda incurred a $3.5 million extraordinary loss (net of a $2.5 million
income tax benefit) in connection with the early retirement of debt
consisting of the write-off of unamortized debt issuance costs,
elimination of unamortized discount and prepayment penalties.
(4) Material differences between EBITDA and net cash provided by or used in
operating activities may occur because of the inherent differences in
each such calculation including (a) the change in operating assets and
liabilities between the beginning and end of each period, as well as
certain non-cash items which are considered when presenting net cash
provided by or used in operating activities but are not used when
calculating EBITDA and (b) interest expense and provision for income
taxes which are included when presenting cash provided by or used in
operating activities but are not included in the calculation of EBITDA.
(5) Cash interest expense excludes (i) the amortization of debt issuance
costs of $560, $1,021, $514, $190 and $272 for Fiscal 1995, 1996 and
1997, the six months ended January 1997 and 1998, respectively, (ii)
pay-in-kind interest expense of $165, $684 and $350 for Fiscal 1996 and
1997 and the six months ended January 1997, respectively, and (iii)
interest income of $490 and $193 for Fiscal 1997 and the six months ended
January 1998, respectively.
(6) Excludes the costs of the Fonda Acquisitions.
(7) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before provision for income taxes plus fixed
charges. Fixed charges consist of interest expense (including the
amortization of debt issuance costs) plus that portion of rental payments
on operating leases deemed representative of the interest factor.
(8) EBITDA represents income from operations before interest expense,
provision for income taxes, other income and depreciation and
amortization. EBITDA is generally accepted as providing information
regarding a company's ability to service debt. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows
from operations, or other income or cash flow data prepared in accordance
with generally accepted accounting principles or as a measure of a
company's profitability or liquidity. In addition, although the EBITDA
measure of performance is not recognized under generally accepted
accounting principles, it is widely used by companies as a measure of
operating performance because it assists in comparing performance on a
relatively consistent basis across companies without regard to
depreciation and amortization, which can vary significantly depending on
accounting methods (particularly where acquisitions are invloved) or
non-operating factors such as historical cost bases. Because EBITDA is
not calculated identically by all companies, the presentation herein may
not be comparable to other similarly titled measures of other companies.
(9) Total indebtedness includes short-term and long-term borrowings and
current maturities of long-term debt.
(10) See Note 10 of the Notes to the Financial Statements of Fonda.
17
SUMMARY HISTORICAL FINANCIAL DATA OF SWEETHEART HOLDINGS INC.
(DOLLARS IN THOUSANDS)
PERIOD FROM PERIOD FROM
JANUARY 1 TO AUGUST 30 TO FISCAL YEAR ENDED SEPTEMBER 30,
AUGUST 29, SEPTEMBER 30, -------------------------------------------------
1993 1993 1994 1995 1996 1997
--------------- -------------- ----------- ----------- ----------- -------------
(PREDECESSOR) (SUCCESSOR)
--------------- ----------------------------------------------------------------
STATEMENT OF OPERATIONS
DATA:
Net sales ......................... $ 591,258 $ 81,571 $ 898,528 $ 986,618 $ 959,818 $ 886,017
Cost of sales ..................... 460,324 64,011 683,429 779,497 748,055 722,539
--------- -------- --------- --------- --------- ---------
Gross income ...................... 130,934 17,560 215,099 207,121 211,763 163,478
Transportation .................... 62,291 7,952 94,734 95,096 98,664 98,482
Selling, general and
administrative ................... 45,494 5,787 67,712 66,089 61,788 66,792
Loss on asset disposal and
impairment ....................... -- -- -- -- -- 24,550
Restructuring charges ............. -- -- -- -- -- 9,680
--------- -------- --------- --------- --------- ---------
Operating income (loss) ........... 23,149 3,821 52,653 45,936 51,311 (36,026)
Interest expense .................. 43,981 3,327 37,460 38,655 38,832 41,812
Other income (expense) ............ 82 (161) 623 2,442 (2,956) 1,620
--------- -------- --------- --------- --------- ---------
Income (loss) before income
taxes, cumulative effect of
an accounting change and
extraordinary loss ............... (20,750) 333 15,816 9,723 9,523 (76,218)
Income tax (expense) benefit ...... 6,641 (161) (6,462) (3,903) (3,809) 30,487
--------- -------- --------- --------- --------- ---------
Income (loss) before
cumulative effect
of an accounting change
and extraordinary loss ........... (14,109) 172 9,354 5,820 5,714 (45,731)
Cumulative effect of a change
in accounting principle, net -- -- -- -- -- --
Extraordinary loss, net ........... -- -- -- -- -- (940)
--------- -------- --------- --------- --------- ---------
Net income (loss) ................. $ (14,109) $ 172 $ 9,354 $ 5,820 5,714 $ (46,671)
========= ======== ========= ========= ========= =========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used
in) operating activities (1) ..... $ 23,735 $ 5,901 $ 41,532 $ 50,899 $ 43,508 $ (3,242)
Net cash (used in) investing
activities ....................... (14,154) (1,942) (32,581) (51,514) (50,236) (29,914)
Net cash provided by
financing activities ............. (9,625) (3,982) 3,240 (3,615) 3,098 31,435
Cash interest expense (2) ......... 14,038 3,063 34,140 35,121 35,272 38,241
Capital expenditures .............. 14,557 1,956 39,428 51,625 50,236 47,757
Depreciation and
amortization (3) ................. 28,507 2,050 25,783 34,207 39,813 44,152
Ratio of earnings to fixed
charges (4) ...................... N/A 1.1x 1.4x 1.2x 1.2x N/A
OTHER NON-GAAP FINANCIAL
DATA:
EBITDA (5) ........................ $ 51,738 $ 5,710 $ 79,059 $ 82,585 $ 88,168 $ 43,976
Ratio of EBITDA to cash
interest expense (5)(2) .......... 3.7x 1.9x 2.3x 2.4x 2.5x 1.1x
THREE MONTHS
ENDEDDECEMBER 31,
-------------------------
1996 1997
------------- -----------
(SUCCESSOR)
-------------------------
STATEMENT OF OPERATIONS
DATA:
Net sales ......................... $ 202,102 $ 201,952
Cost of sales ..................... 176,859 164,341
--------- ---------
Gross income ...................... 25,243 37,611
Transportation .................... 22,462 23,665
Selling, general and
administrative ................... 16,216 19,102
Loss on asset disposal and
impairment ....................... -- --
Restructuring charges ............. -- --
--------- ---------
Operating income (loss) ........... (13,435) (5,156)
Interest expense .................. 9,952 11,126
Other income (expense) ............ 268 3,576
--------- ---------
Income (loss) before income
taxes, cumulative effect of
an accounting change and
extraordinary loss ............... (23,119) (12,706)
Income tax (expense) benefit ...... 9,247 5,081
--------- ---------
Income (loss) before
cumulative effect
of an accounting change
and extraordinary loss ........... (13,872) (7,625)
Cumulative effect of a change
in accounting principle, net -- (1,511)
Extraordinary loss, net ........... -- --
--------- ---------
Net income (loss) ................. $ (13,872) $ (9,136)
========= =========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used
in) operating activities (1) ..... $ (2,838) $ 738
Net cash (used in) investing
activities ....................... (9,523) 8,633
Net cash provided by
financing activities ............. 14,333 (7,334)
Cash interest expense (2) ......... 9,063 10,495
Capital expenditures .............. 9,523 7,134
Depreciation and
amortization (3) ................. 10,605 10,784
Ratio of earnings to fixed
charges (4) ...................... N/A N/A
OTHER NON-GAAP FINANCIAL
DATA:
EBITDA (5) ........................ $ (2,562) $ 5,745
Ratio of EBITDA to cash
interest expense (5)(2) .......... N/A 0.5x
AS OF
DECEMBER 31, 1997
------------------
BALANCE SHEET DATA:
Cash and cash equivalents .................... $ 4,687
Working capital .............................. 125,793
Property, plant and equipment, net ........... 372,718
Total assets ................................. 673,051
Total indebtedness (6) ....................... 406,474
Total shareholders' equity (deficit) ......... 65,056
(Footnotes on next page)
18
- ----------
(1) Material differences between EBITDA and net cash provided by or used in
operating activities may occur because of the inherent differences in
each such calculation including (a) the change in operating assets and
liabilities between the beginning and end of each period, as well as
certain non-cash items which are considered when presenting net cash
provided by or used in operating activities but are not used when
calculating EBITDA and (b) interest expense and provision for income
taxes which are included when presenting net cash provided by or used in
operating activities but are not included in the calculation of EBITDA.
(2) Cash interest expense excludes (i) the amortization of debt issuance cost
of $1,241, $264, $3,320, $3,534, $3,560, $3,571, $889, and $631 for the
eight months ended August 1993, the one month ended September 1993,
Fiscal 1994, 1995, 1996, 1997, the three month December 1996 period and
the three month December 1997 period, respectively, and (ii) $28,702 of
payment-in-kind interest in the eight months ended August 1993.
(3) Depreciation and amortization excludes amortization of deferred financing
costs which are included in interest expense.
(4) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before provision for income taxes plus fixed
charges. Fixed charges consist of interest expense (including the
amortization of debt issuance costs) plus that portion of rental payments
on operating leases deemed representative of the interest factor.
Earnings were not sufficient to cover fixed charges in the eight months
ended August 1993, Fiscal 1997 and the three months ended December 1996
and 1997 periods in the amount of $20,750, $76,803, $23,357 and $12,706,
respectively.
(5) EBITDA represents income from operations before interest expense,
provision for income taxes, depreciation and amortization, loss on asset
disposal and impairment, restructuring expense and gain on the Sweetheart
Bakery Disposition incurred in the three month December 1997 period in
the amount of $3,459. EBITDA is generally accepted as providing
information regarding a company's ability to service debt. EBITDA should
not be considered in isolation or as a substitute for net income, cash
flows from operations, or other income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity. In addition, although the
EBITDA measure of performance is not recognized under generally accepted
accounting principles, it is widely used by companies as a measure of
operating performance because it assists in comparing performance on a
relatively consistent basis across companies without regard to
depreciation and amortization, which can vary significantly depending on
accounting methods (particularly where acquisitions are invloved) or
non-operating factors such as historical cost bases. Because EBITDA is
not calculated identically by all companies, the presentation herein may
not be comparable to other similarly titled measures of other companies.
(6) Total indebtedness includes short-term and long-term borrowings and
current maturities of long-term debt.
19
RISK FACTORS
Holders of the Old Notes should carefully consider the following matters,
as well as the other information contained in this Prospectus, before deciding
to tender their Old Notes in the Exchange Offer.
HOLDING COMPANY STRUCTURE AND RELATED CONSIDERATIONS
SF Holdings is a holding company that conducts all of its operations
through Sweetheart and Fonda, and therefore does not have any material cash
flows independent of Sweetheart and Fonda. The instruments governing the
indebtedness of Sweetheart and Fonda (the "Subsidiary Debt Instruments")
contain numerous restrictive covenants which restrict Sweetheart and Fonda's
ability to pay dividends or make other distributions to SF Holdings. In
addition, the payment of dividends and other distributions by Sweetheart or
Fonda may be restricted by applicable law. Therefore, in order to generate
sufficient cash flow to meet SF Holdings' debt obligations, including the
principal amount at maturity on the New Notes, cash interest when due,
redeeming the New Notes or repurchasing the New Notes upon the occurrence of a
Change of Control or otherwise, the Company will be required to refinance the
New Notes and/or the Subsidiary Debt Instruments. There can be no assurance
that the Company will be able to do so or the assets of the Company would be
sufficient to enable the Company to make any payments in respect of the New
Notes when required. See "Description of Certain Indebtedness."
Any right of the Company and its creditors, including holders of the
Notes, to participate in the assets of Sweetheart, Fonda or any other
subsidiary of the Company upon any liquidation or reorganization of any such
subsidiary will be subject to the prior claims of that subsidiary's creditors,
including the trade creditors. Accordingly, the New Notes will be effectively
subordinated to all liabilities, including trade payables, of the subsidiaries
of the Company.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS; LIQUIDITY
Since the issuance of the Units, each of SF Holdings, Sweetheart and Fonda
has become highly leveraged. As of January 25, 1998, after giving pro forma
effect to the Transactions, the Company would have had total consolidated
indebtedness of $604.2 million consisting of the Notes, $122.7 million of
indebtedness at Fonda and $406.5 of indebtedness at Sweetheart. In addition, as
of January 31, 1998, Sweetheart and Fonda would have had $6.7 million and $40.6
million, respectively, of additional borrowings available under their
respective credit facilities. Moreover, the Company's indebtedness will
increase as a result of the accretion of original issue discount on the Notes.
See "Capitalization." For the twelve months ended January 25, 1998, after
giving pro forma effect to the Transactions, the Company's ratio of EBITDA to
total interest expense would have been 1.2x.
The significant indebtedness outstanding of SF Holdings, Sweetheart and
Fonda may have several important consequences to the holders of the New Notes,
including, but not limited to, the following: (i) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or for other purposes may be impaired; (ii) the
Company's flexibility to expand, make capital expenditures and respond to
changes in the industry and economic conditions generally may be limited; (iii)
the Subsidiary Debt Instruments contain, and the Indenture will contain,
numerous financial and other restrictive covenants, including, among other
things, limitations on the ability of the Company to incur additional
indebtedness, to create liens and other encumbrances, to make certain payments
and investments, to sell or otherwise dispose of assets, to reinvest asset sale
proceeds, if any, or to merge or consolidate with another entity, the failure
to comply with which may result in an event of default, which, if not cured or
waived, could have a material adverse effect on the Company; and (iv) the
ability of the Company to satisfy its obligations pursuant to its indebtedness,
including pursuant to the Indenture, may be impaired. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition." In
addition, SF Holdings has no credit facility to draw upon in order to obtain
additional financing, if necessary.
Due in part to seasonally low cash flows from operations in the first and
second fiscal quarters and reduced profitability in the prior fiscal year,
Sweetheart's available borrowings under its credit facilities as of January 31,
1998 were substantially limited pursuant to the borrowing base formulas set
forth therein.
20
The inability of Sweetheart to increase available borrowings through the
production of inventory and accounts receivable or otherwise could have a
material adverse effect on the Company. In addition, due to the Company's high
leverage, there can be no assurance that the Company would have access to
alternative sources of liquidity.
INDENTURE AND CREDIT FACILITY RESTRICTIONS
The Subsidiary Debt Instruments contain, and the Indenture contains,
numerous restrictive covenants including, among other things, limitations on
the ability of Sweetheart, Fonda and the Company, as the case may be, to incur
additional indebtedness, to create liens and other encumbrances, to make
certain payments and investments, to sell or otherwise dispose of assets, or to
merge or consolidate with another entity. The Fonda Credit Facility (as defined
herein) and Sweetheart Credit Facilities (as defined herein) also require each
respective entity to meet certain financial tests. Fonda, Sweetheart or the
Company's failure to comply with their respective obligations under the
Subsidiary Debt Instruments or the Indenture, as the case may be, or under
agreements relating to indebtedness incurred in the future, could result in an
event of default under such agreements, which could permit acceleration of the
related indebtedness and acceleration of indebtedness under other financing
arrangements that may contain cross-acceleration or cross-default provisions.
In addition, because the Subsidiary Debt Instruments limit, and the Indenture
limits, the ability of Fonda, Sweetheart and the Company, as the case may be,
to engage in certain transactions except under certain circumstances, Fonda,
Sweetheart and the Company may be prohibited from entering into transactions
that could be beneficial to the Company. Furthermore, the Subsidiary Debt
Instruments permit certain transactions with affiliates so long as such
transactions are negotiated on an arm's length basis and are on terms at least
as favorable as those which could otherwise have been obtained from unrelated
third parties. See "--Realization of Benefits from Sweetheart Investment,"
"Description of New Notes" and "Description of Certain Indebtedness."
CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control, the Company will be required
to offer to repurchase each holder's New Notes at a price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of repurchase (or, in the case
of repurchases of Notes prior to March 15, 2003, at a repurchase price equal to
101% of the Accreted Value thereof, plus Liquidated Damages thereon, if any, as
of the date of repurchase). The Company does not have, and may not in the
future have, any assets other than the Capital Stock of Sweetheart and Fonda.
The Subsidiary Debt Instruments limit Sweetheart and Fonda's respective ability
to make payments to the Company. As a result, the ability of the Company to
repurchase the New Notes upon a Change of Control will be dependent on the
Company's ability to refinance the indebtedness under the New Notes or the
Subsidiary Debt Instruments. If the Company is unable to refinance the
indebtedness under the New Notes or the Subsidiary Debt Instruments, the
Company will likely not have the financial resources to repurchase New Notes
upon the occurrence of a Change of Control. In addition, the requirement to
repurchase the New Notes upon a Change of Control may discourage persons from
making a tender offer for or a bid to acquire the Company. In addition, the
Subsidiary Debt Instruments contain similar change of control provisions. As a
result, following a Change of Control, Sweetheart and Fonda, as the case may
be, may be required to offer to repurchase all indebtedness under their
respective indentures. See "The Sweetheart Investment;" "Description of New
Notes--Repurchase at the Option of Holders--Change of Control" and "Description
of Certain Indebtedness."
ORIGINAL ISSUE DISCOUNT; LIMITATIONS ON HOLDERS' CLAIMS
The New Notes will be issued at a substantial original issue discount from
their principal amount at maturity. Consequently, purchasers of the New Notes
will be required to include amounts in gross income for federal income tax
purposes in advance of receipt of the cash payment to which the income is
attributable. See "Certain Federal Income Tax Consequences" for more detailed
discussions of the federal income tax consequences to the purchasers of the New
Notes resulting from the purchase, ownership or disposition thereof.
21
Under the Indenture, in the event of an acceleration of the maturity of
the New Notes upon the occurrence of an Event of Default (as defined herein),
the holders of the New Notes may be entitled to recover only the amount which
may be declared due and payable pursuant to the Indenture, which will be less
than the principal amount at maturity of such New Notes. See "Description of
New Notes--Events of Default and Remedies."
If a bankruptcy case is commenced by or against the Company under the
Bankruptcy Code, the claim of a holder of New Notes with respect to the
principal amount thereto may be limited to an amount equal to the sum of (i)
the issue price of the New Notes as set forth on the cover page hereof and (ii)
that portion of the original issue discount (as determined on the basis of such
issue price) which is not deemed to constitute "unmatured interest" for
purposes of the Bankruptcy Code (as defined herein). In addition, there can be
no assurance that bankruptcy court would compute the accrual of interest under
the same rules as those used for the calculation of original issue discount
under federal income tax law and, accordingly, a holder might be required to
recognize gain or loss in the event of a distribution related to such
bankruptcy case.
DEPENDENCE ON CERTAIN CUSTOMERS
The Company has a number of large national accounts which account for a
significant portion of its revenue. In Fiscal 1997, each of Sweetheart and
Fonda's five largest customers represented approximately 35% and 17%,
respectively, of its net sales. No single customer of Fonda accounted for more
than 10.0% of net sales in Fiscal 1997. One customer of Sweetheart, McDonald's,
accounted for 13.7% of net sales of Sweetheart in Fiscal 1997. In the fourth
quarter of Fiscal 1997, Sweetheart completed negotiations of a three-year
contract renewal with its largest customer, McDonald's. This agreement results
in a lower selling price and less total volume, thereby resulting in lower
margins. The loss of one or more large national customers could adversely
affect the Company's operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Sweetheart Liquidity
and Capital Resources" and "Business--Marketing and Sales."
SUPPLY AND PRICING OF RAW MATERIALS
The Company purchases solid bleached sulfate ("SBS") paperboard, plastic
resin and paper tissue stock, among other raw materials, for the production of
its products. Although the Company believes that current sources of supply for
its raw materials are adequate to meet its requirements, occasional periods of
short supply of certain raw materials may occur. Some of the Company's
competitors own or control sources of supply and may, therefore, have better
access to such raw materials during periods of short supply. In addition,
prices for the Company's raw materials fluctuate. When raw materials prices
decrease, the Company's selling prices have historically decreased. Conversely,
when raw materials prices increase, the Company's selling prices have
historically increased. The actual impact on the Company of raw materials price
changes is affected by a number of factors including the level of inventories
at the time of a price change, the specific timing and frequency of price
changes, and the lead and lag time that generally accompanies the
implementation of both raw materials and subsequent selling price changes. In
the event raw materials prices decrease over a period of several months, the
Company's profit margins may be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
REALIZATION OF BENEFITS FROM SWEETHEART INVESTMENT
There can be no assurance that the Company will be able to realize the
benefits it expects to achieve as a result of the Sweetheart Investment.
Management has not previously had responsibility for day-to-day operations of a
company as large as Sweetheart. The realization of potential benefits from the
Sweetheart Investment could be adversely affected by a number of factors, some
of which are not in the Company's control, including the ability of the Company
to achieve cost savings and other synergies as a result of, among other things,
the limitations under the Subsidiary Debt Instruments, the ability of the
Company's existing management and systems infrastructure to absorb the
increased operations, the response of competition and general economic
conditions. In addition, the implementation of the
22
Company's strategy could result in one-time operating charges, which could
impair the Company's liquidity. See "--Substantial Leverage; Ability to Service
Indebtedness; Liquidity." In addition, pursuant to the Subsidiary Debt
Instruments, transactions with affiliates, including transactions between and
among SF Holdings, Sweetheart and/or Fonda, must be negotiated on terms at
least as favorable as those which could otherwise have been obtained from
unrelated third parties, which may limit the Company's ability to fully realize
the cost savings and synergies expected to be achieved as a result of the
Sweetheart Investment. See "Business--General."
MANAGEMENT INFORMATION SYSTEMS
Sweetheart is in the process of implementing new management information
systems that affect broad aspects of its operations. There can be no assurance
that such systems will be implemented successfully or that implementation of
such systems will not result in a disruption of Sweetheart's operations. The
failure to successfully implement such systems could have a material adverse
effect on the Company.
SEASONALITY
The Company's business is highly seasonal with a majority of its net cash
flow from operations realized in the second and third quarters of the calendar
year. The Company builds its inventory throughout the year to satisfy the high
seasonal demands of the summer months when outdoor and away-from-home
consumption increases. In the event cash flow from operations is insufficient
to provide working capital necessary to fund production requirements during
these quarters, Fonda and Sweetheart will need to borrow under their respective
credit facilities or seek other sources of capital. Although the Company
believes that funds available under the Fonda Credit Facility and Sweetheart
Credit Facilities, together with cash generated from operations, will be
adequate to provide for each company's respective cash requirements, there can
be no assurance that such capital resources will be sufficient in the future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction; --Fonda Liquidity and Capital Resources and
- --Sweetheart Liquidity and Capital Resources."
HIGHLY COMPETITIVE INDUSTRY
The disposable food service products industry is fragmented and highly
competitive. The Company's competitors include large, vertically integrated,
multinational companies as well as regional manufacturers. The Company's
competitors also include those who compete across the full line of the
Company's products, as well as companies that compete against a limited number
of the Company's products. Some of the Company's competitors have greater
financial and other resources than the Company. See "Business--Competition."
VOTING OWNERSHIP OF SWEETHEART
The Sweetheart Stockholders own 52% of the total outstanding Sweetheart
Class A Common Stock and thereby control the vote on matters submitted to the
stockholders of Sweetheart. In addition, the Sweetheart Stockholders have the
right to nominate and elect three of the five members of Sweetheart's Board of
Directors. See "The Sweetheart Investment."
CONTROL BY PRINCIPAL STOCKHOLDER
Dennis Mehiel, the Chairman of the Board of Directors and Chief Executive
Officer of the Company, beneficially owns approximately 80.0% of the
outstanding shares of the Company's Common Stock on a fully diluted basis
(approximately 90.0% of the outstanding shares of the Company's Class A Common
Stock on a fully diluted basis). See "Principal Stockholders." As a result, Mr.
Mehiel controls the Company and has the power to elect the entire board of
directors, appoint new management and approve any other action requiring the
approval of the holders of the Company's stock, including adopting certain
amendments to the Company's certificate of incorporation and approving mergers
or sales of all of the Company's assets. See "Principal Stockholders" and
"Description of Capital Stock."
23
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the retention of, and continued performance
by, its senior management, including Dennis Mehiel, Chairman and Chief
Executive Officer of the Company, and Thomas Uleau, President and Chief
Operating Officer of the Company. The Company believes that the loss of the
services of any of the senior management of the Company could have a material
adverse effect on the Company. The Company does not have employment contracts
with any of its senior management and has not obtained disability or life
insurance policies covering such executive officers. In addition, Dennis Mehiel
is also Chairman and Chief Executive Officer of Four M Corporation ("Four M")
and Dennis Mehiel and Thomas Uleau are executive officers of other affiliates
of the Company. See "Management."
LABOR MATTERS
As of March 31, 1998, approximately 22% and 87% of Sweetheart and Fonda's
hourly employees, respectively, were covered by collective bargaining
agreements. Fonda experienced a one-month work stoppage at its former Three
Rivers facility in August 1996. See "Business--Employees."
ENVIRONMENTAL MATTERS
The Company and its operations are subject to comprehensive and frequently
changing Federal, state and local environmental and occupational health and
safety laws and regulations, including laws and regulations governing emissions
of air pollutants, discharges of waste and storm water, and the disposal of
hazardous wastes. The Company is subject to liability for the investigation and
remediation of environmental contamination (including contamination caused by
other parties) at properties that it owns or operates and at other properties
where the Company or its predecessors have arranged for the disposal of
hazardous substances. As a result, the Company is involved from time to time in
administrative and judicial proceedings and inquiries relating to environmental
matters. The Company believes there are currently no pending investigations at
the Company's plants and sites relating to environmental matters. However,
there can be no assurance that the Company will not be involved in any such
proceeding in the future and that the aggregate amount of future clean up costs
and other environmental liabilities will not be material. See
"Business--Environmental Matters."
The Company cannot predict what environmental legislation or regulations
will be enacted in the future, how existing or future laws or regulations will
be administered or interpreted or what environmental conditions may be found to
exist. Enactment of more stringent laws or regulations or more strict
interpretation of existing laws and regulations could require additional
expenditures by the Company, some of which could be material.
YEAR 2000 COMPLIANCE
Each of Sweetheart and Fonda have implemented Year 2000 compliance
programs designed to ensure that each respective company's computer systems and
applications will function properly beyond 1999. The Company expects Sweetheart
and Fonda's Year 2000 date conversion programs to be substantially completed by
the end of 1999. The Company believes that adequate resources, both internal
and external, have been allocated for this purpose. Spending for these Year
2000 compliance programs, including Fiscal 1998 spending, is estimated to be
$2.7 million and $1.8 million at Sweetheart and Fonda, respectively, and will
be funded from each of the respective company's cash from operations or
borrowings under each company's respective credit facility. However, there can
be no assurance that the Company will identify all Year 2000 date conversion
problems in its computer systems in advance of their occurrence or that the
Company will be able to successfully remedy all problems that are discovered.
Failure by Sweetheart or Fonda and/or their significant vendors and customers
to complete Year 2000 compliance programs in a timely manner could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the revenue stream and financial stability
of existing customers may be adversely impacted by Year 2000 problems which
could cause fluctuations in the Company's revenues and operating profitability.
24
ABSENCE OF PUBLIC MARKET
Prior to this Prospectus, there has been no public market for the New
Notes, and there can be no assurance that such a market will develop. In
addition, the New Notes will not be listed on any national securities exchange.
Although the New Notes are eligible for trading in the Private Offerings,
Resales and Trading through Automatic Linkages ("PORTAL") market, the New Notes
may trade at a discount from their initial offering price, depending upon
prevailing interest rates, the market for similar securities, the Company's
performance and other factors. The Initial Purchasers have made a market in the
Old Notes as permitted by applicable law and regulation; however, the Initial
Purchasers are not obligated to do so and any such market-making activities may
be discontinued at any time without notice. In addition, such market-making
activities may be limited during the Exchange Offer and, if necessary, the
pendency of a Shelf Registration Statement. Therefore, there can be no
assurance that an active market for any of the New Notes will develop after the
Company's performance of its obligations under the Registration Rights
Agreement.
FRAUDULENT TRANSFER STATUTES
Under Federal or state fraudulent transfer laws, the Notes may be
subordinated to existing or future indebtedness of the Company or found not to
be enforceable in accordance with their terms, and the pledge of the Capital
Stock of Sweetheart and Fonda owned by SF Holdings (the "Pledge") may be found
not to be enforceable in accordance with its terms. Under such statutes, if a
court were to find that, at the time (a) the Notes were issued or (b) the
Capital Stock of Sweetheart and Fonda was pledged, the Company was insolvent,
or was rendered insolvent by the issuance of the Notes and the substantially
concurrent use of the proceeds therefrom, was engaged in a business or
transaction for which the assets remaining with the Company constituted
unreasonably small capital, intended to incur, or believed that it would incur,
debts beyond its ability to pay such debts as they matured, or intended to
hinder, delay or defraud its creditors, such court could void the Company's
obligations under the Notes and the Pledge, or subordinate the Notes and the
Pledge to all other indebtedness of the Company. In such event, there can be no
assurance that any repayment of the Notes could ever be recovered by holders of
the Notes.
For purposes of the foregoing, the measure of insolvency varies depending
upon the law of the jurisdiction which is being applied. Generally, however,
the Company would be considered to have been insolvent at the time the Notes
and Pledge were issued if the sum of its debts was, at that time, greater than
the sum of the value of all of its property at a fair valuation, or if the then
fair saleable value of its assets was less than the amount that was then
required to pay its probable liability on its existing debts as they became
absolute and matured. There can be no assurance as to what standard a court
would apply in order to determine whether the Company was insolvent as of the
date the Notes and the Pledge were issued, or that, regardless of the method of
valuation, a court would not determine that the Company was insolvent on that
date, or that, regardless of whether the Company was insolvent on the date the
Notes and the Pledge were issued, that the issuances constituted fraudulent
transfers on another of the grounds summarized above.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this Prospectus may constitute
forward-looking statements, and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward looking
statements. Important factors that could cause the actual results, performance
or achievements of the Company to differ materially from the Company's
expectations are disclosed in this Prospectus ("Cautionary Statements"),
including, without limitation, those statements made in conjunction with the
forward-looking statements included under "Risk Factors" and otherwise herein.
All written forward looking statements attributable to the Company are
expressly qualified in their entirety by the Cautionary Statements.
25
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that it will register the Old Notes under the Securities Act. New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by Holders thereof (other than any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such Notes. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that, by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period 270 days after the effective date of the Exchange Offer Registration
Statement (as defined herein), it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." However, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied with.
To the extent that Old Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Old Notes will be
adversely affected.
26
THE SWEETHEART INVESTMENT
In connection with the Sweetheart Investment, the Company acquired all of
the outstanding capital stock of Fonda in a merger of a subsidiary of the
Company into Fonda, and the stockholders of Fonda became the stockholders of
the Company.
On March 12, 1998, the Investment Agreement was consummated and SF
Holdings acquired 48% of the Sweetheart Class A Common Stock and 100% of the
Sweetheart Class B Common Stock, representing 90% of the total outstanding
common stock of Sweetheart. The aggregate purchase price consisted of $88.0
million in cash, a $7.0 million Demand Note and $30.0 million of Exchangeable
Preferred Stock. See "Description of Capital Stock--Preferred Stock."
Pursuant to the Investment Agreement, Sweetheart has agreed to indemnify
the Sweetheart Stockholders and their respective affiliates and, if applicable,
their respective directors, officers, shareholders, partners, attorneys,
accountants, agents and employees for claims relating to or arising out of the
ownership by the Sweetheart Stockholders of the capital stock of Sweetheart or
the operation by Sweetheart and its subsidiaries of the respective businesses,
regardless of when they arose and regardless of by whom or when asserted. The
foregoing indemnification obligation has no dollar limitation with respect to
such obligation.
The Demand Note was satisfied in full immediately following the
consummation of the Sweetheart Investment.
Upon consummation of the Sweetheart Investment, the Company entered into
certain agreements with the Sweetheart Stockholders concerning their respective
interests in Sweetheart (the "Sweetheart Stockholders' Agreement") and their
respective interests in the Company (the "SF Holdings Registration Rights
Agreement").
Pursuant to the Sweetheart Stockholders' Agreement, the Sweetheart
Stockholders are entitled to nominate three members to the board of directors
of Sweetheart and the Company is entitled to nominate two members. The
Sweetheart Stockholders and the Company have agreed to vote all their shares of
Sweetheart Common Stock in favor of such nominees. In addition, the Sweetheart
Stockholders, following the fifth anniversary of the consummation of the
Sweetheart Investment, have the right to exchange their shares of Sweetheart
Class A Common Stock for warrants (the "Exchange Warrants") to purchase, for
nominal consideration, shares of Class C Common Stock of the Company
representing 10% of the total outstanding shares of common stock of the Company
at the consummation of the Sweetheart Investment on a fully diluted basis. The
Company has the right to cause such exchange and has the right to thereafter
repurchase the Exchange Warrants, in whole or in part, for an aggregate call
price of $50.0 million, subject to increase at 12.5% per annum until the fifth
anniversary of the consummation of the Sweetheart Investment. Upon the
occurrence of a merger (as defined in the Sweetheart Stockholders' Agreement),
the Sweetheart Stockholders will be required to exchange their shares of
Sweetheart Class A Common Stock for the Exchange Warrants. In addition, in the
event the Company proposes to sell shares of Sweetheart Class A Common Stock or
Sweetheart Class B Common Stock in an amount greater than 30% of the
outstanding shares of Sweetheart Common Stock, the Sweetheart Stockholders will
have the right to participate in such sale. In the event the Company proposes
to sell shares of Sweetheart Common Stock in an amount greater than 30% of the
outstanding shares of Sweetheart Common Stock, then the Company will have the
right to require the Sweetheart Stockholders to sell all, but not less than
all, of their shares of Sweetheart Common Stock. The Sweetheart Stockholders
have also agreed not to transfer or pledge their shares of Sweetheart Class A
Common Stock, subject to certain exceptions as described above.
Pursuant to the SF Holdings Registration Rights Agreement, the Company has
agreed to file a registration statement registering the securities of SF
Holdings received by the Sweetheart Stockholders upon consummation of the
Sweetheart Investment no later than the 90th day thereafter. The Sweetheart
Stockholders have agreed not to sell any such securities for a specified period
of time prior to and after a public offering of the Company's Common Stock. In
addition, after the issuance of the Exchange Warrants, upon the request of the
Sweetheart Stockholders, the Company will file a registration statement
registering the Exchange Warrants and the shares of Class C Common Stock
underlying such warrants.
27
Pursuant to the Investment Agreement, the by-laws of Sweetheart and its
subsidiaries were amended immediately prior to the consummation of the
Sweetheart Investment (i) to fix its board of directors at five members, (ii)
to provide for the presence of four directors to constitute a quorum and (iii)
to require approval of four directors for the following matters, among others
(a) a merger, consolidation or other combination of Sweetheart with or into
another entity, (b) the sale of all or a material portion of the assets of
Sweetheart, (c) the entering into of any new line of business by Sweetheart,
(d) the issuance or repurchase by Sweetheart of any equity securities, (e) the
incurrence by Sweetheart of any indebtedness for money borrowed or the
refinancing of any existing indebtedness of Sweetheart, (f) approval of the
annual business plans and operating budgets of Sweetheart, (g) the termination
or modification of any of the terms of the Management Services Agreement, (h)
the amendment or modification of any provisions of the certificate of
incorporation of Sweetheart, (i) the selection of Sweetheart's chief executive
officer, chief operating officer and chief financial officer, (j) any change of
accountants and (k) the removal of officers of Sweetheart.
In addition, immediately prior to the consummation of the Sweetheart
Investment, Dennis Mehiel, Thomas Uleau and Hans Heinsen were appointed Chief
Executive Officer, Chief Operating Officer and Chief Financial Officer,
respectively, of Sweetheart. Pursuant to the Investment Management Agreement,
in the event of the disability of Dennis Mehiel, the Chief Operating Officer
shall automatically replace him as Chief Executive Officer.
The Sweetheart Stockholders also received the same number of shares of
Class C Common Stock, on a pro rata basis, as were offered pursuant to the
issuance of the Units.
Upon consummation of the Sweetheart Investment, American Industrial
Partners Management Company, Inc. ("AIPM"), an affiliate of American Industrial
Partners, L.P. ("AIP"), assigned to the Company certain of its rights under the
restated management services agreement, dated August 31, 1993 (the "1993
Management Services Agreement"), pursuant to which AIPM provided management
services to Sweetheart and received fees of $1.85 million per annum. Following
the assignment of the 1993 Management Services Agreement, such Agreement (the
"Management Services Agreement") was amended and its term was extended through
March 12, 2008. Following the consummation of the Sweetheart Investment, SF
Holdings assigned substantially all of its rights under the Management Services
Agreement to Fonda in consideration for the payment of $7.0 million. During the
term of the Management Services Agreement, Fonda has the right, subject to the
direction of the board of directors of Sweetheart, to manage Sweetheart's
day-to-day operations for and on behalf of Sweetheart, including but not
limited to, the right to cause Sweetheart to (i) acquire and dispose of assets;
(ii) employ, determine compensation of and terminate employees of Sweetheart
other than the Chief Executive Officer, Chief Operating Officer and Chief
Financial Officer; and (iii) take all other actions associated with the
management of the day-to-day operations of the business of Sweetheart. For the
first three years after the consummation of the Sweetheart Investment, AIPM
will continue to provide certain financial advisory services to Sweetheart for
which it will receive fees of $925,000, $740,000 and $555,000 in respect of the
first, second and third years, respectively. In consideration of SF Holdings'
performance of certain administrative services, it will receive fees of
$200,000 per annum throughout the term of the Management Services Agreement. In
consideration of Fonda's performance of services, it will receive fees of
$725,000, $910,000 and $1,095,000 in the first, second and third years,
respectively, following the consummation of the Sweetheart Investment, and
$1,650,000 per annum throughout the remaining term of the Management Services
Agreement.
28
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange pursuant to the
Exchange Offer. The net proceeds from the issuance of the Units were used as
follows:
(DOLLARS IN MILLIONS)
SOURCES OF FUNDS:
Units .................................... $ 77.5
Exchangeable Preferred Stock ............. 30.0
SF Holdings equity investment(1) ......... 15.0
Demand Note(2) ........................... 7.0
-------
TOTAL ................................... $ 129.5
=======
USES OF FUNDS:
Purchase of Sweetheart Equity:
Cash .................................... $ 88.0
Exchangeable Preferred Stock ............ 30.0
Demand Note(2) .......................... 7.0
Fees and expenses ........................ 4.5
-------
TOTAL ................................... $ 129.5
=======
- ----------
(1) An affiliate of Dennis Mehiel made a capital investment in SF Holdings of
$15.0 million in cash in exchange for shares of Class B Series 1
Preferred (as defined herein). See "Description of Capital Stock."
(2) The Demand Note was satisfied in full immediately following the
consummation of the Sweetheart Investment. See "The Sweetheart
Investment."
29
THE EXCHANGE OFFER
PURPOSE AND EFFECTS
The Units, comprised of the Old Notes and the Shares, were sold by the
Company on March 12, 1998 to the Initial Purchasers, who resold the Units to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) and other institutional "accredited investors" (as defined in Rule 501(a)
under the Securities Act). In connection with the sale of the Old Notes, the
Company and the Initial Purchasers entered into a Registration Rights Agreement
dated as of March 12, 1998 (the "Registration Rights Agreement") pursuant to
which the Company agreed to file with the Commission a registration statement
(the "Exchange Offer Registration Statement") with respect to an offer to
exchange the Old Notes for New Notes within 45 days following the closing date
of the issuance of the Old Notes. In addition, the Company agreed to use its
best efforts to cause the Exchange Offer Registration Statement to become
effective under the Securities Act and to issue the New Notes pursuant to the
Exchange Offer. A copy of the Registration Rights Agreement has been filed as
an exhibit to the Exchange Offer Registration Statement.
The Exchange Offer is being made pursuant to the Registration Rights
Agreement to satisfy the Company's obligations thereunder. For purposes of the
Exchange Offer, the term "Eligible Holder" shall mean the registered owner of
any Old Notes that remain Transfer Restricted Securities, as reflected on the
records of The Bank of New York as registrar for the Old Notes (in such
capacity, the "Registrar"), or any person whose Old Notes are held of record by
the depository of the Old Notes. The Company is not required to include any
securities other than the New Notes in the Exchange Offer Registration
Statement. Holders of Old Notes who do not tender their Old Notes or whose Old
Notes are tendered but not accepted would have to rely on exemptions from
registration requirements under the securities laws, including the Securities
Act, if they wish to sell their Old Notes.
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties unrelated to the Company, the Company
believes that the New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by
any holder of such New Notes (other than a person that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act and except as
set forth in the next paragraph) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder is not participating and does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of such New Notes.
If any person were to be participating in the Exchange Offer for the
purpose of distributing securities in a manner not permitted by the
Commission's interpretation, (i) the position of the staff of the Commission
enunciated in interpretive letters would be inapplicable to such person and
(ii) such person would be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
the Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction. Prior to the Exchange
Offer, however, the Company will use its best efforts to register or qualify
the New Notes for offer and sale under the securities or blue sky laws of such
jurisdictions as is necessary to permit consummation of the Exchange Offer and
do any and all other acts or things necessary or advisable to enable the offer
and sale in such jurisdictions of the New Notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept any and
all Old Notes validly tendered prior to 5:00 p.m.,
30
New York City time, on the Expiration Date (as defined below). The Company will
issue up to $144,000,000 aggregate principal amount at maturity of New Notes in
exchange for a like principal amount of outstanding Old Notes which are validly
tendered and accepted in the Exchange Offer. Subject to the conditions of the
Exchange Offer described below, the Company will accept any and all Old Notes
which are so tendered. Holders may tender some or all of their Old Notes
pursuant to the Exchange Offer; however, the Old Notes may be tendered only in
multiples of $1,000. See "Description of New Notes."
The form and terms of the New Notes will be the same in all material
respects as the form and terms of the Old Notes, except that (i) the New Notes
will be registered under the Securities Act and hence will not bear legends
restricting the transfer thereof, (ii) because the New Notes will be
registered, holders of the New Notes will not be entitled to Liquidated Damages
which would have been payable under the terms of the Registration Rights
Agreement in respect of Old Notes constituting Transfer Restricted Securities
held by such holders during any period in which a Registration Default was
continuing and (iii) because the New Notes will be registered, holders of New
Notes will not be, and upon the consummation of the Exchange Offer, Eligible
Holders of Old Notes will no longer be, entitled to certain rights under the
Registration Rights Agreement intended for the holders of unregistered
securities.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of the State of Delaware or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the provisions of the Registration Rights Agreement.
Old Notes which are not tendered for exchange or are tendered but not accepted
in the Exchange Offer will remain outstanding and be entitled to the benefits
of the Indenture, but will not be entitled to any registration rights under the
Registration Rights Agreement.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent for the Exchange Offer. The Exchange Agent will act as agent for
the tendering holders for the purposes of receiving the New Notes from the
Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Eligible Holders who tender Old Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Old Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1998, subject to extension by the Company by notice to the Exchange
Agent as herein provided. The Company reserves the right to so extend the
Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the time and date on which the Exchange Offer as so extended shall
expire. The Company will notify the Exchange Agent of any extension by oral or
written notice and will make a public announcement thereof, each prior to 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
The Company reserves the right (i) to delay accepting for exchange any Old
Notes for any New Notes or to extend or terminate the Exchange Offer and not
accept for exchange any Old Notes for any New Notes if any of the events set
forth below under the caption "Conditions of the Exchange Offer" shall have
occurred and shall not have been waived by the Company by giving oral or
written notice of such delay or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance for exchange, extension or amendment will be followed as promptly as
practicable by public announcement thereof. If the Exchange Offer is amended in
a manner
31
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment in a manner reasonably calculated to inform
the holders of Old Notes of such amendment, and the Company will extend the
Exchange Offer for a minimum of five business days, depending upon the
significance of the amendment and the manner of disclosure to the holders of
Old Notes, if the Exchange Offer would otherwise expire during such five
business-day period. The rights reserved by the Company in this paragraph are
in addition to the Company's rights set forth below under the caption
"Conditions of the Exchange Offer."
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default, Eligible Holders of Old
Notes are entitled to receive Liquidated Damages in an amount equal to 50 basis
points per annum of the Accreted Value of Old Notes for each successive 90-day
period, or any portion thereof, during which such Registration Default
continues, up to a maximum amount of 200 basis points per annum of the Accreted
Value of the Old Notes. For purposes of the Exchange Offer, a "Registration
Default" shall occur if (i) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing; (ii) any such Registration Statement is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the Effectiveness Target Date"); (iii) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement; or (iv)
the Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with the resales of the New
Notes without being succeeded immediately by a post-effective amendment to the
Exchange Offer Registration Statement that cures such failure and is
immediately declared effective. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages will cease.
Holders of New Notes will not be and, upon consummation of the Exchange
Offer, Eligible Holders of Old Notes will no longer be, entitled to (i) the
right to receive Liquidated Damages or (ii) certain other rights under the
Registration Rights Agreement intended for holders of Transfer Restricted
Securities. The Exchange Offer shall be deemed consummated upon the occurrence
of the delivery by the Company to the Registrar under the Indenture of New
Notes in the same aggregate principal amount as the aggregate principal amount
of Old Notes that are tendered by holders thereof pursuant to the Exchange
Offer.
PROCEDURES FOR TENDERING
Only an Eligible Holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, an Eligible Holder must
complete, sign and date the Letter of Transmittal, or a facsimile thereof, have
the signatures thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Old Notes (unless such tender is being effected pursuant to
the procedure for book-entry transfer described below) and any other required
documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
Any financial institution that is a participant in the Depositary's
Book-Entry Transfer Facility System may make book-entry delivery of the Old
Notes by causing the Depositary to transfer such Old Notes into the Exchange
Agent's account in accordance with the Depositary's procedure for such
transfer. Although delivery of Old Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Depositary, the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
or confirmed by the Exchange Agent at its addresses as set forth under the
caption "Exchange Agent" below prior to 5:00 p.m., New York City time, on the
Expiration Date. DELIVERY OF DOCUMENTS TO THE DEPOSITARY IN ACCORDANCE WITH ITS
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
32
The tender by an Eligible Holder of Old Notes will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the Eligible Holders. Instead of delivery by mail, it is recommended that
Eligible Holders use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the Exchange Agent on
or before the Expiration Date. No Letter of Transmittal or Old Notes should be
sent to the Company. Eligible Holders may request their respective brokers,
dealers, commercial banks, trust companies or nominees to effect the tenders
for such holders.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal, or (ii) for
the account of an Eligible Institution. In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member of a signature
guarantee program within the meaning of Rule 17Ad-15 under the Exchange Act (an
"Eligible Institution").
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance and withdrawal of tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's acceptance of which
might, in the judgment of the Company or its counsel, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Old Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such times as the Company in its sole discretion shall determine.
Although the Company intends to request the Exchange Agent to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
In addition, the Company reserves the right in its sole discretion
(subject to limitations contained in the Indenture) (i) to purchase or make
offers for any Old Notes that remain outstanding subsequent to the Expiration
Date and (ii) to the extent permitted by applicable law, to purchase Old Notes
in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
By tendering, each Eligible Holder will represent to the Company that,
among other things, the New Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business by the person receiving such
New Notes, whether or not such person is the holder, and that neither the
Eligible Holder nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such New Notes and that
neither the Eligible Holder nor any such other person is an "affiliate," as
defined in Rule 405 under the Securities Act, of the Company. If the holder is
33
a broker-dealer that will receive New Notes for its own account in exchange for
Old Notes that were acquired as a result of market-making activities or other
trading activities, such holder by tendering will acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes.
