-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, rurl2uNMlSUdDdgQzionvHHVChnNW8CGk/IDI9gZMIjGG5NbRbaOmcKD1IpXiebo pX22WS+J2uQfTQrpgd3HQQ== 0000038195-94-000020.txt : 19940503 0000038195-94-000020.hdr.sgml : 19940503 ACCESSION NUMBER: 0000038195-94-000020 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 1 REFERENCES 429: 033-43448 REFERENCES 429: 033-51557 REFERENCES 429: 033-51876 FILED AS OF DATE: 19940502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORT HOWARD CORP CENTRAL INDEX KEY: 0000038195 STANDARD INDUSTRIAL CLASSIFICATION: 2621 IRS NUMBER: 391090992 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-23826 FILM NUMBER: 94525706 BUSINESS ADDRESS: STREET 1: 1919 S BROADWAY CITY: GREEN BAY STATE: WI ZIP: 54304 BUSINESS PHONE: 4144358821 MAIL ADDRESS: STREET 1: P O BOX 19130 CITY: GREEN BAY STATE: WI ZIP: 54307-9130 FORMER COMPANY: FORMER CONFORMED NAME: FORT HOWARD PAPER CO/DE DATE OF NAME CHANGE: 19870506 FORMER COMPANY: FORMER CONFORMED NAME: MARYLAND CUP CORP/WI DATE OF NAME CHANGE: 19840612 FORMER COMPANY: FORMER CONFORMED NAME: FORT HOWARD PAPER CO DATE OF NAME CHANGE: 19830926 POS AM 1 FORT HOWARD CORPORATION AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 2, 1994 Registration No. 33-23826, 33-43448, 33-51876 and 33-51557 - ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------------- POST-EFFECTIVE AMENDMENT NO. 9 POST-EFFECTIVE AMENDMENT NO. 5 POST-EFFECTIVE AMENDMENT NO. 2 AND POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENTS UNDER THE SECURITIES ACT OF 1933 ------------------------------------------- FORT HOWARD CORPORATION (Exact name of registrant as specified in its charter) Delaware 2699 39-1090992 (State or other jurisdiction (Primary Standard (I.R.S. Employer of incorporation or organization) Industrial Code Number) Identification No.) 1919 South Broadway Green Bay, Wisconsin 54304 (414) 435-8821 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) James W. Nellen II Vice President and General Counsel Fort Howard Corporation 1919 South Broadway Green Bay, Wisconsin 54304 (414) 435-8821 (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. Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus included in this Registration Statement is a combined Prospectus and relates to Registration Statement No. 33-23826 filed by the Registrant and declared effective June 21, 1991, to Registration Statement No. 33-43448 filed by the Registrant and declared effective February 13, 1992, to Registration Statement No. 33-51876 filed by the Registrant and declared effective March 12, 1993 and to Registration Statement No. 33-51557 filed by the Registrant and declared effective February 2, 1994. This Registration Statement constitutes Post-Effective Amendment No. 9 to Registration Statement No. 33-23826, Post-Effective Amendment No. 5 to Registration Statement No. 33- 43448, Post-Effective Amendment No. 2 to Registration Statement No. 33-51876 and Post-Effective Amendment No. 1 to Registration Statement No. 33-51557, and shall hereafter become effective concurrently with the effectiveness of this Registration Statement and in accordance with Section 8(c) of the Securities Act of 1933. The Prospectus included in this Registration Statement has been prepared in accordance with the requirements of Form S-1 and as it relates to Registration Statement No. 33-43448, Registration Statement No. 33-51876 and Registration Statement No. 33-51557, is filed pursuant to Rule 401 under the Securities Act of 1933. The registration statements amended hereby are collectively referred to herein as the "Registration Statement." If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [ x ] FORM S-1 REGISTRATION STATEMENT Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K Item Number and Caption Caption in Prospectus ----------------------- --------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.. Facing Page; Cross Reference Sheet; Outside Front Cover Page 2. Inside Front and Outside Back Cover Page of Prospectus ......................... Inside Front Cover Page; Additional Information 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges ......... Prospectus Summary; The Company; Certain Risk Factors; Selected Historical Consolidated Financial Data 4. Use of Proceeds ............................ Use of Proceeds 5. Determination of Offering Price ............ Not Applicable 6. Dilution ................................... Not Applicable 7. Selling Security Holders ................... Not Applicable 8. Plan of Distribution ....................... Not Applicable 9. Description of Securities to be Registered . Prospectus Summary; Description of the 12 5/8% Debentures; Description of the 14 1/8% Debentures; Description of the 9 1/4% Notes and the 10% Notes; Description of the 8 1/4% Notes and the 9% Notes; Description of the Pass Through Certificates; Description of the Secured Notes; Description of the Recognition Instrument; Certain Federal Income Tax Considerations Applicable to the 1988 Securities; Certain Federal Income Tax Considerations Applicable to the 1993 Notes; Certain Federal Income Tax Considerations Applicable to the 1994 Notes; Certain Federal Income Tax Considerations Applicable to the Pass Through Certificates 10. Interests of Named Experts and Counsel ..... Legal Matters 11. Information with Respect to the Registrant (a) Description of Business ................ Prospectus Summary; The Company; Business (b) Description of Property ................ Business (c) Legal Proceedings ...................... Business; Legal Proceedings (d) Common Equity Securities ............... Not Applicable (e) Financial Statements ................... Consolidated Financial Statements Item Number and Caption Caption in Prospectus ----------------------- --------------------- (f) Selected Financial Data ................ Prospectus Summary; Selected Historical Consolidated Financial Data (g) Supplementary Financial Information .... Consolidated Financial Statements (h) Management's Discussion and Analysis of Financial Condition and Results of Operations ... ....................... Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations (i) Disagreements with Accountants ......... Not Applicable (j) Directors and Executive Officers ....... Management (k) Executive Compensation ................. Management (l) Security Ownership of Certain Beneficial Owners and Management........ The Company; Management; Ownership of Common Stock (m) Certain Relationships and Related Transactions ........................... Management; Ownership of Common Stock; Certain Transactions; Other Transactions; Market-Making Activities of MS&Co. 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities ................................ Not Applicable PROSPECTUS FORT HOWARD CORPORATION 12 5/8% Subordinated Debentures Due 2000 14 1/8% Junior Subordinated Discount Debentures Due 2004 --------------------------------------------------- FORT HOWARD CORPORATION 9 1/4% Senior Notes Due 2001 10% Subordinated Notes Due 2003 --------------------------------------------------- FORT HOWARD CORPORATION 8 1/4% Senior Notes Due 2002 9% Senior Subordinated Notes Due 2006 --------------------------------------------------- FORT HOWARD CORPORATION 1991 Pass Through Trust PASS THROUGH CERTIFICATES, SERIES 1991 --------------------------------------------------- The 12 5/8% Debentures will mature on November 1, 2000, and may be redeemed in whole or in part at the option of the Company at any time at the redemption prices set forth herein. See "Description of the 12 5/8% Debentures." The 14 1/8% Debentures were sold at a substantial discount from their principal amount, and there will not be any periodic payment of interest prior to May 1, 1995. See "Certain Federal Income Tax Considerations Applicable to the 1988 Securities" for a discussion of the federal income tax treatment of the 14 1/8% Debentures under the original issue discount rules. The 14 1/8% Debentures will bear interest, which will be payable in cash, at a rate of 14 1/8% from and after November 1, 1994, will mature on November 1, 2004, and may be redeemed in whole or in part at the option of the Company at any time, at 100% of the principal amount plus accrued interest. See "Description of the 14 1/8% Debentures." (Continued on following page) --------------------------------------------------- SEE "CERTAIN RISK FACTORS" FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE 1988 SECURITIES, THE 1993 NOTES, THE 1994 NOTES OR THE PASS THROUGH CERTIFICATES. --------------------------------------------------- NEITHER THE 1988 SECURITIES, THE 1993 NOTES, THE 1994 NOTES NOR THE PASS THROUGH CERTIFICATES HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------------------------------------- , 1994 The 9 1/4% Notes will mature on March 15, 2001 and are not redeemable prior to maturity. The 10% Notes will mature on March 15, 2003, and are redeemable at the option of the Company in whole or in part, at any time on or after March 15, 1998, initially at 105% of their principal amount, plus accrued interest, declining to 100% of their principal amount, plus accrued interest, on or after March 15, 2002. In addition, at the option of the Company at any time prior to March 15, 1995, up to $75 million aggregate principal amount of the 10% Notes will be redeemable from the proceeds of one or more Public Equity Offerings following which there is a Public Market, at 110% of the principal amount thereof, plus accrued interest. See "Description of the 9 1/4% Notes and the 10% Notes." --------------------------------------------------- The 8 1/4% Notes will mature on February 1, 2002 and are not redeemable prior to maturity. The 9% Notes will mature on February 1, 2006 and are redeemable at the option of the Company in whole or in part, at any time on or after February 1, 1999, initially at 104.5% of their principal amount, plus accrued interest, declining to 100% of their principal amount, plus accrued interest, on or after February 1, 2001. In addition, at the option of the Company at any time prior to February 1, 1997, up to $227.5 million aggregate principal amount of the 9% Notes are redeemable from the proceeds of one or more Public Equity Offerings following which there is a Public Market, at 109% of the principal amount thereof, plus accrued interest. See "Description of the 8 1/4% Notes and the 9% Notes." The 8 1/4% Notes and the 9 1/4% Notes are senior unsecured obligations of the Company and rank pari passu in right of payment with the Pass Through Certificates (as defined below) and all Senior Debt (as such term is defined in the applicable indentures of the Company). The 9% Notes, the 10% Notes, the 12 5/8% Debentures and the 14 1/8% Debentures constitute unsecured obligations subordinated in right of payment to all Senior Debt. In the case of the 9% Notes, Senior Debt includes the 8 1/4% Notes, the 9 1/4% Notes and the Pass Through Certificates. In the case of the 10% Notes and the 12 5/8% Debentures, Senior Debt includes the 8 1/4% Notes, the 9 1/4% Notes, the 9% Notes, and the Pass Through Certificates. In the case of the 14 1/8% Debentures, Senior Debt includes the 8 1/4% Notes, the 9 1/4% Notes, the Pass Through Certificates, the 9% Notes, the 10% Notes and the 12 5/8% Debentures. As of March 31, 1994, Senior Debt was approximately $1.7 billion with respect to the 9% Notes, $2.4 billion with respect to the 10% Notes and the 12 5/8% Debentures, and $2.8 billion with respect to the 14 1/8% Debentures. See "Certain Risk Factors - Risk Factors Relating to the Company--Subordination and Effect of Asset Encumbrances," "Description of the 12 5/8% Debentures--Subordination," "Description of the 14 1/8% Debentures-- Subordination," "Description of the 9 1/4% Notes and the 10% Notes-- Subordination" and "Description of the 8 1/4% Notes and the 9% Notes-- Subordination." --------------------------------------------------- Each Pass Through Certificate represents a fractional undivided interest in the Fort Howard Corporation 1991 Pass Through Trust (the "Pass Through Trust") formed pursuant to a pass through trust agreement (the "Pass Through Trust Agreement") by and between Fort Howard Corporation (the "Company" or the "Lessee") and Wilmington Trust Company (the "Pass Through Trustee"), as trustee under the Pass Through Trust Agreement. The property of the Pass Through Trust consists of secured notes (the "Secured Notes") issued on a nonrecourse basis by the owner trustee (the "Owner Trustee") in connection with leveraged lease transactions to finance or refinance not more than 85% of the cost of acquiring the Company's interest in (i) the Phase IV paper manufacturing facility (the "Facility") (which includes a twin wire Beloit tissue machine and related structures and equipment), (ii) the Phase IV Power Plant (the "Power Plant") (which includes a coal-fired fluidized bed boiler and related structures and equipment) and (iii) the "1990 Equipment" and "1991 Equipment" (which include three groups of certain paper manufacturing production equipment, consisting of converting, shipping, pulp processing and machine shop equipment and a package boiler) (each an "Equipment Group," and together with the Facility and the Power Plant, the "Assets"), all located in - 2 - Effingham County, Georgia, that have been leased by the Owner Trustee to the Company. The Company's interest in the Assets acquired constituted a leasehold interest pursuant to a lease with respect to, among other things, the Assets from the Effingham County Industrial Development Authority to the Company. The Secured Notes were issued in series under an indenture (the "Secured Note Indenture") with a separate series relating to each of the Facility, the Power Plant and each Equipment Group. Interest will be passed through on the Pass Through Certificates at the rate per annum which is the interest rate borne by the Secured Notes. Each series of Secured Notes is secured by a security interest in all of the Assets, the leases (the "Pass Through Certificate Leases" or the "Leases") and certain other documents relating thereto, including the right to receive rentals payable by the Company pursuant to the leases. Amounts payable under the leases will be at least sufficient to pay in full when due all payments of principal of and interest on the Secured Notes held in the Pass Through Trust. However, neither the Pass Through Certificates nor the Secured Notes are obligations of, or guaranteed by, the Company. Unless the Secured Notes are earlier redeemed, on the final distribution date 74.20% (or $62,041,625) of the principal amount of the Pass Through Certificates will be distributed to Certificateholders. Unless the Secured Notes are refunded, refinanced or sold to a third party on or prior to the final distribution date, the source of payment on the final distribution date shall be a rental payment by the Company under the leases. There can be no assurance that the Company will have the financial ability to make such rental payment. See "Certain Risk Factors -- Risk Factors Relating to the Pass Through Certificates -- Potential Inability to Make Payment on Final Distribution Date." Interest paid on the Secured Notes held in the Pass Through Trust will be passed through to the Certificateholders of the Pass Through Trust on January 2 and July 2 of each year at a rate per annum equal to 11% until the final distribution date (January 2, 2002). Principal paid on the Secured Notes held in the Pass Through Trust will be passed through to the Certificateholders of the Pass Through Trust in scheduled amounts on January 2 or July 2, or both, of each year, continuing until the final distribution date (January 2, 2002) unless earlier redeemed. The Secured Notes may not be optionally redeemed on or prior to the seventh anniversary of the issuance of the Pass Through Certificates, except as described below. Thereafter, they may be redeemed at a price equal to the unpaid principal amount thereof plus accrued interest thereon to the redemption date. In addition, the Secured Notes are subject to redemption in whole or in part at the same price following the occurrence of an Event of Loss to an Asset, in certain cases of obsolescence of any Asset, and during the continuance of any Lease Event of Default. The Owner Trustee may purchase or redeem the Secured Notes at the same price so long as a Secured Note Indenture Event of Default resulting from a Lease Event of Default shall have occurred and be continuing. The Collateral Trustee may purchase the Secured Notes at the same price if both a Lease Event of Default and an event of default under certain of the Company's senior indebtedness shall have occurred and be continuing. The Company's obligations under the Leases rank pari passu in right of payment with all other general obligations of the Company. However, the indebtedness under the Bank Credit Agreement (pursuant to which $526 million principal amount is outstanding or committed as of March 31,, 1994 and pursuant to which $582 million principal amount may be outstanding at any one time), the Senior Note Purchase Agreement dated as of September 11, 1991 (the "Senior Secured Note Agreement") (pursuant to which $300 million aggregate principal amount of Senior Secured Notes due 1997 through 2000 (the "Senior Secured Notes") was outstanding as of March 31, 1994) and indebtedness under a term loan agreement dated as of March 22, 1993 between the Company and Bankers Trust Company (the "1993 Term Loan Agreement") (pursuant to which $100 million principal amount (the "1993 Term Loan") was outstanding as of March 31, 1994) are secured by essentially all the assets of the Company, including the Company's leasehold interest in the Assets. The holders of such indebtedness will be entitled to payment of their indebtedness out of the proceeds of such collateral prior to the holders of any general unsecured obligations of the Company, including the Leases. Other than the covenants described in Appendix II, there are no contractual limits enforceable by the Certificateholders on the Company's ability to incur indebtedness pari passu to the Leases and/or secured by any or all of the Company's assets. - 3 - No employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or individual retirement account or employee benefit plan subject to Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), may acquire or hold the Pass Through Certificates. Certain governmental and non-electing church plans, however, are not subject to Title I of ERISA or Section 4975 of the Code and, therefore, may invest in the Pass Through Certificates. The purchase by any person of any Pass Through Certificates constitutes a representation by such person to the Company, the Owner Participant, the Pass Through Trustee, the Owner Trustee and the Secured Note Indenture Trustee that such person is not an ERISA Plan and that such person is not acquiring and has not acquired such Pass Through Certificate with assets of an ERISA Plan. --------------------------------------------------- This Prospectus is to be used by Morgan Stanley & Co. Incorporated ("MS&Co.") in connection with offers and sales of the 1988 Securities (as defined below), the 1993 Notes (as defined below), the 1994 Notes (as defined below) and the Pass Through Certificates (as defined below) in market-making transactions at negotiated prices related to prevailing market prices at the time of sale. MS&Co. may act as principal or agent in such transactions. See "Market Making Activities of MS&Co." No person has been authorized in connection with any offer made hereby to give any information or to make any representations other than those contained or incorporated by reference in this Prospectus in connection with the offer contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or by MS&Co. This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy securities other than the securities to which it relates or any offer to sell or the solicitation of an offer to buy securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation. 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 the information contained herein is correct as of any time subsequent to its date. --------------------------------------------------- - 4 - TABLE OF CONTENTS Page Additional Information ................................................... 5 Reports to Certificateholders by the Pass Through Trustee ................ 6 Prospectus Summary ....................................................... 7 The Company .............................................................. 21 Certain Risk Factors ..................................................... 22 Use of Proceeds .......................................................... 30 Description of Certain Indebtedness ...................................... 31 Selected Historical Consolidated Financial Data .......................... 38 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations .......................... 41 Business ................................................................. 49 Legal Proceedings ........................................................ 54 Management ............................................................... 54 Ownership of Common Stock ................................................ 59 Certain Transactions ..................................................... 60 Other Transactions ....................................................... 63 Description of the 12 5/8% Debentures..................................... 64 Description of the 14 1/8% Debentures .................................... 83 Certain Federal Income Tax Consequences Applicable to the 1988 Securities. 90 Description of the 9 1/4% Notes and the 10% Notes ........................ 95 Certain Federal Income Tax Consequences Applicable to the 1993 Notes...... 123 Description of the 8 1/4% Notes and the 9% Notes ......................... 124 Certain Federal Income Tax Consequences Applicable to the 1994 Notes ..... 152 Formation of the Pass Through Trust ...................................... 153 Diagram of Payments ...................................................... 153 Description of the Pass Through Certificates ............................. 154 Description of the Secured Notes ......................................... 164 Description of the Recognition Instrument ................................ 183 Certain Federal Income Tax Consequences Applicable to the Pass Through Certificates ....................................... 185 Certain Delaware Taxes Relating to the Pass Through Certificates ......... 186 ERISA Considerations Applicable to Pass Through Certificates ............. 187 Marketing-Making Activities of MS&Co...................................... 187 Legal Matters............................................................. 188 Experts................................................................... 188 Index to Consolidated Financial Statements ............................... F-1 Glossary of Certain Terms ..........................................Appendix I Description of Certain Covenants ..................................Appendix II --------------------------------------------------- ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall include all amendments, exhibits and schedules thereto) under the Securities Act, with respect to the 1988 Securities, the 1993 Notes, the 1994 Notes and the Pass Through Certificates (each as defined below). This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission, and to which reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits and schedules thereto, as well as all such reports and other information filed with the Commission may be inspected at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and are also available for inspection and copying at prescribed rates at the regional offices of the Commission located at 500 West Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and at the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. - 5 - The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith is required to file reports and other information with the Commission. The Company's obligation under the Exchange Act to file periodic reports with the Commission will be suspended if each of the 8 1/4% Notes, the 9 1/4% Notes, the 12 5/8% Debentures, the 9% Notes, the 10% Notes, the 14 1/8% Debentures (each as defined below), the Pass Through Certificates and each other issue of debt securities then outstanding are held of record by fewer than 300 holders at the beginning of any fiscal year of the Company. Accordingly, in the absence of any other obligation or undertaking to file reports with the Commission, if there are fewer than 300 holders of each of the 8 1/4% Notes, the 9 1/4% Notes, the 12 5/8% Debentures, the 9% Notes, the 10% Notes, the 14 1/8% Debentures, and the Pass Through Certificates as of the beginning of any such fiscal year, the Company may cease to file reports with the Commission in respect of such fiscal year. However, the Company will be required to continue to file reports with the Commission for fiscal years in which the Registration Statement or an amendment to the Registration Statement is filed and becomes effective. In addition, the Company will be required to continue to file reports with the Commission if any of the 1988 Securities, the 1993 Notes, the 1994 Notes or the Pass Through Certificates are listed on a national securities exchange or if MS&Co. is required, as an affiliate of the Company, to deliver a prospectus in connection with market-making activities in the 1988 Securities, the 1993 Notes, the 1994 Notes or the Pass Through Certificates in which it engages. None of the Company's securities is currently listed on any securities exchange. The respective indentures under which the 1993 Notes and the 1994 Notes were issued require the Company, and the Company intends, to file with the Commission and distribute to the holders of the 1993 Notes and the 1994 Notes annual reports containing consolidated financial statements and the related report of independent public accountants and quarterly reports containing unaudited condensed consolidated financial statements for the first three quarters of each fiscal year for so long as any 1993 Notes or 1994 Notes are outstanding. In the event the Company ceases to file periodic reports with the Commission, the Company intends to distribute to the holders of the 1988 Securities or the Pass Through Certificates annual reports containing audited consolidated financial statements and a report thereon by the Company's independent public accountants and, upon the request of any holder of securities, quarterly reports for the first three quarters of each fiscal year containing unaudited condensed consolidated financial information. REPORTS TO CERTIFICATEHOLDERS BY THE PASS THROUGH TRUSTEE Wilmington Trust Company, as Pass Through Trustee for the holders of the Pass Through Certificates, will provide to such holders certain periodic statements concerning distributions made with respect to the Pass Through Trust. The Pass Through Trustee will include with each distribution of a Scheduled Payment or a Special Payment (as defined herein) to Certificateholders a statement giving effect to such distribution and setting forth the amount of such distribution allocable to principal and interest, Pool Balance and the Pool Factor (each as defined below). In addition, after the end of each calendar year, the Pass Through Trustee will furnish the Certificateholders with a statement containing the sum of the amounts distributed to such Certificateholders allocable to principal and interest for such calendar year, or a portion of such calendar year, and such other items as are readily available to the Pass Through Trustee and which are necessary for a Certificateholder's preparation of its federal income tax returns. The information contained in such reports will not be examined or reported upon by any independent public accountant, nor will any report of any independent public accountant with respect to such information be included. See "Description of the Pass Through Certificates--Reports to Certificateholders." - 6 - PROSPECTUS SUMMARY The following information is qualified in its entirety by the detailed information and financial statements found elsewhere in this Prospectus. THE COMPANY Fort Howard Corporation (the "Company"), founded in 1919, is a major manufacturer, converter and marketer of a diversified line of single-use sanitary tissue paper products for the home and away-from-home markets. The Company's principal products include paper towels, bath tissue, table napkins, wipers and boxed facial tissue. The Company produces and ships its products from manufacturing facilities located in Wisconsin, Oklahoma, Georgia, and the United Kingdom. The Company believes that it is the largest producer of tissue products sold into the domestic commercial (away-from-home) market. The Company sells a majority of its tissue products through paper and institutional food wholesalers into commercial markets. The Company continues to expand its domestic consumer tissue business for the home market. Tissue products for household use are sold principally through brokers to accounts that include major food store chains, mass merchandisers and wholesale grocers. The Company's domestic tissue products for home use are sold under the brand names SOFT 'N GENTLE, MARDI GRAS, GREEN FOREST, PAGE and SO-DRI. The Company's principal markets are in the United States where the Company believes, based on an analysis of publicly available information, that its operating income margins are higher than those of its publicly reporting competition. A key factor contributing to these high operating income margins has been the Company's proprietary de-inking technology, which enables it to use a broad range of wastepaper grades and process wastepaper efficiently to recover the fibers which are the principal raw material in papermaking. However, the Company's operating income margins have been adversely affected by the adverse tissue industry operating conditions experienced since 1991, and continue to be affected by low pricing resulting in part from relatively low industry operating rates. Announced industry capacity additions through 1995 may offset the effects of the current general economic recovery. Consequently, until industry operating rates improve, the Company's net selling prices and operating income margins may continue to be adversely affected. The Acquisition In 1988, FH Acquisition Corp. ("FH Acquisition") was organized on behalf of The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II") to effect the acquisition of the Company. Pursuant to an Agreement and Plan of Merger dated as of June 25, 1988 (the "Merger Agreement"), FH Acquisition commenced a tender offer (the "Offer") on July 1, 1988 for all outstanding shares at $53 per share in cash, and subsequently purchased approximately 53.5 million shares in the Offer. Thereafter, FH Acquisition was merged with and into the Company (the "Merger"). The Offer and the Merger are referred to herein collectively as the "Acquisition." The Acquisition was financed in part through borrowings under an Amended and Restated Credit Agreement dated as of October 24, 1988 (as amended, the "Bank Credit Agreement") among FH Acquisition and a syndicate of banks (the "Banks") and Bankers Trust Company ("Bankers Trust"), as Agent, the issuance and sale of FH Acquisition's Series A, Series B and Series C Subordinated Floating Rate Bridge Notes (collectively, the "Bridge Notes") and the issuance and sale (the "Equity Financing") of shares of common stock of FH Holdings Corp. ("Holdings"). All persons who purchased common stock of Holdings received in connection with the Merger an equal number of shares of common stock of the Company. All references in this Prospectus to "Common Stock" refer to Common Stock of the Company subsequent to the Merger. Borrowings under the Bank Credit Agreement to finance the Acquisition (other than the Bank Bridge Loan as described below), the issuance of the 1988 Securities (as described below), and the Equity Financing, in each case after giving effect to the application of the proceeds therefrom, are hereinafter referred to collectively as the "Financing." See "Use of Proceeds" and "Description of Certain Indebtedness." MSLEF II, an affiliate of MS&Co., is a limited partnership formed to finance investments in industrial and other companies. Its principal investors include major U.S. and foreign banks, insurance companies, pension funds and corporations. As a result of the Acquisition, the Company became privately held by MSLEF II and other investors. - 7 - Recent Developments On April 25, 1994, the Company announced that for the first quarter ended March 31, 1994, net sales decreased 3.3% to $275,330,000 compared to first quarter 1993 net sales of $284,814,000. Operating income increased 7.5% for the first quarter of 1994 to $60,133,000 compared to $55,959,000 for the first quarter of 1993. Operating income for the first quarter of 1994 benefited from the elimination of amortization of goodwill of $14 million for the quarter as a result of the Company's goodwill write-off in the third quarter of 1993. Excluding the amortization of goodwill from 1993 results, operating income for the first quarter of 1994 decreased 14.3% compared to the first quarter of 1993. Earnings before depreciation, interest, amortization and taxes decreased 9.2% to $82,231,000 in the first quarter of 1994 from $90,543,000 in the first quarter of 1993. Business conditions remain extremely competitive. During the first quarter of 1994, a period of seasonally lower volume, the Company maintained its domestic price increases achieved through year-end 1993, adversely affecting domestic sales volume for the first quarter. Severe weather conditions also adversely affected domestic sales volume during the first quarter of 1994. In addition, pricing at the Company's international operations declined further in the first quarter of 1994. Extraordinary losses of $28 million and $10 million related to debt repurchases in 1994 and 1993, respectively, impacted the Company's financial performance in the first quarters of 1994 and 1993. The net loss for the first quarter of 1994 increased to $43,342,000 from $35,975,000 for the same period in 1993. The 1988 Securities The 12 5/8% Subordinated Debentures due 2000 (the "12 5/8% Debentures") and the 14 1/8% Junior Subordinated Discount Debentures due 2004 (the "14 1/8% Debentures") are collectively referred to herein as the "1988 Securities." The 12 5/8% Debentures Maturity Date ..................November 1, 2000. Interest Payment Dates .........May 1 and November 1. Optional Redemption ............The 12 5/8% Debentures may be redeemed in whole or in part at the option of the Company at any time at the redemption prices set forth herein. Subordination ...................The 12 5/8% Debentures are subordinated in right of payment to all Senior Debt (as such term is defined in the respective indentures) of the Company, which includes the Company's obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement (as defined below), the Senior Secured Note Agreement (as defined below), the 8 1/4% Notes (as defined below), the 9 1/4% Notes (as defined below), and capital lease obligations, including the Pass Through Certificate Leases (as defined below) and certain other borrowings of the Company and are subordinate to the 9% Notes (as defined below). The 12 5/8% Debentures rank pari passu in right of payment with the 10% Notes (as defined below). The 12 5/8% Debentures are senior in right of payment to the 14 1/8% Debentures. As of March 31, 1994, Senior Debt was approximately $ 2.4 billion with respect to the 12 5/8% Debentures. Additional Senior Debt may be incurred to the extent permitted by the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Note Agreement, the 1993 Note Indentures (as defined below), the 1994 Note Indentures (as defined below) and the 12 5/8% Debenture Indenture (as defined below). The Company's obligations to the Banks under the Bank Credit Agreement, to the Lenders (as defined below) under the 1993 Term Loan Agreement and to the Purchasers (as defined below) of the Senior Secured Notes (as defined below) are secured by first liens on inventory, accounts receivable, certain patents and trademarks, and certain stock of subsidiaries of the Company, as well as mortgages on the Company's three domestic tissue mills (the "Shared Collateral"). Indebtedness under capital lease obligations, including the Pass Through Certificate Leases, and other secured indebtedness are secured by certain assets of the Company and its subsidiaries. The indebtedness of the Company's foreign subsidiaries is secured by certain assets of those subsidiaries. The secured indebtedness has priority with respect to the assets pledged as collateral to secure such indebtedness. The Pass Through Certificates are indirectly secured by a lien on an owner trustee's interest in a paper manufacturing facility, power plant - 8 - and certain related equipment located at the Company's tissue mill in Georgia (the "Savannah River" mill), all of which are leased to the Company under the Pass Through Certificate Leases. Claims of holders of the 12 5/8% Debentures, as creditors of the Company, are junior in right of payment to existing and future liabilities of the Company's subsidiaries including trade payables. As of March 31,, 1994, the amount of the liabilities of all the Company's subsidiaries was approximately $124 million, including trade payables. See "Certain Risk Factors--Risk Factors Relating to the Company --Subordination and Effect of Asset Encumbrances." Covenants .........................The 12 5/8% Debenture Indenture contains covenants which, among other things, limit the incurrence of indebtedness and the payment of dividends and the making of other distributions by the Company and certain of its subsidiaries, the ability of the Company and certain of its subsidiaries to create liens, and the ability of the Company to merge or consolidate or to transfer substantially all its assets. For more complete information regarding the 12 5/8% Debentures, see "Description of the 12 5/8% Debentures." The 14 1/8% Debentures Maturity Date .....................November 1, 2004. Yield and Interest ................The 14 1/8% Debentures were sold at a substantial discount from their principal amount, and there will not be any periodic payment of interest prior to May 1, 1995. For a discussion of the federal income tax treatment of the 14 1/8% Debentures under the original issue discount rules, see "Certain Federal Income Tax Considerations Applicable to the 1988 Securities." The 14 1/8% Debentures were initially sold at a Price to the Public representing a yield to maturity of 14 1/8%, computed on the basis of semiannual compounding. From and after November 1, 1994, the 14 1/8% Debentures will bear interest which will be payable in cash at a rate of 14 1/8% per annum. Interest Payment Dates ............Interest is payable on May 1 and November 1, commencing May 1, 1995. Optional Redemption ...............The 14 1/8% Debentures may be redeemed in whole or in part at the option of the Company at any time at 100% of the principal amount plus accrued interest to the redemption date. Subordination ......................The 14 1/8% Debentures are subordinated in right of payment to all Senior Debt (as such term is defined in the 14 1/8% Debenture Indenture) of the Company, which includes the Company's obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Note Agreement, the 8 1/4% Notes, the 9 1/4% Notes, capital lease obligations, including the Pass Through Certificate Leases and certain other borrowings of the Company and are subordinate to the 9% Notes, the 12 5/8% Debentures and the 10% Notes. As of March 31, 1994, Senior Debt was approximately $2.8 billion with respect to the 14 1/8% Debentures. Additional Senior Debt may be incurred to the extent permitted by the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Note Agreement, the 1993 Note Indentures, the 1994 Note Indentures and the 12 5/8% Debenture Indenture. The Company's obligations to the Banks under the Bank Credit Agreement, to the Lenders under the 1993 Term Loan Agreement and to the Purchasers under the Senior Secured Note Agreement are secured by liens on inventory, accounts receivable, certain patents and trademarks, and certain stock of subsidiaries of the Company, as well as mortgages on the Company's three domestic tissue mills. Claims of holders of the 14 1/8% Debentures, as creditors of the Company, are junior in right of payment to existing and future liabilities of the Company's subsidiaries, including trade payables. As of March 31, 1994, the amount of the liabilities of all the Company's subsidiaries was approximately $124 million, including trade payables. See "Certain Risk Factors--Risk Factors Relating to the Company--Subordination and Effect of Asset Encumbrances." Covenants ........................The 14 1/8% Debenture Indenture contains certain limited covenants which restrict the Company's ability to pay dividends on or repurchase or retire common stock prior to November 1, 1994 or to merge or consolidate or to transfer substantially all of its assets. - 9 - For more complete information regarding the 14 1/8% Debentures, see "Description of the 14 1/8% Debentures." Use of Proceeds ..................Net proceeds of approximately $1,267 million from the sale of the 1988 Securities, the 14 5/8% Junior Subordinated Debentures due 2004 (the "Junior Debentures"), which Junior Debentures were redeemed in April 1993, and the 12 3/8% Senior Subordinated Notes due 1997 (the 12 3/8% Notes"), which were redeemed in March 1994, together with borrowings of $122 million under the revolving credit facility (the "Revolving Credit Facility") provided by the Banks under the Bank Credit Agreement and cash provided from operations, were used to repay the $400 million bridge term loan (the "Bank Bridge Loan") provided by the Banks under the Bank Credit Agreement, $880 million in aggregate principal amount (plus accrued and unpaid interest) of the Bridge Notes and other outstanding indebtedness of $124 million and to pay expenses incurred by the Company in connection with the offering of the 1988 Securities, the Junior Debentures and the 12 3/8% Notes. In addition, $160 million principal amount of the remaining Bridge Notes (plus accrued and unpaid interest) were exchanged for portions of the 1988 Securities, the Junior Debentures and the 12 3/8% Notes. The 1993 Notes The 9 1/4% Senior Notes due 2001 (the "9 1/4% Notes") and the 10% Subordinated Notes due 2003 (the "10% Notes") are collectively referred to herein as the "1993 Notes." 9 1/4% Notes Interest Rate .....................9 1/4% per annum. Interest Payment Dates ............March 15 and September 15. Maturity ..........................March 15, 2001. Redemption ........................The 9 1/4% Notes may not be redeemed prior to maturity. Subordination......................The 9 1/4% Notes are senior unsecured obligations of the Company, rank pari passu in right of payment with the other senior indebtedness of the Company, including, without limitation, the Company's obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement, the Company's Senior Secured Note Agreement, the 8 1/4% Notes and capital lease obligations, including the Pass Through Certificate Leases, and other senior secured indebtedness (such other senior secured indebtedness, together with the indebtedness under the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Notes and capital lease obligations and secured indebtedness of subsidiaries being, collectively, the "Secured Indebtedness") and are senior in right of payment to all existing and future subordinated indebtedness of the Company, including, without limitation, the 9% Notes, the 12 5/8% Debentures, the 10% Notes and the 14 1/8% Debentures. The indenture under which the 9 1/4% Notes were issued (the "9 1/4% Note Indenture") does not limit the Company's ability to refinance the 12 5/8% Debentures and the 14 1/8% Debentures with indebtedness that is pari passu with the 9 1/4% Notes. At March 31, 1994, the Company and its subsidiaries had outstanding approximately $1.2 billion of Secured Indebtedness. The Secured Indebtedness under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Notes is secured by liens on inventory, accounts receivable, certain patents and trademarks, and certain stock of subsidiaries of the Company, as well as by mortgages on the Company's three domestic tissue mills, referred to herein as the "Shared Collateral." Indebtedness under capital lease obligations, including the Pass Through Certificate Leases, and other Secured Indebtedness are secured by certain assets of the Company and its subsidiaries. The indebtedness of the Company's foreign subsidiaries is secured by certain assets of those subsidiaries. The Secured Indebtedness has priority with respect to the assets pledged as collateral to secure the Secured Indebtedness. The Pass Through Certificates are indirectly secured by a lien on an owner trustee's interest in a paper manufacturing facility, power plant and certain related equipment located at the Company's Savannah River mill, all of which are leased to the Company under the Pass Through Certificate Leases. The 9 1/4% Notes are effectively subordinated to existing and future liabilities of the Company's subsidiaries, - 10 - including trade payables. At March 31, 1994, the Company's subsidiaries had outstanding liabilities of $124 million, including trade payables. See "Certain Risk Factors --Subordination and Effect of Asset Encumbrances." 10% Notes Interest Rate .....................10% per annum. Interest Payment Dates ............March 15 and September 15. Maturity ..........................March 15, 2003. Redemption ........................The 10% Notes may be redeemed at the option of the Company, in whole or in part, at any time on or after March 15, 1998, initially at 105% of their principal amount, plus accrued interest to the redemption date, declining to 100% of their principal amount, plus accrued interest to the redemption date, on or after March 15, 2002. In addition, at the option of the Company at any time prior to March 15, 1995, up to $75 million aggregate principal amount of the 10% Notes are redeemable from the proceeds of one or more Public Equity Offerings following which there is a Public market, at 110% of the principal amount thereof, plus accrued interest, if any. See "Description of the 9 1/4% Notes and the 10% Notes -- Terms of the 10% Notes -- Optional Redemption." Subordination......................The 10% Notes are subordinated in right of payment to all existing and future Senior Indebtedness, as such term is defined in the indenture under which the 10% Notes were issued (the "10% Note Indenture"), of the Company, including, without limitation, the Company's obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Note Agreement, capital lease obligations, including the Pass Through Certificate Leases, the 8 1/4% Notes, the 9 1/4% Notes and the 9% Notes, rank pari passu with the 12 5/8% Debentures and are senior in right of payment to the 14 1/8% Debentures. The 10% Note Indenture does not limit the Company's ability to refinance the 12 5/8% Debentures and the 14 1/8% Debentures with indebtedness that is senior to or pari passu with the 10% Notes, except that the 10% Note Indenture prohibits the Company from issuing additional subordinated indebtedness senior to the 10% Notes, other than senior subordinated indebtedness pari passu with the 9% Notes. At March 31, 1994, approximately $2.4 billion of Senior Indebtedness of the Company was outstanding with respect to the 10% Notes. The 10% Notes are effectively subordinated to existing and future liabilities of the Company's subsidiaries, including trade payables. At March 31, 1994, the Company's subsidiaries had outstanding liabilities of $124 million, including trade payables. See "Certain Risk Factors -- Subordination and Effect of Asset Encumbrances" and "Description of the 9 1/4% Notes and the 10% Notes." Covenants .........................The 9 1/4% Note Indenture and the 10% Note Indenture contain certain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur indebtedness, pay dividends and make other restricted payments, engage in transactions with shareholders and affiliates, create liens, sell assets, engage in mergers and consolidations and make investments in unrestricted subsidiaries. See "Description of the 9 1/4% Notes and the 10% Notes--Covenants." Use of Proceeds ...................The net proceeds from the offerings of the 1993 Notes (the "1993 Note Offerings"), along with borrowings under the 1993 Term Loan, were used to redeem all of the Company's outstanding Junior Debentures (the "Junior Debenture Redemption"), to prepay a portion of the term indebtedness under the Bank Credit Agreement (the "Term Loan"), to repay a portion of the Company's indebtedness under the Revolving Credit Facility and to pay certain fees and expenses. The 1993 Note Offerings, the 1993 Term Loan, the Junior Debenture Redemption, the prepayment of indebtedness under the Term Loan and the repayment of a portion of the indebtedness under the Revolving Credit Facility are referred to herein collectively as the "1993 Refinancing." See "Use of Proceeds" and "Description of Certain Indebtedness." The 1994 Notes The 8 1/4% Senior Notes due 2002 (the "8 1/4% Notes) and the 9% Senior Subordinated Notes due 2006 (the "9% Notes") are collectively referred to herein as the "1994 Notes." - 11 - The 8 1/4% Notes Interest Rate......................8 1/4% per annum. Interest Payment Dates.............February 1 and August 1 commencing August 1, 1994. Maturity...........................February 1, 2002. Redemption.........................The 8 1/4% Notes may not be redeemed prior to maturity. Subordination......................The 8 1/4% Notes are senior unsecured obligations of the Company, rank pari passu in right of payment with the other senior indebtedness of the Company, including, without limitation, the Company's obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Notes, the 9 1/4% Notes and capital lease obligations, including the Pass Through Certificate Leases and other Secured Indebtedness, and are senior in right of payment to all existing and future subordinated indebtedness of the Company, including, without limitation, the Company's 9% Notes, the 12 5/8% Debentures, the 10% Notes and the 14 1/8% Debentures. The indenture under which the 8 1/4% Notes were issued (the "8 1/4% Note Indenture") does not limit the Company's ability to refinance the 10% Notes, the 12 5/8% Debentures and the 14 1/8% Debentures with indebtedness that is pari passu with the 8 1/4% Notes. At March 31, 1994, the Company and its subsidiaries had outstanding approximately $1.2 billion of Secured Indebtedness. The Secured Indebtedness under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Notes is secured by liens on inventory, accounts receivable, certain patents and trademarks, and certain stock of subsidiaries of the Company, as well as mortgages on the Company's three domestic tissue mills (the "Shared Collateral"). Indebtedness under capital lease obligations, including the Pass Through Certificate Leases, and other Secured Indebtedness are secured by certain assets of the Company and its subsidiaries. The indebtedness of the Company's foreign subsidiaries is secured by certain assets of those subsidiaries. The Secured Indebtedness has priority with respect to the assets pledged as collateral to secure the Secured Indebtedness. The Pass Through Certificates are indirectly secured by a lien on an owner trustee's interest in a paper manufacturing facility, power plant and certain related equipment located at the Company's Savannah River mill, all of which are leased to the Company under the Pass Through Certificate Leases. The 8 1/4% Notes will be effectively subordinated to existing and future liabilities of the Company's subsidiaries, including trade payables. At March 31, 1994, the Company's subsidiaries had outstanding liabilities of $124 million, including trade payables. See "Certain Risk Factors--Subordination and Effect of Asset Encumbrances." 9% Notes Interest Rate......................9% per annum. Interest Payment Dates.............February 1 and August 1 commencing August 1, 1994. Maturity...........................February 1, 2006. Redemption.........................The 9% Notes may be redeemed at the option of the Company, in whole or in part, at any time on or after February 1, 1999, initially at 104.5% of their principal amount, plus accrued interest to the redemption date, declining to 100% of their principal amount, plus accrued interest to the redemption date, on or after February 1, 2001. In addition, at the option of the Company at any time prior to February 1, 1997, up to $227.5 million aggregate principal amount of the 9% Notes are redeemable from the proceeds of one or more Public Equity Offerings following which there is a Public Market, at 109% of the principal amount thereof, plus accrued interest. See "Description of the 8 1/4% Notes and the 9% Notes--Terms of the 9% Notes-- Optional Redemption." Subordination......................The 9% Notes are subordinated in right of payment to all existing and future Senior Indebtedness (as such term is defined in the indenture under which the 9% Notes were issued (the "9% Note Indenture" and, together with the 8 1/4% Note Indenture, the "1994 Note Indentures")), including, without limitation, the Company's obligations under - 12 - the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Notes, capital lease obligations, including the Pass Through Certificate Leases, certain other secured indebtedness of the Company, the 8 1/4% Notes and the 9 1/4% Notes. The 9% Notes constitute senior indebtedness with respect to the 10% Notes, the 12 5/8% Debentures and the 14 1/8% Debentures. The 9% Note Indenture does not limit the Company's ability to refinance the 10% Notes, the 12 5/8% Debentures and the 14 1/8% Debentures with indebtedness that is senior to or pari passu with the 9% Notes. At March 31, 1994, approximately $1.7 billion of Senior Indebtedness of the Company was outstanding with respect to the 9% Notes. The 9% Notes are effectively subordinated to existing and future liabilities of the Company's subsidiaries, including trade payables. As of March 31, 1994, the Company's subsidiaries had outstanding liabilities of approximately $124 million, including trade payables. See "Certain Risk Factors--Subordination and Effect of Asset Encumbrances" and "Description of the 8 1/4% Notes and the 9% Notes." Covenants..........................The 8 1/4% Note Indenture and the 9% Note Indenture contain certain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur indebtedness, pay dividends and make other restricted payments, engage in transactions with shareholders and affiliates, create liens, sell assets, engage in mergers and consolidations and make investments in unrestricted subsidiaries. See "Description of the 8 1/4% Notes and the 9% Notes--Covenants." Use of Proceeds....................The net proceeds from the offerings of the 1994 Notes (the "1994 Note Offerings") were used to redeem all of the outstanding 12 3/8% Notes (the "12 3/8% Note Redemption"), to redeem $238 million aggregate principal amount of the 12 5/8% Debentures (the "12 5/8% Debenture Redemption"), to prepay a portion of the indebtedness under the Term Loan, to repay a portion of the Company's indebtedness under the Revolving Credit Facility and to pay certain fees and expenses. The 1994 Note Offerings, the 12 3/8% Note Redemption, the 12 5/8% Debenture Redemption, the prepayment of indebtedness under the Term Loan and the repayment of a portion of the indebtedness under the Revolving Credit Facility are referred to herein collectively as the "1994 Refinancing." See "Use of Proceeds" and "Description of Certain Indebtedness." The Pass Through Certificates Glossary ..........................Included at the end of this Prospectus as Appendix I is a Glossary of certain of the significant defined terms used herein to describe the Pass Through Certificates. 1990 and 1991 Transactions ........During 1990 and 1991, the Company, as part of the Phase IV expansion of its Savannah River mill, completed the acquisition, construction and installation of the Facility, the Power Plant and the Equipment. For a description of such Assets, see "Description of Certain Indebtedness--1990 and 1991 Transactions." In order to induce the Company to locate the Savannah River mill in Effingham County, Georgia, the Effingham County Industrial Development Authority (the "IDA") has entered into an arrangement with the Company whereby the Company makes certain payments in lieu of ad valorem taxes otherwise due. In order to effect such arrangements, the IDA holds legal title to all of the Company's land and equipment at the mill (the "Project"), including the Facility, the Power Plant and the Equipment, and leases the Project (including such Assets) to the Company under a lease (the "IDA Lease") expiring on January 2, 2027. The IDA Lease stipulates that no annual rent shall be payable thereunder and provides that (i) the Company may remove at any time any property subject thereto, including the Facility, the Power Plant and the Equipment and (ii) the Company may acquire title to all of the property leased under the IDA Lease upon payment of one dollar. On December 23, 1990, the Company consummated a sale and leaseback transaction (the "1990 Transaction") with respect to the 1990 Equipment by selling its interest in the 1990 Equipment to the Owner Trustee and simultaneously leasing the 1990 Equipment from the Owner Trustee. The Company has consummated a sale and leaseback transaction (the "1991 Transaction") with respect to the Facility, the Power Plant and the 1991 Equipment and to refinance the Secured Notes issued in connection with the 1990 Transaction. The Company sold its interest in such Assets to the Owner Trustee and simultaneously leased such Assets from the Owner Trustee. In connection with the closing of the 1990 - 13 - Transaction, the sale of the Company's interest in the 1990 Equipment was effected, and in connection with the closing of the 1991 Transaction, the sale of the Company's interest in the Facility, the Power Plant and the 1991 Equipment was effected, through the assignment to the Owner Trustee of all of the Company's right, title and interest in and to such Assets, including all of the Company's right, title and interest under the IDA Lease with respect to such Assets (including the right to remove such Assets from the IDA Lease and acquire title thereto). The Leases provide that the Owner Trustee will not remove any Asset from the IDA Lease except under certain circumstances. Certain persons have or may acquire liens on the Assets or the Company's interest in the Assets. Such liens include tax liens, materialman's liens, and liens arising out of certain judgments and awards against the Company. See "Description of Certain Indebtedness--1990 and 1991 Transactions." Pass Through Trust ................The Fort Howard Corporation 1991 Pass Through Trust was formed pursuant to a Pass Through Trust Agreement between the Company and the Pass Through Trustee. Pass Through Trust Property .......The property of the Pass Through Trust consists of secured notes (the "Secured Notes") issued on a nonrecourse basis to finance or refinance not more than 85% of the Owner Trustee's cost of acquiring the Company's interest in the Assets, all located in Effingham County, Georgia, that have been leased to the Company. The Secured Notes have been issued in series under an indenture (the "Secured Note Indenture") between Shawmut Bank Connecticut, National Association (formerly The Connecticut National Bank), as Owner Trustee, and Wilmington Trust Company, as Secured Note Indenture Trustee, with a separate series relating to each of the Facility, the Power Plant and each Equipment Group. Pass Through Certificates Offered; Book-Entry Registration .........Each Pass Through Certificate, Series 1991 (the "Pass Through Certificates") represents a fractional undivided interest in the Pass Through Trust and have been issued in fully registered form only. The Pass Through Certificates were registered in the name of Cede & Co. ("Cede"), as the nominee of The Depository Trust Company ("DTC"). No person acquiring an interest in a Pass Through Certificate will be entitled to receive a definitive certificate representing such person's interest in the Pass Through Trust, except in the event that definitive certificates are issued under the limited circumstances described herein. See "Description of the Pass Through Certificates." Persons acquiring an interest in the Pass Through Certificates registered in the name of Cede ("Certificate Owners") may experience some delay in their receipt of payments, notices and reports, since such payments, notices and reports will be forwarded by the Pass Through Trustee to Cede, as nominee for DTC. DTC will distribute such payments, notices and reports to DTC Participants (as defined below). Distributions will be the responsibility of such DTC Participants and will be made in accordance with customary industry practices. Certificate Owners will not be recognized by the Pass Through Trustee as Certificateholders, as such term is used in the Pass Through Trust Agreement, and Certificate Owners will be permitted to exercise the rights of Certificateholders only indirectly through DTC and DTC Participants. Further, the ability of a Certificate Owner to pledge, sell, assign, or otherwise transfer ownership of, or other interests in, Pass Through Certificates may be limited due to the lack of a physical certificate for such Pass Through Certificates. See "Description of the Pass Through Certificates--Book-Entry Registration." Certificate Owners that are not DTC Participants or Indirect Participants but desire to purchase, sell or otherwise transfer ownership of, or other interests in, Pass Through Certificates may do so only through DTC Participants and Indirect Participants. In addition, Certificate Owners will receive all distributions of principal and interest from the Pass Through Trustee through DTC Participants or Indirect Participants (as defined below), as the case may be. See "Description of the Pass Through Certificates--Book- Entry Registration." Denominations .....................The Pass Through Certificates were issued in minimum denominations of $1,000 and any integral multiple of $1,000. The denomination signifies a Certificateholder's pro rata share of the aggregate principal amount of the Secured Notes. See "Description of the Pass Through Certificates." - 14 - Regular Distribution Dates ........January 2 and July 2. Special Distribution Dates ........The second day of any month. Record Dates ......................The fifteenth day preceding a Regular or Special Distribution Date. Final Distribution Date ...........January 2, 2002. Distributions .....................All payments of principal and interest received by the Pass Through Trustee on the Secured Notes will be distributed by the Pass Through Trustee to the Certificateholders on the dates referred to below, except in certain cases when such Secured Notes are in default. Payments of interest on the Secured Notes are scheduled to be received in specified amounts by the Pass Through Trustee on January 2 and July 2 of each year and payments of principal on the Secured Notes are scheduled to be received in specified amounts by the Pass Through Trustee on January 2 or July 2, or both, of each year until the final distribution date (unless earlier redeemed) and to be distributed to the Certificateholders on the Regular Distribution Date. Pending distribution, Scheduled Payments received by the Pass Through Trustee will be deposited in one or more non-interest bearing accounts established and maintained by the Pass Through Trustee for the Pass Through Trust and for the benefit of the Certificateholders. Payments of principal and interest on the Secured Notes resulting from early redemptions thereof, if any, will be distributed on a Special Distribution Date after not less than 20 days' notice from the Pass Through Trustee to the Certificateholders. Pending distribution, payments received by the Pass Through Trustee on account of early redemptions of the Secured Notes will be deposited in one or more non-interest bearing accounts maintained by the Pass Through Trustee for the Pass Through Trust and for the benefit of Certificateholders, and shall be invested by the Pass Through Trustee at the direction and risk of the Company in Permitted Investments. For a discussion of distributions upon an Event of Default, see "Description of the Pass Through Certificates--Events of Default and Certain Rights Upon an Event of Default." Interest ..........................Interest is passed through on the Pass Through Certificates at the rate per annum equal to 11%, which is the interest rate borne by the Secured Notes. Interest is calculated on the basis of a 360-day year consisting of twelve 30-day months. See "Description of the Pass Through Certificates--General." Principal .........................The aggregate principal amount of the Secured Notes held in the Pass Through Trust is the same as the aggregate principal amount of Pass Through Certificates. The Pass Through Trust holds Secured Notes whose principal is payable in scheduled amounts on January 2 or July 2, or both, of each year, in accordance with the principal repayment schedule set forth herein under "Description of the Secured Notes--Principal and Interest Payments." See "Description of the Pass Through Certificates-- Payments and Distributions." The maturity dates of the Secured Notes occur later than the final distribution date of the Pass Through Certificates. The payment to be made on such final distribution date shall be made from the proceeds of a sale of the Secured Notes or a refinancing or refunding arranged by the Company or the Owner Participant with respect to the Secured Notes or, in the event there is no such refinancing, refunding or sale, by application of rent payments required under such circumstances to be made by the Company under the Leases. The Owner Participant will under no circumstances be obligated to utilize its own funds in connection with such transaction, or to provide any credit support or credit enhancement or otherwise put itself at any additional economic risk in facilitating the final distribution and, although as beneficial owner of the Assets the Owner Participant may have an economic incentive to facilitate such refinancing, refunding or sale and the final distribution, Certificateholders should not assume that the Owner Participant will in fact so facilitate such transactions or the final distribution. See "Description of the Secured Notes--Redemptions." Secured Notes: Interest Payments ...............Interest is payable on the Secured Notes on the unpaid principal amount thereof on January 2 and July 2 in each year. - 15 - Secured Notes: Redemptions .....................The Secured Notes may not be optionally redeemed on or prior to the seventh anniversary of the issuance of the Pass Through Certificates, except as provided below. Following such seventh anniversary, the Secured Notes may be redeemed at a price equal to the unpaid principal amount thereof, together with accrued interest thereon to the date of redemption. The Secured Notes may be redeemed on or prior to such seventh anniversary at such price only under the following circumstances: (a) following the occurrence of an Event of Loss to an Asset, in which case (i) if such Asset is the Facility or the Power Plant, all of the Secured Notes relating to such Asset shall be redeemed and (ii) if such Asset shall be an item of Equipment, the appropriate proportional amount of the Secured Notes relating to the applicable Equipment Group shall be redeemed (unless such item of Equipment is replaced); (b) on or after January 2, 1997 with respect to the Facility, Power Plant or any item of 1991 Equipment (or on or after January 2, 1996 with respect to any item of 1990 Equipment) if the Company shall have determined that the Facility, Power Plant or any item of Equipment is obsolete, uneconomic or surplus to its needs, the related Lease is terminated and the Asset is sold or retained by the Owner Trustee, in which case (i) if such Asset is the Facility or the Power Plant, all of the Secured Notes relating to such Asset shall be redeemed and (ii) if such Asset shall be an item of Equipment, the appropriate proportional amount of the Secured Notes relating to the applicable Equipment Group shall be redeemed; or (c) following the occurrence and at any time during the continuance of a Lease Event of Default. See "Description of the Secured Notes--Redemptions." In the event of any partial or complete redemption of the Secured Notes as described above, the proceeds received by the Pass Through Trustee with respect to such redemption shall be deposited in one or more non-interest bearing accounts maintained by the Pass Through Trustee for the Pass Through Trust and for the benefit of the Certificateholders, shall be invested by the Pass Through Trustee at the direction and risk of the Company in Permitted Investments and shall be distributed to the Certificateholders in accordance with the terms of the Pass Through Trust Agreement on a Special Distribution Date together with accrued interest thereon at a rate equal to the rate on the Secured Notes held in the Pass Through Trust. In the event the Secured Notes are not redeemed coincident with the Pass Through Certificates, the Company will pay on the related Special Distribution Date an amount equal to the excess of the interest that would have accrued on the Secured Notes over the earnings from the investment and reinvestment of Permitted Investments. All Certificateholders shall participate pro rata in any such distribution. See "Description of the Pass Through Certificates--Payments and Distributions" and "--Events of Default and Certain Rights upon an Event of Default." Secured Notes: Security ...........The Secured Notes relating to the Facility, the Power Plant or an Equipment Group are secured by, among other things, a security interest in all of the Assets and an assignment to the Secured Note Indenture Trustee of the Owner Trustee's rights under the Leases (including the right to receive rentals payable and other amounts payable thereunder, other than Excepted Payments (as defined in "Description of Secured Notes-- Security")), each Site Lease and each Support Agreement. The Assets consist of (i) the Facility (which includes a twin wire Beloit tissue machine and related structures and equipment), (ii) the Power Plant (which is a coal-fired fluidized bed boiler and related structures and equipment) and (iii) the 1990 Equipment and 1991 Equipment (which include three groups of certain paper manufacturing production equipment, consisting of converting, shipping, pulp processing and machine shop equipment and a package boiler). For the Lessor's Cost of the 1990 Equipment, the 1991 Equipment, the Facility and the Power Plant, and the percentage of such Lessor's Cost financed or refinanced by the issuance of the Secured Notes, see "Description of Certain Indebtedness--1990 and 1991 Transactions." Each series of Secured Notes is secured by a lien on all of the Assets and, consequently, a default on one series of Secured Notes constitutes a default under each series. The Secured Notes purchased by the Pass Through Trustee are secured equally and ratably without preference, priority or distinction on account of the series of such Secured Notes. See "Description of the Pass Through Certificates" and "Description of the Secured Notes--Security." - 16 - Although the Secured Notes are not obligations of, or guaranteed by, the Company, the amounts unconditionally payable by the Company for lease of the Assets (exclusive of Excepted Payments) will be sufficient to pay in full when due all payments of principal and interest required to be made on the Secured Notes. See "Description of the Secured Notes--General." Secured Notes: Intercreditor Arrangements ........Certain of the parties to the 1990 and 1991 Transactions, including the Secured Note Indenture Trustee, have entered into an agreement setting forth the rights and obligations of such parties in various specified circumstances with respect to, among other things, cure rights, purchase options, the exercise of remedies under the Operative Documents, including the Secured Note Indenture, rights to assign the Company's interest under the Operative Documents or obtain new leases of the Assets, and other matters. See "Description of the Recognition Instrument" and "Certain Risk Factors--Risk Factors Relating to the Pass Through Certificates--Potential Inability to Fully Exercise Remedies." Use of Proceeds ...................The proceeds from the sale of the Pass Through Certificates were used to purchase the Secured Notes from the Owner Trustee that were issued in order to finance or refinance not more than 85% of the Owner Trustee's cost of acquiring the Company's interest in the Assets that have been leased to the Company. See "Use of Proceeds." Pass Through Trustee .............Wilmington Trust Company acts as trustee, paying agent and registrar for the Pass Through Certificates. Wilmington Trust Company also acts as Secured Note Indenture Trustee for each series of Secured Notes. See "Description of the Pass Through Certificates--The Pass Through Trustee." Federal Income Tax Consequences ...The Pass Through Trust should be classified as a grantor trust for federal income tax purposes. Thus, each Certificate Owner should be treated as the owner of a pro rata undivided interest in each of the Secured Notes and any other property held in the Pass Through Trust and should report on its federal income tax return its pro rata share of income from such Secured Notes in accordance with such Certificate Owner's method of accounting. See "Certain Federal Income Tax Consequences Applicable to the Pass Through Certificates." ERISA Considerations ..............The Pass Through Certificates are not eligible for purchase by employee benefit plans other than certain governmental or non-electing church plans. The purchase by any person of any Pass Through Certificate constitutes a representation by such person that such person is not an ERISA Plan, and that such person is not acquiring, and has not acquired, such Pass Through Certificate with assets of an ERISA Plan. See "ERISA Considerations Applicable to the Pass Through Certificates." Certain Risk Factors For a discussion of certain risk factors that should be considered in evaluating an investment in the 1988 Securities, the 1993 Notes, the 1994 Notes or the Pass Through Certificates, including the Company's highly leveraged position and deficiency of earnings available to cover fixed charges, competition and pricing, covenant restrictions that may limit the Company's operating flexibility, the subordination of the 1988 Securities, the 1993 Notes and the 1994 Notes and the effect of asset encumbrances, certain original issue discount consequences for holders of the 14 1/8% Debentures, the potential inability of the Company to make payment with respect to the Pass Through Certificates on the final distribution date, the potential inability to realize full value of the collateral upon foreclosure and possible rejection of certain operative documents in bankruptcy with respect to the Pass Through Certificates, certain interests of Morgan Stanley Group Inc. ("Morgan Stanley Group") and its affiliates, the absence of a public market and the lack of a sinking fund for any of the 1988 Securities, the 1993 Notes, the 1994 Notes or the Pass Through Certificates and fraudulent conveyance considerations, see "Certain Risk Factors." Selected Historical Consolidated Financial Data The following table sets forth selected historical consolidated financial data of the Company for the years ended December 31, 1993, 1992, 1991, 1990 and 1989, that were derived from the consolidated financial - 17 - statements of the Company, which were audited by Arthur Andersen & Co., independent public accountants. The report of such accountants with respect to the years ended December 31, 1993, 1992 and 1991 appears elsewhere in this Prospectus. Reference is made to such report which calls attention to changes in methods of accounting for postretirement benefits other than pensions and income taxes. The following information should be read in conjunction with "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and the audited consolidated financial statements and the related notes thereto included elsewhere in this Prospectus. - 18 - SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Year Ended December 31, -------------------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- (In millions) STATEMENT OF INCOME DATA: Net sales ............................... $ 1,187 $1,151 $1,138 $1,151 $1,054 Cost of sales (a)........................ 784 726 713 719 660 ------- ------ ------ ------ ------ Gross income............................. 403 425 425 432 394 Selling, general, and administrative......................... 97 97 98 105 96 Amortization of goodwill................. 43 57 57 57 57 Goodwill write-off (b)................... 1,980 -- -- -- -- ------- ------ ------ ------ ------ Operating income (loss).................. (1,717) 271 270 270 241 Interest expense......................... 342 338 371 423 410 Other (income) expense, net (c).......... (3) 2 (3) (33) (11) ------- ------ ------ ------ ------ Loss before taxes........................ (2,056) (69) (98) (120) (158) Income taxes (credit).................... (16) -- (24) (37) 14 ------- ------ ------ ------ ------ Loss before equity earnings, extraordinary items and adjustment for accounting change...................... (2,040) (69) (74) (83) (172) Equity in net loss of unconsolidated subsidiaries (c)....................... -- -- (32) (23) (67) ------- ------ ------ ------ ------ Net loss before extraordinary items and adjustment for accounting change...................... (2,040) (69) (106) (106) (239) Extraordinary items - loss on debt repurchases (net of income taxes)....................... (12) -- (5) -- -- Adjustment for adoption of SFAS No. 106 (d)....................... -- (11) -- -- -- ------- ------ ------ ------ ------ Net loss................................. $(2,052) $ (80) $ (111) $ (106) $ (239) ======= ====== ====== ====== ====== OTHER DATA: EBDIAT (e)............................... $ 387 $ 410 $ 444 $ 441 $ 411 Depreciation of property, plant, and equipment................... 88 81 116 112 109 Amortization of goodwill and goodwill write-off..................... 2,023 57 57 57 57 Non-cash interest expense................ 101 140 141 145 132 Capital expenditures..................... 166 233 144 97 101 Deficiency of earnings available to cover fixed charges (f)............. (2,065) (81) (103) (123) (263) BALANCE SHEET DATA (at end of period): Total assets............................. $ 1,650 $3,575 $3,470 $3,627 $3,948 Working capital (deficit)................ (92) (127) 2 (80) (119) Long-term debt (including current portion and Voting Common Stock with put right).................. 3,234 3,104 2,947 3,125 3,333 Shareholders' equity (deficit)........... (2,081) (29) 62 13 111