GUARANTEED DELIVERY PROCEDURES
Eligible Holders who wish to tender their Old Notes and (i) whose Old
Notes are not immediately available, or (ii) who cannot deliver their Old Notes
and other required documents to the Exchange Agent or cannot complete the
procedure for book-entry transfer prior to the Expiration Date, may effect a
tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Eligible Holder, the certificate
number(s) of such Old Notes (if available) and the principal amount of Old
Notes tendered together with a duly executed Letter of Transmittal (or a
facsimile thereof), stating that the tender is being made thereby and
guaranteeing that, within three business days after the Expiration Date,
the certificate(s) representing the Old Notes to be tendered in proper form
for transfer (or a confirmation of a book entry transfer into the Exchange
Agent's account at the Depositary of Old Notes delivered electronically)
and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such certificate(s) representing all tendered Old Notes in proper
form for transfer (or confirmation of a book-entry transfer into the
Exchange Agent's account at the Depositary of Old Notes delivered
electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three business days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to Eligible Holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date, and prior to acceptance for exchange thereof by the
Company. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Old Notes), (iii) be signed by the Depositor in the
same manner as the original signature on the Letter of Transmittal by which
such Old Notes were tendered (including any required signature guarantees) or
be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the person withdrawing the tender, and (iv) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company in its
sole discretion, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer, and no New Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly re-tendered. Any Old
Notes which have been tendered but which are not accepted for exchange or which
are withdrawn will be returned to the holder thereof without cost to such
holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
re-tendered by following one of the procedures described above under
"Procedures for Tendering" at any time prior to the Expiration Date.
34
CONDITIONS OF THE EXCHANGE OFFER
In addition, and notwithstanding any other term of the Exchange Offer, the
Company will not be required to accept for exchange any Old Notes tendered for
any New Notes and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if any of the following conditions
exist:
(a) Any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority with respect
to the Exchange Offer which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer or have a material adverse effect on the contemplated benefits of the
Exchange Offer to the Company; or
(b) There shall have occurred any change, or any development involving a
prospective change, in the business or financial affairs of the Company,
which in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company; or
(c) There shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer or have a material adverse effect on the contemplated benefits of the
Exchange Offer to the Company; or
(d) There shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on the New
York Stock Exchange (whether or not mandatory), (ii) a declaration of a
banking moratorium or any suspension of payments in respect of banks by
Federal or state authorities in the United States (whether or not
mandatory), (iii) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the
United States, (iv) any limitation (whether or not mandatory) by any
governmental authority on, or other event having a reasonable likelihood of
affecting, the extension of credit by banks or other lending institutions
in the United States, or (v) in the case of any of the foregoing existing
at the time of the commencement of the Exchange Offer, a material
acceleration or worsening thereof.
The foregoing conditions are for the sole benefit of the Company and may
be asserted by the Company regardless of the circumstances giving rise to such
conditions or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. If the Company waives or amends the
foregoing conditions, the Company will, if required by applicable law, extend
the Exchange Offer for a minimum of five business days from the date that the
Company first gives notice, by public announcement or otherwise, of such waiver
or amendment, if the Exchange Offer would otherwise expire within such five
business-day period. Any determination by the Company concerning the events
described above will be final and binding upon all parties.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitation may be
made by telecopy, telephone or in person by officers and regular employees of
the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The Company may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of this Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Old Notes and in handling or
forwarding tenders for exchange. The Company will pay the other expenses to be
incurred in connection with the Exchange Offer, including fees and expenses of
the Trustee, accounting and legal fees and printing costs.
35
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or
if tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Kramer, Levin, Naftalis & Frankel, counsel to the Company, has advised the
Company that the exchange of the Old Notes for the New Notes in the Exchange
Offer should not constitute an exchange for federal income purposes.
Consequently, (i) no gain or loss should be realized by a U.S. Holder upon
receipt of a New Note; (ii) the holding period of the New Note should include
the holding period of the Old Note exchanged therefor and (iii) the adjusted
tax basis of the New Note should be the same as the adjusted tax basis of the
Old Note exchanged therefor immediately before the exchange. Even if the
exchange of an Old Note for a New Note were treated as an exchange, however,
such an exchange should constitute a tax-free recapitalization for federal
income tax purposes. Accordingly, a New Note should have the same issue price
as an Old Note and a U.S. Holder should have the same adjusted basis and
holding period in the New Note as it had in an Old Note immediately before the
exchange. As used herein, the term "U.S. Holder" means a person who is, for
United States federal income tax purposes, (i) a citizen or resident of the
United States; (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political
subdivision thereof; or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Generally, Eligible Holders (other than any holder who is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) who
exchange their Old Notes for New Notes pursuant to the Exchange Offer may offer
such New Notes for resale, resell such New Notes, and otherwise transfer such
New Notes without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided such New Notes are acquired in the
ordinary course of the holders' business, and such holders have no arrangement
with any person to participate in a distribution of such New Notes. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale or register the New
Notes prior to offering or selling such New Notes. Upon request by Eligible
Holders prior to the Exchange Offer, the Company will register or qualify the
New Notes in certain jurisdictions subject to the conditions in the
Registration Rights Agreement. If an Eligible Holder does not exchange such Old
Notes for New Notes pursuant to the Exchange Offer, such Old Notes will
continue to be subject to the restrictions on transfer contained in the legend
thereon and will not have the benefit of any covenant regarding registration
under the Securities Act. In general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. To the extent that Old Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected.
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept the Exchange Offer and tender their Old
Notes. Holders of Old Notes are urged to consult their financial and tax
advisors in making their own decisions on what action to take.
36
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old
Notes, as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company upon the consummation of the Exchange Offer. The
expenses of the Exchange Offer will be amortized by the Company over the term
of the New Notes.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. All correspondence in connection with the Exchange Offer and the Letter
of Transmittal should be addressed to the Exchange Agent, as follows:
By Hand or Overnight Courier: By Mail:
(registered or certified
recommended)
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street 7E
Corporate Trust Services Window New York, New York 10286
Ground Level Attn: Reorganization Section
New York, New York 10286
Attn: Reorganization Section
Facsimile Number (for Eligible Institutions Only and Withdrawal Notices Only):
(212) 571-3080
Confirm Receipt of Notice of Guaranteed Delivery by Telephone:
(212) 815-3687
For Information Call:
(212) 515-3687
Requests for additional copies of this Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
37
CAPITALIZATION
The following table sets forth the capitalization of (i) Fonda as of
January 25, 1998 on an historical and a pro forma basis to give effect to the
Natural Dam Mill Disposition and the application of a portion of the proceeds
therefrom to repay all outstanding borrowings under the Fonda Credit Facility,
and the purchase of the Management Services Agreement from SF Holdings, (ii)
Sweetheart as of December 31, 1997 on an historical basis and (iii) the Company
on a pro forma combined basis to give effect to the Transactions. The following
table should be read in conjunction with the "Unaudited Pro Forma Combined
Condensed Financial Data" and the other financial information appearing
elsewhere in this Prospectus.
JANUARY 25, 1998 DECEMBER 31, 1997
------------------------------ ------------------
FONDA FONDA SWEETHEART PRO FORMA
HISTORICAL PRO FORMA HISTORICAL ADJUSTMENTS COMBINED
------------ --------------- ------------------ -------------------- ----------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents ........... $ 524 $ 8,745(1) $ 28,407(2) $ 37,152
======== =========== =========== ========
Long-term debt, including current
portion:
Credit facilities .................. $ 6,029 -- $ 97,258 $ 97,258
Sweetheart Secured Notes ........... -- -- 190,000 190,000
Sweetheart Subordinated Notes ...... -- -- 110,000 110,000
Fonda Notes ........................ 120,000 $ 120,000 -- 120,000
The Notes .......................... $ 75,038(3) 75,038
Other .............................. 2,680 2,680 9,216 11,896
-------- ----------- ----------- --------
Total long-term debt ............... 128,709 122,680 406,474 75,038 604,192
Exchangeable Preferred Stock ........ -- -- -- 29,050 (4) 29,050
Minority interest in Sweetheart ..... -- -- -- 13,890 (5) 13,890
Redeemable common stock ............. 2,108 2,108 -- 2,108
Stockholders' equity ................ 6,802 13,183(6) 65,056 15,000 (7) 31,633
(65,056) (8)
2,500 (3)
950 (4)
-------------
Total capitalization ................ $137,619 $ 137,971 $ 471,530 $ 71,372 $680,873
======== =========== =========== ============= ========
- ----------
(1) Reflects the excess cash from the Natural Dam Mill Disposition reduced by
the cash paid to SF Holdings to purchase the Management Services
Agreement. The proceeds from the Management Services Agreement were used
by SF Holdings to satisfy the Demand Note.
(2) Includes $23.7 million cash in escrow, which is restricted to qualified
capital expenditures.
(3) Reflects the proceeds of the issuance of the Units, after giving effect
to the $2.5 million fair value of the Shares.
(4) Reflects the Exchangeable Preferred Stock, after giving effect to the
$950 fair value of the Class C Common Stock issued by the Company to the
Sweetheart Stockholders as partial consideration for the Sweetheart
Investment.
(5) Reflects the common equity investment in Sweetheart being retained by the
Sweetheart Stockholders.
(6) The Natural Dam Mill Disposition is expected to result in a net gain of
$6.4 million, which is reflected in stockholders' equity.
(7) Reflects a cash contribution of equity from an affiliate of Dennis Mehiel
to the Company. See "Use of Proceeds."
(8) Reflects elimination of the historical Sweetheart stockholders' equity.
38
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
of the Company set forth the unaudited pro forma combined condensed balance
sheet of the Company as of January 25, 1998 (the "Pro Forma Balance Sheet") and
the unaudited pro forma combined condensed statements of income of the Company
for the fiscal year ended July 27, 1997 and the six and twelve months ended
January 25, 1998 (the "Pro Forma Statements of Income" and, together with the
Pro Forma Balance Sheet, the "Company Pro Forma Financial Statements"). The Pro
Forma Balance Sheet has been derived from Fonda's historical balance sheet as
of January 25, 1998 and Sweetheart's historical balance sheet as of December
31, 1997, and gives effect to (i) the Natural Dam Mill Disposition, (ii) the
Fonda Stockholders Exchange, (iii) the issuance of the Units, (iv) the
Sweetheart Investment and (v) the Sweetheart Reduction, as if each such
transaction had occurred on January 25, 1998. The Pro Forma Statements of
Income have been derived from Fonda's pro forma condensed statements of income
for the fiscal year ended July 27, 1997 and the six and twelve months ended
January 25, 1998 (collectively, the "Fonda Pro Forma Statements of Income"),
included elsewhere herein, and Sweetheart's pro forma condensed statements of
operations for the fiscal year ended September 30, 1997 and the six and twelve
months ended December 31, 1997 (collectively, the "Sweetheart Pro Forma
Statements of Operations"), included elsewhere herein, and give additional
effect to (i) the Fonda Stockholders Exchange, (ii) the issuance of the Units
and (iii) the Sweetheart Investment, as if each such transaction had occurred
on the first day of the Company's fiscal year ended July 27, 1997.
The Fonda Pro Forma Statements of Income have been derived from Fonda's
historical statements of income for the fiscal year ended July 27, 1997 and the
six and twelve months ended January 25, 1998, and give effect to (i) the 1997
Fonda Acquisitions, (ii) the issuance of the Fonda Notes, (iii) the Leisureway
Acquisition and (iv) the Natural Dam Mill Disposition, as if each such
transaction had occurred on the first day of Fonda's fiscal year ended July 27,
1997. The Sweetheart Pro Forma Statements of Operations have been derived from
Sweetheart's historical statements of operations for the fiscal year ended
September 30, 1997 and the six and twelve months ended December 31, 1997, and
give effect to (i) the sale by Sweetheart of its bakery operations in November
1997 (the "Sweetheart Bakery Disposition") and (ii) the closing of Sweetheart's
Riverside facility and the cessation of paper operations at Sweetheart's
Springfield facility during Fiscal 1997 (the "Sweetheart Closures"), as if each
such transaction had occurred on the first day of Sweetheart's fiscal year
ended September 30, 1997. The Sweetheart Pro Forma Statement of Operations for
the six months ended December 31, 1997 combines the first quarter of Fiscal
1998 and the fourth quarter of Fiscal 1997.
The 1997 Fonda Acquisitions, the issuance of the Fonda Notes, the
Leisureway Acquisition, the Natural Dam Mill Disposition, the Sweetheart Bakery
Disposition, the Sweetheart Closures, the Fonda Stockholders Exchange, the
issuance of the Units, the Sweetheart Investment and the Sweetheart Reduction
are collectively referred to herein as the "Transactions."
The 1997 Fonda Acquisitions, the Leisureway Acquisition and the Sweetheart
Investment have been accounted for under the purchase method of accounting,
pursuant to which the total purchase price of such acquisitions is allocated to
the assets and liabilities acquired based upon their relative fair values as of
the closing date, with the excess of the purchase price over the fair value of
the assets acquired, net of the liabilities assumed, allocated to goodwill. The
Company believes that the preliminary allocations set forth herein are
reasonable; however, in some cases the final allocations will be based upon
valuations and other studies that are not yet complete. As a result, the
allocations set forth herein are subject to revision when additional
information becomes available, and such revised allocations could differ
substantially from those set forth herein. In addition, the Pro Forma Financial
Statements exclude the potential effect of rationalization of facilities and
other cost savings initiatives that the Company intends to undertake following
the consummation of the Sweetheart Investment.
39
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS)
FONDA SWEETHEART
JANUARY 25, NATURAL DAM DECEMBER 31,
1998 MILL PRO FORMA 1997 PRO FORMA
HISTORICAL DISPOSITION (A) FONDA HISTORICAL ADJUSTMENTS COMBINED
------------- ----------------- ----------- ------------- -------------------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............ $ 524 $ 15,221 $ 15,745 $ 4,687 $ (7,000)(c) $ 13,432
Cash in escrow ....................... 23,720 23,720
Accounts receivable .................. 31,725 (1,845) 29,880 72,417 102,297
Inventories .......................... 39,434 (1,265) 38,169 140,941 3,883 (b) 182,993
Other current assets ................. 11,139 11,139 22,003 33,142
-------- --------- -------- -------- ----------- --------
TOTAL CURRENT ASSETS ............... 82,822 12,111 94,933 263,768 (3,117) 355,584
Property, plant and equipment, net 61,354 (12,799) 48,555 372,718 12,000 (b) 433,273
Goodwill, net ......................... 22,459 22,459 -- 39,842 (b) 62,301
Other assets, net ..................... 14,202 3,750 17,952 36,565 9,226 (b) 68,281
4,538 (c)
-------- --------- -------- -------- ----------- --------
TOTAL ASSETS .......................... $180,837 $ 3,062 $183,899 $673,051 $ 62,489 $919,439
======== ========= ======== ======== =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................... $ 10,389 $ (1,910) $ 8,479 $ 50,870 $ 59,349
Accrued expenses ..................... 24,038 4,620 28,658 81,589 $ 7,000(b) 117,247
Current portion of long-term
debt ............................... 537 537 5,516 6,053
-------- --------- -------- -------- ----------- --------
TOTAL CURRENT LIABILITIES .......... 34,964 2,710 37,674 137,975 7,000 182,649
Credit facilities ..................... 6,029 (6,029) 97,258 97,258
Other long-term debt .................. 122,143 122,143 303,700 75,038 (c) 500,881
Other long-term liabilities ........... 8,791 8,791 69,062 (15,883) (b) 61,970
-------- --------- -------- -------- ----------- --------
TOTAL LIABILITIES .................. 171,927 (3,319) 168,608 607,995 66,155 842,758
Exchangeable Preferred Stock .......... 29,050 (c) 29,050
Minority interest in Sweetheart ....... 13,890 (b) 13,890
Redeemable common stock ............... 2,108 2,108 2,108
Stockholders' equity .................. 6,802 6,381 13,183 65,056 (65,056) (b) 31,633
18,450 (c)
-------- --------- -------- -------- ----------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .................. $180,837 $ 3,062 $183,899 $673,051 $ 62,489 $919,439
======== ========= ======== ======== =========== ========
See Notes to Unaudited Pro Forma Combined Condensed Balance Sheet.
40
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(a) Reflects the sale of the business and certain assets of the Natural Dam
mill as follows:
Net proceeds ...................................................... $ 25,000
--------
Net book value of assets disposed of:
Accounts receivable ............................................. 1,845
Inventories ..................................................... 1,265
Property, plant and equipment ................................... 12,799
Accounts payable ................................................ (1,910)
--------
13,999
--------
Pre-tax gain on disposal .......................................... 11,001
Income taxes (based on 42% statutory tax rate) .................. 4,620
--------
Net gain on disposition ........................................... $ 6,381
========
Cash consideration applied to:
Eliminate outstanding borrowings under the Fonda Credit Facility $ 6,029
Cash balance .................................................... 15,221
--------
Total cash consideration .......................................... 21,250
Non-cash consideration--note receivable ........................... 3,750
--------
$ 25,000
========
(b) The total purchase price for the Sweetheart Investment was be $125.0
million. The adjustments reflect the preliminary allocation of the
purchase price in accordance with purchase accounting, as follows:
Purchase price ........................................................ $ 125,000
---------
Fair value of net assets acquired:
Net book value of assets as of December 31, 1997 .................... 65,056
Adjustments to fair value of assets acquired and liabilities assumed:
Inventories:
Write-off existing LIFO reserve .................................... $ 125
Write-up finished goods inventory .................................. 3,758 3,883
------
Property, plant and equipment ....................................... 12,000
Other assets:
Eliminate intangible pension asset ................................. (774)
Management Services Agreement ...................................... 7,000
Fair value of intangible assets .................................... 3,000 9,226
------
Accrued expenses -- Sweetheart Reduction expenses ................... (7,000)
Other long-term liabilities--eliminate unrecognized prior service
costs and unrecognized net gains from pension and
post-retirement benefit plans ...................................... 15,883
Minority interest in Sweetheart ..................................... (13,890)
---------
Fair value of net assets acquired .................................. 85,158
---------
Goodwill--excess of purchase price over fair value of net assets
acquired ............................................................. $ 39,842
=========
41
(c) Reflects the financing, including related financing costs, of the
Sweetheart Investment, as follows:
Cash purchase price of Management Services Agreement ................... $ 7,000
Long-term debt--the Notes, net of fair value of the Shares ............. 75,038
Fair value of the Shares issued in connection with the Notes ........... 2,500
Deferred financing costs ............................................... (4,538)
Exchangeable Preferred Stock, net of fair value of the Shares .......... 29,050
Fair value of the Class C Common Stock issued in connection with the
Exchangeable Preferred Stock ......................................... 950
Capital contribution ................................................... 15,000
--------
$125,000
========
42
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
YEAR ENDED JULY 27, 1997
-----------------------------------------------------------
PRO FORMA
-----------------------
PRO FORMA
FONDA SWEETHEART ADJUSTMENTS COMBINED
----------- ------------ ------------------- -------------
STATEMENT OF INCOME DATA:
Net sales ............................................ $262,850 $ 854,365 $1,117,215
Cost of goods sold ................................... 204,904 786,603 $ 1,250(a) 992,757
-------- --------- ---------- ----------
Gross profit ......................................... 57,946 67,762 (1,250) 124,458
Selling, general and administrative expenses ......... 39,390 65,628 696 (b) 104,700
(1,014) (c)
Loss on asset disposal and impairment ................ -- 24,550 24,550
Other income, net .................................... (1,608) (73) (1,681)
-------- --------- ---------- ----------
Income from operations ............................... 20,164 (22,343) (932) (3,111)
Interest expense, net ................................ 12,084 40,265 10,581 (d) 62,930
-------- --------- ---------- ----------
Income (loss) before taxes and minority interest ..... 8,080 (62,608) (11,513) (66,041)
Income tax (benefit) expense ......................... 3,393 (25,043) (4,835) (e) (26,485)
Minority interest in loss of subsidiary .............. -- -- (3,757) (f) (3,757)
-------- --------- ---------- ----------
Income (loss) before cumulative effect of an
accounting change and extraordinary loss ............ 4,687 (37,565) (2,921) (35,799)
Dividends on preferred stock ......................... -- -- 4,220 (g) 4,220
-------- --------- ---------- ----------
Income (loss) available to common stockholders
before cumulative effect of an accounting change
and extraordinary loss .............................. $ 4,687 $ (37,565) $ (7,141) $ (40,019)
======== ========= ========== ==========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (h) ............................ $ 11,520 $ 38,241 $ 49,761
Capital expenditures ................................. 1,762 46,189 47,951
Depreciation and amortization (i) .................... 5,406 43,176 $ 1,446 50,028
Ratio of earnings to fixed charges (j) ............... 1.6x N/A N/A
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (k) ........................................... $ 23,962 $ 46,930 $ 514 $ 71,406
Ratio of EBITDA to cash interest expense (k)(h) ...... 2.1x 1.2x 1.4x
Ratio of EBITDA to total interest expense (k) ........ 1.1x
See Notes to Unaudited Pro Forma Combined Condensed Statements of Income.
43
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JANUARY 25, 1998
-------------------------------------------------------------------
PRO FORMA
----------------------------
PRO FORMA
FONDA SWEETHEART ADJUSTMENTS COMBINED
------------- ------------ --------------------- ------------
STATEMENT OF INCOME DATA:
Net sales ................................................ $ 132,073 $ 425,743 $ 557,816
Cost of goods sold ....................................... 103,623 390,341 $ 550(a) 494,514
--------- --------- --------- ---------
Gross profit ............................................. 28,450 35,402 (550) 63,302
Selling, general and administrative expenses ............. 20,004 36,186 (2) (b) 55,957
(231) (c)
Loss on asset disposal and impairment .................... 24,550 24,550
Other income, net ........................................ (3,514) (3,514)
--------- --------- --------- ---------
Income from operations ................................... 8,446 (21,820) (317) (13,691)
Interest expense, net .................................... 6,003 21,414 5,291 (d) 32,708
--------- --------- ----------- ---------
Income (loss) before taxes and minority interest ......... 2,443 (43,234) (5,608) (46,399)
Income tax (benefit) expense ............................. 1,027 (17,288) (2,355) (e) (18,616)
Minority interest in loss of subsidiary .................. -- -- (2,595) (f) (2,595)
--------- --------- ----------- ---------
Income (loss) before cumulative effect of an
accounting change and extraordinary loss ................ 1,416 (25,946) (658) (25,188)
Dividends on preferred stock ............................. -- -- 2,110 (g) 2,110
--------- --------- ----------- ---------
Income (loss) available to common stockholders
before cumulative effect of an accounting change
and extraordinary loss .................................. $ 1,416 $ (25,946) $ (2,768) $ (27,298)
========= ========= =========== =========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (h) ................................ $ 5,731 $ 20,565 $ 26,296
Capital expenditures ..................................... 2,716 17,158 19,874
Depreciation and amortization (i) ........................ 2,747 21,779 $ 723 25,249
Ratio of earnings to fixed charges (j) ................... 1.3x N/A N/A
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (k) ............................................... $ 11,193 $ 21,720 $ 406 $ 33,319
Ratio of EBITDA to cash interest expense (k)(h) .......... 2.0x 1.1x 1.3x
Ratio of EBITDA to total interest expense (k) ............ 1.0x
See Notes to Unaudited Pro Forma Combined Condensed Statements of Income.
44
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED JANUARY 25, 1998
-----------------------------------------------------------
PRO FORMA
-----------------------
PRO FORMA
FONDA SWEETHEART ADJUSTMENTS COMBINED
----------- ------------ ------------------- -------------
STATEMENT OF INCOME DATA:
Net sales ............................................ $263,195 $ 855,289 $1,118,484
Cost of goods sold ................................... 206,477 775,910 $ 1,200(a) 983,587
-------- --------- ---------- ----------
Gross profit ......................................... 56,718 79,379 (1,200) 134,897
Selling, general and administrative expenses ......... 38,678 68,759 481 (b) 106,926
(992) (c)
Loss on asset disposal and impairment ................ -- 24,550 24,550
Other income, net .................................... (1,608) (3,436) (5,044)
-------- --------- ---------- ----------
Income from operations ............................... 19,648 (10,494) (689) 8,465
Interest expense, net ................................ 12,062 41,494 10,581 (d) 64,137
-------- --------- ---------- ----------
Income (loss) before taxes and minority interest ..... 7,586 (51,988) (11,270) (55,672)
Income tax (benefit) expense ......................... 3,186 (20,794) (4,733) (e) (22,341)
Minority interest in loss of subsidiary .............. -- -- (3,119) (f) (3,119)
-------- --------- ---------- ----------
Income (loss) before cumulative effect of an
accounting change and extraordinary loss ............ 4,400 (31,194) (3,418) (30,212)
Dividends on preferred stock ......................... -- -- 4,220 (g) 4,220
-------- --------- ---------- ----------
Income (loss) available to common stockholders
before cumulative effect of an accounting change
and extraordinary loss .............................. $ 4,400 $ (31,194) $ (7,638) $ (34,432)
======== ========= ========== ==========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (h) ............................ $ 11,498 $ 39,672 $ 51,170
Capital expenditures ................................. 3,538 43,956 47,494
Depreciation and amortization (i) .................... 5,395 43,469 $ 1,446 50,310
Ratio of earnings to fixed charges (j) ............... 1.5x N/A N/A
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (k) ........................................... $ 23,435 $ 55,558 $ 757 $ 79,750
Ratio of EBITDA to cash interest expense (k)(h) ...... 2.0x 1.4x 1.6x
Ratio of EBITDA to total interest expense (k) ........ 1.2x
See Notes to Unaudited Pro Forma Combined Condensed Statements of Income.
45
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(a) Reflects an increase in cost of goods sold resulting from the Sweetheart
Investment, as follows:
SIX MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 JANUARY 25, 1998 JANUARY 25, 1998
--------------- ------------------ -----------------
Increase in depreciation expense resulting from the
preliminary purchase price allocation to
long-term assets acquired ....................... $ 250 $125 $ 250
Increase in pension and post-retirement benefits
resulting from elimination of unrecognized gains 1,000 425 950
------ ---- ------
$1,250 $550 $1,200
====== ==== ======
(b) Reflects adjustments to general and administrative expenses resulting from
the Sweetheart Investment, as follows:
SIX MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 JANUARY 25, 1998 JANUARY 25, 1998
--------------- ------------------ -----------------
Goodwill amortization over forty years .......... $ 996 $ 498 $ 996
Other intangible assets amortization over fifteen
years ......................................... 200 100 200
Reduction in officer compensation ............... (500) (600) (715)
------ ------ ------
$ 696 $ (2) $ 481
====== ====== ======
(c) Reflects the elimination of a portion of the fees paid by Sweetheart to AIP
pursuant to the Management Services Agreement that, upon consummation of
the Sweetheart Investment, were paid to Fonda. See "The Sweetheart
Investment."
(d) Reflects additional interest expense of the Company resulting from the
issuance of the Units, as follows:
SIX MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 JANUARY 25, 1998 JANUARY 25, 1998
--------------- ------------------ -----------------
Amortization of original issue discount on the
Notes at 12.75% ................................ $ 9,881 $4,941 $ 9,881
Amortization of deferred financing costs over ten
years .......................................... 450 225 450
Amortization of additional discount resulting from
the fair value of the Shares ................... 250 125 250
------- ------ -------
$10,581 $5,291 $10,581
======= ====== =======
(e) For pro forma purposes, the income tax provision was calculated at 42%
based on enacted statutory rates applied to pro forma pre-tax income
(loss) and the provisions of SFAS No. 109.
(f) Reflects the minority interest allocable to the common equity investment in
Sweetheart retained by the Sweetheart Stockholders.
(g) Reflects pay-in-kind dividends on the Exchangeable Preferred Stock issued
to the Sweetheart Stockholders and amortization of discount resulting from
an allocation of fair value to the Class C Common Stock.
SIX MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 JANUARY 25, 1998 JANUARY 25, 1998
--------------- ------------------ -----------------
Dividends at 13.75% ...................... $4,125 $2,063 $4,125
Amortization of discount of Class C Common
Stock .................................. 95 47 95
------ ------ ------
$4,220 $2,110 $4,220
====== ====== ======
46
(h) Cash interest expense consists of interest expense, excluding interest on
the Notes and amortization of deferred financing costs of $4,131, $1,791
and $3,877 for Fiscal 1997 and the six and twelve months ended January 25,
1998, respectively.
(i) Depreciation and amortization excludes amortization of deferred financing
costs, which are included in interest expense.
(j) For purposes of calculating the ratio of earnings to fixed charges and the
earnings to fixed charges coverage deficiency, earnings consist of
earnings before provision for income taxes plus fixed charges less
capitalized interest. Fixed charges consist of interest expense plus that
portion of rental payments on operating leases deemed representative of
the interest factor and capitalized interest. Dividends on the
Exchangeable Preferred Stock are not included. Earnings were not
sufficient to cover fixed charges for Sweetheart and for the combined
Company by $63,193 and $66,789, respectively, for Fiscal 1997, by $43,316,
and $46,673 respectively, for six months ended January 25, 1998, and by
$52,335 and $56,374, respectively, for the twelve months ended January 25,
1998.
(k) EBITDA represents income from operations before interest expense, provision
for income taxes, Fonda other income, depreciation and amortization,
Sweetheart loss on asset disposal and impairment and gain on the
Sweetheart Bakery Disposition of $3,459 in the three and twelve months
ended December 31, 1997. EBITDA is generally accepted as providing
information regarding a company's ability to service debt. EBITDA should
not be considered in isolation or as a substitute for net income, cash
flows from operations, or other income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity.
EBITDA does not reflect the elimination of $2.8 million and $1.4 million of
fixed costs in Fiscal 1997 and the twelve months ended January 25, 1998,
respectively, that would not have been incurred had the Three Rivers and
Long Beach facilities been closed at the beginning of the year ended July
27, 1997.
47
SELECTED HISTORICAL FINANCIAL DATA OF FONDA (1)
The following selected historical financial data have been derived from
the financial statements of Fonda. The data as of July 28, 1996 and July 27,
1997 and for the years ended July 30, 1995, July 28, 1996 and July 27, 1997 are
derived from the financial statements of Fonda audited by Deloitte & Touche
LLP, independent auditors, whose report with respect thereto is included
elsewhere in this Prospectus. The data as of January 25, 1998 and for the six
months ended January 26, 1997 and January 25, 1998 are derived from Fonda's
unaudited financial statements included elsewhere in this Prospectus. In the
opinion of management, the unaudited financial statements include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. The results of
operations for the six months ended January 25, 1998 are not necessarily
indicative of the results that may be expected for any other interim period or
the entire year. The following data should be read in conjunction with Fonda's
financial statements and related notes, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the other financial
information included elsewhere herein.
SIX MONTHS
FISCAL YEAR ENDED JULY (2) ENDED JANUARY (2)
---------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Net sales ............................ $ 61,079 $ 61,839 $ 97,074 $ 204,903 $ 252,513 $124,379 $ 136,674
Cost of goods sold ................... 49,776 51,643 76,252 161,304 196,333 96,987 108,077
-------- -------- --------- --------- --------- -------- ---------
Gross profit ......................... 11,303 10,196 20,822 43,599 56,180 27,392 28,597
Selling, general and administrative
expenses ............................ 8,686 8,438 14,112 29,735 37,168 19,520 19,814
Other income, net .................... -- -- -- -- (1,608) -- --
-------- -------- --------- --------- --------- -------- ---------
Income from operations ............... 2,617 1,758 6,710 13,864 20,620 7,872 8,783
Interest expense, net ................ 1,201 1,268 2,943 7,934 9,017 4,540 6,003
-------- -------- --------- --------- --------- -------- ---------
Income before taxes and
extraordinary loss .................. 1,416 490 3,767 5,930 11,603 3,332 2,780
Income taxes ......................... 478 239 1,585 2,500 4,872 1,400 1,168
-------- -------- --------- --------- --------- -------- ---------
Income before extraordinary loss ..... 938 251 2,182 3,430 6,731 1,932 1,612
Extraordinary loss, net (3) .......... -- -- -- -- 3,495 -- --
-------- -------- --------- --------- --------- -------- ---------
Net income ........................... $ 938 $ 251 $ 2,182 $ 3,430 $ 3,236 $ 1,932 $ 1,612
======== ======== ========= ========= ========= ======== =========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used in)
operating activities (4) ............ $ 2,797 $ 140 $ (4,774) $ 17,673 $ 8,273 $ 4,783 $ 9,324
Net cash (used in) investment
activities .......................... (1,027) (1,272) (29,593) (46,532) (36,006) (2,074) (10,641)
Net cash provided by (used in)
financing activities ................ (1,742) 992 34,262 30,206 32,174 (3,849) (4,067)
Capital expenditures (5) ............. 1,027 1,272 1,608 1,314 10,363 2,074 4,408
Depreciation and amortization ........ 1,248 1,246 1,669 3,450 4,440 2,859 2,694
Ratio of earnings to fixed
charges (6) ......................... 1.9x 1.3x 2.1x 1.7x 2.1x 1.7x 1.4x
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (7) ........................... $ 3,865 $ 3,004 $ 8,379 $ 17,314 $ 23,942 $ 10,731 $ 11,670
Ratio of EBITDA to cash interest
expense (7)(8) ...................... 3.2x 2.4x 3.5x 2.6x 2.9x 2.7x 2.0x
(Footnotes on next page)
48
AS OF JULY
--------------------------------------------------- AS OF
1993 1994 1995 1996 1997 JANUARY 25, 1998
--------- --------- --------- ---------- ---------- -----------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash .................................. $ 365 $ 225 $ 120 $ 1,467 $ 5,908 $ 524
Working capital ....................... 1,738 2,731 28,079 38,931 58,003 47,858
Property, plant and equipment, net 7,428 7,454 26,933 46,350 59,261 61,354
Total assets .......................... 24,676 24,668 79,725 136,168 179,604 180,837
Total indebtedness (9) ................ 11,589 12,581 48,165 87,763 122,987 128,709
Redeemable common stock (10) .......... -- -- 2,115 2,179 2,076 2,108
Stockholders' equity .................. 5,726 5,977 7,205 11,873 15,010 6,802
- ----------
(1) The selected historical statement of income and other financial data
include the results of operations of Fonda and each of the Fonda
Acquisitions since their respective dates of acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Introduction," "Business" and Note 3 of the Notes to the
Financial Statements of Fonda.
(2) All fiscal years are 52 weeks, except for Fiscal 1994 which is 53 weeks.
Six month periods are 26 weeks.
(3) Fonda incurred a $3.5 million extraordinary loss (net of a $2.5 million
income tax benefit) in connection with the early retirement of debt
consisting of the write-off of unamortized debt issuance costs,
elimination of unamortized discount and prepayment penalties.
(4) Material differences between EBITDA and net cash provided by or used in
operating activities may occur because of the inherent differences in each
such calculation including (a) the change in operating assets and
liabilities between the beginning and end of each period, as well as
certain non-cash items which are considered when presenting net cash
provided by or used in operating activities but are not used when
calculating EBITDA and (b) interest expense and provision for income taxes
which are included when presenting net cash provided by or used in
operating activities but are not included in the calculation of EBITDA.
(5) Excludes the costs of the Fonda Acquisitions.
(6) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before provision for income taxes plus fixed
charges. Fixed charges consist of interest expense (including the
amortization of debt issuance costs) plus that portion of rental payments
on operating leases deemed representative of the interest factor.
(7) EBITDA represents income from operations before interest expense,
provision for income taxes, other income and depreciation and
amortization. EBITDA is generally accepted as providing information
regarding a company's ability to service debt. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows from
operations, or other income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. In addition, although the EBITDA measure of
performance is not recognized under generally accepted accounting
principles, it is widely used by companies as a measure of operating
performance because it assists in comparing performance on a relatively
consistent basis across companies without regard to depreciation and
amortization, which can vary significantly depending on accounting methods
(particularly where acquisitions are invloved) or non-operating factors
such as historical cost bases. Because EBITDA is not calculated
identically by all companies, the presentation herein may not be
comparable to other similarly titled measures of other companies.
(8) Cash interest expense excludes (i) the amortization of debt issuance costs
of $560, $1,021, $514, $190 and $272 for Fiscal 1995, 1996 and 1997, the
six months ended January 1997 and 1998, respectively, (ii) pay-in-kind
interest expense of $165, $684 and $350 for Fiscal 1996 and 1997 and the
six months ended January 1997, respectively and (iii) interest income of
$490 and $193 for Fiscal 1997 and the six months ended January 1998,
respectively.
(9) Total indebtedness includes short-term and long-term borrowings and
current maturities of long-term debt.
(10) See Note 10 of the Notes to the Financial Statements of Fonda.
49
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SWEETHEART
The following selected historical consolidated financial data have been
derived from the financial statements of Sweetheart. The data as of September
30, 1996 and 1997 and for the years ended September 30, 1995, 1996 and 1997 are
derived from the consolidated financial statements of Sweetheart audited by
Arthur Andersen LLP, independent auditors, whose report with respect thereto is
included elsewhere in this Prospectus. The data as of September 30, 1993 and
1994 and August 29, 1993 and for the year ended September 30, 1994, the period
from August 30, 1993 to September 30, 1993 and the period from January 1, 1993
to August 29, 1993 are derived from the audited consolidated financial
statements of Sweetheart and are not included herein. The data as of December
31, 1997 and for the three months ended December 31, 1996 and 1997 are derived
from Sweetheart's unaudited consolidated financial statements included
elsewhere in this Prospectus. In the opinion of management, the unaudited
consolidated financial statements include all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The results of operations for the three months
ended December 31, 1997 are not necessarily indicative of the results that may
be expected for any other interim period or the entire year. The following data
should be read in conjunction with Sweetheart's financial statements and
related notes, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the other financial information included elsewhere
herein.
PERIOD FROM PERIOD FROM
JANUARY 1 TO AUGUST 30 TO FISCAL YEAR ENDED SEPTEMBER 30,
AUGUST 29, SEPTEMBER 30, -------------------------------------------------
1993 1993 1994 1995 1996 1997
--------------- -------------- ----------- ----------- ----------- -------------
(PREDECESSOR) (SUCCESSOR)
--------------- ----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net Sales ........................... $ 591,258 $81,571 $898,528 $986,618 $959,818 $ 886,017
Cost of sales ....................... 460,324 64,011 683,429 779,497 748,055 722,539
--------- ------- -------- -------- -------- ---------
Gross income ........................ 130,934 17,560 215,099 207,121 211,763 163,478
Transportation ...................... 62,291 7,952 94,734 95,096 98,664 98,482
Selling, general and
administrative ..................... 45,494 5,787 67,712 66,089 61,788 66,792
Loss on asset disposal and
impairment ......................... --- --- --- --- --- 24,550
Restructuring charges ............... -- -- -- -- -- 9,680
--------- ------- -------- -------- -------- ---------
Operating income (loss) ............. 23,149 3,821 52,653 45,936 51,311 (36,026)
Interest expense .................... 43,981 3,327 37,460 38,655 38,832 41,812
Other income (expense) .............. 82 (161) 623 2,442 (2,956) 1,620
--------- ------- -------- -------- -------- ---------
Income (loss) before income
taxes, cumulative effect of
an accounting change and
extraordinary loss ................. (20,750) 333 15,816 9,723 9,523 (76,218)
Income tax (expense) benefit ........ 6,641 (161) (6,462) (3,903) (3,809) 30,487
--------- ------- -------- -------- -------- ---------
Income (loss) before
cumulative effect of an
accounting change and
extraordinary loss ................. (14,109) 172 9,354 5,820 5,714 (45,731)
Cumulative effect of a change
in accounting principle, net . --- --- --- --- --- ---
Extraordinary loss, net ............. -- -- -- -- -- (940)
--------- ------- -------- -------- -------- ---------
Net income (loss) ................... (14,109) 172 9,354 5,820 5,714 (46,671)
Accrued dividends on Class B
Common Stock ....................... 4,200 -- -- -- -- --
--------- ------- -------- -------- -------- ---------
Net income (loss) applicable
to common shareholders ............. $ (18,309) $ 172 $ 9,354 $ 5,820 $ 5,714 $ (46,671)
========= ======= ======== ======== ======== =========
THREE MONTHS
ENDED DECEMBER 31,
-------------------------
1996 1997
------------- -----------
(SUCCESSOR)
-------------------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net Sales ........................... $ 202,102 $ 201,952
Cost of sales ....................... 176,859 164,341
--------- ---------
Gross income ........................ 25,243 37,611
Transportation ...................... 22,462 23,665
Selling, general and
administrative ..................... 16,216 19,102
Loss on asset disposal and
impairment ......................... -- --
Restructuring charges ............... -- --
--------- ---------
Operating income (loss) ............. (13,435) (5,156)
Interest expense .................... 9,952 11,126
Other income (expense) .............. 268 3,576
--------- ---------
Income (loss) before income
taxes, cumulative effect of
an accounting change and
extraordinary loss ................. (23,119) (12,706)
Income tax (expense) benefit ........ 9,247 5,081
--------- ---------
Income (loss) before
cumulative effect of an
accounting change and
extraordinary loss ................. (13,872) (7,625)
Cumulative effect of a change
in accounting principle, net . -- (1,511)
Extraordinary loss, net ............. -- --
--------- ---------
Net income (loss) ................... (13,872) (9,136)
Accrued dividends on Class B
Common Stock ....................... -- --
--------- ---------
Net income (loss) applicable
to common shareholders ............. $ (13,872) $ (9,136)
========= =========
50
PERIOD FROM PERIOD FROM
JANUARY 1 TO AUGUST 30 TO FISCAL YEAR ENDED SEPTEMBER 30,
AUGUST 29, SEPTEMBER 30, ---------------------------------------------------
1993 1993 1994 1995 1996 1997
--------------- -------------- ------------ ------------ ------------ ------------
(PREDECESSOR) (SUCCESSOR)
--------------- ------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used
in) operating activities(1) ..... $ 23,735 $ 5,901 $ 41,532 $ 50,899 $ 43,508 $ (3,242)
Net cash (used in) investing
activities ...................... (14,154) (1,942) (32,581) (51,514) (50,236) (29,914)
Net cash provided by
financing activities ............ (9,625) (3,982) 3,240 (3,615) 3,098 31,435
Capital Expenditures ............. 14,557 1,956 39,428 51,625 50,236 47,757
Depreciation and
amortization .................... 28,507 2,050 25,783 34,207 39,813 44,152
Ratio of earnings to fixed
charges (2) ..................... N/A 1.1x 1.4x 1.2x 1.2x N/A
OTHER NON-GAAP FINANCIAL
DATA:
EBITDA (3) ....................... $ 51,738 $ 5,710 $ 79,059 $ 82,585 $ 88,168 $ 43,976
Ratio of EBITDA to cash
interest expense (3)(4) ......... 3.7x 1.9x 2.3x 2.4x 2.5x 1.1x
BALANCE SHEET DATA
(AT END OF PERIOD): .............
Cash and cash equivalents ........ $ 63 $ 40 $ 12,231 $ 8,001 $ 4,371 $ 2,650
Working capital .................. 112,817 146,821 163,391 153,951 162,379 166,768
Property, plant and
equipment, net .................. 450,362 393,918 400,176 417,563 427,833 382,491
Total assets ..................... 753,531 692,772 728,442 741,906 762,610 719,530
Total indebtedness (5) ........... 621,190 354,132 371,257 371,690 387,114 431,868
Total shareholders' equity
(deficit) ....................... (121,883) 100,548 109,955 115,805 121,415 74,611
THREE MONTHS
ENDED DECEMBER 31,
------------------------
1996 1997
------------ -----------
(SUCCESSOR)
------------------------
(DOLLARS IN THOUSANDS)
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used
in) operating activities(1) ..... $ (2,838) $ 738
Net cash (used in) investing
activities ...................... (9,523) 8,633
Net cash provided by
financing activities ............ 14,333 (7,334)
Capital Expenditures ............. 9,523 7,134
Depreciation and
amortization .................... 10,605 10,784
Ratio of earnings to fixed
charges (2) ..................... N/A N/A
OTHER NON-GAAP FINANCIAL
DATA:
EBITDA (3) ....................... $ (2,562) $ 5,745
Ratio of EBITDA to cash
interest expense (3)(4) ......... N/A 0.5x
BALANCE SHEET DATA
(AT END OF PERIOD): .............
Cash and cash equivalents ........ $ 6,343 $ 4,687
Working capital .................. 157,740 125,793
Property, plant and
equipment, net .................. 426,553 372,718
Total assets ..................... 792,219 673,051
Total indebtedness (5) ........... 407,686 406,474
Total shareholders' equity
(deficit) ....................... 107,462 65,056
- ----------
(1) Material differences between EBITDA and net cash provided by or used in
operating activities may occur because of the inherent differences in
each such calculation including (a) the change in operating assets and
liabilities between the beginning and end of each period, as well as
certain non-cash items which are considered when presenting net cash
provided by or used in operating activities but are not used when
calculating EBITDA and (b) interest expense and provision for income
taxes which are included when presenting net cash provided by or used in
operating activities but are not included in the calculation of EBITDA.
(2) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before provision for income taxes plus fixed
charges. Fixed charges consist of interest expense (including the
amortization of debt issuance costs) plus that portion of rental payments
on operating leases deemed representative of the interest factor.
Earnings were not sufficient to cover fixed charges in the eight months
ended August 1993, Fiscal 1997 and the three months ended December 1996
and 1997 periods in the amount of $20,750, $76,803, $23,357 and $12,706,
respectively.
(3) EBITDA represents income from operations before interest expense,
provision for income taxes, depreciation and amortization, loss on asset
disposal and impairment, restructuring expense and gain on the Sweetheart
Bakery Disposition incurred in the three month December 1997 period in
the amount of $3,459. EBITDA is generally accepted as providing
information regarding a company's ability to service debt. EBITDA should
not be considered in isolation or as a substitute for net income, cash
flows from operations, or other income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity. In addition, although the
EBITDA measure of performance is not recognized under generally accepted
accounting principles, it is widely used by companies as a measure of
operating performance because it assists in comparing performance on a
relatively consistent basis across companies without regard to
depreciation and amortization, which can vary significantly depending on
accounting methods (particularly where acquisitions are invloved) or
non-operating factors such as historical cost bases. Because EBITDA is
not calculated identically by all companies, the presentation herein may
not be comparable to other similarly titled measures of other companies.
(4) Cash interest expense excludes (i) the amortization of debt issuance cost
of $1,241, $264, $3,320, $3,534, $3,560, $3,571, $889, and $631 for the
eight months ended August 1993, the one month ended September 1993,
Fiscal 1994, 1995, 1996, 1997, the three month December 1996 and 1997
periods, respectively, and (ii) $28,702 of payment-in-kind interest in
the eight months ended August 1993.
(5) Total indebtedness includes short-term and long-term borrowings and
current maturities of long-term debt.
51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion contains forward-looking statements which involve
risks and uncertainties. The Company's actual results or future events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, but not limited to, raw material costs,
labor market conditions, the highly competitive nature of the industry and
developments with respect to contingencies.
The following discussion of results of operations for Fiscal 1995, 1996
and 1997 and the interim periods is based on the historical results of
operations of Sweetheart and Fonda. Since the Fonda Acquisitions were
consummated from time to time during such fiscal years, the financial
information contained herein with respect to periods prior to such acquisitions
does not reflect the results of operations of the businesses acquired; thus,
this financial information is not necessarily indicative of the results of
operations that would have been achieved had the acquisitions been consummated
by Fonda at the beginning of the periods presented herein or which may be
achieved in the future.
The Company's business is highly seasonal with a majority of its net cash
flow from operations realized in the second and third quarters of the calendar
year. The Company builds its inventory throughout the year to satisfy the high
seasonal demands of the summer months when outdoor and away-from-home
consumption increases. In the event cash flow from operations is insufficient
to provide working capital necessary to fund production requirements during
these quarters, Fonda and Sweetheart will need to borrow under their respective
credit facilities or seek other sources of capital. Although the Company
believes that funds available under the Fonda Credit Facility and Sweetheart
Credit Facilities, together with cash generated from operations, will be
adequate to provide for each company's respective cash requirements, there can
be no assurance that such capital resources will be sufficient in the future.
GENERAL
SF Holdings is a holding company that conducts all of its operations
through Sweetheart and Fonda. As a holding company, the Company expects to
incur minimal operating expenses. See "Certain Relationships and Related
Transactions." Sweetheart and Fonda, the Company's principal operating
subsidiaries, are converters and marketers of disposable paper, plastic and
foam food service and food packaging products. The prices for each subsidiary's
raw materials fluctuate. When raw material prices decrease, selling prices have
historically decreased. The actual impact on each company from raw materials
price changes is affected by a number of factors including the level of
inventories at the time of a price change, the specific timing and frequency of
price changes, and the lead and lag time that generally accompanies the
implementation of both raw materials and subsequent selling price changes. In
the event raw materials prices decrease over a period of several months, such
company may suffer margin erosion on the sale of such inventory.
In addition to the pro forma adjustments set forth under "Unaudited Pro
Forma Financial Information," the Company believes that it can realize
additional cost savings by (i) eliminating the outsourcing of products which
will be manufactured within the Company; (ii) capitalizing on the Company's
combined purchasing leverage with respect to raw materials and other procured
items, such as packaging materials; (iii) eliminating duplicative
administrative, sales and marketing expenses; (iv) making selective capital
expenditures intending to realize manufacturing and distribution savings; and
(v) rationalizing its facilities.
YEAR 2000
Each of Sweetheart and Fonda have implemented Year 2000 compliance
programs designed to ensure that each respective company's computer systems and
applications will function properly beyond 1999. The Company expects Sweetheart
and Fonda's Year 2000 date conversion programs to be substantially completed by
the end of 1999. The Company believes that adequate resources, both internal
52
and external, have been allocated for this purpose. Spending for these Year
2000 compliance programs, including Fiscal 1998 spending, is estimated to be
$2.7 million and $1.8 million at Sweetheart and Fonda, respectively, and will
be funded from each of the respective company's cash from operations or
borrowings under each company's respective credit facility. However, there can
be no assurance that the Company will identify all Year 2000 date conversion
problems in its computer systems in advance of their occurrence or that the
Company will be able to successfully remedy all problems that are discovered.
Failure by Sweetheart or Fonda and/or their significant vendors and customers
to complete Year 2000 compliance programs in a timely manner could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the revenue stream and financial stability
of existing customers may be adversely impacted by Year 2000 problems which
could cause fluctuations in the Company's revenues and operating profitability.
LIQUIDITY AND CAPITAL RESOURCES
On March 12, 1998, the Company issued $144.0 million aggregate principal
amount at maturity of Units consisting of Old Notes and Shares. Until March 15,
2003, no interest will accrue on the Old Notes, but the Accreted Value will
increase between the date of original issuance and March 15, 2003. Beginning on
March 15, 2003, interest on the Old Notes will accrue at the rate of 12 3/4%
per annum and will be payable in cash semi-annually in arrears on March 15 and
September 15 of each year, commencing on September 15, 2003. The Old Notes will
mature on March 15, 2008. See "Prospectus Summary--Issuance of the Old Notes."
RECENT DEVELOPMENTS
On February 11, 1998, Fonda reached an agreement with Kamine, the owner of
the co-generation facility hosted by Fonda at the Natural Dam mill, whereby
Kamine will terminate its obligations to supply steam to Natural Dam and to
make certain land lease payments in return for a lump sum cash payment and the
delivery of certain equipment. The consummation of this agreement is subject to
various conditions, including the negotiation and execution of a definitive
agreement and the consummation of a master restructuring agreement among
Niagara and sixteen independent power producers, including Kamine. The Company
expects Fonda to record a gain upon the consummation of the transaction
contemplated by this agreement, however, there can be no assurance that such
transaction will be consummated.
On March 12, 1998, Fonda entered into a five-year licensing agreement with
its affiliate, CEG, subject to extension, whereby CEG will manufacture and
distribute certain party goods products currently manufactured by Fonda. In
connection therewith, Fonda will receive a royalty equal to 5% of CEG's cash
flow, as determined in accordance with a formula specified in such agreement.
In Fiscal 1997, Fonda's net sales of such party goods products were
approximately $30 million. The Company expects Fonda's fixed and variable costs
to decrease and it expects to reduce Fonda's accounts receivable and inventory
by approximately $9 million as a result of such licensing agreement. The
Company believes that such transaction will have a favorable impact on Fonda's
results of operations.
On March 24, 1998, Fonda consummated the agreement with Cellu, whereby
Cellu acquired substantially all of the fixed assets and certain related
working capital of the Natural Dam mill in Gouverneur, New York, pursuant to
which Fonda realized net proceeds, after expenses, of approximately $25
million, subject to a post-closing adjustment for working capital.
In connection with the consummation of the Sweetheart Investment,
Sweetheart incurred $4.4 million of financial advisory and legal expenses and
$2.6 million of severance expenses as a result of the termination of certain
officers of Sweetheart pursuant to executive separation agreements (such
expenses are collectively defined herein as the "Sweetheart Reduction"). See
"Unaudited Pro Forma Financial Information." For the three month period ended
March 31, 1998, Sweetheart also expects to recognize additional one time
charges of approximately $15 million related to further cost cutting
initiatives including work force reduction and facility rationalization. Such
charges will consequently have an adverse impact on Sweetheart's results of
operations for such period. As a result of the applications of
53
purchase accounting by SF Holdings for the Sweetheart Investment, the expenses
described above will have no effect on SF Holdings' results of operations.
FONDA RESULTS OF OPERATIONS
FISCAL YEAR ENDED JULY
-------------------------------------------------------------------------
1995 1996 1997
----------------------- ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
---------- ------------ ----------- ------------ ----------- ------------
(DOLLARS IN MILLIONS)
Net sales .................. $ 97.1 100.0% $ 204.9 100.0% $ 252.5 100.0%
Cost of goods sold ......... 76.3 78.6 161.3 78.7 196.3 77.7
------- ----- -------- ----- -------- -----
Gross profit ............... 20.8 21.4 43.6 21.3 56.2 22.3
Selling, general and
admin. expenses ........... 14.1 14.5 29.7 14.5 37.2 14.7
Other income, net .......... -- -- -- -- ( 1.6) 6.0
------- ----- -------- ----- -------- -----
Income from operations ..... $ 6.7 6.9% $ 13.9 6.8% $ 20.6 8.2%
======= ===== ======== ===== ======== =====
EBITDA ..................... $ 8.4 8.6% $ 17.3 8.4% $ 23.9 9.5%
SIX MONTHS ENDED JANUARY
------------------------------------------------
1997 1998
------------------------ -----------------------
PERCENT OF PERCENT OF
AMOUNT NET SALES AMOUNT NET SALES
----------- ------------ ----------- -----------
(DOLLARS IN MILLIONS)
Net sales .................. $ 124.4 100.0% $ 136.7 100.0%
Cost of goods sold ......... 97.0 78.0 108.1 79.1
-------- ----- -------- -----
Gross profit ............... 27.4 22.0 28.6 20.9
Selling, general and
admin. expenses ........... 19.5 15.7 19.8 14.5
Other income, net .......... -- -- -- --
-------- ----- -------- -----
Income from operations ..... $ 7.9 6.3% $ 8.8 6.4%
======== ===== ======== =====
EBITDA ..................... $ 10.7 8.6% $ 11.3 8.3%
FONDA--SIX MONTHS ENDED JANUARY 25, 1998 COMPARED TO SIX MONTHS ENDED JANUARY
26, 1997
Net sales increased $12.3 million, or 9.9%, to $136.7 million, in the six
months ended January 25, 1998 compared to $124.4 million in the six months
ended January 26, 1997. The increase in net sales included a $12.9 million
increase in the Company's converting operations primarily due to sales volume
from businesses acquired in the fourth quarter of Fiscal 1997, as well as
increased sales volume in converted tissue products. Sales volume in the
converting operations increased 12% in the institutional markets and 9% in the
consumer markets, Average selling prices were slightly higher, including a 2%
increase in the institutional markets and a 1% increase in the consumer
markets. Net sales of tissue mill products declined $0.6 million as increased
sales of commodity white paper from the new paper machine were offset by
reduced volume of deep tone paper due to competitive market conditions. In
January 1998, the Natural Dam mill was not operational for nine days as a
result of a severe ice storm which interrupted the availability of electricity
and steam.
Gross profit increased $1.2 million, or 4.4%, to $28.6 million in the six
months ended January 25, 1998 compared to $27.4 million in the six months ended
January 26, 1997. As a percentage of net sales, gross profit decreased from
22.0% in the six months ended January 26, 1997 to 20.9% in the six months ended
January 25, 1998. Gross profits in the converting operations increased $2.6
million. The results of operations from businesses acquired in the fourth
quarter of Fiscal 1997 and higher margins in converted tissue products were
partially offset by increased costs of paperboard, which were not recovered
through price adjustments. Gross profits of tissue mill products declined $1.4
million due to the increased sales of lower margin white paper and reduced
sales of higher margin deep tone paper, as well as increased manufacturing
costs resulting from the start-up of the second paper machine. As a result of
the ice storm, the Natural Dam mill sustained property damage and experienced a
temporary shut down. The Company maintains insurance policies which cover
losses of this type, and expects to recover a significant portion of these
costs. However, there can be no assurance that all of these costs will be
recovered.
Selling, general and administrative expenses increased $0.3 million, or
1.5%, to $19.8 million in the six months ended January 25, 1998 compared to
$19.5 million in the six months ended January 26, 1997. As a percentage of net
sales, selling, general and administrative expenses decreased from 15.7% in the
six months ended January 26, 1997 to 14.5% in the six months ended January 25,
1998.
Income from operations increased $0.9 million, or 11.6% to $8.8 million in
the six months ended January 25, 1998 compared to $7.9 million in the six
months ended January 26, 1997 due to the reasons discussed above. As a
percentage of net sales, income from operations remained relatively unchanged.
Interest expense, net of interest income, increased $1.5 million, or 32.2%
to $6.0 million in the six months ended January 25, 1998 compared to $4.5
million in the six months ended January 26, 1997. The
54
increase was due to higher borrowing levels resulting from the issuance in the
third quarter of Fiscal 1997 of the Senior Notes, which replaced higher
interest rate debt.
As a result of the above, net income was $1.6 million in the six months
ended January 25, 1998 compared to $1.9 million in the six months ended January
26, 1997.
EBITDA increased $0.6 million in the six months ended January 25, 1998
primarily for the reasons stated above. Depreciation and amortization decreased
$0.2 million.
FONDA--FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased $47.6 million, or 23.2%, to $252.5 million in Fiscal
1997 compared to $204.9 million in Fiscal 1996. This increase was a result of a
full year's results of operations for the acquisitions consummated in Fiscal
1996 and two month's results of operations for the 1997 Fonda Acquisitions,
which was partially offset by a $5.8 million decline in net sales due to lower
average selling prices. The lower selling prices arose from competitive market
conditions and lower raw material costs. During Fiscal 1997, prices declined
about 13% in the institutional market and 5% in the consumer market. These
lower selling prices were partially offset by higher sales volumes of 8% and 4%
in the institutional and consumer markets, respectively.
Gross profit increased $12.6 million, or 28.9%, to $56.2 million in Fiscal
1997 compared to $43.6 million in Fiscal 1996, primarily due to the
acquisitions consummated in Fiscal 1996. As a percentage of net sales, gross
profit improved slightly from 21.3% in Fiscal 1996 to 22.2% in Fiscal 1997.
Gross profits increased in the consumer market, primarily due to a 14% decline
in SBS paperboard costs, but were offset by lower gross profits in the
institutional market. Margins for the institutional market were reduced
primarily as a result of competitive market conditions which lowered selling
prices.
Selling, general and administrative expenses increased $7.4 million, or
25.0%, to $37.2 million in Fiscal 1997 compared to $29.7 million in Fiscal
1996. This increase was primarily due to the incurrence of additional expenses
and corporate overhead assumed in connection with the acquisitions consummated
in Fiscal 1996. As a percentage of net sales, selling, general and
administrative expenses increased slightly from 14.5% in 1996 to 14.7% in 1997.
Other income, net includes a gain of a net $2.9 million in Fiscal 1997
from the settlement of a lawsuit. Partially offsetting this gain was a $1.3
million charge for costs of the closure of Fonda's Three Rivers, Michigan
facility. The charge covers the costs for the termination of employees as well
as ongoing costs to maintain the facility until its disposition.
Income from operations increased $6.8 million, or 48.7%, to $20.6 million
in Fiscal 1997 compared to $13.9 million in Fiscal 1996, due to the reasons
discussed above. Excluding the $1.6 million net gain included in other income,
income from operations increased, as a percentage of net sales, from 6.8% in
Fiscal 1996 to 7.5% in Fiscal 1997.
Interest expense, net of interest income, increased $1.1 million, or
13.7%, to $9.0 million in Fiscal 1997 compared to $7.9 million in Fiscal 1996
due to higher borrowing levels primarily resulting from the acquisitions
consummated in Fiscal 1996 and the issuance of the Fonda Notes. See "--Fonda
Liquidity and Capital Resources." Partially offsetting the higher borrowing
levels were the lower interest rates on such notes.
Income before income taxes and extraordinary loss increased to $11.6
million in Fiscal 1997 from $5.9 million in Fiscal 1996. Fonda's effective
income tax rate was 42% in both years.
Fonda incurred a $3.5 million extraordinary loss (net of a $2.5 million
income tax benefit) in connection with the early retirement of debt consisting
of the write-off of unamortized debt issuance costs, elimination of unamortized
debt discount, and prepayment penalties. As a result of the above, net income
was $3.2 million in Fiscal 1997 compared to $3.4 million in Fiscal 1996.
EBITDA increased $6.6 million, or 38.3%, to $23.9 million in Fiscal 1997
compared to $17.3 million in Fiscal 1996 for the reasons stated above.
Depreciation and amortization increased to $4.4 million from $3.5 million as a
result of the acquisitions consummated in Fiscal 1996.
55
FISCAL 1996 COMPARED TO FISCAL 1995
Fonda's net sales increased $107.8 million, or 111.1%, to $204.9 million
in Fiscal 1996 compared to $97.1 million in Fiscal 1995. Approximately 70% of
this increase reflects a full year's results for the Hoffmaster division which
also included seven months of results of operations for the Chesapeake
acquisition. Approximately 7% of this increase is attributable to three months
of results of operations of the James River acquisition which was acquired by
Fonda in May 1996. Sales growth was also driven by a 13% increase in shipments
by the Fonda division, which is primarily due to improved integration and
marketing efforts, and a 5% increase in selling prices.
Gross profit increased by $22.8 million, or 109.4%, to $43.6 million in
Fiscal 1996 compared to $20.8 million in Fiscal 1995. Approximately 70% of this
increase is due to the acquisition of Hoffmaster, for the reasons stated above.
Gross profits as a percentage of net sales was approximately 21.4% in both
periods. The inclusion of the Hoffmaster division results was offset in part by
an increase in cost of goods sold as a percentage of sales at the Fonda
division. In the first half of Fiscal 1996, Fonda experienced increased raw
material costs as a result of continuous price increases during Fiscal 1995,
which affected the Fonda division. Raw material costs stabilized and began to
decline in the latter part of Fiscal 1996 but nevertheless increased
approximately 15% during the year.
Selling, general and administrative expenses increased $15.6 million, or
110.7%, to $29.7 million in Fiscal 1996 compared to $14.1 million in Fiscal
1995, primarily as a result of Fonda's increased presence in consumer markets
as a result of the Chesapeake and Maspeth acquisitions, as well as a full
year's results for the Hoffmaster division. As a percentage of net sales,
however, selling, general and administrative expenses remained relatively
constant at approximately 14.5%.
Income from operations increased $7.2 million, or 106.6%, to $13.9 million
in Fiscal 1996 compared to $6.7 million in Fiscal 1995. As a percentage of net
sales, operating income remained unchanged at 6.9%. Costs of integrating the
Chesapeake and Maspeth acquisitions and slightly lower selling prices were
offset by cost savings achieved in overhead reduction, improved fixed cost
absorption and lower procurement costs.
Interest expense increased $5.0 million as a result of the debt incurred
in connection with the Hoffmaster acquisition and the acquisitions consummated
in Fiscal 1996. Fonda's effective income tax rate was 42% in both periods.
EBITDA increased $8.9 million, or 106.6%, to $17.3 million in Fiscal 1996
compared to $8.4 million in Fiscal 1995 for the reasons stated above.
Depreciation and amortization increased from $1.7 million in Fiscal 1995 to
$3.5 million in Fiscal 1996, primarily as a result of the Hoffmaster
acquisition.
FONDA LIQUIDITY AND CAPITAL RESOURCES
Historically, Fonda has relied on cash flows from operations and
borrowings to finance its working capital requirements, capital expenditures
and acquisitions.
Net cash used in operating activities for the six months ended January 25,
1998 was $9.3 million compared to $4.8 million for the six months ended January
26, 1997. The six month period ended January 25, 1998 includes the receipt of
$2.9 million resulting from the settlement of a lawsuit. Net cash provided by
operating activities for Fiscal 1997 was $8.3 million compared to $17.7 million
for Fiscal 1996. The higher level of net cash provided by operating activities
in Fiscal 1996 reflects the consolidation of the working capital assets
acquired in the Hoffmaster acquisition. This increase was primarily due to a
reduction in the level of accounts receivable and an increase in accounts
payable and accrued expenses.
Fonda's investing activities are primarily capital expenditures and
business acquisitions. Capital expenditures in the six months ended January 25,
1998 were $4.4 million, including $1.7 million related to the installation of a
second paper machine at the Natural Dam mill. The remaining $2.7 million in
such period and the capital expenditures in the six months ended January 26,
1997 were for routine capital improvements. Capital expenditures in Fiscal 1997
were $10.4 million, including $8.2 million related to the
56
installation of the second paper machine at the Natural Dam mill. The remaining
$2.2 million in Fiscal 1997 and most of the capital expenditures in prior years
were for routine capital improvements. Fonda spent $23.0 million in Fiscal
1997, $45.2 million in Fiscal 1996 and $28.0 million in Fiscal 1995 for the
Fonda Acquisitions.
In February 1997, Fonda entered into the Fonda Credit Facility which
provides up to $50.0 million borrowing capacity, collateralized by eligible
accounts receivable and inventories. At January 25, 1998, $6.0 million was
outstanding under the Fonda Credit Facility and $33.2 million was the maximum
advance available based upon eligible collateral.
Pursuant to the terms of the Fonda Credit Facility, Fonda is subject to
certain affirmative and negative covenants customarily contained in agreements
of this type, including, without limitation, covenants that restrict, subject
to specified exceptions (i) mergers, consolidations, asset sales or changes in
capital structure, (ii) creation or acquisition of subsidiaries, (iii) purchase
or redemption of Fonda's capital stock or declaration or payment of dividends
or distributions on such capital stock, (iv) incurrence of additional
indebtedness, (v) investment activities, (vi) granting or incurrence of liens
to secure other indebtedness, (vii) prepayment or modification of the terms of
subordinated indebtedness and (viii) engaging in transactions with affiliates.
In addition, the Fonda Credit Facility requires that Fonda satisfy certain
financial covenants.
The Fonda Notes bear interest at a rate of 9 1/2% per annum, payable
semi-annually in March and September and will mature on March 1, 2007. See
"Description of Certain Indebtedness."
In April 1997, Fonda offered to repurchase up to 74,000 shares of Class A
common stock of Fonda (the "Fonda Class A Common Stock") at $135 per share from
its stockholders on a pro rata basis (the "Fonda Stock Repurchase"). Pursuant
to the Fonda Stock Repurchase, during Fiscal 1997 Fonda redeemed 500 shares of
Fonda Class A Common Stock and 1,000 shares of Class B common stock of Fonda
for $0.2 million; during the six months ended January 25, 1998, Fonda redeemed
72,500 shares of Fonda Class A Common Stock for $9.8 million. The Company has
completed such stock repurchase.
During the six months ended January 25, 1998 and Fiscal 1997, Fonda did
not incur material costs for compliance with environmental laws and
regulations.
The Company believes that cash generated by Fonda's operations, combined
with amounts available under the Fonda Credit Facility, will be sufficient to
meet Fonda's capital expenditure needs, debt service requirements and working
capital needs for the foreseeable future.
SWEETHEART RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER
--------------------------------------------------------------------------
1995 1996 1997
------------------------ ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
----------- ------------ ----------- ------------ ----------- ------------
(DOLLARS IN MILLIONS)
Net sales .................... $ 986.6 100.0% $ 959.8 100.0% $ 886.0 100.0%
Cost of goods sold ........... 779.5 79.0 748.0 77.9 722.5 81.5
-------- ----- -------- ----- -------- -----
Gross income ................. 207.1 21.0 211.8 22.1 163.5 18.5
Transportation ............... 95.1 9.6 98.7 10.3 98.5 11.1
Selling, general and
admin. expenses ............. 66.1 6.7 61.8 6.4 66.8 7.5
Loss on asset disposal and
impairment .................. -- -- -- -- 24.5 2.8
Restructuring Expense ........ -- -- -- -- 9.7 1.1
-------- ----- -------- ----- -------- -----
Income (loss) from
operations .................. $ 45.9 4.7% $ 51.3 5.3% $ (36.0) ( 4.1)%
======== ===== ======== ===== ========= =====
EBITDA ....................... $ 82.6 8.4% $ 88.2 9.2% $ 44.0 5.0%
THREE MONTHS ENDED DECEMBER
------------------------------------------------
1996 1997
------------------------ -----------------------
PERCENT OF PERCENT OF
AMOUNT NET SALES AMOUNT NET SALES
----------- ------------ ----------- -----------
(DOLLARS IN MILLIONS)
Net sales .................... $ 202.1 100.0% $ 201.9 100.0%
Cost of goods sold ........... 176.9 87.5 164.3 81.4
------- ----- ------- -----
Gross income ................. 25.2 12.5 37.6 18.6
Transportation ............... 22.5 11.1 23.7 11.7
Selling, general and
admin. expenses ............. 16.2 8.0 19.1 9.5
Loss on asset disposal and
impairment .................. -- -- -- --
Restructuring Expense ........ -- -- -- --
------- ----- ------- -----
Income (loss) from
operations .................. $ (13.4) ( 6.6)% $ (5.2) ( 2.6)%
======== ===== ======== =====
EBITDA ....................... $ (2.6) 1.3% $ 5.7 2.8%
57
SWEETHEART--THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1996
Net sales decreased $0.1 million to $202.0 million for the three months
ended December 31, 1997, compared to $202.1 million for the comparable 1996
period. Net sales for the three months ended December 31, 1997 reflect a 4.2%
increase in domestic sales volume and a 4.6% decrease in domestic sales price.
Food service selling prices decreased 4.9% while food packaging selling prices
decreased 1.7%. Prices have been impacted by declining raw material prices and
competition in the marketplace during 1997. The benefits of lower raw material
prices are generally passed on to customers. Food service sales volume
increased 4.5% while food packaging sales volume increased 2.4%. Sales volume
measures the dollar value of unit sales, assuming constant prices between
periods. The increase in sales volume is primarily attributable to increased
market penetration into key food service distributors. Canadian sales increased
0.5% from the prior year.
Cost of sales decreased $12.6 million, or 7.1%, to $164.3 million for the
three months ended December 31, 1997 compared to $176.9 million for the
comparable 1996 period. As a percentage of net sales, cost of sales decreased
to 81.3% for the three months ended December 31, 1997 from 87.5% for the
comparable 1996 period. Gross income increased $12.4 million, or 49.2%, to
$37.6 million for the three months ended December 31, 1997 compared to $25.2
million for the comparable 1996 period. The increase in gross income can be
attributed to several factors. Sweetheart implemented cost reduction programs
in Fiscal 1997, including plant consolidation and manufacturing and operational
improvements, which have favorably impacted costs in Fiscal 1998. Sweetheart is
also focusing on increasing sales of higher margin product lines to improve
gross income. Additionally, in the first quarter of Fiscal 1997, Sweetheart
executed a planned inventory reduction resulting in $5.0 million of fixed
overhead absorption into cost of sales. A similar inventory reduction was not
necessary in the first quarter of Fiscal 1998, resulting in a positive
year-to-year comparison.
Transportation costs have increased $1.2 million, or 5.3%, to $23.7
million for the three months ended December 31, 1997 compared to $22.5 million
for the comparable 1996 period, mainly due to the sales volume increases
described above.
Selling, general and administrative expenses increased $2.9, million or
17.9%, to $19.1 million for the three months ended December 31, 1997 compared
to $16.2 million for the comparable 1996 period. As a percentage of net sales,
selling, general and administrative expenses increased to 9.5% for the three
months ended December 31, 1997 from 8.0% for the same period in 1996. This
increase is due primarily to increased employee benefits, both performance and
non-performance related, an executive retention plan, and costs associated with
the new management information system.
Operating loss decreased $8.2 million, or 61.2%, to $5.2 million for the
three months ended December 31, 1997 compared to $13.4 million for the
comparable 1996 period, due to the reasons described above.
Interest expense increased $1.1 million, or 11.0%, to $11.1 million for
the three months ended December 31, 1997 compared to $10.0 million for the
comparable 1996 period, due primarily to slightly higher average use of
revolving credit borrowings and incremental interest paid on the portion of the
new revolving bank loan used to refinance the old notes.
Other income increased $3.3 million to $3.6 million for three months ended
December 31, 1997 compared to $0.3 million for the comparable 1996 period,
primarily due to the $3.5 million gain on the Sweetheart Bakery Disposition.
Income tax benefit was $5.1 million for the three months ended December
31, 1997 compared to $9.2 million for the same period in 1996, a change of $4.1
million. The effective tax rate for the three months ended December 31, 1997
and 1996 was 40.0%.
Cumulative effect of change in accounting principle was an expense
recorded to write-off previously capitalized costs as explained in Note 2 to
the Notes to Sweetheart's Financial Statements.
58
Net loss decreased $4.8 million, or 34.5%, to $9.1 million for the three
months ended December 31, 1997 compared to $13.9 million for the comparable
1996 period, a change of $4.8 million, due to the reasons described above.
SWEETHEART--FISCAL 1997 COMPARED TO FISCAL 1996
Sweetheart's net sales decreased $73.8 million, or 7.7%, to $886.0 million
in Fiscal 1997 compared to $959.8 million in Fiscal 1996. The decrease in net
sales reflects a 2.9% decrease in domestic sales volume and a 4.4% decrease in
average domestic sales prices. Food service selling prices decreased 4.5% while
food packaging selling prices decreased 3.5%. Sweetheart's selling prices have
been negatively impacted by falling raw material prices and by competition in
the marketplace. The benefits of lower raw material prices are generally passed
on to customers. Food service sales volume decreased 1.7% while food packaging
sales volume decreased 11.5%. Sales volume measures the dollar value of unit
sales, assuming constant prices between periods. The decrease in food service
sales volume is primarily attributable to decreases in the national and club
store market segments offset by higher food service distributor account volume.
The decrease in food packaging sales volume is primarily attributable to
decreases in demand experienced by key accounts in their customer base in both
the cultured and frozen segments. Canadian net sales decreased 2.1% from the
prior year.
Cost of sales decreased $25.6 million, or 3.4%, to $722.5 million in
Fiscal 1997 compared to $748.1 million in Fiscal 1996. As a percentage of net
sales, cost of sales increased to 81.5% in Fiscal 1997 from 77.9% in Fiscal
1996. Sweetheart has implemented initiatives which have reduced variable
manufacturing costs to offset price conditions in the marketplace described
above. As a result, raw material and labor costs have been held constant as a
percentage of sales despite lower selling prices to customers. Although
overhead spending was contained at 1996 levels, this cost as a percentage of
net sales has increased. In addition, year-to-date results have been impacted
by changes in overhead absorption relating to planned inventory reductions.
Overhead costs are allocated and absorbed into inventory when inventory is
produced and expensed when inventory is sold. As a result, profit comparisons
can be materially affected when a change in inventory levels during a period
differs significantly from the change in the prior year period. In Fiscal 1996,
inventory levels increased, resulting in an absorption of fixed costs into
inventory. In Fiscal 1997, inventory levels declined, and the fixed costs
associated with inventories sold were recognized. This has resulted in a
year-to-year unfavorable impact on cost of sales of $10.5 million.
Gross income decreased $48.3 million, or 22.8%, to $163.5 million in
Fiscal 1997 compared to $211.8 million in Fiscal 1996 due to the reasons
described above.
Transportation expense decreased $0.2 million, or 0.2%, to $98.5 million
in Fiscal 1997 compared to $98.7 million in Fiscal 1996 due to lower volume
shipped. As a percent of net sales, transportation expense increased to 11.1%
in Fiscal 1997 from 10.3% in Fiscal 1996. This increase, in relation to sales,
is primarily the result of the selling price decreases referred to above.
Selling, general and administrative expenses increased $5.0 million, or
8.0%, to $66.8 million in Fiscal 1997 compared to $61.8 million in Fiscal 1996.
As a percentage of net sales, selling, general and administrative expenses
increased to 7.5% in Fiscal 1997 from 6.4% in Fiscal 1996. Approximately $3
million of the increase relates to expenditures on new management information
systems, while the remainder reflects investment in the food service
distribution selling activity and normal inflation in the wage base. All other
selling, general and administrative expenses were held below prior year levels.
Loss on asset disposal and impairment of $24.6 million was recorded in the
fourth quarter of Fiscal 1997 relating to the review of the carrying value of
Sweetheart's long-lived assets. See Note 14 of Notes to the Financial
Statements of Sweetheart.
Restructuring expense of $9.7 million was recorded in the fourth quarter
of Fiscal 1997 relating to plant closures and other expenses as part of
Sweetheart's strategic planning process. See Note 14 of Notes to the Financial
Statements of Sweetheart.
59
Operating loss was $36.0 million in Fiscal 1997 compared to operating
income of $51.3 million in Fiscal 1996, a change of $87.3 million or 170.2%,
due to the reasons described above.
Interest expense increased $3.0 million, or 7.7%, to $41.8 million in
Fiscal 1997 compared to $38.8 million in Fiscal 1996, due primarily to higher
average usage of short-term borrowings.
Other income (expense) increased to $1.6 million of income in Fiscal 1997
from $3.0 million of expense in Fiscal 1996, an increase of $4.6 million.
Fiscal 1996 was unfavorably impacted by one-time expenses incurred by
Sweetheart relating to an investigation of Sweetheart's strategic alternatives.
Income tax benefit (expense) was $30.5 million of benefit in Fiscal 1997
compared to $3.8 million of expense in Fiscal 1996, a change of $34.3 million.
The effective tax rate for Fiscal 1997 and Fiscal 1996 was 40.0%.
Extraordinary loss of $0.9 million (net of $0.6 million in income taxes)
was recorded in the fourth quarter of Fiscal 1997 relating to the write-off of
deferred financing fees associated with a portion of Sweetheart's debt, which
was refinanced subsequent to September 30, 1997.
Net loss was $46.7 million in Fiscal 1997 compared to net income of $5.7
million in Fiscal 1996, a change of $52.4 million, due to the reasons described
above.
SWEETHEART--FISCAL 1996 COMPARED TO FISCAL 1995
Net sales decreased $26.8 million, or 2.7%, to $959.8 million in Fiscal
1996 compared to $986.6 million in Fiscal 1995. The decrease in net sales
reflects a 1.7% decrease in domestic sales volume and a 1.0% decrease in
domestic sales price. Food service selling prices decreased 1.2% while food
packaging selling prices decreased 0.5%. Food service sales volume decreased
1.4% while food packaging sales volume decreased 3.9%. Sales volume measures
the dollar value of unit sales, assuming constant prices between periods. The
decrease in food service sales volume is primarily attributable to decreases in
the distributor and club store market segments offset by higher national
account volume. The decrease in food packaging sales volume is primarily due to
the withdrawal of Sweetheart's Contour-Pak line from the food packaging market
and a decrease in the cultured products and frozen novelty market segments.
Canadian sales increased 2.5% from the prior year.
Cost of sales decreased $31.4 million, or 4.0%, to $748.1 million in
Fiscal 1996 compared to $779.5 million in Fiscal 1995. As a percentage of net
sales, cost of sales decreased to 77.9% in Fiscal 1996 from 79.0% in Fiscal
1995. The decrease in cost of sales as a percentage of net sales was due
primarily to significant changes between the periods in overhead costs absorbed
into inventory. Overhead costs are allocated and absorbed into inventory when
inventory is produced and expensed when inventory is sold. As a result, profit
comparisons can be affected when a change in inventory levels during a period
differs from the change in the prior year period. Finished goods inventory
levels increased to $137.7 million at September 30, 1996 from $104.6 million at
September 30, 1995, which resulted in a favorable impact on cost of sales of
$10.6 million relating to the absorption of fixed overhead costs. Additionally,
Sweetheart realized a 10.4% decrease in material costs from the prior year,
offset by an unfavorable shift in product mix.
Gross income increased $4.7 million, or 2.3%, to $211.8 million in Fiscal
1996 compared to $207.1 million in Fiscal 1995 due to the reasons described
above.
Selling, general and administrative expenses decreased $4.3 million, or
6.5%, to $61.8 million in Fiscal 1996 compared to $66.1 million in Fiscal 1995.
As a percentage of net sales, selling, general and administrative expenses
decreased to 6.4% in Fiscal 1996 from 6.7% in Fiscal 1995.
Operating income increased $5.4 million, or 11.8%, to $51.3 million in
Fiscal 1996 compared to $45.9 million in Fiscal 1995 due to the reasons
described above.
Interest expense increased $0.1 million, or 0.3%, to $38.8 million in
Fiscal 1996 compared to $38.7 million in Fiscal 1995 due primarily to higher
average usage of short-term borrowings.
60
Other income (expense) decreased to $3.0 million of expense in Fiscal 1996
compared to $2.4 million of income in Fiscal 1995, a decrease of $5.4 million.
This decrease was due primarily to one-time expenses relating to the
investigation of Sweetheart's strategic alternatives.
Income tax expense decreased $0.1 million, or 2.6%, to $3.8 million in
Fiscal 1996 compared to $3.9 million in Fiscal 1995. The effective tax rate in
Fiscal 1996 was 40.0% compared to 40.1% in Fiscal 1995.
Net income decreased $0.1 million, or 1.7%, to $5.7 million in Fiscal 1996
compared to $5.8 million in Fiscal 1995 due to the reasons described above.
SWEETHEART LIQUIDITY AND CAPITAL RESOURCES
In the fourth quarter of Fiscal 1997, Sweetheart completed negotiations of
a three-year contract renewal with its largest customer, McDonald's. Although
this agreement results in a lower selling price and less total volume, thereby
resulting in lower margins, Sweetheart did retain a majority of McDonald's
North American volume for cold cups and lids. In addition, Sweetheart committed
to convert McDonald's cold cup volume to a new raw material substrate (from wax
to double-sided polyethylene ("DSP")) over the life of the contract. This will
cause Sweetheart to incur incremental capital expenditures.
On October 24, 1997, Sweetheart refinanced its old revolving loan facility
and other indebtedness and entered into an amended and restated loan and
security agreement (the "Sweetheart U.S. Credit Facility") with BankAmerica
Business Credit, Inc. ("BankAmerica") as agent, which provides for a revolving
credit facility in the amount of up to $135.0 million, subject to borrowing
base limitations. Borrowings under the Sweetheart U.S. Credit Facility have a
final maturity date of September 30, 2000. Sweetheart's Canadian Credit
Facility (as defined herein) provides for (i) a term loan in the amount of up
to Cdn. $14.0 million, (ii) a revolving credit facility in the amount of up to
Cdn. $7.0 million; and (iii) a revolving overdraft credit facility with standby
or guarantee letters of credit in the amount of up to Cdn. $1.0 million. As of
January 31, 1998, $103.0 million under the Sweetheart U.S. Credit Facility has
been borrowed and $6.3 million is available, and Cdn. $6.5 million has been
borrowed under the Sweetheart Canadian Credit Facility and Cdn. $0.4 million is
available. The Sweetheart U.S. Credit Facility and the Sweetheart Canadian
Credit Facility are herein referred to as the "Sweetheart Credit Facilities."
See "Description of Certain Indebtedness."
For the three months ended December 31, 1997, $174.6 million of debt
repayments, which includes the repayment of SRC Notes and the refinancing of
the revolving credit facility, $7.1 million of capital additions, a $10.4
million increase in cash in escrow, $0.8 million of financing fees and a $2.0
million net increase in cash and cash equivalents were funded through a $29.0
million decrease in restricted cash, $15.8 million of proceeds from sale of
property, plant and equipment, $0.7 million of net cash provided by operations
and $149.5 million of proceeds from debt borrowings, which also includes
proceeds from the refinancing.
In Fiscal 1997, $44.2 million of domestic revolving loan borrowings, $2.1
million of borrowings under the Sweetheart Canadian Credit Facility, $17.8
million of proceeds from sale and leaseback of property, plant and equipment,
and a $1.7 million decrease in cash balances were used to fund $47.8 million of
net capital additions, the payment of $0.1 million for industrial revenue bond
principal, $1.4 million of Canadian term loan reductions, a $0.1 million
increase in restricted cash, a $13.3 million increase in cash in escrow, and
$3.2 million of cash used by operations.
Sweetheart's liquidity has been enhanced because it has not been subject
to current income taxes (other than the Alternative Minimum Tax) due to the use
of net operating loss carryforwards for income tax purposes. At September 30,
1997, Sweetheart's net operating loss carryforwards for tax purposes are
approximately $170 million. These net operating loss carryforwards will expire,
if not used, beginning in 2004. See "--Sweetheart Net Operating Loss
Carryforwards."
In September 1996, Sweetheart received $1.2 million of loans from the
State of Maryland Department of Business and Economic Development and the
County of Baltimore. The loans bear interest at 6.0% per annum with a ten year
life and require repayment in equal quarterly installments starting January 1,
1998. On January 1, 1998, the loans converted to interest-free grants.
61
Sweetheart Cup Company Inc. ("Sweetheart Cup"), a subsidiary of
Sweetheart, has outstanding $190.0 million aggregate principal amount of 9 5/8%
Senior Secured Notes due 2000 (the "Sweetheart Secured Notes") and $110.0
million aggregate principal amount of 10 1/2% Senior Subordinated Notes due
2003 (the "Sweetheart Subordinated Notes" and together with the Sweetheart
Secured Notes, the "Sweetheart Notes"). See "Description of Certain
Indebtedness."
Sweetheart's principal uses of cash will be capital expenditures, working
capital requirements, and debt service requirements. During Fiscal 1997,
Sweetheart made capital expenditures of approximately $47.8 million. New
product development (including conversion from wax to DSP for cold cups) and
cost reduction accounted for approximately 21% and 37%, respectively, of the
total Fiscal 1997 expenditures. Non-discretionary expenditures represented the
balance of the current year spending. Sweetheart anticipates capital spending
in the future for similar projects, of which approximately $13 million has been
committed for Fiscal 1998 as of December 29, 1997. In addition, Sweetheart may
be required to fund various contingent liabilities at any time, including
amounts accrued for litigation, claims and assessments reflected on the balance
sheet as other current liabilities.
The Company believes that cash generated by Sweetheart's operations and
funds available from working capital borrowings under the Sweetheart Credit
Facilities, as well as funds generated by asset sales, will be sufficient to
meet Sweetheart's expected operating needs, planned capital expenditures and
debt service requirements.
SWEETHEART NET OPERATING LOSS CARRYFORWARDS
As of September 30, 1997, Sweetheart had approximately $170 million of net
operating loss ("NOL") carryforwards for federal income tax purposes. The
acquisition of Sweetheart by AIPM in 1993 resulted in a significant limitation
on Sweetheart's ability to utilize its NOL carryforwards, and the consummation
of the Sweetheart Investment will result in further limitations. Although
Sweetheart has taken certain steps to allow utilization of the NOL
carryforwards and anticipates that a portion of its NOL carryforwards will be
available to offset future taxable income, there can be no assurance that its
NOL carryforwards will become available or that Sweetheart will generate future
taxable income. Accordingly, all or a portion of its NOL carryforwards could
expire unutilized, which could adversely affect Sweetheart's ability to satisfy
its obligations as they become due.
62
BUSINESS
GENERAL
The Company is one of the three largest converters and marketers of
disposable food service and packaging products in North America. The Company
sells a broad line of disposable paper, plastic and foam food service and food
packaging products under both branded and private labels to the consumer and
institutional markets, including large national accounts, and participates at
all major price points. The Company conducts its business through two principal
operating subsidiaries, Sweetheart and Fonda, and has marketed its products
under its well recognized Lily (Registered trademark), Sweetheart (Registered
trademark) and Trophy (Registered trademark) brands for over 85, 45 and 15
years, respectively. In addition, the Company's Sensations and Hoffmaster
(Registered trademark) brands are well recognized in the industry. After
giving pro forma effect to the Transactions, the Company would have had net
sales, net income and EBITDA of $1.1 billion, $34.4 million and $79.8 million,
respectively, for the twelve months ended January 25, 1998.
The Company's product offerings are among the broadest in the industry,
enabling it to offer its customers "one-stop" shopping for their disposable
food service and food packaging product needs. The Company's principal products
include (i) paperboard, plastic and foam food service products, primarily cups,
lids, plates, bowls, plastic cutlery and food containers; (ii) tissue and
specialty food service products, primarily napkins and placemats; and (iii)
food packaging products, primarily containers for the dairy and food processing
industries.
The Company sells its products to more than 5,000 customers and serves the
institutional and consumer markets, including large national accounts, located
throughout the United States and Canada. In addition, the Company has developed
and maintained long-term relationships with many of its customers. The
Company's institutional customers, which are served by Sweetheart and Fonda,
include (i) major food service distributors, (ii) national accounts, including
fast-food chains and catering services, and (iii) schools, hospitals and other
major institutions. The Company's consumer customers, which are served by
Fonda, include supermarkets, mass merchandisers, warehouse clubs and other
retailers. The Company's food packaging customers, which are served by
Sweetheart, include national and regional dairy and food companies.
COMPETITIVE STRENGTHS
The Company believes that it has a leading competitive position in the
disposable food service products industry for the following reasons:
o Leading Market Position. The Company serves all markets in the industry.
The Company believes that it holds one of the top three market positions
in each major market segment it serves and for each of its major product
categories. The Company's well recognized brands and long history in the
industry have allowed it to gain its leading market positions. In those
institutional markets served by both of Sweetheart and Fonda, the Company
experiences minimal product redundancy because Sweetheart and Fonda
primarily sell different products to shared customers. The Company also
believes that its multiple distribution channels will enable it to
further penetrate existing markets by cross-marketing new products
through existing channels.
o Brand Recognition. The Company's brands are well recognized in the
industry. The Company's products have been marketed under its Sweetheart
(Registered trademark) and Lily (Registered trademark) brands for over
45 years. The Company believes that it will be able to leverage the
strength of Sweetheart's brands to further penetrate already existing
markets. The Company's Sweetheart (Registered trademark), Lily
(Registered trademark), Trophy (Registered trademark), Jazz (Registered
trademark), Preference (Registered trademark), Silent Service
(Registered trademark), Centerpiece (Registered trademark), Guildware
(Registered trademark), Simple Elegance (Registered trademark) and
Hoffmaster (Registered trademark) brands are well recognized in the
institutional market; and its Sensations, Splash (Registered Trademark)
and Party Creations (Registered trademark) brands are well recognized in
the consumer market.
o Broad Product Offering. The Company believes that its product offering
is one of the broadest in the industry, competing across all major price
points of the markets it serves, and that the Company is the only company
that offers a full selection of premium products as well as a full line
63
of private label products. The Company offers its products in paper,
plastic and foam and in a wide range of colors, designs and graphics
which are often printed to the customer's specifications.
The Company's diverse and expansive product offering allows it to better
serve its customers with "one-stop" shopping and enables both the Company
and its customers to differentiate themselves from their respective
competitors. As the industry continues to experience greater customer
concentration resulting from a consolidation of distributors and retail
outlets, as well as an increase in sales to the mass merchandiser and
discount retailer distribution channels, the Company believes that its
broad product offering will continue to provide a competitive advantage.
In addition, the Company believes that its broad product offering enables
it to increase shelf space with its customers. The Company also maintains
facilities for the development of new products and product line
extensions to support a continued broad product offering.
o Extensive Distribution. The Company has 27 manufacturing and
distribution facilities located throughout the United States and Canada.
The Company's extensive geographic coverage enables it to serve large
institutional and consumer accounts on a national basis and to respond to
customers' product needs in an effective and timely manner.
o Experienced Management Team. The Company's senior operating managers
average over 15 years of experience in the food service industry and have
a proven track record in operating companies efficiently and realizing
cost savings from the integration of acquisitions. Upon consummation of
the Sweetheart Investment, certain of Fonda's senior officers became
executive officers of Sweetheart.
BUSINESS STRATEGY
The Company believes that its ownership of Fonda and investment in
Sweetheart will provide it with significant benefits and synergies which it
expects to realize over the next several years. The Company also believes that
it can improve its leading position in the disposable food service products
industry by (i) achieving cost savings from the Transactions, (ii) achieving
operating efficiencies and other synergies from the relationship between
Sweetheart and Fonda and (iii) cross-marketing its products. The Company will
pursue its business strategy through:
o Cost Savings. The Company intends to focus on reducing its costs,
eliminating redundancies and realizing cost efficiencies. The Company
believes that opportunities for cost reductions can be realized through
(i) eliminating the outsourcing of products which will be manufactured
within the Company, (ii) capitalizing on the Company's combined
purchasing leverage with respect to raw materials and other procured
items, such as packaging materials, (iii) eliminating duplicative
administration, sales and marketing expenses and (iv) making selective
capital expenditures intended to realize manufacturing and distribution
savings.
o Operating Efficiencies and Other Synergies. The Company intends to focus
on achieving operating efficiencies and other synergies from the
relationship between Sweetheart and Fonda. The Company believes that it
can operate more efficiently by (i) rationalizing its facilities through
a more efficient use of its manufacturing equipment, (ii) eliminating
duplicative product offerings and (iii) improving customer service as a
result of its geographic diversification. In addition, the Company
intends to evaluate potential benefits, including cost savings, operating
efficiencies and additional synergies, which may be obtained from other
transactions, including certain business combinations, among the
affiliated group.
o Sales and Marketing. The Company seeks to maintain a balanced presence
in the markets it serves by cross-marketing Sweetheart and Fonda's
respective products to further penetrate their distribution channels. In
addition, in order to better serve its customers, the Company also
focuses on developing new product designs, increasing brand awareness and
channel marketing. The Company believes that new product designs provide
customers recognized value by offering alternatives in color and style.
The Company supports its brand identity and private label program through
enhanced packaging and promotion. Additionally, the Company seeks,
through its direct sales force, to create "pull-through" demand by
marketing directly to end-users in order
64
to create additional demand from institutional distributors for the
Company's products. Sweetheart and Fonda also intend to enter into joint
marketing and sales agreements which will be designed to eliminate
duplicative marketing and sales expenses at both companies.
PRODUCTS
General. The Company's principal products include: (i) paperboard, plastic
and foam food service products, such as white, colored and printed paper,
plastic and foam plates and bowls, paper, plastic and foam cups for both hot
and cold drinks and lids, straws, plastic cutlery, paper and plastic handled
food pails, food containers and trays for take-out of fast food; (ii) tissue
and specialty food service products, such as printed and solid napkins, printed
and solid tablecovers, crepe paper, placemats, doilies, tray covers, fluted
products and paper and plastic portion cups; and (iii) food packaging products,
such as paper and plastic containers for the dairy and food processing
industries. The Company believes it holds one of the top three market positions
in white paper plates, decorated plates, bowls and cups in the consumer market,
as well as in plastic, paper and foam cups, plates, bowls, plastic cutlery,
lids, food containers, food pails, trays and premium napkins in the
institutional market. The Company also believes it is the second largest
supplier, in terms of sales, of containers to the frozen dessert and cultured
dairy products segments of the food packaging industry in North America. These
products are sold nationwide to supermarkets, restaurant franchises, discount
store chains and major food distributors.
PAPERBOARD, PLASTIC AND FOAM FOOD SERVICE PRODUCTS
Beverage Service Products. Paper, plastic and foam cups, which represent
the largest portion of Sweetheart's sales, are sold to both the consumer and
institutional markets, including national accounts. Both Sweetheart and Fonda
offer a number of attractive cup and lid combinations for both hot and cold
beverages. Cups for the consumption of cold beverages are generally plastic or
wax coated for superior rigidity or made of DSP, which permits the printing of
better quality graphics, while cups for the consumption of hot beverages are
made from paper which is poly-coated on one side or foam to provide a barrier
to heat transfer. Printed paper and plastic cups are often used as promotional
items by Sweetheart's customers. Sweetheart sells plastic straws exclusively to
the institutional market. Sweetheart's beverage service products are sold under
the Sweetheart (Registered trademark), Lily (Registered trademark), Trophy
(Registered trademark), Preference (Registered trademark), Jazz (Registered
trademark), Gallery (Registered trademark), Clarity (Registered Trademark)
and Lumina (Registered trademark) brand names. Fonda's hot and cold beverage
cups are sold to the consumer market.