- 19 - (a) Effective January 1, 1992, the Company prospectively changed its estimates of the depreciable lives of certain machinery and equipment. The change had the effect of reducing depreciation expense by approximately $38 million and net loss by $24 million in 1992. (b) During the third quarter of 1993, the Company wrote off the unamortized balance of its goodwill of $1.98 billion. See Note 4 of the Company's audited consolidated financial statements included elsewhere in this Prospectus. (c) In 1989, the Company transferred all the capital stock of Fort Howard Cup Corporation to Sweetheart Holdings Inc. ("Sweetheart") for a 49.9% equity interest in Sweetheart and other assets for a total consideration of $620 million (the "Cup Transfer"). The Company also undertook a plan to divest all its remaining international cup operations. As a result, the Company recorded a $120 million charge in 1989. As of December 31, 1991, the Company had sold all its international cup operations and had discontinued recording equity in net losses of Sweetheart because the carrying value of the Company's investment in Sweetheart was reduced to zero. During the third quarter of 1993, the Company sold its remaining equity interest in Sweetheart for $5.1 million recognizing a gain of the same amount. (d) Reflects the cumulative effect on years prior to 1992 of adopting SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This change in accounting principle, excluding the cumulative effect, decreased operating income for 1992 by $1.2 million. (e) Represents operating income plus depreciation of property, plant and equipment, amortization of goodwill, the goodwill write-off and the effects of employee stock compensation (credits). EBDIAT is presented here, not as a measure of operating results, but rather as a measure of the Company's debt service ability. Certain financial and other restrictive covenants in the Company's Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Note Agreement and other instruments governing the Company's indebtedness are based on the Company's EBDIAT, subject to certain adjustments. (f) For purposes of these computations, earnings consist of consolidated income (loss) before taxes plus fixed charges (excluding capitalized interest) of both consolidated and unconsolidated subsidiaries. Amounts applicable to unconsolidated subsidiaries are excluded from such computations commencing on November 14, 1989, due to the Cup Transfer. Fixed charges consist of interest on indebtedness (including capitalized interest and amortization of deferred loan costs) plus that portion (deemed to be one-fourth) of operating lease rental expense representative of the interest factor. - 20 - THE COMPANY The Company is a major manufacturer, converter and marketer of a diversified line of single-use sanitary tissue paper products for the home and away-from-home markets. The Company's principal products include paper towels, bath tissue, table napkins, wipers and boxed facial tissue. The Company produces and ships its products from manufacturing facilities located in Wisconsin, Oklahoma, Georgia and the United Kingdom. For an analysis of net sales, operating income (loss) and identifiable operating assets by geographic area, refer to Note 16 of the Company's audited consolidated financial statements included elsewhere in this Prospectus. The Company believes that it is the largest producer of tissue products sold into the domestic commercial (away-from-home market). The Company sells a majority of its tissue products through paper and institutional food wholesalers into commercial markets. The Company continues to expand its domestic consumer tissue business for the home market. Tissue products for household use are sold through brokers to accounts that include major food store chains, mass merchandisers and wholesale grocers. The Company's domestic tissue products for home use are sold under the brand names SOFT'N GENTLE, MARDI GRAS, GREEN FOREST, PAGE and SO-DRI. The Company's principal markets are in the United States where the Company believes, based on an analysis of publicly available information, that its operating income margins are higher than those of its publicly reporting competition. A key factor contributing to these high operating income margins has been the Company's proprietary de-inking technology, which enables it to use a broad range of wastepaper grades and process wastepaper efficiently to recover the fibers which are the principal raw material in papermaking. However, the Company's operating income margins have been adversely affected by the adverse tissue industry operating conditions experienced since 1991, and continue to be affected by low pricing resulting in part from relatively low industry operating rates. Announced industry capacity additions through 1995 may offset the effects of the current general economic recovery. Consequently, until industry operating rates improve, the Company's net selling prices and operating income margins may continue to be adversely affected. Since 1984, the Company has built an entirely new facility on the Savannah River in Georgia and has added tissue machines at Muskogee, Oklahoma and Green Bay, Wisconsin and the United Kingdom. This additional capacity has helped the Company to increase its market share in consumer tissue markets and maintain its strong position in domestic commercial tissue markets. The Company has invested heavily in its manufacturing operations, particularly from 1986 to 1992, a period in which its manufacturing facilities operated at or near full capacity. Capital expenditures in the Company's tissue business were approximately $741 million for the five-year period ended December 31, 1993. Given the Company's high leverage and adverse tissue industry operating conditions, the Company intends to continue to maintain and modernize existing tissue mills but does not presently intend to make capital expenditures to add material new capacity subsequent to the start-up of a new paper machine at the Company's Muskogee mill in the first quarter of 1994. The Acquisition In 1988, FH Acquisition was organized on behalf of MSLEF II to effect the acquisition of the Company. Pursuant to the Merger Agreement, FH Acquisition commenced the Offer on July 1, 1988 for all outstanding shares at $53 per share in cash, and subsequently purchased approximately 53.5 million shares in the Offer. Thereafter, FH Acquisition was merged with and into the Company in the Merger. MSLEF II, an affiliate of MS&Co., is a limited partnership formed to finance investments in industrial and other companies. Its principal investors include major U.S. and foreign banks, insurance companies, pension funds and corporations. As a result of the Acquisition, the Company became privately held by MSLEF II and other investors. ---------------------------------------------- - 21 - The Company is a Delaware corporation organized in 1967 to succeed to the business of a Wisconsin corporation founded in 1919 by Austin E. Cofrin. The Company's principal executive offices are located at 1919 South Broadway, Green Bay, Wisconsin 54304, telephone (414) 435-8821. CERTAIN RISK FACTORS Risk Factors Relating to the Company Purchasers of the 1988 Securities, the 1993 Notes, the 1994 Notes and the Pass Through Certificates should carefully consider the specific risk factors set forth below as well as the other information set forth in this Prospectus. Highly Leveraged Position; Deficiency of Earnings Available to Cover Fixed Charges; Potential Inability to Make Payments. The Company has substantial consolidated indebtedness and has a substantial deficit in common shareholders' equity. At March 31, 1994, the Company's consolidated debt (consisting of current and non-current portions of long-term debt and voting common stock with put right) was approximately $3,378 million and the deficit in common shareholders' equity was approximately $2,124 million. For the three-month period ended March 31, 1994 and the year ended December 31, 1993, the Company's earnings before fixed charges (excluding the write-off of its remaining goodwill balance of $1.98 million in 1993) were inadequate to cover its fixed charges by $27 million and $84 million, respectively. The Company's net loss, (excluding the write-off of its remaining goodwill balance of $1.98 billion in 1993) for the three-month period ended March 31, 1994 and the year ended December 31, 1993 was $43 million and $72 million, respectively. If the Company continues to experience losses, and continues to have inadequate earnings before fixed charges to cover fixed charges, the Company may be less able to meet its obligations, including its obligations pursuant to the 1988 Securities, the 1993 Notes, the 1994 Notes and the Leases. In such event, payments with respect to the Pass Through Certificates also will be less likely than would otherwise be the case. The Company's indebtedness subsequent to the Acquisition bears interest at higher average rates than the Company's indebtedness prior to the Acquisition and the obligations of the Company under the Bank Credit Agreement (a maximum of $582 million), the Senior Secured Note Agreement (pursuant to which $300 million principal amount of Senior Secured Notes was outstanding at March 31, 1994) and the 1993 Term Loan Agreement (pursuant to which $100 million principal amount was outstanding at March 31, 1994) bear interest at floating rates, causing the Company to be sensitive to prevailing interest rates. While interest rates are currently at low levels, if interest rates continue to rise the Company may be less able to meet its debt service obligations, including its obligations pursuant to the 1988 Securities, the 1993 Notes, the 1994 Notes and the Leases. In such event, payments with respect to the Pass Through Certificates also may be less likely than would otherwise be the case. The Company is required to enter into interest rate agreements which effectively fix the interest cost to the Company on a portion of the amount outstanding under the Bank Credit Agreement and the Senior Secured Note Agreement. Pursuant to the Bank Credit Agreement, at March 31, 1994, the Company is a party to interest rate cap agreements which limit the interest cost to the Company to 8.25% (including the Company's borrowing margin on Eurodollar rate loans) until June 1, 1996 with respect to $500 million. The Company is also a party to an interest rate cap agreement which limits the interest cost to the Company to rates between 11.25% and 12.00% until September 11, 1994, with respect to $300 million received through the issuance of the Senior Secured Notes. The Company's substantial indebtedness could limit its capacity to respond to market conditions (including its ability to satisfy its capital expenditure requirements) or to meet its contractual and financial obligations, and, therefore, may pose significant risks to holders of securities of the Company, including holders of the 1988 Securities, the 1993 Notes, the 1994 Notes and the Pass Through Certificates. Furthermore, the ability of the Company to satisfy its obligations (including its obligations to pay interest on its indebtedness) and to reduce its debt will be dependent upon the future performance of the Company, which will be subject to prevailing economic conditions and to financial, business and other factors, including factors beyond the control of the Company, affecting the business - 22 - and operations of the Company. See "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company will be obligated to make substantial principal and interest payments on its indebtedness during the next several years. As a result of the significant level of indebtedness and related debt service obligations, the Company may be less able to meet its obligations during a further downturn in its business, including its obligations pursuant to the 1988 Securities, the 1993 Notes, the 1994 Notes and the Leases. In such event, payments with respect to the Pass Through Certificates will also be less likely than would otherwise be the case. Covenant Restrictions May Limit Company's Operating Flexibility. The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement contain numerous financial and operating covenants, including, among other things, (i) a requirement that the Company maintain certain financial ratios, (ii) restrictions on the ability of the Company and its subsidiaries to incur indebtedness, to create or suffer to exist liens, to make certain capital expenditures, to incur liability with respect to leases, to make optional prepayments of any rental obligations under any Lease, to optionally terminate any Lease, to reacquire any Asset and to amend certain Operative Documents, and (iii) limitations on certain other corporate actions. These restrictions could prohibit the Company from taking actions which would otherwise be in the best interests of the Company. In the absence of improved financial results, it is likely that in 1995 the Company will be required to seek a waiver of the cash interest coverage covenant under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement because the Company's 14 1/8% Debentures will accrue interest in cash commencing November 1, 1994 and will require payments of interest in cash commencing May 1, 1995. Although the Company believes that it will be able to obtain the appropriate waivers from its lenders, there can be no assurance that this will be the case. If the Company is not in compliance with its obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement or the Senior Secured Note Agreement, events of default will occur thereunder, and the entire amounts of indebtedness thereunder may be declared due and payable immediately. Upon such declaration, virtually all other indebtedness of the Company, including payments to be made under the 1988 Securities, the 1993 Notes, the 1994 Notes and the Leases, may also become due and payable immediately. In such event, payments with respect to the Pass Through Certificates also will be less likely than would otherwise be the case. Subordination and Effect of Asset Encumbrances. The 1988 Securities, the 9% Notes and the 10% Notes are subordinated to all Senior Debt (as defined in each indenture) of the Company, which at March 31, 1994, includes $526 million of indebtedness under the Bank Credit Agreement, $100 million under the 1993 Term Loan, $300 million principal amount of the Senior Secured Notes, $100 million principal amount of the 8 1/4% Notes, $450 million principal amount of the 9 1/4% Notes and $270 million of other borrowings of the Company. At March 31, 1994, Senior Debt was approximately $1.7 billion with respect to the 9% Notes, $2.4 billion with respect to the 10% Notes and the 12 5/8% Debentures and $2.8 billion with respect to the 14 1/8% Debentures. Therefore, in the event of the bankruptcy, liquidation or reorganization of the Company, the assets of the Company will be available to pay obligations on the 9% Notes, the 10% Notes and the 1988 Securities only after all Senior Indebtedness has been paid in full, and sufficient assets may not exist to pay amounts on the 9% Notes, the 10% Notes and the 1988 Securities. The subordination provisions of the 9% Note Indenture, the 10% Note Indenture and the 12 5/8% Debenture Indenture provide that no cash payment may be made with respect to the principal of or premium, if any, or interest on the 9% Notes, the 10% Notes and the 12 5/8% Debentures, respectively, during the continuance of a payment default under any Senior Indebtedness. In addition, if certain non-payment defaults exist with respect to certain Senior Indebtedness, the holders of such Senior Indebtedness will be able to block payment of the 9% Notes and the 10% Notes for specified periods of time. See "Description of the 12 5/8% Debentures--Limitation on Company and Subsidiary Debt," "Description of the 14 1/8% Debentures--Subordination," "Description of the 9 1/4% Notes and the 10% Notes--Subordination" and "Description of the 8 1/4% Notes and the 9% Notes--Subordination." The Company's obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement are secured by liens on inventory, accounts receivable, certain patents and trademarks, and certain - 23 - stock of subsidiaries of the Company, as well as mortgages on the Company's three domestic tissue mills. The holders of Secured Indebtedness will be entitled to payment of their indebtedness out of the proceeds of their collateral prior to the holders of any general unsecured obligations of the Company, including the 1988 Securities, the 1993 Notes and the 1994 Notes. The 8 1/4% Notes and the 9 1/4% Notes rank pari passu in right of payment with all other general obligations of the Company and are senior in right of payment to the 9% Notes, the 10% Notes and the 1988 Securities. See "Description of Certain Indebtedness--The Bank Credit Agreement, --1993 Term Loan and --Senior Secured Notes," "Description of the 12 5/8% Debentures--Subordination," "Description of the 14 1/8% Debentures--Subordination," "Description of the 9 1/4% Notes and the 10% Notes--Subordination" and "Description of the 8 1/4% Notes and the 9% Notes-- Subordination." Although the Pass Through Certificates are not obligations of, or guaranteed by, the Company, holders of Pass Through Certificates will only receive payments on the Pass Through Certificates to the extent payments are made on or in respect of the Secured Notes. Payments on the Secured Notes will generally only be made if the Company makes payments pursuant to its obligations under the Leases. The Company currently accounts for the Leases as capital leases. Capital leases rank senior in right of payment to the Company's subordinated indebtedness including the indebtedness evidenced by the 9% Notes, the 10% Notes and the 1988 Securities. The Company's obligations under the Leases rank pari passu in right of payment with the 8 1/4% Notes and the 9 1/4% Notes, other sale and leaseback transactions which are treated as capital leases and all other general obligations of the Company. However, the indebtedness under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement are secured by essentially all the assets of the Company, including the Company's leasehold interests in the Assets. The holders of such indebtedness will be entitled to payment of their indebtedness out of the proceeds of such collateral prior to the holders of any general unsecured obligations of the Company, including the Leases. An aggregate of $582 million may be outstanding at any time pursuant to the Bank Credit Agreement. Other than the covenants described in Appendix II, there are no contractual limits enforceable by the Certificateholders on the Company's ability to incur indebtedness pari passu to the Leases and/or secured by any or all of the Company's assets. The indebtedness of the Company's foreign subsidiaries is secured by certain assets of those subsidiaries. The 1988 Securities, the 1993 Notes and the 1994 Notes are effectively subordinated to existing and future liabilities of the Company's subsidiaries, including trade payables. At March 31, 1994, the Company's subsidiaries had outstanding liabilities of $124 million, which included trade payables. Competition and Pricing. The manufacture and sale of tissue products are highly competitive, and sales of tissue paper products are generally subject to changes in the economy and competitive conduct that can significantly impact the selling prices and, as a result, the Company's profitability. Low industry operating rates and aggressive competitive pricing among tissue producers resulting from the 1991-1992 recession, additions to capacity and other factors have been adversely affecting tissue industry operating conditions and the Company's operating results since 1991. As a result of these current conditions, and the effects of announced industry capacity additions through 1995, tissue industry operating rates may remain at relatively low levels for the near term, adversely affecting industry pricing. See "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and "Business--Competition." Interest of Morgan Stanley Group and Affiliates; Potential Conflicts of Interest. Morgan Stanley Group and certain affiliated entities, including MSLEF II, provided significant amounts of financing for the Acquisition. At March 31, 1994, Morgan Stanley Group and certain affiliated entities beneficially owned approximately 57% (on a fully diluted basis) of the Company's Common Stock. In addition, certain persons who are affiliated with MS&Co. comprise a majority of the directors of the Company. As a result of these relationships, circumstances could arise in which the interest of Morgan Stanley Group or MSLEF II, as equity holders, could be in conflict with the interests of holders of 1988 Securities, the 1993 Notes, the 1994 Notes and the Pass Through Certificates. For example, if the Company encounters financial difficulties, or is unable to pay certain of its debts as they mature, the interests of the Company's equity investors might conflict with - 24 - those of the holders of the 1988 Securities, the 1993 Notes, the 1994 Notes and the Pass Through Certificates. In addition, the equity investors may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to the holders of the 1988 Securities, the 1993 Notes, the 1994 Notes and the Pass Through Certificates. It is an event of default under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement, if Morgan Stanley Group, MSLEF II or their affiliates cease to own or control at least a majority of the Company's outstanding Common Stock. The Company has entered into an agreement with MS&Co. for financial advisory services in consideration for which the Company pays MS&Co. an annual fee of $1 million. MS&Co. is also entitled to reimbursement for all reasonable expenses incurred in the performance of the foregoing services. The Company paid MS&Co. approximately $1.0 million, $1.1 million and $1.1 million for these and other miscellaneous services in 1993, 1992 and 1991, respectively. In connection with the sale of the 8 1/4% Notes and the 9% Notes in 1994, MS&Co. received approximately $20.4 million of underwriting fees. In connection with the sale of the 9 1/4% Notes and the 10% Notes in 1993, MS&Co. received approximately $19.5 million of underwriting fees. In 1992, MS&Co. received approximately $0.7 million in connection with the underwriting of the reissuance of the Company's Development Authority of Effingham County Pollution Control Revenue Refunding Bonds, Series 1988. In connection with the 1990 and 1991 Transactions, MS&Co. received approximately $2.9 million of advisory and underwriting fees. In connection with the Company's sale of Senior Secured Notes in 1991, MS&Co. received approximately $6.8 million of advisory fees. See "Certain Transactions--Other Transactions." Based on transactions of similar size and nature, the Company believes the foregoing fees received by MS&Co. are no less favorable to the Company than would be available from unaffiliated third parties. Trading Market for the 1988 Securities, the 1993 Notes, the 1994 Notes and the Pass Through Certificates. The Company does not intend to apply for listing of any of the 1988 Securities, the 1993 Notes, the 1994 Notes or the Pass Through Certificates on a national securities exchange. Although MS&Co. currently makes a market in the 1988 Securities, the 1993 Notes, the 1994 Notes and the Pass Through Certificates, it is not obligated to do so, and any such market-making may be discontinued at any time without notice, in its sole discretion. Accordingly, no assurance can be given as to the liquidity of, or trading markets for, the 1988 Securities, the 1993 Notes, the 1994 Notes or the Pass Through Certificates. See "Market-Making Activities of MS&Co." The liquidity of, and trading market for, the 1988 Securities, the 1993 Notes, the 1994 Notes and the Pass Through Certificates may also be adversely affected by declines in the market for high yield securities generally. Such a decline may adversely affect such liquidity and trading market independent of the financial performance of, and prospects for, the Company. Fraudulent Conveyance Statutes. Various laws, including laws relating to fraudulent conveyance, enacted for the protection of creditors may apply to the Company's incurrence and assumption of indebtedness in connection with the Acquisition, including the assumption of indebtedness of FH Acquisition pursuant to the Merger and the issuance of the 1988 Securities, the 1993 Notes and the 1994 Notes to refinance a portion of such indebtedness, and to the Company's entering into the 1990 and 1991 Transactions. If a court were to find, in a lawsuit by an unpaid creditor or representative of creditors of the Company, that the Company did not receive fair consideration or reasonably equivalent value for incurring or assuming such indebtedness or in exchange for the Assets and, at the time of such incurrence or assumption or at the time of entering into the 1990 and 1991 Transactions the Company (i) was insolvent, (ii) was rendered insolvent by reason of such incurrence, assumption or transaction, (iii) was engaged in a business or transaction for which the assets remaining in the Company constituted unreasonably small capital, or (iv) intended to incur or assume or believed it would incur or assume debts beyond its ability to pay such debts as they mature, such court, subject to applicable statutes of limitation, could determine to invalidate, in whole or in part, such indebtedness or the 1990 and 1991 Transactions between the Company and the Owner Trustee as fraudulent conveyances or subordinate such indebtedness (including any indebtedness related to the 1990 - 25 - and 1991 Transactions, if such transactions were recharacterized as loans) to existing or future creditors of the Company and/or find that the lien granted is unenforceable. In addition, if a court were to find that, at the time the Company granted security interests to or for the benefit of the Banks, the Purchasers and the Lenders, the Company did not receive fair consideration or reasonably equivalent value for the grant of such security interests and came within any of the foregoing clauses (i) through (iv), a creditor or representative of creditors of the Company could seek to avoid the grant of such security interests. This could result in an event of default with respect to the Bank Credit Agreement, the Senior Secured Note Agreement and the 1993 Term Loan Agreement which, under the terms thereof (subject to applicable law), would allow the Banks, the Purchasers and the Lenders, respectively, to accelerate such debt. The measure of insolvency for purposes of the foregoing varies depending on the law of the jurisdiction which is being applied. Generally, however, the Company would be considered insolvent at a particular time if the sum of its debts was then greater than all of its property at a fair valuation or if the present fair saleable value of its assets was then less than the amount that would be required to pay its probable liabilities on its existing debts as they became absolute and matured. With respect to the 1990 and 1991 Transactions, under Georgia law, a conveyance is considered fraudulent and therefore void against creditors if (i) it was made with the intention to delay or defraud creditors and such intention was known to the party acquiring the property, (ii) the transaction was not for valuable consideration and was made by an insolvent debtor or (iii) the debtor was insolvent at the time and transferred or assigned its property in trust and reserved a benefit of the property to itself. Additionally, it is possible that a court could find that the indebtedness incurred or assumed by the Company in connection with the Acquisition was fraudulent and that the 1990 and 1991 Transactions and the issuance of the 1993 Notes and the 1994 Notes were also fraudulent because the proceeds thereof were used to refinance a portion of such indebtedness. It is also possible that the ongoing lease payment obligations of the Company could be considered a fraudulent conveyance to the extent the Company is insolvent and does not receive fair consideration therefor. This situation could arise if the rent payable under the Leases is not reasonably equivalent to the rental value of the Assets. The Company believes that the rentals are a fair consideration for the use of the Assets. To the extent that a federal or state proceeding invalidates either the 1990 Transaction or the 1991 Transaction, a creditor or representative of creditors of the Company could seek to avoid such transactions. This would result in a Secured Note Indenture Event of Default and would allow the Secured Note Indenture Trustee to exercise its remedies under the Secured Note Indenture. On the basis of its historical financial information, its recent operating history as discussed in "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and other factors, the Company believes that, after giving effect to indebtedness incurred or assumed in connection with the Acquisition and subsequent financings , the Company was not rendered insolvent, and has sufficient capital for the businesses in which it is engaged and is able to pay its debts as they mature. Based on the appraisals received with respect to each Asset, the Company believes it received fair consideration for the sale of such asset. Furthermore, although there may be arguments to the contrary, the holders of the 1988 Securities, the 1993 Notes and the 1994 Notes would be able to take the position that, with respect to the 1988 Securities, the 1993 Notes and the 1994 Notes, the Company received reasonably equivalent value or fair consideration for incurring such indebtedness. There can be no assurance, however, as to whether a court would concur with such beliefs and positions. Risk Factors Relating to the 14 1/8% Debentures In addition to the risk factors described in "Risk Factors Relating to the Company" above, purchasers of the 14 1/8% Debentures, should consider the specific risk factor set forth below. Original Issue Discount. Holders of the 14 1/8% Debentures will be required to recognize interest income in respect of those securities for federal income tax purposes in advance of the receipt of cash payments attributable to that interest income. Interest income in the form of original - 26 - issue discount will be includable in the income of such holders as such discount accrues from the issue date of such debentures, although prior to May 1, 1995 no interest will be payable on the 14 1/8% Debentures. See "Certain Federal Income Tax Considerations Applicable to the 1988 Securities-- The 14 1/8% Debentures." Risk Factors Relating to the Pass Through Certificates In addition to the risk factors described in "Risk Factors Relating to the Company" above, purchasers of the Pass Through Certificates should consider the specific risk factors set forth below. Potential Inability to Make Payment on Final Distribution Date. The maturity dates of the Secured Notes occur later than the final distribution date of the Pass Through Certificates. The scheduled principal amount to be passed through on the final distribution date equals approximately 74.20% of the original principal amount of the Pass Through Certificates. The scheduled payment to be made on such final distribution date shall be made from the proceeds of a sale of the Secured Notes or a refinancing or refunding arranged by the Company or the Owner Participant with respect to the Secured Notes or, in the event there is no such refinancing, refunding or sale, by application of rent payments required under such circumstances to be made by the Company under the Leases, which will be sufficient in amount to make the final distribution. The Owner Participant will under no circumstances be obligated to utilize its own funds in connection with such transaction, or to provide any credit support or credit enhancement or otherwise put itself at any additional economic risk in facilitating the final distribution and, although as beneficial owner of the Assets the Owner Participant may have an economic incentive to facilitate such refinancing, refunding or sale and the final distribution, Certificateholders should not assume that the Owner Participant will in fact so facilitate such transactions or the final distribution. If the Company is required to make such rental payment, because of the large amount of other indebtedness of the Company, as well as other factors, it is possible that the Company will not have sufficient funds available to make such rental payment. In such event, the Secured Note Indenture Trustee will have the right to exercise all remedies available to it under the Secured Note Indenture. The exercise of such remedies, however, may be constrained pursuant to the provisions of the Secured Note Indenture and the intercreditor agreement among the parties to the 1990 and 1991 Transactions and the Collateral Trustee (the "Recognition Instruments"). Any such constraints on the exercise of remedies with respect to the Assets or the Company may impair the ability of the Secured Note Indenture Trustee, at such time as it may be permitted to exercise remedies, to realize sufficient funds to satisfy the then unpaid obligations with respect to the Secured Notes (and thus on the Pass Through Certificates). This may be the case if, at the time remedies are permitted to be exercised, the value of the Assets has decreased due to then prevailing market conditions. See "Description of the Secured Notes--Secured Note Indenture Events of Default, Notice and Waiver" and "Description of the Recognition Instrument." Potential Inability to Fully Exercise Remedies. The Collateral Trustee, currently acting on behalf of the Banks under the Bank Credit Agreement (pursuant to which $526 million principal amount is outstanding as of March 31, 1994), the Purchasers of the Company's Senior Secured Notes ($300 million principal amount of which is outstanding as of March 31, 1994), and the Lenders under the 1993 Term Loan Agreement (pursuant to which $100 million principal amount was outstanding as of March 31, 1994) is entitled to, among other things, receive a lien on the Company's interest in the Leases, the Site Leases and the Support Agreements, and notice of defaults and an opportunity to cure certain such defaults. Upon foreclosure of such lien, the Collateral Trustee may assign the Company's interest under the Leases and the Support Agreements. The Collateral Trustee may also postpone termination of the Leases, the Site Leases and the Support Agreements and defer the Lessor's exercise of other remedies following a default and in the event of a rejection by the Company in bankruptcy of the Leases obtain new leases of the Assets provided they undertake to cure all outstanding payment defaults and certain nonpayment defaults. The Collateral Trustee does not have a lien on the Assets. The Recognition Instrument sets forth the rights and obligations of such parties in various specified circumstances with respect to such matters. - 27 - Each of the Owner Trustee under the Secured Note Indenture and the Collateral Trustee under the Recognition Instrument has the right under certain circumstances to cure a Secured Note Indenture Event of Default that results from the occurrence of a Lease Event of Default under any Lease. In general, both the Owner Trustee and the Collateral Trustee have the right to cure all defaults by the Company subject to a limit on the number of defaults in the payment of Basic Rent which can be cured. The Secured Note Indenture provides that the Secured Note Indenture Trustee will not exercise foreclosure remedies under the Secured Note Indenture for a Secured Note Indenture Event of Default which results from a Lease Event of Default unless it has exercised or is exercising material remedies seeking to dispossess the Company under each Lease, unless exercising such remedies under such Lease shall be prohibited by law, governmental authority or court order. In addition, the Recognition Instrument affords the Collateral Trustee the right to defer the Owner Trustee's and the Secured Note Indenture Trustee's exercise of remedies following a default by the Company (provided that within specified time periods during such deferral, among other things, all payment defaults are cured and certain nonpayment defaults are in the process of being cured). The foregoing provisions relating to rights to cure and limitations on the exercise of remedies by the Owner Trustee and the Secured Note Indenture Trustee may delay the Owner Trustee and the Secured Note Indenture Trustee from exercising the full range of remedies otherwise available to it. Any such delay in the exercise of remedies with respect to the Assets or the Company may impair the ability of the Owner Trustee and the Secured Note Indenture Trustee, at such time as they may be permitted to exercise remedies, to realize sufficient funds to satisfy the then unpaid obligations with respect to the Secured Notes (and thus on the Pass Through Certificates). This may be the case if, at the time remedies are permitted to be exercised, the value of the Assets has decreased due to the then prevailing market conditions or because the Company has less assets available to satisfy all of its creditors. In addition, the Recognition Instrument provides that, following a default by the Company, the Collateral Trustee has the right, in connection with the exercise of remedies by the Collateral Trustee in respect of its lien on the Company's interest under the Operative Documents, to have the Company's rights under the Operative Documents assigned to a new entity. The Recognition Instrument also provides that if the Company shall be the subject of any insolvency, bankruptcy or other similar proceeding and in connection therewith shall elect to reject any Operative Document, the Collateral Trustee shall have the right to require the parties to the 1990 and 1991 Transactions to enter into similar agreements with a new entity. In such event, the ultimate source of payments under the Leases and the other Operative Documents (and thus on the Pass Through Certificates) would be an entity other than the Company. There can be no assurances that any such entity could satisfy the Company's obligations under the Operative Documents. See "Description of Secured Notes--Remedies" and "Description of the Recognition Instrument." Potential Inability to Realize Full Value of Collateral Upon Foreclosure. The Secured Notes are secured by the Assets. The Company has obtained appraisals indicating that the aggregate fair market value of the Assets is greater than the aggregate principal amount of the Secured Notes. However, because the Assets in general, and the Facility and the Power Plant in particular, are extremely large and essentially immobile, it may be difficult or impossible in the context of a distressed sale to sell the Assets, either individually or in the aggregate, upon foreclosure or other exercise of remedies so as to realize sufficient value to satisfy the then unpaid obligations with respect to the Secured Notes. Thus, the amount passed through to the Certificateholders might be less than the amount due on the Pass Through Certificates. See "Description of Certain Indebtedness--1990 and 1991 Transactions" for a description of the Assets. In addition, the regulations of the Federal Energy Regulatory Commission ("FERC") impose significant requirements with respect to ownership and operation of the Power Plant, the package boiler, and the other component parts of the Savannah River Mill Cogeneration Facility ("SRMCF") at the Company's Savannah River mill which must be met for the SRMCF to enjoy various regulatory benefits and exemptions associated with its status as a qualifying cogeneration facility under the Public Utility Regulatory Policies Act of 1978 ("PURPA"). PURPA states that a qualifying facility must be owned by a "person - 28 - not primarily engaged in the generation or sale of electric power (other than electric power solely from cogeneration facilities or small power production facilities)." FERC regulations implement this restriction by limiting electric utility or electric utility holding company ownership in a qualifying facility to no more than a 50% equity interest. In addition, qualifying topping-cycle cogeneration facilities such as the SRMCF must meet certain operational requirements relating to the sequential production of electricity and thermal energy, the production of a minimum amount of useful thermal energy output, and the relationship between the facility's oil and/or natural gas fuel input and its electric power and useful thermal energy outputs. FERC's PURPA rules require electric utilities to offer to purchase power from qualifying facilities at the electric utility's avoided cost of producing such power. In addition, FERC regulations require electric utilities to provide supplementary, back-up, maintenance, and interruptible power to qualifying facilities upon request. Qualifying cogeneration facilities are also exempted from the jurisdiction of the Public Utility Holding Company Act of 1935 ("PUHCA"), from most regulation under the Federal Power Act ("FPA"), and from state commission rate, financial, and organizational regulation. In the event of a foreclosure, the requirements outlined above will have to be complied with should the Power Plant and the package boiler continue to be operated as component parts of the SRMCF, in order to preserve the SRMCF's status as a qualifying cogeneration facility. If the SRMCF should lose its qualifying facility status, the owner(s) and/or operator(s) of the SRMCF in a foreclosure context may be subject to regulation as a holding company under PUHCA and/or a public utility under the FPA. The ownership and operation of the Power Plant and the package boiler are not currently subject to regulation by the Georgia Public Service Commission, by reason of the SRMCF's qualifying facility status and the fact that no retail electric sales transactions are occurring with respect to the SRMCF. However, upon foreclosure, depending upon whether the SRMCF is a qualifying facility and/or whether retail electric sales are taking place, the Georgia Public Service Commission may seek to regulate the ownership and operation of the Power Plant and package boiler as part of the SRMCF. Possible Rejection of Certain Operative Documents in Bankruptcy. If the Company were to become a debtor in a bankruptcy or reorganization case under the United States Bankruptcy Code, the Company or its bankruptcy trustee could reject any Lease. Similarly, in such event, the Company or its bankruptcy trustee could reject other Operative Documents, such as the Site Leases (pursuant to which the Company subleases and grants easements with respect to the Sites to the Owner Trustee) and the Support Agreements (pursuant to which the Company agrees to provide certain services to the Owner Trustee in the event of the termination of the Facility Lease or the Power Plant Lease). Such rejection could limit the ability to realize full value upon foreclosure of the Assets. In any such event, there could be no assurance that the amount of any claim for damages that would be allowed in such bankruptcy case would be in an amount sufficient to provide for the repayment of the Secured Notes. In addition, under Section 502(b)(6) of the United States Bankruptcy Code, as amended, a claim by a lessor for damages resulting from the rejection of a lease of real property in connection with bankruptcy proceedings affecting the lessee may be limited to an amount equal to the rent reserved under the lease, without acceleration, for the greater of 1 year or 15 percent (but not more than 3 years) of the remaining term of the lease, plus rent already due but unpaid. Although each of the Leases purports not to be a lease of real property, there can be no assurance that a bankruptcy court could not find it subject to these limitations. The characterization of the property comprising the Assets as personal or real property involves the interpretation of Georgia law. Because there is a lack of clear precedent, the Company is unable to predict how a bankruptcy court would rule on this question. Although the Secured Note Indenture Trustee would retain its security interest in the Assets, the rejection of a Site Lease or Support Agreement by the Company or its bankruptcy trustee could make it impossible to operate the Assets or certain of the Assets at the Sites and, in addition, could require the removal of some or all of the Assets to another location. Further, there can be no assurance that it would be economical to remove certain of the Assets to another location. Such rejection could limit the ability of the Secured Note Indenture Trustee to realize full value upon foreclosure of the Assets, and thus for the Certificateholders to receive the full amounts due to them pursuant to the Pass Through Certificates. See "Description of the Secured Notes--Possible Rejection of Certain Operative Documents in Bankruptcy." - 29 - USE OF PROCEEDS The net proceeds from the sale of the 1988 Securities, the Junior Debentures and the 12 3/8% Notes were approximately $1,267 million and, together with borrowings of approximately $122 million under the Revolving Credit Facility and cash provided from operations, were used to repay the $400 million Bank Bridge Loan, $880 million in aggregate principal amount (plus accrued and unpaid interest, which totaled approximately $26.2 million) of the Bridge Notes held by Morgan Stanley International, MSLEF II and certain institutional investors and other indebtedness of $124 million, and to pay expenses incurred by the Company in connection with the offering of the 1988 Securities, the Junior Debentures and the 12 3/8% Notes. In addition, $160 million principal amount of the remaining Bridge Notes (plus accrued and unpaid interest which totaled approximately $5.2 million) were exchanged for a portion of the 1988 Securities, the Junior Debentures and the 12 3/8% Notes. At the time of the sale of the 1988 Securities, the Junior Debentures and the 12 3/8% Notes, the Series A Bridge Notes, the Series B Bridge Notes and the Series C Bridge Notes bore interest at the rate of 11.9375%, 12.9375% and 13.9375%, respectively. The Pass Through Certificates were issued in order to facilitate the financing or refinancing of the debt portion of the 1991 Transaction and the 1990 Transaction. The proceeds from the sale of the Pass Through Certificates have been used by the Pass Through Trustee on behalf of the Pass Through Trust to purchase the Secured Notes at 100% of the principal amount thereof. The proceeds received from the sale of the Secured Notes have been used by the Owner Trustee to finance or refinance not more than 85% of the Owner Trustee's cost of acquiring the Company's interest in the Assets, as supported by an independent appraisal. The aggregate amount of proceeds used in financing the debt portion of the 1991 Transaction was $76,484,448; the aggregate amount of proceeds used in refinancing the debt portion of the 1990 Transaction was $7,134,861. The Series A-1 Secured Notes redeemed had a maturity date of January 2, 2005 and the Series A-2 Secured Notes redeemed had a maturity date of July 2, 2005. Such Series A Secured Notes had an interest rate equal to a floating rate based upon certain specified reference rates and an aggregate outstanding principal amount of $7,134,861. Simultaneously with the acquisition of the Assets by the Owner Trustee, the Owner Trustee leased such Assets to the Company. For a description of the interest of the Company in the Assets and the acquisition thereof by the Owner Trustee, see "Description of Certain Indebtedness--1990 and 1991 Transactions." The Secured Notes were issued under the Trust Indenture, Assignment of Leases, Security Agreement and Deed to Secure Debt (the "Secured Note Indenture"), between The Connecticut National Bank, as Owner Trustee, and Wilmington Trust Company, as Secured Note Indenture Trustee. The Owner Participant provided to the Owner Trustee, from sources other than the Secured Notes, at least 15% of the cost of acquiring the Company's interest in the Assets and is the beneficial owner of the Assets. The Owner Participant, however, will not be personally liable for any amount payable under the Secured Note Indenture or the Secured Notes issued thereunder. The net proceeds to the Company from the sale of the Assets have been applied by the Company to prepay its indebtedness under the Bank Credit Agreement and to pay its indebtedness under the 7% Notes due 1992 (the "7% Notes") which were redeemed in February 1992, such application being pro rata based upon the outstanding principal amount thereof. The net proceeds received by the Company from the sale of the 1993 Notes were $729 million, after deducting $21 million in underwriter's fees and other expenses incurred in connection with the 1993 Note Offerings. The net proceeds received by the Company from the sale of the 1993 Notes together with borrowings of $100 million under the 1993 Term Loan were used to redeem all of the outstanding Junior Debentures, at 100% of the principal amount thereof, together with accrued and unpaid interest thereon to the date of redemption, to prepay $250 million under the Term Loan, to repay a portion of the Company's indebtedness under the Revolving Credit Facility and to pay certain fees and expenses in connection with the 1993 Refinancing. The Term Loan prepayment and the Revolving Credit Facility repayment occurred on March 23, 1993 and March 26, 1993, respectively. The Junior Debenture Redemption occurred on April 22, 1993. - 30 - The net proceeds received by the Company from the sale of the 1994 Notes were $730 million, after deducting $20 million in underwriter's fees and other expenses incurred in connection with the 1994 Note Offerings. The net proceeds received by the Company from the sale of the 1994 Notes were used to redeem all of the outstanding 12 3/8% Notes at 105% of the principal amount thereof, to redeem $238 million aggregate principal amount of the outstanding 12 5/8% Debentures at 105% of the principal amount thereof, to prepay $100 million of the $107 million Term Loan payment due in December 1994, to repay a portion of the Company's indebtedness under the Revolving Credit Facility and to pay certain fees and expenses in connection with the 1994 Refinancing. The Term Loan prepayment and the Revolving Credit Facility repayment occurred on February 10, 1994. The 12 3/8% Note Redemption and the 12 5/8% Debenture Redemption occurred on March 11, 1994. DESCRIPTION OF CERTAIN INDEBTEDNESS The following summary of the instruments governing certain indebtedness of the Company does not purport to be complete and is qualified in its entirety by reference to such instruments, copies of which have been filed, or incorporated by reference, as exhibits to the Registration Statement of which this Prospectus is a part. Capitalized terms used but not defined herein have the meanings ascribed to them in such instruments. The Bank Credit Agreement General. The Bank Credit Agreement consists of (i) the Term Loan with mandatory annual repayments in varying amounts with a final maturity of December 31, 1996; and (ii) the Revolving Credit Facility with a final maturity of December 31, 1996. The following summary of certain provisions of the Bank Credit Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Bank Credit Agreement, including the definitions of capitalized terms used herein and not otherwise defined herein. A copy of the Bank Credit Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. As of March 31, 1994, the amount outstanding under the Term Loan was $232 million and the Company had reduced the aggregate Revolving Credit Facility commitment to $350 million. At March 31, 1994, the available capacity under the Revolving Credit Facility was $56 million. As part of the Revolving Credit Facility, the Bank Credit Agreement provides for the issuance of letters of credit for the account of the Company in the normal course of business of up to $50 million. In addition, a letter of credit of up to $50 million (the "Support Letter of Credit") is available to support the Company's obligations with respect to the refinancing of the tax-exempt financing of a portion of the Company's tissue mill in Georgia. Bankers Trust also provides a $75 million swing line facility within the Revolving Credit Facility, $50 million of which is available to reimburse draws under the Support Letter of Credit, and $25 million of which is available for general corporate purposes. As of March 31, 1994, no reimbursement obligations were outstanding under the Support Letter of Credit and no letters of credit were issued under the Bank Credit Agreement. Interest. At March 31, 1994, the Term Loan and the Revolving Credit Facility bear interest at the Company's option at Bankers Trust's prime rate, plus 1.50% or, subject to certain limitations, at a reserve adjusted Eurodollar rate, plus 2.25%; the foregoing rates are subject to adjustment downward by up to 0.75% based on certain financial criteria. For each of the Term Loan and the Revolving Credit Facility, interest is payable quarterly based on Bankers Trust's prime rate and on the last day of the selected interest period (and at the end of three months in the case of interest periods longer than three months) for loans based on the Eurodollar rate. In each case, interest is payable in arrears and computed on the basis of a 360-day year. - 31 - Repayment. As of March 31, 1994, the outstanding balance of the Term Loan of $232 million was payable in installments as follows: Principal Installment ----------- (In millions) On December 31, 1994 $ 7 1995 107 1996 118 Mandatory repayments of the Term Loan and the Revolving Credit Facility are to be made on or before the last day of March of each year in an amount equal to 50% of Excess Cash Flow for the prior year. "Excess Cash Flow" is defined as consolidated net income (subject to certain adjustments) plus depreciation and other noncash charges (including deferred taxes and non-cash accreted interest) minus the sum of regularly scheduled repayments of certain indebtedness, scheduled capital expenditure amounts, changes in working capital, permitted payments in respect of equity and $10 million. Excess Cash Flow is to be applied first to the prepayment of the Term Loan applied ratably against the remaining regularly scheduled repayments through 1996 and second, if the Term Loan has been repaid, to the prepayment of the Revolving Credit Facility (with a reduction of the commitment under the Revolving Credit Facility in an amount corresponding to the amount of prepayment). Excess cash flow prepayments under the 1993 Term Loan Agreement are to be applied to the 1993 Term Loan. The Term Loan and the Revolving Credit Facility also provide for mandatory prepayments from proceeds of any Asset Sales and the commitment under the Revolving Credit Facility is to be reduced by the amount of proceeds of Asset Sales applied to prepay the Revolving Credit Facility. "Asset Sale" is defined in the Bank Credit Agreement as the sale, transfer or other disposition by the Company or any subsidiary of the Company of (i) any stock of any subsidiary which is not Margin Stock; (ii) substantially all the assets of any geographic or other division or line of business of the Company or any subsidiary of the Company; or (iii) any Real Property or any other assets having a value in excess of $2 million (excluding assets produced or purchased for sale to others in the ordinary course of business) provided that the aggregate amount of all such sales by the Company and its subsidiaries occurring in any fiscal year equals at least $10 million. Excluded from Asset Sales are sales of cash and cash equivalents in the ordinary course of business and up to $30 million of sales of assets located in the U.K. if the proceeds of such sales are redeployed outside the United States. The proceeds of any Asset Sale are to be applied ratably against the remaining regularly scheduled payments on the Term Loan except in the case of proceeds received with respect to sale and leaseback transactions and certain asset sales and then to prepay the Revolving Credit Facility. In connection with an Asset Sale where the asset being sold is collateral securing the obligations under the Bank Credit Agreement and certain other obligations equally and ratably, the net proceeds of sale must be applied in accordance with the terms of the Collateral Trust Agreement. Under the Bank Credit Agreement, the Company may enter into sale and leaseback transactions with respect to its property only if (i) the applicable leases pertain to property acquired, constructed or placed in service after August 8, 1988 or as otherwise permitted in connection with the sale and leaseback transaction of the Phase IV facility at the Company's Savannah River mill and (ii) the Company does not incur aggregate lease rental expense in excess of annual amounts specified in the Bank Credit Agreement. The proceeds of sale and leaseback transactions, net of costs and taxes, are required to be applied to reduce the loans under the Bank Credit Agreement. The Term Loan and the Revolving Credit Facility may be prepaid in whole or in part at any time (except that Eurodollar loans are prepayable only on the last day of the selected interest period) without premium or penalty, and the Revolving Credit Facility commitment may be reduced by the Company in whole or in part at any time without premium or penalty. - 32 - Guarantees and Security. The indebtedness under the Bank Credit Agreement is secured by a first lien (subject to permitted liens) on the Shared Collateral. Pursuant to the Collateral Trust Agreement, the 1993 Term Loan and the Senior Secured Notes are, with certain exceptions as described below, secured equally and ratably with the indebtedness under the Bank Credit Agreement. See "Description of Certain Indebtedness--Senior Secured Notes-- 1993 Term Loan." Covenants; Events of Default. The Bank Credit Agreement contains several financial covenants that require the Company to maintain certain specified ratios at specified times. These financial covenants include: (i) A requirement that, at all times, the Company maintain a ratio of Consolidated Current Assets, excluding any receivable with respect to current taxes, to Consolidated Current Liabilities, excluding any liability for current taxes, of not less than .75 to 1.0. "Consolidated Current Assets" are defined as the total assets of the Company and its subsidiaries on a consolidated basis which may properly be classified as current assets in conformity with generally accepted accounting principles ("GAAP"), excluding cash and certain instruments defined as "cash equivalents" to the extent such items exceed $10 million. "Consolidated Current Liabilities" are defined as the total liabilities of the Company and its subsidiaries on a consolidated basis which may properly be classified as current liabilities in conformity with GAAP, excluding (a) current maturities of indebtedness, with an initial term longer than one year or renewable at the borrower's option for more than one year, (b) certain other indebtedness permitted under the Bank Credit Agreement which is classified as a current liability in conformity with GAAP, (c) taxes payable solely as a result of Asset Sales and (d) fees, costs and expenses payable by the Company in connection with the transactions contemplated by the Bank Credit Agreement (the "Transaction Costs"). (ii) A requirement that the Company maintain a ratio of (a) Consolidated EBDIT (as defined) to (b) Consolidated Cash Interest Expense of no less than 1.50 to 1.00 for each period of four fiscal quarters (not less than 1.40 to 1.00 in the case of the four fiscal quarters ending March 31, 1994). "Consolidated EBDIT" is defined as the sum of (a) consolidated net income (subject to certain adjustments), (b) provision for taxes based on income, (c) depreciation expenses, (d) total interest expense, (e) amortization expense and (f) other non-cash items increasing consolidated net income, all as determined on a consolidated basis for the Company and its subsidiaries in conformity with GAAP. "Consolidated Cash Interest Expense" is defined as total interest expense and net costs under interest rate agreements of the Company and its subsidiaries on a consolidated basis calculated in conformity with GAAP, but excluding interest expense not payable in cash, certain fees payable to the Banks and the Agent under the Bank Credit Agreement on or prior to August 9, 1988 and the Transaction Costs in connection with the leveraged acquisition of the Company in 1988, all as determined in conformity with GAAP. (iii) A requirement that the Company maintain a ratio of (a) Consolidated Senior Debt to (b) the sum of (x) Consolidated Net Worth plus (y) Subordinated Indebtedness, of not more than 0.85 to 1.00 for the period from January 1, 1994 to and including December 31, 1994, not more than 0.80 to 1.00 for the period from January 1, 1995 to and including December 31, 1995, and 0.75 to 1.00 thereafter. "Consolidated Senior Debt" is defined as the sum of (1) all indebtedness of the Company and its subsidiaries, other than Subordinated Indebtedness, on a consolidated basis calculated in conformity with GAAP and (2) the unutilized maximum commitment under any revolving credit or similar facility of the Company and its subsidiaries, including without limitation the Revolving Credit Facility. "Consolidated Net Worth" is defined as the sum of all common stock and preferred stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) of the Company and its subsidiaries on a consolidated basis calculated in conformity with GAAP (but excluding the effects of certain foreign currency exchange adjustments) minus, to the extent not already excluded in accordance with GAAP, the amount, if any, of nonrecourse loans made to provide the purchase price paid by management for any Common Stock. "Subordinated Indebtedness" is defined as indebtedness of the Company subordinated in right of payment to the indebtedness outstanding under the Bank Credit Agreement, the 1993 Term Loan and the Senior Secured Notes pursuant to documentation containing interest rates, payment terms, maturities, amortization schedules, covenants, defaults, remedies, subordination provisions and other material terms in form and - 33 - substance satisfactory to the Banks holding 66 2/3% or more of the aggregate principal amount outstanding under the Bank Credit Agreement. The Bank Credit Agreement provides that for the purposes of the covenants set forth therein, no calculations will give effect to adjustments in component amounts resulting from application of the purchase method of accounting under Accounting Principles Board Opinions Nos. 16 and 17 to the leveraged acquisition of the Company in 1988 or the amortization of expenses in connection with such transaction or its financing. The Bank Credit Agreement contains additional covenants which, among other things, require the Company (i) to provide equal security to the Banks in the event certain liens are granted on any assets of the Company or its subsidiaries, (ii) to maintain the properties of the Company and its subsidiaries, together with insurance thereon, (iii) to enter into interest rate agreements with respect to a certain portion of the Bank Credit Agreement, (iv) to provide certain reports to the Banks and permit inspections by the Banks, (v) to cause subsidiaries accounting for more than 10% of consolidated assets or consolidated revenues of the Company to provide a guarantee of the Company's obligations under the Bank Credit Agreement and to secure the same with a pledge of inventory and receivables, (vi) to pledge the stock of, with certain exceptions, any subsidiary accounting for more than 10% of consolidated revenues or consolidated assets of the Company (each a "Material Subsidiary"); provided that neither the Company nor any subsidiary shall be required to pledge more than 65% of the voting power of any controlled foreign corporation (as defined in the Internal Revenue Code) or any subsidiary that acts solely as a holding company for the stock of one or more controlled foreign corporations, or certain identified subsidiaries that act principally as holding companies for the stock of one or more controlled foreign corporations, and in no event shall be required to pledge the stock of any subsidiary to the extent such pledge would constitute an investment of earnings in United States property under the Internal Revenue Code and (vii) to provide equal and ratable consideration, if any, to Purchasers of the Senior Secured Notes and Banks for amendments, modifications, supplements, waivers or forbearance of the Senior Secured Note Agreement and the Bank Credit Agreement, respectively. The Bank Credit Agreement also contains covenants which, among other things, (i) limit the ability of the Company and its subsidiaries to incur additional indebtedness and contingent obligations or grant liens or additional negative pledges in respect of their assets, (ii) limit the investments and capital expenditures which may be made by the Company and its subsidiaries, (iii) limit the ability of the Company and its subsidiaries to make interest payments on and prepayments of subordinated debt and limit the ability of the Company to pay dividends or make other distributions on account of any shares of any class of its capital stock (other than dividends payable solely in other shares of such class of capital stock), (iv) limit the ability of the Company and its subsidiaries to incur obligations under leases or to enter into sale and leaseback transactions, (v) prevent the Company and its subsidiaries from selling or discounting receivables, other than certain sales of notes received in connection with Asset Sales, (vi) limit the ability of the Company and its subsidiaries to enter into certain transactions or arrangements with certain affiliates of the Company or any holder of 5% or more of any class of its equity securities or affiliates of such holders, (vii) restrict the ability of the Company and its subsidiaries to make fundamental changes and to enter into new lines of business and (viii) limit the ability of the Company or its subsidiaries to dispose of their respective assets. Under the Bank Credit Agreement, various specified events constitute Events of Default which permit the Banks to cease making loans and to declare all amounts outstanding under the Term Loan and the Revolving Credit Facility to be due and payable. These events include, among other things, failure to pay any installment of principal under the Bank Credit Agreement when due, failure to pay for 5 days after the due date any interest under the Bank Credit Agreement, default in or relating to other indebtedness of the Company or any of its subsidiaries in a principal amount of $15 million or more individually or $30 million or more in the aggregate, breach of certain covenants contained in the Bank Credit Agreement, any representation or warranty in the Bank Credit Agreement proving to have been false in a material respect when made, default in the performance of any other terms contained in the Bank Credit Agreement or certain other related documents without being - 34 - remedied or waived within 30 days after receipt of notice of default, bankruptcy of the Company or any of its Material Subsidiaries, a judgment or attachment involving an amount in excess of $10 million individually or $20 million in the aggregate which is not discharged within a specified period, certain ERISA defaults, the invalidity of any guarantee given by a subsidiary of the Company in connection with the Bank Credit Agreement, failure to maintain the perfection of any security interest as required under the Bank Credit Agreement and a failure by MSLEF II, MS&Co. and their affiliates to own or control at least a majority of the Common Stock entitled to vote for the election of members of the Board of Directors of the Company. Fees and Expenses. A commitment fee of 0.5% per annum on the unused portion of each Bank's commitment under the Revolving Credit Facility is payable to the Banks. In addition, an annual Agent's commission of $500,000 is payable to Bankers Trust. The Company agreed to pay certain of the Banks' expenses incurred in connection with the Bank Credit Agreement and to provide the Banks and their respective directors, officers, employees and affiliates with customary indemnification. In addition, in connection with obtaining amendments and consents required in connection with the issuance of the 9 1/4% Notes and the 10% Notes, the Company paid a consent fee of 0.3% of $932 million to the Banks in 1992. Senior Secured Notes General. In September 1991, the Company privately placed $300 million of Senior Secured Notes due 1997 through 2000 (the "Senior Secured Notes") issued pursuant to a Note Purchase Agreement dated as of September 11, 1991 (the "Senior Secured Note Agreement") among the Company and certain purchasers (such initial Purchasers, together with their successors and assigns, the "Purchasers"). The Senior Secured Notes are limited to $300 million aggregate principal amount and have been issued in five series, Series A, B, C1, C2 and D, maturing in years 1997 through 2000. Series A, B, C1, C2 and D of the Senior Secured Notes bear interest at three-month LIBOR plus 275 basis points, 300 basis points, 325 basis points, 300 basis points, and 350 basis points, respectively. The Company is required to prepay the Senior Secured Notes with the net cash proceeds of Asset Sales to the extent indicated above under "--The Bank Credit Agreement." In addition, subject to the consent of the Banks, the Company may prepay the Senior Secured Notes at any time in whole or in part at par plus accrued and unpaid interest to the prepayment date. The Senior Secured Notes constitute Secured Indebtedness of the Company and, except as indicated above in respect of the Bank Credit Agreement, are secured by a first lien (subject to permitted liens) on the Shared Collateral on an equal and ratable basis with the 1993 Term Loan, all indebtedness from time to time outstanding under the Bank Credit Agreement, and certain indebtedness under interest rate agreements and currency agreements. The Senior Secured Notes contain certain restrictive and financial covenants and events of default that are substantially similar to those contained in the Bank Credit Agreement. In connection with the 1993 Refinancing, the Company paid approximately $0.9 million to the holders of the Senior Secured Notes as a consent fee and for certain of their expenses in connection with amendments to the Senior Secured Note Agreement and has provided such holders and their respective directors, officers, employees and affiliates with customary indemnification relating to liability arising from the Senior Secured Note Agreement. 1990 And 1991 Transactions During 1990 and 1991, the Company, as part of the Phase IV expansion of its Savannah River mill, completed the acquisition, construction and installation of a paper machine and related structures and equipment (the "Facility"), a fluidized bed boiler and related structures and equipment (the "Power Plant") and three groups (each an "Equipment Group") of certain paper manufacturing production equipment and a package boiler (the "Equipment", and - 35 - together with the Facility and the Power Plant, the "Assets"). The Facility consists of a twin wire Beloit tissue machine and related structures and equipment, the Power Plant consists of a coal-fired fluidized bed boiler and related structures and equipment and the Equipment consists of various items of converting, shipping, pulp processing and machine shop equipment and a package boiler. In order to induce the Company to locate its mill in Effingham County, Georgia, the Effingham County Industrial Development Authority (the "IDA") has entered into an arrangement with the Company whereby the Company makes certain payments in lieu of ad valorem taxes otherwise due. In order to effect such arrangement, the IDA holds legal title to all of the Company's land and equipment at the mill (the "Project"), including the Facility, the Power Plant and the Equipment, and leases the Project (including such Assets) to the Company (or its assignee) under a lease (the "IDA Lease") expiring on January 2, 2027. The IDA Lease stipulates that no annual rent shall be payable thereunder and provides that (i) the Company (or its assignee) may remove at any time any property subject thereto, including the Facility, the Power Plant and the Equipment and (ii) the Company may acquire title to all of the property leased under the IDA Lease upon payment of one dollar. The IDA Lease will terminate on January 2, 2027, unless the Company terminates the IDA Lease at any time during the term thereof. Upon termination of the IDA Lease, the IDA agrees to convey legal title to the Project to the Company (or its assignee) for a purchase price of one dollar. To effectuate such conveyance, the Company and the IDA have entered into an escrow agreement (the "IDA Escrow Agreement") with an escrow agent (the "Escrow Agent"), pursuant to which the IDA has delivered to the Escrow Agent a limited warranty deed (the "Deed") conveying legal title to the Project to the Company and the Company has delivered to the Escrow Agent the one dollar purchase price for the Project. Under the IDA Escrow Agreement, the Company and the IDA have directed the Escrow Agent that upon termination of the IDA Lease the Escrow Agent shall deliver the one dollar purchase price to the IDA and shall deliver the Deed conveying the Project to the Company. On December 23, 1990, the Company consummated the 1990 Transaction by selling its interest in the 1990 Equipment to The Connecticut National Bank, as Owner Trustee (the "Owner Trustee") under the Owner Trust Agreement, and simultaneously leasing the 1990 Equipment from the Owner Trustee as Lessor (the "Lessor") under an equipment lease agreement (the "1990 Equipment Lease"). The Company has consummated a sale and leaseback transaction (the "1991 Transaction") with respect to the Facility, the Power Plant and the 1991 Equipment and to refinance the Secured Notes issued in connection with the 1990 Transaction. The Company sold its interest in such Assets to the Owner Trustee and simultaneously leased such Assets from the Owner Trustee under separate lease agreements for the Facility, the Power Plant and the 1991 Equipment. The Pass Through Trustee used the proceeds of the Pass Through Certificates offered hereby to acquire the Secured Notes issued by the Owner Trustee. See "Use of Proceeds." The Lessor's Cost and the percentage financed or refinanced by the issuance of the Secured Notes (the "Debt Percentage") are set forth below: Series of Secured Notes Asset Relating to Such Asset Lessor's Cost Debt Percentage ----- ----------------------- ------------- --------------- 1990 Equipment A-1 and A-2 $ 9,456,147 75.45% 1991 Equipment B 14,993,208 85.00% Facility C 46,179,000 84.79% Power Plant D 28,923,000 85.00% ----------- Total $99,551,355 =========== In connection with the closing of the 1990 Transaction, the sale of the Company's interest in the 1990 Equipment was effected, and in connection with the closing of the 1991 Transaction, the sale of the Company's interest in the Facility, the Power Plant and the 1991 Equipment was effected, through the - 36 - assignment of all of the Company's right, title and interest in and to such Assets, including all of the Company's right, title and interest under the IDA Lease with respect to such Assets (including the right to remove such Assets from the IDA Lease and acquire title) to the Owner Trustee. See "Description of the Secured Notes--Security." Whenever the context requires, references herein to ownership, title and related matters with respect to any Asset subject to the IDA Lease at the relevant time shall refer to the rights in and to such Asset of the Owner Trustee and the Company under the IDA Lease. Notwithstanding that the Company has assigned all of its right, title and interest in and to each Asset to the Owner Trustee, if upon termination of the IDA Lease the IDA shall purport to convey legal title to any Asset to the Company, the Company will cause legal title to such Asset to be conveyed to the Owner Trustee. In addition, in connection with the closings of the 1990 and 1991 Transactions with respect to any Asset, the Company delivered to the Owner Trustee (who in turn delivered to the Secured Note Indenture Trustee as security), an executed deed and bill of sale to such Asset which the Owner Trustee will be authorized to record in the event the IDA purports to convey legal title to such Asset to the Company. The Company has granted to a Collateral Trustee currently acting on behalf of the Banks party to the Bank Credit Agreement and the Purchasers of the Senior Secured Notes, a first lien pursuant to the Georgia Mill Mortgage on, among other things, the Company's interest in the IDA Lease and its reversionary estate in the property subject thereto. Although the Collateral Trustee will not have a lien on the Assets, the Collateral Trustee is entitled to, among other things, receive a lien on the Company's interest as lessee under the Leases. The respective rights of the Collateral Trustee, the Owner Trustee, the Secured Note Indenture Trustee and the Pass Through Trustee are addressed in the Recognition Instrument. See "Description of the Recognition Instrument" and "Certain Risk Factors--Risk Factors Relating to the Pass Through Certificates--Potential Inability to Fully Exercise Remedies." 1993 Term Loan On April 21, 1993, the Company borrowed $100 million under the 1993 Term Loan Agreement, from a syndicate of banks (the "Lenders") for whom Bankers Trust acts as agent. The 1993 Term Loan bears interest, at the Company's option, at Bankers Trust's prime rate, plus 1.75% or, subject to certain limitations, at a reserve adjusted Eurodollar rate, plus 3.00%, and matures on May 1, 1997. The 1993 Term Loan constitutes Secured Indebtedness of the Company and, except as indicated above in respect of the Bank Credit Agreement, is secured by a first lien (subject to permitted liens) on the Shared Collateral on an equal and ratable basis with the Senior Secured Notes, all indebtedness from time to time outstanding under the Bank Credit Agreement, and certain indebtedness under interest rate agreements and currency agreements. The 1993 Term Loan is subject to certain mandatory and optional prepayments. The Company is required to prepay the 1993 Term Loan with Excess Cash Flow and with the net cash proceeds of Asset Sales to the extent indicated above under "The Bank Credit Agreement." In addition, the Company may prepay the 1993 Term Loan in whole or in part at any time (except that Eurodollar loans are prepayable only on the last day of the selected interest period) without premium or penalty. The 1993 Term Loan contains certain restrictive and financial covenants and events of default that are substantially similar to those contained in the Bank Credit Agreement and the Senior Secured Note Agreement. The Company paid Bankers Trust certain funding and commitment fees and certain of the Lenders' expenses in connection with the 1993 Term Loan Agreement totaling approximately $5 million. The Company also provided the Lenders and their respective directors, officers, employees and affiliates with customary indemnification relating to liability arising from the 1993 Term Loan Agreement. Other Debt Of The Company In addition to borrowings under the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Notes, the 1993 Notes, the 1994 Notes, the 1988 Securities, and capital lease obligations of which the Company's obligations under the Leases are a part, at March 31, 1994, the Company and its subsidiaries had outstanding approximately $92 million of other long-term - 37 - debt (including the current portion thereof). All the Company's other long-term debt constitutes "Senior Debt" in respect of which the 1988 Securities, the 9% Notes and the 10% Notes are expressly subordinated. See "Description of the 12 5/8% Debentures--Subordination," "Description of the 14 1/8% Debentures--Subordination," "Description of the 9 1/4% Notes and the 10% Notes--Subordination" and "Description of the 8 1/4% Notes and the 9% Notes-- Subordination." SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table sets forth selected historical consolidated financial data of the Company for the years ended December 31, 1993, 1992, 1991, 1990 and 1989, that were derived from the consolidated financial statements of the Company, which were audited by Arthur Andersen & Co., independent public accountants. The report of such accountants with respect to the years ended December 31, 1993, 1992 and 1991 appears elsewhere in this Prospectus. Reference is made to such report which calls attention to changes in methods of accounting for postretirement benefits other than pensions and income taxes. The following financial information should be read in conjunction with "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and the audited consolidated financial statements and the related notes thereto included elsewhere in this Prospectus. - 38 - Selected Historical Consolidated Financial Data