Sweetheart operates in Canada through its subsidiary Lily Cups, Inc.
("Lily Cups"), which has been manufacturing and marketing food service
disposables since 1947. Lily Cups is one of the largest providers of food
service disposable products in the Canadian market, primarily as a consequence
of its large portfolio of national account customers. Sales by Lily Cups during
Fiscal 1997 constituted approximately 6% of Sweetheart's gross sales.
Tabletop Service Products. Paper plates and bowls, which represent the
largest portion of Fonda's sales, are sold primarily to the consumer market.
These products include coated and uncoated white paper plates, decorated plates
and bowls. Sweetheart's plastic and foam plates and bowls and plastic cutlery
are sold to the institutional market. White uncoated and coated paper plates
are considered commodity items and are generally purchased by cost-conscious
consumers for everyday use. Printed and decorated plates and bowls are
value-added products and are sold for everyday use as well as for parties and
seasonal celebrations, such as Halloween and Christmas. Sweetheart's foam
dinnerware, a value-added product, and plastic cutlery are sold to the
institutional market under the Silent Service (Registered trademark),
Centerpiece (Registered trademark), Basix (Registered trademark), Guildware
(Registered trademark) and Simple Elegance (Registered trademark) brand
names.
Take-Out Containers. Sweetheart sells paper and plastic food containers
and lids and Fonda sells paper trays and food pails, all of which are used
primarily for the take-out of fast foods and are sold to the institutional
market.
TISSUE AND SPECIALTY FOOD SERVICE PRODUCTS
Tissue Converted Products. Napkins represent the second largest portion of
Fonda's sales and are sold under Fonda's Hoffmaster (Registered Trademark),
Fonda, Sensations, Splash (Registered Trademark) and Party Creations
(Registered Trademark) brand names, as well
65
as under national distributor private label names. Napkin products range from
decorated-colored, multi-ply napkins and simple custom printed napkins
featuring an end-user's name or logo to fully printed, graphic-intensive
napkins for the premium paper goods sector. Tablecovers represent one of
Fonda's fastest growing product segments, ranging from economy to premium
product lines, and are sold under the Hoffmaster (Registered trademark),
Linen-Like (Registered trademark), Windsor (Registered trademark),
Sensations, Splash (Registered trademark) and Party Creations (Registered
trademark) brand names. The Company has a broad selection of tablecovers in
one-, two-, and three-ply configurations and produces tablecovers in white,
solid color and one-to four-colored printed products. Fonda also sells crepe
products under the Hoffmaster (Registered trademark), Splash (Registered
trademark) and Party Creations (Registered trademark) brand names.
Specialty Products. The Company sells placemats, traycovers, paper
doilies, plastic and paper portion cups and fluted products in a variety of
shapes and sizes. Fonda produces unique decorated placemats in a variety of
shapes. In addition, Fonda uses a proprietary technology to produce non-skid
traycovers that serve the particular needs of the airline and healthcare
industries.
FOOD PACKAGING PRODUCTS
Sweetheart's food packaging operations sell paper and plastic containers
and lids for ice cream, frozen novelty products and cultured foods (including
sour cream, yogurt, cottage cheese and snack dip), and plastic containers for
single-serving chilled juice products. Other products include Sweetheart's
Flex-E-Form straight-wall paper manufacturing technology and Flex-Guard, a
spiral wound tamper-evident lid.
To enhance product sales, Sweetheart designs, manufactures and leases
container filling and lidding equipment to dairies and other food processors to
package food items in Sweetheart containers at their plants. Sweetheart's
filling and lidding equipment is leased to customers under the Auto-Pak,
Flex-E-Fill and Flex-E-Form trade names. This equipment is manufactured in
Sweetheart's machine shop and assembly plant located in Owings Mills, Maryland.
Types of products packaged in Sweetheart's machines include ice cream,
factory-filled jacketed ice cream cones, cottage cheese, yogurt, squeeze-up
desserts and ice cream sandwiches.
MARKETING AND SALES
The following is a discussion of Sweetheart and Fonda's existing marketing
and sales operations. Sweetheart and Fonda intend to enter into joint marketing
and sales agreements following the Sweetheart Investment which will be designed
to eliminate duplicative marketing and sales expenses.
Sweetheart's marketing efforts are directed at maintaining firsthand
knowledge of its customer needs and structuring Sweetheart's manufacturing and
sales efforts to provide superior products and services tailored to those
needs. Sweetheart's sales force allows it to service a large distributor and
broker network that permits even small accounts to receive appropriate
coverage. Sweetheart sells its products through a sales organization of
approximately 145 salespersons and it sells to more than 4,000 institutional
customers and national accounts throughout the United States and Canada.
Fonda's marketing efforts are principally focused on (i) providing
value-added services; (ii) category expansion by cross marketing products
between the consumer and institutional markets; (iii) developing new graphic
designs which Fonda believes will offer consumers recognized value; and (iv)
increasing brand awareness through enhanced packaging and promotion. Fonda
sells its products through a sales organization of approximately 50
salespersons, as well as independent brokers. Fonda believes that its
experienced sales team and its ability to provide high levels of customer
service enhance its long-term relationships with its customers. Fonda sells to
more than 2,500 institutional and consumer customers located throughout the
United States.
In Fiscal 1997, Sweetheart and Fonda's five largest customers represented
approximately 35% and 17%, respectively, of net sales. One customer of
Sweetheart, McDonald's, accounted for 13.7% of net sales; no one single
customer of Fonda accounted for more than 10% of net sales.
In the fourth quarter of Fiscal 1997, Sweetheart completed negotiations of
a three-year contract renewal with McDonald's. Although this agreement results
in a lower selling price and less total volume,
66
thereby resulting in lower margins, Sweetheart retained a majority of
McDonald's North American volume for cold cups and lids. In addition, the
Company committed to convert McDonald's cold cup volume to a new raw material
substrate (from wax to DSP) over the life of the contract. This will cause
Sweetheart to incur incremental capital expenditures.
SWEETHEART SALES
Food Service Institutional Market. Sweetheart's food service products are
sold directly to large national accounts, such as fast-food chains and catering
services. Food service products are also sold through distributors to other
end-users, such as independent restaurants, school systems and hospitals.
Sweetheart's national accounts include ARAMARK Corporation, McDonald's and
Wendy's International, Inc., and its major distributor accounts include Alliant
Foodservice Inc., ComSource, Inc., Network, Inc. and Sysco Corporation. This
market represented approximately 89% of Sweetheart's net sales in Fiscal 1997.
Food Packaging Institutional Market. Food packaging containers and filling
machines are marketed directly to national and regional dairies and food
companies. Major customers of Sweetheart's food packaging products include Ben
& Jerry's Homemade, Inc., Blue Bell Creameries, L.P., Borden, Inc. and Prairie
Farms Dairy, Inc. This market represented approximately 11% of Sweetheart's net
sales in Fiscal 1997.
FONDA SALES
Institutional Market. Restaurants, schools, hospitals and other major
institutions comprise Fonda's institutional market. This market represented
approximately 48% of Fonda's net sales in Fiscal 1997. Fonda's predominant
institutional customers of private label products include Sysco Corporation,
Rykoff-Sexton, Inc./U.S. Foodservice Inc. and Alliant Foodservice Inc.
Institutional customers of Fonda's branded products include Sweet Paper Sales
Corp., Smart Food Distributors Incorporated, Bunzl USA, Inc. and Lisanti Food
Incorporated. The institutional market is serviced by dedicated field service
representatives located throughout the United States. The field sales force
works directly with these national and regional distributors to service the
needs of the various segments of the food service industry.
Consumer Market. Supermarkets, mass merchants, warehouse clubs, discount
chains and other retail stores comprise the Fonda consumer market. This market
represented approximately 52% of Fonda's net sales in Fiscal 1997. Fonda's
consumer market is classified into four distribution channels: (i) the grocery
channel, which is serviced through a national and regional network of brokers,
(ii) the retail mass merchant channel, which is serviced directly by field
service representatives, (iii) the specialty (party) channel, which is serviced
through both national and regional networks of brokers and directly by field
service representatives and (iv) the warehouse club channel, which is serviced
both through national and regional networks of brokers and directly by field
service representatives. Customers of Fonda's branded consumer products include
Target Stores (a division of Dayton Hudson Corp.), Wal-Mart Stores, Inc., Kmart
Corporation and The Great Atlantic & Pacific Tea Company, Inc. Fonda's primary
private label customers in the consumer market include The Kroger Co., The
Great Atlantic & Pacific Tea Company, Inc. and The Stop & Shop Companies, Inc.
DISTRIBUTION
Each of the Company's manufacturing facilities includes sufficient
warehouse space to store such facility's raw materials and finished goods as
well as products from the Company's other manufacturing facilities. See
"--Facilities." Shipments of finished goods are made from each facility via
common carrier. Sweetheart is in the process of consolidating its warehouse and
distribution facilities in order to reduce costs and improve its customer
service levels. As part of this consolidation, Sweetheart closed its Clackamas,
Oregon and Sparks, Nevada distribution centers. It is further anticipated that
the Ontario and Riverside distribution centers will be combined in a new west
coast distribution center before fiscal year end. Sweetheart is also evaluating
the establishment of a mid-Atlantic distribution center which will replace
distribution centers located at three east coast locations.
67
COMPETITION
The disposable food service products industry is highly competitive. The
Company believes that competition is principally based on product quality,
customer service, price and graphics capability. Competitors include large
multinational companies as well as regional and local manufacturers. The
marketplace for these products is fragmented and includes participants that
compete across the full line of products, as well as those that compete with a
limited number of products. Some of the Company's major competitors are
significantly larger than the Company, are vertically integrated and have
greater access to financial and other resources.
Fonda's primary competitors in the paperboard, plastic and foam food
service converted product categories include Imperial Bondware (a division of
International Paper Co.), Fort James Corp. (successor by merger of James River
and Fort Howard Corp.), AJM Packaging Corp., Temple-Inland Inc., Fold-Pak Corp.
and Solo Cup Co. Major competitors in the tissue and specialty food service
converted product categories include Duni Corp., Erving Paper Products Inc.,
Fort James Corp. and Wisconsin Tissue Mills Inc. (a subsidiary of Chesapeake
Corporation). Fonda's competitors also include manufacturers of products made
from plastics and foam. Fonda's competitors in tissue mill products include
Lincoln Pulp and Paper Co., Inc. ("Lincoln"), Little Rapids Corporation and
Cellu Tissue Corporation.Sweetheart's primary competitors in the food service
categories include Dart Group Corporation, Fort James Corp., Solo Cup Co. and
Tenneco Inc. Major competitors in the food packaging categories include
Cardinal Plastics, Inc., Landis Plastics, Inc., Norse Dairy Systems, Inc.,
Polytainer, Ltd. and Sealright Co., Inc.
RAW MATERIALS AND SUPPLIERS
Raw materials are a significant component of the Company's cost structure.
Principal raw materials for the Company's paperboard and tissue operations
include SBS paperboard, napkin tissue, bond paper and waxed bond obtained from
major domestic manufacturers. Other material components include corrugated
boxes, poly bags, wax adhesives, coating and inks. Paperboard, napkin tissue,
bond paper and waxed bond paper are purchased in "jumbo" rolls which may either
be slit for in-line printing and processing, printed and processed or printed
and blanked for processing into final products. Primary suppliers of paperboard
stock are Georgia-Pacific Corp., Temple-Inland Inc., Fort James Corp. and
Gilman Paper Co. Lincoln is the primary supplier of tissue to the Company.
Pursuant to a contract, as amended, with Lincoln, the Company is required to
purchase color and white tissue at the lower of a formula-based price or market
price through December 31, 1999. The principal raw material for the Company's
plastic operations is plastic resin (polystyrene, polypropylene, high density
polyethylene and polyethylene terphalate glycol modified) purchased directly
from major petrochemical companies and other resin suppliers. Resin is
processed and formed into cups, lids, cutlery, meal service products, straws
and containers. The Company manufactures foam products by extruding sheets of
plastic foam material that are converted into cups and plates. The Company has
a number of suppliers for substantially all of its raw materials and believes
that current sources of supply for its raw materials are adequate to meet its
requirements. Fonda purchases the bulk of its SBS paperboard and napkin tissue
under long-term contracts. Sweetheart does not maintain any written contracts
with its suppliers of raw materials.
FACILITIES
The Company has 25 converting facilities located throughout the United
States and two in Canada. All of the Company's facilities are well maintained,
in good operating condition and suitable for the Company's operations.
68
The table below provides summary information regarding the principal
properties owned or leased by Fonda and Sweetheart.
SIZE
(APPROXIMATE
MANUFACTURING/ AGGREGATE OWNED/
LOCATION WAREHOUSE SQUARE FEET) LEASED
- -------- ---------------- -------------- -------
FONDA CONVERTING FACILITIES
Appleton, Wisconsin ............................ M/W 267,700 O
Glens Falls, New York .......................... M/W 59,100 O
Goshen, Indiana ................................ M/W 63,000 O
Jacksonville, Florida .......................... M/W 70,000 L(1)
Lakeland, Florida .............................. M/W 50,000 L
Maspeth, New York .............................. M/W 130,000 L
Oshkosh, Wisconsin ............................. M/W 484,000 O
St. Albans, Vermont ............................ M 124,900 O
W 182,000 L
Williamsburg, Pennsylvania ..................... M/W 146,000 O(2)
SWEETHEART CONVERTING FACILITIES
Augusta, Georgia ............................... M/W 339,000 O
Conyers, Georgia ............................... M/W 905,000 O
Chicago, Illinois (2 facilities) ............... M/W 902,000 O
W 587,000 L
Dallas, Texas .................................. M/W 1,316,000 O
Manchester, New Hampshire ...................... M/W 160,000 O
North Las Vegas, Nevada (2 facilities) ......... M/W 128,000 L
W 12,000 L
Ontario, California ............................ W 249,000 L(3)
Owings Mills, Maryland (3 facilities) .......... M/W 1,533,000 O
W 267,000 O
W 406,000 O
Scarborough, Ontario (2 facilities) ............ M/W 185,000 O
M/W 207,000 O
Somerville, Massachusetts ...................... M/W 193,000 O
Springfield, Missouri (2 facilities) ........... M/W 925,000 O
W 415,000 L
Wilmington, Massachusetts ...................... W 407,000 L
- ----------
(1) Leased from Dennis Mehiel. In Fiscal 1998, Fonda decided to close its
Jacksonville, Florida facility. See "Certain Relationships and Related
Transactions."
(2) Subject to capital lease.
(3) Facility will be closed and returned to the lessor at or prior to the
lease expiration of May 31, 1998. The facility will be replaced by a new
370,000 square foot warehouse facility which will also be located in
Ontario, California and will be leased.
During Fiscal 1997, Fonda decided to close its Three Rivers, Michigan and
Long Beach, California facilities, which have subsequently closed. One of
Sweetheart's warehouses in Augusta, Georgia was closed in the latter part of
Fiscal 1997. Sweetheart is currently subleasing such property to a third party
through March 31, 2001. Sweetheart's Riverside, California facility was closed
in the latter part of Fiscal 1997. On March 24, 1998, Fonda consummated the
Natural Dam Disposition and in connection therewith sold its tissue mill
facility in Gouverneur, New York.
69
ENVIRONMENTAL MATTERS
The Company and its operations are subject to comprehensive and frequently
changing Federal, state, local and foreign environmental and occupational
health and safety laws and regulations, including laws and regulations
governing emissions of air pollutants, discharges of waste and storm water, and
the disposal of hazardous wastes. The Company is subject to liability for the
investigation and remediation of environmental contamination (including
contamination caused by other parties) at properties that it owns or operates
and at other properties where the Company or its predecessors have arranged for
the disposal of hazardous substances. As a result, the Company is involved from
time to time in administrative and judicial proceedings and inquiries relating
to environmental matters. The Company believes that there are currently no
pending investigations at the Company's plants and sites relating to
environmental matters. However, there can be no assurance that the Company will
not be involved in any such proceeding in the future and that any amount of
future clean up costs and other environmental liabilities will not be material.
The Company cannot predict what environmental legislation or regulations
will be enacted in the future, how existing or future laws or regulations will
be administered or interpreted or what environmental conditions may be found to
exist. Enactment of more stringent laws or regulations or more strict
interpretation of existing laws and regulations may require additional
expenditures by the Company, some of which could be material.
The Clean Air Act mandates the phase out of certain refrigerant compounds,
which will require Sweetheart to upgrade or retrofit air conditioning and
chilling systems during the next few years. Sweetheart has decided to replace
units as they become inefficient or unserviceable. The upgrade of existing
systems would cost approximately $4.0 million. Approximately $1.0 million has
been spent by Sweetheart on upgrading systems in the last five years, exclusive
of costs of $2.4 million to convert to a new foam blowing agent in 1993.
Sweetheart anticipates that future levels of expenditures for environmental
matters (exclusive of costs relating to the blowing agent conversion and the
retrofitting of air conditioning and chilling systems described above) will be
comparable; however, there can be no assurance that expenditures will not be
higher.
During Fiscal 1997, Sweetheart received a request for information from the
Environmental Protection Agency ("EPA") pursuant to Section 104 of the
Comprehensive Environmental Response, Compensation, and Liability Act and
Section 3007 of the Resource Conservation and Recovery Act, concerning the
Lily-Tulip Brown Fields site (the "Site") in Old Town, Maine. Sweetheart
received a demand from the City of Old Town for payment of Sweetheart's alleged
share of the clean-up of the Site. Sweetheart settled these claims by paying
$40,000 in the first quarter of Fiscal 1998.
Some of the Company's facilities contain asbestos. Although there is no
current legal requirement to remove such asbestos, the Company has an ongoing
monitoring and maintenance program to maintain and/or remove such asbestos as
appropriate to prevent the release of friable asbestos. The Company does not
believe the costs associated with such program will be material to its business
or financial condition.
TECHNOLOGY AND RESEARCH
Sweetheart maintains facilities for the development of new products and
product line extensions in Owings Mills, Maryland. Sweetheart maintains a staff
of engineers and technicians who are responsible for product quality, process
control, improvement of existing products, development of new products and
processes and technical assistance in adhering to environmental rules and
regulations. Sweetheart is continually striving to expand its proprietary
manufacturing technology, further automate its manufacturing operations, and
develop improved manufacturing processes and product designs.
LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and other
claims arising in the ordinary course of its business. The Company maintains
insurance coverage of types and in amounts which it believes to be adequate.
The Company believes that it is not presently a party to any litigation, the
outcome of which could reasonably be expected to have a material adverse effect
on its financial condition or results of operations.
70
An action entitled Allan C. Aldridge, et al. v. Lily-Tulip, Inc. Salary
Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil
Action No. CV 187-084, is currently pending against The Lily-Tulip, Inc. Salary
Retirement Plan Benefits Committee and Sweetheart Cup Company Inc. in the
United States District Court for the Southern District of Georgia. See Note 16
of the Notes to the Financial Statements of Sweetheart.
A patent infringement action entitled Fort James Corp. v. Sweetheart Cup
Company Inc., Civil Action No. 97-C-1221, was filed in the United States
District Court for the Eastern District of Wisconsin on November 21, 1997.
Sweetheart has filed an answer to the complaint denying liability and asserting
various affirmative defenses and counterclaims. In the opinion of Sweetheart's
management, the ultimate liability, if any, will not materially affect
Sweetheart's financial position or results of operations.
EMPLOYEES
At March 31, 1998, Sweetheart employed approximately 7,000 persons, of
whom approximately 6,000 persons were hourly employees with approximately 94%
of those employees located at facilities in the United States. Approximately
950 of the hourly employees located at facilities in the United States are
represented by a union. All hourly employees located in Canada are represented
by a union. Sweetheart closed its Riverside, California facility in Fiscal
1997. Sweetheart considers its relationship with its employees to be good.
At March 31, 1998, Fonda employed approximately 1,500 persons, of whom
approximately 1,160 were hourly employees. Approximately 87% of Fonda's hourly
employees are represented by the United Paperworkers International Union. All
of Fonda's facilities are covered by labor agreements other than its facility
in Jacksonville, Florida. During Fiscal 1997, Fonda decided to close its Three
Rivers, Michigan and Long Beach, California facilities, both of which have
subsequently closed. In Fiscal 1998, Fonda decided to close its Jacksonville,
Florida facility. Fonda considers its relationship with its employees to be
good.
71
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
NAME AGE POSITION
- ---- --- --------
Dennis Mehiel ................... 56 Chairman and Chief Executive Officer
Thomas Uleau .................... 53 President, Chief Operating Officer and Director
Hans Heinsen .................... 45 Senior Vice President, Chief Financial Officer
and Treasurer
Harvey L. Friedman .............. 56 Secretary and General Counsel
Alfred B. DelBello .............. 63 Vice Chairman
James Armenakis ................. 54 Director
W. Richard Bingham .............. 62 Director
Gail Blanke ..................... 50 Director
John A. Catsimatidis ............ 49 Director
Chris Mehiel .................... 58 Director
Jerome T. Muldowney ............. 52 Director
G. William Seawright ............ 56 Director
Lowell P. Weicker, Jr. .......... 66 Director
DENNIS MEHIEL has been Chairman and Chief Executive Officer of the Company
since December 1997. He has been Chairman and Chief Executive Officer of Fonda
since it was purchased in 1988. In addition, Mr. Mehiel is Chief Executive
Officer of Sweetheart. Since 1966 he has been Chairman of Four M, a converter
and seller of interior packaging, corrugated sheets and corrugated containers
which he co-founded, and since 1977 (except during a leave of absence from
April 1994 through July 1995) he has been the Chief Executive Officer of Four
M. Mr. Mehiel is also the Chairman of Box USA of New Jersey, Inc. ("Box of New
Jersey"), a manufacturer of corrugated containers, and Chairman and Chief
Executive Officer of CEG.
THOMAS ULEAU has been President, Chief Operating Officer and a Director of
the Company since February 1998. He has been President of Fonda since January
1997, Chief Operating Officer of Fonda since 1994 and a director of Fonda since
1988. In addition, Mr. Uleau is Chief Operating Officer of Sweetheart. Mr.
Uleau was Executive Vice President of Fonda from 1994 to 1996 and from 1988 to
1989. He has been Executive Vice President of CEG since 1996. He served as
Executive Vice President and Chief Financial Officer of Four M from 1989
through 1993 and its Chief Operating Officer in 1994. He is also currently a
director of Four M, CEG, and Box of New Jersey. Mr. Uleau was President of
Cardinal Container Corporation (which was acquired by Four M in 1985) from 1983
to 1987. He started his career as an accountant at Haskins and Sells from 1969
to 1971, after which he spent several years in various capacities at IU
International Corp., a transportation and paper products conglomerate.
HANS HEINSEN has been Senior Vice President, Chief Financial Officer and
Treasurer of the Company since February 1998. He has been Senior Vice President
and Treasurer of Fonda since January 1997 and Vice President Finance and Chief
Financial Officer of Fonda since June 1996. Mr. Heinsen is also Chief Financial
Officer of Sweetheart. Prior to joining Fonda, Mr. Heinsen spent 21 years in a
variety of corporate finance positions with The Chase Manhattan Bank, N.A.
HARVEY L. FRIEDMAN has been Secretary and General Counsel of the Company
since February 1998. He is also Secretary and General Counsel of Fonda. He was
a director of Fonda from 1985 to January 1997. Mr. Friedman is also the
Secretary and General Counsel of CEG, Four M and Box of New Jersey and is a
director of CEG. He was formerly a partner of Kramer, Levin, Naftalis &
Frankel, a New York City law firm.
72
ALFRED B. DELBELLO has served as Vice Chairman of the Company since
February 1998. He has served as Vice Chairman of Fonda since January 1997 and a
director of Fonda since 1990. Since July 1995, Mr. DelBello has been a partner
in the law firm of DelBello, Donnellan & Weingarten & Tartaglia, LLP. From
September 1992 to July 1995 he was a partner in the law firm of Worby DelBello
Donnellan & Weingarten. Prior thereto, he had been President of DelBello
Associates, a consulting firm, since 1985. Mr. DelBello served as Lieutenant
Governor of New York State from 1983 to 1985.
JAMES ARMENAKIS has served as a Director of the Company since February
1998 and a director of Fonda since June 1997. He is a senior partner in the law
firm of Armenakis & Armenakis.
W. RICHARD BINGHAM became a Director of the Company upon the consummation
of the Sweetheart Investment. Mr. Bingham co-founded AIPM and has been a
director and officer of the firm since 1989. He is also a general partner of
AIP. Prior to co-founding AIPM, Mr. Bingham was a Managing Director of Shearson
Lehman Brothers from 1984 until 1987. Prior to joining Shearson Lehman
Brothers, Mr. Bingham was Director of the Corporate Finance Department, a
member of the board, and head of Mergers & Acquisitions at Lehman Brothers Kuhn
Loeb Inc. Prior thereto, he directed investment banking operations at Kuhn Loeb
& Company where he was a partner and member of the board and executive
committee. He formerly served on the board of directors of Avis Inc., ITT Life
Insurance Corporation and Valero Energy Corporation.
GAIL BLANKE has served as a Director of the Company since February 1998
and as a director of Fonda since January 1997. She has been President and Chief
Executive Officer of Gail Blanke's Lifedesigns, LLC since March 1995.
Lifedesigns was founded in March 1995 as a division of Avon Products, Inc.
("Avon") and was spun off from Avon in March 1997. Prior thereto, she held the
position of Corporate Senior Vice President of Avon since August 1991. She also
held a number of management positions at CBS, Inc., including the position of
Manager of Player Promotion for the New York Yankees. Ms. Blanke will be
serving her second consecutive term as President of the New York Women's Forum.
JOHN A. CATSIMATIDIS has served as a Director of the Company since
February 1998 and as a director of Fonda since January 1997. He has been
Chairman and Chief Executive Officer of the Red Apple Group, Inc., a company
with diversified holdings that include oil refining, supermarkets, real estate,
aviation and newspapers, since 1969. Mr. Catsimatidis serves as a director of
Sloan's Supermarket, Inc. and New's Communications, Inc. He also serves on the
board of trustees of New York Hospital, St. Vincent Home for Children, New York
University Business School, Athens College, Independent Refiners Coalition and
New York State Food Merchant's Association.
CHRIS MEHIEL, the brother of Dennis Mehiel, has been a Director of the
Company since February 1998 and a director of Fonda since January 1997. Mr.
Mehiel is a co-founder of Four M and has been Executive Vice President, Chief
Operating Officer and a director of Four M since September 1995 and Chief
Financial Officer since August 1997. He is the President of the managing member
of Fibre Marketing Group, LLC, the successor to Fibre Marketing Group, Inc., a
waste paper recovery business which he co-founded, and was President from 1994
to January 1996. From 1993 to 1994, Mr. Mehiel served as President and Chief
Operating Officer of Box of New Jersey. From 1982 to 1992, Mr. Mehiel served as
the President and Chief Operating Officer of Specialty Industries, Inc., a
waste paper processing and container manufacturing company.
JEROME T. MULDOWNEY has served as a Director of the Company since February
1998 and as a director of Fonda since 1990. Since January 1996, Mr. Muldowney
has been a Managing Director of AIG Global Investment Corp. and since March
1995 he has been a Senior Vice President of AIG Domestic Life Companies ("AIG
Life"). Prior thereto, he had been a Vice President of AIG Life since 1982. In
addition, from 1986 to 1996, he served as President of AIG Investment Advisors,
Inc. He is currently a director of AIG Life and AIG Equity Sales Corp.
G. WILLIAM SEAWRIGHT has served as a Director of the Company since
February 1998 and as a director of Fonda since January 1997. He has been
President and Chief Executive Officer of Stanhome Inc., a manufacturer and
distributor of giftware and collectibles, since 1993. Prior thereto, he was
President and Chief Executive Officer of Paddington, Inc., an importer of
distilled spirits, since 1990. From 1986 to 1990, he was President of Heublein
International, Inc.
73
LOWELL P. WEICKER, JR. has served as a Director of the Company since
February 1998 and as a director of Fonda since January 1997. Mr. Weicker served
as Governor of the State of Connecticut from January 1991 through January 1995.
From 1962 to 1989, Mr. Weicker served in the U.S. Congress. Mr. Weicker
presently teaches at the University of Virginia. In 1992, Mr. Weicker earned
the Profiles in Courage Award from the John F. Kennedy Library Foundation.
EXECUTIVE COMPENSATION
No executive officer of SF Holdings was paid any compensation by SF
Holdings during Fiscal 1997. SF Holdings' executive officers also serve as
executive officers of Sweetheart and/or Fonda. It is anticipated that such
persons will not be separately compensated by SF Holdings. In addition, except
as set forth below under "Stock Options," SF Holdings does not at this time
contemplate that any of its executive officers will be provided with stock
options, restricted stock, stock appreciation rights ("SARs"), phantom stock or
similar equity benefits.
DIRECTOR COMPENSATION
Directors who are not employees of the Company or directors of Fonda or
Sweetheart receive annual compensation of (i) $12,000, (ii) $1,000 for each
Board meeting attended, (iii) $1,000 for each committee meeting attended which
is not held on the date of a Board meeting and (iv) 100 SARs. Directors who are
employees of the Company or directors of Fonda or Sweetheart do not receive any
compensation or fees for service on the Board of Directors or any committee
thereof.
STOCK OPTIONS
Pursuant to the Sweetheart Investment, Dennis Mehiel currently holds
609,307 options to purchase Class A Common Stock of SF Holdings at an option
price of $2.83 per share and 105,842 options to purchase Class A Common Stock
of SF Holdings at an option price of $3.11 per share. Of such options, options
to purchase 238,383 shares are currently exercisable and options to purchase
238,383 shares vest on October 1, 1998 and October 1, 1999 or upon an initial
public offering of the Company's Common Stock, whichever occurs first;
provided, however, that Mr. Mehiel is then employed by SF Holdings and its
subsidiaries.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 10, 1998,
with respect to the beneficial ownership of the shares of common stock of the
Company.
BENEFICIAL OWNERSHIP
------------------------------
NAME AND ADDRESS OF NUMBER OF PERCENTAGE OF
BENEFICIAL OWNER SHARES OWNERSHIP(1)(2)
- ---------------- ----------- ----------------
Dennis Mehiel
115 Stevens Avenue
Valhalla, New York 10595 .......... 6,431,573 78.8%
All executive officers and directors
as a group (3 persons) ............ 6,679,458 81.8%
- ----------
(1) Includes 564,586 shares of Class B Common Stock.
(2) Includes 238,383 shares underlying options to purchase Class A Common
Stock, which are presently exercisable, and 1,341,381 shares which Mr.
Mehiel has the power to vote pursuant to a voting trust agreement between
his spouse, Edith Mehiel, and himself. See "Management--Stock Options."
74
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Fonda leases its Jacksonville facility from Dennis Mehiel on terms that
Fonda believes are no less favorable than could be negotiated with an
independent third party on an arm's-length basis. Pursuant to the lease, which
has a term expiring December 31, 2014, Fonda currently pays base rent of
approximately $167,000 per year, subject to escalations indexed to the Consumer
Price Index ("CPI"). In addition, from January 1, 1998 through July 31, 2006,
Mr. Mehiel may require Fonda to purchase the facility for $1.5 million, subject
to a CPI-based escalation. The purchase price would be paid $350,000 in cash
and the balance in a seven-year note secured by a lien covering the facility
and under which the regular monthly payments would be no greater than the
monthly lease payments payable to Mr. Mehiel immediately prior to the sale
date, with interest payable at a rate of prime plus 2% and the remaining
principal amount payable at maturity. In Fiscal 1998, Fonda decided to close
its Jacksonville facility. Fonda is currently negotiating the termination of
the lease of its Jacksonville facility and does not expect such termination to
have a material adverse effect on Fonda.
Fonda purchased $0.9 million and $0.2 million in Fiscal 1997 and 1996,
respectively, of corrugated containers from Four M. Four M is owned by Dennis
Mehiel. Management believes that the terms on which it purchased such
containers were at least as favorable as those which it could otherwise have
obtained from unrelated third parties and such terms were negotiated on an
arm's-length basis.
Fonda had net sales to Fibre Marketing Group, LLC, a waste paper recovery
business of which Four M and a director of Fonda are members, of $3.6 million
in Fiscal 1997, $4.0 million in Fiscal 1996 and $0.2 million in Fiscal 1995.
Management believes that the sales terms were at least as favorable as those
which it could otherwise have obtained from unrelated third parties and such
terms were negotiated on an arm's-length basis.
Fonda had net sales to CEG in the amount of $7.8 million and $1.9 million
in Fiscal 1997 and 1996, respectively. CEG manufactures party goods such as
decorated plates, cups, napkins, tablecovers, tableware and other related
products. Dennis Mehiel owns 97% of CEG. The Company believes that the terms
upon which it sold products to CEG were at least as favorable as those which it
could otherwise have obtained from unrelated third parties and that such terms
were negotiated on an arm's-length basis.
On February 27, 1997, upon the issuance of the Fonda Notes, Fonda loaned
$2.6 million to CEG for five years at an interest rate of 10% per annum (the
"CEG Note"), the proceeds of which were applied to CEG's prepayment of certain
obligations. On March 12, 1998, certain of the terms of the CEG Note were
amended. At the Company's option, interest on the CEG Note is pay-in-kind and
the note's maturity was extended for an additional three years. In
consideration for such amendment, Fonda was issued a warrant to purchase 2.5%
of CEG's common equity. The Company believes that the terms of such loan and
the amendments thereto are no more favorable to CEG than those that CEG could
otherwise have obtained from unrelated third parties and such terms were
negotiated on an arm's length basis.
On March 12, 1998, Fonda entered into a five-year licensing agreement with
its affiliate, CEG, subject to extension, whereby CEG will manufacture and
distribute certain party goods products currently manufactured by Fonda. In
connection therewith, Fonda will receive a royalty equal to 5% of CEG's cash
flow, as determined in accordance with a formula specified in such agreement.
In Fiscal 1997, Fonda's net sales of such party goods products were
approximately $30 million. The Company expects Fonda's fixed and variable costs
to decrease and it expects to reduce Fonda's accounts receivable and inventory
by approximately $9 million as a result of such licensing agreement. The
Company believes that such transaction will have a favorable impact on Fonda's
results of operations.
Upon consummation of the Sweetheart Investment, SF Holdings and Fonda,
which file consolidated Federal income tax returns, entered into a Tax Sharing
Agreement, pursuant to which Fonda will pay SF Holdings its allocable share of
the consolidated group's consolidated Federal income tax liability, which, in
general, will equal the tax liability Fonda would have paid if it had filed
separate tax returns.
Upon consummation of the Sweetheart Investment, SF Holdings assigned
substantially all of its rights under the Management Services Agreement to
Fonda. See "The Sweetheart Investment."
75
DESCRIPTION OF NEW NOTES
GENERAL
The New Notes will be issued pursuant to the Indenture between the Company
and The Bank of New York, as trustee (the "Trustee"). The terms of the New
Notes include those stated in the Indenture and those made a part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The New Notes are subject to all such terms, and
Holders of New Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of the material provisions of
the Indenture, the Pledge Agreement and the Registration Rights Agreement does
not purport to be complete and is qualified in its entirety by reference to
such documents, including the definitions therein of certain terms used below.
Copies of the proposed form of Indenture, Pledge Agreement and Registration
Rights Agreement are available as set forth below under "--Additional
Information." The definitions of certain terms used in the following summary
are set forth below under "--Certain Definitions." For purposes of this
summary, the term "Company" refers only to SF Holdings Group, Inc. and not to
any of its Subsidiaries.
The New Notes will rank senior in right of payment to any subordinated
indebtedness of the Company incurred in the future, and will rank pari passu in
right of payment with any other senior indebtedness of the Company incurred in
the future. The New Notes will be secured by a first priority pledge of all of
the Capital Stock owned by the Company of the current and future Restricted
Subsidiaries of the Company, including without limitation, Fonda and
Sweetheart. See "--Security."
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company will not have material cash flows independent of its
Subsidiaries. The New Notes will be effectively subordinated to all
Indebtedness and other liabilities and commitments (including trade payables
and lease obligations) of the Company's Subsidiaries. Any right of the Company
to receive assets of any of its Subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the Holders of the New Notes to
participate in those assets) will be effectively subordinated to the claims of
such Subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
Subsidiary and any indebtedness of such Subsidiary senior to that held by the
Company. As of January 25, 1998, after giving pro forma effect to the
Transactions, all indebtedness and other liabilities and commitments of the
Company's Subsidiaries would have totaled $765.5 million of outstanding
Indebtedness. See "Risk Factors--Holding Company Structure and Related
Considerations."
SECURITY
The New Notes will be secured by a pledge of all of the Capital Stock
owned by the Company of, and all intercompany notes issued in favor of the
Company by, all of the current and future Restricted Subsidiaries of the
Company, including Fonda and Sweetheart. The Company has entered into a pledge
agreement (the "Pledge Agreement") providing for the pledge of the Collateral
by the Company to The Bank of New York, as collateral agent (in such capacity,
the "Collateral Agent") for the Holders of the New Notes. The Pledge Agreement
will prohibit the creation of any new directly owned Restricted Subsidiaries of
the Company unless the Company pledges such Capital Stock of such Restricted
Subsidiary that is owned by the Company in accordance with the terms of the
Pledge Agreement. In addition, the Pledge Agreement will prohibit intercompany
loans from the Company to any of its Restricted Subsidiaries unless such loans
are documented in the form of promissory notes payable to the Company and the
Company pledges such promissory notes in accordance with the terms of the
Pledge Agreement. Such pledges will secure the payment and performance when due
of all of the Obligations of the Company under the Indenture and the New Notes
as provided in the Pledge Agreement.
So long as no Default or Event of Default shall have occurred and be
continuing, and subject to certain terms and conditions in the Indenture and
the Pledge Agreement, the Company will be entitled to receive all cash
dividends, interest and other payments made upon or with respect to the
Collateral and to exercise any voting and other consensual rights pertaining to
the Collateral. Upon the occurrence and
76
during the continuance of a Default or Event of Default, (a) all rights of the
Company to exercise such voting or other consensual rights shall cease, and all
such rights shall become vested in the Collateral Agent, which, to the extent
permitted by law, shall have the sole right to exercise such voting and other
consensual rights, (b) all rights of the Company to receive all cash dividends,
interest and other payments made upon or with respect to the Collateral will
cease and such cash dividends, interest and other payments will be paid to the
Collateral Agent, and (c) the Collateral Agent may sell the Collateral or any
part thereof in accordance with the terms of the Pledge Agreement. All funds
distributed under the Pledge Agreement and received by the Collateral Agent for
the benefit of the Holders of the New Notes will be distributed by the
Collateral Agent in accordance with the provisions of the Indenture.
Under the terms of the Pledge Agreement, the Collateral Agent will
determine the circumstances and manner in which the Collateral will be disposed
of, including, but not limited to, the determination of whether to release all
or any portion of the Collateral from the Liens created by the Pledge Agreement
and whether to foreclose on the Collateral following a Default or Event of
Default. Moreover, upon the full and final payment and performance of all
Obligations of the Company under the Indenture and the New Notes, the Pledge
Agreement will terminate and the Collateral will be released.
PRINCIPAL, MATURITY AND INTEREST
Each New Note will be limited in aggregate principal amount at maturity to
$1,000 and will mature on March 15, 2008. The Old Notes were issued at a
substantial discount from their principal amount at maturity, together with the
Common Stock, to generate gross proceeds to the Company of approximately $77.5
million. Until March 15, 2003, no interest will accrue on the New Notes, but
the Accreted Value will increase (representing amortization of original issue
discount) between the date of original issuance of the Old Notes and March 15,
2003, on a semi-annual bond equivalent basis using a 360-day year comprised of
twelve 30-day months, such that the Accreted Value will be equal to the full
principal amount at maturity of the New Notes on March 15, 2003. Beginning on
March 15, 2003, interest on the New Notes will accrue at the rate of 12 3/4%
per annum and will be payable in cash semi-annually in arrears on March 15 and
September 15 of each year, commencing on September 15, 2003, to Holders of
record on the immediately preceding March 1 and September 1. Interest on the
New Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from March 15, 2003. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of and premium, interest and Liquidated Damages, if any, on the New
Notes will be payable at the office or agency of the Company maintained for
such purpose or, at the option of the Company, payment of interest and
Liquidated Damages may be made by check mailed to the Holders of the New Notes
at their respective addresses set forth in the register of Holders of New
Notes; provided that all payments of principal, premium, interest and
Liquidated Damages with respect to New Notes the Holders of which have given
wire transfer instructions to the Company will be required to be made by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's
office or agency will be the office of the Trustee maintained for such purpose.
The New Notes will be issued in denominations of $1,000 and integral multiples
thereof.
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the New Notes will not be
redeemable at the Company's option prior to March 15, 2003. Thereafter, the New
Notes will be subject to redemption at any time at the option of the Company,
in whole or in part, upon not less than 30 nor more than 60 days' notice, at
the redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest and Liquidated Damages thereon, if any,
to the applicable redemption date, if redeemed during the twelve-month period
beginning on March 15 of the years indicated below:
YEAR PERCENTAGE
- ---------------------------------------- -------------
2003 ......................... 106.375%
2004 ......................... 104.250%
2005 ......................... 102.125%
2006 and thereafter .......... 100.000%
77
Prior to March 15, 2001, the Company may, at its option, redeem up to
one-third of the aggregate principal amount at maturity of Notes at a
redemption price equal to 112.75% of the Accreted Value thereof, plus
Liquidated Damages thereon, if any, with the net cash proceeds of an Equity
Offering; provided that at least two-thirds of the original aggregate principal
amount at maturity of Notes remains outstanding immediately after the
occurrence of such redemption (excluding Notes held by the Company and its
Subsidiaries); and provided, further, that any such redemption shall occur
within 60 days of the date of the closing of such Equity Offering.
SELECTION AND NOTICE
If less than all of the New Notes are to be redeemed at any time,
selection of New Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which the New Notes are listed, or, if the New Notes are not so listed, on a
pro rata basis, by lot or by such other method as the Trustee shall deem fair
and appropriate; provided that no New Notes of $1,000 or less shall be redeemed
in part. Notices of redemption shall be mailed by first class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. Notices of redemption may not be
conditional. If any New Note is to be redeemed in part only, the notice of
redemption that relates to such New Note shall state the portion of the
principal amount thereof to be redeemed. A new New Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original New Note. New Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on New Notes or portions of them
called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the New Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required
to make an offer to each Holder of New Notes to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's New Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the
date of purchase (or, in the case of repurchases of Notes prior to , 2003, at a
purchase price equal to 101% of the Accreted Value thereof, plus Liquidated
Damages thereon, if any, as of the date of repurchase) (the "Change of Control
Payment"). Within ten days following any Change of Control, the Company will
mail a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase New Notes on the
date specified in such notice, which date shall be no earlier than 30 days and
no later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"), pursuant to the procedures required by the Indenture
and described in such notice. The Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the New Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all New Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all New
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the New Notes so accepted together with an Officers' Certificate
stating the aggregate principal amount at maturity of New Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
each Holder of New Notes so tendered the Change of Control Payment for such New
Notes, and the
78
Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each Holder a new New Note equal in principal amount at maturity to
any unpurchased portion of the New Notes surrendered, if any; provided that
each such new New Note will be in a principal amount at maturity of $1,000 or
an integral multiple thereof. The Company will publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
There can be no assurances that the Company will have adequate resources
to consummate a Change of Control Offer following a Change of Control. See
"Risk Factors--Substantial Leverage" and "Risk Factors--Holding Company
Structure and Related Considerations." The Company's failure to make a Change
of Control Offer when required or to purchase tendered New Notes when tendered
would constitute an Event of Default under the Indenture.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the New Notes to require that the
Company repurchase or redeem the New Notes in the event of a takeover,
recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all New Notes validly tendered and not withdrawn under
such Change of Control Offer.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash; provided that the amount of (x) any liabilities (as shown
on the Company's or such Restricted Subsidiary's most recent balance sheet), of
the Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the New Notes) that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases the Company or such Restricted Subsidiary from further
liability and (y) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision.
Within 365 days after the Company's or any Restricted Subsidiary's receipt
of any Net Proceeds from an Asset Sale, the Company or such Restricted
Subsidiary may apply such Net Proceeds (a) to permanently repay Indebtedness of
a Restricted Subsidiary of the Company (and, in the case of revolving
borrowings, to correspondingly reduce commitments with respect thereto), or (b)
to the acquisition of a majority of the assets of, or a majority of the Voting
Stock of, another Permitted Business, the making of a capital expenditure or
the acquisition of other long-term assets that are used or useful in a
Permitted Business. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce revolving credit borrowings or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any
Net Proceeds from Asset Sales that are not applied or invested as provided in
the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million,
the Company will be required to make an offer to all Holders of New Notes (an
"Asset Sale Offer") to purchase the maximum principal amount of New Notes that
may be purchased out of the Excess Proceeds, at an offer price in cash in an
amount equal to 100% of the aggregate principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages thereon, if any, to the date of
purchase (or, in the case of purchases of New Notes prior to March 15, 2003, at
a purchase price equal to 100% of the Accreted Value thereof, plus Liquidated
Damages thereon, if
79
any), in accordance with the procedures set forth in the Indenture; provided
however, that such offer will not be required if the application of such Excess
Proceeds to repurchase New Notes would cause an Event of Default under the
Subsidiary Debt Instruments. If the aggregate purchase price of New Notes
tendered into such Asset Sale Offer surrendered by Holders thereof is less than
the amount of Excess Proceeds, the Company may use such Excess Proceeds for
general corporate purposes (subject to the restrictions of the Indenture). If
the aggregate purchase price of New Notes tendered into such Asset Sale Offer
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the New Notes to be purchased on a pro rata basis. Upon
completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company or any of its Restricted Subsidiaries) or to the direct
or indirect holders of the Company's or any of its Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or to the Company or any Restricted Subsidiary of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation involving
the Company) any Equity Interests of the Company or any direct or indirect
parent of the Company or other Affiliate of the Company (other than any such
Equity Interests owned by the Company or any Restricted Subsidiary of the
Company); (iii) make any principal payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
is subordinated to the New Notes, except a payment of principal at Stated
Maturity; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii) and (iv) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company since
the date of the Indenture as a contribution to its common equity capital or
from the issue or sale of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock or debt
securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Restricted Subsidiary of the
Company), plus (iii) to the extent that any Restricted Investment that was
made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, 100% of the net cash proceeds thereof (less
the cost of disposition, if any), but only to the extent not included in
subclause (i) of this clause (c).
80
The foregoing provisions will not prohibit (i) the payments and
applications of the proceeds to be received by the Company from the issuance of
the Units as described under "Use of Proceeds" (ii) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (iii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Equity Interests of the Company in exchange for, or out of
the net cash proceeds of the substantially concurrent sale (other than to a
Restricted Subsidiary of the Company) of, other Equity Interests of the Company
(other than any Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from clause (c)
of the preceding paragraph; (iv) the defeasance, redemption, repurchase or
other acquisition of subordinated Indebtedness with the net cash proceeds from
an incurrence of Permitted Refinancing Indebtedness or the substantially
concurrent sale (other than to a Restricted Subsidiary of the Company) of
Equity Interests of the Company (other than Disqualified Stock); provided that
the amount of any such net cash proceeds that are utilized for any such
defeasance, redemption or repurchase shall be excluded from clause (c) of the
preceding paragraph; (v) the payment of any dividend by a Restricted Subsidiary
of the Company to the holders of its Equity Interests on a pro rata basis; and
(vi) so long as no Default or Event of Default shall have occurred and be
continuing immediately after such transaction, the repurchase, redemption or
other acquisition or retirement for value of any Equity Interests of the
Company or any Restricted Subsidiary of the Company held by any member of the
Company's (or any of its Restricted Subsidiaries') management; provided that
the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $1.0 million in any twelve-month
period plus the aggregate cash proceeds received by the Company (or any of its
Restricted Subsidiaries) during any such twelve-month period from any issuance
of Equity Interests by the Company (or any of its Restricted Subsidiaries) to
members of management of the Company (or any of its Restricted Subsidiaries)
(provided that such proceeds are excluded from clause (c) of the preceding
paragraph); and provided, further, that such repurchase, redemption or other
acquisition or retirement may not include any Equity Interests owned, directly
or indirectly, but the Principals.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
greatest of (i) the net book value of such Investments at the time of such
designation, (ii) the fair market value of such Investments at the time of such
designation and (iii) the original fair market value of such Investments at the
time they were made. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined by
the Board of Directors whose resolution with respect thereto shall be delivered
to the Trustee, such determination to be based upon an opinion or appraisal
issued by an accounting, appraisal or investment banking firm of national
standing if such fair market value exceeds $1.0 million. Not later than the
date of making any Restricted Payment, the Company shall deliver to the Trustee
an Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by the covenant
"Restricted Payments" were computed, together with a copy of any fairness
opinion or appraisal required by the Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly
81
or indirectly liable, contingently or otherwise, with respect to (collectively,
"incur") any Indebtedness (including Acquired Debt) and the Company will not
permit any of its Restricted Subsidiaries to issue any shares of preferred
stock; provided, however, that so long as no Default or Event of Default has
occurred or is continuing, the Company and its Restricted Subsidiaries may
incur Indebtedness (including Acquired Debt) if the Fixed Charge Coverage Ratio
for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred would have been at least 1.75 to
1, if such additional Indebtedness is incurred prior to March 15, 2000, or at
least 2.0 to 1, if such additional Indebtedness is incurred on or after March
15, 2000, in each case, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred at the beginning of such four-quarter period.
The Indenture also provides that the Company will not incur any
Indebtedness that is contractually subordinated in right of payment to any
other Indebtedness of the Company unless such Indebtedness is also
contractually subordinated in right of payment to the New Notes on
substantially identical terms; provided, however, that no Indebtedness of the
Company shall be deemed to be contractually subordinated in right of payment to
any other Indebtedness of the Company solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness from a bank or other financial institution in an aggregate
principal amount not to exceed $200.0 million at any one time outstanding,
less any Net Proceeds of Asset Sales applied to permanently reduce any such
Indebtedness pursuant to the provisions of the Indenture, described under
"--Repurchase at the Option of Holders--Asset Sales;"
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness, other than pursuant to the Fonda Credit Facility or
the Sweetheart Credit Facilities;
(iii) the incurrence by the Company of Indebtedness represented by the
New Notes and the Indenture;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount not to exceed $5.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in connection with the acquisition of assets or a new
Restricted Subsidiary; provided that such Indebtedness was incurred by the
prior owner of such assets or such Restricted Subsidiary prior to such
acquisition by the Company or one of its Restricted Subsidiaries and was
not incurred in connection with, or in contemplation of, such acquisition
by the Company or one of its Restricted Subsidiaries; and provided further
that the principal amount (or accreted value, as applicable) of such
Indebtedness, together with any other outstanding Indebtedness incurred
pursuant to this clause (v) and any Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any Indebtedness incurred pursuant
to this clause (v), does not exceed $5.0 million;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be
incurred under the first paragraph hereof or clauses (ii), (iii), (iv) or
(v) of this paragraph;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries; provided,
82
however, that (a) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than the
Company or a Restricted Subsidiary thereof and (b) any sale or other
transfer of any such Indebtedness to a Person that is not either the
Company or a Restricted Subsidiary thereof shall be deemed, in each case,
to constitute an incurrence of such Indebtedness by the Company or such
Restricted Subsidiary, as the case may be, that was not permitted by this
clause (vii);
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this Indenture to be
outstanding; and
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) not to exceed $25.0 million at any one time
outstanding.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (ix) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in
any manner that complies with this covenant. Accrual of interest, accretion or
amortization of original issue discount, and the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms will
not be deemed to be an incurrence of Indebtedness for purposes of this
covenant; provided, in each such case, that the amount thereof is included in
Fixed Charges of the Company as accrued.
LIENS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset now owned or hereafter
acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom, except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation
in, or measured by, its profits, or (b) pay any indebtedness owed to the
Company or any of its Restricted Subsidiaries, (ii) make loans or advances to
the Company or any of its Restricted Subsidiaries or (iii) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries.
However, the foregoing restrictions will not apply to encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive, with respect to such dividend and other
payment restrictions than those as in effect on the date of the Indenture, (b)
the Indenture and the New Notes, (c) applicable law, (d) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided
that, in the case of Indebtedness, such Indebtedness was permitted by the terms
of the Indenture to be incurred, (e) customary non-assignment provisions in
leases entered into in the ordinary course of business and consistent with past
practices, (f) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, (g) restrictions relating to a
Restricted
83
Subsidiary formed for the sole purpose of engaging in accounts receivable
financing, (h) any agreement for the sale of a Restricted Subsidiary that
restricts distributions by that Restricted Subsidiary pending its sale, (i)
Permitted Refinancing Indebtedness, provided that the restrictions contained in
the agreements governing such Permitted Refinancing Indebtedness are no more
restrictive, taken as a whole, than those contained in the agreements governing
the Indebtedness being refinanced and (j) secured Indebtedness otherwise
permitted to be incurred pursuant to the provisions of the covenant described
above under the caption "--Liens" that limits the right of the debtor to
dispose of the assets securing such Indebtedness.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving entity), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Registration Rights Agreement, the New
Notes, the Pledge Agreement and the Indenture pursuant to supplemental
agreements in a form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction no Default or Event of Default exists; and (iv) except
in the case of a merger of the Company with or into a Wholly Owned Restricted
Subsidiary of the Company, the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction
had occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable transaction by the
Company or such Restricted Subsidiary with an unrelated Person and (ii) the
Company delivers to the Trustee (a) with respect to any Affiliate Transaction
or series of related Affiliate Transactions involving aggregate consideration
in excess of $1.0 million, a resolution of the Board of Directors set forth in
an Officers' Certificate certifying that such Affiliate Transaction complies
with clause (i) above and that such Affiliate Transaction has been approved by
a majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $5.0 million, an
opinion as to the fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or investment
banking firm of national standing with total assets in excess of $1.0 billion,
except with respect to transactions in the ordinary course of business and
consistent with past practice between the Company or any of its Restricted
Subsidiaries and Four M, CEG or any of their respective subsidiaries; provided
that the following will not be deemed to be Affiliate Transactions: (1) the
Indenture of Lease dated as of January 1, 1995, between Dennis Mehiel and Fonda
relating to the Jacksonville Facility except for any purchases of property by
Fonda that may arise
84
thereunder; (2) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and consistent
with the past practice of the Company or such Restricted Subsidiary in an
amount not to exceed $1.0 million per annum; (3) transactions between or among
the Company and its Restricted Subsidiaries; (4) Restricted Payments and
Permitted Investments that are permitted by the provisions of the Indenture
described above under the caption "--Restricted Payments;" and (5) transactions
entered into in connection with the Transactions.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK IN WHOLLY OWNED RESTRICTED
SUBSIDIARIES
The Indenture provided that the Company (i) will not, and will not permit
any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey,
sell, lease or otherwise dispose of any Capital Stock in any Wholly Owned
Restricted Subsidiary of the Company to any Person (other than the Company or a
Wholly Owned Restricted Subsidiary of the Company), unless (a) such transfer,
conveyance, sale, lease or other disposition is of all the Capital Stock in
such Wholly Owned Restricted Subsidiary and (b) the cash Net Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in
accordance with "--Repurchase at the Option of Holders--Asset Sales," and (ii)
will not permit any Wholly Owned Restricted Subsidiary of the Company to issue
any of its Equity Interests (other than, if necessary, shares of its Capital
Stock constituting directors' qualifying shares) to any Person other than to
the Company or a Wholly Owned Restricted Subsidiary of the Company.
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
The Indenture provided that the Company will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee or pledge any assets to secure
the payment of any other Indebtedness of the Company , other than any such
Indebtedness incurred pursuant to clauses (i) and (ii) of the definition of
Permitted Debt, unless such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for the Guarantee
of the payment of the New Notes by such Restricted Subsidiary, which Guarantee
shall be senior to or pari passu with such Restricted Subsidiary's Guarantee of
or pledge to secure such other Indebtedness. Notwithstanding the foregoing, any
such Guarantee by a Restricted Subsidiary of the New Notes shall provide by its
terms that it shall be automatically and unconditionally released and
discharged upon any sale, exchange or transfer, to any Person not an Affiliate
of the Company, of all of the Company's stock in, or all or substantially all
the assets of, such Restricted Subsidiary, which sale, exchange or transfer is
made in compliance with the applicable provisions of the Indenture.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Subsidiary to, engage in any
business other than Permitted Businesses, except to such extent as would not be
material to the Company and its Restricted Subsidiaries taken as a whole.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any New Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the New Notes unless such
consideration is offered to be paid or is paid to all Holders of the New Notes
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any New Notes are outstanding, the
Company will furnish to the Holders of New Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including
85
a "Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations of
the Company and its consolidated Subsidiaries (showing in reasonable detail,
either on the face of the financial statements or in the footnotes thereto and
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company) and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports, in each case within the time periods specified
in the Commission's rules and regulations. In addition, following the
consummation of the Exchange Offer, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available
to securities analysts and prospective investors upon request. In addition, the
Company has agreed that, for so long as any New Notes remain outstanding, it
will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the New
Notes; (ii) default in payment when due of the principal of or premium, or
Liquidated Damages, if any, on the New Notes; (iii) failure by the Company or
any of its Subsidiaries to comply with the provisions described under the
captions "--Repurchase at the Option of Holders--Change of Control,"
"--Repurchase at the Option of Holders--Asset Sales," "--Certain
Covenants--Restricted Payments," "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," or "--Certain Covenants--Merger,
Consolidation or Sale of Assets;" (iv) failure by the Company or any of its
Subsidiaries for 30 days after notice to comply with any of its other
agreements in the Indenture, the New Notes or the Pledge Agreement; (v) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness for money borrowed
by the Company or any of its Restricted Subsidiaries (or the payment of which
is guaranteed by the Company or any of its Restricted Subsidiaries) whether
such Indebtedness or guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (vi) failure by
the Company or any of its Restricted Subsidiaries to pay final judgments
aggregating in excess of $5.0 million and either (a) any creditor commences
enforcement proceedings upon any such judgments or (b) such judgments are not
paid, discharged or stayed for a period of 45 days; (vii) breach by the Company
or any Subsidiary Pledgor of any material representation or warranty set forth
in the Pledge Agreement, or default by the Company or any Subsidiary Pledgor in
the performance of any material covenant set forth in the Pledge Agreement, or
repudiation by the Company or any Subsidiary Pledgor of its material
obligations under the Pledge Agreement or the unenforceability of the Pledge
Agreement against the Company or any Subsidiary Pledgor for any reason; and
(viii) certain events of bankruptcy or insolvency with respect to the Company
or any of its Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding New Notes
may declare all the New Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding New Notes will
86
become due and payable without further action or notice. Upon any acceleration
of maturity of the New Notes, all principal of and accrued interest on and
Liquidated Damages, if any (if on or after March 15, 2003) or Accreted Value
and Liquidated Damages, if any (if prior to March 15, 2003), of the New Notes
shall be due and payable immediately. Holders of the New Notes may not enforce
the Indenture or the New Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding New Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the New Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the New Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted by
law upon the acceleration of the New Notes. If an Event of Default occurs prior
to March 15, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the New Notes prior to March 15, 2003, then the
premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the New Notes.
The Holders of a majority in aggregate principal amount of the New Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all
of the New Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the New Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the New Notes, the Indenture or the Pledge Agreement or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of New Notes by accepting a New Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the New Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding New Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company will be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
New Notes except for (i) the rights of Holders of outstanding New Notes to
receive payments in respect of the principal amount at maturity or Accreted
Value (as applicable) of and premium, interest and Liquidated Damages, if any,
on the New Notes when such payments are due or on the redemption date, as the
case may be, (ii) the Company's obligations with respect to the New Notes
concerning issuing temporary New Notes, registration of New Notes, mutilated,
destroyed, lost or stolen New Notes and the maintenance of an office or agency
for payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the New Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy,
87
receivership, rehabilitation and insolvency events) described under "--Events
of Default and Remedies" will no longer constitute an Event of Default with
respect to the New Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the New Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal amount at maturity of or Accreted
Value (as applicable), premium, if any, interest and Liquidated Damages, if
any, on the outstanding New Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
New Notes are being defeased to maturity or to a particular redemption date;
(ii) in the case of Legal Defeasance, the Company shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of
the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of the outstanding New Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding New Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of New Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange New Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any New Note selected for redemption. Also, the Company is not required to
transfer or exchange any New Note for a period of 15 days before a selection of
New Notes to be redeemed.
The registered Holder of a New Note will be treated as the owner of it for
all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the New Notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount, at maturity of the New Notes then
outstanding (including, without limitation, consents obtained in
88
connection with a purchase of, or tender offer or exchange offer for, New
Notes), and any existing default or compliance with any provision of the
Indenture or the New Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding New Notes (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, New Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any New Notes held by a non-consenting Holder): (i) reduce
the principal amount of New Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal amount at maturity of, change
the fixed maturity of, alter the provisions with respect to the redemption of
the New Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders") or amend or modify
the calculation of Accreted Value so as to reduce the amount of the Accreted
Value of the New Notes, (iii) reduce the rate of or change the time for payment
of interest on any New Note, (iv) waive a Default or Event of Default in the
payment of principal of or premium, if any, or interest on the New Notes
(except a rescission of acceleration of the New Notes by the Holders of at
least a majority in aggregate principal amount of the New Notes and a waiver of
the payment default that resulted from such acceleration), (v) make any New
Note payable in money other than that stated in the New Notes, (vi) make any
change in the provisions of the Indenture relating to waivers of past Defaults
or the rights of Holders of New Notes to receive payments of principal of or
premium, if any, or interest on the New Notes, (vii) waive a redemption or
repurchase payment with respect to any New Note (other than a payment required
by one of the covenants described above under the caption "--Repurchase at the
Option of Holders"), (viii) make any change in the foregoing amendment and
waiver provisions or (ix) modify any provision of the Indenture with respect to
the priority of the New Notes in right of payment. Notwithstanding the
foregoing, any amendment or waiver to the covenant described above under the
caption "--Repurchase at the Option of Holders--Change of Control" will require
the consent of the Holders of at least two-thirds in aggregate principal amount
of the New Notes then outstanding if such amendment would adversely affect the
rights of Holders of the New Notes.
Notwithstanding the foregoing, without the consent of any Holder of New
Notes, the Company and the Trustee may amend or supplement the Indenture or the
New Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated New Notes in addition to or in place of certificated New Notes,
to provide for the assumption of the Company's obligations to Holders of New
Notes in the case of a merger or consolidation or sale of all or substantially
all of the Company's assets, to make any change that would provide any
additional rights or benefits to the Holders of New Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions with the Company; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The Holders of a majority in principal amount at maturity of the then
outstanding New Notes will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. The Indenture provides that in case an
Event of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of New Notes, unless such Holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
89
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture,
the Pledge Agreement and the Registration Rights Agreement without charge by
writing to SF Holdings Group, Inc., 115 Stevens Avenue, Valhalla, New York
10595, Attention: General Counsel.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchasers entered into the Registration
Rights Agreement dated as of March 12, 1998. Pursuant to the Registration
Rights Agreement, the Company agreed to file with the Commission the Exchange
Offer Registration Statement on the appropriate form under the Securities Act
with respect to the New Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the Holders of Transfer
Restricted Securities pursuant to the Exchange Offer who are able to make
certain representations the opportunity to exchange their Transfer Restricted
Securities for New Notes. If the Company does not meet its obligations under
the Registration Rights Agreement, it may be required to pay to each Holder of
Old Notes Liquidated Damages in an amount equal to 50 basis points per annum of
the Accreted Value of Old Notes held by such Holder for each successive 90-day
period, or any portion thereof, during which such Registration Default
continues, up to a maximum amount of 200 basis points per annum of the Accreted
Value of Old Notes.
Holders of New Notes are not entitled to any registration rights with
respect to the New Notes. The Company agrees for a period of 270 days from the
effective date of this Prospectus to make available a prospectus meeting the
requirements of the Securities Act to any broker-dealer for use in connection
with any resale of any New Notes. The Registration Statement of which this
Prospectus is a part constitutes the registration statement for the Exchange
Offer which is the subject of the Registration Rights Agreement. Upon the
closing of the Exchange Offer, subject to certain limited exceptions, Holders
of untendered Old Notes will not retain any rights under the Registration
Rights Agreement.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, as of any date of determination prior to March 15,
2003, with respect to any Note, the sum of (a) the initial offering price to
investors of such Note and (b) the portion of the excess of the principal
amount of such Note over such initial offering price which shall have been
accreted thereon through such date, such amount to be so accreted on a daily
basis at a rate of 12 3/4% per annum of the initial offering price of such
Note, compounded semi-annually on each March 15 and September 15 from the date
of issuance of the Old Notes through the date of determination, computed on the
basis of a 360-day year of twelve 30-day months.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured
by a Lien encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary
90
course of business consistent with past practices (provided that the sale,
lease, conveyance or other disposition of all or substantially all of the
assets of the Company and its Restricted Subsidiaries taken as a whole will be
governed by the provisions of the Indenture described above under the caption
"Repurchase at the Option of Holders--Change of Control" and/or the provisions
described above under the caption "Certain Covenants--Merger, Consolidation or
Sale of Assets" and not by the provisions described under the caption
"--Repurchase at the Option of Holders--Asset Sales"), and (ii) the issue or
sale by the Company or any of its Restricted Subsidiaries of Equity Interests
of any of the Company's Restricted Subsidiaries, in the case of either clause
(i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $2.5 million or (b)
for net proceeds in excess of $2.5 million. Notwithstanding the foregoing, the
following items shall not be deemed to be Asset Sales: (i) a transfer of assets
by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to the
Company or to another Restricted Subsidiary and (ii) a Restricted Payment that
is permitted by the covenant described above under the caption "--Restricted
Payments." The term "all or substantially all" as used in this definition has
not been interpreted under New York law (which is the governing law of the
Indenture) to represent a specific quantitative test. As a consequence, in the
event the holders of the Notes elected to exercise their rights under the
Indenture and the Company elected to contest such election, there could be no
assurance as to how a court interpreting New York law would interpret the
phrase.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person, excluding stock appreciation rights issued in the ordinary
course of business.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any domestic commercial
bank having capital and surplus in excess of $500 million and a Thompson Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution
meeting the qualifications specified in clause (iii) above, (v) commercial
paper having the highest rating obtainable from Moody's Investors Service, Inc.
or Standard & Poor's Corporation and in each case maturing within one year
after the date of acquisition and (vi) money market funds at least 95% of the
assets of which constitute Cash Equivalents of the kinds described in clauses
(i) - (v) of this definition.
"CEG" means Creative Expressions Group, Inc., and CEG Holdings, LLC.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) or "group" (as defined in Sections 13(d)(3) and 14(d)(2) of
the Exchange Act) other than the Principals, (ii) the adoption of a plan
relating to the liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" or "group" (as defined
above), other than the Principals, becomes the "beneficial owner"
91
(as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act),
directly or indirectly, of more of the voting power of the Voting Stock of the
Company than at that time is beneficially owned by the Principals or (iv) the
first day on which more than a majority of the members of the Board of
Directors of the Company are not Continuing Directors. For purposes of this
definition, any transfer of an equity interest of an entity that was formed for
the purpose of acquiring Voting Stock of the Company will be deemed to be a
transfer of such portion of such Voting Stock as corresponds to the portion of
the equity of such entity that has been so transferred.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of the Company and its Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Notes to require
the Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
"Collateral" means all shares of Capital Stock in, and all intercompany
notes issued by, all current and future Restricted Subsidiaries of the Company
that are pledged to the Collateral Agent in accordance with the Indenture and
the Pledge Agreement.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period plus (i) an amount equal to any extraordinary loss plus any net
loss realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus (ii) provision for
taxes based on income or profits of such Person and its Restricted Subsidiaries
for such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (iii) consolidated interest
expense of such Person and its Restricted Subsidiaries for such period, whether
paid or accrued and whether or not capitalized (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income, plus (iv) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other non-cash charges (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a
prior period) of such Person and its Restricted Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash charges were
deducted in computing such Consolidated Net Income, minus (v) non-cash items
increasing such Consolidated Net Income for such period, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Restricted
Subsidiary of the referent Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent that a corresponding amount
would be permitted at the date of determination to be dividended to the Company
by such Restricted Subsidiary without prior governmental approval (that has not
been obtained), and without direct or indirect restriction pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that
92
Restricted Subsidiary of that Net Income is not at the date of determination
permitted without any prior governmental approval (that has not been obtained)
or, directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles shall be excluded and
(v) income of any Unrestricted Subsidiary shall be excluded whether or not
distributed to the Company or any of its Restricted Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a consolidated
Restricted Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the New Notes mature; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "--Certain Covenants--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means an underwritten public offering of common stock
(other than Disqualified Stock) of the Company registered under the Securities
Act (other than a public offering registered on Form S-8 under the Securities
Act).
"Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries in existence on the date of the Indenture, including
Indebtedness represented by the Demand Note, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations,
93
the interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations) and (ii) the consolidated interest of
such Person and its Restricted Subsidiaries that was capitalized during such
period, and (iii) any interest expense on Indebtedness of another Person that
is Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries
(whether or not such Guarantee or Lien is called upon) and (iv) the product of
(a) all dividend payments, whether or not in cash, on any series of preferred
stock of such Person, other than dividend payments on Equity Interests payable
solely in Equity Interests of the Company (other than Disqualified Stock) or to
the Company or a Restricted Subsidiary of the Company, times (b) a fraction,
the numerator of which is one and the denominator of which is one minus the
then current combined federal, state and local statutory tax rate of such
Person, expressed as a decimal, in each case, on a consolidated basis and in
accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
referent Person or any of its Restricted Subsidiaries incurs, assumes,
Guarantees or redeems any Indebtedness (other than revolving credit borrowings)
or issues or redeems preferred stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date on which the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage
Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had occurred at the beginning of
the applicable four-quarter reference period. In addition, for purposes of
making the computation referred to above, (i) acquisitions that have been made
by the Company or any of its Restricted Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, and (ii)
the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall
be excluded, but only to the extent that the obligations giving rise to such
Fixed Charges will not be obligations of the referent Person or any of its
Subsidiaries following the Calculation Date.
"Fonda" means The Fonda Group, Inc.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments
94
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or representing Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any property or representing any
Hedging Obligations, except any such balance that constitutes an accrued
expense or trade payable, if and to the extent any of the foregoing (other than
letters of credit and Hedging Obligations) would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, as well as all
Indebtedness of others secured by a Lien on any asset of such Person (whether
or not such Indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person. The amount of any Indebtedness outstanding as of any date shall
be (i) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount, and (ii) the principal amount thereof, together with
any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary of the
Company such that, after giving effect to any such sale or disposition, such
Person is no longer a Subsidiary of the Company, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition equal to
the fair market value of the Equity Interests of such Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain
(but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale, and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would
95
permit (upon notice, lapse of time or both) any holder of any other
Indebtedness (other than the New Notes being offered hereby) of the Company or
any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the business of producing and selling food
service, packaging, tissue and party goods products and such other businesses
as the Company and its Restricted Subsidiaries are engaged in on the date of
the Indenture, and reasonable expansions and extensions thereof.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Restricted Subsidiary of the Company
in a Person that is evidenced by Capital Stock or Subsidiary Intercompany Notes
that are pledged to the Trustee as Collateral for the New Notes, if as a result
of such Investment (i) such Person becomes a Restricted Subsidiary of the
Company or (ii) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary of the Company; (d) any
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "--Repurchase at the Option of Holders--Asset
Sales;" (e) a $2.6 million loan from Fonda to CEG, as in effect on the date of
the Indenture as such loan may be amended or refinanced in a manner not adverse
to Fonda, the Company or the Holders of the New Notes; and (f) other
Investments in an aggregate amount not to exceed $5.0 million.
"Permitted Liens" means (i) Liens on Indebtedness of the Company's
Restricted Subsidiaries that was permitted by the terms of the Indenture to be
incurred; (ii) Liens in favor of the Company or any of its Restricted
Subsidiaries; (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company or any Restricted Subsidiary; (iv) Liens on property existing at the
time of acquisition thereof by the Company or any Restricted Subsidiary of the
Company, provided that such Liens were in existence prior to the contemplation
of such acquisition; (v) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of
a like nature incurred in the ordinary course of business; (vi) Liens to secure
Indebtedness (including Capital Lease Obligations) permitted by clause (iv) of
the third paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness; (vii) Liens existing on the date of the Indenture; (viii) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded, provided that any reserve or
other appropriate provision as shall be required in conformity with GAAP shall
have been made therefor; (ix) Liens incurred in the ordinary course of business
of the Company or any Restricted Subsidiary of the Company with respect to
obligations that do not exceed $2.5 million at any one time outstanding and
that (a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary course
of business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by the Company or such Restricted Subsidiary; (x) Liens in favor of
the holders of New Notes; and (xi) renewals or refundings of any Liens referred
to in clauses (iii) through (x) above provided that any such renewal or
refunding does not extend to any assets or secure any Indebtedness not securing
or secured by the Liens being renewed or refinanced.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any such Restricted Subsidiary;
96
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the New Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the New Notes on
terms at least as favorable to the Holders of New Notes as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred
either by the Company or by the Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Principals" means Dennis Mehiel, his lineal descendants and any trust,
corporation, partnership, association, limited liability company or other
entity in which Dennis Mehiel and/or his lineal descendants hold at least 80%
of the total, combined outstanding voting power or similar controlling
interest.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent Person
that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date
hereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof); provided,
however, that Sweetheart shall be deemed to be a Subsidiary of the Company for
so long as the Company directly or indirectly owns at least 50% of Sweetheart's
aggregate outstanding common stock.
"Subsidiary Intercompany Notes" means the intercompany notes, subordinate
in right of payment to the New Notes issued by Subsidiaries of the Company in
favor of the Company to evidence advances by the Company, in each case, in the
form attached as Annex B to the Indenture.
"Sweetheart" means Sweetheart Holdings Inc. and its Subsidiaries.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than Fonda or
Sweetheart or any successor to any of them) that is designated by the Board of
Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but
only to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (c) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any
of its Restricted Subsidiaries; and (e) has at least one director on its board
of directors that is not a director or executive officer of the Company or any
of its Restricted
97
Subsidiaries and has at least one executive officer that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
caption "Incurrence of Indebtedness and Issuance of Preferred Stock," the
Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of the Company of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the
covenant described under the caption "Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis
as if such designation had occurred at the beginning of the four-quarter
reference period, and (ii) no Default or Event of Default would be in existence
following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
PROVISIONS GENERALLY APPLICABLE TO ALL SECURITIES
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Notes will be issued in registered,
global form in minimum denominations of $1,000 and integral multiples of $1,000
in excess thereof. New Notes will be issued at the closing of the Exchange
Offer (the "Closing") only against payment in immediately available funds.
The New Notes initially will be issued in the form of one global note (the
"Global Note"). The Global Note will be deposited upon issuance with the
Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New
York, and registered in the name of DTC or its nominee, in each case for credit
to an account of a direct or indirect participant in DTC as described below.
Except as set forth below, the Global Note may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Note may not be exchanged for
Securities in certificated form except in the limited circumstances described
below. See "--Exchange of Book-Entry Securities for Certificated Securities."
Except in the limited circumstances described below, owners of beneficial
interests in the Global Note will not be entitled to receive physical delivery
of Certificated Securities (as defined below).
Initially, the Trustee will act as Paying Agent and Registrar with respect
to the New Notes. The New Notes may be presented for registration of transfer
and exchange at the offices of the Registrar.
98
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Cedel are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them from time to time. The
Company takes no responsibility for these operations and procedures and urges
investors to contact the system or their participants directly to discuss these
matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interests in, and transfers of ownership
interests in, each actual purchaser of each security held by or on behalf of
DTC are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established
by it, (i) upon deposit of the Global Note, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Note and (ii) ownership of the New Notes
evidenced by the Global will be shown on, and the transfer of ownership thereof
will be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interest in the Global Securities).
Investors in the Global Note may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations (including Euroclear and Cedel) which are Participants in such
system. Prospective purchasers are advised that the laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer beneficial interests in a
Global Note to such persons will be limited to that extent. Because DTC can act
only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in a Global Note to pledge such interests to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such interests, may be affected by the lack of a physical certificate
evidencing such interests. For certain other restrictions on the
transferability of the New Notes, see "--Exchange of Book-Entry Securities for
Certificated Securities."
Except as described below, owners of interests in the Global Note will not
have New Notes registered in their names, will not receive physical delivery of
New Notes in certificated form and will not be considered the registered owners
or "Holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any New Notes registered in the name of DTC or
its nominee will be payable by the Trustee to DTC in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee will treat the persons in whose names the New Notes are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the Company
nor the Trustee nor any agent of the Company or the Trustee has or will have
any responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interest in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership
interests in the Global Notes or (ii) any other matter relating to the actions
and practices of DTC or any of its Participants or Indirect Participants. DTC
has advised the Company that its current practice, upon receipt of any payment
in respect of securities such as the New Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings
99
in the principal amount of beneficial interest in the relevant security as
shown on the records of DTC unless DTC has reason to believe it will not
receive payment on such payment date. Payments by the Participants and the
Indirect Participants to the beneficial owners of New Notes will be governed by
standing instructions and customary practices and will be the responsibility of
the Participants or the Indirect Participants and will not be the
responsibility of DTC, the Trustee or the Company. Neither the Company nor the
Trustee will be liable for any delay by DTC or any of its Participants in
identifying the beneficial owners of the New Notes, and the Company, the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Interests in the Global Note are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in
all cases to the rules and procedures of DTC and its Participants. See "--Same
Day Settlement and Payment."
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same day funds, and transfers between
participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on the one hand,
and Euroclear or Cedel participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as
the case may be, by its respective depositary; however, such cross-market
transactions will require delivery of instructions to Euroclear or Cedel, as
the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Cedel, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the Global Note in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Cedel participants may
not deliver instructions directly to the depositories for Euroclear or Cedel.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of New Notes only at the direction of one or more
Participants to whose account DTC has credited the interests in the Global Note
and only in respect of such portion of the aggregate principal amount of the
New Notes as to which such Participant or Participants has or have given such
direction. However, if there is an Event of Default under the New Notes, DTC
reserves the right to exchange the Global Note for legended Securities in
certificated form, and to distribute such Securities to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
to facilitate transfers of interests in the Global Note among Participants in
DTC, Euroclear and Cedel, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued at
any time. Neither the Company nor the Trustee, nor any of their respective
agents will have any responsibility for the performance by DTC, Euroclear or
Cedel or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
EXCHANGE OF BOOK-ENTRY SECURITIES FOR CERTIFICATED SECURITIES
A beneficial interest in the Global Note is exchangeable for New Notes in
the form of registered certificated securities if (i) DTC (x) notifies the
Company that it is unwilling or unable to continue as depositary for the Global
Note and the Company thereupon fails to appoint a successor depositary or (y)
has ceased to be a clearing agency registered under the Exchange Act, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of the Certificated Securities or (iii) there shall have occurred
and be continuing a Default or Event of Default with respect to the New Notes.
In addition, beneficial interests in the Global Note may be exchanged for New
Notes in the form of Certificated Securities upon request but only upon prior
written notice given to the Trustee by or on behalf of DTC in accordance with
the Indenture. In all cases, Certificated Securities delivered in exchange for
any Global Note or beneficial interests therein will be registered in the
names, and issued in any
100
approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures) unless the Company determines
otherwise in compliance with applicable law.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the New Notes
represented by the Global Note (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the Global Note Holder. With
respect to Certificated Securities, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof or, if no such account is specified, by mailing a check to each
such Holder's registered address. The New Notes represented by the Global Notes
are expected to be eligible to trade in the PORTAL market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such New Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Securities will also be settled in
immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in the Global Note from a Participant
in DTC will be credited, and any such crediting will be reported to the
relevant Euroclear or Cedel participant, during the securities settlement
processing day (which must be a business day for Euroclear and Cedel)
immediately following the settlement date of DTC. DTC has advised the Company
that cash received in Euroclear or Cedel as a result of sales of interests in
the Global Note by or through a Euroclear or Cedel participant to a Participant
in DTC will be received with value on the settlement date of DTC but will be
available in the relevant Euroclear or Cedel cash account only as of the
business day for Euroclear or Cedel following DTC's settlement date.
101
DESCRIPTION OF CERTAIN INDEBTEDNESS
FONDA CREDIT FACILITY
General. Fonda is a party to a credit facility with IBJ Schroder Bank &
Trust Company, as agent, providing for available borrowings of up to $50.0
million (the "Fonda Credit Facility"). Borrowings under the Fonda Credit
Facility have a final maturity date of March 31, 2000. As of January 25, 1998,
$6.0 million was outstanding under the Fonda Credit Facility.
Interest Rates. Borrowings under the Fonda Credit Facility bear interest,
at the Company's election, at a rate per annum equal to (i) LIBOR plus 2.25% or
(ii) an Alternate Base Rate (being the higher of the (a) Base Rate publicly
announced by the Agent and (b) Federal Funds Rate in effect on such day plus
0.5%) plus 0.25%.
Prepayments. Prior to March 30, 1998, Fonda has the right, without penalty
or premium, to permanently reduce borrowings under the Fonda Credit Facility,
in minimum amounts of $1.0 million, up to $3.0 million.
Covenants. The obligation to advance funds is subject to certain
conditions customary for facilities of similar size and nature. In addition,
Fonda is subject to certain affirmative and negative covenants customarily
contained in agreements of this type, including, without limitation, covenants
that restrict, subject to specified exceptions (i) mergers, consolidations,
asset sales or changes in capital structure, (ii) creation or acquisition of
subsidiaries, (iii) purchase or redemption of capital stock or declaration or
payment of dividends or distributions on such capital stock, (iv) incurrence of
additional indebtedness, (v) investment activities, (vi) granting or incurrence
of liens to secure other indebtedness, (vii) prepayment or modification of the
terms of subordinated indebtedness and (viii) engaging in transactions with
affiliates.
In addition, the Fonda Credit Facility requires Fonda to satisfy certain
financial covenants, including the maintenance of an interest coverage ratio of
not less than 2.0 to 1.0. The Fonda Credit Facility also provides for customary
events of default.
Security. The Fonda Credit Facility is secured by accounts receivable,
inventory, certain general intangibles and the proceeds on the sale of accounts
receivable and inventory.
FONDA INDENTURE
General. In 1997, Fonda issued $120.0 million of its 9 1/2% Senior
Subordinated Notes due 2007 (the "Fonda Notes"). Payment of the principal of,
and interest on, the Fonda Notes is subordinate in right of payment to the
prior payment of Senior Debt (as defined therein), which includes the Fonda
Credit Facility.
Interest. Interest is payable semi-annually in arrears on the Fonda Notes
at a rate of 9 1/2% per annum.
Repayment. The principal amount of the Fonda Notes is payable on February
28, 2007. Fonda may, at its election, redeem the Fonda Notes at any time after
March 1, 2002 at a redemption price equal to a percentage (104.750% after March
1, 2002 and declining to 103.166% after March 1, 2003, 101.583% after March 1,
2004 and to 100% after March 1, 2005) of the principal amount thereof plus
accrued interest. The Fonda Notes provide that upon the occurrence of a Change
of Control (as defined therein), the holders thereof will have the option to
require the redemption of the Fonda Notes at a redemption price equal to 101%
of the principal amount thereof plus accrued interest.
Covenants. The indenture relating to the Fonda Notes (the "Fonda
Indenture") contains certain affirmative and negative covenants customarily
contained in agreements of this type, including, without limitation, covenants
that restrict, subject to specified exceptions (i) purchase or redemption of
Fonda's capital stock or declaration or payment of dividends or distributions
on such capital stock, (ii) incurrence
102
of additional indebtedness, (iii) investment activities, (iv) mergers,
consolidations, asset sales or changes in capital structure, (v) creation or
acquisition of subsidiaries, (vi) granting or incurrence of liens to secure
other indebtedness, and (vii) engaging in transactions with affiliates. The
Fonda Indenture also provides for customary events of default.
SWEETHEART CREDIT FACILITIES
SWEETHEART U.S. CREDIT FACILITY
General. On October 24, 1997, Sweetheart and Sweetheart Cup entered into
the Sweetheart U.S. Credit Facility with BankAmerica, which provides for a
revolving credit facility in the amount of up to $135.0 million, subject to
certain borrowing base limitations. Borrowings under the Sweetheart U.S. Credit
Facility have a final maturity date of September 30, 2000. As of January 31,
1998, $103.0 million was outstanding under the Sweetheart U.S. Credit Facility.
Interest Rate. Borrowings under the Sweetheart U.S. Credit Facility bear
interest, at Sweetheart's election, at a rate per annum equal to (i) LIBOR plus
2.25% or (ii) the Base Rate publicly announced by Bank of American National
Trust and Savings Association plus 1.00%.
Termination. If the Sweetheart U.S. Credit Facility is terminated during
the period from October 24, 1997 to October 24, 1998, Sweetheart will be
obligated to pay BankAmerica $2.7 million. If the Sweetheart U.S. Credit
Facility is terminated during the period from October 24, 1998 to October 24,
1999, Sweetheart will be obligated to pay BankAmerica $1.35 million.
Covenants. Sweetheart is subject to certain affirmative and negative
covenants customarily contained in agreements of this type, including, without
limitation, covenants that restrict, subject to specified exceptions (i)
mergers, consolidations, asset sales or changes in capital structure, (ii)
creation or acquisition of subsidiaries, (iii) purchase or redemption of
Sweetheart's capital stock or declaration or payment of dividends or
distributions on such capital stock, (iv) incurrence of additional
indebtedness, (v) investment activities, (vi) granting or incurrence of liens
to secure other indebtedness, (vii) prepayment or modification of the terms of
subordinated indebtedness and (viii) engaging in transactions with affiliates.
In addition, the Sweetheart U.S. Credit Facility requires Sweetheart to
satisfy certain financial covenants. The Sweetheart U.S. Credit Facility also
provides for customary events of default and change of control provisions.
Security. The Sweetheart U.S. Credit Facility is secured by accounts
receivable, inventory, equipment, intellectual property, general intangibles
and the proceeds on the sale of any of the foregoing.
SWEETHEART CANADIAN CREDIT FACILITY
General. In 1989, Lily Cups entered into a term and revolving credit
facilities agreement (the "Sweetheart Canadian Credit Facility"), as amended,
with The Bank of Nova Scotia, as agent, which provides for (i) a term loan
facility in the amount of up to Cdn. $14.0 million; (ii) a revolving credit
facility in the amount of up to Cdn. $7.0 million; and (iii) a revolving
overdraft credit facility with standby or guarantee letters of credit in the
amount of up to Cdn. $1.0 million. The total amount outstanding under the
Canadian Credit Facility cannot exceed Cdn. $21.0 million. Term loan borrowings
under the Sweetheart Canadian Credit Facility are due and payable in
installments on October 31 of each year through 1998. Revolving credit
borrowings under the Sweetheart Canadian Credit Facility have a final maturity
date of October 31, 1998. As of January 31, 1998, Cdn. $6.5 million was
outstanding under the Sweetheart Canadian Credit Facility.
Interest Rate. Borrowings under the Sweetheart Canadian Credit Facility
bear interest, at Sweetheart's election, at a rate per annum equal to (i) LIBOR
plus 2.0%, (ii) the U.S. Base Rate (as defined therein) plus 1.25%, or (iii)
the Prime Rate plus 1.25%.
Prepayments. In the event that Lily Cups sells the property located at
Danforth Road, Scarborough, Ontario, Lily Cups is required to use certain net
proceeds of such sale to repay term loans outstanding on the first day
following the second anniversary of the date on which the Danforth Road
property is sold. In the event Lily Cups sells any of its assets, Lily Cups is
required to use certain net proceeds of such sale to repay term loans
outstanding.
103
Covenants. Lily Cups is subject to certain affirmative and negative
covenants customarily contained in agreements of this type, including, without
limitation, covenants that restrict, subject to specified exceptions (i)
mergers, consolidations, asset sales or changes in capital structure, (ii)
creation or acquisition of subsidiaries, (iii) purchase or redemption of Lily
Cups' capital stock or declaration or payment of dividends or distributions on
such capital stock, (iv) incurrence of additional indebtedness, (v) investment
activities, (vi) granting or incurrence of liens to secure other indebtedness,
(vii) prepayment or modification of the terms of subordinated indebtedness and
(viii) engaging in transactions with affiliates.
Security. The Sweetheart Canadian Credit Facility is secured by accounts
receivable, inventory, property, plant and equipment held by Lily Cups located
in Canada and the proceeds on the sale of any of the foregoing.
SWEETHEART INDENTURES
SWEETHEART SECURED NOTE INDENTURE
General. In 1993, Sweetheart Cup issued $190.0 million of 9 5/8% Senior
Secured Notes due 2000. Payment of the principal of, and interest on, the
Sweetheart Secured Notes is guaranteed by Sweetheart.
Interest. Interest is payable semi-annually in arrears on the Sweetheart
Secured Notes at a rate of 9 5/8% per annum.
Repayment. The principal amount of the Sweetheart Secured Notes is payable
on August 31, 2000. Sweetheart Cup may, at its election, redeem the Sweetheart
Secured Notes at any time at a redemption price equal to a percentage
(currently 103.208% and declining to 101.604% after August 31, 1998 and to 100%
after August 31, 1999) of the principal amount thereof, plus accrued interest.
The Sweetheart Secured Notes provide that upon the occurrence of a Change of
Control (as defined therein), the holders thereof will have the option to
require the redemption of the Sweetheart Secured Notes at a redemption price
equal to 101% of the principal amount thereof plus accrued interest.
Covenants. The indenture relating to the Sweetheart Secured Notes (the
"Sweetheart Secured Notes Indenture") contains certain affirmative and negative
covenants customarily contained in agreements of this type, including, without
limitation, covenants that restrict, subject to specified exceptions (i)
purchase or redemption of Sweetheart Cup's capital stock or declaration or
payment of dividends or distributions on such capital stock, (ii) incurrence of
additional indebtedness, (iii) investment activities, (iv) mergers,
consolidations, asset sales or changes in capital structure, (v) creation or
acquisition of subsidiaries, (vi) granting or incurrence of liens to secure
other indebtedness, and (vii) engaging in transactions with affiliates. The
Sweetheart Secured Notes Indenture also provides for customary events of
default.
Security. The Sweetheart Secured Notes are secured by mortgages on the
real property owned by Sweetheart Cup and by a pledge of the capital stock of
the subsidiaries of Sweetheart Cup. Sweetheart's guarantee of the Sweetheart
Secured Notes is secured by mortgages on the real property owned by Sweetheart.
SWEETHEART SUBORDINATED INDENTURE
General. In 1993, Sweetheart Cup issued $110.0 million of 10 1/2% Senior
Subordinated Notes due 2003. Payment of the principal of, and interest on, the
Sweetheart Subordinated Notes is guaranteed by Sweetheart. Payment of the
principal of, and interest on, the Subordinated Notes is subordinate in right
of payment to the prior payment of Senior Indebtedness (as defined therein),
which includes the Sweetheart U.S. Credit Facility and the Sweetheart Secured
Notes.
Interest. Interest is payable semi-annually in arrears on the Sweetheart
Subordinated Notes at a rate of 10 1/2% per annum.
Repayment. The entire principal amount of the Sweetheart Subordinated
Notes is payable on August 31, 2003. Sweetheart Cup may, at its election,
redeem the Sweetheart Subordinated Notes at any time after August 31, 1998 at a
redemption price equal to a percentage (103.938% after August 31, 1998
104
and declining to 102.625% after August 31, 1999, 101.313% after August 31, 2000
and to 100% after August 31, 2001) of the principal amount thereof, plus
accrued interest. The Sweetheart Subordinated Notes provide that upon the
occurrence of a Change of Control (as defined therein), the holders thereof
will have the option to require the redemption of the Sweetheart Subordinated
Notes at a redemption price equal to 101% of the principal amount thereof plus
accrued interest.
Covenants. The indenture relating to the Sweetheart Subordinated Notes
(the "Sweetheart Subordinated Notes Indenture") contains certain affirmative
and negative covenants customarily contained in agreements of this type,
including, without limitation, covenants that restrict, subject to specified
exceptions (i) purchase or redemption of Sweetheart Cup's capital stock or
declaration or payment of dividends or distributions on such capital stock,
(ii) incurrence of additional indebtedness, (iii) investment activities, (iv)
mergers, consolidations, asset sales or changes in capital structure, (v)
creation or acquisition of subsidiaries, (vi) granting or incurrence of liens
to secure other indebtedness, and (vii) engaging in transactions with
affiliates. The Sweetheart Subordinated Notes Indenture also provides for
customary events of default.
105
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue an aggregate of 18,000,000 shares of
common stock, par value $.001 per share, consisting of 15,000,000 shares of
Class A Common Stock, 1,000,000 shares of Class B Common Stock and 2,000,000
shares of Class C Common Stock. There are currently 5,625,838 shares of Class A
Common Stock, 564,586 shares of Class B Common Stock, and 399,000 shares of
Class C Common Stock outstanding. The shares of Class A Common Stock are held
by four stockholders of record and the shares of Class B Common Stock are held
by one stockholder of record. The rights of holders of Class A, Class B and
Class C Common Stock are identical except as to voting and conversion rights.
Each share of Class A Common Stock is entitled to one vote per share on
all matters to be voted upon by stockholders and does not have cumulative
voting rights in the election of directors. Each share of Class B Common Stock
is entitled to one-tenth of a vote per share and shall vote together with the
Class A Common Stock as a single class; provided, however, that the vote of the
holders of a majority of the shares of Class B Common Stock shall be required
for the amendment or modification of the Certificate of Incorporation of the
Company in any way that would adversely affect the powers, preferences and
rights of the Class B Common Stock. The holders of Class C Common Stock are not
entitled to any vote whatsoever, except to the extent otherwise provided by
law.
The holders of all classes of Common Stock are entitled, among other
things, (i) to share ratably in dividends if, when and as declared by the Board
of Directors out of funds legally available therefor, and (ii) in the event of
liquidation, distribution or sale of assets, dissolution or winding-up of the
Company, to share ratably in the distribution of assets legally available
therefor. The holders of Common Stock have no preemptive rights to subscribe
for additional shares of the Company. All currently outstanding shares of the
Common Stock are fully paid and nonassessable.
Each share of Class B Common Stock may, at any time, be converted into a
fully paid and non-assessable share of Class A Common Stock at the option of
any holder other than a "Non-Converting Holder" (as defined in SF Holdings'
certificate of incorporation), or at the option of any Non-Converting Holder
concurrently with a sale or other transfer of shares of Class B Common Stock to
any person, firm or corporation other than a Non-Converting Holder. In
addition, the current holder of the Class B Common Stock has anti-dilution
protections.
Each share of Class C Common Stock may, following an underwritten initial
public offering of shares of Common Stock of the Company, be converted into a
fully paid and non-assessable share of Class A Common Stock at the option of
any holder, or at the option of the Company.
PREFERRED STOCK
The Company is authorized to issue an aggregate of 120,000 shares of
preferred stock, par value $.001 per share, consisting of 20,000 shares of
Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") and 100,000
shares of Class B Preferred Stock (the "Class B Preferred"). There are
currently 3,000 shares of Exchangeable Preferred Stock and 15,000 shares of
Class B Series 1 Preferred issued and outstanding.
Exchangeable Preferred Stock. The holders of the Exchangeable Preferred
Stock are entitled to receive cumulative dividends at an annual rate equal to
1.0% over the interest rate of the New Notes. Until the fifth anniversary of
the consummation of the Sweetheart Investment, dividends on the Exchangeable
Preferred Stock will be payable quarterly in arrears, at the option of the
Company, (i) in cash or (ii) by issuing shares of Exchangeable Preferred Stock
with an aggregate liquidation value equal to the amount of such dividends. From
and after such time, dividends are payable quarterly in arrears in cash,
subject to certain exceptions.