Year Ended December 31, -------------------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- (In millions) STATEMENT OF INCOME DATA: Net sales ............................... $ 1,187 $1,151 $1,138 $1,151 $1,054 Cost of sales (a)........................ 784 726 713 719 660 ------- ------ ------ ------ ------ Gross income............................. 403 425 425 432 394 Selling, general, and administrative......................... 97 97 98 105 96 Amortization of goodwill................. 43 57 57 57 57 Goodwill write-off (b)................... 1,980 -- -- -- -- ------- ------ ------ ------ ------ Operating income (loss).................. (1,717) 271 270 270 241 Interest expense......................... 342 338 371 423 410 Other (income) expense, net (c).......... (3) 2 (3) (33) (11) ------- ------ ------ ------ ------ Loss before taxes........................ (2,056) (69) (98) (120) (158) Income taxes (credit).................... (16) -- (24) (37) 14 ------- ------ ------ ------ ------ Loss before equity earnings, extraordinary items and adjustment for accounting change...................... (2,040) (69) (74) (83) (172) Equity in net loss of unconsolidated subsidiaries (c)....................... -- -- (32) (23) (67) ------- ------ ------ ------ ------ Net loss before extraordinary items and adjustment for accounting change...................... (2,040) (69) (106) (106) (239) Extraordinary items - loss on debt repurchases (net of income taxes)....................... (12) -- (5) -- -- Adjustment for adoption of SFAS No. 106 (d)....................... -- (11) -- -- -- ------- ------ ------ ------ ------ Net loss................................. $(2,052) $ (80) $ (111) $ (106) $ (239) ======= ====== ====== ====== ====== OTHER DATA: EBDIAT (e)............................... $ 387 $ 410 $ 444 $ 441 $ 411 Depreciation of property, plant, and equipment................... 88 81 116 112 109 Amortization of goodwill and goodwill write-off..................... 2,023 57 57 57 57 Non-cash interest expense................ 101 140 141 145 132 Capital expenditures..................... 166 233 144 97 101 Deficiency of earnings available to cover fixed charges (f)............. (2,065) (81) (103) (123) (263) BALANCE SHEET DATA (at end of period): Total assets............................. $ 1,650 $3,575 $3,470 $3,627 $3,948 Working capital (deficit)................ (92) (127) 2 (80) (119) Long-term debt (including current portion and Voting Common Stock with put right).................. 3,234 3,104 2,947 3,125 3,333 Shareholders' equity (deficit)........... (2,081) (29) 62 13 111
- 39 - (a) Effective January 1, 1992, the Company prospectively changed its estimates of the depreciable lives of certain machinery and equipment. The change had the effect of reducing depreciation expense by approximately $38 million and net loss by $24 million in 1992. (b) During the third quarter of 1993, the Company wrote off the unamortized balance of its goodwill of $1.98 billion. See Note 4 of the Company's audited consolidated financial statements included elsewhere in this Prospectus. (c) In 1989, the Company transferred all the capital stock of Fort Howard Cup Corporation to Sweetheart Holdings Inc. ("Sweetheart") for a 49.9% equity interest in Sweetheart and other assets for a total consideration of $620 million (the "Cup Transfer"). The Company also undertook a plan to divest all its remaining international cup operations. As a result, the Company recorded a $120 million charge in 1989. As of December 31, 1991, the Company had sold all its international cup operations and had discontinued recording equity in net losses of Sweetheart because the carrying value of the Company's investment in Sweetheart was reduced to zero. During the third quarter of 1993, the Company sold its remaining equity interest in Sweetheart for $5.1 million recognizing a gain of the same amount. (d) Reflects the cumulative effect on years prior to 1992 of adopting SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This change in accounting principle, excluding the cumulative effect, decreased operating income for 1992 by $1.2 million. (e) Represents operating income plus depreciation of property, plant and equipment, amortization of goodwill, the goodwill write-off and the effects of employee stock compensation (credits). EBDIAT is presented here, not as a measure of operating results, but rather as a measure of the Company's debt service ability. Certain financial and other restrictive covenants in the Company's Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Note Agreement and other instruments governing the Company's indebtedness are based on the Company's EBDIAT, subject to certain adjustments. (f) For purposes of these computations, earnings consist of consolidated income (loss) before taxes plus fixed charges (excluding capitalized interest) of both consolidated and unconsolidated subsidiaries. Amounts applicable to unconsolidated subsidiaries are excluded from such computations commencing on November 14, 1989, due to the Cup Transfer. Fixed charges consist of interest on indebtedness (including capitalized interest and amortization of deferred loan costs) plus that portion (deemed to be one-fourth) of operating lease rental expense representative of the interest factor. - 40 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Acquisition was accounted for using the purchase method of accounting. The aggregate purchase price of approximately $3.7 billion, including related acquisition costs, was allocated first to the assets and liabilities of the Company based upon their respective fair values, with the remainder of approximately $2.3 billion allocated to goodwill. In the third quarter of 1993, the Company wrote-off its remaining goodwill balance of $1.98 billion. Results Of Operations Year Ended December 31, ----------------------------- 1993 1992 1991 ---- ---- ---- (In millions, except percentages) Net sales: Domestic tissue................ $ 1,004 $ 978 $ 994 International operations....... 143 143 110 Eliminations and other......... 40 30 34 ------- ------ ------ Consolidated................... $ 1,187 $1,151 $1,138 ======= ====== ====== Operating income (loss): Domestic tissue(a)(b).......... $(1,715) $ 252 $ 251 International operations(a).... (1) 17 16 Eliminations and other(a)...... (1) 2 3 ------- ------ ------ Consolidated(b)................ (1,717) 271 270 Amortization of purchase accounting..................... 57 75 85 Goodwill write-off(a)............ 1,980 -- -- Employee stock compensation...... (8) 1 1 ------- ------ ------ Adjusted operating income...... 312 347 356 Other depreciation............... 75 63 88 ------- ------ ------ EBDIAT......................... $ 387 $ 410 $ 444 ======= ====== ====== Consolidated net loss............ $(2,052) $ (80) $ (111) ======= ====== ====== EBDIAT as a percent of net sales...................... 32.6% 35.6% 39.0% (a) See Note 4 to the audited consolidated financial statements included elsewhere in this Prospectus. (b) Effective January 1, 1992, the Company prospectively changed its estimates of the depreciable lives of certain machinery and equipment. The change had the effect of reducing depreciation expense and increasing operating income by approximately $38 million in 1992. A progressive decline in domestic commercial and consumer market selling prices occurred during 1991. Low industry operating rates and aggressive competitive pricing among tissue producers resulting from the 1991-1992 recession, additions to capacity in the industry and other factors adversely affected tissue industry operating conditions in 1991. These conditions persisted through 1992 and 1993 with further price declines being only modestly recovered by net selling price increases announced in each of the first three quarters of 1993. Business conditions remain extremely competitive. During the first quarter of 1994, a period of seasonally lower volume, the Company maintained its domestic price increases achieved through year-end 1993, adversely affecting domestic sales volume for the first quarter of 1994. Severe weather conditions also adversely affected domestic sales volume during the first quarter of 1994. See "Recent Developments." In addition, announced industry capacity additions through 1995 may offset the - 41 - effects of the current general economic recovery. Consequently, until industry operating rates improve, the Company's net selling prices and operating income margins may continue to be adversely affected. Fiscal Year 1993 Compared to Fiscal Year 1992 Net Sales. Consolidated net sales for 1993 increased 3.1% compared to 1992. Domestic tissue net sales for 1993 increased 2.7% compared to 1992 due to volume increases that were largely offset by lower net selling prices. In mid-1992, average net selling prices rose principally as a result of an attempted price increase in the commercial market but then fell to pre-price increase levels in the fourth quarter of 1992 and fell again in the first quarter of 1993, periods of seasonally lower volume shipments. Average net selling prices held flat from the first quarter of 1993 to the second quarter of 1993 and increased in each of the third and fourth quarters of 1993 from the previous quarter levels. However, in spite of introductions of net selling price increases in each of the first three quarters of 1993, average net selling prices for 1993 were below average net selling prices for 1992. Net sales of the Company's international operations were flat in 1993 compared to 1992 primarily due to significantly lower net selling prices and lower exchange rates offset by volume increases resulting from the acquisition of Stuart Edgar and the start-up of a new paper machine. United Kingdom retailers engaged in increasingly competitive pricing activity in 1993 across a broad range of consumer products including disposable paper products. Such competitive pricing activity is expected to continue into 1994. Gross Income. Consolidated gross margins decreased to 34.0% in 1993 compared to 36.9% in 1992. Domestic tissue gross margins decreased to 37.4% in 1993 from 40.0% in 1992 primarily due to lower net selling prices and an increase in wastepaper costs. Gross margins of international operations also declined in 1993 principally due to the lower net selling prices. Unit manufacturing costs of international operations declined in 1993 compared to 1992 as a result of the start-up of a new paper machine and related facilities in the first quarter of 1993 at the Company's United Kingdom tissue operations. Selling, General and Administrative Expenses. Due to the effects of adverse tissue industry operating conditions on its long-term earnings forecast, the Company decreased the estimated fair market valuation of its Common Stock. Accordingly, in 1993 the Company reversed all previously accrued employee stock compensation expense of $8 million, resulting in a decrease in selling, general and administrative expenses, as a percent of net sales, to 8.2% in 1993 from 8.5% in 1992. Excluding the effects of employee stock compensation from both years, selling, general and administrative expenses, as a percent of net sales, would have increased slightly in 1993 to 8.8% from 8.4% for 1992. Goodwill Write-Off. As previously reported by the Company (and as further described below), low industry operating rates and aggressive competitive pricing among tissue producers resulting from the 1991-1992 recession, additions to industry capacity and other factors adversely affected tissue industry operating conditions and the Company's operating results beginning in 1991 and through the third quarter of 1993. Declining Selling Prices. Although sales volumes increased, industry pricing was very competitive due to the factors discussed below. The Company's average domestic net selling prices declined by approximately 5% in each of 1991 and 1992. Commercial market price increases attempted in mid- 1992 were not achieved as commercial market pricing fell to pre-price increase levels in the fourth quarter of 1992 and fell again in the first quarter of 1993, periods of seasonally lower volume shipments. Average net selling prices held flat from the first quarter of 1993 to the second quarter of 1993 and increased from the second to the third quarter of 1993. However, in spite of introductions of net selling price increases in each of the first three quarters of 1993, average net selling prices for the first nine months of 1993 were below average net selling prices for the same period in 1992. Pricing in the Company's international markets declined significantly over this time period as well. - 42 - Industry Operating Rates. Based on publicly available information, including data collected by the American Forest and Paper Association ("AFPA"), industry capacity additions in 1990 through 1992 significantly exceeded historic capacity addition rates. Such additions and weak demand caused industry operating rates to fall to very low levels in 1991 and 1992 in comparison to historic rates. Tissue industry operating rates increased only slightly during the first nine months of 1993 from the low levels experienced in 1991 and 1992. Announced tissue industry capacity additions through 1995, as reported by the AFPA through the first three quarters of 1993, approximated average industry shipment growth rates after 1990. For the first nine months of 1993, the industry shipment growth rate fell sharply from the already low rates in 1991 and 1992. Consequently, without an improved economic recovery and improved industry demand, tissue industry operating rates were expected to remain at relatively low levels for the near term, adversely affecting industry pricing. Economic Conditions. The 1991-1992 recession and weak recovery continued to adversely affect tissue market growth. Job formation is an important stimulus for growth in the commercial tissue market where approximately two- thirds of the Company's domestic tissue sales are targeted. From 1990 through the first nine months of 1993, job formation was weak and was projected to improve only slightly in 1994. Accordingly, demand growth was weak in 1991, 1992 and in the first nine months of 1993, and did not appear to offer any substantial relief to the outlook for industry operating rates and pricing for the near term. Gross Margins. The Company's gross margins steadily declined in 1991, 1992 and 1993 as a result of the factors noted above. In the first nine months of 1993, the Company's gross margins were also affected by increased wastepaper costs. As a result of these conditions, the Company expected that the significant pricing deterioration experienced in 1991 through mid-1993 would be followed by average annual price increases that approximated the Company's annual historical price increase trend for the years 1984 through 1993 of approximately 1% per year. Accordingly, during the second quarter of 1993, the Company commenced an evaluation of the carrying value of its goodwill for possible impairment. The Company revised its projections and concluded its evaluation in the third quarter of 1993 determining that its forecasted cumulative net income before goodwill amortization was inadequate to recover the future amortization of the Company's goodwill balance over the remaining amortization period of the goodwill. For a more detailed discussion of the methodology and assumptions employed to assess the recoverability of the Company's goodwill, refer to Note 4 of the Company's audited consolidated financial statements included elsewhere in this Prospectus. Operating Income (Loss). As a result of the goodwill write-off, the Company's operating loss was $1,717 million for 1993 compared to operating income of $271 million for 1992. The depreciation of asset write-ups to fair market value in purchase accounting is charged against the Company's cost of sales and selling, general and administrative expenses. Excluding this purchase accounting depreciation, amortization of goodwill, the goodwill write-off and the reversal of employee stock compensation, adjusted operating income (as reported in the preceding table) declined to $312 million for 1993 from $347 million for 1992. Adjusted operating income declined in 1993 compared to 1992 principally due to the effects of lower domestic and foreign net selling prices, higher wastepaper costs in the U.S. and lower exchange rates. EBDIAT. Earnings before depreciation, interest, amortization and taxes ("EBDIAT") declined to $387 million for 1993 from $410 million for 1992. EBDIAT is reported by the Company, not as a measure of operating results, but rather as a measure of the Company's debt service ability. Certain financial and other restrictive covenants in the Company's Bank Credit Agreement, the Senior Secured Note Agreement, the 1993 Term Loan Agreement and other instruments governing the Company's indebtedness are based on the Company's EBDIAT, subject to certain adjustments. - 43 - Other Income, Net. In 1993, the Company sold its remaining equity interest in Sweetheart for $5.1 million recognizing a gain of the same amount. The Company had previously reduced the carrying value of its investment in Sweetheart to zero in 1991. Income Taxes. The income tax credit for 1993 principally reflects the reversal of previously provided deferred income taxes. The income tax credit for 1992 reflects the reversal of previously provided deferred income taxes related to domestic tissue operations offset almost entirely by foreign income taxes. Extraordinary Loss and Accounting Change. The Company's net loss in 1993 was increased by an extraordinary loss of $12 million (net of income taxes of $7 million) representing the write-off of unamortized deferred loan costs associated with the repayment of $250 million of indebtedness under the Term Loan, the repurchase of all the Junior Debentures and the repurchase of $50 million of the 12 3/8% Notes. The net loss for 1992 was increased by the Company's adoption of Statement of Financial Accounting Standards ("SFAS") No. 106. The cumulative effect on years prior to 1992 of adopting SFAS No. 106 is stated separately in the Company's unaudited condensed consolidated statement of income for 1992 as a one-time, after-tax charge of $11 million. Net Loss. For 1993, the Company's net loss increased, principally due to the goodwill write-off, to $2,052 million compared to $80 million for 1992. Fiscal Year 1992 Compared to Fiscal Year 1991 Net Sales. Domestic tissue sales decreased 1.6% in 1992 compared to 1991. The decrease was attributable to lower net selling prices which were partially offset by volume increases. Net sales of the Company's United Kingdom tissue operations increased 30.0% in 1992 compared to 1991. The increase primarily was due to volume increases in both the consumer and commercial markets, and to a lesser extent, due to the acquisition of Stuart Edgar in September 1992, partially offset by lower net selling prices and lower exchange rates. Gross Income. Effective January 1, 1992, the Company prospectively changed its estimates of the depreciable lives of certain machinery and equipment. These changes were made to better reflect the estimated periods during which such assets will remain in service. As a result, the Company believes, based primarily on an analysis of publicly available information, that the lives over which the Company depreciates the cost of its operating equipment and other capital assets more closely approximates industry norms. For 1992, the change had the effect of reducing depreciation expense by $38 million and reducing net loss by $24 million. Domestic tissue gross margins increased slightly in 1992 to 40.0% compared to 39.4% in 1991 due to lower depreciation expense and lower raw material costs, which were largely offset by the decline in net selling prices. Excluding the effects of the changes in depreciable lives, domestic tissue gross margins would have declined to 36.1% in 1992. Gross margins for international operations declined in 1992 due to purchases of parent rolls to support volume increases in anticipation of the start-up of a new paper machine in 1993 and the effects of the acquisition of Stuart Edgar. Selling, General and Administrative Expenses. Selling, general and administrative expenses, as a percent of net sales, decreased to 8.5% in 1992 compared to 8.6% in 1991. These results occurred principally due to an overall cost containment effort on the part of the Company, partially offset by the effects of the lower net selling prices and higher volume. Operating Income. Operating income of $271 million in 1992 was flat with operating income in 1991. The depreciation of asset write-ups to fair market value in purchase accounting is charged against the Company's cost of sales and selling, general and administrative expenses. Excluding this purchase accounting depreciation, amortization of goodwill and employee stock compensation, adjusted operating income would have been $347 million and $356 million or 30.1% and 31.3% as a percent of net sales in 1992 and 1991, respectively. Adjusted operating income as a percent of net sales declined in 1992 from 1991 due to the effects in 1992 of lower net selling prices, the - 44 - higher volume growth rate of the lower margin international operations compared to domestic operations and the acquisition of Stuart Edgar, partially offset by the effects of the changes in depreciable lives. EBDIAT. EBDIAT declined $34 million in 1992 to $410 million from $444 million in 1991 and declined as a percent of net sales to 35.6% in 1992 from 39.0% in 1991. Interest Expense. Interest expense declined approximately $33 million in 1992 as compared to 1991. Debt repurchased with the proceeds of a private placement of Common Stock in 1991 reduced the Company's average outstanding indebtedness in 1992 compared to 1991. Lower average interest rates, in part due to borrowings under the Company's Revolving Credit Facility to repurchase high yield subordinated debt, also contributed to lower interest expense in 1992 as compared to 1991. Equity Earnings. The Company's results for 1992 exclude any equity in the net loss of Sweetheart for the year compared to equity in net losses totaling $32 million in 1991. The Company discontinued the recording of equity in the net losses of Sweetheart, an unconsolidated subsidiary, when the carrying value of its investment in Sweetheart was reduced to zero in the fourth quarter of 1991. Income Taxes. The lower income tax credit for 1992 reflects the Company's lower domestic net loss for the year, offset by foreign income taxes. The income tax credit for 1991 principally reflects the reversal of previously provided deferred income taxes. Extraordinary Loss and Accounting Change. Results for 1991 were impacted by an extraordinary loss of $5 million (net of income taxes) related to debt repurchases. As of January 1, 1992, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The standard requires that the expected cost of postretirement health care benefits be charged to expense during the years that employees render service. The cumulative effect on years prior to 1992 of adopting SFAS No. 106 is stated separately in the Company's consolidated statement of income for 1992 as a one-time after-tax charge of $11 million. This change in accounting principle, excluding the cumulative effect, decreased operating income for 1992 by $1 million. Net Loss. For 1992, the Company's net loss decreased 27.7% to $80 million from $111 million in 1991. Excluding the effects of the changes in depreciable lives and the change in accounting principle for postretirement benefits in 1992, and excluding the extraordinary item attributable to debt repurchases and equity in net losses incurred by unconsolidated subsidiaries in 1991, the net loss for 1992 would have increased 7.3% compared to 1991. Liquidity And Capital Resources During 1993, cash increased $39,000. Capital additions of $166 million and debt repayments of $841 million, including the repayment of $250 million of the Term Loan, the repurchase of all the Junior Debentures, and the repurchase of $50 million of the 12 3/8% Notes, were funded principally by cash provided from operations of $151 million, net proceeds from the sale of the 1993 Notes of $729 million, net proceeds of the 1993 Term Loan of $95 million, borrowings of $28 million under the Revolving Credit Facility and Fort Sterling Limited ("Fort Sterling"), the Company's United Kingdom tissue operations, borrowings of $9 million. During 1992, cash decreased $9 million. Capital additions of $233 million, the acquisition of Stuart Edgar for $8 million (net of debt assumed of $17 million) and debt repayments of $168 million, principally for the retirement of the 7% Notes, were funded principally by cash provided from operations of $210 million, borrowings under the Revolving Credit Facility of $141 million and borrowings of $49 million by Fort Sterling. Although the obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement bear interest at floating rates, the Company is required to enter into interest rate agreements which effectively fix or limit the interest cost to the Company. Pursuant to the Bank Credit Agreement, the Company is a party to interest rate cap agreements which limit the interest cost to the Company to 8.25% (including the Company's - 45 - borrowing margin on Eurodollar rate loans) until June 1, 1996, with respect to $500 million. The Company is also a party to an interest rate cap agreement which limits the interest cost to the Company to rates between 11.25% and 12.00% until September 11, 1994, with respect to $300 million received through the issuance of the Senior Secured Notes. See Note 8 to the Company's audited consolidated financial statements included elsewhere in this Prospectus for additional information concerning the agreements. On March 22, 1993, the Company sold $450 million principal amount of 9 1/4% Notes due 2001 and $300 million principal amount of 10% Notes due 2003 in a registered public offering. On April 21, 1993, the Company borrowed $100 million pursuant to the 1993 Term Loan. Proceeds from the sale of the 1993 Notes and from the 1993 Term Loan were applied to the prepayment of $250 million of the Term Loan, to the repayment of a portion of the Company's indebtedness under the Revolving Credit Facility, to the repurchase of all the Company's outstanding Junior Debentures and to the payment of fees and expenses. The 9 1/4% Notes are senior unsecured obligations of the Company, rank equally in right of payment with the other senior indebtedness of the Company and are senior to all existing and future subordinated indebtedness of the Company. The 10% Notes are subordinated in right of payment to all existing and future senior indebtedness of the Company, rank equally with the 12 5/8% Debentures and constitute senior indebtedness with respect to the 14 1/8% Debentures. The 1993 Term Loan bears interest, at the Company's option, at Bankers Trust's prime rate, plus 1.75% or, subject to certain limitations, at a reserve adjusted Eurodollar rate, plus 3.00%, and matures May 1, 1997. The 1993 Term Loan constitutes senior secured indebtedness of the Company. In connection with the sale of the 1993 Notes and the borrowing under the 1993 Term Loan, the Company amended the Bank Credit Agreement and the Senior Secured Note Agreement. Among other changes, the amendments reduced domestic capital spending limits for 1993 and future years. In addition, the Company's required ratios of earnings before non-cash charges, interest and taxes to cash interest for 1993 and subsequent years were lowered to give effect to the greater amount of the Company's cash interest payments as a result of the issuance of the 9 1/4% Notes and the 10% Notes and subsequent repurchases of Junior Debentures. The Company redeemed $50 million of its 12 3/8% Notes at the redemption price of 105% of the principal amount thereof on November 1, 1993, the first date that such notes were redeemable. The redemption was funded principally from excess funds from the sale of the 1993 Notes. In connection with the redemption, the Company incurred an extraordinary loss in the fourth quarter of 1993 of $2 million (net of income taxes), representing the redemption premium and unamortized deferred loan costs. On February 9, 1994, the Company sold $100 million principal amount of 8 1/4% Senior Unsecured Notes due 2002 and $650 million principal amount of 9% Senior Subordinated Notes due 2006 in a registered public offering. Proceeds from the sale of the 1994 Notes were applied to the repurchase of all the remaining 12 3/8% Notes at the redemption price of 105% of the principal thereof, to the repurchase of $238 million of 12 5/8% Debentures at the redemption price of 105% of the principal thereof, to the prepayment of $100 million of the Term Loan, to the repayment of a portion of the Company's indebtedness under the Revolving Credit Facility and to the payment of fees and expenses. The 8 1/4% Notes are senior unsecured obligations of the Company, rank equally in right of payment with the other senior indebtedness of the Company and are senior to all existing and future subordinated indebtedness of the Company. The 9% Notes are subordinated in right of payment to all existing and future senior indebtedness of the Company, and constitute senior indebtedness with respect to the 10% Notes, the 12 5/8% Debentures and the 14 1/8% Debentures. In connection with the sale of the 1994 Notes, the Company amended the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement. Among other changes, the amendments reduced the required ratio of earnings before non-cash charges, interest and taxes to cash interest for the four fiscal quarters ending March 31, 1994, from 1.50 to 1.00 to 1.40 to 1.00. - 46 - The Company incurred an extraordinary loss of $28 million (net of income tax credits of $15 million) in the first quarter of 1994 representing the redemption premiums on the repurchases of the 12 3/8% Notes and the 12 5/8% Debentures, and the write-off of deferred loan costs associated with the repayment of the $100 million of the Term Loan and the repurchases of the 12 3/8% Notes and the 12 5/8% Debentures. In 1991, Fort Sterling entered into a credit agreement to provide financing for the addition of a third paper machine and related equipment at its tissue mill. The facility consists of a 20 million pound sterling (approximately $30 million) term loan due March 2001, and a 5 million pound sterling (approximately $7 million) revolving credit facility due March 1996. In 1992, Fort Sterling entered into a second credit agreement to finance the acquisition of Stuart Edgar. This facility consists of a term loan due December 1997 with 3.4 million pounds sterling (approximately $5 million) outstanding at December 31, 1993, and a second term loan due December 1997 with 6.8 million pounds sterling (approximately $10 million) outstanding at December 31, 1993. Both credit agreements bear interest at floating rates and are secured by certain assets of Fort Sterling and Stuart Edgar but are nonrecourse to the Company. At December 31, 1993, $47 million was outstanding under these credit agreements. The Company's principal use of funds for the next several years will be for the repayment of indebtedness under the Bank Credit Agreement, the repurchase of the 12 5/8% Debentures and the 14 1/8% Debentures, capital expenditures, including capital expenditures to comply with environmental regulations, the repurchase of its subordinated debt securities generally as described below, and support of the Company's working capital requirements. The Term Loan matures and the Revolving Credit Facility expires in 1996. In connection with the sale of the 1994 Notes, the Company prepaid $100 million of the $107 million mandatory payment due under the Term Loan in 1994, repurchased all the 12 3/8% Notes that were due in 1997 and repurchased $238 million principal amount of the 12 5/8% Debentures due in 2000. The Company is required to make repayments of the Term Loan of $107 million in 1995 and $118 million in 1996. The 1993 Term Loan matures in 1997. The Company intends to use funds generated from operations and borrowings under the Bank Credit Agreement or from other sources to meet its principal needs for funds. Given the Company's high leverage and adverse tissue industry operating conditions, the Company intends to continue to maintain and modernize existing tissue mills but does not currently intend to make capital expenditures to add material new capacity. Capital expenditures were $166 million, $233 million and $144 million in 1993, 1992 and 1991, respectively. Capital expenditures are projected to approximate $55-$80 million annually over the next ten years, plus $32 million in 1994 to complete the Muskogee mill expansion and another $32 million over 1994 and 1995 for a new coal-fired boiler under construction at the Company's Savannah River mill. The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement impose limits for domestic capital expenditures, subject to certain exceptions, of $175 million for 1994, $100 million for 1995 and $100 million for 1996 (with lower sublimits for foreign subsidiaries). In addition, the Company may carryover to one or more years (thereby increasing the scheduled permitted limit for capital expenditures in respect of such year) the sum of all previously unutilized amounts in 1993 and subsequent years (up to $400 million per year) by which the scheduled permitted limit for each prior year exceeded the capital expenditures actually made in respect of such prior year. The Company does not believe such limitations impair its plans for capital expenditures. For a discussion of the Company's capital expenditures in connection with environmental control matters, see "Business - Environmental Matters." Market conditions with respect to high yield debt securities may from time to time be such that it is to the Company's advantage to repurchase some or all of its subordinated debt securities in privately negotiated transactions or in the open market. However, the repurchase of subordinated debt securities is limited by certain provisions contained in the Company's senior debt agreements and the indentures under which such subordinated debt securities were issued. As of March 31, 1994, the Company may borrow up to $39 million to repurchase 14 1/8% Debentures and may also borrow up to $75 million to repurchase 12 5/8% Debentures, until June 30, 1995. Subject to and in compliance with the limitations contained in the Company's debt agreements, and depending upon market conditions, prevailing prices and cash available, the Company may from time to time repurchase subordinated debt. - 47 - The Company has a $350 million Revolving Credit Facility (including letters of credit) under the Bank Credit Agreement with a final maturity of December 31, 1996, which may be used for general corporate purposes. At March 31, 1994, the Company had $56 million in available capacity under the Revolving Credit Facility. The Company believes that, notwithstanding the adverse tissue industry operating conditions and the non-cash charge to write-off the remaining balance of the Company's goodwill discussed above, cash provided by operations and access to debt financing in the public and private markets will be sufficient to enable it to fund maintenance and modernization capital expenditures and meet its debt service requirements for the foreseeable future. However, in the absence of improved financial results, it is likely that in 1995 the Company would be required to seek a waiver of the cash interest coverage covenant under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement because the Company's 14 1/8% Debentures will accrue interest in cash commencing on November 1, 1994 and will require payments of interest in cash on May 1, 1995. Although the Company believes that it will be able to obtain appropriate waivers from its lenders, there can be no assurance that this will be the case. During 1993, 1992, and 1991, a slightly higher amount of the Company's revenues and operating income have been recognized during the second and third quarters. The Company expects to fund seasonal working capital needs from the Revolving Credit Facility. The Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Note Agreement, and the Fort Sterling credit agreements impose certain limitations on the liquidity of the Company that include restrictions on the Company's ability to incur additional indebtedness and mandatory principal repayment requirements, including scheduled principal repayments and repayments out of excess cash flow and from proceeds of asset sales. See "Description of Certain Indebtedness--The Bank Credit Agreement,--Senior Secured Notes and--1993 Term Loan.". The limitations contained in the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Note Agreement, and in the Company's indentures on the ability of the Company and its subsidiaries to incur indebtedness, together with the highly leveraged position of the Company, could limit the Company's ability to effect future financings and may otherwise restrict corporate activities, including the Company's ability to take advantage of business opportunities which may arise or to take actions that require funds in excess of those available to the Company. In addition, as a result of the Company's highly leveraged position and related debt service obligations, the Company will be less able to meet its obligations during a further downturn in its business. Refer to Note 7 to the audited consolidated financial statements included elsewhere in this Prospectus for a description of certain matters related to income taxes. Recent Developments On April 25, 1994, the Company announced that for the first quarter ended March 31, 1994, net sales decreased 3.3% to $275,330,000 compared to first quarter 1993 net sales of $284,814,000. Operating income increased 7.5% for the first quarter of 1994 to $60,133,000 compared to $55,959,000 for the first quarter of 1993. Operating income for the first quarter of 1994 benefited from the elimination of amortization of goodwill of $14 million for the quarter as a result of the Company's goodwill write-off in the third quarter of 1993. Excluding the amortization of goodwill from 1993 results, operating income for the first quarter of 1994 decreased 14.3% compared to the first quarter of 1993. Earnings before depreciation, interest, amortization and taxes decreased 9.2% to $82,231,000 in the first quarter of 1994 from $90,543,000 in the first quarter of 1993. Business conditions remain extremely competitive. During the first quarter of 1994, a period of seasonally lower volume, the Company maintained its domestic price increases achieved through year-end 1993, adversely affecting domestic sales volume for the first quarter. Severe weather conditions also adversely affected domestic sales volume during the first quarter of 1994. In addition, pricing at the Company's international operations declined further in the first quarter of 1994. Extraordinary losses of $28 million and $10 million related to debt - 48 - repurchases in 1994 and 1993, respectively, impacted the Company's financial performance in the first quarters of 1994 and 1993. The net loss for the first quarter of 1994 increased to $43,342,000 from $35,975,000 for the same period in 1993. BUSINESS General The Company, founded in 1919, is a major manufacturer, converter and marketer of a diversified line of single-use sanitary tissue paper products for the home and away-from-home markets. The Company's principal products include paper towels, bath tissue, table napkins, wipers and boxed facial tissue. The Company produces and ships its products from manufacturing facilities located in Wisconsin, Oklahoma, Georgia and the United Kingdom. For an analysis of net sales, operating income (loss) and identifiable operating assets by geographic area, refer to Note 16 of the Company's audited consolidated financial statements included elsewhere in this Prospectus. The Company believes that it is the largest producer of tissue products sold into the domestic commercial (away-from-home) market. The Company sells a majority of its tissue products through paper and institutional food wholesalers into commercial markets. The Company continues to expand its domestic consumer tissue business for the home market. Tissue products for household use are sold principally through brokers to accounts that include major food store chains, mass merchandisers and wholesale grocers. The Company's domestic tissue products for home use are sold under the brand names SOFT 'N GENTLE, MARDI GRAS, GREEN FOREST, PAGE AND SO-DRI. Domestic Tissue Operations The Company's principal markets are in the United States where the Company believes, based on an analysis of publicly available information, that its operating income margins are higher than those of its publicly reporting competition. A key factor contributing to these high operating income margins has been the Company's proprietary de-inking technology, which enables it to use a broad range of wastepaper grades and process wastepaper efficiently to recover the fibers which are the principal raw material in papermaking. However, the Company's operating income margins have been adversely affected by the adverse tissue industry operating conditions experienced since 1991, and continue to be affected by low pricing resulting in part from relatively low industry operating rates. Announced industry capacity additions through 1995 may offset the effects of the current general economic recovery. Consequently, until industry operating rates improve, the Company's net selling prices and operating income margins may continue to be adversely affected. Commercial Tissue. The Company believes it is the leading manufacturer of tissue products for the commercial segment of the U.S. tissue market. The Company believes, based upon industry data, including data collected by the American Forest and Paper Association, that the commercial market represents approximately 40% of the total United States tissue market. The Company's primary thrust in the tissue business has been in the commercial segment which, though smaller in total size than the consumer segment, grew significantly faster than the consumer segment from 1987 to 1990. From 1991 through 1993, the commercial segment grew at a slower rate than the consumer segment due in part to the effects of the recession and weak recovery. The commercial segment of the Company's tissue business includes folded and roll towels, bath and facial tissue, bulk and dispenser napkins, disposable wipers and specialty printed merchandise. The Company also offers a line of tissue products under the ENVISION brand name which meets U.S. Environmental Protection Agency ("U.S. EPA") guidelines for tissue products containing postconsumer recovered wastepaper. Based primarily on the Company's analysis of publicly available information, the Company estimates that in 1993 its market share in the United States for sales of commercial tissue products was approximately 28%. Consumer Tissue. The Company's consumer tissue business has experienced significant growth over the past fifteen years. Based primarily on the Company's analysis of publicly available information, the Company estimates that its market share in the United States for sales of consumer tissue - 49 - products has grown from 1% in the late 1970's to approximately 9% in the most recent years. The Company's retail line includes bath and facial tissue, household roll towels and table napkins. The Company's brands include SOFT 'N GENTLE, MARDI GRAS, GREEN FOREST, PAGE AND SO-DRI. GREEN FOREST bath tissue, napkins and towels, which are made with 100% recycled fibers, are marketed to the environmentally conscious consumer. In addition, the Company has become a major supplier of private label tissue products to the retail grocery trade. The market share information presented herein reflects the Company's best estimates based on publicly available information, and no assurance can be given regarding the accuracy of such estimates. International Tissue Operations The Company's international operations consist of tissue facilities in the United Kingdom which manufacture and sell a broad line of tissue products. The Company's principal brand in the United Kingdom is NOUVELLE. Capital Expenditures The Company has invested heavily in its manufacturing operations. Capital expenditures in the Company's tissue business were approximately $741 million for the five-year period ended December 31, 1993. Given the Company's high leverage and adverse tissue industry operating conditions, the Company intends to continue to maintain and modernize existing tissue mills but does not currently intend to make capital expenditures to add material new capacity. Total capital expenditures after 1993 are projected to approximate $55-$80 million annually over the next ten years, plus $32 million in 1994 to complete the Muskogee mill expansion and an additional $32 million over 1994 and 1995 for a new coal-fired boiler under construction at the Company's Savannah River mill. A significant portion of the Company's capital budget in recent years has been invested in the Savannah River mill located in Effingham County, near Savannah, Georgia, which was completed in 1991. Total expenditures for the Savannah River mill were $570 million. In 1993, the Company completed an expansion of its Green Bay, Wisconsin tissue mill. The expansion includes a new paper machine and related environmental protection, pulp processing, converting, and steam generation equipment. The new paper machine commenced production on August 31, 1992. Total expenditures for the expansion were $180 million. In 1992, the Company began the installation of a fifth paper machine, environmental protection equipment and associated facilities at its Muskogee, Oklahoma tissue mill. The expansion is planned for completion in 1994 at an estimated cost of $140 million. Total expenditures for the expansion through December 31, 1993 were $109 million. The new paper machine commenced production on March 14, 1994. In 1993, the Company completed an expansion of its United Kingdom tissue mill. The expansion included a new paper machine and related environmental protection, pulp processing and converting equipment. The new paper machine commenced production on February 7, 1993. Total expenditures for the expansion were $96 million. See "Properties" below. On September 4, 1992, Fort Sterling acquired for $25 million, Stuart Edgar, a United Kingdom converter of consumer tissue products with annual net sales approximating $43 million. Stuart Edgar acquires a majority of its paper requirements from Fort Sterling. Energy Sources The Company's major sources of energy for its Green Bay, Wisconsin; Muskogee, Oklahoma and Savannah River tissue mills are coal and other fuels which are burned to produce the heat necessary to dry paper, process wastepaper, provide steam and produce virtually all the electric power at those mills. Coal is received in Green Bay in self-unloading vessels during the Great Lakes shipping season and at the Muskogee and Savannah River mills by truck and rail. The Company maintains inventories of coal and other fuels at all mills. The Savannah River mill can also generate electrical power by - 50 - burning natural gas in combustion turbines. The primary sources of energy for the Company's United Kingdom tissue facilities are purchased electrical power and natural gas. Raw Materials And Supplies The principal raw materials and supplies used to manufacture tissue products are wastepaper (which is processed to reclaim fiber), chemicals, corrugated shipping cases and packaging materials. A substantial majority of the Company's products are made with 100% recycled fiber derived from wastepaper. The de-inking technology employed by the Company allows it to use a broad range of wastepaper grades, which effectively increases both the number of sources and the quantity of wastepaper available for its manufacturing process. The Company manufactures some of the process chemicals required for the Company's tissue production at each of its domestic mill locations. The balance of its chemical requirements is purchased from outside sources. The Company also purchases significant quantities of coal for generation of electrical power and steam at all three of its domestic tissue mills. The Company seeks to maintain inventories of wastepaper, other raw materials and supplies which are adequate to meet its anticipated manufacturing needs. Competition All the markets in which the Company sells its products are extremely competitive. The Company's tissue products compete directly with those of Georgia-Pacific Corporation, James River Corporation of Virginia, Kimberly- Clark Corporation, Pope & Talbot, Inc., Scott Paper Company, The Procter & Gamble Company, Wisconsin Tissue Mills (owned by Chesapeake Corporation), as well as regional manufacturers, including converters of tissue into finished products who buy tissue directly from tissue mills. Although customers generally take into account price, quality, distribution and service as factors when considering purchasing products from the Company, over the last three years, pricing has become a more dominant competitive factor. Customers The Company principally markets its products to customers in the United States and the United Kingdom. The business of the Company is not dependent on a single customer. Backlog The Company's products are manufactured with relatively short production time from basic materials. Products marketed under the Company's trademarks and stock items are sold from inventory. The backlog of customer orders is not significant in relation to sales. Research The Company maintains laboratory facilities with a permanent staff of engineers, scientists and technicians who are responsible for product quality, process control, improvement of existing products, development of new products and processes and provision of technical assistance in adhering to regulatory standards. Continuing emphasis is placed upon expanding the Company's capability to de-ink a broader range of wastepaper grades, further automation of manufacturing operations, the development of improved manufacturing and environmental processes and the design of new products. Patents, Licenses, Trademarks And Trade Names While the Company owns or is a licensee of a number of patents, its operations and products are not materially dependent on any patent. The Company's domestic tissue products for home use are sold under the principal brand names SOFT 'N GENTLE, MARDI GRAS, GREEN FOREST, PAGE AND SO-DRI. For the Company's domestic commercial tissue business, principal brand names include ENVISION and GENERATION II. All brand names are registered trademarks of the Company. A portion of the Company's tissue products are sold under private labels or brand names owned by customers. - 51 - Employees And Employee Relations At December 31, 1993, the Company's world-wide employment was approximately 6,800. There is no union representation at any of the Company's domestic facilities. The Company considers its relationship with its employees to be good. Environmental Matters The Company's domestic manufacturing operations are subject to regulation by various federal, state and local authorities concerned with the limitation and control of emissions and discharges to the air and waters and the handling, use and disposal of specified chemicals and solid waste. The Company's United Kingdom operations are subject to similar regulation. The Company has made significant capital expenditures in the past to comply with environmental regulations and will continue to do so in the future. In 1993, the Company made capital expenditures of $13.2 million with respect to pollution abatement and environmental compliance. The Company expects to commit to approximately $15.1 million of capital expenditures to maintain compliance with environmental control standards at its facilities over 1994 and 1995. Included in the 1993 capital expenditures was $11.1 million for pollution abatement equipment in connection with mill expansions in Green Bay, Wisconsin; Muskogee, Oklahoma; Effingham County, Georgia and the United Kingdom. Included in the 1994-1995 expected expenditures is $5.7 million for pollution abatement equipment in connection with completing projects initiated in 1993 and prior years. Future environmental legislation and developing regulations are expected to further limit emission and discharge levels and to expand the scope of regulation, all of which will require continuing capital expenditures. The U.S. EPA has proposed Great Lakes Water Quality Guidance regarding the development of water quality standards for the Great Lakes and its tributaries. That same agency has also indicated that it intends to propose air emission standards in 1995 under the federal Clean Air Act Amendments for the de-inking portion of the pulp and paper industry. Further, the U.S. EPA has proposed technology based effluent discharge standards for the de-inking portion of the pulp and paper industry. The Company is awaiting the issuance of final regulations, as well as, in certain instances, implementing regulations by state environmental authorities to determine the nature and stringency of these several regulatory initiatives, including the period over which new standards are to be achieved and the impact of those regulatory initiatives on the Company's results of operations and capital expenditures. There can be no assurance that such costs would not be material to the Company. Pursuant to the requirements of applicable federal, state and local statutes and regulations, the Company has received or applied for all the environmental permits and approvals material to the operation of its manufacturing facilities. The impact of any modifications that may be required in the future to the Company's existing permits will be determined by the environmental standards specified in such permits, upon renewal or modification, and the time period over which new standards are to be achieved. In March 1990, the Company began a remedial investigation of its Green Bay, Wisconsin landfill. The investigation is being overseen by the U.S. EPA under authority granted to the agency by the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the "Superfund Act." A Preliminary Health Assessment released by the United States Department of Health and Human Services in January 1992 reported that the Company's Green Bay landfill does not pose any apparent public health hazard. Based upon the results of the remedial investigation through December 31, 1993, the Company believes that costs or expenditures associated with any future remedial action, were it to be required, would not have a material adverse effect on the Company's financial condition. Except for the Green Bay landfill site, the Company is not presently named as a potentially responsible party at any other Superfund related sites; however, there can be no certainty that the Company will not be named as a potentially responsible party at any other sites in the future or that the costs associated with those sites would not be material. - 52 - The Company is participating with a coalition consisting of industry, local government, state regulatory commission and public interest members studying the nature and extent of sediment contamination of the Fox River in Wisconsin. The objective of the coalition is to identify, recommend and implement cost effective remediation of contaminated deposits which can be implemented on a voluntary basis. One of the industry coalition members in cooperation with the Wisconsin Department of Natural Resources has undertaken a demonstration project designed to remediate one sediment deposit located approximately 38 miles upstream from the Company's Green Bay, Wisconsin facility. The costs to remediate the deposit are being borne by parties whose operations are contiguous to or are otherwise potentially responsible for remediation of that site. The Company's participation in the studies undertaken by the coalition is voluntary and its contributions to funding those activities, to date, have not been significant. The extent and timing, as well as the technology to be employed in connection with any Fox River remediation efforts downstream from the initial deposit are uncertain. Based upon all of the information available, the Company is presently unable to estimate the financial impact to the Company, if any, of future Fox River remediation but cannot conclude that such impact in all events would not be material. On July 15, 1992, Region V of the U.S. EPA issued a Finding of Violation to the Company concerning the No. 8 boiler at its Green Bay, Wisconsin mill. The Finding alleges violation of regulations issued by the U.S. EPA under the Clean Air Act relating to New Source Performance Standards for Fossil- Fuel-Fired Steam Generators. In response to an accompanying Request for Information, the Company furnished certain information concerning the operation of the boiler. The Company met with representatives of the U.S. EPA in August 1992 and February 1993 to discuss the alleged violations. On January 11, 1994, the U.S. EPA informally advised the Company that, due to its internal guidelines that limit the authority of the agency to administratively resolve matters that include alleged violations extending over a period of more than one year, disposition of the Finding of Violation is being transferred to the U.S. Department of Justice. The Company believes the operation of its No. 8 boiler has been in continuous compliance with the applicable rules. Although the ultimate disposition of this matter cannot be predicted with certainty, the Company believes that it will not have a material adverse effect on the Company's financial condition. Properties The Company's Green Bay, Wisconsin tissue mill includes a coal-fired cogenerating power plant; a de-inking and pulp processing plant; a chemical plant; papermaking machines and related drying equipment; nonwoven and dry form manufacturing machines; and converting equipment for cutting, folding, printing and packaging paper and nonwovens into the Company's finished products. The Company's Green Bay mill is well maintained and considered suitable for its intended purpose. A second domestic tissue mill is located in Muskogee, Oklahoma. This mill includes a coal-fired cogenerating power plant; a de-inking and pulp processing plant; a chemical plant; papermaking machines and related drying equipment; and converting equipment for cutting, folding, printing and packaging paper into the Company's finished products. The Muskogee mill was specifically designed for its purpose. A third domestic tissue mill, the Savannah River mill, is located in Effingham County, near Savannah, Georgia. This mill includes a de-inking and pulp processing plant; a chemical plant; papermaking machines and related drying equipment; and converting equipment for the cutting, folding, printing and packaging of paper into the Company's finished products. The Savannah River mill also contains coal-fired cogenerating power equipment and combustion turbines for the production of electrical power and steam. The Savannah River mill was specifically designed for its purpose. The Company's tissue manufacturing facilities in the United Kingdom include a de-inking and pulp processing plant; papermaking machines and related drying equipment; and converting equipment for the cutting, folding, printing and packaging of paper into the Company's finished products. The Company's United Kingdom operations are well maintained and considered suitable for their intended purpose. - 53 - Except for certain facilities and equipment constructed or acquired in connection with sale and leaseback transactions pursuant to which the Company continues to possess and operate such facilities and equipment, substantially all the Company's manufacturing facilities and equipment are owned in fee. The Company's domestic and United Kingdom tissue manufacturing facilities are pledged as collateral under the terms of the Company's debt agreements. See Note 8 to the audited consolidated financial statements included elsewhere in this Prospectus. The Green Bay, Muskogee, Savannah River and United Kingdom facilities generally operate paper machines at full capacity seven days per week. Converting facilities are generally operated on a 3-shift, 5-day per week basis or a 7-day per week schedule. Converting capacity could be expanded by working additional hours and/or adding converting equipment. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to lawsuits and state and federal administrative proceedings in connection with their businesses. Although the final results in such suits and proceedings cannot be predicted with certainty, the Company believes that they will not have a material adverse effect on the Company's financial condition. The Internal Revenue Service ("IRS") issued a statutory notice of deficiency ("Notice") to the Company in March 1992 for additional income tax for the 1988 tax year. The Notice resulted from an audit of the Company's 1988 tax year wherein the IRS adjusted income and disallowed deductions, including deductions for fees and expenses related to the Acquisition. The IRS also disallowed deductions for fees and expenses related to 1988 debt financing and refinancing transactions. In March 1992, the Company filed a petition in the U.S. Tax Court opposing substantially all of the claimed deficiency and the case was tried in September 1993. After the trial, the Company and the IRS executed an agreed Supplemental Stipulation of Facts by which the IRS and the Company partially settled the case by agreeing that certain fees and expenses (previously disallowed by the IRS and potentially representing approximately $26 million of tax liability) were properly deductible by the Company over the term of the 1988 debt financing and refinancing. In addition, the Company agreed to capitalize certain amounts identified by the IRS and paid additional federal income tax of approximately $5 million representing its liability with respect to the agreed adjustments. The U.S. Tax Court has not yet decided the points that remain in dispute in the case after the partial settlement. The Company estimates that if the IRS were to prevail in disallowing deductions for the fees and expenses remaining in dispute before the trial judge, the potential amount of additional taxes due the IRS on account of such disallowance for the period 1988 through 1993 would be approximately $31 million and for the periods after 1993 (assuming current statutory tax rates) would be approximately $11 million, in each case exclusive of IRS interest charges. Since the Company's 1988 tax case involves disputed issues of law and fact, the Company is unable to predict its final result with certainty. The Company believes, however, that its ultimate resolution will not have a material adverse effect on the Company's financial condition. MANAGEMENT Directors Of The Company The following table provides certain information about each of the current directors of the Company. All directors hold office until the next annual meeting of shareholders of the Company and until their successors are duly elected and qualified. - 54 - Present Principal Occupation or Employment; Name and Position Five-Year Employment History with the Company Age and other Directorships ----------------- --- ------------------------------------------- Donald H. DeMeuse 58 Chairman of the Board of Directors and Chairman of the Board Chief Executive Officer since March 1992; President and Chief Executive Officer from July 1990 to March 1992. Prior to March 1992, President for more than five years. Director of Associated Bank Green Bay. Kathleen J. Hempel 43 Vice Chairman and Chief Financial Officer Vice Chairman since March 1992; Senior Executive Vice President and Chief Financial Officer prior to that time. Michael T. Riordan 43 President and Chief Operating Officer since Director March 1992; Vice President prior to that time. Donald P. Brennan 53 Managing Director of MS&Co. since prior to Director 1988 and head of MS&Co.'s Merchant Banking Division. Chairman and President of Morgan Stanley Leveraged Equity Fund II, Inc. ("MSLEF II, Inc.") and Chairman of Morgan Stanley Capital Partners III, Inc. ("MSCP III"). Director of Agricultural Minerals and Chemicals Inc., Agricultural Minerals Corporation, A/S Bulkhandling, Beaumont Methanol Corporation, BMC Holdings Inc., Coltec Industries Inc, Container Corporation of America, Hamilton Services Limited, Jefferson Smurfit Corporation, PSF Finance Holdings, Inc., Shuttleway, SIBV/MS Holdings, Inc., Stanklav Holdings, Inc., Waterford Wedgwood plc (Deputy Chairman) and Waterford Wedgwood U.K. plc. Frank V. Sica 43 Managing Director of MS&Co. since 1988. Vice Director President and Director of MSLEF II, Inc. since 1989 and Vice Chairman of MSCP III. Director of ARM Financial Group, Inc., Consolidated Hydro, Inc., Emmis Broadcasting Corporation, Integrity Life Insurance Company, Interstate Natural Gas Company, Kohl's Corporation, Kohl's Department Stores, Inc., National Integrity Life Insurance Company, PageMart, Inc., Southern Pacific Rail Corporation, Sullivan Communications, Inc. and Sullivan Graphics, Inc. Robert H. Niehaus 38 Managing Director of MS&Co. since 1990 Director Principal of MS&Co. prior to that time. Vice President and Director of MSLEF II, Inc. and Vice Chairman of MSCP III. Director of American Italian Pasta Company, MS Distribution Inc., Randall's Food Markets, Inc., Shuttleway, Silgan Corporation, Silgan Holdings Inc., Tennessee Valley Steel Corp., Waterford Wedgwood plc, Waterford Wedgwood U.K. plc (Chairman) and Waterford Crystal Ltd. James S. Hoch 34 Principal of MS&Co. since February 1993; Director Vice President of MS&Co. from January 1991 to February 1993; Associate of MS&Co. prior to that time. Director of Silgan Corporation, Silgan Holdings Inc. and Sullivan Communications, Inc. - 55 - Executive Officers Of The Company The following table provides certain information about each of the current executive officers of the Company. All executive officers are elected by, and serve at the discretion of, the Board of Directors. None of the executive officers of the Company is related by blood, marriage or adoption to any other executive officer or director of the Company. Present Principal Occupation or Employment; Name and Position Five-Year Employment History with the Company Age and other Directorships ----------------- --- ------------------------------------------- Donald H. DeMeuse 58 See description under "Directors" Chairman of the Board and Chief Executive Officer Kathleen J. Hempel 43 See description under "Directors of the Vice Chairman and Chief Company" above. Financial Officer Michael T. Riordan 43 See description under "Directors of the President and Chief Company" above. Operating Officer Andrew W. Donnelly 51 Executive Vice President for more than Executive Vice President five years. John F. Rowley 53 Executive Vice President for more than Executive Vice President five years. George F. Hartmann, Jr. 51 Vice President for more than five years. Vice President James W. Nellen II 46 Vice President and Secretary for more Vice President and than five years. Secretary Daniel J. Platkowski 44 Vice President for more than five years. Vice President Timothy G. Reilly 43 Vice President for more than five years. Vice President Donald J. Schneider 57 Vice President since July 1989. Director Vice President of Research and Development prior to that time. David K. Wong 44 Vice President since June 1993; Director of Vice President Personnel from September 1990 until June 1993. Director of Recruiting and Training prior to that time. R. Michael Lempke 41 Treasurer since November 1989; Assistant Treasurer Treasurer prior to that time. Charles L. Szews 37 Controller since November 1989; Director Controller of Financial Reporting prior to that time. David A. Stevens 45 Assistant Vice President for more than Assistant Vice President five years. Compensation Of Executive Officers And Directors The following table presents information concerning compensation paid for services to the Company during the last three fiscal years to the Chief Executive Officer and the four other most highly compensated executive officers (the "Named Executive Officers") of the Company. - 56 - SUMMARY COMPENSATION TABLE