The Exchangeable Preferred Stock is convertible into subordinated
indebtedness of SF Holdings, subject to certain conditions, at the option of SF
Holdings, which shall have terms comparable to the Exchangeable Preferred
Stock.
106
The Exchangeable Preferred Stock is required to be redeemed on the date
immediately following the 11th anniversary of the consummation of the
Sweetheart Investment at a redemption price per share, in cash, equal to the
aggregate liquidation value, plus the cash value of any accrued and unpaid
dividends payable in kind and the amount of any accrued and unpaid cash
dividends.
The Company has the right but not the obligation to redeem the
Exchangeable Preferred Stock, in whole or in part, (i) at any time after the
fifth anniversary of the consummation of the Sweetheart Investment and (ii)
prior to the third anniversary of the consummation of the Sweetheart Investment
at any time following an initial public offering by the Company, subject to
certain restrictions, on the same terms and at comparable percentages as
specified under "Description of New Notes--Optional Redemption," with respect
to the optional redemption of the New Notes.
In the event of a Change of Control, each holder of Exchangeable Preferred
Stock has the right to require the Company to repurchase its stock at a
purchase price equal to 101% of the liquidation value, plus the cash value of
any accrued and unpaid dividends payable in kind and the amount of any accrued
and unpaid cash dividends.
The holders of Exchangeable Preferred Stock are not entitled to any voting
rights, except as described below or as otherwise required by applicable law.
In the event the Company fails to (i) pay dividends for six or more quarters,
(ii) satisfy any mandatory redemption obligation, (iii) make a "repurchase
offer" within 30 days following a "Change of Control" or (iv) comply with any
of the covenants set forth in the Indenture for a period of 30 days, the
Company's board of directors will be increased by two members and the holders
of a majority of the outstanding shares of the Exchangeable Preferred Stock,
voting as a separate class, will be entitled to elect two members to the
Company's board of directors. The approval of the holders of a majority of the
Exchangeable Preferred Stock, voting as a separate class, is also required for
(i) the authorization of any series of preferred stock senior to the
Exchangeable Preferred Stock, (ii) the amendment or modification of any
provisions of the Company's Certificate of Incorporation in a manner that would
adversely affect the voting powers, designation, preferences and rights of the
Exchangeable Preferred Stock and (iii) any merger or consolidation or sale of
all or substantially all of the assets of the Company if the terms of such
transaction do not provide for the repurchase or redemption of all of the
Exchangeable Preferred Stock.
Class B Preferred. The Board of Directors is authorized to issue shares of
Class B Preferred, from time to time, in one or more series, and to determine,
among other things, with respect to each such series, (i) the dividend rate and
conditions and the dividend preferences, if any; (ii) whether dividends would
be cumulative; (iii) whether, and to what extent, the holders of such series
would enjoy voting rights, if any, in addition to those prescribed by law; (iv)
whether, and upon what terms, such series would be convertible into or
exchangeable for shares of any other class of capital stock; (v) whether, and
upon what terms, such series would be redeemable; (vi) whether or not a sinking
fund or redemption or purchase account would be provided for such series and,
if so, the terms and conditions thereof; and (vii) the preference, if any, to
which such series would be entitled in the event of voluntary or involuntary
liquidation, distribution or sale of assets, dissolution or winding up of the
Company.
Issuance of Class B Preferred, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could make it more
difficult for a third party to acquire a majority of the outstanding voting
stock. Accordingly, the issuance of Class B Preferred may be used as an "anti-
takeover" device without further action on the part of the stockholders of the
Company. The Company has no present plans to issue any shares of Class B
Preferred.
Class B Series 1 Preferred. The holder of the Class B Series 1 Preferred
is not entitled to receive dividends. The Class B Series 1 Preferred is
convertible, at any time, into 1,334,945 shares of Class A Common Stock, at the
option of the holder and is required to be redeemed on the date immediately
following the 12th anniversary of the consummation of the Sweetheart Investment
at a redemption price per share, in cash, equal to the aggregate liquidation
value. The holder of the Class B Series 1 Preferred is not entitled to any
voting rights, except as otherwise required by law. In the event any shares of
Class B Series 1 Preferred are redeemed (the "Redemption Amount"), the
Sweetheart Stockholders will have the right to redeem that number of the
Exchange Warrants or shares of Class C Common Stock issuable upon exercise of
the Exchange Warrants, as the case may be, equal to 10% of the value of the
Redemption Amount.
107
REGISTRATION RIGHTS
After the earlier to occur of March 15, 2002 or the occurrence of a
Triggering Event (as defined herein), the holders of one-quarter or more of the
Shares will be entitled to require the Company to effect one registration (a
"Demand Registration") under the Securities Act of the Shares, subject to
certain limitations. Upon a demand, the Company will (a) notify the holders of
all of the Shares that a demand registration has been requested, (b) prepare,
file and use its best efforts to cause to become effective within 120 days of
such demand registration statement in respect of all of the Shares which
holders request, no later than 30 days after the date of such notice, to have
included therein (the "Included Securities"); provided, that if such demand
occurs during the "lock up" or "black out" period (not to exceed 180 days)
imposed on the Company pursuant to any underwriting or purchase agreement
relating to an underwritten Rule 144A or registered public offering of Common
Stock or securities convertible into or exchangeable or exercisable for Common
Stock, the Company shall not be required to so notify holders of the Shares and
file such demand registration statement prior to the end of such "lock up" or
"black out" period, in which event the Company will use its best efforts to
cause such demand registration statement to become effective no later than 30
days after the end of such "lock up" or "black out" period and (c) keep such
registration statement continuously effective for the shorter of (i) 180 days
(the "Effectiveness Period") and (ii) such period of time as all of the Shares
included in such registration statement shall have been sold thereunder;
provided, that the Company may postpone the filing period, suspend the
effectiveness of any registration statement, suspend the use of any prospectus
and shall not be required to amend or supplement the registration statement,
any related prospectus or any document incorporated therein by reference (other
than an effective registration statement being used for an underwritten
offering) in the event that, and for a period (a "Black Out Period") not to
exceed an aggregate of 45 days with respect to a Demand Registration, (i) an
event or circumstance occurs and is continuing as a result of which the
registration statement, any related prospectus or any document incorporated
therein by reference as then amended or supplemented would, in the Company's
good faith judgment, contain an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, and
(ii)(A) the Company determines in its good faith judgment that the disclosure
of such an event at such time would have a material adverse effect on the
business, operations or prospects of the Company or (B) the disclosure
otherwise relates to a material business transaction which has not yet been
publicly disclosed; provided further, that the Effectiveness Period shall be
extended by the number of days in any Black Out Period. In the event of any
"lock up" or "black out" period in any underwriting or purchase agreement, the
Company will so notify the holders of the Shares.
Holders of Shares will also have the right to include the Shares in any
registration statement under the Securities Act filed by the Company for its
own account or for the account of any of its security holders covering the sale
of Common Stock (other than (a) a registration statement on Form S-4 or S-8 or
(b) a registration statement filed in connection with an offer of securities
solely to existing security holders or (c) a Demand Registration) for sale on
the same terms and conditions as the securities of the Company or any other
selling security holder included therein (a "Piggy-Back Registration") if and
whenever any such registration statement is filed under the Securities Act,
except that the Piggy-Back Registration right of holders of the Shares shall
not apply to any Equity Offering that is the initial Equity Offering of the
Company unless the securities of other selling security holders are to be
included therein. In the case of a Piggy-Back Registration, the number of the
Shares requested to be included therein is subject to a reduction (a "Cut
Back") to the extent that the Company is advised by the managing underwriter,
if any, therefor that the total number or type of the Shares to be included
therein is such as to materially and adversely affect the success of the
offering. Any such reduction shall be pro rata among holders of the Shares. If
the Company grants any Piggy-Back Registration rights to any person other than
to such persons who have Piggy-Back Registration rights existing on the date of
the closing of the offering, such securities subject to the Piggy-Back
Registration rights shall be cut back prior to any of the Shares.
If the Company has complied with all its obligations with respect to a
Demand Registration or a Piggy-Back Registration relating to an underwritten
public offering, all holders of the Shares, upon request of the lead managing
underwriter with respect to such underwritten public offering, will be
108
required to not sell or otherwise dispose of any of the Shares owned by them
for a period not to exceed 180 days from the consummation of such underwritten
public offering, provided, that such requirement shall apply to the Shares not
sold in a Demand Registration or Piggy-Back Registration due to a Cut Back for
a period not to exceed 90 days from such date of consummation.
As used herein, "Triggering Event" means the occurrence of any of the
following events: (i) the day immediately prior to a Change of Control, (ii)
the 90th day (or such earlier date as determined by the Company in its sole
discretion) following the initial Equity Offering of the Company or (iii) other
than as a result of the initial Equity Offering of the Company, the day on
which a class of common equity securities of the Company is listed on a
national securities exchange or authorized for quotation on the Nasdaq National
Market System or is otherwise subject to registration under the Exchange Act.
As used herein, "Equity Offering" shall have the same meaning as set forth in
the "Description of New Notes."
See "The Sweetheart Investment" for registration rights granted to the
Sweetheart Stockholders.
109
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a discussion of certain U.S. federal income tax
consequences of the purchase, ownership and disposition of Notes as of the date
hereof applicable to initial Holders who purchased Units pursuant to the
Offering. This summary applies only to Notes acquired by the holders thereof
and held as capital assets within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code"). It does not discuss all of the
tax consequences that may be relevant to a Holder in light of its particular
circumstances or to Holders subject to special rules, such as dealers in
securities or foreign currencies, financial institutions, life insurance
companies, or regulated investment companies, or to Holders whose functional
currency is not the United States dollar or who hold the Notes as part of a
synthetic security, conversion transaction, or certain "straddle" or hedging
transactions.
The U.S. federal income tax considerations set forth below are based upon
the Code and regulations, rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified,
possibly with retroactive effect, so as to result in U.S. federal income tax
consequences different from those presented below.
TAX CONSEQUENCES TO U.S. HOLDERS
The following discussion describes United States federal income tax
consequences with respect to U.S. Holders.
For purposes of this discussion, a "U.S. Holder" is a Holder that is an
individual who is a citizen or resident of the United States, a corporation or
a partnership that is created or organized in the United States or under the
laws of the United States or any state thereof or an estate whose income is
includable in gross income regardless of its source. A trust generally is a
U.S. Holder only if a court within the United States is able to exercise
primary supervision over its administration and one or more United States
persons have the authority to control all substantial decisions of the trust.
THE NOTES
Original Issue Discount. The Notes will be issued with original issue
discount ("OID"). As a result, a U.S. Holder will generally be required to
include OID in income as it accrues, rather than upon the receipt of cash
attributable to such income, whether such U.S. Holder uses the cash or accrual
method of accounting.
The amount of OID on a Note generally is the excess of its "stated
redemption price at maturity" over its "issue price." A Note's stated
redemption price at maturity includes all payments required to be made over the
term of the Note other than the payment of "qualified stated interest," which
includes interest that is unconditionally payable in cash or property (other
than debt instruments of the issuer) at least annually at a single fixed rate.
The Notes will not provide for the payment of any qualified stated interest. In
general, the issue price of a Note will be the price at which a substantial
amount of the Units are sold, reduced by the portion of the purchase price of
the Units allocable to Shares. The Company will allocate the purchase price of
a Unit between the Shares and the Note based on their relative fair market
values. Such allocation will be binding on a U.S. Holder, unless the Holder
discloses on a statement attached to its income tax return that it is using a
different allocation.
A U.S. Holder must include in income for the taxable year (whether on the
cash or accrual method of accounting) the sum of the daily portions of OID
accrued for each day of the taxable year in which the Holder held the Note. The
daily portions of OID are determined by determining the OID attributable to
each accrual period and allocating a ratable portion of such amount to each day
in the accrual period. The accrual period may be of any length and may vary in
length over the term of the Note, provided that each accrual period is no
longer than one year and each scheduled payment of principal and interest
occurs on the final day of an accrual period or on the first day of an accrual
period. In general, OID allocable to an accrual period equals the product of
the (i) adjusted issue price at the beginning of the accrual period (i.e.,
110
the original issue price plus previously accrued OID minus prior payments made
on the Note other than payments of qualified stated interest) multiplied by
(ii) the yield to maturity of the Note (determined on the basis of compounding
at the end of each accrual period). The yield to maturity is the discount rate
that, when used in computing the present value of all principal and interest
payments to be made on the Note, produces an amount equal to the issue price.
In general, payments of interest will be treated first as a payment of
previously accrued OID and then as payment of principal. Such amounts generally
will not be treated as additional interest income. The exchange of a Note for
an Exchange Note pursuant to the Exchange Offer should not be taxable to
Holders. While not free from doubt, any Liquidated Damages paid should
generally be taxable to Holders as ordinary income in accordance with their
method of accounting.
Sale, Exchange or Redemption of a Note. A U.S. Holder will recognize gain
or loss upon the sale, exchange, redemption or other taxable disposition of a
Note in an amount equal to the difference, if any, between the amount received
therefor and the Holder's adjusted tax basis in the Note (generally, the Note's
adjusted issue price). Such gain or loss generally will be long-term capital
gain or loss if the Note was held for more than one year as of the date of
disposition. Long-term capital gain recognized by a U.S. Holder that is an
individual will be taxed at the lowest rates applicable to capital gains if the
U.S. Holder has held the Note for more than 18 months as of the date of
disposition.
Deductibility of OID. If the yield to maturity on the Notes is more than
five percentage points in excess of the applicable Federal rate in effect at
the time the Notes are issued (such rate for February 1998 is 5.84%, based on
semiannual compounding), the Notes will constitute "high yield discount
obligations." In that event, the Company will not be able to deduct accrued OID
until it is paid. In addition, if the yield to maturity exceeds such applicable
Federal rate by more than six percentage points, a portion of the OID
(generally, the portion of the OID reflecting the portion of the yield that
exceeds the applicable Federal rate plus five percentage points) will not be
deductible by the Company even when paid (the "disqualified portion").
Corporate U.S. Holders will be entitled to a dividends received deduction with
respect to the accrual of the disqualified portion of OID, if any, to the
extent of the Company's current and accumulated earnings and profits.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion describes United States federal income and estate
tax consequences with respect to the Non-U.S. Holders. Non-U.S. Holders are
Holders who are not U.S. Holders.
INTEREST ON THE NOTES
Interest and previously accrued OID paid by the Company to a Non-U.S.
Holder will not be subject to United States federal income or withholding tax
if such interest is not effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Holder and such Non-U.S.
Holder (i) does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company; (ii) is not a
controlled foreign corporation with respect to which the Company is a "related
person" within the meaning of the Code and (iii) certifies, under penalties of
perjury, that such holder is not a United States person and provides such
holder's name and address.
Interest and previously accrued OID paid to a Non-U.S. Holder of the Notes
that is effectively connected with a United States trade or business conducted
by such Non-U.S. Holder is taxed at the graduated rates applicable to United
States citizens, resident aliens and domestic corporations, and is not subject
to withholding tax, if the Non-U.S. Holder gives an appropriate statement to
the Company or its paying agent in advance of the payment. In addition to the
graduated tax, effectively connected interest received by a Non-U.S. Holder
that is a corporation may also be subject to an additional branch profits tax
at a rate of 30% (or such lower rate as may be specified by an applicable
income tax treaty). Interest or previously accrued OID paid to a Non-U.S.
Holder that is not effectively connected with a United States trade or
business, but to which clause(s) (i), (ii), or (iii) in the preceding paragraph
does not apply will be subject to withholding at a rate of 30%, unless the rate
is reduced or eliminated by treaty.
111
GAIN ON DISPOSITION OF NOTES
A Non-U.S. Holder will generally not be subject to United States federal
income tax on gain recognized on a sale, redemption or other disposition of a
Note unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-U.S. Holder or (ii) in the case
of a Non-U.S. Holder who is a nonresident alien individual and holds the Note
as a capital asset, such holder is present in the United States for 183 or more
days in the taxable year and certain other requirements are met.
If a Non-U.S. Holder falls under clause (i) in the preceding paragraph,
the holder will be taxed on the net gain derived from the sale under the
graduated United States federal income tax rates that are applicable to United
States citizens, resident aliens and domestic corporations, as the case may be,
and may be subject to withholding under certain circumstances (and, with
respect to corporate Non-U.S. Holders, may also be subject to the branch
profits tax described above). If an individual Non-U.S. Holder falls under
clause (ii) in the preceding paragraph, the holder generally will be subject to
United States federal income tax at a rate of 30% on the gain derived from the
sale and may be subject to withholding under certain circumstances.
FEDERAL ESTATE TAXES
If interest on the Notes is exempt from withholding of United States
federal income tax under the rules described above, the Notes will not be
included in the estate of a deceased Non-U.S. Holder for United States federal
estate tax purposes.
NEW WITHHOLDING REGULATIONS
The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules applicable to Non-U.S. Holders
(the "New Withholding Regulations"). In general, the New Withholding
Regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The New Withholding
Regulations are generally effective for payments made after December 31, 1999,
subject to certain transition rules. Non-U.S. Holders should consult their own
tax advisors with respect to the impact, if any, of the New Withholding
Regulations.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company will, where required, report to the holders of Notes and the
Internal Revenue Service the amount of any interest (including OID) paid on the
Notes in each calendar year and the amounts of tax withheld, if any, with
respect to such payments.
A U.S. Holder of a Note may be subject to information reporting and
possible backup withholding. If applicable, backup withholding would apply at a
rate of 31% with respect to payments of interest or OID on, or the proceeds of
a sale, exchange, redemption, retirement or other disposition of, a Note,
unless (i) such Holder is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding and otherwise complies with applicable backup withholding
rules.
A Non-U.S. Holder of Notes may also be subject to certain information
reporting or backup withholding if certain requisite certification is not
received or other exemptions do not apply.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INTENDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A PARTICULAR HOLDER'S
SITUATION. PERSONS CONSIDERING A PURCHASE OF THE NOTES SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF PURCHASING, OWNING
AND DISPOSING OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL
OR FOREIGN LAWS AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
(POSSIBLY INCLUDING RETROACTIVE CHANGES) IN U.S. FEDERAL AND OTHER TAX LAWS.
112
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer to an Eligible Holder in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by such
Eligible Holder (other than (i) a broker-dealer who purchased the Old Notes
directly from the Company for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act, or (ii) a person
that is an affiliate of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that the Eligible Holder is
acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution of the New Notes.
Each broker-dealer that holds Old Notes which were acquired for its own
account as a result of market-making activities or other trading activities
(other than Old Notes acquired directly from the Company or an affiliate of the
Company), may exchange the Old Notes for New Notes in the Exchange Offer.
However, such broker-dealer may be deemed an "underwriter" within the meaning
of the Securities Act and, therefore, must deliver a prospectus in connection
with any resales of the New Notes received by such broker-dealer in the
Exchange Offer. This prospectus delivery requirement may be satisfied by
delivery of this Prospectus, as it may be amended or supplemented from time to
time. The Company has agreed that it will provide sufficient copies of the
latest version of the Prospectus to broker-dealers promptly upon request at any
time during the 270 day period following the effective date of this Prospectus
to facilitate such resales.
The Company will not receive any proceeds from any sale of the New Notes
by broker-dealers. New Notes received by broker-dealers for their own accounts
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resales may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter' within the meaning of
the Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
By acceptance of the Exchange Offer, each broker-dealer and Holder that
receives New Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using the Prospectus in connection with the sale or transfer
of New Notes, and each broker-dealer and Holder agrees that upon receipt of any
notice from the Company of the existence of any fact or the happening of any
event that makes any statement of a material fact in the Prospectus, or any
amendment or supplement hereto, or any document incorporated herein by
reference untrue or requires the making of any additions or changes in the
Prospectus (the "Notice"), such broker-dealer or Holder will forthwith
discontinue the disposition of the New Notes until such broker-dealer or Holder
(i) receives copies of a supplemental prospectus or (ii) is advised in writing
by the Company that the use of the Prospectus may be resumed and has received
copies of any additional or supplemental filings that are incorporated herein
by reference. Upon the Company's request and at its expense, each Holder will
deliver to the Company all copies, other than permanent file copies in such
Holder's possession, of the Prospectus covering such New Notes that was current
at the time of receipt of such Notice.
LEGAL MATTERS
The legality of the New Notes being offered hereby will be passed upon for
the Company by Kramer, Levin, Naftalis & Frankel, New York, New York.
113
EXPERTS
The financial statements of Fonda as of July 28, 1996 and July 27, 1997,
and for each of the three years in the period ended July 27, 1997 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The financial statements of Sweetheart as of September 30, 1996 and 1997,
and for each of the three years in the period ended September 30, 1997 included
in this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report appearing herein, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
114
UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA OF SWEETHEART AND FONDA
The Sweetheart Pro Forma Statements of Operations have been derived from
Sweetheart's historical statements of operations for the fiscal year ended
September 30, 1997 and the six and twelve months ended December 31, 1997, and
give effect to (i) the Sweetheart Bakery Disposition and (ii) the Sweetheart
Closures, as if each such transaction had occurred on the first day of
Sweetheart's fiscal year ended September 30, 1997. The Sweetheart Pro Forma
Statement of Operations for the six months ended December 31, 1997 combines the
first quarter of Fiscal 1998 and the fourth quarter of Fiscal 1997. The Fonda
Pro Forma Statements of Income have been derived from Fonda's historical
statements of income for the fiscal year ended July 27, 1997 and the six and
twelve months ended January 25, 1998, and give effect to (i) the 1997 Fonda
Acquisitions, (ii) the February 24, 1997 issuance of the Fonda Notes, (iii) the
Leisureway Acquisition and (iv) the Natural Dam Mill Disposition, as if each
such transaction had occurred on the first day of Fonda's fiscal year ended
July 27, 1997.
SWEETHEART UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------------------------------
HISTORICAL BAKERY OTHER SWEETHEART
SWEETHEART DISPOSITION (A) ADJUSTMENTS RECLASSIFICATIONS (B) PRO FORMA
------------ ----------------- ------------------ ----------------------- -------------
STATEMENT OF OPERATIONS DATA:
Net sales ............................. $ 886,017 $ (31,652) $ 854,365
Cost of sales ......................... 722,539 (26,438) $ (5,472)(c) $ 95,974 786,603
--------- --------- --------- --------- ---------
Gross income ......................... 163,478 (5,214) 5,472 (95,974) 67,762
--------- --------- --------- --------- ---------
Transportation ........................ 98,482 (2,508) (95,974) --
Selling, general and administrative
expenses ............................. 66,792 (1,164) 65,628
Loss on asset disposal and
impairment ........................... 24,550 -- 24,550
Restructuring charges ................. 9,680 -- (9,680)(c) --
Other income, net ..................... -- -- (73) (73)
--------- --------- --------- --------- ---------
Income from operations ............... (36,026) (1,542) 15,152 73 (22,343)
Other income .......................... (1,620) -- (1,620) --
Interest expense, net ................. 41,812 -- (1,547) 40,265
--------- --------- --------- --------- ---------
Income (loss) before taxes,
cumulative effect of an accounting
change and extraordinary loss ........ (76,218) (1,542) 15,152 (62,608)
Income tax (benefit) expense (d) ...... (30,487) (617) 6,061 (25,043)
--------- --------- --------- ---------
Income (loss) before cumulative
effect of an accounting change and
extraordinary loss ................... $ (45,731) $ (925) $ 9,091 $ (37,565)
========= ========= ========= =========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (e) ............. $ 38,241 $ 38,241
Capital expenditures .................. 47,757 $ (1,568) 46,189
Depreciation and amortization (f) ..... 44,152 (888) $ (88) 43,176
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (g) ............................ $ 43,976 $ 46,930
Ratio of EBITDA to cash interest
expense (g)(e) ....................... 1.1x 1.2x
See Notes to Sweetheart Unaudited Pro Forma Condensed Statements of Operations.
P-1
SWEETHEART UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------------
HISTORICAL BAKERY OTHER RECLASS- SWEETHEARTS
SWEETHEART DISPOSITION (A) ADJUSTMENTS IFICATIONS (B) PRO FORMA
------------ ----------------- ------------------ ---------------- ------------
STATEMENT OF OPERATIONS DATA:
Net sales ................................. $ 437,901 $ (12,158) $ 425,743
Cost of sales ............................. 352,115 (9,805) $ (1,029)(c) $ 49,060 390,341
--------- --------- --------- --------- ---------
Gross income ............................. 85,786 (2,353) 1,029 (49,060) 35,402
--------- --------- --------- --------- ---------
Transportation ............................ 50,055 (995) (49,060) --
Selling, general and administrative
expenses ................................. 36,647 (461) 36,186
Loss on asset disposal and
impairment ............................... 24,550 -- 24,550
Restructuring charges ..................... 9,680 -- (9,680)(c) --
Other income, net ......................... -- -- (3,514) (3,514)
--------- --------- --------- --------- ---------
Income from operations ................... (35,146) (897) 10,709 3,514 (21,820)
Other income .............................. (4,184) -- 4,184 --
Interest expense, net ..................... 22,084 -- (670) 21,414
--------- --------- --------- --------- ---------
Income (loss) before taxes,
cumulative effect of an accounting
change and extraordinary loss ............ (53,046) (897) 10,709 (43,234)
Income tax (benefit) expense (d) .......... (21,213) (359) 4,284 (17,288)
--------- --------- --------- ---------
Income (loss) before cumulative
effect of an accounting change and
extraordinary loss ....................... $ (31,833) $ (538) $ 6,425 $ (25,946)
========= ========= ========= =========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (e) ................. $ 20,565 $ 20,565
Capital expenditures ...................... 17,388 $ (230) 17,158
Depreciation and amortization (f) ......... 22,112 (305) $ (28) 21,779
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (g) ................................ $ 21,921 $ 21,720
Ratio of EBITDA to cash interest
expense (g)(e) ........................... 1.1x 1.1x
See Notes to Sweetheart Unaudited Pro Forma Condensed Statements of Operations.
P-2
SWEETHEART UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------
HISTORICAL BAKERY OTHER RECLASS- SWEETHEART
SWEETHEART DISPOSITION (A) ADJUSTMENTS IFICATIONS (B) PRO FORMA
------------ ----------------- ------------------ ---------------- -------------
STATEMENT OF OPERATIONS DATA:
Net sales ................................. $ 885,867 $ (30,578) $ 855,289
Cost of sales ............................. 710,021 (27,258) $ (4,104)(c) $ 97,251 775,910
--------- --------- --------- --------- ---------
Gross income ............................. 175,846 (3,320) 4,104 (97,251) 79,379
--------- --------- --------- --------- ---------
Transportation ............................ 99,685 (2,434) (97,251) --
Selling, general and administrative
expenses ................................. 69,678 (919) 68,759
Loss on asset disposal and
impairment ............................... 24,550 -- 24,550
Restructuring charges ..................... 9,680 -- (9,680)(c) --
Other income, net ......................... -- -- (3,436) (3,436)
--------- --------- --------- --------- ---------
Income from operations ................... (27,747) 33 13,784 3,436 (10,494)
Other income .............................. (4,928) -- 4,928 --
Interest expense, net ..................... 42,986 -- (1,492) 41,494
--------- --------- --------- --------- ---------
Income (loss) before taxes,
cumulative effect of an accounting
change and extraordinary loss ............ (65,805) 33 13,784 (51,988)
Income tax (benefit) expense (d) .......... (26,321) (13) 5,514 (20,794)
--------- --------- --------- ---------
Income (loss) before cumulative
effect of an accounting change and
extraordinary loss ....................... $ (39,484) $ 20 $ 8,270 $ (31,194)
========= ========= ========= =========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (e) ................. $ 39,672 $ 39,672
Capital expenditures ...................... 45,368 $ (1,412) 43,956
Depreciation and amortization (f) ......... 44,300 (752) $ (110) 43,469
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (g) ................................ $ 52,252 $ 55,558
Ratio of EBITDA to cash interest
expense (g)(e) ........................... 1.3x 1.4x
See Notes to Sweetheart Unaudited Pro Forma Condensed Statements of Operations.
P-3
NOTES TO SWEETHEART UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(a) Reflects the elimination of the results of operations of
Sweetheart's bakery operations as a result of the Sweetheart Bakery
Disposition.
(b) Reflects certain reclassifications for consistency with Fonda's
presentation, as follows:
(i) transportation costs, including freight, warehousing and
distribution, are reclassified from transportation to cost of
sales;
(ii) interest income is reclassified from other income to interest
expense, net; and
(iii) other income is reclassified to operating income.
(c) Reflects the elimination of certain costs as a result of the
Sweetheart Closures, as well as the elimination of the restructuring
charge incurred in connection therewith.
(d) For pro forma purposes, the income tax provision was calculated at
40% based on enacted statutory rates applied to pro forma pre-tax
income and the provision of SFAS No. 109.
(e) Cash interest expense consists of interest expense, excluding
amortization of deferred financing costs of $3,571, $1,519 and
$3,313 for Fiscal 1997 and the six and twelve months ended December
31, 1997, respectively.
(f) Depreciation and amortization excludes amortization of debt issuance
costs which are included in interest expense.
(g) EBITDA represents income from operations before interest expense,
provision for income taxes, depreciation and amortization, loss on
asset disposal and impairment, and gain on the Sweetheart Bakery
Disposition of $3,459 in the six and twelve month periods ended
December 31, 1997. EBITDA is generally accepted as providing
information regarding a company's ability to service debt. EBITDA
should not be considered in isolation or as a substitute for net
income, cash flows from operations, or other income or cash flow
data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or
liquidity.
P-4
FONDA UNAUDITED PRO FORMA CONDENSED
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
YEAR ENDED JULY 27, 1997
------------------------------------------------------------------------------
NATURAL
FONDA DAM MILL ACQUISITIONS OTHER FONDA
HISTORICAL DISPOSITION (A) HISTORICAL (B) ADJUSTMENTS PRO FORMA
------------ ----------------- ---------------- ----------------- ------------
STATEMENT OF INCOME DATA:
Net sales ................................. $252,513 $ (19,340) $29,677 $262,850
Cost of goods sold ........................ 196,333 (13,114) 21,595 $ 90(c) 204,904
-------- --------- ------- --------- --------
Gross profit .............................. 56,180 (6,226) 8,082 (90) 57,946
-------- --------- ------- --------- --------
Selling, general and administrative
expenses ................................. 37,168 (2,125) 5,908 (1,561)(d) 39,390
Other income, net ......................... (1,608) -- -- (1,608)
-------- --------- ------- --------- --------
Income from operations .................... 20,620 (4,101) 2,174 1,471 20,164
Interest expense, net ..................... 9,017 -- -- 3,067(e) 12,084
-------- --------- ------- --------- --------
Income before taxes and
extraordinary loss ....................... 11,603 (4,101) 2,174 (1,596) 8,080
Income taxes (f) .......................... 4,872 (1,722) 913 (670) 3,393
-------- --------- ------- --------- --------
Income before extraordinary loss .......... $ 6,731 $ (2,379) $ 1,261 $ (926) $ 4,687
======== ========= ======= ========= ========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (g) ................. $ 8,309 $ 11,520
Capital expenditures ...................... 10,363 $ (8,601) 1,762
Depreciation and amortization (h) ......... 4,440 (171) $ 351 $ 786 5,406
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (i) ................................ $ 23,942 $ 23,962
Ratio of EBITDA to cash interest
expense (i)(g) ........................... 2.9x 2.1x
See Notes to Fonda Unaudited Pro Forma Condensed Statement of Income.
P-5
FONDA UNAUDITED PRO FORMA CONDENSED
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JANUARY 25, 1998
-----------------------------------------------------------------------------
NATURAL
FONDA DAM MILL ACQUISITIONS OTHER FONDA
HISTORICAL DISPOSITION (A) HISTORICAL (B) ADJUSTMENTS PRO FORMA
------------ ----------------- ---------------- --------------- -------------
STATEMENT OF INCOME DATA:
Net sales ................................. $ 136,674 $ (8,893) $4,292 $ 132,073
Cost of goods sold ........................ 108,077 (7,742) 3,253 35(c) 103,623
--------- -------- ------ -- ---------
Gross profit .............................. 28,597 (1,151) 1,039 (35) 28,450
--------- -------- ------ --- ---------
Selling, general and administrative
expenses ................................. 19,814 (610) 930 (130)(d) 20,004
Income from operations .................... 8,783 (541) 109 95 8,446
Interest expense, net ..................... 6,003 -- -- 6,003
--------- -------- ------ --- ---------
Income before taxes and
extraordinary loss ....................... 2,780 (541) 109 95 2,443
Income taxes (f) .......................... 1,168 (227) 46 40 1,027
--------- -------- ------ ---- ---------
Income before extraordinary loss .......... $ 1,612 $ (314) $ 63 $ 55 $ 1,416
========= ======== ====== ======= =========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (g) ................. $ 5,924 $ 5,731
Capital expenditures ...................... 4,408 $ (1,692) 2,716
Depreciation and amortization (h) ......... 2,694 (110) $ 23 $ 140 2,747
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (i) ................................ $ 11,670 $ 11,193
Ratio of EBITDA to cash interest
expense (i)(g) ........................... 2.0x 2.0x
See Notes to Fonda Unaudited Pro Forma Condensed Statement of Income.
P-6
FONDA UNAUDITED PRO FORMA CONDENSED
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED JANUARY 25, 1998
-----------------------------------------------------------------------------
NATURAL
FONDA DAM MILL ACQUISITIONS OTHER FONDA
HISTORICAL DISPOSITION (A) HISTORICAL (B) ADJUSTMENTS PRO FORMA
------------ ----------------- ---------------- --------------- -------------
STATEMENT OF INCOME DATA:
Net sales ................................. $264,808 $ (19,037) $17,424 $ 263,195
Cost of goods sold ........................ 207,423 (14,357) 13,334 77(c) 206,477
-------- --------- ------- --- ---------
Gross profit .............................. 57,385 (4,680) 4,090 (77) 56,718
-------- --------- ------- ---- ---------
Selling, general and administrative
expenses ................................. 37,462 (1,685) 2,923 (22)(d) 38,678
Other income, net ......................... (1,608) -- -- (1,608)
-------- --------- ------- -------
Income from operations .................... 21,531 (2,995) 1,167 (55) 19,648
Interest expense, net ..................... 10,480 -- -- 1,582(e) 12,062
-------- --------- ------- ------- ---------
Income before taxes and
extraordinary loss ....................... 11,051 (2,995) 1,167 (1,637) 7,586
Income taxes (f) .......................... 4,640 (1,257) 490 (687) 3,186
-------- --------- ------- ------- ---------
Income before extraordinary loss .......... $ 6,411 $ (1,738) $ 677 $ (950) $ 4,400
======== ========= ======= ======== =========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (g) ................. $ 10,233 $ 11,498
Capital expenditures ...................... 12,697 $ (9,159) 3,538
Depreciation and amortization (h) ......... 4,275 285 $ 184 $ 651 5,395
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (i) ................................ $ 24,881 $ 23,435
Ratio of EBITDA to cash interest
expense (i)(g) ........................... 2.4x 2.0x
See Notes to Fonda Unaudited Pro Forma Condensed Statement of Income.
P-7
NOTES TO FONDA UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
(a) Reflects the elimination of the results of operations of the Natural
Dam mill as a result of the Natural Dam Mill Disposition.
(b) The results of operations of each entity acquired in the 1997 Fonda
Acquisitions are included in Fonda's historical results of
operations commencing with such entity's respective acquisition
date. The adjustments reflect (i) the additional results of
operations of the acquired entities as if such acquisitions had
occurred at the beginning of the year ended July 27, 1997 and (ii)
the results of operations of the Leisureway Acquisition as if it had
occurred at the beginning of the year ended July 27, 1997.
(c) Reflects an increase in depreciation expense resulting from the
allocation of the purchase price to the long-term assets acquired
based on fair value and an average life ranging from 8 to 30 years.
(d) Reflects adjustments to general and administrative expenses
resulting from the 1997 Fonda Acquisitions and the Leisureway
Acquisition, as follows:
SIX MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 JANUARY 25, 1998 JANUARY 25, 1998
--------------- ------------------ -----------------
Goodwill amortization over twenty years:
1997 Fonda Acquisitions ..................... $ 440 $ 176
Leisureway Acquisition ...................... 373 $ 155 342
Contractual reduction in officer compensation:
1997 Fonda Acquisitions ..................... (1,439) --
Leisureway Acquisition ...................... (935) (285) (540)
-------- ------ ------
$ (1,561) $ (130) $ (22)
======== ====== ======
(e) Reflects (i) the elimination of interest income attributable to cash
used to finance a portion of the 1997 Fonda Acquisitions, (ii)
additional interest expense resulting from the issuance of the Fonda
Notes and borrowings under the Fonda Credit Facility to finance the
1997 Fonda Acquisitions and the Leisureway Acquisition and (iii) the
elimination of interest expense relating to indebtedness that was
repaid with a portion of the proceeds of the Fonda Notes and the
Natural Dam Mill Disposition.
(f) For pro forma purposes, the income tax provision was calculated at
42% based on enacted statutory rates applied to pro forma pre-tax
income and the provisions of SFAS No. 109.
(g) Cash interest expense consists of interest expense, excluding
amortization of deferred financing costs of $564, $272 and $564 for
Fiscal 1997 and the six and twelve months ended January 25, 1998,
respectively.
(h) Depreciation and amortization excludes amortization of deferred
financing costs, which are included in interest expense.
(i) EBITDA represents income from operations before interest expense,
provision for income taxes, other income and depreciation and
amortization. EBITDA is generally accepted as providing information
regarding a company's ability to service debt. EBITDA should not be
considered in isolation or as a substitute for net income, cash
flows from operations, or other income or cash flow data prepared in
accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.
EBITDA does not reflect the elimination of $2.8 million and $1.4
million of fixed costs in Fiscal 1997 and the twelve months ended
January 25, 1998, respectively, that would not have been incurred
had the Three Rivers and Long Beach facilities been closed at the
beginning of the year ended July 27, 1997.
P-8
SF HOLDINGS GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
THE FONDA GROUP, INC.:
Independent Auditors' Report ............................................................ F-2
Balance Sheets as of July 28, 1996 and July 27, 1997 and (unaudited) January 25, 1998 ... F-3
Statements of Income for the Years Ended July 30, 1995, July 28, 1996 and July 27, 1997
and (unaudited) the Six Months Ended January 26, 1997 and January 25, 1998 ............ F-4
Statements of Cash Flows for the Years Ended July 30, 1995, July 28, 1996 and July 27,
1997 and (unaudited) the Six Months ended January 26, 1997 and January 25, 1998 ....... F-5
Notes to Financial Statements ........................................................... F-6
SWEETHEART HOLDINGS INC.:
Report of Independent Public Accountants ................................................ F-18
Consolidated Balance Sheets as of September 30, 1996 and 1997 and (unaudited)
December 31, 1997 ..................................................................... F-19
Consolidated Statements of Operations for the Years Ended September 30, 1995, 1996 and
1997 and (unaudited) the Three Months Ended December 31, 1996 and 1997 ................ F-20
Consolidated Statements of Cash Flows for the Years Ended September 30, 1995, 1996 and
1997 and (unaudited) the Three Months Ended December 31, 1996 and 1997 ................ F-21
Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 1995,
1996 and 1997 and (unaudited) the Three Months ended December 31, 1997 ................ F-22
Notes to Financial Statements ........................................................... F-23
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Fonda Group, Inc.
We have audited the accompanying balance sheets of The Fonda Group, Inc.
as of July 28, 1996 and July 27, 1997 and the related statements of income and
cash flows for each of the three years in the period ended July 27, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The Fonda Group, Inc. as of July 28, 1996
and July 27, 1997 and the results of its operations and its cash flows for each
of the three years in the period ended July 27, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
September 25, 1997
(March 24, 1998 as to Note 16)
F-2
THE FONDA GROUP, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
JULY 28, 1996 JULY 27, 1997 JANUARY 25, 1998
--------------- --------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash ...................................................... $ 1,467 $ 5,908 $ 524
Accounts receivable, less allowance for doubtful
accounts of $549, $961 and $1,070, respectively ......... 27,173 30,009 31,725
Due from affiliates ....................................... 994 1,207 2,072
Inventories ............................................... 37,467 40,834 39,434
Deferred income taxes ..................................... 5,435 6,780 7,177
Refundable income taxes ................................... 822 1,657 969
Other current assets ...................................... 1,160 4,178 921
-------- -------- --------
Total current assets .................................... 74,518 90,573 82,822
Property, plant and equipment, net ......................... 46,350 59,261 61,354
Goodwill, net .............................................. 5,400 15,405 22,459
Other assets, net .......................................... 9,900 14,365 14,202
-------- -------- --------
TOTAL ASSETS ............................................... $136,168 $179,604 $180,837
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 14,671 $ 7,340 $ 10,389
Accrued expenses .......................................... 14,893 24,611 24,038
Current maturities of long-term debt ...................... 6,023 619 537
-------- -------- --------
Total current liabilities ............................... 35,587 32,570 34,964
Long-term debt ............................................. 81,740 122,368 128,172
Other liabilities .......................................... 2,345 1,436 1,865
Deferred income taxes ...................................... 2,444 6,144 6,926
-------- -------- --------
Total liabilities ....................................... 122,116 162,518 171,927
Redeemable common stock, $.01 par value, 7,000
shares issued, 7,000, 6,500 and 6,500 shares
outstanding, respectively ................................. 2,179 2,076 2,108
Stockholders' equity ....................................... 11,873 15,010 6,802
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY .................................................... $136,168 $179,604 $180,837
======== ======== ========
See notes to financial statements.
F-3
THE FONDA GROUP, INC.
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
YEARS ENDED SIX MONTHS ENDED
---------------------------------- --------------------------
JULY 30, JULY 28, JULY 27, JANUARY 26, JANUARY 25,
1995 1996 1997 1997 1998
---------- ---------- ------------ ------------- ------------
(UNAUDITED)
Net sales .......................................... $97,074 $204,903 $252,513 $124,379 $136,674
Cost of goods sold ................................. 76,252 161,304 196,333 96,987 108,077
------- -------- -------- -------- --------
Gross profit .................................... 20,822 43,599 56,180 27,392 28,597
Selling, general and administrative expenses ....... 13,568 29,735 37,168 19,520 19,814
Other income, net .................................. -- -- (1,608) -- --
Management fee ..................................... 544 -- -- -- --
------- -------- -------- -------- --------
Income from operations ............................ 6,710 13,864 20,620 7,872 8,783
Interest expense (net of $490 interest income in
Fiscal 1997 and $193 in Fiscal 1998 six
months) ........................................... 2,943 7,934 9,017 4,540 6,003
------- -------- -------- -------- --------
Income before income taxes and extraordinary
loss .............................................. 3,767 5,930 11,603 3,332 2,780
Provision for income taxes ......................... 1,585 2,500 4,872 1,400 1,168
------- -------- -------- -------- --------
Income before extraordinary loss .................. 2,182 3,430 6,731 1,932 1,612
Extraordinary loss from debt extinguishment,
net ............................................... -- -- 3,495 -- --
------- -------- -------- -------- --------
Net income ........................................ $ 2,182 $ 3,430 $ 3,236 $ 1,932 $ 1,612
======= ======== ======== ======== ========
See notes to financial statements.
F-4
THE FONDA GROUP, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED SIX MONTHS ENDED
-------------------------------------- --------------------------
JULY 30, JULY 28, JULY 27, JANUARY 26, JANUARY 25,
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------- ------------
(UNAUDITED)
Operating activities:
Net income ......................................... $ 2,182 $ 3,430 $ 3,236 $ 1,932 $ 1,612
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization .................... 1,669 3,450 4,440 2,859 2,694
Amortization and write-off of debt issuance
costs ........................................... 560 1,021 2,640 190 272
Elimination of unamortized debt discount ......... -- -- 2,108 -- --
Provision for doubtful accounts .................. 184 148 457 121 108
Deferred income taxes ............................ (1,690) 533 3,005 594 538
Gain on sale of equipment ........................ -- -- -- -- (466)
Interest capitalized on debt ..................... -- 165 684 350 --
Changes in assets and liabilities (net of
business acquisitions):
Accounts receivable ............................. (6,543) 6,826 (2,007) 2,777 (736)
Due from affiliates ............................. 464 (994) (213) 336 (865)
Inventories ..................................... (6,648) (299) (1,178) (1,036) 1,973
Other current assets ............................ (309) (26) (3,273) 116 3,275
Accounts payable and accrued expenses ........... 3,840 8,782 (1,019) (2,001) 553
Income taxes payable (refundable) ............... 3,029 (3,644) (1,280) (868) 499
Other ........................................... (1,512) (1,719) 673 (587) (133)
--------- --------- --------- -------- ---------
Net cash provided by (used in) operating
activities ...................................... (4,774) 17,673 8,273 4,783 9,324
--------- --------- --------- -------- ---------
Investing activities:
Capital expenditures ............................... (1,608) (1,314) (10,363) (2,074) (4,408)
Proceeds from disposition of equipment ............. -- -- -- -- 479
Payments for business acquisitions ................. (27,985) (45,218) (23,043) -- (6,712)
Note receivable from affiliate ..................... -- -- (2,600) -- --
--------- --------- --------- -------- ---------
Net cash used in investing activities ........... (29,593) (46,532) (36,006) (2,074) (10,641)
--------- --------- --------- -------- ---------
Financing activities:
Net increase (decrease) in revolving credit
agreement ........................................ (7,225) 14,745 (32,842) (786) 6,029
Proceeds from long-term debt ....................... 47,520 18,803 120,000 -- --
Repayments of long-term debt ....................... (3,638) (2,499) (49,879) (3,063) (308)
Debt issuance costs ................................ (2,395) (843) (4,902) --
Acquisition of common stock ........................ -- -- (203) -- (9,788)
--------- --------- --------- -------- ---------
Net cash provided by (used in) financing
activities ....................................... 34,262 30,206 32,174 (3,849) (4,067)
--------- --------- --------- -------- ---------
Net increase (decrease) in cash ..................... (105) 1,347 4,441 (1,140) (5,384)
Cash, beginning of period ........................... 225 120 1,467 1,467 5,908
--------- --------- --------- -------- ---------
Cash, end of period ................................. $ 120 $ 1,467 $ 5,908 $ 327 $ 524
========= ========= ========= ======== =========
Supplemental cash flow information:
Cash paid during the period for:
Interest, including $163 capitalized in Fiscal
1997 and $192 in Fiscal 1998 six months ......... $ 2,114 $ 6,029 $ 5,018 $ 3,383 $ 6,163
Income taxes, net of refunds ..................... -- 5,611 614 1,630 98
Businesses acquired:
Fair value of assets acquired .................... $ 37,777 $ 59,090 $ 23,637 $ 9,147
Cash paid ........................................ 27,985 45,218 23,043 6,712
--------- --------- --------- ---------
Liabilities assumed (including notes payable
to sellers of $9,250 during Fiscal 1996) ........ $ 9,792 $ 13,872 $ 594 $ 2,435
========= ========= ========= =========
See notes to financial statements.
F-5
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND ORGANIZATION
The Fonda Group, Inc. (the "Company") is a leading converter and marketer
of a broad line of disposable paper food service products. Prior to March 30,
1995, the Company was a wholly-owned subsidiary of Four M Corporation ("Four
M"). On March 30, 1995, Four M distributed approximately 96% of the Company's
common stock to Four M's sole stockholder at such time. The remaining 4% of the
Company's common stock was distributed to American International Life Insurance
Company of New York ("AIG") (see Note 16).
2. SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those estimates.
FISCAL YEAR -- The Company's fiscal year is the fifty-two or fifty-three
week period which ends on the last Sunday in July. The 1995, 1996 and 1997
fiscal years were fifty-two week periods ended July 30, 1995, July 28, 1996 and
July 27, 1997, respectively.
INVENTORIES -- Inventories are valued at the lower of cost (first-in,
first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated
at cost or fair market value for business acquisitions. Depreciation is
computed by use of the straight-line method over the estimated useful lives of
the assets.
GOODWILL -- Goodwill represents the excess of the purchase price over the
fair value of tangible and identifiable intangible net assets acquired and is
amortized on a straight-line basis over twenty years. The carrying value of
goodwill is reviewed when facts and circumstances suggest that it may be
impaired. The Company assesses its recoverability by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted projected future cash flows.
INCOME TAXES -- Deferred income taxes are provided on the differences
between the basis of assets and liabilities for financial reporting and income
tax purposes using presently enacted tax rates.
DEBT ISSUANCE COSTS -- Included in other assets are unamortized debt
issuance costs of $2.8 million at July 28, 1996 and $4.8 million at July 27,
1997 incurred in connection with obtaining financing which are being amortized
over the terms of the respective borrowing agreements.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying value of financial
instruments including cash, accounts receivable and accounts payable
approximate fair value because of the relatively short maturities of these
instruments. The carrying value of long-term debt, including the current
portion and subordinated debt, approximate fair value based upon market rates
for similar instruments.
INTERIM FINANCIAL STATEMENTS -- The accompanying balance sheet as of
January 25, 1998 and the statements of income and cash flows for the six months
ended January 26, 1997 and January 25, 1998 are unaudited but, in the opinion
of management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods. Results for interim periods are not necessarily indicative of results
for the entire year.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and
Related Information, which will be effective for the Company beginning August
1, 1998. SFAS No. 131 redefines how operating segments are determined and
requires disclosure of certain financial and descriptive information about a
company's operating segments. The Company has not yet completed its analysis of
which operating segments, if any, it will report on.
F-6
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. BUSINESS ACQUISITIONS
The following acquisitions have been accounted for under the purchase
method and their results of operations have been included in the statements of
income since the respective dates of acquisition. Goodwill amortization was
less than $.1 million in Fiscal 1995, $.2 million in Fiscal 1996 and $.4
million in Fiscal 1997.
The following summarized, unaudited pro forma results of operations assume
the business acquisitions occurred as of the beginning of the respective years
(in thousands).
YEARS ENDED
-------------------------------------
JULY 30, JULY 28, JULY 27,
1995 1996 1997
---------- ---------- -----------
Net sales ................................ $238,645 $286,849 $271,777
Income before extraordinary loss ......... $ 1,764 $ 6,308 $ 7,412
1998 ACQUISITION
In January 1998, the Company acquired certain net assets of Leisureway,
Inc., a manufacturer of white paper plates for $7.3 million, including a
deferred payment of $.6 million and acquisition costs, subject to a working
capital adjustment. The excess of the purchase price over the Company's
preliminary evaluation of the fair value of the net assets acquired was $7.5
million and has been recorded as goodwill.
1997 ACQUISITIONS
In June 1997, the Company acquired all of the outstanding capital stock of
Heartland Mfg. Corp., a manufacturer of paper plates, for $12.6 million,
including acquisition costs. The excess of the purchase price over the
Company's evaluation of the fair value of the net assets acquired was $9.3
million and has been recorded as goodwill.
Also in June 1997, the Company acquired from Tenneco Inc. net assets
relating to the manufacture of placemats and other disposable tabletop products
for $6.6 million, including acquisition costs. The excess of the purchase price
over the Company's evaluation of the fair value of the net assets acquired was
$1.3 million and has been recorded as goodwill.
1996 ACQUISITIONS
In May 1996, the Company acquired certain net assets of two divisions
(James River-California and Natural Dam) of the Specialties Operations Division
(the "Division") of James River Paper Corporation ("James River") for $13.1
million (including a final purchase price adjustment consummated in Fiscal
1997), including acquisition costs. The purchase price consisted of cash and a
promissory note to the seller for $7 million, see Note 9 (which was later
reduced to $2.2 million in a final settlement of this note simultaneous with
the final purchase price adjustment). In Fiscal 1997, management decided to
close the James River--California facility which produced tissue-based
products. The Natural Dam mill produces specialty and deep-toned colored tissue
paper. Natural Dam hosts a co-generation facility on its property which
produces steam for internal use and which is expected to provide significant
cost savings. Natural Dam received all of its steam energy requirements at 50%
of historical cost in calendar 1997 and expects to receive significantly
increased savings for the next 40 years thereafter. In addition, Natural Dam
expects to receive land lease payments from the operator of the land occupied
by the co-generation facility. See Note 15. The $10 million in benefits from
the co-generation facility is included in long-term assets acquired and is
being amortized based upon Natural Dam's annual savings over the 42-year
remaining life of the contract. See Note 16. The excess of the Company's
evaluation of the fair value of the net assets acquired (including $10 million
in benefits from the co-generation facility) over the final adjusted
F-7
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. BUSINESS ACQUISITIONS--(CONTINUED)
purchase price was $6.3 million and has been allocated to long-term assets. The
remaining net assets and business of the Division were acquired by Creative
Expressions Group, Inc. ("CEG"), a company under common ownership with the
Company, in a separate transaction.
In December 1995, the Company acquired the Chesapeake Consumer Products
Company ("Chesapeake") from Chesapeake Corporation for $29 million, including
acquisition costs. Chesapeake produces design-intensive and solid-colored
premium napkins, tablecovers and crepe paper. The excess of the purchase price
over the Company's evaluation of the fair value of the net assets acquired was
$4.6 million and has been recorded as goodwill.
In November 1995, the Company acquired substantially all of the net assets
of Alfred Bleyer & Co., Inc. ("Maspeth"), a manufacturer of paper plates and
cups, for $10 million, including acquisition costs. The purchase price
consisted of cash and a promissory note to the seller for $2.25 million. The
excess of the Company's evaluation of the fair value of the net assets over the
purchase price was $.1 million and has been allocated to the long-term assets.
1995 ACQUISITION
In March 1995, the Company acquired substantially all of the net assets of
the Scott Foodservice Division ("Hoffmaster") from Scott Paper Company
("Scott") for $28 million, including acquisition costs. Hoffmaster produces
colored and custom-printed napkins and placemats. The excess of the purchase
price over the Company's evaluation of the fair value of the net assets
acquired was $.8 million and has been recorded as goodwill.
4. OTHER INCOME, NET
Other income, net in Fiscal 1997 includes a net $2.9 million from the
settlement of a lawsuit. Partially offsetting this gain was a $1.3 million
charge for costs of the closure of the Company's Three Rivers, Michigan
facility. The charge covers the costs for the termination of employees as well
as ongoing costs to maintain the facility until its disposition.
5. INVENTORIES
Inventories consist of the following (in thousands):
JULY 28, JULY 27, JANUARY 25,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
Raw materials ........... $17,015 $18,143 $18,299
Work-in-process ......... 339 391 277
Finished goods .......... 19,126 20,345 18,739
Other ................... 987 1,955 2,119
------- ------- -------
$37,467 $40,834 $39,434
======= ======= =======
F-8
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
LIVES IN JULY 28, JULY 27, JANUARY 25,
YEARS 1996 1997 1998
---------- ------------ ------------ ------------
(UNAUDITED)
Land and buildings ..................... 20-40 $ 17,675 $ 21,703 $ 21,792
Machinery and equipment ................ 3-12 42,492 46,108 46,145
Leasehold improvements ................. 5-10 950 955 797
Construction in progress ............... 767 8,794 12,526
--------- --------- ---------
61,884 77,560 81,260
Less: accumulated depreciation ......... (15,534) (18,299) (19,906)
--------- --------- ---------
$ 46,350 $ 59,261 $ 61,354
========= ========= =========
Property, plant and equipment includes property and equipment under
capital lease as follows (in thousands):
JULY 28, JULY 27, JANUARY 25,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
Building ............................... $2,217 $2,217 $2,217
Equipment .............................. 350 -- --
Less: accumulated depreciation ......... (830) (554) (591)
------ ------ ------
$1,737 $1,663 $1,626
====== ====== ======
Depreciation expense was $1.7 million in Fiscal 1995, $3.2 million in
Fiscal 1996 and $3.9 million in 1997.
7. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, and
their dispersion across many different geographical regions. The Company had
sales to one customer representing approximately 11% of net sales in Fiscal
1996.
8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
JULY 28, JULY 27, JANUARY 25,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
Accrued compensation ......... $ 4,367 $ 8,149 $ 7,084
Accrued interest ............. 639 4,716 4,629
Accrued promotion ............ 2,310 2,555 3,670
Other ........................ 7,577 9,191 8,655
------- ------- -------
$14,893 $24,611 $24,038
======= ======= =======
F-9
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
JULY 28, JULY 27, JANUARY 25,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
Revolving credit agreement ................................... $32,842 $ -- $ 6,029
9 1/2% Series A Senior Subordinated Notes due 2007 ........... -- 120,000 120,000
Subordinated notes payable to the Equitable .................. 13,796 -- --
Subordinated note payable to James River (see Note 3), plus
capitalized interest of $165,000, due May 2007, bearing
interest at 10% ............................................. 7,165 -- --
Term loan payable to a bank, with interest payable monthly at
LIBOR plus 2.5%, principal payable monthly through
March 31, 2000; collateralized by machinery and equipment
and certain real estate ..................................... 25,236 -- --
Term loan payable to a bank, due March 31, 2000, with interest
payable monthly at 2.50% above the prime rate, collaterized
by machinery and equipment and certain real estate .......... 4,500 -- --
Other ........................................................ 4,224 2,987 2,680
------- -------- --------
87,763 122,987 128,709
Less amounts due within one year ............................. 6,023 619 537
------- -------- --------
$81,740 $122,368 $128,172
======= ======== ========
On February 27, 1997, the Company issued $120 million of 9 1/2% Series A
Senior Subordinated Notes due 2007 (the "Notes"). Interest is payable
semi-annually in March and September. Proceeds from the issuance of the Notes
were primarily used to retire debt. The Company incurred a $3.5 million
extraordinary loss (net of a $2.5 million income tax benefit) in connection
with the early retirement of debt consisting of the write-off of unamortized
debt issuance costs, elimination of unamortized discount and prepayment
penalties.
In Fiscal 1997, the Company entered into a $50 million revolving credit
agreement with a bank, expiring March 31, 2000 and collateralized by eligible
accounts receivable and inventories. At July 27, 1997, there was no outstanding
balance and $37.1 million was the maximum advance available based upon eligible
collateral. At October 26, 1997, $8 million was outstanding and $37.6 million
was the maximum advance available. A commitment fee of .375% per annum is
charged on the unutilized portion of the facility. At July 27, 1997, borrowings
were available at the bank's prime rate (8.50%) plus .25% and at LIBOR
(approximately 5.65%) plus 2.25%. The revolving credit agreement and the Notes
contain certain restrictive covenants with respect to, among others, (i)
mergers and acquisitions, (ii) capital expenditures, (iii) dividends, and (iv)
additional indebtedness. In addition, the revolving credit agreement requires
that the Company satisfy certain financial covenants.
On May 24, 1995, the Company issued $10 million of 14% subordinated notes
due May 24, 2002 to The Equitable Life Assurance Society of the United States
(the "Equitable"). In connection therewith, the Company granted warrants, which
expire in May 2003, to the Equitable to purchase 9,176 shares of its Class B
common stock for $.01 per share. See Note 16. The fair value of the warrants
($1.2 million) at the date of issuance was recorded as paid-in capital with a
corresponding reduction in the carrying value of the subordinated notes. On
December 29, 1995, the Company issued $6 million of 14% subordinated notes due
December 30, 2002 to the Equitable. In connection therewith, the Company issued
3,666 shares of its Class B common stock to the Equitable (the "Equitable
Shares"). The fair value of the common
F-10
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. LONG-TERM DEBT--(CONTINUED)
stock ($1.3 million) at the date of issuance was recorded as common stock and
paid-in capital with a corresponding reduction in the carrying value of the
subordinated notes. The discounts on the subordinated notes were amortized as
additional interest expense over the terms of such notes until the subordinated
notes were repaid with proceeds from the issuance of the Notes. Such discount
amortization was $.1 million in Fiscal 1995, $.3 million in Fiscal 1996 and $.1
million in Fiscal 1997.
10. STOCKHOLDERS' EQUITY AND REDEEMABLE COMMON STOCK
Stockholders' equity consists of the following (in thousands, except share
data):
JULY 28, JULY 27, JANUARY 25,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
Preferred Stock, $.01 par value, 1,000 shares
authorized, none issued ........................................ $ -- $ -- $ --
Preferred Stock Class B, $.01 par value,
100,000 shares authorized, none issued ......................... -- -- --
Common Stock Class A, $.01 par value,
400,000 shares authorized, 184,000 issued and outstanding in
Fiscal 1996 and 1997, 111,500 outstanding at January 25, 1998 2 2 2
Common Stock Class B, $.01 par value,
20,000 shares authorized, 3,666 issued, 3,666, 2,666
and 2,666 outstanding, respectively ............................ -- -- --
Common Stock Class C, $.01 par value,
200,000 shares authorized, none issued ......................... -- -- --
Paid-in capital ................................................. 3,500 3,500 3,500
Retained earnings ............................................... 8,371 11,643 13,223
Treasury stock, at cost, 1,000 shares Class B Common Stock and
72,500 shares Class A Common Stock at January 25, 1998 ......... -- (135) (9,923)
------- ------- --------
$11,873 $15,010 $ 6,802
======= ======= ========
In connection with the March 30, 1995 distribution of the Company's common
stock by Four M, 7,000 shares of the Company's Class A Common Stock were
distributed to AIG (the "AIG Shares") in partial satisfaction of a $4 million
subordinated note made by Four M in favor of AIG. In Fiscal 1997, 500 AIG
Shares were acquired by the Company pursuant to the Stock Repurchase (as
defined below). Concurrent with the distribution, the Company and AIG entered
into a redemption agreement, whereby AIG has the right to require the Company
to repurchase all of the AIG Shares at the earlier of March 31, 2007 or the
date of a merger or consolidation of the Company with another entity in which
the Company is not the surviving party. The aggregate repurchase price for the
outstanding AIG Shares is $2.8 million discounted from March 31, 2007 at a rate
of 3% per annum. The redemption agreement also contains redemption rights
whereby the Company can require AIG to redeem the remaining AIG Shares after
March 31, 2000 on the same terms specified above. The AIG Shares are disclosed
at the present value of their liquidation value on the balance sheets. The 1995
transfer of the present value of the liquidation value of the redeemable common
stock and the annual accretion to liquidation value has been charged to
retained earnings.
In April 1997, the Company offered to repurchase up to 74,000 shares of
common stock at $135 per share from the Company's stockholders on a pro rata
basis (the "Stock Repurchase"). In Fiscal 1997, pursuant to the Stock
Repurchase, the Company redeemed 500 of the AIG Shares and 1,000 of the
Equitable Shares for $135 per share. The repurchase of the 500 AIG Shares for
less than the present value
F-11
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. STOCKHOLDERS' EQUITY AND REDEEMABLE COMMON STOCK--(CONTINUED)
of the liquidation amount as of the date of repurchase resulted in a credit to
retained earnings. The Equitable Shares have been reported as Treasury Stock.
In September 1997 and January 1998, pursuant to the Stock Repurchase, the
Company redeemed 61,865 and 10,635 shares of Class A common stock for $8.4
million and $1.4 million, respectively, which have been included as treasury
stock within stockholders' equity. The Company has completed such stock
repurchase.
In September 1997, the Board of Directors granted the majority stockholder
15,000 options to purchase Class A Common Stock at an option price of $135 per
share. Options to purchase 5,000 shares vest on October 1, 1997, and options to
purchase an additional 5,000 shares vest on October 1, 1998 and October 1, 1999
respectively, or upon an initial public offering of the Company's common stock,
whichever occurs first; provided that the majority stockholder is employed by
the Company on the applicable vesting date (see Note 16).
The changes in retained earnings consists of the following (in thousands):
YEARS ENDED SIX MONTHS
------------------------------------- ENDED
JULY 30, JULY 28, JULY 27, JANUARY 25,
1995 1996 1997 1998
----------- ---------- ---------- ------------
(UNAUDITED)
Balance, beginning of year .................... $ 4,938 $5,005 $ 8,371 $11,643
Net income ................................... 2,182 3,430 3,236 1,612
Transfer of liquidation value of redeemable
common stock ............................... (2,094) -- 100 --
Accretion of redeemable common stock ......... (21) (64) (64) (32)
-------- ------ ------- -------
Balance, end of year .......................... $ 5,005 $8,371 $11,643 $13,223
======== ====== ======= =======
Effective August 1, 1995, the Company adopted The Fonda Group, Inc. Stock
Appreciation Unit Plan (the "Plan"). The Plan provides for the granting of up
to 200,000 units to key executives of the Company. A grantee is entitled to the
appreciation in a unit's value from the date of the grant to the date of its
redemption. Unit value is based upon a formula consisting of net income and
book value criteria and grants vest over a five-year period. The Company
granted 5,850 in Fiscal 1995, 9,500 in Fiscal 1996 and 10,980 units in Fiscal
1997 at an aggregate value on the date of grant of $.2 million, $.3 million and
$.4 million, respectively. The Company recorded compensation expense of $.1
million in Fiscal 1996 and less than $.1 million in Fiscal 1997.
F-12
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
YEARS ENDED
-----------------------------------
JULY 30, JULY 28, JULY 27,
1995 1996 1997
---------- ---------- ---------
Current:
Federal ......... $ 2,577 $1,526 $1,449
State ........... 698 441 418
-------- ------ ------
3,275 1,967 1,867
-------- ------ ------
Deferred:
Federal ......... (1,381) 423 2,328
State ........... (309) 110 677
-------- ------ ------
(1,690) 533 3,005
-------- ------ ------
$ 1,585 $2,500 $4,872
======== ====== ======
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Deferred tax assets (liabilities) result from
temporary differences as follows (in thousands):
JULY 28, JULY 27,
1996 1997
---------- -----------
Deferred tax assets:
Capitalized inventory costs ....................................... $ 881 $ 785
Allowance for doubtful accounts receivable ........................ 180 349
Accruals for health insurance and other employee benefits ......... 1,824 1,911
Inventory and sales related reserves .............................. 662 567
Pension reserve ................................................... 1,158 433
Benefit of tax carryforwards ...................................... -- 370
Other ............................................................. 1,495 1,485
-------- --------
6,200 5,900
Deferred tax liabilities:
Depreciation ...................................................... (3,209) (5,264)
-------- --------
$ 2,991 $ 636
======== ========
A reconciliation of the income tax provision to the amount computed using
the Federal statutory rate is as follows (in thousands):
YEARS ENDED
-----------------------------------
JULY 30, JULY 28, JULY 27,
1995 1996 1997
---------- ---------- ---------
Income tax at statutory rate ........................ $1,281 $2,076 $4,061
State income taxes (net of Federal benefit) ......... 232 365 712
Other ............................................... 72 59 99
------ ------ ------
$1,585 $2,500 $4,872
====== ====== ======
F-13
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
12. LEASES
The Company leases certain of its facilities and equipment under operating
leases. Future minimum payments under noncancellable operating leases with
remaining terms of one year or more are $1.2 million in Fiscal 1998, $.9
million in Fiscal 1999, $.9 million in Fiscal 2000, $.8 million in Fiscal 2001,
$.8 million in Fiscal 2002, and $2.6 million thereafter.
Rent expense was $1.2 million in Fiscal 1995, $1.8 million in Fiscal 1996
and $2 million in Fiscal 1997.
13. RELATED PARTY TRANSACTIONS
The Company subleased a portion of a building in Jacksonville, Florida
from Four M prior to January 1, 1995. Effective January 1, 1995, the Company
leases the entire facility from its majority stockholder. Annual payments under
the lease are $.2 million plus annual increases based on changes in the
Consumer Price Index ("CPI") through December 31, 2014. In addition, from
January 1, 1998 to July 31, 2006, the majority stockholder may require the
Company to purchase the facility for $1.5 million, subject to a CPI-based
escalation. The purchase price would be $.4 million in cash and the balance in
a seven-year note secured by a lien covering the facility with interest payable
at 2% over prime. Rent expense, net of sublease income on a portion of the
premises subleased to Four M, was $.1 million in each of the fiscal years 1995,
1996 and 1997. See Note 16.
On February 27, 1997, the Company loaned $2.6 million to CEG for five
years at an interest rate of 10%, the proceeds of which were applied to CEG's
prepayment of certain obligations to James River.
Net sales to CEG were $1.9 million in Fiscal 1996 and $7.8 million in
Fiscal 1997. Net sales to Fibre Marketing Group, LLC, a waste paper recovery
business of which Four M and a Director of the Company are members, were $.2
million in Fiscal 1995, $4 million in Fiscal 1996 and $3.6 million in Fiscal
1997. Net purchases of corrugated containers from Four M were $.2 million in
Fiscal 1996 and $.9 million in Fiscal 1997. The Company believes that the terms
on which it sold or purchased products from related parties were at least as
favorable as those it could otherwise have obtained from unrelated third
parties and were negotiated on an arm's length basis.
During the period that the Company was owned by Four M, the Company was
charged a management fee by Four M for certain general and administrative
services. The $.5 million fee in 1995 was based on the time allocated to the
Company's matters by certain Four M corporate personnel and a pro rata amount
for various expenses such as insurance, directors' fees, and other
miscellaneous expenses. At any point in time there were seven to ten Four M
individuals who performed various functions on behalf of the Company, each
allocating between 25% and 75% of their time to the Company. The Company
believes that the allocation methods used for Four M's charges are reasonable
and include all expenses that Four M incurred on the Company's behalf.
14. EMPLOYEE BENEFIT PLANS
The Company provides certain union and non-union employees with retirement
and disability income benefits under defined benefit pension plans. Pension
costs are based upon the actuarially determined normal costs plus interest on
and amortization of the unfunded liabilities. On December 31, 1996, the benefit
accruals were frozen for participants in the non-union pension plans resulting
in a $.7 million reduction in the pension liability. The Company's policy has
been to fund annually the minimum contributions required by applicable
regulations.
Pursuant to the Asset Purchase Agreement covering the Hoffmaster
acquisition, Scott made required aggregate contributions of $.9 million to the
Hoffmaster plans. As such, in Fiscal 1997, the Company reversed a $.7 million
pension reserve that it had previously accrued for such contributions.
F-14
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
14. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The net periodic pension cost for benefits earned in the respective years
is computed as follows (in thousands):
YEARS ENDED
-----------------------------------
JULY 30, JULY 28, JULY 27,
1995 1996 1997
---------- ---------- ---------
Service cost ...................... $ 269 $ 731 $ 433
Interest cost ..................... 204 455 403
Return on plan assets ............. (123) (313) (751)
Deferred gain ..................... -- -- 487
------ ------ ------
Net periodic pension cost ......... $ 350 $ 873 $ 572
====== ====== ======
The funded status of the plans and the amount recognized in the balance
sheets is as follows (in thousands):
JULY 28, 1996 JULY 27, 1997
--------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------- ------------- ------------- ------------
Accumulated benefit obligation:
Vested .............................................. $1,307 $2,964 $2,004 $3,515
Non-vested .......................................... 35 33 30 49
------ ------ ------ ------
Total ................................................ $1,342 $2,997 $2,034 $3,564
====== ====== ====== ======
Projected benefit obligation ......................... $2,499 $2,997 $2,034 $3,564
Plan assets at fair value, primarily common stocks
and government obligations .......................... 930 1,689 2,170 2,846
------ ------ ------ ------
Projected benefit obligation in excess of plan assets 1,569 1,308 (136) 718
Unrecognized net gain (loss) ......................... (81) 1 136 329
------ ------ ------ ------
Accrued pension cost ................................. $1,488 $1,309 $ -- $1,047
====== ====== ====== ======
The actuarial present values of accumulated and projected benefit
obligations were determined using discount rates of 8%, except for non-union
plans which used 7% in Fiscal 1997, and an assumed rate of increase in
compensation levels of 4%. The expected rate of return on assets was assumed to
be 8%.
The Company provides 401(k) savings and investment plans for the benefit
of non-union employees. Employee contributions are matched at the discretion of
the Company. On January 1, 1997, the Company adopted a defined contribution
benefit plan for all non-union employees for which contributions and costs are
based on participant earnings. The costs for these plans were less than $.1
million in Fiscal 1995, $.4 million in Fiscal 1996 and $.8 million in Fiscal
1997.
The Company also participates in multi-employer pension plans for certain
of its union employees. Contributions to these plans, at a defined rate per
hour worked, amounted to $.9 million in Fiscal 1995, $1.3 million in Fiscal
1996, and $.6 million in Fiscal 1997.
15. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceeding and other claims arising in the
ordinary course of its business. The Company maintains insurance coverage of
types and in amounts which it believes to be
F-15
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
adequate and believes that it is not presently a party to any litigation, the
outcome of which could reasonably be expected to have a material adverse effect
on its financial condition or results of operations.
The Company has commitments to purchase paperboard from three major
vendors. The total annual commitment is for the purchase of 49,200 tons of
paperboard through April 2001. The price per ton will be based on market rates,
less applicable rebates for all of these commitments. In addition, the Company
has a commitment through calendar 1999 to purchase 14,500 tons of tissue paper
in 1997, 11,000 tons in 1998 and 10,000 tons in 1999, at market rates.
16. SUBSEQUENT EVENTS
In February 1998, the Company decided to close its Jacksonville, Florida
facility. The costs to close such facility are not expected to have a material
adverse effect on the Company's results of operations.
On February 11, 1998, the Company reached an agreement with the owner of
the co-generation facility hosted by the Company at its Natural Dam mill,
whereby among other things (a) the operator will terminate its obligations to
supply steam to Natural Dam; and (b) the operator will not be obligated to make
fixed rent payments for three years following the consummation of such
agreement and will have the right to terminate the land lease payments in
return for a lump sum cash payment and the delivery of certain equipment. The
consummation of this agreement is subject to various conditions, including the
negotiation and execution of a definitive agreement. The Company expects to
record a gain upon the consummation of the transaction contemplated by this
agreement, however, there can be no assurance that such transaction will be
consummated.
On March 12, 1998, the Company entered into an agreement with CEG, subject
to extension, whereby CEG will manufacture and distribute certain party goods
products currently manufactured by the Company for a period of five years. In
connection therewith, the Company will receive a royalty equal to 5% of CEG's
cash flow, as determined in accordance with a formula specified in such
agreement. In Fiscal 1997, the Company's net sales of such party goods products
were approximately $30 million.
On March 12, 1998, SF Holdings Group, Inc. ("SF Holdings"), a Delaware
corporation principally owned by the majority stockholder of the Company,
issued and sold $77.5 million in gross proceeds of units, each unit consisting
of 12 3/4% Senior Secured Notes due 2008 and Two shares of Class C common stock
of SF Holdings. The net proceeds of such offering were used to fund the
acquisition (the "Sweetheart Investment") by SF Holdings of 90% of the total
outstanding common stock, including 48% of the voting stock, of Sweetheart
Holdings, Inc. ("Sweetheart"). The Company also consummated the following
transactions:
(1) All of the shares of the Company were converted into shares of SF
Holdings pursuant to a merger of a subsidiary of SF Holdings into the Company.
(the "Stockholders Exchange") and the Company became a wholly-owned subsidiary
of SF Holdings;
(2) The 15,000 options to purchase Class A common stock of the Company
granted to the majority stockholder (see Note 10) were converted into options
to purchase Class A common stock of SF Holdings;
(3) Prior to the Stockholders Exchange, outstanding warrants to purchase
9,176 shares of Class B common stock of the Company (see Note 9) were exercised
and such shares were converted into shares of Class B common stock of SF
Holdings; and
(4) SF Holdings assigned substantially all of its rights under the
Management Services Agreement between SF Holdings and American Industrial
Partners Management Company, Inc. ("AIPM"), as amended, to the Company in
consideration for the payment of $7.0 million. During the term of the
Management Services Agreement, Fonda has the right, subject to the direction of
the board of directors of Sweetheart, to manage Sweetheart's day-to-day
operations for and on behalf of Sweetheart, including
F-16
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
16. SUBSEQUENT EVENTS--(CONTINUED)
but not limited to, the right to cause Sweetheart to (i) acquire and dispose of
assets; (ii) employ, determine compensation of and terminate employees of
Sweetheart other than the Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer; and (iii) take all other actions associated with the
management of the day-to-day operations of the business of Sweetheart. For the
first three years after the consummation of the Sweetheart Investment, AIPM
will continue to provide certain financial advisory services to Sweetheart for
which it will receive certain fees. In consideration of Fonda's performance of
services, it will receive certain fees during the term of the agreement.
On March 24, 1998, the Company consummated an agreement to sell
substantially all of the fixed assets and certain related working capital of
Natural Dam, pursuant to which Fonda realized net proceeds, after expenses, of
approximately $25 million, subject to a post-closing adjustment for working
capital.
F-17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Sweetheart Holdings Inc.:
We have audited the accompanying consolidated balance sheets of Sweetheart
Holdings Inc. (a Delaware corporation) and subsidiaries as of September 30,
1996 and 1997 and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended September 30, 1995,
1996 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sweetheart Holdings Inc.
and Subsidiaries as of September 30, 1996 and 1997, and the consolidated
results of their operations and their cash flows for the years ended September
30, 1995, 1996 and 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Baltimore, Maryland
December 8, 1997
(except with respect to
the matter discussed in
Note 20, as to which the
date is March 12, 1998)
F-18
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
------------------------- DECEMBER 31,
1996 1997 1997
----------- ----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 4,371 $ 2,650 $ 4,687
Restricted cash ..................................... 28,870 29,016
Cash in escrow ...................................... -- 13,323 23,720
Receivables, less allowances of $2,466, $1,740 and
$1,851, respectively .............................. 88,183 85,774 72,417
Inventories ......................................... 172,838 148,845 140,941
Deferred income taxes ............................... 1,771 2,471 2,471
Assets held for sale, net ........................... -- 8,466 --
Other current assets ................................ 20,099 20,868 19,532
-------- --------- ---------
Total current assets .............................. 316,132 311,413 263,768
Property, plant and equipment ........................ 527,394 527,999 526,770
Less--Accumulated depreciation ....................... 99,561 145,508 154,052
Net property, plant and equipment .................... 427,833 382,491 372,718
Deferred income taxes ................................ -- 12,471 19,083
Other assets ......................................... 18,645 13,155 17,482
-------- --------- ---------
TOTAL ASSETS ......................................... $762,610 $ 719,530 $ 673,051
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 70,472 $ 58,933 $ 50,870
Accrued payroll and related costs ................... 47,828 40,528 35,770
Other current liabilities ........................... 33,918 43,815 45,819
Current portion of long-term debt and bonds ......... 1,535 1,369 5,516
-------- --------- ---------
Total current liabilities ......................... 153,753 144,645 137,975
Long-term debt ...................................... 381,879 426,799 397,258
Long-term bonds ..................................... 3,700 3,700 3,700
Deferred income taxes ............................... 17,803 -- --
Other non-current liabilities ....................... 84,060 69,775 69,062
Shareholders' equity:
Common stock--
Par value $.01 per share; 3,000,000 shares
authorized; 1,046,000 shares issued and
outstanding ...................................... 101,100 101,100 101,100
Cumulative translation adjustment ................... (322) (507) (926)
Retained earnings (accumulated deficit) ............. 21,060 (25,611) (34,747)
Note receivable related to purchase of common
stock ............................................. (423) (371) (371)
-------- --------- ---------
Total shareholders' equity ........................ 121,415 74,611 65,056
-------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ........................................... $762,610 $ 719,530 $ 673,051
======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------------------------- ---------------------------
1995 1996 1997 1996 1997
----------- ----------- ------------- ------------- -----------
(UNAUDITED)
Net sales ............................ $ 986,618 $ 959,818 $ 886,017 $ 202,102 $ 201,952
Cost of sales ........................ 779,497 748,055 722,539 176,859 164,341
--------- --------- --------- --------- ---------
Gross income ........................ 207,121 211,763 163,478 25,243 37,611
--------- --------- --------- --------- ---------
Transportation ....................... 95,096 98,664 98,482 22,462 23,665
Selling, general, and
administrative ...................... 66,089 61,788 66,792 16,216 19,102
Loss on asset disposal and
impairment .......................... -- -- 24,550 -- --
Restructuring charges ................ -- -- 9,680 -- --
--------- --------- --------- --------- ---------
Operating income (loss) ............. 45,936 51,311 (36,026) (13,435) (5,156)
Interest expense ..................... (38,655) (38,832) (41,812) (9,952) (11,126)
Other income (expense) ............... 2,442 (2,956) 1,620 268 3,576
--------- --------- --------- --------- ---------
Income (loss) before income
taxes, cumulative effect of
an accounting change and
extraordinary loss ................ 9,723 9,523 (76,218) (23,119) (12,706)
Income tax expense (benefit) ......... 3,903 3,809 (30,487) (9,247) (5,081)
--------- --------- --------- --------- ---------
Income (loss) before
cumulative effect of an
accounting change and
extraordinary loss ................ 5,820 5,714 (45,731) (13,872) (7,625)
Cumulative effect of a change
in accounting principle (net of
income taxes of $1,007) ............. -- -- -- -- (1,511)
Extraordinary loss on debt
extinguishment (net of
income taxes of $627) ............... -- -- 940 -- --
--------- --------- --------- --------- ---------
Net income (loss) ................. $ 5,820 $ 5,714 $ (46,671) $ (13,872) $ (9,136)
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------------------- ----------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------- ------------ -------------
(UNAUDITED)
Cash flows from operating activities:
Net (loss) income ...................... $ 5,820 $ 5,714 $ (46,671) (13,872) (9,136)
Depreciation and amortization .......... 37,741 43,373 47,723 11,494 11,415
Asset impairment expense ............... -- -- 24,550 -- --
Gain on sale of assets ................. -- -- -- -- (4,245)
Cumulative effect of change in
accounting principle ................. -- -- -- -- 1,511
Extraordinary loss, net of tax ......... -- -- 940 -- --
Deferred income taxes .................. 3,144 2,645 (30,487) (9,222) (5,081)
Changes in operating assets and
liabilities:
Receivables .......................... (17,863) 14,103 (1,341) 17,886 13,357
Inventories .......................... 21,055 (20,878) 23,993 22,638 7,904
Accounts payable ..................... 4,852 5,259 (11,541) (27,011) (8,063)
Other ................................ (3,850) (6,708) (10,408) (4,751) (6,924)
---------- ---------- ---------- ------- ------
Net cash provided by (used in)
operating activities .............. 50,899 43,508 (3,242) (2,838) 738
---------- ---------- ---------- ------- ------
Cash flows from investing activities:
Additions to property, plant, and
equipment ............................ (51,625) (50,236) (47,757) (9,523) (7,134)
Proceeds from sales of property,
plant, and equipment ................. 111 -- 17,843 -- 15,767
---------- ---------- ---------- ------- ------
Net cash provided by (used in)
investing activities .............. (51,514) (50,236) (29,914) (9,523) 8,633
---------- ---------- ---------- ------- ------
Cash flows from financing activities:
Proceeds from debt ..................... 103,852 194,160 331,216 85,150 149,467
Repayment of debt ...................... (103,535) (178,235) (286,364) (64,533) (174,585)
Payment received on common
stock note receivable ................ -- 77 52 -- --
Increase in restricted cash ............ (3,932) (12,904) (146) (6,284) 29,016
Increase in cash in escrow ............. -- -- (13,323) -- (10,397)
Payment of financing fees .............. -- -- -- -- (835)
---------- ---------- ---------- ------- --------
Net cash provided by (used in)
financing activities .............. (3,615) 3,098 31,435 14,333 (7,334)
---------- ---------- ---------- ------- --------
Net decrease in cash and cash
equivalents ............................ (4,230) (3,630) (1,721) 1,972 2,037
Cash and cash equivalents, beginning
of year ................................ 12,231 8,001 4,371 4,371 2,650
---------- ---------- ---------- ------- --------
Cash and cash equivalents, end of
year ................................... $ 8,001 $ 4,371 $ 2,650 $ 6,343 $ 4,687
========== ========== ========== ========= ==========
Supplemental cash flow disclosures:
Interest paid .......................... $ 35,748 $ 35,767 $ 38,818 $ 1,813 $ 2,348
========== ========== ========== ========= ==========
Income taxes paid ...................... $ 1,061 $ 2,226 $ -- $ 69 $ 335
========== ========== ========== ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
CUMULATIVE TOTAL
COMMON TRANSLATION RETAINED NOTE SHAREHOLDERS'
STOCK ADJUSTMENT EARNINGS RECEIVABLE EQUITY
----------- ------------- ------------ ------------ --------------
Balance, September 30, 1994 ......... $101,100 $ (171) $ 9,526 $ (500) $ 109,955
Net income .......................... -- -- 5,820 -- 5,820
Translation adjustment .............. -- 30 -- -- 30
-------- ------ --------- ------ ---------
Balance, September 30, 1995 ......... 101,100 (141) 15,346 (500) 115,805
Net income .......................... -- -- 5,714 -- 5,714
Payment received on note
receivable ......................... -- -- -- 77 77
Translation adjustment .............. -- (181) -- -- (181)
-------- ------ --------- ------ ---------
Balance, September 30, 1996 ......... 101,100 (322) 21,060 (423) 121,415
Net loss ............................ -- -- (46,671) -- (46,671)
Payment received on note receivable -- -- -- 52 52
Translation adjustment .............. -- (185) -- -- (185)
-------- ------ --------- ------ ---------
Balance, September 30, 1997 ......... 101,100 (507) (25,611) (371) 74,611
Net loss ............................ -- -- (9,136) -- (9,136)
Translation adjustment .............. -- (419) -- -- (419)
-------- ------ --------- ------ ---------
Balance, December 31, 1997
(unaudited) ........................ $101,100 $ (926) $ (34,747) $ (371) $ 65,056
======== ====== ========= ====== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As used in these notes, unless the context otherwise requires, the
"Company" shall refer to Sweetheart Holdings Inc. and its subsidiaries,
including Sweetheart Cup Company Inc.
1. SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation and Translation
The financial statements include all of the accounts of the Company and
its subsidiaries on a consolidated basis as of September 30, 1996 and 1997 and
for the years ended September 30, 1995, 1996 and 1997. For all periods
presented, the consolidated financial statements include all of the accounts of
the Company's United States operations (Sweetheart Holdings Inc. and its
domestic subsidiaries, Sweetheart Cup Company Inc. and Sweetheart Receivables
Corporation) and Lily Cups Inc., a Canadian subsidiary. Assets and liabilities
of Lily Cups Inc. are translated at the rates of exchange in effect at the
balance sheet date. Income amounts are translated at the average of the monthly
exchange rates. The cumulative effect of translation adjustments is deferred
and classified as a cumulative translation adjustment. All significant
intercompany and intergroup accounts and transactions have been eliminated. The
accompanying balance sheet as of December 31, 1997 and the statements of
operations and cash flows for the three months ended December 31, 1996 and
December 31, 1997 are unaudited but, in the opinion of management, include all
adjustments (consisting of normal, recurring adjustments) necessary for a fair
presentation of results for these interim periods. Results for interim periods
are not necessarily indicative of results for the entire year.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash overdrafts are
reclassified to accounts payable and accrued payroll and related costs. Cash
balances related to Sweetheart Receivables Corporation are restricted from
transfer to other entities within the Company. Restricted cash is shown
separately on the balance sheet. The balance of restricted cash was $29.0
million and $28.9 million at September 30, 1997 and 1996, respectively. Cash
received as proceeds from the sale of assets is restricted to qualified capital
expenditures under the Bond Indentures (see Note 10), and is held in escrow
with the trustee until utilized. The balance of cash in escrow was $13.3
million at September 30, 1997.
c. Inventories
Inventories are carried at the lower of cost or market as described in
Note 2. Spare parts of $20.1 million at September 30, 1996 were reclassified
from inventories to other current assets.
d. Assets held for sale
Property, plant, and equipment for the Bakery division was reclassified as
held for sale at September 30, 1997. The Bakery division was sold on November
30, 1997, as discussed in Note 15.
e. Property, Plant and Equipment
Property, plant and equipment is recorded at cost, less accumulated
depreciation, and is depreciated on the straight-line method over the estimated
useful lives of the assets, with the exception of property, plant, and
equipment acquired prior to January 1, 1991, which is depreciated on the
declining balance method.
The asset lives of buildings and fixtures range between 12 and 50 years
and have an average useful life of 38 years. The asset lives of equipment range
between 5 and 18 years and have an average useful life of 13 years.
F-23
f. Revenue Recognition
Sales of the Company's products are recorded based on shipment of
products.
g. Income Taxes
Deferred income taxes are provided to recognize temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. The principal differences relate to depreciation expense,
pension and postretirement benefits and LIFO inventory.
No deferred income taxes have been provided on the cumulative
undistributed earnings of the Canadian subsidiary of Sweetheart Cup Company
Inc. Those earnings (approximately $12.8 million) are considered permanently
reinvested under Accounting Principles Bulletin No. 23. The incremental U.S.
tax costs (deferred taxes) of repatriating these earnings would not be
material.
h. Employee Benefit Plans (also see Note 7)
The Company has various defined benefit plans and a defined contribution
plan for substantially all employees who meet eligibility requirements.
Benefits under the defined benefit plans are based on years of service, and
funding is in accordance with actuarial requirements of the plans, subject to
provisions of the Employee Retirement Income Security Act. The Company makes
contributions to the defined contribution plan in accordance with the plan's
provisions.
i. Postretirement Health Care Plans (also see Note 8)
The Company sponsors various defined benefit postretirement health care
plans that cover substantially all employees who meet eligibility requirements.
These plans are not funded by the Company.
j. Reclassifications
The Company has reclassified certain amounts for current year presentation
from prior year presentation. Spare parts, previously reported as a component
of inventories, is now reported as other current assets.
Within the statement of operations, freight charges, previously reported
as a component of net sales, are now reported as transportation; warehousing
and fleet costs, previously reported as costs of sales, are now reported as
transportation; plant administration costs, previously reported as selling,
general, and administrative costs, are now reported as costs of sales; and
certain other revenues, previously reported as other income, are now reported
as a component of net sales.
All prior periods have been restated to conform to the current year
presentation.
k. Impact of Recently Issued Accounting Standards
In October 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock Based Compensation, which
provides an alternative to APB Opinion No. 25, Accounting for Stock Issued to
Employees in accounting for stock based compensation issued to employees. The
Company has adopted only the disclosure provisions of Statement 123, and the
impact was not material.
In October 1996, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption of SFAS 121 did not
have a material impact on net income. In the fourth quarter of fiscal year
1997, the Company recorded a loss on asset disposal and impairment. See Note
14.
F-24
During 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share, No. 129, Disclosure of Information about Capital Structure,
No. 130, Reporting Comprehensive Income, and No. 131, Disclosures about
Segments of an Enterprise and Related Information. These statements address
presentation and disclosure matters and will have no impact on the Company's
financial position or results of operations. These statements become effective
during the Company's fiscal years 1998 and 1999 and will be adopted as
applicable.
On November 20, 1997, the Emerging Issues Task Force (EITF) reached a
consensus on Issue 97-13 regarding reengineering costs. This consensus provides
guidance about what activities constitute business process reengineering in
connection with the development and installation of software for internal use
and concludes that all reengineering costs, including those incurred in
connection with a software installation, should be expensed as incurred. The
Company has capitalized costs such as those described above through fiscal year
1997, and as required by this consensus, $1.5 million (net of a $1 million
income tax benefit) (unaudited) of these costs were expensed as a cumulative
change in accounting principle in the first quarter of fiscal year 1998.
l. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
2. INVENTORIES
The components of inventories and their valuation methods are as follows
(in thousands):
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
--------------- --------------- -------------
(UNAUDITED)
Components
Raw materials and supplies .................... $ 35,166 $ 32,302 $ 39,721
Finished and partly finished products ......... 137,672 116,543 101,220
-------- -------- --------
$172,838 $148,845 $140,941
======== ======== ========
Valued at lower of cost or market
First in, first out ("FIFO") .................. $ 17,011 $ 15,300 $ 14,717
Last in, first out ("LIFO") ................... 155,827 133,545 126,224
-------- -------- --------
$172,838 $148,845 $140,941
======== ======== ========
Had inventories valued on the LIFO basis been stated on a FIFO basis,
inventories would have been $4,598,000, $889,000 and $139,000 higher than
reported at September 30, 1996 and 1997, and December 31, 1997, respectively.
Cost of sales on a FIFO basis would have been higher by $17,856,000 for the
year ended September 30, 1995, and lower by $12,310,000 and $3,709,000 for the
years ended September 30, 1996 and 1997, respectively.
F-25
3. PROPERTY, PLANT AND EQUIPMENT
The Company's major classes of property, plant and equipment are as
follows (in thousands):
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
--------------- --------------- -------------
(UNAUDITED)
Land ...................................... $ 26,008 $ 23,801 $ 22,820
Buildings ................................. 90,760 85,808 85,962
Machinery and equipment ................... 375,404 394,754 389,756
Construction in progress .................. 35,222 23,636 28,232
-------- -------- --------
Total .................................... 527,394 527,999 526,770
-------- -------- --------
Accumulated depreciation .................. 99,561 145,508 154,052
-------- -------- --------
Net property, plant and equipment ......... $427,833 $382,491 $372,718
======== ======== ========
4. OTHER ASSETS
The components of long term other assets are as follows (in thousands):
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
--------------- --------------- -------------
(UNAUDITED)
Debt issuance costs, net of accumulated
amortization ................................. $12,874 $ 8,159 $ 7,989
Intangible pension asset (see Note 7) ......... 2,484 860 860
Prepaid assets ................................ 1,299 2,423 6,248
Other ......................................... 1,988 1,713 2,385
------- ------- -------
Total long-term .............................. $18,645 $13,155 $17,482
======= ======= =======
Amortization of the above debt issuance costs totaled approximately $3.5
million, $3.6 million and $5.2 million for the years ended September 30, 1995,
1996 and 1997, respectively, of which $3.6 million of the 1997 costs are
included as interest expense in the accompanying statement of operations.
During the year ended September 30, 1997, the Company accelerated $1.6 million
of amortization for the debt issuance costs related to Sweetheart Receivables
Corporation and the 1993 Credit Agreement, both of which were refinanced
subsequent to year end (See Note 10). This charge is shown as an extraordinary
loss (net of $627,000 of income taxes) on the consolidated statement of
operations.
5. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in thousands):
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
--------------- --------------- -------------
(UNAUDITED)
Sales allowances ......................................... $ 6,023 $ 7,052 $ 5,334
Restructuring costs ...................................... 4,934 13,201 10,433
Taxes other than income taxes ............................ 2,288 2,841 2,966
Litigation, claims and assessments (see Note 16) ......... 15,196 15,445 15,372
Interest payable ......................................... 2,798 2,806 10,953
Other .................................................... 2,679 2,470 771
------- ------- -------
Total ................................................... $33,918 $43,815 $45,829
======= ======= =======
F-26
6. OTHER NON-CURRENT LIABILITIES
The components of other non-current liabilities are as follows (in
thousands):
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
--------------- --------------- -------------
(UNAUDITED)
Post retirement health care benefits (see Note 8) ......... $58,725 $57,983 $57,959
Pensions .................................................. 13,620 9,761 9,337
Other ..................................................... 11,715 2,031 1,766
------- ------- -------
Total .................................................... $84,060 $69,775 $69,062
======= ======= =======
7. EMPLOYEE BENEFIT PLANS
A majority of the employees ("participants") are covered under a 401(k)
defined contribution plan. The Company's annual contributions to this defined
contribution plan represent a 50% match on participant contributions. The
Company's match is limited to participant contributions up to 6% of participant
salaries. In addition, the Company is allowed to make discretionary
contributions. Costs charged against operations for this defined contribution
plan were approximately $3,681,000, $3,715,000 and $3,586,000 for the years
ended September 30, 1995, 1996 and 1997, respectively. Certain employees are
covered under defined benefit plans. Benefits under the plans are generally
based on fixed amounts for each year of service.