Long-Term Compensation ------------ Annual Compensation Awards ---------------------------------- ------------ Number of Securities Name and Other Annual Underlying All Other Principal Position Year Salary Bonus Compensation(a) Options/SARs Compensation(b) - ------------------ ---- ------ ----- --------------- ------------ --------------- Donald H. DeMeuse 1993 $653,846 $55,250 $4,840 -- $62,742 Chairman and 1992 675,000 55,250 3,831 -- 57,480 Chief Executive 1991 525,000 -- 3,125 17,000 50,383 Officer Kathleen J. Hempel 1993 $453,077 $38,381 -- -- $27,388 Vice Chairman and 1992 456,923 37,400 -- -- 27,222 Chief Financial 1991 404,616 -- -- 5,000 27,610 Officer Michael T. Riordan 1993 $302,885 $25,500 -- 7,500 $18,437 President and 1992 248,846 20,171 $ 317 -- 15,028 Chief Operating 1991 161,346 -- -- 7,000 11,323 Officer Andrew W. Donnelly 1993 $350,000 $29,750 -- -- $20,859 Executive Vice 1992 342,692 28,050 -- -- 20,133 President 1991 293,077 -- -- 8,000 19,693 John F. Rowley 1993 $255,000 $21,675 -- -- $15,111 Executive Vice 1992 244,039 19,975 -- -- 14,561 President 1991 210,962 -- -- 7,000 14,405
(a) Includes amounts reimbursed for the payment of taxes. (b) Company contributions to the Company's profit sharing plan and supplemental retirement plan, including Company contributions to the Company's supplemental retirement plan which were paid to the participant. The following table presents information concerning individual grants of stock options made during the last completed fiscal year to each of the Named Executive Officers. OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realisable Individual Grants Value at Assumed - -------------------------------------------------------------------------- Annual Rates of Percent of Stock Price Number of Total Appreciation For Securities Options/ Option Term Underlying SARs Granted Exercise or -------------------- Options/SARs to Employees Base Price Expiration Name Granted in Fiscal Year ($/Sh) Date 5% 10% ---- ------------ -------------- ----- ---------- ---- ----- Donald H. DeMeuse -- -- -- -- -- -- Kathleen J. Hempel -- -- -- -- -- -- Michael T. Riordan 7,500(a) 49% $120 4/30/03 $566,005 $1,434,368 Andrew W. Donnelly -- -- -- -- -- -- John F. Rowley -- -- -- -- -- --
(a) The stock options granted in 1993 to Equity Investors (as defined below under "Certain Transactions--Management Equity Plan"), including the options granted to Mr. Riordan, were granted pursuant to the Management Equity Plan (as defined below under "Certain Transactions--Management Equity Plan"). The options vest and become exercisable at a rate of 20% per year, subject to partial acceleration of vesting in the event of death or disability. Subject to certain exceptions, Equity Investors who terminate their employment with - 57 - the Company before the later of (i) the fifth anniversary of the date on which the options were granted, and (ii) the date on which 15% or more of the Common Stock has been sold in one or more public offerings, must sell their vested options to the Company or its designee. In addition, Equity Investors may put specified percentages of their vested options to the Company annually during the period from the fifth anniversary of the date the options were granted to the date on which 15% or more of the Common Stock has been sold in one or more public offerings. See "Certain Transactions -- Management Equity Plan." The following table presents information concerning unexercised stock options for the Named Executive Officers. No stock options were exercised by the Named Executive Officers during 1993. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES Value of Unexercised Number of Unexercised Options In-the-money Options Held Held at December 31, 1993 at December 31, 1993 (a) ----------------------------- -------------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- -------------- ----------- ------------- Donald H. DeMeuse 74,375 9,200 -- -- Kathleen J. Hempel 85,515 3,000 -- -- Michael T. Riordan 15,409 11,300 -- -- Andrew W. Donnelly 20,235 4,200 -- -- John F. Rowley 14,342 3,800 -- -- a) The Common Stock of the Company is not registered or publicly traded and, therefore, a public market price for the stock is not available. The Company believes that none of the exercisable or unexercisable stock options held at December 31, 1993 were in-the-money as of such date. See Notes 12 and 13 of the Company's audited consolidated financial statements included elsewhere in this Prospectus. Director's Compensation Directors of the Company do not receive any compensation for services on the Board of Directors. Employment Agreements The Named Executive Officers have three-year employment agreements with the Company (the "Employment Agreements") which took effect in 1993. The Employment Agreements contain customary employment terms, have an initial duration of three years beginning October 15, 1993 for Mr. DeMeuse, Ms. Hempel and Mr. Riordan and December 10, 1993 for Mr. Donnelly and Mr. Rowley, provide for automatic one-year extensions (unless notice not to extend is given by either party at least six months prior to the end of the effective term), and provide for base annual salaries and annual incentive bonuses. In addition, the Employment Agreements for Mr. DeMeuse, Ms. Hempel and Mr. Riordan provide for participation in additional bonus arrangements which may be agreed upon in good faith from time to time with the Company. The Employment Agreements provide that certain payments in lieu of salary and bonus are to be made and certain benefits are to be continued for a stated period following termination of employment. The time periods for such payments vary depending on the cause of termination. The amount of the payments to be made to each individual would vary depending upon such individual's level of compensation and benefits at the time of termination and whether such employment is terminated prior to the end of the term by the Company for "cause" or by the employee for "good reason" (as such terms are defined in the Employment Agreements) or otherwise during the term of the agreements. In addition, the Employment Agreements for Mr. DeMeuse, Ms. Hempel and Mr. Riordan include noncompetition and confidentiality provisions. Compensation Committee Interlocks and Insider Participation The Executive Committee of the Board of Directors of the Company (the "Executive Committee") acts as a compensation committee for determining certain aspects of the compensation of the executive officers of the Company. The members of the Executive Committee are Donald H. DeMeuse, the Company's Chairman and Chief Executive Officer, and Donald P. Brennan. - 58 - The Executive Committee administers the Management Equity Plan which provides for the offer of Common Stock and the grant of options to purchase Common Stock to executive officers and certain other key employees of the Company. See "Certain Transactions -- Management Equity Plan." The Executive Committee selects the officers and key employees to whom Common Stock will be offered or options will be granted. The Executive Committee also administers the Company's Management Incentive Plan under which annual cash awards are paid to employees serving in key executive, administrative, professional and technical capacities. Awards are based upon the extent to which the Company's financial performance during the year has met or exceeded certain performance goals specified by the Executive Committee. Salaries and employment contract terms are determined by the entire Board of Directors for the Chief Executive Officer, by the Executive Committee for other executive officers who also serve as directors of the Company and by the Company's Chief Executive Officer for other executive officers of the Company. OWNERSHIP OF COMMON STOCK The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of March 1, 1994 by holders having beneficial ownership of more than 5% of the Company's Common Stock, by certain other principal holders, by each of the Company's directors, by the Named Executive Officers, and by all directors and all executive officers of the Company as a group. Shares Beneficially Owned ----------------------------- Number of Percentage Name Shares of Class ---- --------- ---------- THE MORGAN STANLEY LEVERAGED EQUITY FUND II, L.P.......................2,850,000 (a) 48.6 1251 Avenue of the Americas New York, New York 10020 FIRST PLAZA GROUP TRUST...................1,033,155 17.6 c/o Mellon Bank, N.A., as Trustee 1 Mellon Bank Center Pittsburgh, Pennsylvania 15258 LEEWAY & CO............................... 516,577 8.8 1 Monarch Drive North Quincy, Massachusetts 02177 MORGAN STANLEY GROUP INC.................. 427,213 (b) 7.3 1251 Avenue of the Americas New York, New York 10020 FORT HOWARD EQUITY INVESTORS II, L.P...... 261,737 (c) 4.5 1251 Avenue of the Americas New York, New York 10020 FORT HOWARD EQUITY INVESTORS, L.P......... 102,000 (d) 1.7 1251 Avenue of the Americas New York, New York 10020 Donald H. DeMeuse......................... 100,100 (e) 1.7 Kathleen J. Hempel........................ 90,491 (f) 1.5 Michael T. Riordan........................ 17,934 (g) less than 1 Donald P. Brennan......................... 0 -- Frank V. Sica............................. 0 -- Robert H. Niehaus......................... 0 -- - 59 - Shares Beneficially Owned ----------------------------- Number of Percentage Name Shares of Class ---- --------- ---------- James S. Hoch............................. 0 -- Andrew W. Donnelly........................ 22,735 (h) less than 1 John F. Rowley............................ 16,042 (i) less than 1 Directors and Executive Officers.......... 347,414 (j) 5.7 as a Group (a) MSLEF II, Inc. is the sole general partner of MSLEF II and is a wholly owned subsidiary of Morgan Stanley Group. (b) Excludes 40,000 shares for which Morgan Stanley Group exercises exclusive voting rights on shares not beneficially owned. (c) Morgan Stanley Equity Investors Inc. is the sole general partner of Fort Howard Equity Investors II, L.P. and is a wholly owned subsidiary of Morgan Stanley Group. (d) Morgan Stanley Equity Investors Inc. is the sole general partner of Fort Howard Equity Investors, L.P. and is a wholly owned subsidiary of Morgan Stanley Group. (e) Includes 74,375 shares subject to acquisition within 60 days by exercise of employee stock options. (f) Includes 85,515 shares subject to acquisition within 60 days by exercise of employee stock options. (g) Includes 15,409 shares subject to acquisition within 60 days by exercise of employee stock options. (h) Includes 20,235 shares subject to acquisition within 60 days by exercise of employee stock options. (i) Includes 14,342 shares subject to acquisition within 60 days by exercise of employee stock options. (j) Includes 284,453 shares subject to acquisition within 60 days by exercise of employee stock options. Certain affiliates of Morgan Stanley Group are entitled, subject to the satisfaction of certain conditions, to receive up to 20% of certain gains realized by MSLEF II on its investment in Common Stock, up to 10% of certain gains realized by Fort Howard Equity Investors, L.P. and up to 10% of certain gains realized by Fort Howard Equity Investors II, L.P. CERTAIN TRANSACTIONS Management Equity Plan Effective as of April 29, 1991, the Board of Directors adopted the Fort Howard Corporation Management Equity Plan (the "Management Equity Plan"). The Management Equity Plan provides for the offer of Common Stock and the grant of options to purchase Common Stock to executive officers and certain other key employees of the Company. Executive officers or other key employees of the Company who purchase shares of Common Stock or are granted options pursuant to the Management Equity Plan ("Equity Investors") are required to enter into a Management Equity Plan Agreement with the Company, and to become bound by the terms of the Company's stockholders agreement. See "Certain Transactions--Stockholders Agreement." Options granted pursuant to the Management Equity Plan vest in accordance with a schedule determined at the time of grant and set forth in the applicable Management Equity Plan Agreement. Any such options will be subject to partial acceleration of vesting in the event of death or disability. Shares of Common Stock purchased pursuant to the Management Equity Plan, as well as options that have become vested, may not be transferred for an extended period of time, except in certain limited circumstances. Options which have not vested are not transferable. - 60 - Subject to certain exceptions, under the Management Equity Plan, Equity Investors who terminate their employment with the Company before the later of (i) the fifth anniversary of the date on which shares of Common Stock were purchased or options were granted, as the case may be, and (ii) the date on which 15% or more of the Common Stock has been sold in one or more public offerings, must sell their shares of Common Stock and vested options to the Company or its designee. The terms and conditions of such repurchases by the Company (including the determination of the applicable repurchase price) are substantially similar to those prescribed for the repurchase by the Company of shares of Common Stock and vested options acquired by certain executive officers and other key employees of the Company pursuant to the Management Equity Participation Agreement (as defined below). See "Certain Transactions--Management Equity Participation." Subject to certain exceptions, options which have not vested at the time an Equity Investor's employment is terminated are forfeited to the Company. The Management Equity Plan also provides that Equity Investors may put specified percentages of their shares of Common Stock and vested options to the Company annually during the period from the fifth anniversary of the date on which such shares were purchased or options were granted, as the case may be, to the date on which 15% or more of the Common Stock has been sold in one or more public offerings. The terms and conditions governing such put option are substantially similar to those prescribed for the exercise of the put option set forth in the Management Equity Participation Agreement. In April 1991, certain executive officers and other key employees of the Company purchased an aggregate of 6,200 shares of Common Stock at $120 per share pursuant to the Management Equity Plan. In addition, options to purchase a total of 111,100 shares of Common Stock at an exercise price of $120 per share were granted in 1991, 1992 and 1993 pursuant to the Management Equity Plan to certain executive officers and other key employees of the Company. Such options vest at the rate of 20% per year. Further, the terms and conditions of options to purchase 15,500 shares of Common Stock granted in December 1988 at an exercise price of $100 per share pursuant to a predecessor plan are now governed by the Management Equity Plan. Management Equity Participation Mr. DeMeuse, Ms. Hempel, Mr. Riordan and other current executive officers and members of the Company's senior management (the "Management Investors") are parties to an Amended and Restated Management Equity Participation Agreement, as amended, with the Company, Morgan Stanley Group and MSLEF II (the "Management Equity Participation Agreement"), pursuant to which the Management Investors purchased 63,107 shares of Common Stock in 1988 and 4,896 shares of Common Stock in 1990 at $100 and $135 per share, respectively. Management Investors who purchased shares of Common Stock pursuant to the Management Equity Participation Agreement were also granted stock options to acquire 278,052 and 42,460 shares of Common Stock pursuant to the Management Equity Participation Agreement at exercises prices of $100 and $120 per share, respectively. Such options vest at the rate of 20% per year and are subject to partial acceleration of vesting in the event of death or disability. Certain of the Management Investors have also purchased shares of Common Stock and have been granted options to acquire additional shares of Common Stock pursuant to the terms of the Management Equity Plan. See "Certain Transactions--Management Equity Plan." The Management Equity Participation Agreement prohibits for an extended period of time, except in certain limited circumstances, the transfer of Common Stock and rights to acquire Common Stock, including options that have become vested ("Vested Options"), held by the Management Investors. Options which have not vested are not transferable. Subject to certain exceptions relating to death and disability, the Management Equity Participation Agreement also provides that Management Investors who terminate their employment with the Company within five years of the date (the "Effective Date") on which shares of Common Stock were purchased and options were granted shall sell their shares of Common Stock and Vested Options to the Company or its designee. In the case of termination by the Company without "cause" (as defined), termination as a result of death or disability or retirement at an age of at least 55 years, or, only in the case of Mr. DeMeuse or Ms. Hempel, the voluntary termination of employment by a Management Investor for "good reason" (as defined), the purchase price to be paid by the Company for shares of Common Stock is equal to the greater of the consideration paid for each share or the fair market value of such shares (except that the purchase price - 61 - is equal to fair market value with respect to shares acquired in 1990 by Management Investors other than Mr. DeMeuse). (Under the Management Equity Plan, the purchase price upon such a termination of employment is in all cases equal to fair market value.) In all other cases, the purchase price to be paid by the Company for shares of Common Stock is equal to the lesser of the consideration paid for each share or the fair market value of such shares. Without regard to the reason for termination, the purchase price to be paid by the Company for Vested Options is equal to the fair market value of the shares subject to the options, minus the aggregate exercise price. The Management Equity Participation Agreement also provides that Management Investors shall sell to the Company or its designee the shares of Common Stock and Vested Options held by them if they terminate their employment with the Company after the date which is five years from the Effective Date unless as of such date 15% or more of the Common Stock has been sold in one or more public offerings. In such event, the purchase price to be paid by the Company for shares of Common Stock and Vested Options is equal to their fair market value. Subject to certain exceptions, any options which have not vested at the time a Management Investor's employment is terminated are forfeited to the Company. The Management Equity Participation Agreement also provides that the Management Investors may put to the Company annually during the period from the fifth anniversary of the Effective Date to the date on which 15% or more of the Common Stock has been sold in one or more public offerings, specified percentages of their shares of Common Stock and Vested Options at a price equal to their fair market value. In certain circumstances and subject to certain limitations, Mr. DeMeuse and Ms. Hempel may require MSLEF II or Morgan Stanley Group to fulfill the Company's purchase obligations upon any termination of employment or exercise of the put option. The Management Equity Participation Agreement also provides that the Company will indemnify Management Investors for taxes on income which may be recognized upon the vesting of shares of Common Stock under certain circumstances. The indemnity is limited to the tax benefit to the Company, and if the tax benefit has not yet been received by the Company in cash at the time when the taxes must be paid by a Management Investor, the Company will make a nonrecourse loan to the Management Investor (secured by Common Stock and Vested Options) until the time the tax benefit is actually received. The Management Equity Participation Agreement contains noncompetition provisions applicable to each Management Investor except Mr. DeMeuse, Ms. Hempel and Mr. Riordan, whose noncompetition agreements are contained in their respective Employment Agreements. (Similar noncompetition provisions are applicable to the Equity Investors under the Management Equity Plan.) The Company's obligation to make nonrecourse loans under the Management Equity Participation Agreement or purchase shares of Common Stock for cash pursuant to the Management Equity Participation Agreement or the Management Equity Plan is subject to restrictions contained in any debt or lease agreements to which it is a party. In 1988 and 1990, the Company's former chairman of the board and chief executive officer acquired shares of Common Stock and was granted options to acquire additional shares of Common Stock pursuant to the Management Equity Participation Agreement. Under the terms of an agreement entered into with the Company at the time of his resignation in July 1990, he retained his entire interest in the Company's Common Stock and all options to acquire additional shares thereof granted to him pursuant to the Management Equity Participation Agreement were vested. In addition, all the shares of the Company's Common Stock then owned by him became putable to the Company, and he retained certain other put rights previously granted to him with respect to such options and the shares issuable upon the exercise thereof. Except as set forth above, the former chairman and chief executive officer's interest in the Company's Common Stock remains subject to terms substantially equivalent to the relevant terms of the Management Equity Participation Agreement. Stockholders Agreement The Company, Morgan Stanley Group, MSLEF II, certain other investors and the Management Investors have entered into a stockholders agreement (the "Stockholders Agreement"), which contains certain restrictions with respect to the transferability of Common Stock by the parties thereunder, certain registration rights granted by the Company with respect to such shares and - 62 - certain voting arrangements. The Stockholders Agreement will terminate as of such time as more than 50% of the shares of Common Stock then outstanding have been sold pursuant to one or more public offerings. Pursuant to the terms of the Stockholders Agreement, no holder of Common Stock who is a party or becomes a party to the Stockholders Agreement (a "Holder") may sell or otherwise encumber Common Stock beneficially owned by such Holder unless such transfer is to (i) certain permitted transferees (related persons or affiliated entities) of such Holder, (ii) the Company, or in certain cases its designees, (iii) subject to certain rights of first refusal by the other Holders and the Company, any person if immediately after such sale the transferee and its affiliates do not in the aggregate beneficially own more than 15% of the Common Stock then outstanding, subject to receipt of a legal opinion that such sale does not require the Common Stock to be registered under the Securities Act of 1933, and such transferee is not determined by the Board of Directors of the Company to be an "Adverse Person" (as defined in the Stockholders Agreement), (iv) any person pursuant to a public offering, or (v) any person pursuant to Rule 144 under the Securities Act of 1933 after 15% or more of the Common Stock has been sold pursuant to one or more underwritten public offerings. Notwithstanding the above, however, Morgan Stanley Group and MSLEF II, have the right to transfer all or any portion of the Common Stock beneficially owned by them (i) at any time in connection with the refinancing of the Company's outstanding indebtedness, or (ii) at any time in connection with one transaction or a series of transactions in which Morgan Stanley Group and/or MSLEF II intends to sell such number of shares of Common Stock then constituting a majority of the outstanding shares of Common Stock subject to the Stockholders Agreement. In the event that one or more Holders (each a "Controlling Stockholder") sell a majority of the shares of Common Stock subject to the Stockholders Agreement to a third party, each other Holder has the right to elect to sell on the same terms the same percentage of such other Holder's shares to the third party as the Controlling Stockholder is selling of its shares of Common Stock. In addition, if a Controlling Stockholder sells all of its shares of Common Stock to a third party, the Controlling Stockholder has the right to require that the remaining Holders sell all of their shares to the third party on the same terms. Pursuant to the terms of the Stockholders Agreement, Holders of specified percentages of Common Stock will be entitled to certain demand registration rights ("Demand Rights") with respect to shares of Common Stock held by them; provided, however, that the Company (or purchasers designated by the Company) shall have the right to purchase at fair market value the shares which are the subject of Demand Rights in lieu of registering such shares of Common Stock. In addition to the Demand Rights, Holders are, subject to certain limitations, entitled to register shares of Common Stock in connection with a registration statement prepared by the Company to register its equity securities. The Stockholders Agreement contains customary terms and provisions with respect to, among other things, registration procedures and certain rights to indemnification granted by parties thereunder in connection with the registration of Common Stock subject to such agreement. The Stockholders Agreement also requires the Holders to vote for director designees of Morgan Stanley Group and its affiliates (including one director designated by MSLEF II) ensuring Morgan Stanley Group and its affiliates majority board representation for so long as they own a majority of the outstanding Common Stock. Pursuant to the Stockholders Agreement, Holders have certain preemptive rights, subject to certain exceptions, with respect to future issuances of shares or share equivalents of Common Stock so that such Holders may maintain their proportional equity ownership interest in the Company. OTHER TRANSACTIONS The Company has entered into an agreement with MS&Co. for financial advisory services in consideration for which the Company pays MS&Co. an annual fee of $1 million. MS&Co. is also entitled to reimbursement for all reasonable expenses incurred in performance of the foregoing services. The Company paid MS&Co. approximately $1.0 million, $1.1 million and $1.1 million for these and other miscellaneous services in 1993, 1992 and 1991, respectively. - 63 - MS&Co. served as lead underwriter for the initial public offering of the 1988 Securities, the 1993 Notes, the 1994 Notes, the 12 3/8% Notes and the Junior Debentures and is a market-maker with respect to the 1988 Securities, the 1993 Notes, the 1994 Notes and the Pass Through Certificates. In connection with the sale of the 8 1/4% Notes and the 9% Notes in 1994, MS&Co. received approximately $20.4 million of underwriting fees. In connection with the sale of the 9 1/4% Notes and the 10% Notes in 1993, MS&Co. received approximately $19.5 million of underwriting fees. In 1992, MS&Co. received approximately $0.7 million in connection with the underwriting of the reissuance of the Company's Development Authority of Effingham County Pollution Control Revenue Refunding Bonds, Series 1988. In connection with the 1990 and 1991 Transactions, MS&Co. received approximately $2.9 million of advisory and underwriting fees. In connection with the Company's sale of Senior Secured Notes in 1991, MS&Co. received approximately $6.8 million of advisory fees. Based on transactions of similar size and nature, the Company believes the foregoing fees received by MS&Co. are no less favorable to the Company than would be available from unaffiliated third parties. In connection with the repurchases of certain of the Company's securities during 1991, $52.8 million aggregate principal amount at maturity of the Junior Debentures and $132.7 million aggregate principal amount at maturity of the 14 1/8% Debentures were purchased through MS&Co. In addition, $46.5 million and $77.5 million aggregate principal amount at maturity of the 14 1/8% Debentures were purchased from Leeway & Co. and First Plaza Group Trust, respectively, shareholders of the Company. The purchases were made in negotiated transactions at market prices. DESCRIPTION OF THE 12 5/8% DEBENTURES The 12 5/8% Debentures were issued under an Indenture dated as of November 1, 1988 (the "12 5/8% Debenture Indenture"), between the Company and United States Trust Company of New York, as Trustee (the "12 5/8% Debenture Trustee"). The following summary of certain provisions of the 12 5/8% Debenture Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the 12 5/8% Debenture Indenture, including the definitions of certain terms included therein. Wherever particular sections or defined terms of the 12 5/8% Debenture Indenture are referred to herein, such sections or defined terms shall be incorporated herein by reference. Unless the context otherwise requires, reference to Sections and defined terms refer to Sections and defined terms of the 12 5/8% Debenture Indenture. A copy of the 12 5/8% Debenture Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. Principal of, premium, if any, and interest on the 12 5/8% Debentures are payable, and the 12 5/8% Debentures are exchangeable and transferable, at the office or agency of the Company in The City of New York; provided, however, that payment of interest may be made at the option of the Company by check mailed to the Person entitled thereto as shown on the register for the 12 5/8% Debentures. The 12 5/8% Debentures are issued only in fully registered form without coupons, in denominations of $1,000 and any integral multiple thereof. No service charge will be made for any registration of transfer or exchange of 12 5/8% Debentures, except for any tax or other governmental charge that may be imposed in connection therewith. The 12 5/8% Debenture Indenture and the 12 5/8% Debentures are governed by and construed in accordance with the laws of the State of New York except as may otherwise be required by mandatory provisions of law. Terms of the 12 5/8% Debentures The 12 5/8% Debentures constitute unsecured subordinated obligations of the Company, limited to $145,815,0000 aggregate principal amount currently outstanding and will mature on November 1, 2000. The 12 5/8% Debentures bear interest at the rate per annum equal to 12 5/8% from the date of issuance of the 12 5/8% Debentures or from the most recent Interest Payment Date to which interest has been paid or duly provided for. Interest is payable semiannually (to the Holders of record at the close of business on the April 15 or October 15 immediately preceding the Interest Payment Date), on May 1 and November 1 of each year. - 64 - Optional Redemption. The 12 5/8% Debentures are redeemable, in whole or in part, at the option of the Company, upon not less than 30 nor more than 60 days' prior notice mailed first class to a Holder's last address, as it shall appear upon the registry book, at the following redemption prices (expressed in percentages of principal amount), together with accrued and unpaid interest to the redemption date, if redeemed during the 12-month period commencing Redemption November 1, Prices ----------- ---------- 1993 105.0% 1994 102.5% and thereafter at 100% of the principal amount. In the case of a partial redemption, selection of 12 5/8% Debentures for redemption will be made by the 12 5/8% Debenture Trustee in such manner as in its sole discretion it shall deem appropriate and fair. If any 12 5/8% Debenture is to be redeemed in part only, the notice of redemption that relates to such 12 5/8% Debenture shall state the portion of the principal amount to be redeemed. A new 12 5/8% Debenture in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original 12 5/8% Debenture. The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement each contain provisions restricting the optional redemption of the 12 5/8% Debentures. Subordination Upon any payment or distribution of assets or securities of the Company, as the case may be, of any kind or character, whether in cash, property or securities, upon any dissolution or winding up or total or partial liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due with respect to the Senior Debt (including any interest accruing subsequent to an event of bankruptcy to the extent that such interest is an allowed claim enforceable against the debtor under the United States bankruptcy code) shall first be paid in full in cash or cash equivalents, or payment provided for in cash or cash equivalents, before the Holders or the 12 5/8% Debenture Trustee on behalf of the Holders shall be entitled to receive any payment by the Company of the principal of, premium, if any, or interest on the 12 5/8% Debentures, or any payment to acquire any of the 12 5/8% Debentures for cash, property or securities, or any distribution with respect to the 12 5/8% Debentures of any cash, property or securities. Before any payment may be made by, or on behalf of, the Company of the principal of, premium, if any, or interest on the 12 5/8% Debentures upon any such dissolution or winding up or liquidation or reorganization, any payment or distribution of assets or securities of the Company of any kind or character, whether in cash, property or securities, to which the Holders of the 12 5/8% Debentures or the 12 5/8% Debenture Trustee on their behalf would be entitled, but for the subordination provisions of the 12 5/8% Debenture Indenture, shall be made by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, directly to the Holders of the Senior Debt (pro rata to such Holders on the basis of the respective amounts of Senior Debt held by such Holders) or their representatives or to the trustee or trustees under any indenture pursuant to which any of such Senior Debt may have been issued, as their respective interests may appear, to the extent necessary to pay all such Senior Debt in full in cash or cash equivalents after giving effect to any concurrent payment, distribution or provision therefor, to or for the Holders of such Senior Debt. No direct or indirect payment by or on behalf of the Company of principal of, premium, if any, or interest on the 12 5/8% Debentures whether pursuant to the terms of the 12 5/8% Debentures or upon acceleration or otherwise, shall be made if, at the time of such payment, there exists a default in the payment of all or any portion of the obligations on any Senior Debt (and the 12 5/8% Debenture Trustee has received written notice thereof), and such default shall not have been cured or waived or the benefits of this sentence waived by or on behalf of the Holders of such Senior Debt. In addition, during the continuance of any other event of default with respect to - 65 - (i) the Bank Credit Agreement pursuant to which the maturity thereof may be accelerated, (a) from and after the date of receipt by the 12 5/8% Debenture Trustee of written notice from the Agent or (b) if such event of default results from the acceleration of the 12 5/8% Debentures, from and after the date of such acceleration, no such payment may be made by or on behalf of the Company upon or in respect of the 12 5/8% Debentures for a period ("Payment Blockage Period") commencing on the earlier of the date of receipt of such notice or the date of such acceleration and ending 159 days thereafter (unless such Payment Blockage Period shall be terminated by written notice to the 12 5/8% Debenture Trustee from the Agent), or (ii) any other Designated Senior Debt, upon receipt by the 12 5/8% Debenture Trustee of written notice from the trustee or other representative for the Holders of such Designated Senior Debt (or the Holders of at least a majority in principal amount of such Designated Senior Debt then outstanding), no such payment may be made by or on behalf of the Company upon or in respect of the 12 5/8% Debentures for a Payment Blockage Period commencing on the date of receipt of such notice and ending 119 days thereafter (unless such Payment Blockage Period shall be terminated by written notice to the 12 5/8% Debenture Trustee from such trustee or other representative of such Holders). Not more than one Payment Blockage Period may be commenced with respect to the 12 5/8% Debentures during any period of 360 consecutive days; provided, that the commencement of a Payment Blockage Period by the representatives for, or the Holders of, Designated Senior Debt other than under the Bank Credit Agreement shall not bar the commencement of another Payment Blockage Period by the Agent within such period of 360 days. No event of default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Debt initiating such Payment Blockage Period shall be, or be made, the basis for the commencement of a second Payment Blockage Period by the representative for, or the Holders of, such Designated Senior Debt whether or not within a period of 360 consecutive days unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. As defined in the 12 5/8% Debenture Indenture, "Senior Debt" means the following obligations of the Company: (i) all Debt and other monetary obligations of the Company under the Bank Credit Agreement (including the Additional Bank Credit Amount (as defined below)) and the Company's Guarantee of any Debt or monetary obligation of any of its subsidiaries under the Bank Credit Agreement, (ii) all Debt of the Company, unless such Debt, by its terms or the terms of the instrument creating or evidencing it, is subordinate in right of payment to, or pari passu with, the 12 3/8% Notes and (iii) all fees, expenses and indemnities payable in connection with the Bank Credit Agreement and, if applicable, Currency Agreements and Interest Rate Agreements; provided that the term Senior Debt shall not include (a) any Debt of the Company which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, was without recourse to the Company, (b) any Debt of the Company to a Subsidiary, (c) any Debt of the Company not otherwise permitted by the "Limitation on Company and Subsidiary Debt" covenant described below, (d) Debt to any employee of the Company, (e) any liability for federal, state, local or other taxes owed or owing by the Company and (f) Trade Payables. As defined in the 12 5/8% Debenture Indenture, "Designated Senior Debt" means (i) Debt under the Bank Credit Agreement (including the Additional Bank Credit Amount) and (ii) any other Debt constituting Senior Debt which, at the time of determination has an aggregate principal amount of at least $75 million and is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" by the Company. Designated Senior Debt includes the Senior Secured Notes, the 1993 Term Loan Agreement, the 8 1/4% Notes, the 9 1/4% Notes and the Pass Through Certificates Leases. By reason of the subordination provisions described above, in the event of insolvency, funds which would otherwise be payable to Holders of the 12 5/8% Debentures will be paid to the Holders of Senior Debt to the extent necessary to pay the Senior Debt in full, and the Company may be unable to fully meet its obligations with respect to the 12 5/8% Debentures. At March 31, 1994, there was approximately $2.4 billion of Senior Debt with respect to the 12 5/8% Debentures. Subject to the restrictions set forth in the Bank Credit Agreement, the Senior Secured Note Agreement, the 1993 Term Loan Agreement, the 1993 Note Indentures, the 1994 Note Indentures and the 12 5/8% Debenture Indenture, in the future, the Company may issue additional Senior Debt to finance acquisitions, to refinance existing indebtedness, or for other corporate purposes. - 66 - The claims of Holders of the 12 5/8% Debentures, as creditors of the Company, will be junior in right of payment to all liabilities (whether or not for borrowed money) of all the Subsidiaries of the Company. At March 31, 1994, the amount of the liabilities of all the subsidiaries of the Company was approximately $124 million. Certain Definitions Set forth below is a summary of certain of the defined terms used in the covenants contained in the 12 5/8% Debenture Indenture. Reference is made to the 12 5/8% Debenture Indenture for the full definition of all terms as well as any other capitalized terms used herein for which no definition is provided. "Accreted Value" as of any date with respect to any Junior Discount Debenture (defined as the 14 1/8% Debentures in this Prospectus) means an amount equal to the sum of (i) the issue price of such Junior Discount Debenture as determined in accordance with Section 1273 of the Code and (ii) the aggregate of the portions of the original issue discount (the excess of the amounts considered as part of the "stated redemption price at maturity" of such Junior Discount Debentures within the meaning of Section 1273(a)(2) of the Code, whether denominated as principal or interest, over the issue price of such Junior Discount Debenture) which shall theretofore have accrued pursuant to Section 1272 of the Code (without regard to Section 1272(a)(7) of the Code) from the date of issue of such Junior Discount Debenture to the date of determination, minus (iii) any amount considered as part of the "stated maturity price" of such Junior Discount Debenture which has been paid on such Junior Discount Debenture from the date of issue to the date of determination. "Acquired Debt" means Debt of a Person existing at the time such Person became a Subsidiary. "Additional Bank Credit Amount" has the meaning specified in clause (i) of the second paragraph of the "Limitation on Company and Subsidiary Debt" covenant described below. "Adjusted Consolidated Net Worth" of any Person means, as of any date, the Consolidated Net Worth of such Person less any amount attributable to Preferred Stock or any other Capital Stock of such Person (other than Redeemable Stock, which is not included in Consolidated Net Worth) which is exchangeable or convertible into a debt security of such Person or any of its Subsidiaries at the option of such Person or any of its Subsidiaries. "Affiliate" as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities, by contract or otherwise. For purposes of this definition, neither Bankers Trust New York Corporation, nor any Bank nor any Affiliate of any of them shall be deemed to be an Affiliate of the Company. "Agent" means the agent under the Bank Credit Agreement or any successor agent appointed pursuant to the terms of such agreement. "Asset Sale" means the sale or other disposition by the Company or any of its Subsidiaries to any Person other than the Company or one of its Subsidiaries of (i) any of the Capital Stock of any of the Company's Subsidiaries or (ii) substantially all of the assets of any division or line of business of the Company or any of its Subsidiaries. "Average Life" means, as of the date of determination, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such debt security multiplied by the amount of such principal payment by (ii) the sum of all such principal payments. "Bank Credit Agreement" means the Amended and Restated Credit Agreement dated as of October 24, 1988 among FH Acquisition Corp., the Lenders listed therein, and Bankers Trust Company, as Agent, as such Agreement may be - 67 - amended, restated, supplemented or otherwise modified from time to time, and includes any agreement extending the maturity of, or restructuring (including, but not limited to, the inclusion of additional borrowers thereunder that are subsidiaries of the Company and whose obligations are guaranteed by the Company thereunder) all or any portion of, the Debt under such Agreement or any successor agreements and any agreement with one or more banks refinancing all or any portion of the Debt under such Agreement or any successor agreements. "Banks" means the lenders who are parties to the Bank Credit Agreement. "Board of Directors" means the Board of Directors for the Company or any committee of such Board duly authorized to act hereunder. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized by law to close. "Capital Funds Ratio" means, as of the date of determination, the ratio of (i) the sum of the Consolidated Net Worth of the Company on such date plus the outstanding aggregate amount of Debt (which, in the case of the Junior Discount Debentures (defined as the 14 1/8% Debentures in this Prospectus), shall be their Accreted Value) of the Company which is subordinated in right of payment to the Senior Subordinated Notes (defined as the 12 3/8% Notes in this Prospectus) or Subordinated Debentures (defined as the 12 5/8% Debentures in this Prospectus), as the case may be, and which has a remaining Average Life equal to or greater than the remaining Average Life of the Senior Subordinated Notes or the Subordinated Debentures, as the case may be, to (ii) the then outstanding principal amount of the Senior Subordinated Notes or the Subordinated Debentures, as the case may be. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) the discounted present value of the rental obligations of such Person as lessee under which, in conformity with GAAP, is required to be capitalized on the balance sheet of that Person and "Capitalized Lease Obligation" means the rental obligations, as aforesaid, under such lease. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means, with respect to any Person, any and all shares, interests, participations and other equivalents (however designated, whether voting or non-voting) of such Person's common stock and includes, without limitation, all series and classes of such common stock. "Consolidated Capital Expenditures" means expenditures (whether paid in cash or accrued as liabilities and including Capitalized Lease Obligations) of the Company and its Subsidiaries that, in conformity with GAAP, are included in the property, plant or equipment reflected in the consolidated balance sheet of the Company and its Subsidiaries. "Consolidated Cash Flow Available for Fixed Charges" means, for any period, the sum of the amounts for such period of (i) Consolidated Net Operating Income, (ii) Consolidated Interest Expense, (iii) provisions for taxes based on income, (iv) depreciation expense, (v) amortization expense, and (vi) all other non-cash items reducing Consolidated Net Operating Income, minus all non-cash items increasing Consolidated Net Operating Income, all as determined on a consolidated basis for any Person and its Subsidiaries in conformity with GAAP; provided that if, during such period, such Person or any of its Subsidiaries shall have made any Asset Sales, Consolidated Cash Flow Available for Fixed Charges of such Person and its Subsidiaries for such period shall be reduced by an amount equal to the Consolidated Cash Flow Available for Fixed Charges (if positive) directly attributable to the assets which are the subject of such Asset Sales for such period or increased by an amount equal to the Consolidated Cash Flow Available for Fixed Charges (if negative) directly attributable thereto for such period. - 68 - "Consolidated Fixed Charge Ratio" means the ratio, on a pro forma basis, giving effect to any Debt to be incurred as if it had been incurred on the first day of the four-fiscal-quarter period referred to in clause (i), of (i) the aggregate amount of Consolidated Cash Flow Available for Fixed Charges of any Person for the four fiscal quarters for which financial information in respect thereof is available immediately prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Ratio (the "Transaction Date") to (ii) the aggregate Consolidated Fixed Charges of such Person during such four fiscal quarters; provided, that in making such computation, (x) Consolidated Interest Expense attributable to interest on any Debt (whether existing or being incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period, (y) there shall be excluded from Consolidated Interest Expense any Interest Expense related to Debt which was outstanding during such four fiscal quarters but is not outstanding on the Transaction Date ("Repaid Debt"), unless the Company may again incur, create or assume such Repaid Debt in an amount equal to the weighted average amount of Repaid Debt outstanding during such four fiscal quarters (the "Weighted Average Amount") pursuant to clauses (i), (v), (vi), (x), (xi), (xii), (xiii) or (xv) of the second paragraph of the "Limitation on Company and Subsidiary Debt" covenant described below, in which case such Interest Expense shall not be excluded (it being understood that if the Company can again so incur, create or assume an amount of Repaid Debt which is less than the Weighted Average Amount, then a portion of such Interest Expense shall be excluded equivalent to a fraction of which the numerator shall be the difference between the Weighted Average Amount and the amount of such Repaid Debt which the Company can again so incur, create or assume, and of which the denominator shall be the Weighted Average Amount) and (z) if such Person or any of its Subsidiaries shall have made any Asset Sales subsequent to such four fiscal quarters and prior to the Transaction Date, such Asset Sales will be deemed to have been made during such four fiscal quarters. "Consolidated Fixed Charges" of any Person means, for any period, Consolidated Interest Expense; provided that if, during such period, such Person or any of its Subsidiaries shall have made any Asset Sales, Consolida- ted Fixed Charges of such Person and its Subsidiaries for such period shall be reduced by an amount equal to the Consolidated Fixed Charges directly attribu- table to the assets which are the subject of such Asset Sales for such period. "Consolidated Interest Expense" of any Person means, for any period, the aggregate Interest Expense of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" means, for any period taken as one accounting period, the net income (or loss) of any Person and its Subsidiaries on a consolidated basis for such period determined in conformity with GAAP; provided that there shall be excluded (i) the income (or loss) of any Person (other than a Subsidiary of such Person) in which any other Person (other than such Person or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to such Person or any of its Subsidiaries by such other Person during such period, (ii) except to the extent includible pursuant to the foregoing clause (i), the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of such Person or is merged into or consolidated with such Person or any of its Subsidiaries or that Person's assets are acquired by such Person or any of its Subsidiaries, (iii) the income of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, and (iv) any gains or losses attributable to Asset Sales. "Consolidated Net Operating Income" of any Person means, for any period taken as one accounting period, the aggregate Consolidated Net Income of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, adjusted by excluding (to the extent not otherwise excluded in calculating Consolidated Net Income) any net extraordinary gain or net extraordinary loss, as the case may be, during such period except that no adjustment shall be made for extraordinary items consisting of income tax effects associated with net operating loss carryforwards incurred by such Person after the Effective Time and prior to any reporting of positive Consolidated Net Income. - 69 - "Consolidated Net Worth" of any Person means, as at any date of determination, the sum of the Capital Stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) of such Person and its Subsidiaries on a consolidated basis, less amounts attributable to Redeemable Stock, each item to be determined in conformity with GAAP (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement No. 52). "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in currency values to or under which the Company or any of its Subsidiaries is a party or a beneficiary. "Debt" of any Person means at any date, without duplication, (i) all obligations, contingent or otherwise, of such Person in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (or reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all obligations of such Person as lessee under Capitalized Leases, (vi) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (vii) all Debt of others Guaranteed by such Person and (viii) to the extent not otherwise included, obligations under Currency Agreements and Interest Rate Agreements. The amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability of any such contingent obligations at such date. "Debt to Net Worth Ratio" means, as at any date of determination, the ratio of (i) the outstanding aggregate amount of Debt of the Company and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, to (ii) the Consolidated Net Worth of the Company. "Domestic Subsidiary" means a Subsidiary of the Company which is not a Foreign Subsidiary. "Effective Time" means the date and time the Merger became effective as set forth in the Merger Agreement. "Financing" means the financing of the Tender Offer and the Merger. "Foreign Subsidiary" means any subsidiary of the Company which is organized under the laws of a jurisdiction other than the United States of America or any State thereof and more than 80% of the sales, earnings or assets (determined on a consolidated basis in accordance with GAAP) of which are located or derived from operations located in territories of the United States of America and jurisdictions outside the United States of America. "GAAP" means generally accepted accounting principles in the United States as in effect as of the date of the relevant Subordinated Indenture (defined as the 12 3/8% Notes, the 12 5/8% Debentures and the 14 1/8% Debentures, respectively, in this Prospectus), including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession; provided, that all ratios and computations based on GAAP contained in the Subordinated Indentures shall be computed in accordance with GAAP except that calculations made for the purpose of determining compliance with the terms of the covenants set forth below and other provisions of the Subordinated Indentures shall be made, except as otherwise provided herein, without giving effect to adjustments in component amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17 as a result of the Tender Offer and the Merger and for the amortization of any expenses incurred in connection with the Tender Offer, the Merger or the Financing. - 70 - "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation of such other Person (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Interest Expense" of any Person means, for any period taken as one accounting period, the aggregate amount of interest in respect of Debt (including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and the net costs associated with Interest Rate Agreements) and all but the principal component of rentals in respect of Capitalized Lease Obligations, paid or accrued by such Person during such period, excluding, however, interest expense not required to be paid in cash (including amortization of discount) and which such Person did not in fact pay in cash (or, in the case of interest accrued for which payment has not become due at the time of determination, which such Person does not intend to pay in cash), all as determined in accordance with GAAP. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in interest rates, to or under which the Company or any of its Subsidiaries is a party or a beneficiary. "Joint Venture" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form; provided that, as to any such arrangement in corporate form, such corporation shall not, as to any Person of which such corporation is a Subsidiary, be considered to be a Joint Venture to which such Person is a party. "Junior Discount Debenture Indenture" (defined as the 14 1/8% Debenture Indenture in this Prospectus) means the indenture dated as of November 1, 1988 between the Company and Ameritrust Company National Association, as trustee, pursuant to which the Junior Discount Debentures (defined as the 14 1/8% Debentures in this Prospectus) were issued. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset (including any conditional sale agreement, capital lease or other title retention agreement relating to such asset). "Material Subsidiary" means each and any Subsidiary which (i) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company, or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company, all as shown on the consolidated financial statements of the Company for such fiscal year. "Merger" means the merger of FH Acquisition Corp. into the Company pursuant to the Merger Agreement. "Permitted Liens" means (i) Liens for taxes, assessments, governmental charges or claims which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (ii) statutory Liens of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's, or other like Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate proceedings, if a reserve or other appropriate provision, if any, - 71 - as shall be required in conformity with GAAP shall have been made therefor; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens created or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, restrictions and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any of its Material Subsidiaries incurred in the ordinary course of business; (vi) Liens (including extensions and renewals thereof) upon real or tangible personal property acquired after the Effective Time; provided that (a) any such Lien is created solely for the purpose of securing Debt representing, or incurred to finance, refinance or refund, the cost (including the cost of improvement or construction) of the item of property subject thereto, (b) the principal amount of the Debt secured by such Lien does not exceed 100% of such cost, (c) such Lien does not extend to or cover any other property other than such item of property and any improvements on such item and (d) the incurrence of such Debt is permitted by the "Limitation on Company and Subsidiary Debt" covenant; (vii) Liens upon specific items of inventory or other goods and proceeds of the Company or its Subsidiaries securing the Company's or any Subsidiary's obligations in respect of bankers' acceptances issued or created for the account of any such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (viii) Liens securing reimbursement obligations with respect to letters of credit which encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (ix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (x) judgment and attachment Liens not giving rise to an Event of Default; (xi) leases or subleases granted to others not interfering in any material respect with the business of the Company or any of its Subsidiaries; (xii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or one of its Subsidiaries relating to such property or assets; (xiii) Liens encumbering customary initial deposits and margin deposits, and other Liens incurred in the ordinary course of business and which are either within the general parameters customary in the industry or otherwise approved by requisite Banks, in each case securing Debt under Interest Rate Agreements and Currency Agreements and forward contracts, options, futures contracts, futures options or similar agreements or arrangements designed to protect the Company or any of its Subsidiaries from fluctuations in the price of commodities; (xiv) Liens encumbering deposits made to secure obligations arising from statutory or regulatory requirements of the Company or its Subsidiaries; (xv) Liens arising out of consignment or similar arrangements for the sale of goods entered into by the Company or any of its Subsidiaries in the ordinary course of business in accordance with the past practices of the Company and its Subsidiaries prior to the Effective Time; (xvi) any interest or title of a lessor in the property subject to any Capitalized Lease Obligation or operating lease; (xvii) Liens on the assets of any entity existing at the time such assets are acquired, whether by merger, consolidation, purchase of assets or otherwise; provided that such Liens do not extend to any other assets of the Company or any of its subsidiaries; and (xviii) Liens arising from filing UCC financing statements regarding leases. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's preferred or preference stock, and includes, without limitation, all classes and series of preferred or preference stock. "Redeemable Stock" means any class or series of Capital Stock that by its terms or otherwise is required to be redeemed prior to the stated maturity of the Senior Subordinated Notes (defined as the 12 3/8% Notes in this Prospectus) or the Subordinated Debentures (defined as the 12 5/8% Debentures in this Prospectus), or is redeemable at the option of the Holder thereof at any time prior to stated maturity of any of the Senior Subordinated Notes or the Subordinated Debentures. "Subsidiary" means 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 - 72 - election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more of the other subsidiaries of that Person or a combination thereof. (Section 1.1) Covenants The 12 5/8% Debenture Indenture contains, among others, the following covenants. Limitation on Company and Subsidiary Debt. The 12 5/8% Debenture Indenture provides that the Company shall not, and shall not permit any of its Subsidiaries to, incur, create, assume, guarantee or in any other manner become liable with respect to, or extend the maturity of or become responsible for the payment of, any Debt unless, after giving effect to the incurrence of such Debt and the receipt and application of the proceeds thereof, the Consolidated Fixed Charge Ratio of the Company would be greater than 1.5 to 1 if such determination is made after December 31, 1993; provided that if the Debt which is the subject of a determination is Acquired Debt, then the Consolidated Cash Flow Available for Fixed Charges of the Company shall be determined giving pro forma effect to both the incurrence or assumption of such Acquired Debt by the Company or such Subsidiary and the inclusion in the Consolidated Cash Flow Available for Fixed Charges of the Company of the Consolidated Cash Flow Available for Fixed Charges of the Person whose Debt would constitute such Acquired Debt. Notwithstanding the foregoing, the Company and its Subsidiaries may incur, create, assume or guarantee each and all of the following: (i) Debt under the Bank Credit Agreement in an aggregate principal amount not to exceed the sum of (A) $2,200 million at any one time outstanding, less (x) any mandatory principal payments made by the Company pursuant to the Bank Credit Agreement other than mandatory principal payments expressly required to be made from excess cash flow; provided that to the extent any mandatory principal payments expressly required to be made from excess cash flow reduce any other mandatory principal payment obligation of the Company, then at the time such other mandatory principal payment is made (or would have been made but for the earlier payment in full from excess cash flow), less the full amount of such mandatory principal payment obligation as if such amount had not been reduced by such mandatory principal payment from excess cash flow and (y) any amounts by which the revolving credit facility commitments are permanently reduced, (B) an amount (the "Additional Bank Credit Amount") equal to $500 million, and (C) an amount equal to Debt, arising by virtue of letters of credit or other facilities, permitted by clause (ix) of this "Limitation on Company and Subsidiary Debt" covenant; (ii) Debt evidenced by the 12 5/8% Debentures, the 14 1/8% Debentures and the obligations under the 12 5/8% Debentures Indenture and the 14 1/8% Debenture Indenture; (iii) Debt of the Company to any of its Subsidiaries or of a Subsidiary to the Company or to a Subsidiary; (iv) Debt the proceeds of which are used to refinance outstanding Debt of the Company or any of its Subsidiaries in an amount (or, if such new Debt provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, with an original issue price) not to exceed the amount so refinanced (plus, accrued interest and fees and expenses and, with respect to refinancings of the Bank Credit Agreement or any successor or replacement facility, any Additional Bank Credit Amount not previously borrowed pursuant to clause (i) above or this clause (iv)), provided that Debt the proceeds of which are used to refinance the 12 5/8% Debentures, the 14 1/8% Debentures or other Debt of the Company which is subordinated in right of payment to the 12 5/8% Debentures shall only be permitted (1) if, in case the 12 5/8% Debentures are refinanced in part, such Debt is expressly made pari passu or subordinate in right of payment to the remaining 12 5/8% Debentures, (2) if, in case the Debt to be refinanced is subordinated in right of payment to the 12 5/8% Debentures, such Debt is subordinated in right of payment to the 12 5/8% Debentures at least to the extent that the Debt to be refinanced is subordinated to the 12 5/8% Debentures, and (3) if, in case the 12 5/8% Debentures are refinanced in part or the Debt to be refinanced is subordinated in right of payment to the 12 5/8% Debentures, such Debt determined as of the date of incurrence of such new Debt does not mature prior to the final scheduled maturity date of the 12 5/8% Debentures and the Average Life of such Debt is equal to or greater than the remaining Average Life of the 12 5/8% Debentures; and provided, further, that in no event may Debt of the Company (other than Senior Debt) be refinanced by means of Debt of any Subsidiary of the Company pursuant to this clause (iv) and provided, further, that the two foregoing provisos of this clause (iv) shall not be applicable to Debt incurred to refinance (A) up to $352,709,000 - 73 - aggregate principal amount of Junior Debentures plus any additional Junior Debentures issued in lieu of cash interest on such amount of Junior Debentures (less any amount incurred pursuant to (B) of this clause (iv)) and (B) up to $827 million in aggregate principal amount of 14 1/8% Debentures in an amount not to exceed the Accreted Value of the 14 1/8% Debentures so refinanced at the time of such refinancing (less any amount incurred pursuant to (A) of this clause (iv)) (provided that no refinancings may be effected pursuant to this third proviso if, after giving effect to such refinancing, the Consolidated Net Worth of the Company plus the aggregate amount of Debt of the Company which is subordinated to the 12 5/8% Debentures and which has an Average Life equal to or greater than the remaining Average Life of the 12 5/8% Debentures would be less than $430 million); (v) Debt up to an aggregate principal amount (or, if such Debt provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the entirety thereof, with an original issue price) of $500 million at any one time outstanding less the outstanding Additional Bank Credit Amount; (vi) Debt under Currency Agreements and Interest Rate Agreements, provided that in the case of Currency Agreements which relate to other Debt, such Currency Agreements do not increase the Debt of the Company outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (vii) Debt incurred in connection with (x) the repurchase of shares of, or options to purchase shares of, the Common Stock from employees of the Company or any of its Subsidiaries or (y) Guarantees of borrowings made by employees exclusively for the purpose of exercising options to purchase shares of Common Stock and paying any associated tax liability, in each case pursuant to the terms of the form of agreements under which such employees purchase, or are granted the option to purchase, shares of the Common Stock; (viii) Debt which by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued, (1) is subordinate in right of payment to the 12 5/8% Debentures, at least to the extent the 12 5/8% Debentures are subordinate to Senior Debt, and (2) provides that no payments of principal of such Debt by way of sinking fund, mandatory redemption or otherwise (including defeasance) may be made by the Company (including, without limitation, at the option of the Holder thereof) at any time prior to the maturity of the 12 5/8% Debentures, provided, however, that after giving effect to the incurrence of such Debt, the Consolidated Fixed Charge Ratio of the Company would be at least 1.5 to 1; (ix) Debt arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any Subsidiary pursuant to such agreements, in any case incurred or assumed in connection with the disposition of any business, assets or Subsidiary of the Company, other than Guarantees of Debt incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; (x) Debt in an aggregate amount not to exceed $75 million at any one time outstanding under Guarantees of Debt incurred in the ordinary course of business to suppliers, licensees, franchisees, or customers; (xi) Debt in an aggregate amount not to exceed $100 million at any one time outstanding in respect of performance bonds and surety bonds provided in the ordinary course of business, and refinancings thereof; (xii) Debt under Guarantees in respect of obligations of Foreign Subsidiaries and Joint Ventures in an aggregate principal amount not to exceed $200 million at any one time outstanding; (xiii) Debt of the Company in respect of letters of credit not to exceed an aggregate amount of $200 million at any time outstanding plus any letters of credit from time to time outstanding with respect to pollution control revenue bonds issued by the Development Authority of Effingham County for the benefit of the Company; (xiv) Debt directly incurred to finance Consolidated Capital Expenditures in an aggregate amount not to exceed in any fiscal year of the Company the amount indicated below: Maximum Fiscal Year Amount ----------- ------- (In Millions) 1994 $250 1995 250 1996 and thereafter 275 provided, however, that the amount of Debt which may be incurred in any fiscal year pursuant to this clause (xiv) shall be increased by the amount of Debt which could have been incurred in the prior fiscal year pursuant to this - 74 - clause (xiv) but which was not so incurred; and (xv) Debt of Foreign Subsidiaries in an aggregate principal amount not to exceed $200 million at any one time outstanding. For purposes of determining any particular amount of Debt under this "Limitation on Company and Subsidiary Debt" covenant, Guarantees of (or obligations with respect to letters of credit supporting) Debt otherwise included in the determination of such amount shall also not be included. For the purpose of determining compliance with this "Limitation on Company and Subsidiary Debt" covenant, (A) in the event that an item of Debt meets the criteria of more than one of the types of Debt described in the above clauses, the Company, in its sole discretion, shall classify such item of Debt and only be required to include the amount and type of such Debt in one of such clauses and (B) the amount of Debt issued at a price which is less than the principal amount thereof will be equal to the amount of the liability in respect thereof determined in accordance with GAAP. (Section 3.5) Limitation on Preferred Stock of Domestic Subsidiaries and Subsidiary Distributions. The 12 5/8% Debenture Indenture provides that the Company will not permit any Domestic Subsidiary of the Company to, directly or indirectly, issue or sell any Preferred Stock (except to the Company or a Domestic Subsidiary). In addition, the 12 5/8% Debenture Indenture provides that the Company will not permit any Domestic Subsidiary of the Company to, directly or indirectly, (i) declare or pay any dividend or make any distribution on the Capital Stock of such Domestic Subsidiary or to the Holders of such Domestic Subsidiary's Capital Stock (other than dividends or distributions payable in Common Stock of such Domestic Subsidiary) or (ii) purchase, redeem or otherwise acquire or retire for value, any such Capital Stock; provided, that this covenant shall not prevent (A) the payment by any Domestic Subsidiary of dividends or other distributions to the Company or a wholly owned Domestic Subsidiary of the Company or the redemption or repurchase by any Domestic Subsidiary of any of its Capital Stock owned by the Company or a wholly owned Domestic Subsidiary of the Company, (B) the payment of dividends to Holders of the Common Stock of a Domestic Subsidiary, following an initial public offering of such Domestic Subsidiary's Common Stock, of up to 6% per annum of the net proceeds received by such Domestic Subsidiary in such public offering or (C) the payment of pro rata dividends to Holders of minority interests in the Capital Stock of a Domestic Subsidiary of the Company up to an aggregate of $50 million (excluding amounts paid pursuant to clause (B) above), provided that, in the case of clauses (B) and (C), no Event of Default or event or condition which through the giving of notice or lapse of time or both would become an Event of Default shall have occurred and be continuing or occur as a consequence thereof and provided, further, that nothing contained in this paragraph shall prevent any Domestic Subsidiary from making any payment at any time up to the amount of Restricted Payments that the Company could make at that time pursuant to the first paragraph of the "Limitation on Restricted Payments" covenant described below. (Section 3.6) Limitation on Restricted Payments. The 12 5/8% Debenture Indenture provides that the Company will not directly or indirectly (i) declare or pay any dividend or make any distribution on its Capital Stock or to the Holders of its Capital Stock (other than dividends or distributions payable in its Common Stock, in shares of Capital Stock, other than Redeemable Stock, of the same class held by such Holders or in options, warrants or other rights to purchase Common Stock or such Capital Stock), (ii) purchase, redeem or otherwise acquire or retire for value, or permit any Subsidiary of the Company to, directly or indirectly, purchase, redeem or otherwise acquire or retire for