The components of net pension expense for domestic defined benefit plans
are as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
-------------------- -------------------- -------------------
Service cost ....................... $ 952 $ 1,078 $ 1,111
Interest cost ...................... 3,230 3,545 3,720
Projected return on assets ......... (1,637) (2,874) (3,212)
Net amortization ................... 16 188 262
-------- -------- --------
Net pension expense ............... $ 2,561 $ 1,937 $ 1,881
======== ======== ========
The status of defined benefit pension plans using data as of the most
recent actuarial valuation dates is as follows (in thousands):
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
--------------- --------------
Actuarial present value of benefit obligations
Vested benefits ........................................... $ 37,231 $ 41,616
Nonvested benefits ........................................ 10,741 11,094
Accumulated and projected benefit obligation ............... 47,972 52,710
Plan assets at fair value .................................. 31,023 39,243
Funded status ............................................. (16,949) (13,467)
Unrecognized prior service cost ............................ 2,484 1,529
Unrecognized net gain ...................................... (626) 473
Adjustment required to recognize minimum liability ......... (2,484) (860)
--------- ---------
Net pension liability ..................................... $ (17,575) $ (12,325)
========= =========
As required by SFAS No. 87, "Employers' Accounting for Pensions," the
Company recognized additional pension liabilities of $2,484,000 and $860,000 as
of September 30, 1996 and 1997, respectively, and equal amounts as other
assets.
F-27
Actuarial assumptions used in calculating the above amounts include a 10%
return on plan assets for the years ended September 30, 1996 and 1997, an 8.0%
discount rate on benefit obligations as of September 30, 1996, a 7.75% weighted
average discount rate for the first six months and 8.0% for the second six
months of the year ended September 30, 1996, and a 7.5% discount rate on
benefit obligations as of September 30, 1997, and a weighted average discount
rate of 7.5% for the year ended September 30, 1997.
Data with respect to the Lily Cups Inc., Canada defined benefit plan is
not material and is not included in the above data.
8. POSTRETIREMENT HEALTH CARE PLANS
The Company sponsors various defined benefit postretirement health care
plans that cover substantially all full-time employees. The plans, in most
cases, pay stated percentages of most medical expenses incurred by retirees,
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants generally become eligible after reaching
age 60 with one year of participation. The majority of the Company's plans are
contributory, with retiree contributions adjusted annually. The accounting for
the plans anticipates future cost-sharing changes to the written plan that are
consistent with the Company's announced policies. The Company does not fund the
plans.
The following table analyzes the plans' unfunded, accrued postretirement
health care cost liability as reflected on the balance sheet (in thousands):
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
--------------- --------------
Accumulated Postretirement Benefit Obligation:
Retirees .................................................. $25,596 $24,936
Other fully eligible participants ......................... 6,472 5,731
Other active participants ................................. 17,577 12,166
------- -------
49,645 42,833
Unrecognized prior service cost ........................... 1,536 4,861
Unrecognized actuarial gain ............................... 10,644 13,389
------- -------
Accrued postretirement health care cost liability ......... $61,825 $61,083
======= =======
The components of net postretirement health care cost are as follows (in
thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
-------------------- -------------------- -------------------
Service cost benefits attributed to service
during the period ........................... $1,497 $1,533 $ 859
Interest cost on accumulated post retirement
benefit obligation .......................... 4,134 3,868 3,098
Net amortization and deferral ................ (118) (187) (1,326)
------ ------ --------
Net postretirement health care cost ......... $5,513 $5,214 $ 2,631
====== ====== ========
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0%, and 7.5% at September 30, 1996 and
1997, respectively. Net postretirement health care cost was computed using a
weighted average discount rate of 8.5% for the year ended September 30, 1995,
7.75% for the year ended September 30, 1996, and 8.0% for the year ended
September 30, 1997. For measuring the expected postretirement benefit
obligation, a 10% annual rate of increase in the per capita claims cost was
assumed for 1997. This rate is assumed to decrease by 1.0% per year to an
ultimate rate of 5.0%. The health care cost trend rate assumption has a
significant effect on the amounts reported. To
F-28
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of September 30, 1996 and September 30, 1997 by
approximately $2.8 million and $2.2 million, respectively, and the aggregate of
the service and interest cost components of net postretirement health care cost
$0.4 million for each of the years ended September 30, 1995 and 1996, and by
approximately $0.2 million for the year ended September 30, 1997.
9. INCOME TAXES
The income tax benefit (provision) includes the following components (in
thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
-------------------- -------------------- -------------------
Current ...................
Federal .................. $ -- $ -- $ --
State .................... -- -- --
Foreign .................. (759) (1,164) --
-------- -------- -------
Total current .......... (759) (1,164) --
-------- -------- -------
Deferred ..................
Federal .................. (2,829) (2,315) 26,165
State .................... (315) (330) 3,738
Foreign .................. -- -- 584
-------- -------- -------
Total deferred ......... (3,144) (2,645) 30,487
-------- -------- -------
$ (3,903) $ (3,809) $30,487
======== ======== =======
The effective tax rate varied from the U.S. Federal tax rate of 35% for
the years ended September 30, 1995, 1996 and 1997 as a result of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
-------------------- -------------------- -------------------
U.S. Federal tax rate ..................... 35% 35% 35%
State income taxes, net of U.S. Federal tax
impact ................................... 4 4 4
Other, net ................................ 1 1 1
-- -- --
Effective tax rate ....................... 40% 40% 40%
== == ==
At September 30, 1997, the Company had deferred tax liabilities of $167
million, of which $32 million are current in nature, and deferred tax assets of
$182 million, of which $35 million are current in nature. Deferred tax assets
and liabilities have been netted as a current asset and a non-current liability
in the accompanying Consolidated Balance Sheets. The principal temporary
differences included above are depreciation, a $75 million liability, LIFO
inventory, a $22 million liability, net operating loss carryforwards, a $67
million asset, postretirement health and pension benefits, a $28 million asset,
and $17 million of other net miscellaneous asset items.
The Company has net operating loss carryforwards for income tax purposes
of approximately $170 million, of which $5 million expire in 2004, $51 million
expire in 2005, $25 million expire in 2006, $13 million expire in 2007, $28
million expire in 2008, and $48 million expire in 2012.
F-29
10. LONG-TERM OBLIGATIONS
Long-term debt, including amounts payable within one year, is as follows
(in thousands):
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
--------------- --------------- -------------
(i) Sweetheart Cup Company Inc.
Senior Secured Notes, at 9.625%, interest payable
semiannually on March 1 and September 1 of each
year, commencing March 1, 1994, due on
September 1, 2000, and are subject to redemption
on or after September 1, 1997 at the option of the
Company, in whole or in part, at the redemption
prices set forth below (expressed as percentages of
the principal amount), plus accrued interest to the
redemption date, for redemptions during the 12
month period beginning September 1, of the
following years: 1997--103.208%, 1998--101.604%,
and 1999--100.000% ................................. $190,000 $190,000 $190,000
Senior Subordinated Notes, at 10.50%, interest
payable semiannually on March 1 and September 1
of each year, commencing March 1, 1994, due on
September 1, 2003, and are subject to redemption
on or after September 1, 1998 at the option of the
Company, in whole or in part, at the redemption
prices set forth below (expressed as percentages of
the principal amount), plus accrued interest to the
redemption date, for redemption during the 12
month period beginning September 1, of the
following years: 1998--103.938%, 1999--102.625%,
2000--101.313%, and 2001 and
thereafter--100.000% ............................... 110,000 110,000 110,000
Revolving Loan at Bankers Trust's prime rate plus
1.50%, or Bankers Trust's Eurodollar rate plus
2.50%, subject to certain limitations as well as
downward adjustment for any interest period
beginning after October 1, 1994 upon the
satisfaction of certain financial criteria, due on
August 30, 1998 (interest rates--7.91% and 10.0%
at September 30, 1996 and 1997) .................... 15,800 60,000 --
Revolving Credit Facility with Bank of America
Business Credit, see Note 15. ...................... -- -- 97,258
(ii) Sweetheart Receivables Corporation
Sweetheart Receivables Corporation Series 1994-1
A-V Trade Receivables-Backed Notes, a private
placement, at Telerate one month LIBOR plus
.40%. Interest payable monthly commencing on
October 17, 1994 through the Scheduled Pay-Out
Period starting July 31, 1999 (interest rates--5.90%
and 6.06% at September 30, 1996 and 1997) .......... 60,000 60,000 --
(iii) Lily Cups Inc.
Term Facility, at Bank of Nova Scotia's prime rate
plus 1.25% payable quarterly, due in equal annual
repayments commencing October 31, 1994 and
ending October 31, 1998 (interest rates--7.0% and
6.0% at September 30, 1996 and 1997) ............... 4,210 2,737 1,321
F-30
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
-------------- --------------- --------------
Operating Facility, at Bank of Nova Scotia's prime
rate plus 1.25%, repaid and reborrowed until
October 31, 1998, subject to satisfaction of certain
conditions on the date of any such borrowing
(interest rates--7.0% and 6.0% at September 30,
1996 and 1997) ..................................... 3,404 5,431 4,195
----- ----- -----
383,314 428,168 402,774
Less: Current portion of long-term debt ............. (1,435) (1,369) (5,516)
------- ------- -------
$381,879 $426,799 $397,258
======== ======== ========
The aggregate annual maturities of long-term debt at September 30, 1997
are as follows (in thousands):
1998 ........................ $ 1,369
1999 ........................ 66,799
2000 ........................ 250,000
2001 ........................ --
2002 ........................ --
2003 and thereafter ......... 110,000
--------
$428,168
========
Long-term bonds consist of four industrial development bonds and a loan
from the State of Maryland with interest rates ranging from 6.0% to 6.75%, due
in varying amounts through 2006. The aggregate annual maturities of long-term
bonds at September 30, 1997 are as follows (in thousands):
1998 ........................ $ --
1999 ........................ 2,500
2000 ........................ --
2001 ........................ --
2002 ........................ --
2003 and thereafter ......... 1,200
------
$3,700
======
The maximum month-end balances outstanding, average amounts outstanding,
and the weighted average interest rates on the domestic Revolving Loan Facility
and Canadian Operating Facility during the years ended September 30 were as
follows (in thousands, except for interest rates):
DOMESTIC REVOLVING LOAN CANADIAN OPERATING
FACILITY FACILITY
------------------------- -----------------------
1996 1997 1996 1997
------------ ------------ ----------- -----------
Maximum month-end balances outstanding ..... $ 23,000 $ 60,000 $ 4,321 $ 6,123
======== ======== ======= =======
Average amounts outstanding ................ $ 8,660 $ 48,194 $ 3,564 $ 4,843
======== ======== ======= =======
Weighted average interest rates ............ 8.63% 8.52% 8.16% 6.10%
The 1993 Credit Agreement and the Sweetheart Receivables Corporation
Series 1994-1 A-V Trade Receivables-Backed Notes were refinanced subsequent to
September 30, 1997. See Note 15 for details.
F-31
1993 Credit Agreement
On August 30, 1993, the Company entered into the 1993 Credit Agreement,
which provided for a $40 million Term Loan and a $75 million Revolving Loan
Facility. The Company prepaid the $40 million Term Loan on September 20, 1994
in connection with the issuance of the Sweetheart Receivables Corporation
1994-1 A-V Trade Receivables-Backed Notes and it may not be reborrowed.
Additionally, certain terms and conditions of the Credit Agreement were
amended. The Revolving Loan Facility is limited to 50% of eligible inventory of
Sweetheart Cup Company Inc. (up to a maximum of $150 million of eligible
inventory). In addition, the combined borrowings outstanding under the Revolver
plus the Sweetheart Receivables Corporation 1994-1 A-V Trade Receivables-Backed
Notes less the aggregate amount of cash on deposit in certain Sweetheart
Receivables Corporation accounts may not exceed $115 million in aggregate. The
Revolving Loan borrowings were $15.8 million at September 30, 1996 and $60.0
million at September 30, 1997.
The borrowings under the 1993 Credit Agreement bear interest, at
Sweetheart Cup Company Inc.'s option, at Bankers Trust Company's prime rate
plus 1.50% or, subject to certain limitations, at Bankers Trust Company's
Eurodollar rate plus 2.50%. Interest rates may be reduced by 0.25% as of
October 1, 1994, and on the first day of any fiscal quarter thereafter,
depending upon Sweetheart Cup Company Inc.'s ratios of cash flow coverage to
interest expense. Up to $15 million of the Revolving Loan Facility may be
utilized to issue Letters of Credit. Approximately $9.7 million in Letters of
Credit were issued on behalf of Sweetheart Cup Company Inc. as of September 30,
1996 and 1997. The 1993 Credit Agreement also provides for the payment of a
commitment fee of 0.5% per annum on the daily average unused amount of the
commitments under the Revolving Loan Facility (approximately $299,600 and
$104,600 for the years ended September 30, 1996 and 1997, respectively, as well
as a 2.75% per annum fee on outstanding Letters of Credit (approximately
$272,400 and $254,000 for the years ended September 30, 1996 and 1997,
respectively).
Loans made pursuant to the Revolving Loan Facility can be borrowed,
repaid, and reborrowed from time to time until final maturity on August 30,
1998. The 1993 Credit Agreement provides for partial mandatory prepayments upon
the issuance of equity by Sweetheart Holdings Inc. or any of its subsidiaries,
and full repayment upon any change of control (as defined in the 1993 Credit
Agreement). The Revolving Loan Facility also requires a $20 million clear-down
period between December 1 and January 31 of each year, commencing December 1,
1994, whereby the average unused revolver during any consecutive 31-day period
within the clear-down period must average $20 million; failure to do so results
in an immediate reduction of the Revolving Loan Facility by $20 million
effective immediately succeeding February 1.
The indebtedness of Sweetheart Cup Company Inc. under the 1993 Credit
Agreement is guaranteed by Sweetheart Holdings Inc. and secured by a first
priority perfected security interest in inventory, spare parts and all proceeds
of the foregoing of Sweetheart Cup Company Inc., a first priority security
interest, shared with the holders of the Senior Secured Notes, in Shared
Collateral (as defined in the 1993 Credit Agreement to include primarily all
capital stock owned by Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
and of each of their respective present and future direct subsidiaries, all
intercompany indebtedness payable to Sweetheart Holdings Inc. or Sweetheart Cup
Company Inc. by Sweetheart Holdings Inc., Sweetheart Cup Company Inc. or their
respective present and future subsidiaries, and any proceeds from business
interruption insurance), and a second priority perfected security interest in
the Senior Secured Note collateral as described below.
Senior Secured Notes and Senior Subordinated Notes
Sweetheart Cup Company Inc. is the obligor with respect to $190 million of
Senior Secured Notes and $110 million of Senior Subordinated Notes. The Senior
Secured Notes were issued pursuant to an Indenture among Sweetheart Cup Company
Inc., Sweetheart Holdings Inc., as Guarantor, and United States Trust Company
of New York, as Trustee (the "Senior Secured Indenture"). The Senior Secured
Notes bear interest at 9.625% per annum, payable semi-annually in arrears on
March 1 and September 1 each year to holders of record on February 15 or August
15 next preceding the interest payment date. The Senior Secured Notes mature on
September 1, 2000 and were issued in denominations of $1,000 and integral
multiples thereof.
F-32
The Senior Secured Notes are secured by a first priority lien on the
Senior Secured Note collateral (which includes all material properties and
equipment and substantially all of the other assets of Sweetheart Cup Company
Inc., but excludes collateral under the 1993 Credit Agreement, the capital
stock of its subsidiaries, and intercompany indebtedness) and by a second lien
on collateral under the 1993 Credit Agreement (primarily accounts receivable,
inventory, and proceeds thereof as described above). The Senior Secured Notes
and borrowings under the 1993 Credit Agreement are also jointly secured by
Shared Collateral (comprised of pledges of the capital stock of Lily Canada,
the capital stock of any direct subsidiaries formed or acquired in the future,
future intercompany notes, and the proceeds of business interruption
insurance).
The Senior Secured Indenture contains various covenants which prohibit, or
limit, among other things, asset sales, change of control, dividend payments,
equity repurchases or redemptions, the incurrence of additional indebtedness,
the issuance of disqualified stock, certain transactions with affiliates, the
creation of additional liens, and certain other business activities. The Senior
Secured Notes may be redeemed at the dates and prices indicated in the table
above.
The Senior Subordinated Notes were issued pursuant to an Indenture among
Sweetheart Cup Company Inc., Sweetheart Holdings Inc., as Guarantor, and U.S.
Trust Company of Texas, N.A., as Trustee (the "Senior Subordinated Indenture").
The Senior Subordinated Notes bear interest at 10.50% per annum, payable
semi-annually in arrears on March 1 and September 1 each year to holders of
record on the February 15 or August 15 next preceding the interest payment
date. The Senior Subordinated Notes mature on September 1, 2003 and were issued
in denominations of $1,000 and integral multiples thereof.
The Senior Subordinated Notes are subordinate in right of payment to the
prior payment in full of all Senior Secured Notes, all borrowings under the
1993 Credit Agreement, and all other indebtedness not otherwise prohibited. As
a result of the subordination provisions, and in the event of an insolvency or
liquidation proceeding, holders of the Senior Subordinated Notes may recover a
lesser percentage of their investment than other creditors of the Company.
The Senior Subordinated Indenture contains various covenants which
prohibit, or limit, among other things, asset sales, change of control,
dividend payments, equity repurchases or redemptions, the incurrence of
additional indebtedness, the issuance of disqualified stock, certain
transactions with affiliates, the creation of additional liens, and certain
other business activities. The Senior Subordinated Notes may be redeemed at the
dates and prices indicated in the table above.
Sweetheart Receivables Corporation Series 1994-1 A-V Trade Receivables-Backed
Notes
Sweetheart Cup Company Inc. securitizes its receivables through its wholly
owned limited purpose, bankruptcy-remote finance subsidiary, Sweetheart
Receivables Corporation ("SRC"). This structure is intended to segregate
receivables from Sweetheart Cup Company Inc.'s other assets or liabilities and
achieve a lower cost of funds based on the credit quality of the receivables.
On September 20, 1994, SRC issued and sold to Bankers Trust as Placement
Agent, $60 million of Series 1994-1 A-V Trade Receivables-Backed Notes (the
"Notes"), under an indenture and security agreement. The proceeds of the notes
were used to purchase substantially all of the receivables of Sweetheart Cup
Company Inc. on the closing date. SRC's share of the proceeds of collections on
those receivables will be used to purchase newly generated receivables from
Sweetheart Cup Company Inc. on an ongoing basis.
SRC's purchase of receivables from Sweetheart Cup Company Inc. is intended
to be a "true sale" for bankruptcy law purposes and without recourse to
Sweetheart Cup Company Inc., except that Sweetheart Cup Company Inc. will be
required to make payment to SRC for certain dilution of the receivables and
will remain liable for making payments in connection of certain customary
representations and covenants.
SRC grants the Trustee, Manufacturer's and Traders Trust, a first
perfected security interest in the receivables and certain other related
assets, subject to certain limited exceptions. The holders of the Notes have no
recourse to the assets of SRC in respect of obligations under the Notes.
Noteholders are
F-33
protected by over-collateralization of receivables on the Notes requiring
certain amounts to be set aside in an equalization account and four months of
interest set aside in the carrying cost account by the Trustee. These amounts
may be invested by SRC in highly rated liquid investments such as A-1+
commercial paper and AAA moneymarket funds as rated by Standard & Poors
Corporation. These amounts are shown on the consolidated balance sheet as
restricted cash. Restricted cash totaled $29.0 million and $28.9 million at
September 30, 1997 and 1996, respectively. Sweetheart Cup Company Inc. retains
a promissory note which pays interest monthly at prime rate, subject to certain
limitations, on these and other balances due from SRC.
Sweetheart Cup Company Inc. acts as servicer of the receivables sold. The
interest rate is based on Telerate's one month LIBOR plus .40% and is paid
monthly. The Notes have a first scheduled principal payment date of July 31,
1999 and have a stated maturity date of September 30, 2000. There are certain
early voluntary and involuntary liquidation events. Noteholders are entitled to
certain breakage payments if the Notes are prepaid in part or whole prior to
July 31, 1998. The breakage payment is equal to the present value of the .40%
spread for the period from the prepayment date until the first scheduled
principal payment date, multiplied by the amount of principal prepayment.
The SRC promissory note and equity held by Sweetheart Cup Company Inc.
constitute Shared Collateral which is a first priority interest shared under
the Credit Agreement and Senior Secured Notes.
Canadian Credit Agreement
On December 20, 1989, Lily Cups Inc. entered into a Term and Revolving
Credit Facilities Agreement (the "Canadian Credit Agreement"), consisting of
CDN $14.0 million of Term Advances and CDN $6.0 million of Operating Advances.
Effective August 30, 1993, the Canadian Credit Agreement was renegotiated and
extended to provide for equal annual repayments on the remaining CDN $9.5
million Term Facility of CDN $1.9 million beginning October 31, 1994 and ending
October 31, 1998 and to provide for an additional CDN $1.0 million of Operating
Advances in addition to the CDN $6.0 million Operating Facility previously
available. The renegotiated and extended Operating Facility provides for a
final repayment on October 31, 1998. Lily Cups Inc. has pledged substantially
all its assets as collateral for the Canadian Credit Agreement. The Company is
charged a 0.5% fee with respect to any unused balance available under the
Canadian Credit Agreement as renegotiated and extended. At September 30, 1996
and 1997, the available capacity under the Canadian Credit Agreement was CDN
$2.4 million and CDN $1.4 million, respectively (U.S. $1.8 million and U.S.
$1.0 million, respectively).
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments held by the Company:
CURRENT ASSETS AND CURRENT LIABILITIES -- The carrying amount approximates
fair value because of the short maturity of those instruments.
LONG-TERM BONDS -- The carrying amount approximates fair value based on
the nature of the instrument.
LONG-TERM DEBT -- The fair value of the Company's Senior Secured Notes and
the Senior Subordinated Notes are based on the quoted market prices at the end
of the fiscal years. The other instruments have variable interest rates that
fluctuate along with current market conditions.
F-34
The estimated fair values of the Company's financial instruments at
September 30 are as follows (in thousands):
1996 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Cash and cash equivalents ................. $ 4,371 $ 4,371 $ 2,650 $ 2,650
Other current assets ...................... 311,761 311,761 308,763 308,763
Current portion of long-term debt and bonds 1,535 1,535 1,369 1,369
Other current liabilities ................. 152,218 152,218 163,276 163,276
Long-term bonds ........................... 3,700 3,700 3,700 3,700
Long-term debt ............................ 381,879 388,792 426,799 428,271
The fair value of the Company's long-term debt is estimated to be
$6,913,000 higher than the carrying value at September 30, 1996 and $1,472,000
higher than the carrying value at September 30, 1997. The differences are
primarily the result of fluctuations in the interest rate market since the
issuance of the Company's Senior Secured Notes and Senior Subordinated Notes.
12. LEASE COMMITMENTS
The Company leases certain transportation vehicles, warehouse and office
facilities, and machinery and equipment under both cancelable and
non-cancelable operating leases, most of which expire within ten years and may
be renewed by the Company. Rent expense under such arrangements totaled
$12,417,000, $15,636,000 and $16,756,000 for the years ended September 30,
1995, 1996 and 1997, respectively. Future minimum rental commitments under
non-cancelable operating leases in effect at September 30, 1997 are as follows
(in thousand of dollars):
1998 ........................ $12,116
1999 ........................ 11,207
2000 ........................ 9,083
2001 ........................ 7,533
2002 ........................ 6,767
2003 and thereafter ......... 11,026
-------
$57,732
=======
Data with respect to Lily Cups Inc.'s rental commitments for the years
1998 and thereafter is not material and is not included in the above table.
13. SHAREHOLDERS' EQUITY
Sweetheart Holdings Inc. has a single-class capital structure consisting
of 3,000,000 shares of common stock, par value $.01 per share. As of August 30,
1993, 1,040,000 shares of single-class stock were issued to AIP, First Plaza
Group Trust (Mellon Bank, N.A., as Trustee) and AT&T Master Pension Trust
(Leeway and Company as nominee) for approximately $100.5 million. All
outstanding shares of single-class common stock are deemed fully paid and
nonassessable. The single-class common stock is neither redeemable nor
convertible, and the holders thereof have no preemptive or other subscription
rights to purchase any securities of Sweetheart Holdings Inc. There currently
is no public market for this common stock. During the third quarter of fiscal
year 1994, the Company issued 6,000 authorized shares of common stock for $100
per share. The Company received approximately $100,000 in cash and a $500,000
promissory note in consideration for the shares. The promissory note is
reflected as a reduction to shareholders' equity in the consolidated balance
sheet. There were 1,046,000 shares of single-class common stock outstanding as
of September 30, 1996 and 1997.
F-35
Subject to Delaware law and limitations in certain debt instruments
(Senior Secured Notes, Senior Subordinated Notes, and borrowings under the 1993
Credit Agreement), common shareholders are entitled to receive such dividends
as may be declared by Sweetheart Holdings Inc.'s Board of Directors out of
funds legally available thereof. In the event of a liquidation, dissolution or
winding up of Sweetheart Holdings, Inc., common shareholders are entitled to
share ratably in all assets remaining after payment or provision for payment of
debts or other liabilities of Sweetheart Holdings Inc. Each outstanding common
share is entitled to one vote on any matter submitted to a vote of
stockholders. This single-class common stock has no cumulative voting rights.
The Board of Directors of Sweetheart Holdings Inc. approved the Stock
Option and Purchase Plan (the "Plan") during fiscal year 1994 which provides
for the granting of nonqualified and incentive stock options as defined by the
Internal Revenue Code. The Plan is administered by the Compensation Committee
(the "Committee") of the Board of Directors. The Committee has the authority to
select participants, grant stock purchase options, and make all necessary
determinations for the administration of the Plan. The exercise price per share
of common stock under each option is fixed by the Committee at the time of the
grant of the option and is equal to at least 100% of the fair market value of a
share of common stock on the date of grant, but not less than $100 per share.
The Committee determines the term of each option which may not exceed ten years
from the date of grant of the option. Options are exercisable in equal
increments over fiscal years 1994, 1995, 1996, and 1997, depending on certain
operating results of the Company. Any options not exercisable within the above
years are exercisable on the ninth anniversary of the grant of the option.
Under the provisions of the Plan, the Committee may also grant participants the
short-term option to purchase shares of common stock at a price per share equal
to not less than the fair market value of the common stock on the date of
grant. Short-term options expire 30 days after the date of grant to the extent
not exercised.
The Plan provides for the issuance of up to 103,000 shares of common stock
in connection with the stock options granted under the Plan. Options that are
canceled or expire unexercised are available for future grants. All options are
granted via approval of the Board of Directors. The Company granted 10,400 and
30,135 options during 1996 and 1997, respectively. Options canceled totaled
6,140 and 11,035 during 1996 and 1997, respectively. At September 30, 1997,
31,827 shares were available for the granting of additional options. As the
Company's stock is privately held, the value of the common stock is assumed to
be $100 per share at all times during the year. Although no options were
exercised during fiscal year 1996, and 13,818 shares were exercisable at
September 30, 1997.
14. NON-RECURRING CHARGES
The Company incurred non-recurring charges in 1997 attributable to plant
restructuring and an impairment of certain long-lived assets.
In the fourth quarter of fiscal 1997, the Company adopted a restructuring
plan designed to improve efficiency and enhance its competitiveness.
Restructuring charges consist of cash charges primarily related to severance
costs, as well as costs to close and exit the Riverside facility, and cease
paper operations at the Springfield facility, substantially all of which will
be paid in fiscal 1998. The Company anticipates substantial completion of this
restructuring in fiscal 1998.
As a result of market conditions experienced by the Company and the
decision to close facilities as described above, the Company reviewed the
carrying value of its long-lived assets. Certain assets were identified which
would be disposed of, abandoned or become obsolete prior to the end of their
accounting useful lives, and were written-down accordingly, resulting in a
pre-tax non-cash charge totaling $24.6 million.
The loss on asset disposal and impairment had no impact on the Company's
1997 cash flow or its ability to generate cash flow in the future. As a result
of this charge, depreciation expense related to these assets will decrease in
future periods.
F-36
15. SUBSEQUENT EVENTS
1997 Amended and Restated Credit Agreement
On October 24, 1997, the Company entered into the 1997 Amended and
Restated Credit Agreement, which provides for a $135 million Revolving Credit
Facility with Bank of America Business Credit, as Agent and various other
Financial Institutions. At closing on October 24, 1997, Bank of America
Business Credit acquired the outstanding amount of loans from Bankers Trust
Company, made under the 1993 Credit Agreement, referred to in Note 10. The 1993
Credit Agreement was Amended and Restated to increase the facility size to $135
million, and include receivables as collateral, which had previously been sold
to Sweetheart Receivables Corporation as described in Note 10. The Company then
reacquired the receivables at SRC with the proceeds of the 1997 Amended and
Restated Credit Agreement, enabling SRC to repay the Sweetheart Receivables
Corporation 1994-1 A-V Trade Receivables-Backed Notes with those proceeds and
existing restricted cash. Additionally, certain other terms and conditions of
the Credit Agreement were amended.
Availability under the Amended and Restated Credit Agreement is limited to
60% of eligible inventory constituting raw material and work-in-process, and
65% of eligible inventory constituting finished goods, and 40% of eligible
inventory constituting in-transit inventory of Sweetheart Cup Company Inc. (up
to a maximum of $100 million of eligible inventory). Additionally, eligible
accounts from customers, subject to certain restrictions, are allowed to 85%.
These calculations are subject to an overall maximum 80% of account's not more
than 60 days past due, plus 50% of book value of inventory.
The borrowings under the 1997 Amended and Restated Credit Agreement bear
interest, at Sweetheart Cup Company Inc.'s option, at Bank of America's prime
rate plus 1.00% or, subject to certain limitations, at Bank of America's
Eurodollar rate plus 2.25%. Additionally, the Company must pay certain other
annual and on-going expenses to Bank of America, as Agent. Up to $15 million of
the Facility may be utilized to issue Letters of Credit. The letter of Credit
Fee is 1.75% per annum, plus out of pocket fees and expense. The 1997 Amended
and Restated Credit Agreement also provides for the payment of a commitment fee
of 0.5% per annum on the daily average unused amount of the commitments under
the Facility.
Loans made pursuant to the Revolving Loan Facility can be borrowed,
repaid, and reborrowed from time to time until final maturity on August 1,
2000. The 1997 Amended and Restated Credit Agreement provides for partial
mandatory prepayments upon the issuance of equity by Sweetheart Holdings Inc.
or any of its subsidiaries, and full repayment upon any change of control (as
defined in the Agreement).
The indebtedness of Sweetheart Cup Company Inc. under the 1997 Amended and
Restated Credit Agreement is guaranteed by Sweetheart Holdings Inc. and secured
by a first priority perfected security interest in inventory, spare parts,
accounts receivable and all proceeds of the foregoing of Sweetheart Cup Company
Inc., a first priority security interest, shared with the holders of the Senior
Secured Notes, in Shared Collateral (as defined in the 1993 Credit Agreement to
include primarily all capital stock owned by Sweetheart Holdings Inc. and
Sweetheart Cup Company Inc. and of each of their respective present and future
direct subsidiaries, all intercompany indebtedness payable to Sweetheart
Holdings Inc. or Sweetheart Cup Company Inc. by Sweetheart Holdings Inc.,
Sweetheart Cup Company Inc. or their respective present and future
subsidiaries, and any proceeds from business interruption insurance), and a
second priority perfected security interest in the Senior Secured Note
collateral as described below.
The 1997 Amended and Restated Credit Agreement contains various covenants
which limit, or restrict, among other things, indebtedness, dividends, leases,
capital expenditures, the use of proceeds from asset sales and certain other
business activities. Additionally, the Company must maintain on a consolidated
basis, certain specified ratios at specified times, including, without
limitation, maintenance of minimum fixed charge coverage ratio. The Company is
currently in compliance with all covenants under the 1997 Amended and Restated
Credit Agreement.
Bakery Sale
On November 30, 1997, the Company entered into an agreement to sell assets
of its bakery operation to Ace Baking Company Limited Partnership. Assets sold
included property, plant, and equipment, which
F-37
have been reclassified to assets held for sale, and inventories. Consideration
of $22.3 million was received, including $20.3 million of cash, and a $2
million non-interest bearing note. A gain of $4.5 million will be recognized in
fiscal year 1998. Bakery operations represented 3% of net sales in fiscal year
1997.
16. RELATED-PARTY TRANSACTIONS
AIP, which is Sweetheart Holdings Inc.'s largest stockholder and is a
private investment partnership which makes equity investments, principally in
industrial and manufacturing companies in the United States, is managed by
AIPM, an affiliate of AIP. AIPM receives an annual fee of approximately $1.85
million for providing general management, financial and other corporate
advisory services, and is reimbursed for certain out-of-pocket expenses. The
fees are paid to AIPM pursuant to a management services agreement among AIPM,
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
In addition, for the year ended September 30, 1996, the Company reimbursed
AIPM for $950,000 of expenses incurred in connection with an investigation of
the Company's strategic alternatives.
17. BUSINESS SEGMENT AND MAJOR CUSTOMERS
The Company operates in a single industry which is the manufacture and
distribution of paper and plastic related products in foodservice and food
packaging disposables. Sales to a major customer accounted for 13.0%, 13.6% and
13.7% for the years ended September 30, 1995, 1996 and 1997, respectively.
18. CONTINGENCIES
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation was initially filed in state
court in Georgia in April 1987, and is currently pending against the Company in
federal court. The remaining issue involved in the case is a claim that the
Company wrongfully terminated the Lily-Tulip , Inc. Salary Retirement Plan (the
"Plan") in violation of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). In December 1994, the United States Circuit Court of Appeals
for the Eleventh Circuit (the "Circuit Court") ruled that the Plan was
terminated on December 31, 1986. Following that decision, the plaintiffs sought
a rehearing which was denied, and subsequently filed a petition for a writ of
certiorari with the United States Supreme Court, which was also denied.
Following remand, in March 1996 the United States District Court for the
Southern District of Georgia entered a judgment in favor of the Company.
Following denial of a motion for reconsideration, the plaintiffs in April 1997
filed an appeal with the Circuit Court.
Management believes that the Company will ultimately prevail on the
remaining issues in the Aldridge litigation. Due to the complexity involved in
connection with the claims asserted in this case, the Company cannot determine
at present with any certainty the amount of damages it would be required to pay
should the plaintiffs prevail; accordingly, there can be no assurance that such
amount would not have a material adverse effect on the Company's financial
position or results of operations.
The Company is subject to a variety of environmental and pollution control
laws and regulations in all jurisdictions in which it operates. The Company is
also involved in various other claims and lawsuits incidental to its business.
In the opinion of management, the ultimate liabilities, if any, after
considering the reserves established relating to these matters, will not
materially affect the Company's financial position or results of operations.
F-38
19. SUMMARIZED FINANCIAL INFORMATION FOR SWEETHEART CUP COMPANY INC.
The following tables provide summarized financial information for
Sweetheart Cup Company Inc. and subsidiaries (in thousands):
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
--------------- --------------
Current assets ................. $572,259 $562,731
Noncurrent assets .............. 174,006 176,382
Current liabilities ............ 127,728 114,415
Noncurrent liabilities ......... 519,635 563,065
Prior year amounts below have been reclassified as noted in Note 1, item
(j):
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
-------------------- -------------------- -------------------
Net sales .............................. $986,618 $959,819 $ 886,017
Gross income ........................... 166,101 193,191 134,401
Income (loss) from continuing operations
before extraordinary loss ............. 766 20,213 (36,143)
Net income (loss) ...................... 766 20,213 (37,083)
20. SUBSEQUENT EVENT
On March 12, 1998, the stockholders of the Company consummated an
agreement with SF Holdings Group, Inc. ("Buyer") and Creative Expressions
Group, Inc., an affiilate of Buyer. Pursuant to the agreement, Buyer acquired
from the Company's stockholders 48% of the Company's outstanding common stock
and all of a new class of non-convertible, non-voting common stock, as a result
of which Buyer holds 90% of the total number of outstanding shares of both
classes of the Company's common stock. Upon consummation of the transaction,
the Company's existing stockholders nominated three of the Company's five
directors and Buyer nominated two directors. Significant actions by the
Company's Board of Directors will require the vote of four directors.
Additionally, pursuant to the agreement, The Fonda Group, Inc., an affiliate of
Buyer, manages the day-to-day operations of the Company. The Company incurred
$2.6 million of severance expenses as a result of the termination of certain
officers of the Company pursuant to certain executive separation agreements.
The Company also incurred financial advisory and legal expenses of
approximately $4.4 million in connection with the transaction.
F-39
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT ANY
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------------------------------
TABLE OF CONTENTS
PAGE
---------
Available Information ........................ 2
Prospectus Summary ........................... 4
Risk Factors ................................. 20
The Sweetheart Investment .................... 27
Use of Proceeds .............................. 29
The Exchange Offer ........................... 30
Capitalization ............................... 38
Unaudited Pro Forma Financial
Information ............................... 39
Unaudited Pro Forma Combined
Condensed Balance Sheet ................... 40
Unaudited Pro Forma Combined
Condensed Statements of Income ............ 43
Selected Historical Financial Data of
Fonda ..................................... 48
Selected Historical Consolidated Financial
Data of Sweetheart ........................ 50
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ............................. 52
Business ..................................... 63
Management ................................... 72
Principal Stockholders ....................... 74
Certain Relationships and Related
Transactions .............................. 75
Description of New Notes ..................... 76
Description of Certain Indebtedness .......... 102
Description of Capital Stock ................. 106
Certain Federal Income Tax
Consequences .............................. 110
Plan of Distribution ......................... 113
Legal Matters ................................ 113
Experts ...................................... 114
Unaudited Pro Forma Condensed
Financial Data of Sweetheart and
Fonda ..................................... P-1
Index to Financial Statements ................ F-1
SF HOLDINGS GROUP, INC.
OFFER TO EXCHANGE ITS
12 3/4% SERIES B SENIOR
SECURED DISCOUNT NOTES DUE 2008
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
FOR ANY AND ALL OF ITS
OUTSTANDING
12 3/4% SERIES A SENIOR
SECURED DISCOUNT NOTES DUE 2008
--------------------------------
PROSPECTUS
--------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Company provides that the Company
shall, to the fullest extent permitted by the laws of the State of Delaware,
indemnify any and all persons whom it shall have power to indemnify under such
laws to the extent that such indemnification is permitted under such laws, as
such laws may from time to time be in effect. Section 145 of the Delaware
General Corporation Law ("DGCL") permits the Company to indemnify and hold
harmless any director, officer, employee or agent of the Company and any person
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise
(including an employee benefit plan) against expenses (including attorneys'
fees), judgments, fines (including excise taxes assessed on a person with
respect to an employee benefit plan), and amounts paid in settlement that may
be imposed upon or incurred by him or her in connection with, or as a result
of, any proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Company), in which he or she
may become involved, as a party or otherwise, by reason of the fact that he or
she is or was such a director, officer, employee or agent of the Company or is
or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise (including an employee benefit plan). The indemnification provided
by the Certificate of Incorporation shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any by-law, any
agreement, by vote of directors or stockholders or otherwise, both as to action
in his or her official capacity and as to action in another capacity while
holding such office, shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The Certificate of Incorporation provides that a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty or loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL or (iv) for any transaction from which the director derived any
improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
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, subject to a court of appropriate
jurisdiction the question of 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-1
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
2.1* Investment Agreement, dated as of December 29, 1997, among the Stockholders of Sweetheart
Holdings Inc. ("Sweetheart Holdings"), Creative Expressions Group, Inc. ("CEG") and SF
Holdings Group, Inc. (the "Company").
3.1* Restated Certificate of Incorporation of the Company.
3.2* By-laws of the Company.
4.1* Indenture, dated as of March 12, 1998, between the Company and The Bank of New York.
4.2* Form of 12 3/4% Series A and Series B Senior Secured Discount Notes, dated as of March 12, 1998
(incorporated by reference to Exhibit 4.1).
4.3* Registration Rights Agreement, dated as of March 12, 1998, among the Company, Bear, Stearns
& Co. Inc. and SBC Warburg Dillon Read Inc. (the "Initial Purchasers").
5.1** Opinion of Kramer, Levin, Naftalis & Frankel.
10.1* Stockholders' Rights Agreement, dated as of March 12, 1998, among the Company and the
persons listed on Schedule I thereto.
10.2* Stockholders' Agreement, dated as of March 12, 1998, among Sweetheart Holdings, the Company
and the Original Stockholders.
10.3* Stockholders Agreement, dated as of March 12, 1998, among the Company and the Initial
Purchasers.
10.4* Pledge Agreement, dated as of March 12, 1998, between SF Holdings Group, Inc. and The Bank
of New York.
10.5* Tax Sharing Agreement, dated as of March 12, 1998, among SF Holdings Group, Inc. and The
Fonda Group, Inc ("Fonda").
10.6* Second Restated Management Services Agreement, dated as of March 12, 1998, among
Sweetheart Holdings, Sweetheart Cup Company Inc. ("Sweetheart Cup"), American Industrial
Partners Management Company, Inc. ("AIPM") and the Company.
10.7* Amendment No. 1 to Second Restated Management Services Agreement, dated as of March 12,
1998, among Sweetheart Holdings, Sweetheart Cup, AIPM and the Company.
10.8* Assignment and Assumption Agreement, dated as of March 12, 1998, between the Company and
Fonda.
12.1* Statements re Computation of Ratios.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Deloitte & Touche LLP.
23.2* Consent of Arthur Andersen LLP.
24.1** Power of Attorney (incorporated by reference in the signature pages).
25.1* Form T-1 Statement of Eligibility and Qualification of The Bank of New York, as trustee.
99.1** Form of Letter of Transmittal.
99.2** Form of Notice of Guaranteed Delivery.
99.3** Form of Exchange Agent Agreement.
- ----------
* Filed herewith.
** To be filed by amendment.
II-2
(b) The Financial Statement Schedule filed as part of this Registration
Statement is as follows:
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Information required by other schedules is not applicable or the required
information is included in the Financial Statements or Notes thereto.
ITEM 22. UNDERTAKING
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 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.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 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 Exchange Offer Registration
Statement through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means to 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 Exchange Offer Registration Statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this registration statement or amendment to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of New York, New York,
on April 20, 1998.
SF HOLDINGS GROUP, INC.
By: /s/ Dennis Mehiel
------------------------------------
Dennis Mehiel
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
SIGNATURE TITLE DATE
- ------------------------------- ---------------------------------------- ---------------
/s/ Dennis Mehiel Chairman and Chief Executive Officer April 20, 1998
- ------------------------------
Dennis Mehiel
/s/ Thomas Uleau President, Chief Operating Officer and April 20, 1998
- ------------------------------ Director
Thomas Uleau
/s/ Hans Heinsen Senior Vice President, Chief Financial April 20, 1998
- ------------------------------ Officer and Treasurer
Hans Heinsen
/s/ Alfred DelBello Vice Chairman April 20, 1998
- ------------------------------
Alfred DelBello
Director April , 1998
- ------------------------------
James Armenakis
Director April , 1998
- ------------------------------
W. Richard Bingham
/s/ Gail Blanke Director April 20, 1998
- ------------------------------
Gail Blanke
/s/ John A. Catsimatidis Director April 20, 1998
- ------------------------------
John A. Catsimatidis
/s/ Chris Mehiel Director April 20, 1998
- ------------------------------
Chris Mehiel
/s/ Jerome T. Muldowney Director April 20, 1998
- ------------------------------
Jerome T. Muldowney
/s/ G. William Seawright Director April 20, 1998
- ------------------------------
G. William Seawright
/s/ Lowell P. Weicker, Jr. Director April 20, 1998
- ------------------------------
Lowell P. Weicker, Jr.
II-4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Sweetheart Holdings Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated balance sheets, statements of operations, shareholders' equity
and cash flows of Sweetheart Holdings Inc. and Subsidiaries included in this
Form S-4 and have issued our report thereon dated December 8, 1997 (except with
respect to the matter discussed in Note 20, as to which the date is March 12,
1998.) Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the accompanying
index 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 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 respect the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Baltimore, Maryland
December 8, 1997
S-1
SCHEDULE II
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
ADDITIONS
------------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT END
CLASSIFICATIONS OF PERIOD EXPENSES(1) ACCOUNTS (2) DEDUCTIONS (3) OF PERIOD
- --------------------------------------- ------------ ------------- -------------- ---------------- ---------------
Allowance for Doubtful Accounts:
Year ended September 30, 1997 ......... $2,466 $446 $51 $1,223 $1,740
Year ended September 30, 1996 ......... 2,524 369 46 473 2,466
Year ended September 30, 1995 ......... 2,468 556 9 509 2,524
- ----------
(1) Current year provision for doubtful accounts.
(2) Includes recoveries on accounts previously written off, translation
adjustments and reclassifications.
(3) Accounts written off.
S-2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
Board of Directors
The Fonda Group, Inc.
We consent to the use in this Registration Statement of SF Holdings Group,
Inc. on Form S-4 of our report dated September 25, 1997 (March 24, 1998 as to
Note 16) on the financial statements of The Fonda Group, Inc., appearing in the
Prospectus, which is part of the Registration Statement, and to the references
to us under the headings "Selected Historical Financial Data of Fonda" and
"Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of The Fonda Group, Inc.
listed in Item 21(b). This financial statement schedule is the responsibility
of the management of The Fonda Group, Inc. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
April 21, 1998
S-3
SCHEDULE II
THE FONDA GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------ ------------ ---------------------------- --------------- -----------
ADDITIONS
----------------------------
CHARGED TO
BALANCE AT CHARTED TO OTHER BALANCE AT
BEGINNING COST AND ACCOUNTS DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------------ ------------ ------------ ------------- --------------- -----------
Year ended July 27, 1997
Allowance for doubtful accounts ......... $549 $457 $ 45(1) $961
Year ended July 28, 1996
Allowance for doubtful accounts ......... 401 148 $ 100(2) 100(1) 549
Year ended July 30, 1995
Allowance for doubtful accounts ......... 174 184 50(2) 7 (1) 401
- ----------
(1) Amounts written off
(2) Additions related to acquisitions
S-4
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
2.1* Investment Agreement, dated as of December 29, 1997, among the Stockholders of Sweetheart
Holdings Inc. ("Sweetheart Holdings"), Creative Expressions Group, Inc. ("CEG") and SF
Holdings Group, Inc. (the "Company").
3.1* Restated Certificate of Incorporation of the Company.
3.2* By-laws of the Company.
4.1* Indenture, dated as of March 12, 1998, between the Company and The Bank of New York.
4.2* Form of 12 3/4% Series A and Series B Senior Secured Discount Notes, dated as of March 12, 1998
(incorporated by reference to Exhibit 4.1).
4.3* Registration Rights Agreement, dated as of March 12, 1998, among the Company, Bear, Stearns
& Co. Inc. and SBC Warburg Dillon Read Inc. (the "Initial Purchasers").
5.1** Opinion of Kramer, Levin, Naftalis & Frankel.
10.1* Stockholders' Rights Agreement, dated as of March 12, 1998, among the Company and the
persons listed on Schedule I thereto.
10.2* Stockholders' Agreement, dated as of March 12, 1998, among Sweetheart Holdings, the Company
and the Original Stockholders.
10.3* Stockholders Agreement, dated as of March 12, 1998, among the Company and the Initial
Purchasers.
10.4* Pledge Agreement, dated as of March 12, 1998, between SF Holdings Group, Inc. and The Bank
of New York.
10.5* Tax Sharing Agreement, dated as of March 12, 1998, among SF Holdings Group, Inc. and The
Fonda Group, Inc ("Fonda").
10.6* Second Restated Management Services Agreement, dated as of March 12, 1998, among
Sweetheart Holdings, Sweetheart Cup Company Inc. ("Sweetheart Cup"), American Industrial
Partners Management Company, Inc. ("AIPM") and the Company.
10.7* Amendment No. 1 to Second Restated Management Services Agreement, dated as of March 12,
1998, among Sweetheart Holdings, Sweetheart Cup, AIPM and the Company.
10.8* Assignment and Assumption Agreement, dated as of March 12, 1998, between the Company and
Fonda.
12.1* Statements re Computation of Ratios.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Deloitte & Touche LLP.
23.2* Consent of Arthur Andersen LLP.
24.1** Power of Attorney (incorporated by reference in the signature pages).
25.1* Form T-1 Statement of Eligibility and Qualification of The Bank of New York, as trustee.
99.1** Form of Letter of Transmittal.
99.2** Form of Notice of Guaranteed Delivery.
99.3** Form of Exchange Agent Agreement.
- ----------
* Filed herewith.
** To be filed by amendment.