value, any such Capital Stock (including options, warrants or other rights to acquire such Capital Stock), or (iii) redeem, repurchase, defease (including, but not limited to, in-substance or legal defeasance) or otherwise acquire or retire for value, or permit any Subsidiary of the Company to, directly or indirectly, redeem, repurchase, defease (including, but not limited to, in-substance or legal defeasance) or otherwise acquire or retire for value, prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, Debt of the Company which is pari passu or subordinate (whether pursuant to its terms or by operation of law) in right of payment to the 12 5/8% Debentures and which was scheduled to mature on or after the maturity date of the 12 5/8% Debentures (the foregoing actions, set forth in clauses (i) through (iii), being referred to as "Restricted Payments"), if: (a) at the time of such Restricted Payment or after giving effect thereto, an Event of Default or an event or condition which through the giving of notice or lapse of time or both would become an Event of Default shall have occurred and be continuing; or (b) after giving effect to such Restricted Payment, the - 75 - aggregate amount expended for all Restricted Payments (the amount so expended, if other than in cash, to be determined by the Board of Directors, whose reasonable determination shall be conclusive and evidenced by a resolution of the Board of Directors certified by delivery of an Officers' Certificate to the Trustee) shall exceed the sum (without duplication) of (1) 50% of the aggregate Consolidated Net Operating Income of the Company accrued on a cumulative basis for the period (taken as one accounting period) beginning with the first full fiscal quarter following the date of issuance of the 12 5/8% Debentures to the last day of the quarter immediately preceding the quarter in which the Restricted Payment is proposed to be made; provided that if Consolidated Net Operating Income for such period is a loss, then 100% of such loss; plus (2) the aggregate net proceeds, including the fair market value of property other than cash (as determined by the Board of Directors, whose reasonable determination shall be conclusive and evidenced by a resolution of the Board of Directors certified by delivery of an Officers' Certificate to the Trustee), received by the Company from the issuance and sale (other than to a Subsidiary) after the date of issuance of the 12 5/8% Debentures of the Company's Capital Stock (other than Redeemable Stock), including the issuance or sale for cash or upon the conversion or exchange of any Debt or other securities of the Company (which Debt or other securities are, by their terms, convertible into Capital Stock of the Company) or from the exercise of any options, warrants or other rights to acquire Capital Stock of the Company, minus (3) the aggregate amount of payments previously made by all Domestic Subsidiaries pursuant to the third proviso of the "Limitation on Preferred Stock of Domestic Subsidiaries and Domestic Subsidiary Distributions" covenant. For purposes of any calculation pursuant to the preceding sentence which is required to be made in respect of a dividend payment to be made within 60 days after the declaration of such dividend by the Company, such dividend shall be deemed to be paid at the date of declaration. For purposes of clause (2) above, the proceeds received by the Company (x) from the issuance of its Capital Stock upon the conversion of, or exchange for, Debt shall be equal to the aggregate amount of the Debt converted or exchanged and (y) upon the conversion or exchange of other securities of the Company shall be equal to the aggregate net proceeds of the original sale of the securities so converted or exchanged (if such proceeds of such original sale were not previously included in any calculation for the purposes of clause (2) above) plus any additional sums payable upon conversion or exchange. The foregoing provision shall not be violated by reason of (1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would comply with the foregoing provision, (2) redemptions or repurchases of Preferred Stock of the Company, the 14 1/8% Debentures or other Debt of the Company which is pari passu or subordinated in right of payment to the 12 5/8% Debentures and which was scheduled to mature on or after the maturity date of the 12 5/8% Debentures, provided that this clause (2) shall only be applicable (x) to the redemption or repurchase of (A) up to $352,709,000 in aggregate principal amount of Junior Debentures plus any additional Junior Debentures issued in lieu of cash interest on such amount of Junior Debentures (less the amount redeemed or repurchased pursuant to (B) of this clause (x)) and (B) up to $827 million in aggregate principal amount of 14 1/8% Debentures in an amount not to exceed the Accreted Value of the 14 1/8% Debentures redeemed or repurchased at the time of such redemption or repurchase (less the amount redeemed or repurchased pursuant to (A) of this clause (x)) and (y) with respect to each additional redemption or repurchase pursuant to this clause (2) beyond those that could be made pursuant to clause (x) above, if after giving effect to such redemption or repurchase, the Company could incur at least $1.00 of Debt pursuant to the first paragraph of the "Limitation on Company and Subsidiary Debt" covenant and the Company would have a Capital Funds Ratio equal to or greater than 1.5 to 1 (provided, that no redemptions or repurchases may be effected pursuant to this clause (2) if, after giving effect to such redemption or repurchase, the Consolidated Net Worth of the Company plus the aggregate amount of Debt of the Company which is subordinate to the 12 5/8% Debentures and which has an Average Life equal to or greater than the remaining Average Life of the 12 5/8% Debentures is less than or equal to $430 million), (3) the payment of accrued and unpaid dividends on Preferred Stock of the Company, (4) the payment of dividends on Common Stock, following an initial public offering of Common Stock, of up to 6% per annum of the net proceeds received by the Company in such public offering, (5) the acquisition, redemption or retirement of Preferred Stock of the Company in exchange for Debt then permitted to be incurred under the first paragraph or under clause (viii) of the "Limitation on Company and Subsidiary Debt" covenant, (6) the - 76 - repurchase of shares of, or options to purchase shares of, Common Stock from employees of the Company or any of its Subsidiaries pursuant to the terms of the form of agreements under which employees purchase, or are granted the option to purchase, shares of Common Stock, (7) the acquisition of 14 1/8% Debentures or other Debt of the Company which is pari passu or subordinated in right of payment to the 12 5/8% Debentures in exchange for shares of the Common Stock, (8) the redemption or repurchase of the 14 1/8% Debentures with the proceeds of Debt incurred pursuant to the first paragraph or under clause (viii) of the second paragraph of the "Limitation on Company or Subsidiary Debt" covenant or (9) the repurchase of Common Stock owned by Morgan Stanley for immediate resale, provided that in each case no Event of Default or event or condition which through the giving of notice or lapse of time or both would become an Event of Default shall have occurred and be continuing or occur as a consequence thereof. (Section 3.7) Limitation on Payment Restrictions Affecting Subsidiaries. The 12 5/8% Debenture Indenture provides that the Company will not, and will not permit any Subsidiary of the Company to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on the right of any such Subsidiary to (i) pay dividends or make any other distributions on such Subsidiary's Capital Stock or pay any Debt owed to the Company or any Subsidiary of the Company, (ii) make any loans or advances to the Company or any Subsidiary of the Company or (iii) transfer any of its property or assets to the Company or any Subsidiary of the Company, except (a) any restrictions existing under agreements in effect, or entered into, on the date of issuance of the 12 5/8% Debentures, or any renewals or extensions thereof, provided that the terms and conditions of any such renewals or extensions are no less favorable to Holders of the 12 5/8% Debentures than the agreements being renewed or extended, (b) any restrictions existing under any agreement which refinances the Bank Credit Agreement, provided that the terms and conditions of any such agreement are no less favorable to the Holders of the 12 5/8% Debentures than those under or pursuant to the Bank Credit Agreement as in effect on the date of issuance of the 12 5/8% Debentures, (c) any restrictions existing under any agreement which refinances any 12 5/8% Debentures, provided that the terms and conditions of any such agreement are no less favorable to Holders of the 12 5/8% Debentures than those under or pursuant to the 12 5/8% Debentures, (d) any restrictions existing with respect to Debt of a Person at the time it becomes a Subsidiary and (e) any restrictions set forth in the Bank Credit Agreement, provided such restrictions are no more restrictive on the Company and its Subsidiaries than the provisions described in this paragraph. Nothing contained in this covenant shall prevent the Company from entering into any agreement providing for the incurrence of Liens permitted by the "Limitation on Liens" covenant described below. (Section 3.8) Limitations on Liens. The 12 5/8% Debenture Indenture provides that the Company will not, and will not permit any Subsidiary of the Company to, create, incur, assume or suffer to exist any Liens upon any of their respective assets unless the 12 5/8% Debentures are equally and ratably secured, except for (i) Liens existing as of or immediately after the date of issuance of the 12 5/8% Debentures, including Liens with respect to the Financing and Liens otherwise required under the Collateral Documents (as defined in the Bank Credit Agreement) as in effect as of, or immediately after, the date of issuance of the 12 5/8% Debentures or under substantially similar agreements securing the Bank Credit Agreement; (ii) Liens created after the date of issuance of the 12 5/8% Debentures, on any assets or Capital Stock of the Company or its Subsidiaries created in favor of the Holders of the 12 5/8% Debentures and successor or replacement facilities thereof; (iii) Liens granted after the date of issuance of the 12 5/8% Debentures on any assets or Capital Stock of the Company or its Subsidiaries created in favor of any of the Banks under the Bank Credit Agreement and successor or replacement facilities thereof, provided that the 12 5/8% Debentures are secured by Liens on such assets or Capital Stock, which are subordinated to the Liens securing the Debt under the Bank Credit Agreement or any successor or replacement facilities thereof; provided, further, that the foregoing proviso will not apply to (A) Liens granted or arising in connection with the Merger or the Financing, (B) Liens securing Debt permitted under clause (ix) of the second paragraph of the "Limitation on Company or Subsidiary Debt" covenant (or the obligations arising under the agreements referred to in clause (ix) of the second paragraph of the "Limitation on Company or Subsidiary Debt" covenant), or (C) Liens granted pursuant to, or to carry out the provisions of, Section 5.14 of the Bank Credit Agreement as in effect on the date of the 12 5/8% Debenture Indenture, or any provision in a successor or replacement facility that is substantially identical to such Section 5.14; (iv) Liens securing the - 77 - payment of Debt permitted to be incurred under the first paragraph or by clauses (iii), (v), (vi) or (xiv) of the second paragraph of the "Limitation on Company or Subsidiary Debt" covenant and Liens securing Senior Debt incurred under clause (iv) of the second paragraph of the "Limitation on Company and Subsidiary Debt" covenant; (v) Liens with respect to Acquired Debt provided that such Liens do not extend to or cover any property or assets of the Company or any Subsidiary of the Company, other than the property or assets acquired; (vi) Liens with respect to the assets of a Subsidiary of the Company granted by such Subsidiary to the Company to secure Debt owing to the Company by such Subsidiary; (vii) Liens securing the Additional Bank Credit Amount and Liens securing any obligation in respect of Senior Debt issued to any Bank (including, without limitation, any Lien granted under the Bank Credit Agreement); (viii) Liens securing all or any portion of Debt which is incurred to refinance secured Debt and is permitted to be incurred under clause (iv) of the second paragraph of the "Limitation on Company or Subsidiary Debt" covenant, provided that such Liens do not extend to or cover any property or assets of the Company or any Subsidiary of the Company other than the property or assets securing the Debt being refinanced; (ix) Liens securing Debt existing as of the date of issuance of the 12 5/8% Debentures or any refinancing thereof, which is unsecured as of the date of issuance of the 12 5/8% Debentures, provided that the aggregate amount of such secured Debt does not exceed $100 million, (x) Liens securing Debt with respect to property or assets with an aggregate fair market value of not more than $50 million; (xi) Permitted Liens; and (xii) Liens securing any Debt required to be secured equally and ratably with any Debt secured by Liens permitted by clauses (i) through (xi) hereof. (Section 3.9) Transactions with Stockholders and Affiliates. The 12 5/8% Debenture Indenture provides that, following the Merger, the Company will not, and will not permit any Subsidiary of the Company to, directly or indirectly, enter into any transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any Holder of 5% or more of any class of Capital Stock of the Company (excluding The Bankers Trust New York Corporation and any of its Subsidiaries or Affiliates) or with any Affiliate of the Company or of any such Holder, on terms that are less favorable to the Company or such Subsidiary, as the case may be, than those which might be obtained at the time of such transaction from a Person who is not such a Holder or Affiliate; provided, however, that the purchase, sale or lease of any property to, or exchange of any property with, or other disposition of any property to any such Holder of 5% or more of any class of Capital Stock of the Company or any Affiliate of the Company or of any such Holder shall be deemed to be on terms that are no less favorable to the Company or such Subsidiary, as the case may be, than those obtainable at the time of the transaction from a Person who is not such a Holder or Affiliate if the Board of Directors shall have received a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Company from a financial point of view, and provided, further however, that this covenant shall not limit, or be applicable to, (i) the payment of fees to MS&Co. and its Affiliates for financial and consulting services, (ii) transactions between the Company or any of its Subsidiaries and any employee of the Company or any of its Subsidiaries that are approved by the Board of Directors, (iii) the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company or (iv) any transaction between the Company and any of its wholly owned Subsidiaries or between any of its wholly owned Subsidiaries. (Section 3.10) Mergers and Consolidations The 12 5/8% Debenture Indenture provides that the Company may not consolidate with, merge with or into or transfer all or substantially all of its assets (as an entirety or substantially as an entirety in one transaction or a series of related transactions), to any Person (except a wholly owned Subsidiary of the Company with a positive Consolidated Net Worth) unless: (i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which properties and assets of the Company are transferred shall be a solvent corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia and shall expressly assume, by supplemental indenture, executed and delivered to the 12 5/8% Debenture Trustee, in form satisfactory to the 12 5/8% Debenture Trustee, all of the obligations of the Company under the 12 5/8% Debentures and the 12 5/8% Debenture Indenture; (ii) immediately before and immediately after giving effect to such transaction, no Event of Default or event or condition which - 78 - through the giving of notice or lapse of time or both would become an Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis, the Adjusted Consolidated Net Worth of the surviving entity would be at least equal to the Adjusted Consolidated Net Worth of the Company immediately prior to such transaction; (iv) immediately after giving effect to such transaction on a pro forma basis, the Consolidated Fixed Charge Ratio of the surviving entity would be at least 1 to 1; provided, that, if the Consolidated Fixed Charge Ratio of the Company is within the range set forth in column (A) below, then the pro forma Consolidated Fixed Charge Ratio of the surviving entity shall be at least equal to the percentage of the Consolidated Fixed Charge Ratio of the Company set forth in column (B) below: (A) (B) --- --- 1.11:1 to 1.99:1 90% 2.00:1 to 2.99:1 80% 3.00:1 to 3.99:1 70% 4.00:1 to 4.99:1 60% 5.00:1 to 5 or more 50% and provided, further, that if the pro forma Consolidated Fixed Charge Ratio of the surviving entity is 3 to 1 or more, the calculation in the preceding proviso shall be inapplicable and such transaction shall be deemed to have complied with the requirements of this clause (iv); and (v) the Company has delivered to the 12 5/8% Debenture Trustee an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clause (iv)) and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture comply with the provisions of the 12 5/8% Debenture Indenture and that all conditions precedent therein provided for relating to such transaction have been complied with. If, as a result of any such merger or consolidation, or upon any conveyance, lease or transfer of the property of the Company substantially as an entirety to any other corporation, any of the property or assets held by the Company prior to such event would thereupon become subject to any Lien, then, unless such Lien could be created pursuant to the "Limitation on Liens" covenant without securing the 12 5/8% Debentures in the manner provided in such covenant, the 12 5/8% Debentures outstanding shall be secured in the manner required in the "Limitation on Liens" covenant pursuant to documentation providing that the Holders (or the 12 5/8% Debenture Trustee on their behalf) are entitled to vote as their interests appear in connection with the release of or enforcement against any property or assets subject to such Lien. (Sections 9.1 and 9.3) Events of Default The 12 5/8% Debenture Indenture defines an "Event of Default" as being: (i) default in the payment of any interest on any of the 12 5/8% Debentures when the same becomes due and payable and the default continues for a period of 30 days; (ii) default in the payment of the principal of (or premium, if any, on) any of the 12 5/8% Debentures, as the case may be, when the same becomes due and payable at maturity, upon any redemption, by declaration or otherwise, (iii) failure on the part of the Company duly to observe or perform any covenant or agreements contained in the 12 5/8% Debentures or the 12 5/8% Debenture Indenture, and the continuance of such failure for a period of 60 days after written notice as set forth in the 12 5/8% Debenture Indenture; (iv) there shall have occurred with respect to any issue or issues of Debt of the Company and/or one or more Material Subsidiaries having an outstanding principal amount of $50 million or more individually, or $100 million or more in the aggregate for all such issues of all such Persons, whether such Debt now exists or shall hereafter be created, an event of default which has caused the Holders thereof to declare such Debt to be due and payable prior to its stated maturity and such Debt has not been discharged in full or such acceleration has not been rescinded or annulled within 60 days of such acceleration; (v) any judgment or order (not covered by insurance) for the payment of money shall be rendered against the Company or any Material Subsidiary of the Company in excess of $50 million individually, or $100 million in the aggregate for all such judgments or orders against all such Persons (treating any deductibles, self insurance or retention as not so covered) that shall not be discharged, and all such judgments and orders remain outstanding and there shall be any period of 60 consecutive days - 79 - following entry of the judgment or order in excess of $50 million or the judgment or order which causes the aggregate amount described above to exceed $100 million during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (vi) there shall have occurred certain events of bankruptcy, insolvency or reorganization with respect to the Company or a Material Subsidiary; or (vii) the Company and/or one or more Material Subsidiaries shall have failed to make (A) at the final (but not any interim) fixed maturity of any issue of Debt a principal payment of $50 million or more or (B) at the final (but not any interim) fixed maturity of more than one issue of such Debt principal payments aggregating $100 million or more and, in the case of clause (A), such defaulted payment shall not have been made within 60 days of such payment default and, in the case of clause (B), all such defaulted payments shall not have been made within 60 days of the payment default which causes the amount described in clause (B) to exceed $100 million. (Section 5.1) If an Event of Default (other than an Event of Default specified in clause (vi) above) occurs and is continuing under the 12 5/8% Debenture Indenture, the 12 5/8% Debenture Trustee thereunder or the Holders of at least a majority (or at least 40% in the case of an Event of Default specified in clause (i) or (ii) above) of the principal amount of the 12 5/8% Debentures then Outstanding (as defined), by written notice to the Company and the Agent (and to the 12 5/8% Debenture Trustee if such notice is given by the Holders), may, and the 12 5/8% Debenture Trustee at such request of such Holders shall, declare all unpaid principal of, premium, if any, and accrued interest on the 12 5/8% Debentures, to be due and payable immediately, as specified below. Upon a declaration of acceleration, such principal, premium, if any, and accrued interest shall be due and payable upon the first to occur of an acceleration under the Bank Credit Agreement or five Business Days after receipt by the Company and the Agent of such written notice given hereunder. In the event of a declaration of acceleration under the 12 5/8% Debenture Indenture because an Event of Default set forth in clause (iv) or (vii) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (iv) or (vii) shall be remedied, cured by the Company or waived by the Holders of the relevant debt. If an Event of Default specified in clause (vi) above occurs, all unpaid principal of, premium, if any, and accrued interest on the 12 5/8% Debentures then outstanding shall become and be immediately due and payable without any declaration or other act on the part of the 12 5/8% Debenture Trustee or any Holder. The Holders of at least a majority in principal amount of the outstanding 12 5/8% Debentures by notice to the 12 5/8% Debenture Trustee may rescind an acceleration and its consequences if all existing Events of Default, other than the nonpayment of the principal of and interest on such 12 5/8% Debentures which became due solely by such declaration of acceleration, have been cured or waived. (Section 5.1) The Holders of at least a majority in aggregate principal amount of the outstanding 12 5/8% Debentures may direct the time, method and place of conducting any proceeding or any remedy available to the 12 5/8% Debenture Trustee or exercising any trust or power conferred on such 12 5/8% Debenture Trustee. However, the 12 5/8% Debenture Trustee under the 12 5/8% Debenture Indenture may refuse to follow any direction that conflicts with law or the 12 5/8% Debenture Indenture, or that may involve the 12 5/8% Debenture Trustee in personal liability. (Section 5.9) A Holder may not pursue any remedy with respect to the 12 5/8% Debenture Indenture unless: (i) the Holder gives to the 12 5/8% Debenture Trustee written notice of a continuing Event of Default; (ii) the Holders of at least a majority in principal amount of outstanding 12 5/8% Debentures make a written request to the 12 5/8% Debenture Trustee to pursue the remedy; (iii) such Holder or Holders offer to the 12 5/8% Debenture Trustee indemnity satisfactory to such 12 5/8% Debenture Trustee against any cost, liability or expense; (iv) such 12 5/8% Debenture Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period the Holders of a majority in principal amount of the outstanding 12 5/8% Debentures do not give such 12 5/8% Debenture Trustee a direction which is inconsistent with the request. (Section 5.6) The 12 5/8% Debenture Indenture requires certain officers of the Company to certify, on or before a date not more than 120 days after the end of each fiscal year, that a review has been conducted of the activities of the Company and its Subsidiaries and the Company's and its Subsidiaries' performance under the 12 5/8% Debenture Indenture and that the Company has fulfilled all - 80 - obligations thereunder, or, if there has been a default in the fulfillment of any such obligation, specifying each such default and the nature and status thereof. The Company will also be obligated to notify the 12 5/8% Debenture Trustee of any default or defaults in the performance of any covenants or agreements under the 12 5/8% Debenture Indenture. (Section 3.11) Amendments and Supplements The 12 5/8% Debenture Indenture contains provisions permitting the Company and the 12 5/8% Debenture Trustee, with the consent of the Holders of not less than a majority in aggregate principal amount of the 12 5/8% Debentures at the time outstanding, to amend or supplement such 12 5/8% Debenture Indenture or any supplemental indenture or modify the rights of such Holders, provided that no such modification may, without the consent of each such Holder affected thereby, (i) reduce the rate of or extend the time for payment of interest on any 12 5/8% Debenture, reduce the principal amount of or extend the final maturity of any 12 5/8% Debenture, reduce any amount payable on redemption of the 12 5/8% Debentures or impair or affect the right of any such Holder to institute suit for the payment therefor or (ii) reduce the percentage of 12 5/8% Debentures, as the case may be, whose Holders must consent to any amendment, supplement or waiver. (Section 8.2) Satisfaction and Discharge of the 12 5/8% Debenture Indenture; Covenant Defeasance The 12 5/8% Debenture Indenture will cease to be of further effect as to all outstanding 12 5/8% Debentures (except as to (i) rights of registration of transfer and exchange, and the Company's right of optional redemption, (ii) rights of Holders to receive payments of principal of and interest on the 12 5/8% Debentures and any other rights of such Holders with respect to the amounts deposited with the 12 5/8% Debenture Trustee under the provisions referred to in this paragraph, (iii) the rights, obligations and immunities of the 12 5/8% Debenture Trustee under the 12 5/8% Debenture Indenture and (iv) certain other specified provisions in such 12 5/8% Debenture Indenture) and the Company will be deemed to have paid and discharged its entire indebtedness on all outstanding 12 5/8% Debentures if (i) all outstanding 12 5/8% Debentures theretofore authenticated (except lost, stolen or destroyed 12 5/8% Debentures which have been replaced or paid) have been delivered to the 12 5/8% Debenture Trustee for cancellation or (ii) the Company shall have paid or caused to be paid the principal of and interest on all outstanding 12 5/8% Debentures as and when the same shall have become due and payable or (iii) (a) the 12 5/8% Debentures not previously delivered to the 12 5/8% Debenture Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year, or are to be called for redemption under arrangements satisfactory to the 12 5/8% Debenture Trustee upon delivery of notice and (b) the Company shall have irrevocably deposited or caused to be deposited with the 12 5/8% Debenture Trustee, as trust funds, the entire amount in cash sufficient to pay principal of and interest on the outstanding 12 5/8% Debentures to maturity or redemption, as the case may be. (Section 10.1) The 12 5/8% Debenture Indenture will also cease to be in effect (except as aforesaid) on the 123rd day after the irrevocable deposit by the Company with the 12 5/8% Debenture Trustee, in trust for the benefit of the relevant Holders, (i) money in an amount or, (ii) U.S. Government Obligations which through the payment of interest and principal will provide, not later than one day before the due dates of payments in respect of the 12 5/8% Debentures, money in an amount, or (iii) a combination thereof, sufficient to pay or discharge without consideration of the reinvestment of interest and after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the 12 5/8% Debenture Trustee, the principal of and interest on the 12 5/8% Debentures then outstanding at the maturity date of such principal or interest. Such a trust may only be established if the Company has delivered to the 12 5/8% Debenture Trustee (i) either (A) a ruling directed to such 12 5/8% Debenture Trustee received from the Internal Revenue Service to the effect that the Holders of the 12 5/8% Debentures will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of its option to create such a trust and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised or (B) an opinion of counsel to the same effect as the ruling described in clause (A) and (ii) an opinion of counsel to the effect that, (A) the trust funds will not be subject to any rights of Holders of Senior Debt, - 81 - including without limitation those arising under Article Thirteen of the relevant 12 5/8% Debenture Indenture, and (B) after the passage of 123 days 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. The 12 5/8% Debenture Indenture will not be discharged if, among other things, (i) an Event of Default, or an event which with notice or lapse of time would become an Event of Default, with respect to the 12 5/8% Debentures shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after such date, (ii) such deposit would cause the 12 5/8% Debenture Trustee to have a conflicting interest, as defined in the respective 12 5/8% Debenture Indenture, for purposes of the Trust Indenture Act of 1939 (the "Trust Indenture Act") and (iii) such deposit would result in a breach or violation of, or constitute a default under, the 12 5/8% Debenture Indenture or any other agreement or instrument to which the Company is a party or by which it is bound. In the event of any such defeasance and discharge, affected Holders will thereafter be able to look only to such trust fund for payment of principal and interest on the 12 5/8% Debentures. (Section 10.2) The 12 5/8% Debenture Indenture provides that the Company may cease to comply with the covenants set forth above under "Covenants," including, without limitation, the incurrence of additional Debt or the making of Restricted Payments, if the Company irrevocably deposits with the 12 5/8% Debenture Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the relevant Holders (i) money in an amount or (ii) U.S. Government Obligations, which, through the payment of interest and principal in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment in respect of the 12 5/8% Debentures money in an amount or (iii) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the 12 5/8% Debenture Trustee, to pay and discharge without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the 12 5/8% Debenture Trustee, the principal of and interest on the outstanding 12 5/8% Debentures at the maturity date of such principal or interest. The obligations of the Company under the 12 5/8% Debenture Indenture other than with respect to the covenants referred to above shall remain in full force and effect. Such a trust may only be established if, among other things, the Company has delivered to the 12 5/8% Debenture Trustee an opinion of counsel acceptable to such 12 5/8% Debenture Trustee (who may be counsel to the Company) to the effect that (i) the deposit and related covenant defeasance will not be deemed, or result in, a taxable event with respect to the affected Holders, (ii) the creation of the trust will not violate the Investment Company Act of 1940 and (iii) Holders of the 12 5/8% Debentures will have a valid first-priority security interest in the trust funds. (Section 10.3) In the event the Company takes the necessary action to enable it to omit to comply with the covenants of the 12 5/8% Debenture Indenture as described above and the 12 5/8% Debentures are declared due and payable because of the occurrence of an Event of Default with respect thereto, the amount of money and U.S. Government obligations on deposit with the 12 5/8% Debenture Trustee will be sufficient to pay amounts due on the 12 5/8% Debentures at the time of their stated maturity but may not be sufficient to pay amounts due on the 12 5/8% Debentures at the time of the acceleration resulting from such Event of Default. In such event, the Company will remain liable for such payments. The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement each contain provisions that restrict the defeasance of the 12 5/8% Debentures. The 12 5/8% Debenture Trustee The 12 5/8% Debenture Indenture provides that, except during the continuance of an Event of Default with respect thereto, the 12 5/8% Debenture Trustee thereunder will perform only such duties as are specifically set forth in such 12 5/8% Debenture Indenture. During the existence of an Event of Default, the 12 5/8% Debenture Trustee will exercise such rights and powers vested in it under the 12 5/8% Debenture Indenture and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. - 82 - The 12 5/8% Debenture Indenture and the provisions of the Trust Indenture Act contain limitations on the rights of the 12 5/8% Debenture Trustee thereunder, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The 12 5/8% Debenture Trustee is permitted to engage in other transactions; provided, that if it acquires any conflicting interest (as defined) it must eliminate such conflict or resign. (Article Six) Reports So long as 12 5/8% Debentures are outstanding, the Company will furnish to the relevant Holders quarterly and annual financial reports that the Company is required to file with the Commission under the Exchange Act (or similar reports in the event the Company is not at the time required to file such reports with the Commission). DESCRIPTION OF THE 14 1/8% DEBENTURES The 14 1/8% Debentures were issued under an Indenture dated as of November 1, 1988 (the "14 1/8% Debenture Indenture"), between the Company and Ameritrust Company National Association, Trustee (the "14 1/8% Debenture Trustee"). The following summary of certain provisions of the 14 1/8% Debenture Indenture hereunder does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the 14 1/8% Debenture Indenture, including the definitions therein of certain terms included therein. Wherever particular sections or defined terms of the 14 1/8% Debenture Indenture are referred to herein, such sections or defined terms shall be incorporated herein by reference. Unless the context otherwise requires, references to Sections and defined terms refer to Sections and defined terms of the 14 1/8% Debenture Indenture. A copy of the 14 1/8% Debenture Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. For federal income tax purposes, Holders of the 14 1/8% Debentures will be required to recognize interest income in respect of those debentures in advance of the receipt of cash payments attributable to interest income on such debentures. Principal of, premium, if any, and interest on the 14 1/8% Debentures is payable, and the 14 1/8% Debentures are exchangeable and transferable, at the office or agency of the Company in The City of New York; provided, however, that payment of interest may be made at the option of the Company by check mailed to the Person entitled thereto as shown on the registers for the 14 1/8% Debentures. The 14 1/8% Debentures are issued only in fully registered form without coupons, in denominations of $1,000 and any integral multiple thereof. No service charge will be made for any registration of transfer or exchange of 14 1/8% Debentures, except for any tax or other governmental charge that may be imposed in connection therewith. The 14 1/8% Debenture Indenture and the 14 1/8% Debentures are governed by and construed in accordance with the laws of the State of New York, except as may otherwise be required by mandatory provisions of law. Terms of the 14 1/8% Debentures The 14 1/8% Debentures constitute unsecured junior subordinated obligations of the Company, limited to $568 million aggregate principal amount and will mature on November 1, 2004. Although for federal income tax purposes a significant amount of original issue discount, taxable as ordinary interest income, will be recognized by a Holder of 14 1/8% Debentures as such discount accrues from their issue date, no interest will be payable on the 14 1/8% Debentures prior to May 1, 1995. From and after November 1, 1994 interest on the 14 1/8% Debentures will accrue at a rate per annum equal to 14 1/8%, payable semiannually (to Holders of record at the close of business on the April 15 or October 15 immediately preceding the Interest Payment Date) on each May 1 and November 1, commencing on May 1, 1995. Optional Redemption. The 14 1/8% Debentures are redeemable, in whole or in part, at any time at the option of the Company at a redemption price equal to the outstanding principal amount, together with accrued and unpaid - 83 - interest, if any, to the redemption date, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to a Holder's last address as it shall appear upon the registry book. In the case of a partial redemption, selection of the 14 1/8% Debentures for redemption will be made by the 14 1/8% Debenture Trustee in such manner as in its sole discretion it shall deem appropriate and fair. If any 14 1/8% Debenture is to be redeemed in part only, the notice of redemption that relates to such 14 1/8% Debenture shall state the portion of the principal amount to be redeemed. A new 14 1/8% Debenture in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original 14 1/8% Debenture. The Bank Credit Agreement, the 1993 Term Loan Agreement, and the Senior Secured Note Agreement each contain provisions restricting the optional redemption of the 14 1/8% Debentures. Subordination Upon any payment or distribution of assets or securities of the Company, as the case may be, of any kind or character, whether in cash, property or securities, upon any dissolution or winding up or total or partial liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due with respect to the Senior Debt (including any interest accruing subsequent to an event of bankruptcy to the extent that such interest is an allowed claim enforceable against the debtor under the United States bankruptcy code) shall first be paid in full in cash or cash equivalents, or payment provided for in cash or cash equivalents, before the Holders or the 14 1/8% Debenture Trustee on behalf of the Holders shall be entitled to receive any payment by the Company of the principal of, premium, if any, or interest on the 14 1/8% Debentures or any payment to acquire any of the 14 1/8% Debentures for cash, property or securities or distribution of any cash, property or securities. Before any payment may be made by the Company of the principal of, premium, if any, or interest on the 14 1/8% Debentures upon any such dissolution or winding up or liquidation or reorganization, any payment or distribution of assets or securities of the Company of any kind or character, whether in cash, property or securities, to which the Holders of the 14 1/8% Debentures or the 14 1/8% Debenture Trustee on their behalf would be entitled, but for the subordination provisions of the 14 1/8% Debenture Indenture, shall be made by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, directly to the Holders of the Senior Debt or their representatives to the extent necessary to pay all such Senior Debt in full after giving effect to any concurrent payment or distribution to the Holders of such Senior Debt. No direct or indirect payment by or on behalf of the Company of principal of, premium, if any, or interest on the 14 1/8% Debentures whether pursuant to the terms of the 14 1/8% Debentures or upon acceleration or otherwise, shall be made if, at the time of such payment, there exists a default in the payment of all or any portion of the obligations on any Senior Debt (and the 14 1/8% Debenture Trustee has received written notice thereof), and such default shall not have been cured or waived or the benefits of this sentence waived by or on behalf of the Holders of such Senior Debt. In addition, during the continuance of any other event of default with respect to (i) the Bank Credit Agreement pursuant to which the maturity thereof may be accelerated, (a) from and after the date of receipt by the respective Trustees of written notice from the Agent or (b) if such event of default results from the acceleration of the 14 1/8% Debentures, from and after the date of such acceleration, no such payment may be made by or on behalf of the Company upon or in respect of the 14 1/8% Debentures for a period ("Payment Blockage Period") commencing on the date of receipt of such notice or the date of such acceleration and ending 159 days thereafter (unless such Payment Blockage Period shall be terminated by written notice to the 14 1/8% Debenture Trustee from the Agent) or (ii) any other Designated Senior Debt, upon receipt by the 14 1/8% Debenture Trustee of written notice from the trustee or other representative for the Holders of such Designated Senior Debt (or the Holders of at least a majority in principal amount of such other Designated Senior Debt then outstanding), no such payment may be made by or on behalf of the Company upon or in respect of the 14 1/8% Debentures for a Payment Blockage Period commencing on the date of receipt of such notice and ending 119 days thereafter (unless such Payment Blockage Period shall be terminated by written - 84 - notice to the respective Trustees from such trustee or other representative or such Holders. Not more than one Payment Blockage Period may be commenced with respect to the 14 1/8% Debentures during any period of 360 consecutive days; provided that the commencement of a Payment Blockage Period by representatives for or the Holders of Designated Senior Debt other than under the Bank Credit Agreement shall not bar the commencement of another Payment Blockage Period by the Agent under the Bank Credit Agreement within such period of 360 consecutive days. No Event of Default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Debt initiating such Payment Blockage Period shall be, or be made, the basis for the commencement of a second Payment Blockage Period by the representative for, or the Holders of, such Designated Senior Debt whether or not within a period of 360 consecutive days unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. As defined in the 14 1/8% Debenture Indenture, "Senior Debt" means (i) all Debt and other monetary obligations of the Company under the Bank Credit Agreement (including the Additional Bank Credit Amount), the 12 3/8% Notes, the 12 5/8% Debentures, and the Company's Guarantee of any Debt or monetary obligation of any of its subsidiaries under the Bank Credit Agreement, (ii) all Debt of the Company (other than the 14 1/8% Debentures), unless such Debt, by its terms or the terms of the instrument creating or evidencing it, is subordinate in right of payment to, or pari passu with, the 14 1/8% Debentures and (iii) all fees, expenses and indemnities payable in connection with the Bank Credit Agreement and, if applicable, Currency Agreements and Interest Rate Agreements; provided that the term Senior Debt shall not include (a) any Debt of the Company which, when incurred and without respect to any election under Section 1111(b) of Title 11 of the United States Code, was without recourse to the Company, (b) any Debt of the Company to any of its Subsidiaries, (c) Debt to any employee of the Company, (d) any liability for federal, state, local or other taxes owed or owing by the Company and (e) any Trade Payable. The 12 5/8% Debentures are Senior Debt with respect to the 14 1/8% Debentures. As defined in the 14 1/8% Debenture Indenture, "Designated Senior Debt" means (i) Debt under the Bank Credit Agreement (including the Additional Bank Credit Amount) and (ii) any other Debt constituting Senior Debt which, at the time of determination has an aggregate principal amount of at least $75 million and is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" by the Company. As defined in the 14 1/8% Debenture Indenture, "Debt" of any Person means at any date, without duplication, (i) all obligations, contingent or otherwise, of such Person in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (or reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all obligations of such Person as lessee under capital leases, (vi) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (vii) all Debt of others Guaranteed by such Person and (viii) to the extent not otherwise included, obligations under Currency Agreements and Interest Rate Agreements. The amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability of any such contingent obligations at such date. By reason of the subordination provisions described above, in the event of insolvency, funds which would otherwise be payable to Holders of the 14 1/8% Debentures will be paid to the Holders of Senior Debt to the extent necessary to pay the Senior Debt in full and the Company may be unable to fully meet its obligations with respect to the 14 1/8% Debentures. - 85 - As of March 31, 1994, there was approximately $2.8 billion of Senior Debt with respect to the 14 1/8% Debentures. Subject to the restrictions set forth in the Bank Credit Agreement, the Senior Secured Note Agreement, the 1993 Term Loan Agreement, the 1993 Note Indentures, the 1994 Note Indentures and the 12 5/8% Note Indentures, in the future, the Company may issue additional Senior Debt to finance acquisitions, to refinance existing Debt, or for other corporate purposes. The claims of Holders of the 14 1/8% Debentures, as creditors of the Company, will be junior in right of payment to all liabilities (whether or not for borrowed money) of all the Subsidiaries of the Company. As of March 31, 1994, the amount of the liabilities of all the Subsidiaries of the Company was approximately $124 million. Covenants Limitation on Common Stock Dividends. The 14 1/8% Debenture Indenture provides that prior to the sixth anniversary of the date of the original issuance of the 14 1/8% Debentures, the Company shall not effect the declaration, payment or setting apart for payment of any dividend on any of the Common Stock or effect or make any payment on account of the purchase, redemption or other retirement, of any of the Common Stock, or make any distribution in respect thereof, either directly or indirectly, and whether in cash, obligations or shares of the Company or other property, and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem or otherwise retire any of the Common Stock other than distributions, dividends or interest payable in the Common Stock to the Holders of the Common Stock, and the repurchase of shares of, or options to purchase shares of, the Common Stock from employees of the Company or any of its Subsidiaries pursuant to the terms of the form of agreements under which employees purchase, or are granted options to purchase, shares of the Common Stock; provided, however, that nothing in the foregoing provision shall prevent the payment of dividends on the Common Stock following an initial public offering of the Common Stock of up to 6% per annum of the net proceeds received by the Company in such public offering; and provided, further, that nothing in this provision will prohibit any transaction that would be permitted by the "Limitation on Restricted Payments" covenant set forth in the 1988 Securities Indentures. (Section 3.5) Mergers and Consolidations The 14 1/8% Debenture Indenture provides that the Company may not consolidate or merge with or into, or sell, lease or convey all or substantially all of its assets (as determined at the time of such transfer without regard to any prior transfer or series of transfers), to any Person unless: (i) the Company or a Subsidiary of the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which the properties and assets of the Company substantially as an entirety are transferred shall be a solvent corporation or partnership organized under the laws of the United States or any State thereof or the District of Columbia and shall expressly assume, by supplemental indenture (satisfactory in form to the 14 1/8% Debenture Trustee), all of the obligations of the Company under the 14 1/8% Debentures and the 14 1/8% Debenture Indenture; (ii) immediately after giving effect to such transaction no Event of Default or event or condition which through the giving of notice or lapse of time or both could become an Event of Default shall have occurred and be continuing; (iii) such Person formed by such consolidation or into which the Company is merged or to which the properties and assets of the Company substantially as an entirety are transferred shall, on a pro forma basis after giving effect to such consolidation, merger or transfer, have a ratio of (a) consolidated shareholders' equity and indebtedness which is subordinated by its terms to the 14 1/8% Debentures to (b) consolidated liabilities and consolidated shareholders' equity at least equal to such ratio of the Company at the effective time of the Merger; and (iv) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture comply with the provisions of the 14 1/8% Debenture Indenture and that all conditions precedent therein provided for relating to such transaction have been complied with. (Section 9.1) - 86 - Events of Default The 14 1/8% Debenture Indenture defines an "Event of Default" as being: (i) default in the payment of any interest on any 14 1/8% Debentures, when the same becomes due and payable and the default continues for a period of 30 days; (ii) default in the payment of the principal of any 14 1/8% Debentures when the same becomes due and payable at maturity, upon redemption by declaration or otherwise; (iii) failure by the Company to observe or perform any covenant or agreement contained in the 14 1/8% Debentures or the 14 1/8% Debenture Indenture for a period of 60 days after notice has been given as set forth in the 14 1/8% Debenture Indenture; (iv) there shall have occurred with respect to any issue or issues of Debt of the Company and/or one or more Material Subsidiaries having an outstanding principal amount of $50 million or more individually, or $100 million or more in the aggregate for all such issues of all such Persons, whether such Debt now exists or shall hereafter be created, an event of default which has caused the Holder thereof to declare such Debt to be due and payable prior to its stated maturity and such Debt has not been discharged in full or such acceleration has not been rescinded or annulled within 60 days of such acceleration; (v) any judgment or order (not covered by insurance) for the payment of money shall be rendered against the Company or a Material Subsidiary of the Company in excess of $50 million individually, or $100 million in the aggregate for all such judgments or orders against all such Persons (treating any deductibles, self insurance or retention as not so covered) that shall not be discharged and all such judgments and orders remain outstanding and there shall be any period of 60 consecutive days following entry of the judgment or order in excess of $50 million or the judgment or order which causes the aggregate amount described above to exceed $100 million during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (vi) there shall have occurred certain events of bankruptcy, insolvency or reorganization with respect to the Company or a Material Subsidiary; or (vii) the Company and/or one or more Material Subsidiaries shall have failed to make (A) at the final (but not any interim) fixed maturity of any issue of Debt a principal payment of $50 million or more or (B) at the final (but not any interim) fixed maturity of more than one issue of such Debt principal payments aggregating $100 million or more and, in the case of clause (A), such defaulted payment shall not have been made within 60 days of such payment default and, in the case of clause (B), all such defaulted payments shall not have been made within 60 days of the payment default which causes the amount described in clause (B) to exceed $100 million. (Section 5.1) If the Event of Default (other than an Event of Default specified in clause (vi) above) occurs and is continuing under the 14 1/8% Debenture Indenture, the 14 1/8% Debenture Trustee thereunder or the Holders of at least a majority (or at least 40% in case of an Event of Default specified in clause (i) or (ii) above) in principal amount of the then Outstanding 14 1/8% Debentures, by written notice to the Company (and to the 14 1/8% Debenture Trustee if such notice is given by the Holders), may, and the 14 1/8% Debenture Trustee at such request of such Holders shall, declare the Default Amount (as defined below), to be due and payable immediately, as specified below. Upon a declaration of acceleration, such Default Amount shall be due and payable upon the first to occur of an acceleration under the Bank Credit Agreement or five Business Days after receipt by the Company and the Agent of such written notice of acceleration given pursuant to this paragraph. In the event of a declaration of acceleration under the respective indentures because an Event of Default set forth in clause (iv) or (vii) above has occurred and is continuing, such declaration of acceleration shall be automatically annulled if the event of default triggering such Event of Default pursuant to clause (iv) or (vii) shall be remedied, cured by the Company or waived by the Holders of the relevant Debt. If an Event of Default specified in clause (vi) above occurs, all unpaid principal of, premium, if any, and accrued interest (or, in the case such event occurs prior to November 1, 1994, the Default Amount) shall become and be immediately due and payable without any declaration or other act on the part of the 14 1/8% Debenture Trustee or any Holder. Upon payment to the Holders of all the amounts set forth above, all the Company's obligations with respect to the 14 1/8% Debentures and the 14 1/8% Debenture Indenture, other than its obligations with respect to the compensation, reimbursement and indemnification of the 14 1/8% Debenture Trustee, shall terminate. The Holders of at least a majority in principal amount of the respective outstanding 14 1/8% Debentures, by notice to the 14 1/8% Debenture Trustee, may rescind an acceleration and its consequences if all existing Events of Default, other than the nonpayment of the principal of, - 87 - premium, if any, and accrued interest (or, in the case such event occurs prior to November 1, 1994, the Default Amount) which became due solely by such declaration of acceleration, have been cured or waived. (Section 5.1) As defined in the 14 1/8% Debenture Indenture, the "Default Amount" for each $1,000 principal amount of 14 1/8% Debentures will be: Default Amount (Per $1,000 Semi-Annual Accrual Date Principal Amount) ------------------------ ----------------- November 1, 1993 $ 872.42 May 1, 1994 934.03 November 1, 1994 and thereafter 1,000.00 If the date of acceleration occurs between two Semi-Annual Accrual Dates, the Default Amount will be the sum of (1) the Default Amount for the Semi-Annual Accrual Date immediately preceding the date of acceleration, and (2) the Proportionate Share (as defined below). The "Proportionate Share" is an amount equal to the product of (i) the Default Amount for the immediately following Semi-Annual Accrual Date less the Default Amount for the immediately preceding Semi-Annual Accrual Date times (ii) a fraction, the numerator of which is the number of days from the immediately preceding Semi-Annual Accrual Date, or the original date of issuance of the 14 1/8% Debentures (the "Issue Date"), as the case may be, to the date of acceleration, using a 360-day year of twelve 30-day months, and the denominator of which is 180 or the number of days elapsed from the Issue Date to the first Semi-Annual Accrual Date, as the case may be; provided that in the case of an acceleration prior to the first Semi-Annual Accrual Date, the amount subtracted referred to in clause (i) shall be the dollar amount referred to below. If the date of acceleration occurs prior to the first Semi-Annual Accrual Date, the Default Amount will be the sum of (1) $440.91 and (2) the Proportionate Share. (Section 5.1) The Holders of at least a majority in principal amount of the respective outstanding 14 1/8% Debentures may direct the time, method and place of conducting any proceeding or any remedy available to the 14 1/8% Debenture Trustee or exercising any trust or power conferred on such 14 1/8% Debenture Trustee. However, the 14 1/8% Debenture Trustee may refuse to follow any direction that conflicts with law or the 14 1/8% Debenture Indenture, that may involve the 14 1/8% Debenture Trustee in personal liability, or which in such Trustee's good faith judgment, would unduly prejudice the interests of Holders of 14 1/8% Debentures not joining in the giving of said direction. (Section 5.9) A Holder may not pursue any remedy with respect to the 14 1/8% Debenture Indenture or the 14 1/8% Debentures unless: (i) the Holder gives to the 14 1/8% Debenture Trustee written notice of a continuing Event of Default; (ii) the Holders of at least a majority in principal amount of the outstanding 14 1/8% Debentures make a written request to the 14 1/8% Debenture Trustee to pursue the remedy; (iii) such Holder or Holders offer to the 14 1/8% Debenture Trustee indemnity satisfactory to such 14 1/8% Debenture Trustee against any loss, liability or expense; (iv) such 14 1/8% Debenture Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period the Holders of a majority in principal amount of the respective outstanding 14 1/8% Debentures, do not give such 14 1/8% Debenture Trustee a direction which is inconsistent with the request. (Section 5.6) The 14 1/8% Debenture Indenture requires certain officers of the Company to certify, on or before a date not more than 120 days after the end of each fiscal year, that a review has been conducted of the activities of the Company and its Subsidiaries and the Company's and its Subsidiaries' performance under the 14 1/8% Debenture Indenture and that the Company has fulfilled all obligations thereunder, or, if there has been a default in the fulfillment in any such obligation, specifying such default and the nature and status thereof. The Company will also be obligated to notify the 14 1/8% Debenture Trustee of any default or defaults in the performance of any covenants or agreements under the 14 1/8% Debenture Indenture. (Section 3.6) Amendments and Supplements 14 1/8% Debenture Indenture contains provisions permitting the Company and the relevant 14 1/8% Debenture Trustee, with the consent of the Holders of not less than a majority in aggregate principal amount of Outstanding 14 1/8% - 88 - Debentures to amend or supplement such 14 1/8% Debenture Indenture or any supplemental indenture or modify the rights of the relevant Holders, provided that no such modifications may, without the consent of each Holder affected thereby, (i) reduce the rate of, or extend the time for, payment of interest on any 14 1/8% Debenture, reduce the principal amount of or change the manner of computing the amount due in the event of acceleration of the 14 1/8% Debentures or extend the final maturity of any 14 1/8% Debenture, reduce any amount payable on redemption of any 14 1/8% Debenture or impair or affect the right of any Holder to institute suit for the payment of any 14 1/8% Debenture or (ii) reduce the percentage of 14 1/8% Debentures whose holders must consent to any amendment, supplement or waiver and provided, further, that no amendment or supplement shall modify any provision of the 14 1/8% Debenture Indenture so as to adversely affect the rights of any holder of Senior Debt at the time outstanding to the benefits of subordination hereunder without the consent of such Holders. (Section 8.2) Satisfaction and Discharge of the 14 1/8% Debenture Indenture; Covenant Defeasance The 14 1/8% Debenture Indenture will cease to be of further effect as to all outstanding 14 1/8% Debentures (except as to (i) rights of registration of transfer and exchange and the Company's right of optional redemption, (ii) rights of Holders to receive payments of principal of and interest on the 14 1/8% Debentures and any other rights of the Holders with respect to the amounts deposited with the 14 1/8% Debenture Trustee under the provisions referred to in this paragraph, (iii) the rights, obligations and immunities of the 14 1/8% Debenture Trustee under the 14 1/8% Debenture Indenture and (iv) certain other specified provisions in the 14 1/8% Debenture Indenture) and the Company will be deemed to have paid and discharged its entire Debt on all outstanding 14 1/8% Debentures if (i) all outstanding 14 1/8% Debentures (except lost, stolen or destroyed 14 1/8% Debentures which have been replaced or paid) have been delivered to the 14 1/8% Debenture Trustee for cancellation or (ii) the Company shall have paid or caused to be paid the principal of and interest on the 14 1/8% Debentures as and when the same shall have become due and payable or (iii) (a) the 14 1/8% Debentures not previously delivered to the 14 1/8% Debenture Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption under arrangements satisfactory to the 14 1/8% Debenture Trustee upon delivery of notice and (b) the Company shall have deposited with the 14 1/8% Debenture Trustee, as trust funds, the entire amount in cash sufficient to pay principal of and interest on the outstanding 14 1/8% Debentures to maturity or redemption, as the case may be. (Section 10.1) The 14 1/8% Debenture Indenture will also cease to be in effect (except as aforesaid) on the 123rd day after the irrevocable deposit by the Company with the 14 1/8% Debenture Trustee, in trust for the benefit of the relevant Holders, (i) money in an amount or (ii) U.S. government obligations which through the payment of interest and principal will provide, not later than one day before the due date of payments in respect of the 14 1/8% Debentures money in an amount, or (iii) a combination thereof, sufficient to pay and discharge, without consideration of reinvestment of interest and after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the 14 1/8% Debenture Trustee, the principal of and interest on the 14 1/8% Debentures then outstanding at the maturity date of such principal or interest. Such a trust may only be established if certain conditions are satisfied, which conditions include, among other things, the Company delivering to the 14 1/8% Debenture Trustee (i) either (A) a ruling directed to such Trustee received from the Internal Revenue Service to the effect that the Holders of the 14 1/8% Debentures will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of its option to create such a trust and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised or (B) an opinion of counsel to the same effect as the ruling described in clause (A) and (ii) an opinion of counsel to the effect that, (A) the trust funds will not be subject to any rights of Holders of Senior Debt, including without limitation those arising under Article Thirteen of the 14 1/8% Debenture Indenture, and (B) after the passage of 123 days following the deposit, the trust funds will not, with respect to the Company, be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally. The 14 1/8% Debenture Indenture will not be discharged if, among other things, an Event of Default, or an event - 89 - which with notice or lapse of time would have become an Event of Default, with respect thereto shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after such date. In the event of any such defeasance and discharge, affected 14 1/8% Debentureholders will thereafter be able to look only to such trust fund for payment of principal and interest on the 14 1/8% Debentures. (Section 10.2) The Bank Credit Agreement, the 1993 Term Loan Agreement, and the Senior Secured Note Agreement each contains a provision that prohibits the defeasance of the 14 1/8% Debentures. The 14 1/8% Debenture Trustee The 14 1/8% Debenture Indenture provides that, except during the continuance of an Event of Default, the 14 1/8% Debenture Trustee thereunder will perform only such duties as are specifically set forth in the 14 1/8% Debenture Indenture. During the existence of an Event of Default, such 14 1/8% Debenture Trustee will exercise such rights and powers vested in it under the 14 1/8% Debenture Indenture and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. The 14 1/8% Debenture Indenture and provisions of the Trust Indenture Act contain limitations on the rights of the 14 1/8% Debenture Trustee thereunder, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. With respect to the 14 1/8% Debenture Indenture, the 14 1/8% Debenture Trustee is permitted to engage in other transactions; provided, that if it acquires any conflicting interest (as defined) it must eliminate such conflict or resign. (Article Six) Reports So long as 14 1/8% Debentures are outstanding, the Company will furnish to the relevant Holders quarterly and annual financial reports that the Company is required to file with the Commission under the Exchange Act (or similar reports in the event the Company is not at the time required to file such reports with the Commission). CERTAIN FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO THE 1988 SECURITIES The following discussion is a summary of certain federal income tax considerations relevant to the purchase, ownership and disposition of the 1988 Securities but does not purport to be a complete analysis of all the potential tax effects of such purchase, ownership and disposition. The discussion is based upon the Code, Treasury regulations, IRS rulings and judicial decisions now in effect, all of which are subject to change at any time by legislative, judicial or administrative action, and any such changes may be retroactively applied in a manner that could adversely affect a Holder of one or more of the 1988 Securities. No information is provided in this discussion with respect to foreign, state or local tax laws or estate and gift tax considerations. This information is directed to investors who will hold the 1988 Securities as "capital assets" within the meaning of Section 1221 of the Code. In addition, the tax consequences to a particular person may be affected by matters not addressed in this discussion. For example, certain types of investors (including life insurance companies, tax exempt organizations, banks and dealers in securities) may be subject to special rules that are not addressed in this discussion. The Company has not sought, nor does it intend to seek, a ruling from the IRS that its position as reflected in the following discussion will be accepted by the IRS. Each prospective investor should consult his own tax advisor concerning the tax consequences of the purchase, ownership and disposition of the 1988 Securities. In 1986, the IRS issued proposed Treasury regulations addressing the federal income tax treatment of debt instruments with original issue discount (the "Proposed Regulations"). On December 21, 1992, the IRS withdrew the Proposed Regulations and promulgated a new set of proposed Treasury regulations (the "New Proposed Regulations") which were proposed to govern the federal income tax treatment of debt instruments with original issue discount issued on or after the date that was 60 days after the New Proposed Regulations are finalized. In the preamble to the New Proposed Regulations, - 90 - the IRS stated its intention to treat the Proposed Regulations as authority under Code section 6662 (protection against accuracy-related penalties) for debt instruments issued prior to the withdrawal of the Proposed Regulations in December 1992 and for sales that occurred prior to such withdrawal. In February 1994, the IRS published final Treasury regulations for original issue discount debt instruments (the "Final Regulations") which largely replaced the New Proposed Regulations and which, with certain exceptions, generally may be relied upon by taxpayers for debt instruments issued, or sold or exchanged, after December 21, 1992. The discussion below as to the rules for the calculation and taxation of original issue discount on the 1988 Securities is based upon the Proposed Regulations (which were the outstanding regulations published by the IRS when the 1988 Securities were originally issued), with references to the Final Regulations where they clarify ambiguities in the Proposed Regulations. Under the Final Regulations, a holder of a debt instrument acquired on or after April 4, 1994 may elect to include in gross income interest that accrues on the debt instrument by using the constant yield method. For purposes of this election, interest on a debt instrument includes stated interest, original issue discount and market discount (including any de minimis amounts), adjusted as applicable by any premium. Such election may be revoked only with the consent of the IRS. Taxpayers should consult with their advisors regarding the effect of such an election on any other debt instruments held by such taxpayer and the advantages and disadvantages of making this election. The 1988 Securities should be treated as debt for federal income tax purposes. If any of the 1988 Securities ultimately were treated as equity, the amount treated as a distribution on any such 1988 Security would first be taxable to the Holder as dividend income to the extent of the Company's current and accumulated earnings and profits and would next be treated as a return of capital to the extent of the Holder's tax basis in the 1988 Security, with any remaining amount treated as a gain from the sale of the 1988 Security. In addition, in such event, the Company would not be entitled to deduct interest and original issue discount on such 1988 Securities for federal income tax purposes. The 14 1/8% Debentures The 14 1/8% Debentures bear "original issue discount" within the meaning of Section 1273(a)(1) of the Code. The total amount of original issue discount with respect to a 14 1/8% Debenture is equal to the excess of its "stated redemption price at maturity" over its "issue price." The Proposed Regulations provide that the interest payments required on the 14 1/8% Debentures do not constitute "qualified periodic interest payments" (because no interest is payable until 1995) and therefore that all payments of principal and interest required to be made on the 14 1/8% Debentures will be considered components of the stated redemption price at maturity of the 14 1/8% Debentures. As a result, each 14 1/8% Debenture bears original issue discount in an amount equal to the excess of (i) the sum of its face amount and all stated interest payments, over (ii) its issue price. A Holder of a 14 1/8% Debenture is required to include in income as interest the original issue discount on the 14 1/8% Debenture, but (except as discussed below with respect to market discount) will not be required to include in income any cash payments received by such Holder on the 14 1/8% Debenture, even if denominated as interest. The amount required to be included in a Holder's income as original issue discount in a taxable year will be determined by allocating to each day during such taxable year on which the Holder holds the 14 1/8% Debenture a pro rata portion of the original issue discount on the 14 1/8% Debenture attributable to the "accrual period" (i.e., the six-month period (or shorter period from the issue date of the 14 1/8% Debentures) that ends on a day of the calendar year corresponding to the maturity date or the date six months before such maturity date) in which such day is included. For purposes of determining the accrual period, if the maturity date is the first day of a month, the Company may consider the maturity date to be the last day of the preceding month. The amount of original issue discount attributable to an accrual period with respect to the 14 1/8% Debentures will be the product of (i) the "adjusted issue price" at the beginning of such accrual period (i.e., the issue price plus original issue discount attributable to prior accrual periods, disregarding any - 91 - reduction on account of acquisition premium, described below, less any cash payments on the 14 1/8% Debenture during such prior accrual periods) multiplied by (ii) their yield to maturity of 14 1/8% (determined on the basis of semiannual compounding). If a Holder pays an "acquisition premium," as defined below, for a 14 1/8% Debenture, the amount of such premium will reduce the amount of original issue discount that such Holder must include in income with regard to that 14 1/8% Debenture. A Holder's initial tax basis in a 14 1/8% Debenture will be equal to the price paid for such 14 1/8% Debenture. A Holder's tax basis in a 14 1/8% Debenture will be increased by the amount of any original issue discount includible in the Holder's income under the rules discussed above (and by any market discount includible in the Holder's income under the rules discussed below) and decreased by any cash payments received by such Holder with respect to the 14 1/8% Debenture. The 12 5/8% Debentures Subject to the discussion in the next succeeding paragraph, the 12 5/8% Debentures were not issued with original issue discount. A Holder of a 12 5/8% Debenture is required to include in income the stated amount of interest on the 12 5/8% Debenture (which will constitute "qualified periodic interest payments") in accordance with the Holder's method of tax accounting. A Holder of a 12 5/8% Debenture using the cash method of accounting for tax purposes generally will be required to include such interest in income when cash payments are actually received (or made available for receipt if earlier). A Holder of a 12 5/8% Debenture using the accrual method of accounting for tax purposes generally will be required to include such interest in income as it accrues. Additional Original Issue Discount Considerations The Proposed Regulations contain certain aggregation rules that could under certain circumstances be interpreted to require that some or all of the 12 5/8% Debentures, the 14 1/8% Debentures and certain other debt instruments issued contemporaneously with the 1988 Securities and thereafter redeemed, be treated together as a single debt instrument, which, for purposes of calculating and amortizing any original issue discount, has a single issue price, maturity date, stated redemption price at maturity and yield to maturity, and, in addition, such treatment could be more likely in the case of 1988 Securities first registered in 1991. If those aggregation rules were to apply to the 1988 Securities, such 1988 Securities could be treated as a single debt instrument. That treatment could result in a distortion in the amount of original issue discount included in the income of the Holders of the 1988 Securities that have original issue discount and in original issue discount being included in the income of the Holders of 1988 Securities that would otherwise not have original issue discount. In any event, under an exception in the Proposed Regulations, a Holder of 14 1/8% Debentures who does not hold 12 5/8% Debentures should not be subject to these aggregation rules if the 14 1/8% Debentures are treated as separately traded on an established securities market for purposes of such rules. Absent further clarification of the Proposed Regulations, the Company does not intend to treat any of the 1988 Securities as being subject to these aggregation rules for purposes of computing original issue discount. Apart from providing a similar exception for traded debt, the aggregation rule in the Final Regulations does not apply where a Holder owns only debt instruments of a single series or where a substantial part of multiple series of debt instruments are issued to different Holders. If the Company is considered to have issued the 1988 Securities that have original issue discount with an intention to call such 1988 Securities prior to maturity, then any gain realized on the sale or redemption of such 1988 Securities would be treated as ordinary income to the extent that the entire original issue discount on such 1988 Securities exceeded the original issue discount previously includible in the income of any Holder (disregarding any reduction on account of acquisition premium, as defined below). The Proposed Regulations do not describe what constitutes an intention to call prior to maturity. Although the Company had no intention at the time of original issue to call the 1988 Securities prior to maturity, the existence of the optional redemption features of the 1988 Securities could be interpreted by the IRS as indicating such an intention. The Final Regulations exempt - 92 - registered debt instruments, such as the 1988 Securities, from the intention to call prior to maturity provision. Market Discount and Acquisition Premium Under Sections 1276 through 1278 of the Code, (i) in the case of the 12 5/8% Debentures, if the stated redemption price at maturity of the Debenture exceeds a Holder's tax basis in such Debenture and (ii) in the case of the 14 1/8% Debentures, if the "revised issue price" of the Debenture exceeds a Holder's tax basis in such Debenture, such excess will be considered "market discount" within the meaning of Section 1278(a)(2) of the Code, subject in either case to a de minimis exception. As a general rule and subject to the discussion set forth below, the "revised issue price" of the 14 1/8% Debentures equals the issue price plus the original issue discount includible in the income of all Holders for periods before a Holder's acquisition of the Debenture (disregarding any reduction on account of acquisition premium, as defined below), less any cash payments (other than "qualified periodic interest payments") on such Debenture. If a Holder realized a gain upon disposition of the 1988 Security, the lesser of (i) the excess of the amount received on such disposition (or fair market value of the 1988 Security in the case of certain dispositions such as gifts) over the Holder's tax basis in the 1988 Security or (ii) the portion of the market discount that accrued while the 1988 Security was held by such Holder and was not previously included in income generally will be treated as interest at the time of disposition. Market discount will be treated as accruing ratably unless the Holder elects to accrue it on a constant yield method. Furthermore, if a cash payment other than a qualified periodic interest payment is received by a Holder, the portion of the unrecognized market discount that accrued prior to the receipt of such cash payment (up to the amount of such cash payment) is includible for federal income tax purposes in the Holder's income at the time such cash payment is received. For purposes of this rule, market discount will accrue in a manner provided in future Treasury regulations, but the legislative history accompanying the Tax Reform Act of 1986 provides that until such regulations are issued, such Market Discount would accrue at the election of the Holder either on the basis of a constant interest rate or (i) for debt instruments with original issue discount, in the ratio of original issue discount accrued for the relevant period to the total remaining original issue discount at the beginning of such period, and (ii) for debt instruments without original issue discount, in the proportion that stated interest paid on the obligation for the current period bears to the total stated interest remaining to be paid on the obligation at the beginning of such period. The Code also provides that a Holder of a 1988 Security who acquires it at a market discount may be required to defer the deduction of a portion of the interest paid or accrued on indebtedness incurred or continued to purchase or carry the 1988 Security until the Holder disposes of the 1988 Security in a taxable transaction. A Holder of a 1988 Security may elect to include market discount in income as the discount accrues. If a Holder so elects, the foregoing rules regarding the treatment as interest income of gain upon disposition of the 1988 Security and upon receipt of certain cash payments, and regarding the deferral of interest deductions on indebtedness related to the 1988 Security would not apply. Treasury regulations implementing the market discount rules of the Code have not been promulgated. Therefore, the treatment of the 14 1/8% Debentures under those market discount rules is not entirely clear and Holders are urged to consult their own tax advisors with respect to such treatment, including the application of the de minimis rule. A Holder who pays an "acquisition premium" within the meaning of Section 1272(a)(7) of the Code for a 1988 Security that has original issue discount will be entitled to a reduction in the amount of original issue discount includible in such Holder's income. "Acquisition premium" is any amount paid for such 1988 Security in excess of its revised issue price at the time of its acquisition. If a Holder's tax basis in a 1988 Security exceeds the remaining stated redemption price at maturity of the 1988 Security, such excess generally constitutes amortizable bond premium and the Holder may elect to amortize and deduct such premium as an offset to interest income pursuant to Section 171 of - 93 - the Code. In general, such bond premium would be amortized using a constant yield method over the remaining term of the 1988 Security. However, if the 1988 Security may be optionally redeemed after it is acquired by the Holder at a price in excess of its stated redemption price at maturity, special rules would apply which could result in a deferral of the amortization of some of the bond premium until later in the term of the 1988 Security. The Holder's tax basis in the 1988 Security will be decreased by the amount of the amortized bond premium. An election to amortize bond premium applies to all taxable debt obligations then owned and thereafter acquired by the Holder and may be revoked only with the permission of the IRS. Disposition of 1988 Securities Upon a redemption, sale or exchange of a 1988 Security, its Holder will recognize gain or loss measured by the difference between the amount received in exchange therefor and such Holder's adjusted tax basis in the 1988 Security. Any gain or loss recognized on the redemption, sale or exchange of a 1988 Security will ordinarily be capital gain or loss if such 1988 Security is held as a capital asset (except as noted above with respect to Holders who acquire a 1988 Security at a market discount). Such capital gain or loss will be long-term capital gain or loss if the 1988 Security was held for more than one year at the time of such redemption, sale or exchange. Foreign Holders The following discussion is a summary of certain United States federal income tax consequences to a Foreign Person that holds a 1988 Security. The term "Foreign Person" means a nonresident alien individual or a foreign corporation (as such terms are defined for United States tax purposes), but only if the income or gain on the 1988 Security is not "effectively connected with the conduct of a trade or business within the United States" within the meaning of Section 864 of the Code. If the income or gain on the 1988 Security is "effectively connected with the conduct of a trade or business within the United States," then the nonresident alien individual or foreign corporation will be subject to tax in essentially the same manner as a United States citizen or resident or a domestic corporation, as discussed above, and in the case of a foreign corporation, may also be subject to the branch profits tax. The 1988 Securities should be treated as debt for federal income tax purposes. Accordingly, no tax will be withheld from payments to Foreign Persons who are eligible for the "portfolio interest" exception and comply with the certification requirements described below. However, if any of the 1988 Securities ultimately were treated as equity rather than debt, then the "portfolio interest" exception would not apply to such 1988 Securities and withholding tax at a flat rate of 30% (or a lower rate under an applicable income tax treaty) would be imposed on amounts treated as distributions on such 1988 Securities out of current and accumulated earnings and profits or on the entire distribution if the withholding agent does not know the amount of such earnings and profits. Further, any such withholding could commence when the IRS first asserted that the 1988 Security constituted equity; in such event, if the IRS did not ultimately prevail, the Holder would be able to recover the tax withheld by filing a claim for refund with the IRS. Under the "portfolio interest" exception to the general rules for the withholding of tax on interest and original issue discount paid to Foreign Persons, a Foreign Person will not be subject to United States tax (or to withholding) on interest or original issue discount on a 1988 Security, provided that (i) the Foreign Person does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote and is not a controlled foreign corporation with respect to the United States that is related to the Company through stock ownership, and (ii) the Company, its paying agent or the person who would otherwise be required to withhold tax receives either (A) a statement (an "Owner's Statement") signed under penalties of perjury by the beneficial owner of the 1988 Security in which the owner certifies that the owner is not a United States person and which provides the owner's name and address, or (B) a statement signed under penalties of perjury by the Financial Institution holding the 1988 Security on behalf of the beneficial owner in which the Financial Institution certifies that it has received the Owner's Statement from the beneficial owner, together with a copy of the Owner's Statement. The term "Financial Institution" means a securities clearing organization, bank or - 94 - other financial institution that holds customers' securities in the ordinary course of its trade or business and that holds a 1988 Security on behalf of the beneficial owner of the 1988 Security. A Foreign Person who does not qualify for the "portfolio interest" exception would under current law generally be subject to United States withholding tax at a flat rate of 30% (or a lower treaty rate) on interest payments and payments (including redemption proceeds) attributable to original issue discount on the 1988 Securities. In general, gain recognized by a Foreign Person upon the redemption, sale or exchange of a 1988 Security (including any gain representing accrued market discount) will not be subject to United States tax. However, a Foreign Person may be subject to United States tax at a flat rate of 30% (unless exempt by applicable treaty) on any such gain if the Foreign Person is an individual present in the United States for 183 days or more during the taxable year in which the 1988 Security is redeemed, sold or exchanged. Backup Withholding Under federal income tax backup withholding rules, unless an exception applies under the applicable law and regulations, the Company, its paying agent or other withholding agent may be required to withhold and remit to the Treasury 31% of the interest payments on, or sales proceeds with respect to, the 1988 Securities if the IRS notifies the Company, its paying agent or other withholding agent that the Holder is subject to backup withholding or if the Holder fails to provide his taxpayer identification number (employer identification number or social security number), to certify that such Holder is not subject to backup withholding, or to otherwise comply with applicable requirements of the backup withholding rules. Certain Holders (including, among others, corporations and foreign individuals who comply with the certification requirements described under "Foreign Holders" above) are not subject to these backup withholding and reporting requirements. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ONE OR MORE OF THE 1988 SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS. DESCRIPTION OF THE 9 1/4% NOTES AND THE 10% NOTES The 9 1/4% Notes were issued under an Indenture, dated as of March 15, 1993 (the "9 1/4% Note Indenture"), between the Company and Norwest Bank Wisconsin, N.A., as Trustee (the "9 1/4% Note Trustee"). The 10% Notes were issued under an Indenture, dated as of March 15, 1993 (the "10% Note Indenture"), between the Company and United States Trust Company of New York, as Trustee (the "10% Note Trustee"). The 9 1/4% Note Indenture and the 10% Note Indenture are hereinafter referred to collectively as the "1993 Note Indentures." The 9 1/4% Note Trustee and the 10% Note Trustee are sometimes hereinafter referred to collectively as the "1993 Note Trustees." Any reference to a "1993 Note Trustee" means the 9 1/4% Note Trustee or the 10% Note Trustee, as the context may require. A copy of the form of each 1993 Note Indenture is filed as an exhibit to the Registration Statement of which this Prospectus is a part and is available as described under "Additional Information." The following summaries of certain provisions of the respective 1993 Note Indentures do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the respective 1993 Note Indentures, including the definitions of certain terms therein and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. Wherever particular Sections or defined terms of the 1993 Note Indentures not otherwise defined herein are referred to, such Sections or defined terms shall be incorporated herein by reference. - 95 - General Principal of, premium, if any, and interest on the 1993 Notes are payable, and the 9 1/4% Notes and the 10% Notes may be exchanged or transferred, at the office or agency of the Company in the Borough of Manhattan, The City of New York (which, for the 9 1/4% Notes, initially shall be the corporate trust office of the 9 1/4% Note Trustee, at 3 New York Plaza, 15th Floor, New York, New York 10004 and, for the 10% Notes, initially shall be the corporate trust office of the 10% Note Trustee, at 114 West 47th Street, 15th Floor, New York, New York 10036); provided that, at the option of the Company, payment of interest may be made by check mailed to the address of the Holders as such address appears in the Security Register. (Sections 2.01 and 2.03) The 1993 Notes are issued only in fully registered form, without coupons, in denominations of $1,000 and any integral multiple of $1,000. (Section 2.02) No service charge shall be made for any registration of transfer or exchange of the 1993 Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. (Section 2.05) Terms Of The 9 1/4% Notes The 9 1/4% Notes constitute unsecured senior obligations of the Company, limited to $450 million aggregate principal amount, and will mature on March 15, 2001. Each 9 1/4% Note bears interest at a rate per annum equal to 9 1/4% from March 22, 1993 or from the most recent Interest Payment Date to which interest has been paid or provided for. Interest is payable semiannually (to Holders of record at the close of business on the March 1 or September 1 immediately preceding the Interest Payment Date) on March 15 and September 15 of each year. The 9 1/4% Notes will not be redeemable prior to maturity. Terms Of The 10% Notes The 10% Notes constitute unsecured subordinated obligations of the Company, limited to $300 million aggregate principal amount, and will mature on March 15, 2003. Each 10% Note bears interest at a rate per annum equal to 10% from March 22, 1993 or from the most recent Interest Payment Date to which interest has been paid or provided for. Interest is payable semiannually (to the Holders of record at the close of business on the March 1 or September 1 immediately preceding the Interest Payment Date) on March 15 and September 15 of each year. Optional Redemption. The 10% Notes are redeemable, at the Company's option, in whole or in part, at any time on or after March 15, 1998 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to each Holder's last address as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount), plus accrued interest to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date), if redeemed during the 12-month period commencing on or after March 15 of the years set forth below: REDEMPTION YEAR PRICE ---------- ----- 1998............... 105.00% 1999............... 103.75% 2000............... 102.50% 2001............... 101.25% and, after March 15, 2002, at 100% of principal amount. (Section 10.01) In addition, at any time prior to March 15, 1995, the Company may redeem up to $75 million aggregate principal amount of 10% Notes with the proceeds of one or more Public Equity Offerings following which there is a Public Market, at any time or from time to time, at a redemption price (expressed as a percentage of principal amount) of 110%, plus accrued interest to the redemption date. - 96 - Selection. In the case of any partial redemption, selection of the 10% Notes for redemption will be made by the 10% Note Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the 10% Notes are listed or, if the 10% Notes are not listed on a national securities exchange, on a pro rata basis, by lot or by such other method as the 10% Note Trustee in its sole discretion shall deem to be fair and appropriate; provided that no 10% Note of $1,000 in original principal amount or less shall be redeemed in part. If any 10% Note is to be redeemed in part only, the notice of redemption relating to such 10% Note shall state the portion of the principal amount thereof to be redeemed. A new 10% 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 10% Note. The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement each contain provisions prohibiting the optional redemption of the 10% Notes without the consent of a specified percentage in interest of lenders under the Bank Credit Agreement and the 1993 Term Loan Agreement, and of Holders of Senior Secured Notes. The 8 1/4% Note Indenture, the 9 1/4% Note Indenture, the 9% Note Indenture, the 12 5/8% Debenture Indenture and the Pass Through Certificate Leases also contain covenants limiting the optional redemption of the 10% Notes. Subordination The Indebtedness evidenced by the 9 1/4% Notes ranks pari passu in right of payment with all other senior indebtedness of the Company, including, without limitation, the Company's obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement, the Pass Through Certificate Leases, certain other leases resulting from sale and leaseback transactions, the Senior Secured Notes (including any agreement pursuant to which the Senior Secured Notes are issued) and the 8 1/4% Notes. The Company's obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement are secured by a first lien (subject to permitted liens) on the Shared Collateral. The Pass Through Certificates are indirectly secured by a lien on the Pass Through Assets, which consist of an owner trustee's interest in a paper manufacturing facility, power plant and certain equipment related thereto located at the Company's Savannah River mill, all of which are leased to the Company by such owner trustee under the Pass Through Certificate Leases. The Pass Through Certificate Leases are treated as capital leases pari passu with the 9 1/4% Notes. In addition, the Company has obligations resulting from other sale and leaseback transactions which are treated as capital leases pari passu with the 9 1/4% Notes. The 1993 Notes are not secured. The Holders of Secured Indebtedness will be entitled to payment of their Indebtedness out of the proceeds of their collateral prior to the Holders of any unsecured obligations of the Company, including the 1993 Notes. At March 31, 1994, the Company and its subsidiaries had outstanding approximately $1.2 billion of Secured Indebtedness and an additional $56 million available for borrowing under the Revolving Credit Facility. See "Certain Risk Factors -- Subordination and Effect of Asset Encumbrances" and "Selected Historical Consolidated Financial Data." At March 31, 1994, the Company's subsidiaries had outstanding liabilities of $124 million, including trade payables. The 1993 Notes will be effectively subordinated to liabilities of the Company's subsidiaries, including trade payables. The payment of the Subordinated Obligations, to the extent set forth in the 10% Note Indenture, is subordinated in right of payment to the prior payment in full, in cash or cash equivalents, of all Senior Indebtedness, including, without limitation, the Company's obligations under the Bank Credit Agreement, the 1993 Term Loan, the Senior Secured Notes, the Pass Through Certificate Leases (to the extent required to pay the Pass Through Certificates in full), the 8 1/4% Notes and the 9 1/4% Notes. The 10% Notes are subordinate to the 9% Notes. At March 31, 1994, approximately $2.4 billion of Senior Indebtedness of the Company was outstanding with respect to the 10% Notes. The 10% Notes rank pari passu with the 12 5/8% Debentures and senior in right of payment to the 14 1/8% Debentures. See "Selected Historical Consolidated Financial Data." - 97 - To the extent any payment of Senior Indebtedness (whether by or on behalf of the Company, as proceeds of security or enforcement of any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person under any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then, if such payment is recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person, the Senior Indebtedness or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payment had not occurred. To the extent the obligation to repay any Senior Indebtedness is declared to be fraudulent, invalid, or otherwise set aside under any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then the obligation so declared fraudulent, invalid or otherwise set aside (and all other amounts that would come due with respect thereto had such obligation not been so affected) shall be deemed to be reinstated and outstanding as Senior Indebtedness for all purposes hereof as if such declaration, invalidity or setting aside had not occurred. Upon any payment or distribution of assets or securities of the Company of any kind or character, whether in cash, property or securities, upon any dissolution or winding up or total or partial liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Indebtedness (including any interest accruing subsequent to an event of bankruptcy, whether or not such interest is an allowed claim enforceable against the debtor under the United States Bankruptcy Code) shall first be paid in full, in cash or cash equivalents, before the Holders of the 10% Notes or the 10% Note Trustee on behalf of the Holders of the 10% Notes shall be entitled to receive any payment by the Company on account of Subordinated Obligations, or any payment to acquire any of the 10% Notes for cash, property or securities, or any distribution with respect to the 10% Notes of any cash, property or securities. Before any payment may be made by, or on behalf of, the Company of any Subordinated Obligations upon any such dissolution, winding up, liquidation or reorganization, any payment or distribution of assets or securities of the Company of any kind or character, whether in cash, property or securities, to which the Holders of the 10% Notes or the 10% Note Trustee on behalf of the Holders of the 10% Notes would be entitled, but for the subordination provisions of the 10% Note Indenture, shall be made by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person making such payment or distribution or by the Holders of the 10% Notes or the 10% Note Trustee if received by them or it, directly to the Holders of the Senior Indebtedness (pro rata to such Holders on the basis of the respective amounts of Senior Indebtedness held by such Holders) or their representatives or to the trustee or trustees under any indenture pursuant to which Senior Indebtedness may have been issued, as their respective interests appear, to the extent necessary to pay all such Senior Indebtedness in full, in cash or cash equivalents, after giving effect to any concurrent payment, distribution or provision therefor to or for the Holders of such Senior Indebtedness. No direct or indirect payment by or on behalf of the Company of Subordinated Obligations, whether pursuant to the terms of the 10% Notes or upon acceleration or otherwise shall be made if, at the time of such payment, there exists a default in the payment of all or any portion of the obligations on any Senior Indebtedness, and such default shall not have been cured or waived or the benefits of this sentence waived by or on behalf of the Holders of such Senior Indebtedness. In addition, during the continuance of any other event of default with respect to (i) the Bank Credit Agreement, the Senior Secured Note Agreement or the 1993 Term Loan Agreement pursuant to which the maturity thereof may be accelerated and (a) upon receipt by the 10% Note Trustee of written notice from any Bank Agent or (b) if such event of default under the Bank Credit Agreement, the Senior Secured Note Agreement or the 1993 Term Loan Agreement results from the acceleration of the 10% Notes, from and after the date of such acceleration, no such payment may be made by or on behalf of the Company upon or in respect of the 10% Notes for a period (a "Payment Blockage Period") commencing on the earlier of the date of receipt of such notice or the date of such acceleration and ending 159 days thereafter (unless such Payment Blockage Period shall be terminated by written notice to the 10% Note Trustee from any Bank Agent or such event of default has been cured or waived) or (ii) any other Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated, upon receipt by the 10% Note Trustee of written notice from the trustee or other representative for the - 98 - Holders of such other Designated Senior Indebtedness (or the Holders of at least a majority in principal amount of such other Designated Senior Indebtedness then outstanding), no such payment may be made by or on behalf of the Company upon or in respect of the 10% Notes for a Payment Blockage Period commencing on the date of receipt of such notice and ending 119 days thereafter (unless, in each case, such Payment Blockage Period shall be terminated by written notice to the 10% Note Trustee from such trustee of, or other representatives for, such Holders). Not more than one Payment Blockage Period may be commenced with respect to the 10% Notes during any period of 360 consecutive days; provided that, subject to the limitations set forth in the next sentence, the commencement of a Payment Blockage Period by the representatives for, or the Holders of, Designated Senior Indebtedness other than under the Bank Credit Agreement or the 1993 Term Loan Agreement or under clause (i)(b) of this paragraph shall not bar the commencement of another Payment Blockage Period by the Bank Agents within such period of 360 consecutive days. Notwithstanding anything in the 10% Note Indenture to the contrary, there must be 180 consecutive days in any 360-day period in which no Payment Blockage Period is in effect. No event of default (other than an event of default pursuant to the financial maintenance covenants under the Bank Credit Agreement, the Senior Secured Note Agreement or the 1993 Term Loan Agreement) that existed or was continuing (it being acknowledged that any subsequent action that would give rise to an event of default pursuant to any provision under which an event of default previously existed or was continuing shall constitute a new event of default for this purpose) on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Indebtedness initiating such Payment Blockage Period shall be, or shall be made, the basis for the commencement of a second Payment Blockage Period by the representative for, or the Holders of, such Designated Senior Indebtedness, whether or not within a period of 360 consecutive days, unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. (Article Eleven) By reason of the subordination provisions described above, in the event of liquidation or insolvency, creditors of the Company who are not Holders of Senior Indebtedness may recover less ratably than Holders of Senior Indebtedness and may recover more ratably than Holders of the 10% Notes. "Subordinated Obligations" is defined to mean any principal of, premium, if any, and interest on the 10% Notes payable pursuant to the terms of the 10% Notes or upon acceleration, including any amounts received upon the exercise of rights of rescission or other rights of action (including claims for damages) or otherwise, to the extent relating to the purchase price of the 10% Notes or amounts corresponding to such principal, premium, if any, or interest on the 10% Notes. "Senior Indebtedness" under the 10% Note Indenture is defined to mean the following obligations of the Company, whether outstanding on the date of the 10% Note Indenture or thereafter Incurred: (i) all Indebtedness and other monetary obligations of the Company under the Bank Credit Agreement, the 1993 Term Loan Agreement, any Interest Rate Agreement or any Currency Agreement and the Company's Guarantee of any Indebtedness or monetary obligation of any of its Subsidiaries under the Bank Credit Agreement, the 1993 Term Loan Agreement, any Interest Rate Agreement or any Currency Agreement, (ii) any principal of, premium, if any, and interest on the Senior Secured Notes, the 9 1/4% Notes, and the 12 3/8% Notes, (iii) all other Indebtedness of the Company (other than the 10% Notes), including principal and interest on such Indebtedness, unless such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, is pari passu with, or subordinated in right of payment to, the 10% Notes and (iv) all fees, expenses and indemnities payable in connection with the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Notes (including any agreement pursuant to which the Senior Secured Notes are issued) and, if applicable, Currency Agreements and Interest Rate Agreements; provided that the term "Senior Indebtedness" shall not include (a) the 12 5/8% Debentures, the 14 1/8% Debentures, or the Junior Debentures or any amounts payable under the indentures relating thereto, or amounts payable under the Pass Through Certificate Leases in excess of the amount necessary to pay the outstanding Pass Through Secured Notes (including accrued and unpaid interest) in full on the date of payment, (b) any Indebtedness of the Company that, when Incurred and without respect to any election under Section 1111(b) of the United States Bankruptcy Code, was without recourse to the Company, (c) any Indebtedness of the Company to a Subsidiary of the Company or to a joint venture in which the Company has an interest, (d) any Indebtedness of the - 99 - Company (other than such Indebtedness already described in clause (i) above) of the type described in clause (iii) above and not permitted by the "Limitation on Indebtedness" covenant described below, (e) any repurchase, redemption or other obligation in respect of Redeemable Stock, (f) any Indebtedness to any employee of the Company or any of its Subsidiaries, (g) any liability for federal, state, local or other taxes owed or owing by the Company and (h) any Trade Payables. Senior Indebtedness will also include interest accruing subsequent to events of bankruptcy of the Company and its Subsidiaries at the rate provided for in the document governing such Senior Indebtedness, whether or not such interest is an allowed claim enforceable against the debtor in a bankruptcy case under federal bankruptcy law. (Section 1.01) "Designated Senior Indebtedness" under the 10% Note Indenture is defined to mean (i) Indebtedness under the Bank Credit Agreement, the 1993 Term Loan Agreement or the Senior Secured Notes (including any agreement pursuant to which the Senior Secured Notes are issued) and (ii) any other Indebtedness constituting Senior Indebtedness that, at any date of determination, has an aggregate principal amount of at least $100 million and is specifically designated by the Company in the instrument creating or evidencing such Senior Indebtedness as "Designated Senior Indebtedness"; provided that, at the time of such designation, the aggregate outstanding amount (plus any unutilized commitments) under the Bank Credit Agreement shall be $200 million or less. (Section 1.01) Except as set forth in the 10% Note Indenture, the subordination provisions described above will cease to be applicable to the 10% Notes upon any defeasance of the 10% Notes as described under "--Defeasance." (Article Seven) Certain Definitions Set forth below is a summary of certain of the defined terms used in the covenants and other provisions of the 1993 Note Indentures. Reference is made to the appropriate 1993 Note Indenture for the full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided. (Section 1.01) "Acquired Indebtedness" is defined to mean Indebtedness of a Person existing at the time such Person became a Subsidiary and not Incurred in connection with, or in contemplation of, such Person becoming a Subsidiary. "Adjusted Consolidated Assets" is defined to mean the total amount of assets of the Company and its Subsidiaries (less applicable depreciation, amortization and other valuation reserves), after deducting therefrom all current liabilities of the Company and its consolidated Subsidiaries, all as set forth on the most recently available consolidated balance sheet of the Company and its consolidated Subsidiaries, prepared in conformity with GAAP. "Adjusted Consolidated Net Income" is defined to mean, for any period, the aggregate net income (or loss) of any Person and its consolidated Subsidiaries for such period determined in conformity with GAAP; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income (or loss) of such Person (other than a Subsidiary of such Person) in which any other Person (other than such Person or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to such Person or any of its Subsidiaries by such other Person during such period, (ii) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of the "Limitation on Restricted Payments" covenant described below (and in such case, except to the extent includible pursuant to the foregoing clause (i) above), the net income (or loss) of such Person accrued prior to the date it becomes a Subsidiary of any other Person or is merged into or consolidated with such other Person or any of its Subsidiaries or all or substantially all of the property and assets of such Person are acquired by such other Person or any of its Subsidiaries, (iii) the net income (or loss) of any Subsidiary of such Person to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation and (iv) all extraordinary gains and extraordinary losses; provided that, - 100 - solely for purposes of calculating the Interest Coverage Ratio (and in such case, except to the extent includible pursuant to clause (i) above), Adjusted Consolidated Net Income of the Company shall include the amount of all cash dividends received by the Company or any Subsidiary of the Company from an Unrestricted Subsidiary. "Administrative Agent" is defined to mean the Bank Agent under the Bank Credit Agreement or the 1993 Term Loan Agreement, or any successor thereto. "Affiliate" is defined to mean, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, is defined to mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. For purposes of this definition, no Bank Agent, Administrative Agent or Bank and no affiliate of any of them shall be deemed to be an Affiliate of the Company. "Asset Acquisition" is defined to mean (i) an investment by the Company or any of its Subsidiaries in any other Person pursuant to which such Person shall become a Subsidiary of the Company or any of its Subsidiaries or shall be merged into or consolidated with the Company or any of its Subsidiaries or (ii) an acquisition by the Company or any of its Subsidiaries of the assets of any Person other than the Company or any of its Subsidiaries that constitute substantially all of a division or line of business of such Person. "Asset Disposition" is defined to mean the sale or other disposition by the Company or any of its Subsidiaries (other than to the Company or another Subsidiary of the Company) of (i) all or substantially all of the Capital Stock of any Subsidiary of the Company or (ii) all or substantially all of the assets that constitute a division or line of business of the Company or any of its Subsidiaries. "Asset Sale" is defined to mean with respect to any Person, any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transactions) in one transaction or a series of related transactions by such Person or any of its Subsidiaries to any Person other than the Company or any of its Subsidiaries of (i) all or any of the Capital Stock of any Subsidiary of such Person, (ii) all or substantially all of the assets of a division or line of business of such Person or any of its Subsidiaries or (iii) any other assets of such Person or any of its Subsidiaries outside the ordinary course of business of such Person or such Subsidiary and in each case, that is not governed by the provisions of the Indentures applicable to mergers, consolidations and transfers of all or substantially all of the property and assets of the Company; provided that, for the purposes of determining the restrictions under the "Limitation on Asset Sales" covenant described below, the Company may disregard sales or other dispositions of inventory, receivables and other current assets. "Attributable Indebtedness" is defined to mean, when used in connection with a sale-leaseback transaction referred to in the "Limitation on Sale- Leaseback Transactions" covenant described below, at any date of determination, the product of (i) the net proceeds from such sale-leaseback transaction and (ii) a fraction, the numerator of which is the number of full years of the term of the lease relating to the property involved in such sale- leaseback transaction (without regard to any options to renew or extend such term) remaining at the date of the making of such computation and the denominator of which is the number of full years of the term of such lease (without regard to any options to renew or extend such term) measured from the first day of such term. "Average Life" is defined to mean, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the product of (A) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security multiplied by (B) the amount of such principal payment by (ii) the sum of all such principal payments. "Bank Agent" is defined to mean Bankers Trust Company, as agent for the Banks pursuant to the Bank Credit Agreement or the 1993 Term Loan Agreement, and any successor or successors thereto. - 101 - "Bank Credit Agreement" is defined to mean the Credit Agreement, dated as of October 24, 1988, among the Company, the Banks party thereto and the Bank Agents party thereto, as amended to date, together with the related documents thereto (including, without limitation, any Guarantees and security documents), in each case, as such agreements may be amended (including any amendment and restatement thereof), supplemented, replaced or otherwise modified from time to time, including any agreement extending the maturity of, refinancing or otherwise restructuring (including, but not limited to, the inclusion of additional borrowers or Guarantors thereunder that are Subsidiaries of the Company and whose obligations are Guaranteed by the Company thereunder) all or any portion of the Indebtedness under such agreements or any successor agreements; provided that, with respect to any agreement providing for the refinancing of Indebtedness under the Bank Credit Agreement, such agreement shall be the Bank Credit Agreement under the Indentures only if a notice to that effect is delivered to the Trustees; and provided further that there shall be at any one time only one instrument, together with any related documents (including, without limitation, any Guarantees or security documents), that is the Bank Credit Agreement under the Indentures. "Banks" is defined to mean the lenders who are from time to time parties to the Bank Credit Agreement or the 1993 Term Loan Agreement. "Board of Directors" is defined to mean the Board of Directors of the Company or any committee of such Board of Directors duly authorized to act under the Indentures. "Business Day" is defined to mean any day except a Saturday, Sunday or other day on which commercial banks in The City of New York, or in the city of the Corporate Trust Office of the respective Trustees, are authorized by law to close. "Capital Stock" is defined to mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's capital stock, whether now outstanding or issued after the date of the Indentures, including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease" is defined to mean, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person; and "Capitalized Lease Obligation" is defined to mean the rental obligations, as aforesaid, under such lease. "Closing Date" is defined to mean the date on which the Senior Notes (defined as the 9 1/4% Notes in this Prospectus) or the Subordinated Notes (defined as the 10% Notes in this Prospectus), as the case may be, are originally issued under their respective Indentures. "Common Stock" is defined to mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of the Indentures, including, without limitation, all series and classes of such common stock. "Consolidated Capital Expenditures" means expenditures (whether paid in cash or accrued as liabilities and including Capitalized Lease Obligations) of the Company and its Subsidiaries that, in conformity with GAAP, are included in the property, plant or equipment reflected in the consolidated balance sheet of the Company and its Subsidiaries. "Consolidated EBITDA" is defined to mean, with respect to any Person for any period, the sum of the amounts for such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) income taxes (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales of assets), (iv) depreciation expense, (v) amortization expense and (vi) all other non-cash items reducing Adjusted Consolidated Net Income, less all non-cash items increasing Adjusted Consolidated Net Income, all as determined on a consolidated basis for such Person and its Subsidiaries in conformity with GAAP; provided that, if a Person has any Subsidiary that is not a Wholly Owned Subsidiary, Consolidated EBITDA of such Person shall be reduced by an amount - 102 - equal to (A) the Adjusted Consolidated Net Income of such Subsidiary multiplied by (B) the quotient of (1) the number of shares of outstanding Common Stock of such Subsidiary not owned on the last day of such period by such Person or any Subsidiary of such Person divided by (2) the total number of shares of outstanding Common Stock of such Subsidiary on the last day of such period. "Consolidated Interest Expense" is defined to mean, with respect to any Person for any period, the aggregate amount of interest in respect of Indebtedness (including amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; and the net costs associated with Interest Rate Agreements) and all but the principal component of rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by such Person and its consolidated subsidiaries during such period; excluding, however, (i) any amount of such interest of any Subsidiary of such Person if the net income (or loss) of such Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income for such Person pursuant to clause (iii) of the definition thereof (but only in the same proportion as the net income (or loss) of such Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income for such Person pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the Acquisition and the Refinancing (defined as the 1993 Refinancing in this Prospectus), all as determined in conformity with GAAP. "Consolidated Net Worth" is defined to mean, at any date of determination, shareholders equity as set forth on the most recently available consolidated balance sheet of the Company and its consolidated Subsidiaries (which shall be as of a date not more than 60 days prior to the date of such computation), less, to the extent required in conformity with GAAP, any amounts attributable to Redeemable Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of Capital Stock of the Company or any Subsidiary of the Company (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Currency Agreement" is defined to mean any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in currency values to or under which the Company or any of its Subsidiaries is a party or a beneficiary on the date of the Indentures or becomes a party or a beneficiary thereafter. "Domestic Subsidiary" is defined to mean any Subsidiary of the Company other than a Foreign Subsidiary. "Foreign Subsidiary" is defined to mean any Subsidiary of the Company that is organized under the laws of a jurisdiction other than the United States of America or any state thereof and more than 80% of the sales, earnings or assets (determined on a consolidated basis in conformity with GAAP) of which are located or derived from operations located in territories outside of the United States of America and jurisdictions outside the United States of America. "GAAP" is defined to mean generally accepted accounting principles in the United States of America as in effect as of the date of the Indentures, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations based on GAAP contained in the Indentures shall be computed in conformity with GAAP, except that calculations made for purposes of determining compliance with the terms of the covenants described below and with other provisions of the Indentures shall be made without giving effect to (i) the amortization of any expenses incurred in connection with the Acquisition or the Refinancing (defined as the 1993 Refinancing in this - 103 - Prospectus) and (ii) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. "Guarantee" is defined to mean any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or- pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Holder" or "Securityholder" is defined to mean the registered holder of any Senior Note or Subordinated Note (defined as the 9 1/4% Note and the 10% Note, respectively, in this Prospectus), as the case may be. "Incur" is defined to mean, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to or extend the maturity of or become responsible for, the payment of, contingently or otherwise, such Indebtedness; provided that neither the accrual of interest (whether such interest is payable in cash or kind) nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" is defined to mean, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all obligations of such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness of such other Persons, (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person, (viii) all obligations in respect of borrowed money under the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Notes, the Notes (defined as the 1993 Notes in this Prospectus)(including any agreements pursuant to which the Notes are issued) and any Guarantees thereof and (ix) to the extent not otherwise included in this definition, obligations under Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP. "Interest Coverage Ratio" is defined to mean, with respect to any Person on any Transaction Date, the ratio of (i) the aggregate amount of Consolidated EBITDA of such Person for the four fiscal quarters for which financial information in respect thereof is available immediately prior to such Transaction Date to (ii) the aggregate Consolidated Interest Expense of such Person during such four fiscal quarters. In making the foregoing calculation, (A) pro forma effect shall be given to (1) any Indebtedness Incurred subsequent to the end of the four-fiscal-quarter period referred to in clause (i) and prior to the Transaction Date (other than Indebtedness Incurred under - 104 - a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any predecessor revolving credit or similar arrangement) on the last day of such period), (2) any Indebtedness Incurred during such period to the extent such Indebtedness is outstanding at the Transaction Date and (3) any Indebtedness to be Incurred on the Transaction Date, in each case as if such Indebtedness had been Incurred on the first day of such four- fiscal-quarter period and after giving effect to the application of the proceeds thereof; (B) Consolidated Interest Expense attributable to interest on any Indebtedness (whether existing or being Incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months) had been the applicable rate for the entire period; (C) there shall be excluded from Consolidated Interest Expense any Consolidated Interest Expense related to any amount of Indebtedness that was outstanding during such four-fiscal-quarter period or thereafter but that is not outstanding or is to be repaid on the Transaction Date, except for Consolidated Interest Expense accrued (as adjusted pursuant to clause (B)) during such four-fiscal-quarter period under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any successor revolving credit or similar arrangement) on the Transaction Date; (D) pro forma effect shall be given to Asset Dispositions and Asset Acquisitions that occur during such four-fiscal-quarter period or thereafter and prior to the Transaction Date (including any Asset Acquisition to be made with the Indebtedness Incurred pursuant to clause above) as if they had occurred on the first day of such four-fiscal-quarter period; (E) with respect to any such four-fiscal-quarter period commencing prior to the Refinancing (defined as the 1993 Refinancing in this Prospectus), the Refinancing shall be deemed to have taken place on the first day of such period; and (F) pro forma effect shall be given to asset dispositions and asset acquisitions that have been made by any Person that has become a Subsidiary of the Company or has been merged with or into the Company or any Subsidiary of the Company during the four-fiscal-quarter period referred to above or subsequent to such period and prior to the Transaction Date and that would have been Asset Dispositions or Asset Acquisitions had such transactions occurred when such Person was a Subsidiary of the Company as if such asset dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the first day of such period. "Interest Rate Agreement" is defined to mean any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in interest rates to or under which the Company or any of its Subsidiaries is a party or a beneficiary on the date of the Indentures or becomes a party or a beneficiary thereafter. "Investment" is defined to mean any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of any Person or its Subsidiaries) or other extension of credit or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by any other Person. For purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant described below, (i) "Investment" shall include the fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary of the Company is designated an Unrestricted Subsidiary and shall exclude the fair market value of the net assets of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Subsidiary of the Company and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined by the Board of Directors in good faith. "Lien" is defined to mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, any sale with recourse against the seller or any Affiliate of the seller). - 105 - "Net Cash Proceeds" is defined to mean, with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Subsidiary of the Company) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Company and its Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Company or any Subsidiary of the Company as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP. "1993 Term Loan Agreement" is defined to mean the Term Loan Agreement, dated as of March 22, 1993, among the Company, the Banks party thereto and the Bank Agents party thereto, together with the related documents thereto (including, without limitation, any Guarantees and security documents), in each case, as such agreements may be amended (including any amendment and restatement thereof), supplemented, replaced or otherwise modified from time to time, including any agreement extending the maturity of, refinancing or otherwise restructuring (including, but not limited to, the inclusion of additional borrowers or Guarantors thereunder that are Subsidiaries of the Company and whose obligations are Guaranteed by the Company thereunder) all or any portion of the Indebtedness under such agreements or any successor agreements; provided that, with respect to any agreement providing for the refinancing of Indebtedness under the 1993 Term Loan Agreement, such agreement shall be the 1993 Term Loan Agreement under the Indentures only if a notice to that effect is delivered to the Trustees; and provided further that there shall be at any one time only one instrument, together with any related documents (including, without limitation, any Guarantees or security documents), that is the 1993 Term Loan Agreement under the Indentures. "Operating Lease" is defined to mean, as applied to any Person, any lease of any property (whether real, personal or mixed) that is not a Capitalized Lease. "Pass Through Certificates" is defined to mean the Pass Through Certificates, Series 1991, representing fractional undivided interests in the Fort Howard Corporation 1991 Pass Through Trust formed pursuant to a pass through trust agreement by and between the Company and Wilmington Trust Company, as trustee. "Pass Through Certificate Leases" is defined to mean the leases under which the Company leases the Phase IV paper manufacturing facility, the Phase IV power plant and certain paper manufacturing production equipment, all located in Effingham County, Georgia. "Pass Through Certificate Secured Notes" is defined to mean the secured notes issued on a nonrecourse basis by the owner trustee in connection with its acquisition of the Company's interest in the Phase IV paper manufacturing facility, the Phase IV power plant and certain paper manufacturing production equipment, all located in Effingham County, Georgia. "Permitted Liens" is defined to mean (i) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (ii) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as - 106 - shall be required in conformity with GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers' acceptances, surety and appeal bonds, government contracts, performance and return of money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company or any of its Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real or tangible personal property acquired after the Closing Date; provided that (a) such Lien is created solely for the purpose of securing Indebtedness Incurred (1) to finance the cost (including the cost of improvement or construction) of the item of property or assets subject thereto and such Lien is created prior to, at the time of or within 12 months after the later of the acquisition, the completion of construction or the commencement of full operation of such property or (2) to refinance any Indebtedness previously so secured, (b) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item; (vii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company or any of its Subsidiaries; (viii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or any of its Subsidiaries relating to such property or assets, (ix) any interest or title of a lessor in the property subject to any Capitalized Lease or Operating Lease; provided that, in the case of the Senior Notes (defined as the 9 1/4% Notes in this Prospectus), any sale-leaseback transaction related thereto complies with the "Limitation on Sale-Leaseback Transactions" covenant described below; (x) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xi) Liens on property of, or on shares of stock or Indebtedness of, any corporation existing at the time such corporation becomes, or becomes a part of, any Restricted Subsidiary; (xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens securing any real property or other assets of the Company or any Subsidiary of the Company in favor of the United States of America or any State, or any department, agency, instrumentality or political subdivision thereof, in connection with the financing of industrial revenue bond facilities or of any equipment or other property designed primarily for the purpose of air or water pollution control; provided, however, that any such Lien on such facilities, equipment or other property shall not apply to any other assets of the Company or such Subsidiary of the Company; (xiv) Liens arising from the rendering of a final judgment or order against the Company or any Subsidiary of the Company that does not give rise to an Event of Default; (xv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xvi) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvii) Liens encumbering customary initial deposits and margin deposits, and other Liens that are either within the general parameters customary in the industry and incurred in the ordinary course of business or otherwise permitted under the terms of the Bank Credit Agreement or the 1993 Term Loan Agreement, in each case securing Indebtedness under Interest Rate Agreements and Currency Agreements and forward contracts, options, futures contracts, futures options or similar agreements or arrangements designed to protect the Company or any of its Subsidiaries from fluctuations in the price of commodities; (xviii) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Company or any of its Subsidiaries in the ordinary course of business in accordance with the past practices of the Company and its Subsidiaries prior to the Closing Date; and (xix) Liens on or sales of receivables. "Person" is defined to mean an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plans" is defined to mean any employee benefit plan, pension plan, stock option plan or similar plan or arrangement of the Company or any Subsidiary of the Company, or any successor plan thereof. - 107 - "Preferred Stock" is defined to mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's preferred or preference stock, whether now outstanding or issued after the date of the Indentures, including, without limitation, all series and classes of such preferred or preference stock. "Principal Property" is defined to mean any manufacturing or processing plant, warehouse or other building used by the Company or any Restricted Subsidiary, other than a plant, warehouse or other building that, in the good faith opinion of the Board of Directors as reflected in a Board Resolution, is not of material importance to the respective businesses conducted by the Company or any Restricted Subsidiary as of the date such Board Resolution is adopted. "Public Equity Offering" means an underwritten primary public offering of equity securities of the Company pursuant to an effective registration statement under the Securities Act. "Public Market" means any time after (x) a Public Equity Offering has been consummated and (y) at least 15% of the total issued and outstanding common stock of the Company has been distributed by means of an effective registration statement under the Securities Act or sales pursuant to Rule 144 under the Securities Act. "Redeemable Stock" is defined to mean any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Notes (defined as the 1993 Notes in this Prospectus), (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Stated Maturity of the Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Notes; provided that any Capital Stock that would not constitute Redeemable Stock but for provisions thereof giving Holders thereof the right to require the Company to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" occurring prior to the Stated Maturity of the Notes shall not constitute Redeemable Stock if the asset sale provisions applicable to such Capital Stock are no more favorable to the Holders of such Capital Stock than the provisions contained in the "Limitation on Asset Sales" covenant described below and such Capital Stock specifically provides that the Company will not repurchase or redeem any such stock pursuant to such provisions prior to the Company's repurchase of such Notes as are required to be repurchased pursuant to the provisions of the "Limitation on Asset Sales" covenant described below. "Restricted Subsidiary" is defined to mean any Subsidiary of the Company other than an Unrestricted Subsidiary. "Senior Secured Notes" is defined to mean the Company's Senior Secured Notes due 1997 through 2000, issued in 1991 and having an aggregate principal amount of $300 million. "Significant Subsidiary" is defined to mean, at any date of determination, any Subsidiary of the Company that, together with its Subsidiaries, (i) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company, all as set forth on the most recently available consolidated financial statements of the Company for such fiscal year. "Stated Maturity" is defined to mean, with respect to any debt security or any installment of interest thereon, the date specified in such debt security as the fixed date on which any principal of such debt security or any such installment of interest is due and payable. "Subsidiary" is defined to mean, with respect to any Person, any corporation, association or other business entity of which more than 50% of the outstanding Voting Stock is owned, directly or indirectly, by the Company or by one or more other Subsidiaries of the Company, or by such Person and one or more other Subsidiaries of such Person; provided that, except as the term "Subsidiary" is used in the definition of "Unrestricted Subsidiary" described - 108 - below, an Unrestricted Subsidiary shall not be deemed to be a Subsidiary of the Company for purposes of the Indentures. "Trade Payables" is defined to mean, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Transaction Date" is defined to mean, with respect to the Incurrence of any Indebtedness by the Company or any of its Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Unrestricted Subsidiary" is defined to mean (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, that such designation would be permitted under the "Limitation on Restricted Payments" covenant described below; and provided further that, for purposes of valuing the amount of an Investment in any Foreign Subsidiary being made by reason of such designation, the amount that shall be taken into account (instead of the fair market value of the net assets of such Subsidiary (which shall apply in the case of a Domestic Subsidiary)) shall be the sum of (1) the amount of Investments that have been made by the Company or any Restricted Subsidiary in such Foreign Subsidiary during the period from the Closing Date to the date of such designation plus (2) the amount, determined pursuant to clause (C)(1) of the first paragraph of such "Limitation on Restricted Payments" covenant, in respect of the Adjusted Consolidated Net Income of the Company attributable to such Foreign Subsidiary during the period (taken as one accounting period) beginning on April 1, 1993 and ending on the last day of the last fiscal quarter preceding the Transaction Date and not previously dividended or distributed to the Company or any other Restricted Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the Company; provided that immediately after giving effect to such designation (x) the Company could Incur $1.00 of additional Indebtedness under the first paragraph of the "Limitation on Indebtedness" covenant described below and (y) no Event of Default, or event that after notice or passage of time or both would become an Event of Default, shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustees by promptly filing with each of the Trustees a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Voting Stock" is defined to mean Capital Stock of any class or kind ordinarily having the power to vote for the election of directors of the Company. "Wholly Owned Subsidiary" is defined to mean, with respect to any Person, any Subsidiary of such Person if all of the Common Stock or other similar equity ownership interests (but not including Preferred Stock) in such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) is owned directly or indirectly by such Person. Covenants Limitation on Indebtedness. Under the terms of the 1993 Note Indentures, the Company shall not, and shall not permit any Restricted Subsidiary to, Incur any Indebtedness (other than the 1993 Notes (including any agreements pursuant to which the 1993 Notes are issued) and Indebtedness existing on the Closing Date); provided that the Company may Incur Indebtedness if, after giving effect to the Incurrence of such Indebtedness - 109 - and the receipt and application of the proceeds therefrom, the Interest Coverage Ratio of the Company would be greater than (a) prior to or on December 31, 1996, 1.5:1 and (b) after December 31, 1996, 1.75:1. Notwithstanding the foregoing, under each of the 1993 Note Indentures (except as expressly provided otherwise below), the Company and any Restricted Subsidiary may Incur each and all of the following: (i) Indebtedness outstanding at any time in an aggregate principal amount not to exceed the sum of the outstanding Indebtedness and the unused commitment under the Bank Credit Agreement and the 1993 Term Loan Agreement as of the Closing Date; (ii) Indebtedness outstanding at any time in an aggregate principal amount not to exceed $400 million; provided that, solely in the case of the 9 1/4% Note Indenture, (A) the amount of such Indebtedness outstanding at any time of Restricted Subsidiaries under this clause (ii) shall not exceed $200 million and (B) the amount of such Indebtedness outstanding at any time of Domestic Subsidiaries under this clause (ii) shall not exceed $100 million; (iii) Indebtedness of the Company to any of its Restricted Subsidiaries that is a Wholly Owned Subsidiary of the Company, or of a Restricted Subsidiary to the Company or to any other Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company; (iv) Indebtedness issued in exchange for, or the net proceeds of which are used to refinance, outstanding Indebtedness of the Company or any of its Restricted Subsidiaries, other than Indebtedness Incurred under clauses (i), (ii), (vii), (viii) or (x) and any refinancings thereof, in an amount (or, if such new Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, with an original issue price) not to exceed the amount so exchanged or refinanced (plus premiums, accrued interest, fees and expenses); provided that Indebtedness issued in exchange for or the net proceeds of which are used to refinance the 9 1/4% Notes or the 10% Notes, as the case may be, or other Indebtedness of the Company that is subordinated in right of payment to the 9 1/4% Notes or the 10% Notes, as the case may be, shall only be permitted under this clause (iv) if (A) in case the 9 1/4% Notes or the 10% Notes, as the case may be, are exchanged or refinanced in part, such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, is expressly made pari passu with, or subordinate in right of payment to, the remaining 9 1/4% Notes or 10% Notes, as the case may be, (B) in case the Indebtedness to be exchanged or refinanced is subordinated in right of payment to the 9 1/4% Notes or the 10% Notes, as the case may be, such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, is expressly made subordinate in right of payment to the 9 1/4% Notes or the 10% Notes, as the case may be, at least to the extent that the Indebtedness to be exchanged or refinanced is subordinated to the 9 1/4% Notes or the 10% Notes, as the case may be, and (C) in case the 9 1/4% Notes or the 10% Notes, as the case may be, are exchanged or refinanced in part or the Indebtedness to be exchanged or refinanced is subordinated in right of payment to the 9 1/4% Notes or the 10% Notes, as the case may be, such Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to six months after the Stated Maturity of the 9 1/4% Notes or the 10% Notes, as the case may be, and the Average Life of such Indebtedness is equal to or greater than the sum of the remaining Average Life of the 9 1/4% Notes or the 10% Notes, as the case may be, plus six months; provided further that in no event may Indebtedness of the Company that is pari passu with, or subordinated in right of payment to, the 9 1/4% Notes or the 10% Notes, as the case may be, be exchanged or refinanced by means of Indebtedness of any Subsidiary of the Company pursuant to this clause (iv); and provided further that the two foregoing provisos of this clause (iv) shall not be applicable to Indebtedness Incurred in exchange for or to refinance the 12 3/8% Notes, the 12 5/8% Debentures, the 14 1/8% Debentures or the Junior Debentures (including in each case redemption or other premiums, consent or other fees, and expenses incurred in connection therewith); (v) Indebtedness Incurred by the Company in connection with (x) the repurchase of shares of, or options to purchase shares of, the Common Stock of the Company or any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors) or (y) Guarantees of borrowings made by such Persons exclusively for the purpose of exercising options to purchase or sell such shares of Common Stock and paying any associated tax liability, in each case pursuant to the terms of the form of agreements or plans (or amendments thereto) under which such Persons purchase or sell, or are granted the option to purchase, shares of such Common Stock; (vi) Indebtedness (A) in respect of performance bonds, bankers' acceptances, letters of credit and surety or - 110 - appeal bonds provided in the ordinary course of business, (B) under Currency Agreements and Interest Rate Agreements; provided that, in the case of Currency Agreements that relate to other Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder and (C) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any Subsidiary of the Company pursuant to such agreements, in any case Incurred in connection with the disposition of any business, assets or Subsidiary of the Company, other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Subsidiary of the Company for the purpose of financing such acquisition; (vii) Indebtedness under Guarantees incurred by the Company in respect of obligations of Unrestricted Subsidiaries outstanding at any time in an aggregate amount not to exceed $50 million; (viii) Acquired Indebtedness; provided that, at the time of the Incurrence thereof, the Company could Incur at least $1.00 of Indebtedness under the first paragraph of this "Limitation on Indebtedness" covenant and refinancings thereof; provided that such refinancing Indebtedness may not be Incurred by any Person other than the Company or the Restricted Subsidiary that is the obligor on such Acquired Indebtedness; (ix) Indebtedness directly Incurred to finance Consolidated Capital Expenditures in an aggregate amount not to exceed in any fiscal year of the Company the amount indicated below: FISCAL MAXIMUM YEAR AMOUNT ------ ------- (In Millions) 1994 ................... $250 1995 ................... 250 1996 and thereafter..... 275 ; provided, however, that the amount of Indebtedness which may be Incurred in any fiscal year pursuant to this clause (ix) shall be increased by the amount of Indebtedness which could have been Incurred in the prior fiscal year pursuant to this clause (ix) but which was not so Incurred; or (x) Indebtedness of the Company outstanding at any time in an aggregate amount not to exceed $175 million; provided that such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, (A) is expressly made subordinate in right of payment to the 9 1/4% Notes or the 10% Notes, as the case may be, at least to the extent the 10% Notes are subordinated to Senior Indebtedness and (B) provides that no payments of principal of such Indebtedness by way of sinking fund, mandatory redemption or otherwise (including defeasance) may be made by the Company (including, without limitation, at the option of the Holder thereof, other than an option given to such Holder pursuant to an "asset sale" provision that is no more favorable to such Holders of such Indebtedness than the provisions contained in the "Limitation on Asset Sales" covenant described below and such Indebtedness specifically provides that the Company will not purchase or redeem such Indebtedness pursuant to such provision prior to the Company's repurchase of the 1993 Notes required to be repurchased by the Company under the "Limitation on Asset Sales" covenant) at any time prior to the Stated Maturity of the 9 1/4% Notes or the 10% Notes, as the case may be. Notwithstanding any other provision of this "Limitation on Indebtedness" covenant, (i) the maximum amount of Indebtedness that the Company or any Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant shall not be deemed to be exceeded due solely to the result of fluctuations in the exchange rates of currencies, (ii) for purposes of calculating the amount of Indebtedness outstanding at any time under clause (ii) of the second paragraph of this "Limitation on Indebtedness" covenant, no amount of Indebtedness of the Company or any Subsidiary of the Company outstanding on the Closing Date shall be considered to be outstanding, and (iii) in the case of the 9 1/4% Notes, the Company shall not Incur any Indebtedness that is expressly subordinated to any other Indebtedness of the Company unless such Indebtedness, by its terms or the terms of any agreement instrument pursuant to which such Indebtedness is issued, is also expressly made subordinate to the 9 1/4% Notes at least to the extent it is subordinated - 111 - to such other Indebtedness, except that the 9 1/4% Notes shall not be required to become Designated Senior Indebtedness or its equivalent due solely to the Incurrence of such other Indebtedness in accordance with this clause (iii). For purposes of determining any particular amount of Indebtedness under this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred pursuant to the Bank Credit Agreement or the 1993 Term Loan Agreement prior to or on the Closing Date shall be treated as Incurred pursuant to clause (i) of the second paragraph of this "Limitation on Indebtedness" covenant, (2) Guarantees of, or obligations with respect to letters of credit supporting, Indebtedness otherwise included in the determination of such particular amount shall not be included and (3) any Liens granted pursuant to the equal and ratable provisions referred to in the first paragraph of the "Limitation on Liens" covenant shall not be treated as Indebtedness. For purposes of determining compliance with this "Limitation on Indebtedness" covenant, (x) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in the above clauses, the Company, in its sole discretion, shall classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses and (y) the amount of Indebtedness issued at a price that is less than the principal amount thereof shall be equal to the amount of the liability in respect thereof determined in conformity with GAAP. (Section 3.03) Limitation on Restricted Payments. Under the terms of the 1993 Note Indentures, the Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend or make any distribution on its Capital Stock (other than dividends or distributions payable solely in shares of its or such Subsidiary's Capital Stock (other than Redeemable Stock) of the same class held by such Holders or in options, warrants or other rights to acquire such shares of Capital Stock) held by Persons other than the Company or another Restricted Subsidiary, (ii) purchase, redeem, retire or otherwise acquire for value any shares of Capital Stock of the Company, any Restricted Subsidiary or any Unrestricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by Persons other than the Company or another Restricted Subsidiary, (iii) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Indebtedness of the Company that is subordinated in right of payment to the 9 1/4% Notes or the 10% Notes, as the case may be, or (iv) make any Investment in any Unrestricted Subsidiary (such payments or any other actions described in clauses (i) through (iv) being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (A) an Event of Default or event that, after notice or passage of time or both would become an Event of Default, shall have occurred and be continuing, (B) the Company could not Incur at least $1.00 of Indebtedness under the first paragraph of the "Limitation on Indebtedness" covenant or (C) the aggregate amount expended for all Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) after the date of the 1993 Note Indentures shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of such amount) of the Company (determined by excluding income resulting from the transfers of assets received by the Company or a Restricted Subsidiary from an Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken as one accounting period) beginning on April 1, 1993 and ending on the last day of the last fiscal quarter preceding the Transaction Date plus (2) the aggregate net proceeds (including the fair market value of non-cash proceeds as determined in good faith by the Board of Directors whose determination shall be conclusive and evidenced by a Board Resolution) received by the Company from the issuance and sale permitted by the 1993 Note Indentures of its Capital Stock (not including Redeemable Stock) to a Person who is not a Subsidiary of the Company, including an issuance or sale permitted by the 1993 Note Indentures for cash or other property upon the conversion of any Indebtedness of the Company subsequent to the Closing Date, or from the issuance of any options, warrants or other rights to acquire Capital Stock of the Company (in each case, exclusive of any Redeemable Stock or any options, warrants or other rights that are redeemable at the option of the Holder, or are required to be redeemed, prior to the Stated Maturity of the 9 1/4% Notes or 10% Notes, as the case may be) plus (3) an amount equal to the net reduction in Investments in Unrestricted Subsidiaries resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or any - 112 - Restricted Subsidiary from Unrestricted Subsidiaries, or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed in the case of any Unrestricted Subsidiary the amount of Investments previously made by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary plus (4) $75 million. The foregoing provision shall not take into account, and shall not be violated by reason of: (i) the payment of any dividend within 60 days after the date of declaration thereof if, at such date of declaration, such payment would comply with the foregoing provision; (ii) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the 9 1/4% Notes or 10% Notes, as the case may be, including premium, if any, with the proceeds of Indebtedness Incurred under the first paragraph of the "Limitation on Indebtedness" covenant or clause (iv) or (x) of the second paragraph of the "Limitation on Indebtedness" covenant; (iii) the payment of dividends on the Capital Stock of the Company, following any issuance of the Capital Stock of the Company, of up to 6% per annum of the net proceeds received by the Company in such issuance of the Capital Stock of the Company; (iv) the repurchase of shares of, or options to purchase shares of, Common Stock of the Company or any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors), pursuant to the terms of the form of agreements or plans (or amendments thereto) under which such Persons purchase or sell, or are granted the option to purchase or sell, shares of such Common Stock; (v) the repurchase, redemption or other acquisition of Capital Stock of the Company in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of Capital Stock of the Company (other than Redeemable Stock); (vi) the acquisition of Indebtedness of the Company that is subordinated in right of payment to the 9 1/4% Notes or the 10% Notes, as the case may be, in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of the Capital Stock of the Company (other than Redeemable Stock); (vii) payments or distributions pursuant to or in connection with a consolidation, merger or transfer of assets that complies with the provisions of the 1993 Note Indentures applicable to mergers, consolidations and transfers of all or substantially all of the property and assets of the Company; (viii) the purchase, redemption, acquisition, cancellation or other retirement for a nominal value per right (as determined in good faith by the Board of Directors) of any rights granted to all the Holders of Common Stock of the Company pursuant to any shareholders' rights plan (i.e., a "poison pill") adopted for the purpose (determined in good faith by the Board of Directors) of protecting shareholders from unfair takeover tactics; provided that any such purchase, redemption, acquisition, cancellation or other retirement of such rights shall not be for the purpose of evading the limitations of this "Limitation on Restricted Payments" covenant (all as determined in good faith by the Board of Directors); or (ix) the purchase of shares of Capital Stock of the Company or any Restricted Subsidiary for the purpose of contributing such shares to the Plans, or permitting the Plans to make payments to participants therein in cash rather than shares of Capital Stock of the Company or such Restricted Subsidiary; provided that such purchases do not in any one fiscal year of the Company exceed an aggregate amount of $30 million; and provided that, in the case of clauses (ii) through (iv) and (vi), no Event of Default, or event that after notice or passage of time or both would become an Event of Default, shall have occurred and be continuing or shall occur as a consequence thereof. (Section 3.04) Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. Under the terms of each of the 1993 Note Indentures, the Company will not, and will not permit any Restricted Subsidiary (other than a Foreign Subsidiary) to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make loans or advances to the Company or any other Restricted Subsidiary or (iv) transfer, subject to certain exceptions, any of its property or assets to the Company or any other Restricted Subsidiary. - 113 - The foregoing provision shall not restrict or prohibit any encumbrances or restrictions existing: (i) in the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Notes (including any agreement pursuant to which the Senior Secured Notes are issued) or any other agreements in effect on the Closing Date, including extensions, refinancings, renewals or replacements thereof; provided that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements are no less favorable in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) under any other agreement providing for the Incurrence of Indebtedness; provided that the encumbrances and restrictions in any such agreement are no less favorable in any material respect to the Holders than those encumbrances and restrictions contained in the Bank Credit Agreement, the Senior Secured Notes (including any agreement pursuant to which the Senior Secured Notes are issued) or the 1993 Term Loan Agreement as of the Closing Date; (iii) under or by reason of applicable law; (iv) with respect to any Person or the property or assets of such Person acquired by the Company or any Restricted Subsidiary and existing at the time of such acquisition, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (v) in the case of clause (iv) of the first paragraph of this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by the 1993 Note Indentures or (C) arising or agreed to in the ordinary course of business and that do not, individually or in the aggregate, detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or such Restricted Subsidiary; or (vi) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing contained in this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary from (1) entering into any agreement permitting the incurrence of Liens otherwise permitted in the "Limitation on Liens" covenant or (2) restricting the sale or other disposition of property or assets of the Company or any of its Subsidiaries that secure Indebtedness of the Company or any of its Subsidiaries. (Section 3.05) Limitation on Additional Tiers of Senior Subordinated Indebtedness. Under the terms of the 10% Note Indenture, the Company will not Incur any Indebtedness that is expressly made subordinate in right of payment to any Senior Indebtedness unless such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, (i) is expressly made pari passu with, or subordinate in right of payment to, the 10% Notes pursuant to provisions substantially similar to those contained in Article Eleven of the 10% Note Indenture, (ii) is the only issue of subordinated Indebtedness senior in right of payment to the 10% Notes, or (iii) is pari passu with such other subordinated Indebtedness described in clause (ii) and subordinate in right of payment to the same Senior Indebtedness as such other subordinated Indebtedness pursuant to provisions substantially similar to those applicable to such other subordinated Indebtedness; provided, however, that the foregoing limitation shall not apply to distinctions between categories of unsubordinated Indebtedness that exist by reason of any Liens or Guarantees arising or created in respect of some but not all of such unsubordinated Indebtedness. (Section 3.06) Limitation on the Issuance of Capital Stock of Domestic Restricted Subsidiaries. Under the terms of the 9 1/4% Note Indenture, the Company will not permit any Domestic Subsidiary that is a Restricted Subsidiary, directly or indirectly, to issue or sell any shares of its Capital Stock (including options, warrants or other rights to purchase shares of such Capital Stock) except (i) to the Company or another Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company or (ii) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary for purposes of the 9 1/4% Note Indenture. (Section 3.06) - 114 - Limitation on Transactions with Shareholders and Affiliates. Under the terms of each of the 1993 Note Indentures, the Company will not, and will not permit any Subsidiary of the Company to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any Holder (or any Affiliate of such Holder) of 5% or more of any class of Capital Stock of the Company or any Subsidiary of the Company or with any Affiliate of the Company or any Subsidiary of the Company (other than the Plans), except upon fair and reasonable terms no less favorable to the Company or such Subsidiary of the Company than could be obtained in a comparable arm's-length transaction with a Person that is not such a Holder or an Affiliate. The foregoing limitation does not limit, and shall not apply to (i) transactions (A) approved by a majority of the disinterested members of the Board of Directors or (B) for which the Company or a Subsidiary delivers to the 1993 Note Trustees a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Company or such Subsidiary of the Company from a financial point of view; (ii) any transaction between the Company and any Restricted Subsidiary or between Restricted Subsidiaries; (iii) the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company; or (iv) any Restricted Payments not prohibited by the "Limitation on Restricted Payments" covenant. (Section 3.07) Limitation on Liens. Under the terms of each of the 1993 Note Indentures, the Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien on any Principal Property, or any shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without making effective provision for all of the 1993 Notes and all other amounts due under the 1993 Note Indentures to be directly secured equally and ratably with (or prior to) the obligation or liability secured by such Lien unless, after giving effect thereto, the aggregate amount of any Indebtedness so secured, plus, in the case of the 9 1/4% Notes, the Attributable Indebtedness for all sale-leaseback transactions restricted as described in the "Limitation on Sale-Leaseback Transactions" covenant, does not exceed 15% of Adjusted Consolidated Assets. Under the terms of the 9 1/4% Note Indenture, the foregoing limitation does not apply to, and any computation of Indebtedness secured under such limitation shall exclude, (i) Liens securing (A) obligations under the Bank Credit Agreement or the 1993 Term Loan Agreement up to the amount of Indebtedness permitted to be Incurred under clause (i) of the second paragraph of the "Limitation on Indebtedness" covenant or (B) the Senior Secured Notes up to the amount thereof outstanding on the Closing Date; (ii) other Liens existing on the Closing Date; (iii) Liens securing Indebtedness of Restricted Subsidiaries (other than Acquired Indebtedness and refinancings thereof); (iv) Liens securing Indebtedness (other than subordinated Indebtedness) Incurred under clause (ii) (except that the sum of (A) the amount of Indebtedness Incurred by the Restricted Subsidiaries plus (B) the amount of secured Indebtedness (without duplication of any amount Incurred under subclause (A) of this clause (iv)) shall not exceed $200 million outstanding at any time) or (vi) of the second paragraph of the "Limitation on Indebtedness" covenant; (v) Liens granted in connection with the extension, renewal or refinancing, in whole or in part, of any Indebtedness described in clauses (i) through (iv) above; provided that the amount of Indebtedness secured by such Lien is not increased thereby (except to the extent that Indebtedness under the Bank Credit Agreement is increased to the extent permitted by clause (i) of the second paragraph of the "Limitation on Indebtedness" covenant); and provided further that the extension, renewal or refinancing of Indebtedness of the Company may not be secured by Liens on assets of any Restricted Subsidiary other than to the extent the Indebtedness being extended, renewed or refinanced was at any time previously secured by Liens on assets of such Restricted Subsidiary; (vi) Liens with respect to Acquired Indebtedness and refinancings thereof permitted under clause (viii) of the second paragraph of the "Limitation on Indebtedness" covenant; provided that such Liens do not extend to or cover any property or assets of the Company or any Subsidiary of the Company other than the property or assets of the Subsidiary acquired; or (vii) Permitted Liens. - 115 - Under the terms of the 10% Note Indenture, the limitation set forth in the first paragraph of this "Limitation on Liens" covenant does not apply to (i) Liens described in the preceding paragraph of this "Limitation on Liens" covenant or (ii) Liens securing Senior Indebtedness. (Section 3.08) Limitation on Sale-Leaseback Transactions. Under the terms of the 9 1/4% Note Indenture, the Company will not, and will not permit any Restricted Subsidiary to, enter into any sale-leaseback transaction involving any Principal Property, unless the aggregate amount of all Attributable Indebtedness with respect to such transactions, plus all Indebtedness secured by Liens on Principal Properties (excluding secured Indebtedness that is excluded as described in the "Limitation on Liens" covenant), does not exceed 15% of Adjusted Consolidated Assets. The foregoing restriction does not apply to, and any computation of Attributable Indebtedness under such limitation shall exclude, any sale- leaseback transaction if (i) the lease is for a period, including renewal rights, of not in excess of three years; (ii) the sale or transfer of the Principal Property is entered into prior to, at the time of, or within 12 months after the later of the acquisition of the Principal Property or the completion of construction thereof; (iii) the lease secures or relates to industrial revenue or pollution control bonds; (iv) the transaction is between the Company and any Restricted Subsidiaries or between Restricted Subsidiaries; or (v) the Company or such Restricted Subsidiary, within 12 months after the sale of any Principal Property is completed, applies an amount not less than the net proceeds received from such sale to the retirement of Senior Indebtedness, to Indebtedness of a Restricted Subsidiary or to the purchase of other property that will constitute Principal Property or improvements thereto. (Section 3.10) Limitation on Asset Sales. Under the terms of each of the 1993 Note Indentures, in the event and to the extent that the Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries from one or more Asset Sales occurring on or after the Closing Date in any period of 12 consecutive months (other than Asset Sales by the Company or any Restricted Subsidiary to the Company or another Restricted Subsidiary) exceed 15% of Adjusted Consolidated Assets in any one fiscal year (determined as of the date closest to the commencement of such 12-month period for which a balance sheet of the Company and its Subsidiaries has been prepared), then the Company shall (i) within 12 months (or, in the case of Asset Sales of plants or facilities, 24 months) after the date Net Cash Proceeds so received exceed 15% of Adjusted Consolidated Assets in any one fiscal year (determined as of the date closest to the commencement of such 12-month period for which a balance sheet of the Company and its Subsidiaries has been prepared) (A) apply an amount equal to such excess Net Cash Proceeds to repay Senior Indebtedness (in the case of the 10% Note Indenture) or unsubordinated Indebtedness (in the case of the 9 1/4% Note Indenture) or, in the case of either 1993 Note Indenture, Indebtedness of any Restricted Subsidiary, in each case owing to a Person other than the Company or any of its Subsidiaries or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement), in property or assets that are of a nature or type or are used in a business (or in a company having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Company and its Subsidiaries existing on the date thereof (as determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) and (ii) apply such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraphs of this "Limitation on Asset Sales" covenant. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period or 24-month period, as the case may be, as set forth in clause (A) or (B) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined below) totals at least $10 million, the Company must, not later than the fifteenth Business Day of such month, make an offer (an "Excess Proceeds Offer") to purchase from the Holders on a pro rata basis an aggregate principal amount of 1993 Notes equal to the Excess Proceeds on such date, at a purchase price equal to 101% of the principal amount of such 1993 Notes, plus, - 116 - in each case, accrued interest (if any) to the date of purchase (the "Excess Proceeds Payment"); provided, however, that no Excess Proceeds Offer shall be required to be commenced with respect to the 10% Notes until the Business Day following the Excess Proceeds Payment Date (as defined below) with respect to the 9 1/4% Notes and need not be commenced if the Excess Proceeds remaining after application to the 9 1/4% Notes purchased in the Excess Proceeds Offer applicable thereto are less than $10 million; and provided further, however that no 10% Notes may be purchased under this "Limitation on Asset Sales" covenant unless the Company shall have purchased all 9 1/4% Notes tendered pursuant to the Excess Proceeds Offer applicable thereto. Notwithstanding the foregoing, (i) to the extent that any or all of the Net Cash Proceeds of any Asset Sale are prohibited or delayed by applicable local law from being repatriated to the United States of America, the portion of such Net Cash Proceeds so affected will not be required to be applied pursuant to this "Limitation on Asset Sales" covenant but may be retained for so long, but only for so long, as the applicable local law will not permit repatriation to the United States of America (the Company hereby agrees to promptly take all reasonable actions required by the applicable local law to permit such repatriation) and once such repatriation of any such affected Net Cash Proceeds is permitted under the applicable local law, such repatriation will be immediately effected and such repatriated Net Cash Proceeds will be applied in the manner set forth in this "Limitation on Asset Sales" covenant as if such Asset Sale had occurred on the date of repatriation; and (ii) to the extent that the Board of Directors has determined in good faith that repatriation of any or all of the Net Cash Proceeds would have an adverse tax consequence to the Company, the Net Cash Proceeds so affected may be retained outside the United States of America for so long as such adverse tax consequence would continue. The Company shall commence an Excess Proceeds Offer by mailing a notice to the 1993 Note Trustee or 1993 Note Trustees, as the case may be, and each Holder stating: (i) that the Excess Proceeds Offer is being made pursuant to this "Limitation on Asset Sales" covenant and that all 1993 Notes validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 40 days from the date such notice is mailed) (the "Excess Proceeds Payment Date"); (iii) that any 1993 Note not tendered will continue to accrue interest; (iv) that, unless the Company defaults in the payment of the Excess Proceeds Payment, any 1993 Note accepted for payment pursuant to the Excess Proceeds Offer shall cease to accrue interest after the Excess Proceeds Payment Date; (v) that Holders electing to have a 1993 Note purchased pursuant to the Excess Proceeds Offer will be required to surrender the 1993 Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the 1993 Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Excess Proceeds Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Excess Proceeds Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of 1993 Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such 1993 Notes purchased; and (vii) that Holders whose 1993 Notes are being purchased only in part will be issued new 1993 Notes equal in principal amount to the unpurchased portion of the 1993 Notes surrendered; provided that each 1993 Note purchased and each new 1993 Note issued shall be in an original principal amount of $1,000 or integral multiples thereof. On the Excess Proceeds Payment Date, the Company shall (i) accept for payment on a pro rata basis 1993 Notes or portions thereof tendered pursuant to the Excess Proceeds Offer; (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all 1993 Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the 1993 Note Trustee or 1993 Note Trustees, as the case may be, 1993 Notes or portions thereof so accepted together with an Officers' Certificate specifying the 1993 Notes or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail to the Holders of 1993 Notes so accepted payment in an amount equal to the purchase price, and the appropriate 1993 Note Trustee shall promptly authenticate and mail to such Holders a new 1993 Note equal in principal amount to any unpurchased portion of the 1993 Note surrendered; provided that each 1993 Note purchased and each new 1993 Note issued shall be - 117 - in an original principal amount of $1,000 or integral multiples thereof. The Company will publicly announce the results of the Excess Proceeds Offer as soon as practicable after the Excess Proceeds Payment Date. For purposes of this "Limitation on Asset Sales" covenant, the respective 1993 Note Trustee for the 9 1/4% Notes or the 10% Notes, as the case may be, shall act as the Paying Agent. (Section 3.09) The Company will comply with 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 the event that such Excess Proceeds are received by the Company under this "Limitation on Asset Sales" covenant and the Company is required to repurchase 1993 Notes as described above. Events Of Default The following events will be defined as "Events of Default" in each 1993 Note Indenture: (a) the Company defaults in the payment of principal of (or premium, if any, on) any 9 1/4% Note or 10% Note, as the case may be, when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise, whether or not, in the case of the 10% Notes, such payment is prohibited by Article Eleven of the 10% Note Indenture; (b) the Company defaults in the payment of interest on any 9 1/4% Note or 10% Note, as the case may be, when the same becomes due and payable, and such default continues for a period of 30 days, whether or not, in the case of the 10% Notes, such payment is prohibited by Article Eleven of the 10% Note Indenture; (c) the Company defaults in the performance of or breaches any other covenant or agreement of the Company in the applicable 1993 Note Indenture or under the 9 1/4% Notes or 10% Notes, as the case may be, and such default or breach continues for a period of 30 consecutive days after written notice by the respective 1993 Note Trustee or the Holders of 25% or more in aggregate principal amount of the 9 1/4% Notes or 10% Notes, as the case may be; (d) there occurs with respect to any issue or issues of Indebtedness of the Company and/or one or more Significant Subsidiaries having an outstanding principal amount of $50 million or more individually or $100 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, an event of default that has caused the Holder or Holders thereof, or representatives of such Holder or Holders, to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration; (e) any final judgment or order (not covered by insurance) for the payment of money in excess of $50 million individually or $100 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Significant Subsidiary and shall not be discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order in excess of $50 million individually or that causes the aggregate amount for all such final judgments or orders outstanding against all such Persons to exceed $100 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (f) a court having jurisdiction in the premises enters a decree or order for (i) relief in respect of the Company or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (ii) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (iii) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; (g) the Company or any Significant Subsidiary (i) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (ii) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (iii) effects any general assignment for the benefit of creditors; or (h) the Company and/or one or more Significant Subsidiaries fails to make (i) at the final (but not any interim) fixed maturity of any issue of Indebtedness a principal payment of $50 million or more or (ii) at the final (but not any interim) fixed maturity - 118 - of more than one issue of such Indebtedness principal payments aggregating $100 million or more and, in the case of clause (i), such defaulted payment shall not have been made, waived or extended within 30 days of the payment default and, in the case of clause (ii), all such defaulted payments shall not have been made, waived or extended within 30 days of the payment default that causes the amount described in clause (ii) to exceed $100 million. (Section 5.01) If an Event of Default (other than an Event of Default specified in clause (f) or (g) above that occurs with respect to the Company) occurs and is continuing under the 1993 Note Indentures, the respective 1993 Note Trustee thereunder or the Holders of at least 25% in aggregate principal amount of the 9 1/4% Notes or 10% Notes, as the case may be, then outstanding, by written notice to the Company (and to the respective 1993 Note Trustee if such notice is given by such Holders (the "Acceleration Notice")), may, and the 1993 Note Trustee at the request of the Holders shall, declare the entire unpaid principal of, premium, if any, and accrued interest on the 9 1/4% Notes or 10% Notes, as the case may be, to be immediately due and payable. Upon a declaration of acceleration, such principal of, premium, if any, and accrued interest shall be immediately due and payable; provided that, in the case of the 10% Notes, for so long as the Bank Credit Agreement or the 1993 Term Loan Agreement is in effect, such declaration shall not become effective until the earlier of (i) five Business Days after receipt of the Acceleration Notice by each Administrative Agent and the Company or (ii) acceleration of the Indebtedness under the Bank Credit Agreement or the 1993 Term Loan Agreement; and provided further that such acceleration shall automatically be rescinded and annulled without any further action required on the part of the Holders of the 10% Notes in the event that any and all Events of Default specified in the Acceleration Notice under the 10% Note Indenture shall have been cured, waived or otherwise remedied as provided in the 10% Note Indenture prior to the expiration of the period referred to in the preceding clauses (i) and (ii). In the event of a declaration of acceleration because an Event of Default set forth in clause (d) or (h) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (d) or (h) shall be remedied, cured by the Company or waived by the Holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto. If an Event of Default specified in clause (f) or (g) above occurs with respect to the Company, all unpaid principal of, premium, if any, and accrued interest on the 9 1/4% Notes or 10% Notes, as the case may be, then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the respective 1993 Note Trustee or any Holder. The Holders of at least a majority in principal amount of the respective outstanding 9 1/4% Notes or 10% Notes, as the case may be, by written notice to the Company and to their respective 1993 Note Trustee, may waive all past defaults and rescind and annul a declaration of acceleration and its consequences if (i) all existing Events of Default, other than the non-payment of the principal of, premium, if any, and interest on the 9 1/4% Notes or 10% Notes, as the case may be, that have become due solely by such declaration of acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. (Sections 5.02 and 5.04) For information as to the waiver of defaults, see "--Modification and Waiver." The Holders of at least a majority in aggregate principal amount of the outstanding 9 1/4% Notes or 10% Notes, as the case may be, may direct the time, method and place of conducting any proceeding for any remedy available to their respective 1993 Note Trustee or exercising any trust or power conferred on such 1993 Note Trustee. However, the 1993 Note Trustee under each 1993 Note Indenture may refuse to follow any direction that conflicts with law or such 1993 Note Indenture, that may involve the 1993 Note Trustee in personal liability, or that the 1993 Note Trustee determines in good faith may be unduly prejudicial to the rights of Holders of 9 1/4% Notes or 10% Notes, as the case may be, not joining in the giving of such direction. (Section 5.05) A Holder may not pursue any remedy with respect to its respective 1993 Note Indenture or the 9 1/4% Notes or 10% Notes, as the case may be, unless: (i) the Holder gives to its respective 1993 Note Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate principal amount of outstanding 9 1/4% Notes or 10% Notes, as the case may be, make a written request to their respective 1993 Note Trustee to pursue the remedy; (iii) such Holder or Holders offer to their respective 1993 Note Trustee indemnity satisfactory to their respective 1993 Note Trustee against - 119 - any costs, liability or expense; (iv) such 1993 Note Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period, the Holders of a majority in aggregate principal amount of the outstanding 9 1/4% Notes or 10% Notes, as the case may be, do not give their respective 1993 Note Trustee a direction that is inconsistent with the request. (Section 5.06) However, such limitations do not apply to the right of any Holder of a 9 1/4% Note or 10% Note, as the case may be, to receive payment of the principal of, premium, if any, or interest on, such 9 1/4% Note or 10% Note, as the case may be, or to bring suit for the enforcement of any such payment, on or after the respective due dates expressed in the 9 1/4% Notes or 10% Notes, as the case may be, which right shall not be impaired or affected without the consent of the Holder. (Section 5.07) The 1993 Note Indentures will require certain officers of the Company to certify, on or before a date not more than 90 days after the end of each fiscal year, that a review has been conducted of the activities of the Company and its Subsidiaries and the Company's and its Subsidiaries' performance under the 1993 Note Indentures and that the Company has fulfilled all obligations thereunder, or, if there has been a default in the fulfillment of any such obligation, specifying each such default and the nature and status thereof. The Company will also be obligated to notify the 1993 Note Trustees of any default or defaults in the performance of any covenants or agreements under the 1993 Note Indentures. (Section 3.14) Consolidation, Merger And Sale Of Assets The Company shall not consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person (other than a Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company with a positive net worth; provided that, in connection with any merger of the Company with a Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company, no consideration (other than Common Stock in the surviving Person or the Company) shall be issued or distributed to the stockholders of the Company) or permit any Person to merge with or into the Company unless:(i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or that acquired or leased such property and assets of the Company shall be a corporation organized and validly existing under the laws of the United States of America or any jurisdiction thereof and shall expressly assume, by a supplemental indenture, executed and delivered to the 1993 Note Trustees, in form satisfactory to the 1993 Note Trustees, all of the obligations of the Company on all of the 1993 Notes and under the 1993 Note Indentures; (ii) immediately after giving effect to such transaction, no Event of Default and no event that, after notice or passage of time or both will become an Event of Default, shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis, the Interest Coverage Ratio of the Company (or any Person becoming the successor obligor of the 1993 Notes) is at least 1:1; provided that, if the Interest Coverage Ratio of the Company before giving effect to such transaction is within the range set forth in column (A) below, then the pro forma Interest Coverage Ratio of the Company (or any Person becoming the successor obligor of the 1993 Notes) shall be at least equal to the lesser of (1) the ratio determined by multiplying the percentage set forth in column (B) below by the Interest Coverage Ratio of the Company prior to such transaction and (2) the ratio set forth in column (C) below: (A) (B) (C) 1.11:1 to 1.99:1 .......................90% 1.5:1 2:00:1 to 2.99:1 .......................80% 2.1:1 3.00:1 to 3.99:1 .......................70% 2.4:1 4.00:1 or more .......................60% 2.5:1 ; and provided further that, if the pro forma Interest Coverage Ratio of the Company (or any Person becoming the successor obligor of the 1993 Notes) is 3:1 or more, the calculation in the preceding proviso shall be inapplicable and such transaction shall be deemed to have complied with the requirements of this clause (iii); (iv) immediately after giving effect to such transaction on a pro forma basis, the Company (or any Person that becomes the successor obligor of the 1993 Notes) shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to - 120 - such transaction; and (v) the Company delivers to the 1993 Note Trustee an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clauses (iii) and (iv)) and Opinion of Counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture comply with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with; provided, however, that clauses (iii) and (iv) above do not apply if, in the good faith determination of the Board of Directors, whose determination shall be evidenced by a Board Resolution, the principal purpose of such transaction is to change the state of incorporation of the Company; and provided further that any such transaction shall not have as one of its purposes the evasion of the foregoing limitations. (Section 4.01) Defeasance Defeasance and Discharge. Each 1993 Note Indenture provides that the Company will be deemed to have paid and will be discharged from any and all obligations in respect of the 9 1/4% Notes or the 10% Notes, as the case may be, and the provisions of such 1993 Note Indenture will no longer be in effect with respect to the 9 1/4% Notes or the 10% Notes, as the case may be, on the 123rd day after the deposit described below (except for, among other matters, certain obligations to register the transfer or exchange of the 9 1/4% Notes or the 10% Notes, as the case may be, to replace stolen, lost or mutilated 9 1/4% Notes or 10% Notes, as the case may be, to maintain paying agencies and to hold monies for payment in trust) if, among other things, (A) the Company has deposited with the relevant 1993 Note Trustee, in trust, money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the 9 1/4% Notes or the 10% Notes, as the case may be, on the Stated Maturity of such payments in accordance with the terms of the relevant 1993 Note Indenture and the 9 1/4% Notes or the 10% Notes, as the case may be, (B) the Company has delivered to the relevant 1993 Note Trustee either an Opinion of Counsel to the effect that Holders of the 9 1/4% Notes or the 10% Notes, as the case may be, will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of its option under this "Defeasance" provision and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred, which Opinion of Counsel must be accompanied by a ruling of the Internal Revenue Service to the same effect or a change in applicable federal income tax law after the date of such 1993 Note Indenture or a ruling directed to the Company or such 1993 Note Trustee received from the Internal Revenue Service to the same effect as the aforementioned Opinion of Counsel, (C) immediately after giving effect to such deposit on a pro forma basis, no Event of Default, or event that after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after the date of such deposit, and such deposit shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which the Company is bound, and (D) in the case of the 10% Note Indenture, the Company is not prohibited from making payments in respect of the 10% Notes by the provisions described under "Subordination," above. (Section 7.02) Defeasance of Certain Covenants and Certain Events of Default. Each 1993 Note Indenture further provides that the provisions of such 1993 Note Indenture will no longer be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets" and all the covenants described herein under "Covenants," clause (c) under "Events of Default" with respect to such covenants and clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets," and clauses (d), (e) and (h) under "Events of Default" shall be deemed not to be Events of Default, and the provisions described herein under "Subordination" shall not apply, upon, among other things, the deposit with the relevant 1993 Note Trustee, in trust, of money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the 9 1/4% Notes or the 10% Notes, as the case may be, on the Stated Maturity of such payments in accordance with the terms of such 1993 Note Indenture and the 9 1/4% Notes or the 10% Notes, as the case may be, the satisfaction of the provisions described in clause (C) (and, in the case of the 10% Notes, clause (D)) of the preceding paragraph and the delivery by the - 121 - Company to such 1993 Note Trustee of an Opinion of Counsel to the effect that, among other things, the Holders of the 9 1/4% Notes or the 10% Notes, as the case may be, will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain covenants and Events of Default and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred. (Section 7.03) Defeasance and Certain Other Events of Default. In the event the Company exercises its option to omit compliance with certain covenants and provisions of the 1993 Note Indenture with respect to the 9 1/4% Notes or the 10% Notes, as the case may be, as described in the immediately preceding paragraph and the 9 1/4% Notes or the 10% Notes, as the case may be, are declared due and payable because of the occurrence of an Event of Default that remains applicable, the amount of money and/or U.S. Government Obligations on deposit with the relevant 1993 Note Trustee will be sufficient to pay amounts due on the 9 1/4% Notes or the 10% Notes, as the case may be, at the time of their Stated Maturity but may not be sufficient to pay amounts due on the 9 1/4% Notes or the 10% Notes, as the case may be, at the time of the acceleration resulting from such Event of Default. However, the Company shall remain liable for such payments. The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement each contain a covenant prohibiting defeasance of the 9 1/4% Notes and the 10% Notes without the consent of a specified percentage of lenders under the Bank Credit Agreement and the 1993 Term Loan Agreement and the Holders of the Senior Secured Notes. The 9 1/4% Note Indenture, the 12 5/8% Debenture Indenture and the Pass Through Certificate Leases also contain covenants limiting defeasance of the 10% Notes. Modification And Waiver Modifications and amendments of each 1993 Note Indenture may be made by the Company and the relevant 1993 Note Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the outstanding 9 1/4% Notes or 10% Notes, as the case may be; provided, however, that no such modification or amendment may, without the consent of each Holder affected thereby, (i) change the Stated Maturity of the principal of, or any installment of interest on, any 9 1/4% Note or 10% Note, as the case may be, (ii) reduce the principal amount of, or premium, if any, or interest on, any 9 1/4% Note or 10% Note, as the case may be, (iii) change the place or currency of payment of principal of, or premium, if any, or interest on, any 9 1/4% Note or 10% Note, as the case may be, (iv) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the Redemption Date) of any 9 1/4% Note or 10% Note, as the case may be, (v) in the case of the 10% Notes, modify the subordination provisions in a manner adverse to the Holders of the 10% Notes, (vi) reduce the above-stated percentage of outstanding 9 1/4% Notes or 10% Notes, as the case may be, the consent of whose Holders is necessary to modify or amend such 1993 Note Indenture, (vii) waive a default in the payment of principal of, premium, if any, or interest on the 9 1/4% Notes or 10% Notes, as the case may be or (viii) reduce the percentage of aggregate principal amount of outstanding 9 1/4% Notes or 10% Notes, as the case may be, the consent of whose Holders is necessary for waiver of compliance with certain provisions of such 1993 Note Indenture or for waiver of certain defaults. (Article Eight) The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement each contain a covenant prohibiting the Company from consenting to any modification of the 1993 Note Indentures or waiver of any provision thereof without the consent of a specified percentage of the lenders under the Bank Credit Agreement and the 1993 Term Loan Agreement and the Holders of the Senior Secured 1993 Notes. See "Description of Certain Indebtedness--The Bank Credit Agreement" and "--The Senior Secured Notes." No Personal Liability Of Incorporators, Shareholders, Officers, Directors Or Employees Each 1993 Note Indenture provides that no recourse for the payment of the principal of, premium, if any, or interest on any of the 9 1/4% Notes or 10% Notes, as the case may be, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or - 122 - agreement of the Company in such 1993 Note Indenture, or in any of the 9 1/4% Notes or 10% Notes, as the case may be, or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator, shareholder, officer, director, employee or controlling person of the Company or of any successor Person thereof. Each Holder, by accepting such 9 1/4% Notes or 10% Notes, as the case may be, waives and releases all such liability. (Section 9.09) Concerning The 1993 Note Trustees Each of the 1993 Note Indentures provides that, except during the continuance of an Event of Default, the respective 1993 Note Trustee thereunder will perform only such duties as are specifically set forth in such 1993 Note Indenture. If an Event of Default has occurred and is continuing, the respective 1993 Note Trustee will exercise such rights and powers vested in it under such 1993 Note Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. (Section 6.01) Each of the 1993 Note Indentures and provisions of the Trust Indenture Act of 1939, as amended, incorporated by reference therein contain limitations on the rights of the respective 1993 Note Trustee thereunder, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. Each of the 1993 Note Trustees is permitted to engage in other transactions; provided, however, that if it acquires any conflicting interest, it must eliminate such conflict or resign. The 10% Trustee also serves as trustee with respect to the 12 5/8% Debenture Indenture (as defined below). The 12 5/8% Debentures rank pari passu in right of payment with the 10% Notes. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO THE 1993 NOTES The 1993 Notes should be treated as debt for federal income tax purposes. However, in the unlikely event that any of the 1993 Notes ultimately were treated as equity, the amount treated as a distribution on any such 1993 Note would first be taxable to the Holder as dividend income to the extent of the Company's current and accumulated earnings and profits and would next be treated as a return of capital to the extent of the Holder's tax basis in the 1993 Note, with any remaining amount treated as gain from the sale of the 1993 Notes. Further, payments on such 1993 Notes to foreign persons would not be eligible for the portfolio interest exception from U.S. withholding tax and dividends thereon would be subject to U.S. withholding tax at a flat rate of 30% (or lower treaty rate). In addition, in the event of equity treatment, the Company would not be entitled to deduct interest expense on such 1993 Notes for federal income tax purposes. Subject to the discussion below, stated interest on both the 9 1/4% Notes and the 10% Notes will be taxable as ordinary income to a Holder of such notes when received or accrued in accordance with such Holder's method of tax accounting. If, however, a Holder owns both the 9 1/4% Notes and the 10% Notes, such Holder should be aware that, under the Final Regulations relating to the tax treatment of original issue discount, the Holder could under certain circumstances be required to aggregate the 9 1/4% Notes and the 10% Notes held by such Holder and treat such aggregated Notes as a single debt instrument, which treatment may result in such Holder having to recognize all or a portion of stated interest on the 1993 Notes as original issue discount under an economic accrual basis prior to the receipt of cash attributable to stated interest. However, because a substantial portion of the 9 1/4% Notes and 10% Notes were issued to Holders who were not related to each other or the Company and who did not purchase both the 9 1/4% Notes and the 10% Notes, then there is an exception in the Final Regulations which provides that the aggregation rule would not apply to the 1993 Notes. A Holder who purchases a 9 1/4% Note or a 10% Note at a premium (generally, at a cost in excess of its principal amount or earlier call price in the case of the 10% Notes) may elect to amortize such premium as an offset to interest income on the debt with a corresponding decrease in tax basis. A Holder who purchases a 9 1/4% Note or a 10% Note at a discount (generally, at - 123 - a cost less than its principal amount) that exceeds a statutorily defined de minimis amount will be subject to the "market discount" rules of the Code. These rules provide in part that gain on the sale of a debt instrument is treated as ordinary income, generally interest, to the extent of accrued market discount not previously included in income by the Holder. The market discount rules also provide for a deferral of deductions for net interest expense on indebtedness incurred or continued by a Holder to purchase or carry a 9 1/4% Note or 10% Note acquired at a market discount until the Note is disposed of in a taxable transaction or unless the Holder elects to include market discount in income as it accrues. Upon a redemption, sale or exchange of a 9 1/4% Note or a 10% Note, its Holder will recognize gain or loss measured by the difference between the amount received in exchange therefor and such Holder's adjusted tax basis in the note. Any gain or loss recognized on the redemption, sale or exchange of a note will ordinarily be capital gain or loss if such note is held as a capital asset (except as noted above with respect to Holders who acquire a note at a market discount) and will be long-term capital gain or loss, as the case may be, if the Note was held for more than one year at the time of such redemption, sale or exchange. Under the Final Regulations, a holder of a debt instrument acquired on or after April 4, 1994 may elect to include in gross income interest that accrues on the debt instrument by using the constant yield method. For purposes of this election, interest on a debt instrument includes stated interest, original issue discount and market discount (including any de minimis amounts), adjusted as applicable by any premium. Such election may be revoked only with the consent of the IRS. Taxpayers should consult with their advisors regarding the effect of such an election on any other debt instruments held by such taxpayer and the advantages and disadvantages of making this election. Payments made on the 1993 Notes and proceeds from the sale of the 1993 Notes may be subject to a backup withholding tax of 31% unless the Holder of the 1993 Note complies with certain reporting requirements or is an exempt recipient under the Code. Any such withheld amounts will be allowed as a credit against the Holder's federal income tax liability. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY, ASSUMES THAT THE 1993 NOTES ARE HELD AS CAPITAL ASSETS, DOES NOT DEAL WITH CERTAIN ASPECTS FOR TAXPAYERS SUBJECT TO SPECIAL RULES AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE 1993 NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS. DESCRIPTION OF THE 8 1/4% NOTES AND THE 9% NOTES The 8 1/4% Notes were issued under an Indenture, dated as of February 1, 1994 (the "8 1/4% Note Indenture"), between the Company and Norwest Bank Wisconsin, N.A., as Trustee (the "8 1/4% Note Trustee"). The 9% Notes were issued under an Indenture, dated as of February 1, 1994 (the "9% Note Indenture"), between the Company and The Bank of New York, as Trustee (the "9% Note Trustee"). The 8 1/4% Note Indenture and the 9% Note Indenture are hereinafter referred to collectively as the "1994 Note Indentures." The 8 1/4% Note Trustee and the 9% Note Trustee are sometimes hereinafter referred to collectively as the "1994 Note Trustees." Any reference to a "1994 Note Trustee" means the 8 1/4% Note Trustee or the 9% Note Trustee, as the context may require. A copy of the form of each 1994 Note Indenture is filed as an exhibit to the Registration Statement of which this Prospectus is a part and is available as described under "Additional Information." The following summaries of certain provisions of the respective 1994 Note Indentures do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the respective 1994 Note Indentures, including the definitions of certain terms therein and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. Wherever particular Sections or defined terms of the 1994 Note Indentures not otherwise defined herein are referred to, such Sections or defined terms shall be incorporated herein by reference. - 124 - General Principal of, premium, if any, and interest on the 8 1/4% Notes and the 9% Notes are payable, and the 8 1/4% Notes and the 9% Notes may be exchanged or transferred, at the office or agency of the Company in the Borough of Manhattan, The City of New York (which, for the 8 1/4% Notes, initially shall be the corporate trust office of the 8 1/4% Note Trustee, at 3 New York Plaza, 15th Floor, New York, New York 10004 and, for the 9% Notes, initially shall be the corporate trust office of the 9% Note Trustee, at 101 Barclay Street, New York, New York 10286); provided that, at the option of the Company, payment of interest may be made by check mailed to the address of the Holders as such address appears in the Security Register. (Sections 2.01 and 2.03) The 8 1/4% Notes and the 9% Notes are issued only in fully registered form, without coupons, in denominations of $1,000 and any integral multiple of $1,000. (Section 2.02) No service charge shall be made for any registration of transfer or exchange of 8 1/4% Notes or 9% Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. (Section 2.05) Terms Of The 8 1/4% Notes The 8 1/4% Notes constitute unsecured senior obligations of the Company, limited to $100 million aggregate principal amount, and will mature on February 1, 2002. Each 8 1/4% Note bears interest at a rate per annum equal to 8 1/4% from February 9, 1994 or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semiannually (to Holders of record at the close of business on the January 15 or July 15 immediately preceding the Interest Payment Date) on February 1 and August 1 of each year, commencing August 1, 1994. The 8 1/4% Notes will not be redeemable prior to maturity. Terms Of The 9% Notes The 9% Notes constitute unsecured senior subordinated obligations of the Company, limited to $650 million aggregate principal amount, and will mature on February 1, 2006. Each 9% Note bears interest at the rate per annum equal to 9% from February 9, 1994 or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semiannually (to the Holders of record at the close of business on the January 15 or July 15 immediately preceding the Interest Payment Date) on February 1 and August 1 of each year, commencing August 1, 1994. Optional Redemption. The 9% Notes are redeemable, at the Company's option, in whole or in part, at any time on or after February 1, 1999, and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to each Holder's last address as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount), plus accrued interest to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date), if redeemed during the 12-month period commencing on or after February 1 of the years set forth below: REDEMPTION YEAR PRICE --------------- ----- 1999......................104.50% 2000......................102.25% and, after February 1, 2001, at 100% of principal amount. (Section 10.01) In addition, at any time prior to February 1, 1997, the Company may redeem up to $227.5 million aggregate principal amount of 9% Notes with the proceeds of one or more Public Equity Offerings following which there is a Public Market, at any time or from time to time, at a redemption price (expressed as a percentage of principal amount) of 109%, plus accrued interest to the Redemption Date. Selection. In the case of any partial redemption, selection of the 9% Notes for redemption will be made by the 9% Note Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the 9% Notes are listed or, if the 9% Notes are not listed on a national securities exchange, on a pro rata basis, by lot or by such other method as - 125 - the 9% Note Trustee in its sole discretion shall deem to be fair and appropriate; provided that no 9% Note of $1,000 in original principal amount or less shall be redeemed in part. If any 9% Note is to be redeemed in part only, the notice of redemption relating to such 9% Note shall state the portion of the principal amount thereof to be redeemed. A new 9% 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 9% Note. The Bank Credit Agreement, the Senior Secured Note Agreement and the 1993 Term Loan Agreement each contain a covenant prohibiting the optional redemption of the 9% Notes without the consent of a specified percentage in interest of lenders under the Bank Credit Agreement and the 1993 Term Loan Agreement, and of holders of Senior Secured Notes. The 8 1/4% Note Indenture, 9 1/4% Note Indenture and the Pass Through Certificate Leases also contain covenants limiting the optional redemption of the 9% Notes. Subordination The Indebtedness evidenced by the 8 1/4% Notes ranks pari passu in right of payment with all other senior indebtedness of the Company, including, without limitation, the Company's obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement, the Pass Through Certificate Leases, certain other leases resulting from sale and leaseback transactions, the Senior Secured Notes (including the Senior Secured Note Agreement) and the 9 1/4% Notes. The Company's obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement are secured by a first lien (subject to permitted liens) on the Shared Collateral. The Pass Through Certificates are indirectly secured by a lien on the Pass Through Assets, which consist of an owner trustee's interest in a paper manufacturing facility, power plant and certain equipment related thereto located at the Company's Savannah River mill, all of which are leased to the Company by such owner trustee under the Pass Through Certificate Leases. The Pass Through Certificate Leases are treated as capital leases pari passu with the 8 1/4% Notes. In addition, the Company has obligations resulting from other sale and leaseback transactions which are treated as capital leases pari passu with the 8 1/4% Notes. The 1994 Notes are not secured. The holders of Secured Indebtedness will be entitled to payment of their Indebtedness out of the proceeds of their collateral prior to the holders of any unsecured obligations of the Company, including the 1994 Notes. At March 31, 1994, the Company and its subsidiaries had outstanding approximately $1.2 billion of Secured Indebtedness and an additional $56 million available for borrowing under the Revolving Credit Facility. See "Certain Risk Factors--Subordination and Effect of Asset Encumbrances" and "Selected Historical Consolidated Financial Data." At March 31, 1994, the Company's subsidiaries had outstanding liabilities of $124 million, including trade payables. The 1994 Notes will be effectively subordinated to liabilities of the Company's subsidiaries, including trade payables. The payment of the Senior Subordinated Obligations, to the extent set forth in the 9% Note Indenture, is subordinated in right of payment to the prior payment in full, in cash or cash equivalents, of all Senior Indebtedness, including, without limitation, the Company's obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Notes, the Pass Through Certificate Leases (to the extent required to pay the Pass Through Certificate Secured Notes in full), and the 9 1/4% Notes. At March 31, 1994, approximately $1.7 billion of Senior Indebtedness of the Company was outstanding with respect to the 9% Notes. The 9% Notes rank senior in right of payment to the 12 5/8% Debentures, the 14 1/8% Debentures and the 10% Notes. See "Selected Historical Consolidated Financial Data." To the extent any payment of Senior Indebtedness (whether by or on behalf of the Company, as proceeds of security or enforcement of any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person under any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then, if such payment is recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person, the Senior Indebtedness or part thereof originally intended to be satisfied shall be deemed to be - 126 - reinstated and outstanding as if such payment had not occurred. To the extent the obligation to repay any Senior Indebtedness is declared to be fraudulent, invalid, or otherwise set aside under any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then the obligation so declared fraudulent, invalid or otherwise set aside (and all other amounts that would come due with respect thereto had such obligation not been so affected) shall be deemed to be reinstated and outstanding as Senior Indebtedness for all purposes of the 9% Note Indenture as if such declaration, invalidity or setting aside had not occurred. Upon any payment or distribution of assets or securities of the Company of any kind or character, whether in cash, property or securities, upon any dissolution or winding up or total or partial liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Indebtedness (including any interest accruing subsequent to an event of bankruptcy, whether or not such interest is an allowed claim enforceable against the debtor under the United States Bankruptcy Code) shall first be paid in full, in cash or cash equivalents, before the Holders of the 9% Notes or the 9% Note Trustee on behalf of the Holders of the 9% Notes shall be entitled to receive any payment by the Company on account of Senior Subordinated Obligations, or any payment to acquire any of the 9% Notes for cash, property or securities, or any distribution with respect to the 9% Notes of any cash, property or securities. Before any payment may be made by, or on behalf of, the Company of any Senior Subordinated Obligations upon any such dissolution, winding up, liquidation or reorganization, any payment or distribution of assets or securities of the Company of any kind or character, whether in cash, property or securities, to which the Holders of the 9% Notes or the 9% Note Trustee on behalf of the Holders of the 9% Notes would be entitled, but for the subordination provisions of the 9% Note Indenture, shall be made by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person making such payment or distribution or by the Holders of the 9% Notes or the 9% Note Trustee if received by them or it, directly to the holders of the Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders) or their representatives or to the trustee or trustees under any indenture pursuant to which Senior Indebtedness may have been issued, as their respective interests appear, to the extent necessary to pay all such Senior Indebtedness in full, in cash or cash equivalents, after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of such Senior Indebtedness. No direct or indirect payment by or on behalf of the Company of Senior Subordinated Obligations, whether pursuant to the terms of the 9% Notes or upon acceleration or otherwise shall be made if, at the time of such payment, there exists a default in the payment of all or any portion of the obligations on any Senior Indebtedness, and such default shall not have been cured or waived or the benefits of this sentence waived by or on behalf of the holders of such Senior Indebtedness. In addition, during the continuance of any other event of default with respect to (i) the Bank Credit Agreement, the Senior Secured Note Agreement or the 1993 Term Loan Agreement pursuant to which the maturity thereof may be accelerated and (a) upon receipt by the 9% Note Trustee of written notice from any Bank Agent or (b) if such event of default under the Bank Credit Agreement, the Senior Secured Note Agreement or the 1993 Term Loan Agreement results from the acceleration of the 9% Notes, from and after the date of such acceleration, no such payment may be made by or on behalf of the Company upon or in respect of the 9% Notes for a period (a "Payment Blockage Period") commencing on the earlier of the date of receipt of such notice or the date of such acceleration and ending 159 days thereafter (unless such Payment Blockage Period shall be terminated by written notice to the 9% Note Trustee from any Bank Agent or such event of default has been cured or waived) or (ii) any other Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated, upon receipt by the 9% Note Trustee of written notice from the trustee or other representative for the holders of such other Designated Senior Indebtedness (or the holders of at least a majority in principal amount of such other Designated Senior Indebtedness then outstanding), no such payment may be made by or on behalf of the Company upon or in respect of the 9% Notes for a Payment Blockage Period commencing on the date of receipt of such notice and ending 119 days thereafter (unless, in each case, such Payment Blockage Period shall be terminated by written notice to the 9% Note Trustee from such trustee of, or other representatives for, such holders). Not more than one Payment Blockage Period may be commenced with respect to the 9% Notes during any period of 360 consecutive days; provided that, subject to the limitations set forth in the - 127 - next sentence, the commencement of a Payment Blockage Period by the representatives for, or the holders of, Designated Senior Indebtedness other than under the Bank Credit Agreement or the 1993 Term Loan Agreement or under clause (i)(b) of this paragraph shall not bar the commencement of another Payment Blockage Period by the Bank Agents within such period of 360 consecutive days. Notwithstanding anything in the 9% Note Indenture to the contrary, there must be 180 consecutive days in any 360-day period in which no Payment Blockage Period is in effect. No event of default (other than an event of default pursuant to the financial maintenance covenants under the Bank Credit Agreement, the Senior Secured Note Agreement or the 1993 Term Loan Agreement) that existed or was continuing (it being acknowledged that any subsequent action that would give rise to an event of default pursuant to any provision under which an event of default previously existed or was continuing shall constitute a new event of default for this purpose) on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Indebtedness initiating such Payment Blockage Period shall be, or shall be made, the basis for the commencement of a second Payment Blockage Period by the representative for, or the holders of, such Designated Senior Indebtedness, whether or not within a period of 360 consecutive days, unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. (Article Eleven) By reason of the subordination provisions described above, in the event of liquidation or insolvency, creditors of the Company who are not holders of Senior Indebtedness may recover less ratably than holders of Senior Indebtedness and may recover more ratably than Holders of the 9% Notes. "Senior Subordinated Obligations" is defined to mean any principal of, premium, if any, and interest on the 9% Notes payable pursuant to the terms of the 9% Notes or upon acceleration, including any amounts received upon the exercise of rights of rescission or other rights of action (including claims for damages) or otherwise, to the extent relating to the purchase price of the 9% Notes or amounts corresponding to such principal, premium, if any, or interest on the 9% Notes. "Senior Indebtedness" under the 9% Note Indenture is defined to mean the following obligations of the Company, whether outstanding on the date of the 9% Note Indenture or thereafter Incurred: (i) all Indebtedness and other monetary obligations of the Company under the Bank Credit Agreement, the 1993 Term Loan Agreement, any Interest Rate Agreement or any Currency Agreement and the Company's Guarantee of any Indebtedness or monetary obligation of any of its Subsidiaries under the Bank Credit Agreement, the 1993 Term Loan Agreement, any Interest Rate Agreement or any Currency Agreement, (ii) any principal of, premium, if any, and interest on the Senior Secured Notes, the 9 1/4% Notes and the 8 1/4% Notes, (iii) all other Indebtedness of the Company (other than the 9% Notes), including principal and interest on such Indebtedness, unless such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, is pari passu with, or subordinated in right of payment to, the 9% Notes and (iv) all fees, expenses and indemnities payable in connection with the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Notes (including any agreement pursuant to which the Senior Secured Notes were issued) and, if applicable, Currency Agreements and Interest Rate Agreements; provided that the term "Senior Indebtedness" shall not include (a) the 12 3/8% Notes, the 12 5/8% Debentures, the 14 1/8% Debentures, the 10% Notes or any amounts payable under the indentures relating thereto, or amounts payable under the Pass Through Certificate Leases in excess of the amount necessary to pay the outstanding Pass Through Certificate Secured Notes (including accrued and unpaid interest) in full on the date of payment, (b) any Indebtedness of the Company that, when Incurred and without respect to any election under Section 1111(b) of the United States Bankruptcy Code, was without recourse to the Company, (c) any Indebtedness of the Company to a Subsidiary of the Company or to a joint venture in which the Company has an interest, (d) any Indebtedness of the Company (other than such Indebtedness already described in clause (i) above) of the type described in clause (iii) above and not permitted by the "Limitation on Indebtedness" covenant described below, (e) any repurchase, redemption or other obligation in respect of Redeemable Stock, (f) any Indebtedness to any employee of the Company or any of its Subsidiaries, (g) any liability for federal, state, local or other taxes owed or owing by the Company and (h) any Trade Payables. Senior Indebtedness will also include interest accruing subsequent to events of bankruptcy of the Company and its Subsidiaries at the rate provided for in the document - 128 - governing such Senior Indebtedness, whether or not such interest is an allowed claim enforceable against the debtor in a bankruptcy case under federal bankruptcy law. (Section 1.01) "Designated Senior Indebtedness" under the 9% Note Indenture is defined to mean (i) Indebtedness under the Bank Credit Agreement, the 1993 Term Loan Agreement or the Senior Secured Notes (including any agreement pursuant to which the Senior Secured Notes were issued) and (ii) any other Indebtedness constituting Senior Indebtedness that, at any date of determination, has an aggregate principal amount of at least $100 million and is specifically designated by the Company in the instrument creating or evidencing such Senior Indebtedness as "Designated Senior Indebtedness"; provided that, at the time of such designation, the aggregate outstanding amount (plus any unutilized commitments) under the Bank Credit Agreement shall be $200 million or less. (Section 1.01) Except as set forth in the 9% Note Indenture, the subordination provisions described above will cease to be applicable to the 9% Notes upon any defeasance of the 9% Notes as described under "--Defeasance." (Article Seven) Certain Definitions Set forth below is a summary of certain of the defined terms used in the covenants and other provisions of the 1994 Note Indentures. Reference is made to the appropriate 1994 Note Indenture for the full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided. (Section 1.01) "Acquired Indebtedness" is defined to mean Indebtedness of a Person existing at the time such Person became a Subsidiary and not Incurred in connection with, or in contemplation of, such Person becoming a Subsidiary. "Adjusted Consolidated Assets" is defined to mean the total amount of assets of the Company and its Subsidiaries (less applicable depreciation, amortization and other valuation reserves), after deducting therefrom all current liabilities of the Company and its consolidated Subsidiaries, all as set forth on the most recently available consolidated balance sheet of the Company and its consolidated Subsidiaries, prepared in conformity with GAAP. "Adjusted Consolidated Net Income" is defined to mean, for any period, the aggregate net income (or loss) of any Person and its consolidated Subsidiaries for such period determined in conformity with GAAP; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income (or loss) of such Person (other than a Subsidiary of such Person) in which any other Person (other than such Person or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to such Person or any of its Subsidiaries by such other Person during such period, (ii) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of the "Limitation on Restricted Payments" covenant described below (and in such case, except to the extent includible pursuant to the foregoing clause (i) above), the net income (or loss) of such Person accrued prior to the date it becomes a Subsidiary of any other Person or is merged into or consolidated with such other Person or any of its Subsidiaries or all or substantially all of the property and assets of such Person are acquired by such other Person or any of its Subsidiaries, (iii) the net income (or loss) of any Subsidiary of such Person to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation and (iv) all extraordinary gains and extraordinary losses; provided that, solely for purposes of calculating the Interest Coverage Ratio (and in such case, except to the extent includible pursuant to clause (i) above), Adjusted Consolidated Net Income of the Company shall include the amount of all cash dividends received by the Company or any Subsidiary of the Company from an Unrestricted Subsidiary. "Administrative Agent" is defined to mean the Bank Agent under the Bank Credit Agreement or the 1993 Term Loan Agreement, or any successor thereto. - 129 - "Affiliate" is defined to mean, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, is defined to mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. For purposes of this definition, no Bank Agent, Administrative Agent or Bank and no affiliate of any of them shall be deemed to be an Affiliate of the Company. "Asset Acquisition" is defined to mean (i) an investment by the Company or any of its Subsidiaries in any other Person pursuant to which such Person shall become a Subsidiary of the Company or any of its Subsidiaries or shall be merged into or consolidated with the Company or any of its Subsidiaries or (ii) an acquisition by the Company or any of its Subsidiaries of the assets of any Person other than the Company or any of its Subsidiaries that constitute substantially all of a division or line of business of such Person. "Asset Disposition" is defined to mean the sale or other disposition by the Company or any of its Subsidiaries (other than to the Company or another Subsidiary of the Company) of (i) all or substantially all of the Capital Stock of any Subsidiary of the Company or (ii) all or substantially all of the assets that constitute a division or line of business of the Company or any of its Subsidiaries. "Asset Sale" is defined to mean with respect to any Person, any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transactions) in one transaction or a series of related transactions by such Person or any of its Subsidiaries to any Person other than the Company or any of its Subsidiaries of (i) all or any of the Capital Stock of any Subsidiary of such Person, (ii) all or substantially all of the assets of a division or line of business of such Person or any of its Subsidiaries or (iii) any other assets of such Person or any of its Subsidiaries outside the ordinary course of business of such Person or such Subsidiary and in each case, that is not governed by the provisions of the Indentures (defined as the 1994 Note Indentures in this Prospectus) applicable to mergers, consolidations and transfers of all or substantially all of the property and assets of the Company; provided that, for the purposes of determining the restrictions under the "Limitation on Asset Sales" covenant described below, the Company may disregard sales or other dispositions of inventory, receivables and other current assets. "Attributable Indebtedness" is defined to mean, when used in connection with a sale-leaseback transaction referred to in the "Limitation on Sale- Leaseback Transactions" covenant described below, at any date of determination, the product of (i) the net proceeds from such sale-leaseback transaction and (ii) a fraction, the numerator of which is the number of full years of the term of the lease relating to the property involved in such sale- leaseback transaction (without regard to any options to renew or extend such term) remaining at the date of the making of such computation and the denominator of which is the number of full years of the term of such lease (without regard to any options to renew or extend such term) measured from the first day of such term. "Average Life" is defined to mean, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the product of (A) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security multiplied by (B) the amount of such principal payment by (ii) the sum of all such principal payments. "Bank Agent" is defined to mean Bankers Trust Company, as agent for the Banks pursuant to the Bank Credit Agreement or the 1993 Term Loan Agreement, and any successor or successors thereto. "Bank Credit Agreement" is defined to mean the Credit Agreement, dated as of October 24, 1988, among the Company, the Banks party thereto and the Bank Agents party thereto, as amended to date, together with the related documents thereto (including, without limitation, any Guarantees and security documents), in each case, as such agreements may be amended (including any amendment and restatement thereof), supplemented, replaced or otherwise modified from time to time, including any agreement extending the maturity of, - 130 - refinancing or otherwise restructuring (including, but not limited to, the inclusion of additional borrowers or Guarantors thereunder that are Subsidiaries of the Company and whose obligations are Guaranteed by the Company thereunder) all or any portion of the Indebtedness under such agreements or any successor agreements; provided that, with respect to any agreement providing for the refinancing of Indebtedness under the Bank Credit Agreement, such agreement shall be the Bank Credit Agreement under the Indentures (defined as the 1994 Note Indentures in this Prospectus) only if a notice to that effect is delivered to the Trustee; and provided further that there shall be at any one time only one instrument, together with any related documents (including, without limitation, any Guarantees or security documents), that is the Bank Credit Agreement under the Indentures. "Banks" is defined to mean the lenders who are from time to time parties to the Bank Credit Agreement or the 1993 Term Loan Agreement. "Board of Directors" is defined to mean the Board of Directors of the Company or any committee of such Board of Directors duly authorized to act under the Indentures (defined as the 1994 Note Indentures in this Prospectus). "Business Day" is defined to mean any day except a Saturday, Sunday or other day on which commercial banks in The City of New York, or in the city of the Corporate Trust Office of the respective Trustees, are authorized by law to close. "Capital Stock" is defined to mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's capital stock, whether now outstanding or issued after the date of the Indenture (defined as the 1994 Note Indentures in this Prospectus), including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease" is defined to mean, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person; and "Capitalized Lease Obligation" is defined to mean the rental obligations, as aforesaid, under such lease. "Closing Date" is defined to mean the date on which the Senior Notes or the Senior Subordinated Notes (defined as the 8 1/4% Notes and the 9% Notes, respectively, in this Prospectus), as the case may be, are originally issued under their respective Indentures (defined as the 1994 Note Indentures in this Prospectus). "Common Stock" is defined to mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of the Indentures (defined as the 1994 Note Indentures in this Prospectus), including, without limitation, all series and classes of such common stock. "Consolidated Capital Expenditures" means expenditures (whether paid in cash or accrued as liabilities and including Capitalized Lease Obligations) of the Company and its Subsidiaries that, in conformity with GAAP, are included in the property, plant or equipment reflected in the consolidated balance sheet of the Company and its Subsidiaries. "Consolidated EBITDA" is defined to mean, with respect to any Person for any period, the sum of the amounts for such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) income taxes (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales of assets), (iv) depreciation expense, (v) amortization expense and (vi) all other non-cash items reducing Adjusted Consolidated Net Income, less all non-cash items increasing Adjusted Consolidated Net Income, all as determined on a consolidated basis for such Person and its Subsidiaries in conformity with GAAP; provided that, if a Person has any Subsidiary that is not a Wholly Owned Subsidiary, Consolidated EBITDA of such Person shall be reduced by an amount equal to (A) the Adjusted Consolidated Net Income of such Subsidiary multiplied by (B) the quotient of (1) the number of shares of outstanding Common Stock of such Subsidiary not owned on the last day of such period by - 131 - such Person or any Subsidiary of such Person divided by (2) the total number of shares of outstanding Common Stock of such Subsidiary on the last day of such period. "Consolidated Interest Expense" is defined to mean, with respect to any Person for any period, the aggregate amount of interest in respect of Indebtedness (including amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; and the net costs associated with Interest Rate Agreements) and all but the principal component of rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by such Person and its consolidated subsidiaries during such period; excluding, however, (i) any amount of such interest of any Subsidiary of such Person if the net income (or loss) of such Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income for such Person pursuant to clause (iii) of the definition thereof (but only in the same proportion as the net income (or loss) of such Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income for such Person pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the Acquisition, the 1993 Refinancing and the Refinancing (defined as the 1994 Refinancing in this Prospectus), all as determined in conformity with GAAP. "Consolidated Net Worth" is defined to mean, at any date of determination, shareholders' equity as set forth on the most recently available consolidated balance sheet of the Company and its consolidated Subsidiaries (which shall be as of a date not more than 60 days prior to the date of such computation), less, to the extent required in conformity with GAAP, any amounts attributable to Redeemable Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of Capital Stock of the Company or any Subsidiary of the Company (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Currency Agreement" is defined to mean any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in currency values to or under which the Company or any of its Subsidiaries is a party or a beneficiary on the date of the Indentures or becomes a party or a beneficiary thereafter. "Domestic Subsidiary" is defined to mean any Subsidiary of the Company other than a Foreign Subsidiary. "Foreign Subsidiary" is defined to mean any Subsidiary of the Company that is organized under the laws of a jurisdiction other than the United States of America or any state thereof and more than 80% of the sales, earnings or assets (determined on a consolidated basis in conformity with GAAP) of which are located or derived from operations located in territories outside of the United States of America and jurisdictions outside the United States of America. "GAAP" is defined to mean generally accepted accounting principles in the United States of America as in effect as of the date of the Indentures (defined as the 1994 Note Indentures in this Prospectus), including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations based on GAAP contained in the Indentures shall be computed in conformity with GAAP, except that calculations made for purposes of determining compliance with the terms of the covenants described below and with other provisions of the Indentures shall be made without giving effect to (i) the amortization of any expenses incurred in connection with the Acquisition, the 1993 Refinancing or the Refinancing (defined as the 1994 Refinancing in this Prospectus) and (ii) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. - 132 - "Guarantee" is defined to mean any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or- pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Holder" or "Securityholder" is defined to mean the registered holder of any Senior Note or any Senior Subordinated Note (defined as the 8 1/4% Notes and the 9% Notes, respectively, in this Prospectus), as the case may be. "Incur" is defined to mean, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to or extend the maturity of or become responsible for, the payment of, contingently or otherwise, such Indebtedness; provided that neither the accrual of interest (whether such interest is payable in cash or kind) nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" is defined to mean, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all obligations of such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness of such other Persons, (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person, (viii) all obligations in respect of borrowed money under the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Notes, the Notes (defined as the 1994 Notes in this Prospectus) (including any agreements pursuant to which the Notes were issued) and any Guarantees thereof and (ix) to the extent not otherwise included in this definition, obligations under Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP. "Interest Coverage Ratio" is defined to mean, with respect to any Person on any Transaction Date, the ratio of (i) the aggregate amount of Consolidated EBITDA of such Person for the four fiscal quarters for which financial information in respect thereof is available immediately prior to such Transaction Date to (ii) the aggregate Consolidated Interest Expense of such Person during such four fiscal quarters. In making the foregoing calculation, (A) pro forma effect shall be given to (1) any Indebtedness Incurred subsequent to the end of the four-fiscal-quarter period referred to in clause (i) and prior to the Transaction Date (other than Indebtedness Incurred under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any predecessor revolving credit or similar arrangement) on the last day of such period), (2) any Indebtedness Incurred during such period to the extent such Indebtedness is outstanding at the Transaction Date - 133 - and (3) any Indebtedness to be Incurred on the Transaction Date, in each case as if such Indebtedness had been Incurred on the first day of such four- fiscal-quarter period and after giving effect to the application of the proceeds thereof; (B) Consolidated Interest Expense attributable to interest on any Indebtedness (whether existing or being Incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months) had been the applicable rate for the entire period; (C) there shall be excluded from Consolidated Interest Expense any Consolidated Interest Expense related to any amount of Indebtedness that was outstanding during such four-fiscal-quarter period or thereafter but that is not outstanding or is to be repaid on the Transaction Date, except for Consolidated Interest Expense accrued (as adjusted pursuant to clause (B)) during such four-fiscal-quarter period under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any successor revolving credit or similar arrangement) on the Transaction Date; (D) pro forma effect shall be given to Asset Dispositions and Asset Acquisitions that occur during such four-fiscal-quarter period or thereafter and prior to the Transaction Date (including any Asset Acquisition to be made with the Indebtedness Incurred pursuant to clause (i) above) as if they had occurred on the first day of such four-fiscal-quarter period; (E) with respect to any such four-fiscal-quarter period commencing prior to the 1993 Refinancing or the Refinancing (defined as the 1994 Refinancing in this Prospectus), the 1993 Refinancing or the Refinancing, as the case may be, shall be deemed to have taken place on the first day of such period; and (F) pro forma effect shall be given to asset dispositions and asset acquisitions that have been made by any Person that has become a Subsidiary of the Company or has been merged with or into the Company or any Subsidiary of the Company during the four-fiscal-quarter period referred to above or subsequent to such period and prior to the Transaction Date and that would have been Asset Dispositions or Asset Acquisitions had such transactions occurred when such Person was a Subsidiary of the Company as if such asset dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the first day of such period. "Interest Rate Agreement" is defined to mean any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in interest rates to or under which the Company or any of its Subsidiaries is a party or a beneficiary on the date of the Indentures (defined as the 1994 Note Indentures in this Prospectus) or becomes a party or a beneficiary thereafter. "Investment" is defined to mean any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of any Person or its Subsidiaries) or other extension of credit or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by any other Person. For purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant described below, (i) "Investment" shall include the fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary of the Company is designated an Unrestricted Subsidiary and shall exclude the fair market value of the net assets of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Subsidiary of the Company and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined by the Board of Directors in good faith. "Lien" is defined to mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, any sale with recourse against the seller or any Affiliate of the seller). "Net Cash Proceeds" is defined to mean, with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent - 134 - corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Subsidiary of the Company) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Company and its Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Company or any Subsidiary of the Company as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP. "1993 Term Loan Agreement" is defined to mean the Term Loan Agreement, dated as of March 22, 1993, among the Company, the Banks party thereto and the Bank Agents party thereto, together with the related documents thereto (including, without limitation, any Guarantees and security documents), in each case, as such agreements may be amended (including any amendment and restatement thereof), supplemented, replaced or otherwise modified from time to time, including any agreement extending the maturity of, refinancing or otherwise restructuring (including, but not limited to, the inclusion of additional borrowers or Guarantors thereunder that are Subsidiaries of the Company and whose obligations are Guaranteed by the Company thereunder) all or any portion of the Indebtedness under such agreements or any successor agreements; provided that, with respect to any agreement providing for the refinancing of Indebtedness under the 1993 Term Loan Agreement, such agreement shall be the 1993 Term Loan Agreement under the Indentures (defined as the 1994 Note Indentures in this Prospectus) only if a notice to that effect is delivered to the Trustees (defined as the 1994 Note Trustees in this Prospectus); and provided further that there shall be at any one time only one instrument, together with any related documents (including, without limitation, any Guarantees or security documents), that is the 1993 Term Loan Agreement under the Indentures. "Operating Lease" is defined to mean, as applied to any Person, any lease of any property (whether real, personal or mixed) that is not a Capitalized Lease. "Pass Through Certificates" is defined to mean the Pass Through Certificates, Series 1991, representing fractional undivided interests in the Fort Howard Corporation 1991 Pass Through Trust formed pursuant to a pass through trust agreement by and between the Company and Wilmington Trust Company, as trustee. "Pass Through Certificate Leases" is defined to mean the leases under which the Company leases the Phase IV paper manufacturing facility, the Phase IV power plant and certain paper manufacturing production equipment, all located in Effingham County, Georgia. "Pass Through Certificate Secured Notes" is defined to mean the secured notes issued on a nonrecourse basis by the owner trustee in connection with its acquisition of the Company's interest in the Phase IV paper manufacturing facility, the Phase IV power plant and certain paper manufacturing production equipment, all located in Effingham County, Georgia. "Permitted Liens" is defined to mean (i) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (ii) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as - 135 - shall be required in conformity with GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers' acceptances, surety and appeal bonds, government contracts, performance and return of money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company or any of its Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real or tangible personal property acquired after the Closing Date; provided that (a) such Lien is created solely for the purpose of securing Indebtedness Incurred (1) to finance the cost (including the cost of improvement or construction) of the item of property or assets subject thereto and such Lien is created prior to, at the time of or within 12 months after the later of the acquisition, the completion of construction or the commencement of full operation of such property or (2) to refinance any Indebtedness previously so secured, (b) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item; (vii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company or any of its Subsidiaries; (viii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or any of its Subsidiaries relating to such property or assets, (ix) any interest or title of a lessor in the property subject to any Capitalized Lease or Operating Lease; provided that, in the case of the Senior Notes (defined as the 8 1/4% Notes in this Prospectus), any sale-leaseback transaction related thereto complies with the "Limitation on Sale-Leaseback Transactions" covenant described below; (x) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xi) Liens on property of, or on shares of stock or Indebtedness of, any corporation existing at the time such corporation becomes, or becomes a part of, any Restricted Subsidiary; (xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens securing any real property or other assets of the Company or any Subsidiary of the Company in favor of the United States of America or any State, or any department, agency, instrumentality or political subdivision thereof, in connection with the financing of industrial revenue bond facilities or of any equipment or other property designed primarily for the purpose of air or water pollution control; provided, however, that any such Lien on such facilities, equipment or other property shall not apply to any other assets of the Company or such Subsidiary of the Company; (xiv) Liens arising from the rendering of a final judgment or order against the Company or any Subsidiary of the Company that does not give rise to an Event of Default; (xv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xvi) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvii) Liens encumbering customary initial deposits and margin deposits, and other Liens that are either within the general parameters customary in the industry and incurred in the ordinary course of business or otherwise permitted under the terms of the Bank Credit Agreement or the 1993 Term Loan Agreement, in each case securing Indebtedness under Interest Rate Agreements and Currency Agreements and forward contracts, options, futures contracts, futures options or similar agreements or arrangements designed to protect the Company or any of its Subsidiaries from fluctuations in the price of commodities; (xviii) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Company or any of its Subsidiaries in the ordinary course of business in accordance with the past practices of the Company and its Subsidiaries prior to the Closing Date; and (xix) Liens on or sales of receivables. "Person" is defined to mean an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plans" is defined to mean any employee benefit plan, pension plan, stock option plan or similar plan or arrangement of the Company or any Subsidiary of the Company, or any successor plan thereof. - 136 - "Preferred Stock" is defined to mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's preferred or preference stock, whether now outstanding or issued after the date of the Indentures (defined as the 1994 Note Indentures in this Prospectus), including, without limitation, all series and classes of such preferred or preference stock. "Principal Property" is defined to mean any manufacturing or processing plant, warehouse or other building used by the Company or any Restricted Subsidiary, other than a plant, warehouse or other building that, in the good faith opinion of the Board of Directors as reflected in a Board Resolution, is not of material importance to the respective businesses conducted by the Company or any Restricted Subsidiary as of the date such Board Resolution is adopted. "Public Equity Offering" means an underwritten primary public offering of equity securities of the Company pursuant to an effective registration statement under the Securities Act. "Public Market" means any time after (x) a Public Equity Offering has been consummated and (y) at least 15% of the total issued and outstanding common stock of the Company has been distributed by means of an effective registration statement under the Securities Act or sales pursuant to Rule 144 under the Securities Act. "Redeemable Stock" is defined to mean any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Notes (defined as the 1994 Notes in this Prospectus), (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Stated Maturity of the Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Notes; provided that any Capital Stock that would not constitute Redeemable Stock but for provisions thereof giving holders thereof the right to require the Company to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" occurring prior to the Stated Maturity of the Notes shall not constitute Redeemable Stock if the asset sale provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in the "Limitation on Asset Sales" covenant described below and such Capital Stock specifically provides that the Company will not repurchase or redeem any such stock pursuant to such provisions prior to the Company's repurchase of the Notes as are required to be repurchased pursuant to the provisions of the "Limitation on Asset Sales" covenant described below. "Restricted Subsidiary" is defined to mean any Subsidiary of the Company other than an Unrestricted Subsidiary. "Senior Secured Notes" is defined to mean the Company's Senior Secured Notes due 1997 through 2000, issued in 1991 and having an aggregate principal amount of $300 million. "Significant Subsidiary" is defined to mean, at any date of determination, any Subsidiary of the Company that, together with its Subsidiaries, (i) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company, all as set forth on the most recently available consolidated financial statements of the Company for such fiscal year. "Stated Maturity" is defined to mean, with respect to any debt security or any installment of interest thereon, the date specified in such debt security as the fixed date on which any principal of such debt security or any such installment of interest is due and payable. "Subsidiary" is defined to mean, with respect to any Person, any corporation, association or other business entity of which more than 50% of the outstanding Voting Stock is owned, directly or indirectly, by the Company or by one or more other Subsidiaries of the Company, or by such Person and one or more other Subsidiaries of such Person; provided that, except as the term "Subsidiary" is used in the definition of "Unrestricted Subsidiary" described - 137 - below, an Unrestricted Subsidiary shall not be deemed to be a Subsidiary of the Company for purposes of the Indentures (defined as the 1994 Note Indentures in this Prospectus). "Trade Payables" is defined to mean, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Transaction Date" is defined to mean, with respect to the Incurrence of any Indebtedness by the Company or any of its Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Unrestricted Subsidiary" is defined to mean (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, that such designation would be permitted under the "Limitation on Restricted Payments" covenant described below; and provided further that, for purposes of valuing the amount of an Investment in any Foreign Subsidiary being made by reason of such designation, the amount that shall be taken into account (instead of the fair market value of the net assets of such Subsidiary (which shall apply in the case of a Domestic Subsidiary)) shall be the sum of (1) the amount of Investments that have been made by the Company or any Restricted Subsidiary in such Foreign Subsidiary during the period from the Closing Date to the date of such designation plus (2) the amount, determined pursuant to clause (C)(1) of the first paragraph of such "Limitation on Restricted Payments" covenant, in respect of the Adjusted Consolidated Net Income of the Company attributable to such Foreign Subsidiary during the period (taken as one accounting period) beginning on April 1, 1994 and ending on the last day of the last fiscal quarter preceding the Transaction Date and not previously dividended or distributed to the Company or any other Restricted Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the Company; provided that immediately after giving effect to such designation (x) the Company could Incur $1.00 of additional Indebtedness under the first paragraph of the "Limitation on Indebtedness" covenant described below and (y) no Event of Default, or event that after notice or passage of time or both would become an Event of Default, shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustees (defined as the 1994 Note Trustees in this Prospectus) by promptly filing with each of the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Voting Stock" is defined to mean Capital Stock of any class or kind ordinarily having the power to vote for the election of directors of the Company. "Wholly Owned Subsidiary" is defined to mean, with respect to any Person, any Subsidiary of such Person if all of the Common Stock or other similar equity ownership interests (but not including Preferred Stock) in such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) is owned directly or indirectly by such Person. Covenants Limitation on Indebtedness. Under the terms of the 1994 Note Indentures, the Company shall not, and shall not permit any Restricted Subsidiary to, Incur any Indebtedness (other than the 1994 Notes (including any agreements pursuant to which the 1994 Notes were issued) and Indebtedness existing on the Closing Date); provided that the Company may Incur Indebtedness if, after giving effect to the Incurrence of such Indebtedness and the receipt and - 138 - application of the proceeds therefrom, the Interest Coverage Ratio of the Company would be greater than (a) prior to or on December 31, 1996, 1.5:1 and (b) after December 31, 1996, 1.75:1. Notwithstanding the foregoing, under each 1994 Note Indenture (except as expressly provided otherwise below), the Company and any Restricted Subsidiary may Incur each and all of the following: (i) Indebtedness outstanding at any time in an aggregate principal amount not to exceed the sum of the outstanding Indebtedness and the unused commitment under the Bank Credit Agreement and the 1993 Term Loan Agreement as of the Closing Date; (ii) Indebtedness outstanding at any time in an aggregate principal amount not to exceed $400 million; provided that, solely in the case of the 8 1/4% Note Indenture, (A) the amount of such Indebtedness outstanding at any time of Restricted Subsidiaries under this clause (ii) shall not exceed $200 million and (B) the amount of such Indebtedness outstanding at any time of Domestic Subsidiaries under this clause (ii) shall not exceed $100 million; (iii) Indebtedness of the Company to any of its Restricted Subsidiaries that is a Wholly Owned Subsidiary of the Company, or of a Restricted Subsidiary to the Company or to any other Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company; (iv) Indebtedness issued in exchange for, or the net proceeds of which are used to refinance, outstanding Indebtedness of the Company or any of its Restricted Subsidiaries, other than Indebtedness Incurred under clauses (i), (ii), (vii), (viii) or (x) and any refinancings thereof, in an amount (or, if such new Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, with an original issue price) not to exceed the amount so exchanged or refinanced (plus premiums, accrued interest, fees and expenses); provided that Indebtedness issued in exchange for or the net proceeds of which are used to refinance the 8 1/4% Notes or the 9% Notes, as the case may be, or other Indebtedness of the Company that is subordinated in right of payment to the 8 1/4% Notes or the 9% Notes, as the case may be, shall only be permitted under this clause (iv) if (A) in case the 8 1/4% Notes or the 9% Notes, as the case may be, are exchanged or refinanced in part, such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, is expressly made pari passu with, or subordinate in right of payment to, the remaining 8 1/4% Notes, or 9% Notes, as the case may be, (B) in case the Indebtedness to be exchanged or refinanced is subordinated in right of payment to the 8 1/4% Notes or the 9% Notes, as the case may be, such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, is expressly made subordinate in right of payment to the 8 1/4% Notes or the 9% Notes, as the case may be, at least to the extent that the Indebtedness to be exchanged or refinanced is subordinated to the 8 1/4% Notes or the 9% Notes, as the case may be, and (C) in case the 8 1/4% Notes or the 9% Notes, as the case may be, are exchanged or refinanced in part or the Indebtedness to be exchanged or refinanced is subordinated in right of payment to the 8 1/4% Notes or the 9% Notes, as the case may be, such Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to six months after the Stated Maturity of the 8 1/4% Notes or the 9% Notes, as the case may be, and the Average Life of such Indebtedness is equal to or greater than the sum of the remaining Average Life of the 8 1/4% Notes or the 9% Notes, as the case may be, plus six months; provided further that in no event may Indebtedness of the Company that is pari passu with, or subordinated in right of payment to, the 8 1/4% Notes or the 9% Notes, as the case may be, be exchanged or refinanced by means of Indebtedness of any Subsidiary of the Company pursuant to this clause (iv); and provided further that the two foregoing provisos of this clause (iv) shall not be applicable to Indebtedness Incurred in exchange for or to refinance the 12 5/8% Debentures, the 14 1/8% Debentures or the 10% Notes (including in each case redemption or other premiums, consent or other fees, and expenses incurred in connection therewith); (v) Indebtedness Incurred by the Company in connection with (x) the repurchase of shares of, or options to purchase shares of, the Common Stock of the Company or any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors) or (y) Guarantees of borrowings made by such Persons exclusively for the purpose of exercising options to purchase or sell such shares of Common Stock and paying any associated tax liability, in each case pursuant to the terms of the form of agreements or plans (or amendments thereto) under which such Persons purchase or sell, or are granted the option to purchase, shares of such Common Stock; (vi) Indebtedness (A) in respect of performance bonds, bankers' acceptances, letters of credit and surety or appeal bonds provided in the ordinary course of business, (B) under Currency Agreements and Interest Rate Agreements; - 139 - provided that, in the case of Currency Agreements that relate to other Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder and (C) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any Subsidiary of the Company pursuant to such agreements, in any case Incurred in connection with the disposition of any business, assets or Subsidiary of the Company, other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Subsidiary of the Company for the purpose of financing such acquisition; (vii) Indebtedness under Guarantees incurred by the Company in respect of obligations of Unrestricted Subsidiaries outstanding at any time in an aggregate amount not to exceed $50 million; (viii) Acquired Indebtedness; provided that, at the time of the Incurrence thereof, the Company could Incur at least $1.00 of Indebtedness under the first paragraph of this "Limitation on Indebtedness" covenant and refinancings thereof; provided that such refinancing Indebtedness may not be Incurred by any Person other than the Company or the Restricted Subsidiary that is the obligor on such Acquired Indebtedness; (ix) Indebtedness directly Incurred to finance Consolidated Capital Expenditures in an aggregate amount not to exceed in any fiscal year of the Company the amount indicated below: FISCAL MAXIMUM YEAR AMOUNT --------------------------- (In Millions) 1994..................$250 1995.................. 250 1996 and thereafter... 275 ; provided, however, that the amount of Indebtedness which may be Incurred in any fiscal year pursuant to this clause (ix) shall be increased by the amount of Indebtedness which could have been Incurred in the prior fiscal year pursuant to this clause (ix) but which was not so Incurred; or (x) Indebtedness of the Company outstanding at any time in an aggregate amount not to exceed $175 million; provided that such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, (A) is expressly made subordinate in right of payment to the 8 1/4% Notes or the 9% Notes, as the case may be, at least to the extent the 9% Notes are subordinated to Senior Indebtedness and (B) provides that no payments of principal of such Indebtedness by way of sinking fund, mandatory redemption or otherwise (including defeasance) may be made by the Company (including, without limitation, at the option of the holder thereof, other than an option given to such holder pursuant to an "asset sale" provision that is no more favorable to such holders of such Indebtedness than the provisions contained in the "Limitation on Asset Sales" covenant described below and such Indebtedness specifically provides that the Company will not purchase or redeem such Indebtedness pursuant to such provision prior to the Company's repurchase of the 1994 Notes required to be repurchased by the Company under the "Limitation on Asset Sales" covenant) at any time prior to the Stated Maturity of the 8 1/4% Notes or the 9% Notes, as the case may be. Notwithstanding any other provision of this "Limitation on Indebtedness" covenant, (i) the maximum amount of Indebtedness that the Company or any Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant shall not be deemed to be exceeded due solely to the result of fluctuations in the exchange rates of currencies, (ii) for purposes of calculating the amount of Indebtedness outstanding at any time under clause (ii) of the second paragraph of this "Limitation on Indebtedness" covenant, no amount of Indebtedness of the Company or any Subsidiary of the Company outstanding on the Closing Date shall be considered to be outstanding and (iii) in the case of the 8 1/4% Notes, the Company shall not Incur any Indebtedness that is expressly subordinated to any other Indebtedness of the Company unless such Indebtedness, by its terms or the terms of any agreement or instrument pursuant to which such Indebtedness is issued, is also expressly made subordinate to the 8 1/4% Notes at least to the extent it is subordinated to such other Indebtedness, except that the 8 1/4% Notes shall not be required to become Designated Senior Indebtedness or its equivalent due solely to the Incurrence of such other Indebtedness in accordance with this clause (iii). - 140 - For purposes of determining any particular amount of Indebtedness under this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred pursuant to the Bank Credit Agreement or the 1993 Term Loan Agreement prior to or on the Closing Date shall be treated as Incurred pursuant to clause (i) of the second paragraph of this "Limitation on Indebtedness" covenant, (2) Guarantees of, or obligations with respect to letters of credit supporting, Indebtedness otherwise included in the determination of such particular amount shall not be included and (3) any Liens granted pursuant to the equal and ratable provisions referred to in the first paragraph of the "Limitation on Liens" covenant shall not be treated as Indebtedness. For purposes of determining compliance with this "Limitation on Indebtedness" covenant, (x) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in the above clauses, the Company, in its sole discretion, shall classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses and (y) the amount of Indebtedness issued at a price that is less than the principal amount thereof shall be equal to the amount of the liability in respect thereof determined in conformity with GAAP. (Section 3.03) Limitation on Restricted Payments. Under the terms of the 1994 Note Indentures, the Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend or make any distribution on its Capital Stock (other than dividends or distributions payable solely in shares of its or such Subsidiary's Capital Stock (other than Redeemable Stock) of the same class held by such holders or in options, warrants or other rights to acquire such shares of Capital Stock) held by Persons other than the Company or another Restricted Subsidiary, (ii) purchase, redeem, retire or otherwise acquire for value any shares of Capital Stock of the Company, any Restricted Subsidiary or any Unrestricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by Persons other than the Company or another Restricted Subsidiary, (iii) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Indebtedness of the Company that is subordinated in right of payment to the 8 1/4% Notes or the 9% Notes, as the case may be, or (iv) make any Investment in any Unrestricted Subsidiary (such payments or any other actions described in clauses (i) through (iv) being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (A) an Event of Default or event that, after notice or passage of time or both would become an Event of Default, shall have occurred and be continuing, (B) the Company could not Incur at least $1.00 of Indebtedness under the first paragraph of the "Limitation on Indebtedness" covenant or (C) the aggregate amount expended for all Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) after the date of the 1994 Note Indentures shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of such amount) of the Company (determined by excluding income resulting from the transfers of assets received by the Company or a Restricted Subsidiary from an Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken as one accounting period) beginning on April 1, 1994 and ending on the last day of the last fiscal quarter preceding the Transaction Date plus (2) the aggregate net proceeds (including the fair market value of non-cash proceeds as determined in good faith by the Board of Directors whose determination shall be conclusive and evidenced by a Board Resolution) received by the Company from the issuance and sale permitted by the 1994 Note Indenture of its Capital Stock (not including Redeemable Stock) to a Person who is not a Subsidiary of the Company, including an issuance or sale permitted by the 1994 Note Indentures for cash or other property upon the conversion of any Indebtedness of the Company subsequent to the Closing Date, or from the issuance of any options, warrants or other rights to acquire Capital Stock of the Company (in each case, exclusive of any Redeemable Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Stated Maturity of the 8 1/4% Notes or the 9% Notes, as the case may be), plus (3) an amount equal to the net reduction in Investments in Unrestricted Subsidiaries resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or any Restricted Subsidiary from Unrestricted Subsidiaries, or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed in - 141 - the case of any Unrestricted Subsidiary the amount of Investments previously made by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary plus (4) $75 million. The foregoing provision shall not take into account, and shall not be violated by reason of: (i) the payment of any dividend within 60 days after the date of declaration thereof if, at such date of declaration, such payment would comply with the foregoing provision; (ii) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the 8 1/4% Notes or the 9% Notes, as the case may be, including premium, if any, with the proceeds of Indebtedness Incurred under the first paragraph of the "Limitation on Indebtedness" covenant or clause (iv) or (x) of the second paragraph of the "Limitation on Indebtedness" covenant; (iii) the payment of dividends on the Capital Stock of the Company, following any issuance of the Capital Stock of the Company, of up to 6% per annum of the net proceeds received by the Company in such issuance of the Capital Stock of the Company; (iv) the repurchase of shares of, or options to purchase shares of, Common Stock of the Company or any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors), pursuant to the terms of the form of agreements or plans (or amendments thereto) under which such Persons purchase or sell, or are granted the option to purchase or sell, shares of such Common Stock; (v) the repurchase, redemption or other acquisition of Capital Stock of the Company in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of Capital Stock of the Company (other than Redeemable Stock); (vi) the acquisition of Indebtedness of the Company that is subordinated in right of payment to the 8 1/4% Notes or the 9% Notes, as the case may be, in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of the Capital Stock of the Company (other than Redeemable Stock); (vii) payments or distributions pursuant to or in connection with a consolidation, merger or transfer of assets that complies with the provisions of the 1994 Note Indentures applicable to mergers, consolidations and transfers of all or substantially all of the property and assets of the Company; (viii) the purchase, redemption, acquisition, cancellation or other retirement for a nominal value per right (as determined in good faith by the Board of Directors) of any rights granted to all the holders of Common Stock of the Company pursuant to any shareholders' rights plan (i.e., a "poison pill") adopted for the purpose (determined in good faith by the Board of Directors) of protecting shareholders from unfair takeover tactics; provided that any such purchase, redemption, acquisition, cancellation or other retirement of such rights shall not be for the purpose of evading the limitations of this "Limitation on Restricted Payments" covenant (all as determined in good faith by the Board of Directors); (ix) the purchase of shares of Capital Stock of the Company or any Restricted Subsidiary for the purpose of contributing such shares to the Plans, or permitting the Plans to make payments to participants therein in cash rather than shares of Capital Stock of the Company or such Restricted Subsidiary; provided that such purchases do not in any one fiscal year of the Company exceed an aggregate amount of $30 million; or (x) the purchase of subordinated Indebtedness pursuant to an "excess proceeds offer" or similar offer after the Company has complied with the "Limitation on Asset Sales" covenant; and provided that, in the case of clauses (ii) through (iv) and (vi), no Event of Default, or event that after notice or passage of time or both would become an Event of Default, shall have occurred and be continuing or shall occur as a consequence thereof. (Section 3.04) Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. Under the terms of the 1994 Note Indentures, the Company will not, and will not permit any Restricted Subsidiary (other than a Foreign Subsidiary) to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make loans or advances to the Company or any other Restricted Subsidiary or (iv) transfer, subject to certain exceptions, any of its property or assets to the Company or any other Restricted Subsidiary. The foregoing provision shall not restrict or prohibit any encumbrances or restrictions existing: (i) in the Bank Credit Agreement, the 1993 Term Loan - 142 - Agreement, the Senior Secured Notes (including any agreement pursuant to which the Senior Secured Notes were issued) or any other agreements in effect on the Closing Date, including extensions, refinancings, renewals or replacements thereof; provided that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements are no less favorable in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) under any other agreement providing for the Incurrence of Indebtedness; provided that the encumbrances and restrictions in any such agreement are no less favorable in any material respect to the Holders than those encumbrances and restrictions contained in the Bank Credit Agreement, the Senior Secured Notes (including any agreement pursuant to which the Senior Secured Notes were issued) or the 1993 Term Loan Agreement as of the Closing Date; (iii) under or by reason of applicable law; (iv) with respect to any Person or the property or assets of such Person acquired by the Company or any Restricted Subsidiary and existing at the time of such acquisition, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (v) in the case of clause (iv) of the first paragraph of this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by the 1994 Note Indentures or (C) arising or agreed to in the ordinary course of business and that do not, individually or in the aggregate, detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or such Restricted Subsidiary; or (vi) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing contained in this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary from (1) entering into any agreement permitting the incurrence of Liens otherwise permitted in the "Limitation on Liens" covenant or (2) restricting the sale or other disposition of property or assets of the Company or any of its Subsidiaries that secure Indebtedness of the Company or any of its Limitation on Additional Tiers of Senior Subordinated Indebtedness Under the terms of the 9% Note Indenture, the Company will not Incur any Indebtedness that is expressly made subordinate in right of payment to any Senior Indebtedness unless such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, is expressly made pari passu with, or subordinate in right of payment to, the 9% Notes pursuant to provisions substantially similar to those contained in Article Eleven of the 9% Note Indenture; provided, however, that the foregoing limitation shall not apply to distinctions between categories of unsubordinated Indebtedness that exist by reason of any Liens or Guarantees arising or created in respect of some but not all of such unsubordinated Indebtedness. (Section 3.06) Limitation on the Issuance of Capital Stock of Domestic Restricted Subsidiaries. Under the terms of the 8 1/4% Note Indenture, the Company will not permit any Domestic Subsidiary that is a Restricted Subsidiary, directly or indirectly, to issue or sell any shares of its Capital Stock (including options, warrants or other rights to purchase shares of such Capital Stock) except (i) to the Company or another Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company or (ii) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary for purposes of the 8 1/4% Note Indenture. (Section 3.06) Limitation on Transactions with Shareholders and Affiliates. Under the terms of each of the Indentures, the Company will not, and will not permit any Subsidiary of the Company to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any holder (or any Affiliate of such holder) of 5% or more of any class of Capital Stock of the Company or any Subsidiary of the Company or with any Affiliate of the Company or any Subsidiary of the Company (other than the - 143 - Plans), except upon fair and reasonable terms no less favorable to the Company or such Subsidiary of the Company than could be obtained in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate. The foregoing limitation does not limit, and shall not apply to (i) transactions (A) approved by a majority of the disinterested members of the Board of Directors or (B) for which the Company or a Subsidiary delivers to the 1994 Note Trustees a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Company or such Subsidiary of the Company from a financial point of view; (ii) any transaction between the Company and any Restricted Subsidiary or between Restricted Subsidiaries; (iii) the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company; or (iv) any Restricted Payments not prohibited by the "Limitation on Restricted Payments" covenant. (Section 3.07) Limitation on Liens. Under the terms of each of the 1994 Note Indentures, the Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien on any Principal Property, or any shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without making effective provision for all of the 1994 Notes and all other amounts due under the 1994 Note Indentures to be directly secured equally and ratably with (or prior to) the obligation or liability secured by such Lien unless, after giving effect thereto, the aggregate amount of any Indebtedness so secured plus, in the case of the 8 1/4% Notes, the Attributable Indebtedness for all sale-leaseback transactions restricted as described in the "Limitation on Sale-Leaseback Transactions" covenant, does not exceed 15% of Adjusted Consolidated Assets. Under the terms of the 8 1/4% Note Indenture, the foregoing limitation does not apply to, and any computation of Indebtedness secured under such limitation shall exclude, (i) Liens securing (A) obligations under the Bank Credit Agreement or the 1993 Term Loan Agreement up to the amount of Indebtedness permitted to be Incurred under clause (i) of the second paragraph of the "Limitation on Indebtedness" covenant or (B) the Senior Secured Notes up to the amount thereof outstanding on the Closing Date; (ii) other Liens existing on the Closing Date; (iii) Liens securing Indebtedness of Restricted Subsidiaries (other than Acquired Indebtedness and refinancings thereof); (iv) Liens securing Indebtedness (other than subordinated Indebtedness) Incurred under clause (ii) (except that the sum of (A) the amount of Indebtedness Incurred by the Restricted Subsidiaries plus (B) the amount of secured Indebtedness (without duplication of any amount Incurred under subclause (A) of this clause (iv)) shall not exceed $200 million outstanding at any time) or (vi) of the second paragraph of the "Limitation on Indebtedness" covenant; (v) Liens granted in connection with the extension, renewal or refinancing, in whole or in part, of any Indebtedness described in clauses (i) through (iv) above; provided that the amount of Indebtedness secured by such Lien is not increased thereby (except to the extent that Indebtedness under the Bank Credit Agreement is increased to the extent permitted by clause (i) of the second paragraph of the "Limitation on Indebtedness" covenant); and provided further that the extension, renewal or refinancing of Indebtedness of the Company may not be secured by Liens on assets of any Restricted Subsidiary other than to the extent the Indebtedness being extended, renewed or refinanced was at any time previously secured by Liens on assets of such Restricted Subsidiary; (vi) Liens with respect to Acquired Indebtedness and refinancings thereof permitted under clause (viii) of the second paragraph of the "Limitation on Indebtedness" covenant; provided that such Liens do not extend to or cover any property or assets of the Company or any Subsidiary of the Company other than the property or assets of the Subsidiary acquired; or (vii) Permitted Liens. (Section 3.08) Under the terms of the 9% Note Indenture, the limitation set forth in the first paragraph of this "Limitation of Liens" covenant does not apply to (i) Liens described in the preceding paragraph of this "Limitation of Liens" covenant or (ii) Liens securing Senior Indebtedness. (Section 3.08) Limitation on Sale-Leaseback Transactions. Under the terms of the 8 1/4% Note Indenture, the Company will not, and will not permit any Restricted Subsidiary to, enter into any sale-leaseback transaction involving any Principal Property, unless the aggregate amount of all Attributable Indebtedness with respect to such transactions, plus all Indebtedness secured - 144 - by Liens on Principal Properties (excluding secured Indebtedness that is excluded as described in the "Limitation on Liens" covenant), does not exceed 15% of Adjusted Consolidated Assets. The foregoing restriction does not apply to, and any computation of Attributable Indebtedness under such limitation shall exclude, any sale-leaseback transaction if (i) the lease is for a period, including renewal rights, of not in excess of three years; (ii) the sale or transfer of the Principal Property is entered into prior to, at the time of, or within 12 months after the later of the acquisition of the Principal Property or the completion of construction thereof; (iii) the lease secures or relates to industrial revenue or pollution control bonds; (iv) the transaction is between the Company and any Restricted Subsidiary or between Restricted Subsidiaries; or (v) the Company or such Restricted Subsidiary, within 12 months after the sale of any Principal Property is completed, applies an amount not less than the net proceeds received from such sale to the retirement of unsubordinated Indebtedness, to Indebtedness of a Restricted Subsidiary or to the purchase of other property that will constitute Principal Property or improvements thereto. (Section 3.10) Limitation on Asset Sales. Under the terms of each of the 1994 Note Indentures, in the event and to the extent that the Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries from one or more Asset Sales occurring on or after the Closing Date in any period of 12 consecutive months (other than Asset Sales by the Company or any Restricted Subsidiary to the Company or another Restricted Subsidiary) exceed 15% of Adjusted Consolidated Assets in any one fiscal year (determined as of the date closest to the commencement of such 12-month period for which a balance sheet of the Company and its Subsidiaries has been prepared), then the Company shall (i) within 12 months (or, in the case of Asset Sales of plants or facilities, 24 months) after the date Net Cash Proceeds so received exceed 15% of Adjusted Consolidated Assets in any one fiscal year (determined as of the date closest to the commencement of such 12-month period for which a balance sheet of the Company and its Subsidiaries has been prepared) (A) apply an amount equal to such excess Net Cash Proceeds to repay Senior Indebtedness or pari passu Indebtedness (in the case of the 9% Note Indenture) or unsubordinated Indebtedness (in the case of the 8 1/4% Note Indenture) or, in the case of either Indenture, Indebtedness of any Restricted Subsidiary, in each case owing to a Person other than the Company or any of its Subsidiaries or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement), in property or assets that are of a nature or type or are used in a business (or in a company having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Company and its Subsidiaries existing on the date thereof (as determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) and (ii) apply such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraphs of this "Limitation on Asset Sales" covenant. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period or 24-month period, as the case may be, as set forth in clause (A) or (B) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined below) totals at least $10 million, the Company must, not later than the fifteenth Business Day of such month, make an offer (an "Excess Proceeds Offer") to purchase from the Holders and, in the case of the 8 1/4% Note Indenture, the holders of other unsubordinated Indebtedness, on a pro rata basis an aggregate principal amount of 1994 Notes equal to the Excess Proceeds on such date, at a purchase price equal to 101% of the principal amount of such 1994 Notes, plus, in each case, accrued interest (if any) to the date of purchase (the "Excess Proceeds Payment"); provided, however, that no Excess Proceeds Offer shall be required to be commenced with respect to the 9% Notes if the purchase of at least $10 million of 9% Notes pursuant to such Excess Proceeds Offer would not (during the time such Excess Proceeds Offer is required to be commenced) be permitted by the terms of any Indebtedness of the Company (or any agreement pursuant to which such Indebtedness was issued) and in such case the amount that would otherwise constitute Excess Proceeds shall no longer be treated as Excess Proceeds; and provided further, however that no - 145 - 9% Notes may be purchased under this "Limitation on Asset Sales" covenant unless the Company shall have purchased all Senior Indebtedness tendered pursuant to an "excess proceeds offer" or similar offer applicable thereto. Notwithstanding the foregoing, (i) to the extent that any or all of the Net Cash Proceeds of any Asset Sale are prohibited or delayed by applicable local law from being repatriated to the United States of America, the portion of such Net Cash Proceeds so affected will not be required to be applied pursuant to this "Limitation on Asset Sales" covenant but may be retained for so long, but only for so long, as the applicable local law will not permit repatriation to the United States of America (the Company hereby agrees to promptly take all reasonable actions required by the applicable local law to permit such repatriation) and once such repatriation of any such affected Net Cash Proceeds is permitted under the applicable local law, such repatriation will be immediately effected and such repatriated Net Cash Proceeds will be applied in the manner set forth in this "Limitation on Asset Sales" covenant as if such Asset Sale had occurred on the date of repatriation; and (ii) to the extent that the Board of Directors has determined in good faith that repatriation of any or all of the Net Cash Proceeds would have an adverse tax consequence to the Company, the Net Cash Proceeds so affected may be retained outside the United States of America for so long as such adverse tax consequence would continue. The Company shall commence an Excess Proceeds Offer by mailing a notice to the 1994 Note Trustee or 1994 Note Trustees, as the case may be, and each Holder stating: (i) that the Excess Proceeds Offer is being made pursuant to this "Limitation on Asset Sales" covenant and that all 1994 Notes validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 40 days from the date such notice is mailed) (the "Excess Proceeds Payment Date"); (iii) that any 1994 Note not tendered will continue to accrue interest; (iv) that, unless the Company defaults in the payment of the Excess Proceeds Payment, any 1994 Note accepted for payment pursuant to the Excess Proceeds Offer shall cease to accrue interest on and after the Excess Proceeds Payment Date; (v) that Holders electing to have a 1994 Note purchased pursuant to the Excess Proceeds Offer will be required to surrender the 1994 Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the 1994 Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Excess Proceeds Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Excess Proceeds Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of 1994 Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such 1994 Notes purchased; and (vii) that Holders whose 1994 Notes are being purchased only in part will be issued new 1994 Notes equal in principal amount to the unpurchased portion of the 1994 Notes surrendered; provided that each 1994 Note purchased and each new 1994 Note issued shall be in an original principal amount of $1,000 or integral multiples thereof. On the Excess Proceeds Payment Date, the Company shall (i) accept for payment on a pro rata basis 1994 Notes or portions thereof tendered pursuant to the Excess Proceeds Offer; (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all 1994 Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the 1994 Note Trustee or 1994 Note Trustees, as the case may be, 1994 Notes or portions thereof so accepted together with an Officers' Certificate specifying the 1994 Notes or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail to the Holders of 1994 Notes so accepted payment in an amount equal to the purchase price, and the appropriate 1994 Note Trustee shall promptly authenticate and mail to such Holders a new 1994 Note equal in principal amount to any unpurchased portion of the 1994 Note surrendered; provided that each 1994 Note purchased and each new 1994 Note issued shall be in an original principal amount of $1,000 or integral multiples thereof. The Company will publicly announce the results of the Excess Proceeds Offer as soon as practicable after the Excess Proceeds Payment Date. For purposes of this "Limitation on Asset Sales" covenant, the respective 1994 Note Trustee for the 8 1/4% Notes or the 9% Notes, as the case may be, shall act as the Paying Agent. - 146 - The Company will comply with 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 the event that such Excess Proceeds are received by the Company under this "Limitation on Asset Sales" covenant and the Company is required to repurchase 1994 Notes as described above. (Section 3.09) Events Of Default The following events will be defined as "Events of Default" in each 1994 Note Indenture: (a) the Company defaults in the payment of principal of (or premium, if any, on) any 8 1/4% Note or 9% Note, as the case may be, when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise, whether or not, in the case of the 9% Notes, such payment is prohibited by Article Eleven of the 9% Note Indenture; (b) the Company defaults in the payment of interest on any 8 1/4% Note or 9% Note, as the case may be, when the same becomes due and payable, and such default continues for a period of 30 consecutive days, whether or not, in the case of the 9% Notes, such payment is prohibited by Article Eleven of the 9% Note Indenture; (c) the Company defaults in the performance of or breaches any other covenant or agreement of the Company in the applicable 1994 Note Indenture or under the 8 1/4% Notes or 9% Notes, as the case may be, and such default or breach continues for a period of 30 consecutive days after written notice by the respective 1994 Note Trustee or the Holders of 25% or more in aggregate principal amount of the 8 1/4% Notes or 9% Notes, as the case may be; (d) there occurs with respect to any issue or issues of Indebtedness of the Company and/or one or more Significant Subsidiaries having an outstanding principal amount of $50 million or more individually or $100 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, an event of default that has caused the holder or holders thereof, or representatives of such holder or holders, to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration; (e) any final judgment or order (not covered by insurance) for the payment of money in excess of $50 million individually or $100 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Significant Subsidiary and shall not be discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order in excess of $50 million individually or that causes the aggregate amount for all such final judgments or orders outstanding against all such Persons to exceed $100 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (f) a court having jurisdiction in the premises enters a decree or order for (i) relief in respect of the Company or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (ii) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (iii) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; (g) the Company or any Significant Subsidiary (i) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (ii) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (iii) effects any general assignment for the benefit of creditors; or (h) the Company and/or one or more Significant Subsidiaries fails to make (i) at the final (but not any interim) fixed maturity of any issue of Indebtedness a principal payment of $50 million or more or (ii) at the final (but not any interim) fixed maturity of more than one issue of such Indebtedness principal payments aggregating $100 million or more and, in the case of clause (i), such defaulted payment shall not have been made, waived or extended within 30 days of the payment default and, in the case of clause (ii), all such defaulted payments shall not have been made, waived or extended within 30 days of the payment default that causes the amount described in clause (ii) to exceed $100 million. (Section 5.01) - 147 - If an Event of Default (other than an Event of Default specified in clause (f) or (g) above that occurs with respect to the Company) occurs and is continuing under the 1994 Note Indentures, the respective 1994 Note Trustee thereunder or the Holders of at least 25% in aggregate principal amount of the 8 1/4% Notes or the 9% Notes, as the case may be, then outstanding, by written notice to the Company (and to the respective 1994 Note Trustee if such notice is given by such Holders (the "Acceleration Notice")), may, and the respective 1994 Note Trustee at the request of such Holders shall, declare the entire unpaid principal of, premium, if any, and accrued interest on the 8 1/4% Notes or the 9% Notes, as the case may be, to be immediately due and payable. Upon a declaration of acceleration, such principal of, premium, if any, and accrued interest shall be immediately due and payable; provided that, in the case of the 9% Notes, for so long as the Bank Credit Agreement or the 1993 Term Loan Agreement is in effect, such declaration shall not become effective until the earlier of (i) five Business Days after receipt of the Acceleration Notice by each Administrative Agent and the Company or (ii) acceleration of the Indebtedness under the Bank Credit Agreement or the 1993 Term Loan Agreement; and provided further that such acceleration shall automatically be rescinded and annulled without any further action required on the part of the Holders of the 9% Notes in the event that any and all Events of Default specified in the Acceleration Notice under the 9% Note Indenture shall have been cured, waived or otherwise remedied as provided in the 9% Note Indenture prior to the expiration of the period referred to in the preceding clauses (i) and (ii). In the event of a declaration of acceleration because an Event of Default set forth in clause (d) or (h) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (d) or (h) shall be remedied, cured by the Company or waived by the holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto. If an Event of Default specified in clause (f) or (g) above occurs with respect to the Company, all unpaid principal of, premium, if any, and accrued interest on the 8 1/4% Notes or the 9% Notes, as the case may be, then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the respective 1994 Note Trustee or any Holder. The Holders of at least a majority in principal amount of the outstanding 8 1/4% Notes or 9% Notes, as the case may be, by written notice to the Company and to their respective 1994 Note Trustee, may waive all past defaults and rescind and annul a declaration of acceleration and its consequences if (i) all existing Events of Default, other than the non-payment of the principal of, premium, if any, and interest on the 8 1/4% Notes or the 9% Notes, as the case may be, that have become due solely by such declaration of acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. (Sections 5.02 and 5.04) For information as to the waiver of defaults, see "--Modification and Waiver." The Holders of at least a majority in aggregate principal amount of the outstanding 8 1/4% Notes or 9% Notes, as the case may be, may direct the time, method and place of conducting any proceeding for any remedy available to their respective 1994 Note Trustee or exercising any trust or power conferred on such 1994 Note Trustee. However, the 1994 Note Trustee under each 1994 Note Indenture may refuse to follow any direction that conflicts with law or such 1994 Note Indenture, that may involve such 1994 Note Trustee in personal liability, or that such 1994 Note Trustee determines in good faith may be unduly prejudicial to the rights of Holders of 8 1/4% Notes or 9% Notes, as the case may be, not joining in the giving of such direction. (Section 5.05) A Holder may not pursue any remedy with respect to its respective 1994 Note Indenture or the 8 1/4% Notes or the 9% Notes, as the case may be, unless: (i) the Holder gives to its respective 1994 Note Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate principal amount of outstanding 8 1/4% Notes or 9% Notes, as the case may be, make a written request to their respective 1994 Note Trustee to pursue the remedy; (iii) such Holder or Holders offer to their respective 1994 Note Trustee indemnity satisfactory to such 1994 Note Trustee against any costs, liability or expense; (iv) such 1994 Note Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period, the Holders of a majority in aggregate principal amount of the outstanding 8 1/4% Notes or 9% Notes, as the case may be, do not give the appropriate 1994 Note Trustee a direction that is inconsistent with the request. (Section 5.06) However, such limitations do not apply to the right of any Holder of a 8 1/4% Note or 9% Note, as the case may be, to receive payment of the principal of, premium, if any, or interest - 148 - on, such 8 1/4% Note or 9% Note, as the case may be, or to bring suit for the enforcement of any such payment, on or after the respective due dates expressed in the 8 1/4% Notes or the 9% Notes, as the case may be, which right shall not be impaired or affected without the consent of the Holder. (Section 5.07) The 1994 Note Indentures will require certain officers of the Company to certify, on or before a date not more than 90 days after the end of each fiscal year, that a review has been conducted of the activities of the Company and its Subsidiaries and the Company's and its Subsidiaries' performance under the 1994 Note Indentures and that the Company has complied with all conditions and covenants thereunder, or, if there has been a default thereunder, specifying each such default and the nature and status thereof. The Company will also be obligated to notify the 1994 Note Trustees of any default or defaults in the performance of any covenants or agreements under the 1994 Note Indentures. (Section 3.14 or 3.15) Consolidation, Merger And Sale Of Assets The Company shall not consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person (other than a Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company with a positive net worth; provided that, in connection with any merger of the Company with a Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company, no consideration (other than Common Stock in the surviving Person or the Company) shall be issued or distributed to the stockholders of the Company) or permit any Person to merge with or into the Company unless: (i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or that acquired or leased such property and assets of the Company shall be a corporation organized and validly existing under the laws of the United States of America or any jurisdiction thereof and shall expressly assume, by a supplemental indenture, executed and delivered to the 1994 Note Trustees in form satisfactory to the 1994 Note Trustees, all of the obligations of the Company on all of the 1994 Notes and under the 1994 Note Indentures; (ii) immediately after giving effect to such transaction, no Event of Default and no event that, after notice or passage of time or both will become an Event of Default, shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis, the Interest Coverage Ratio of the Company (or any Person becoming the successor obligor of the 1994 Notes) is at least 1:1; provided that, if the Interest Coverage Ratio of the Company before giving effect to such transaction is within the range set forth in column (A) below, then the pro forma Interest Coverage Ratio of the Company (or any Person becoming the successor obligor of the 1994 Notes) shall be at least equal to the lesser of (1) the ratio determined by multiplying the percentage set forth in column (B) below by the Interest Coverage Ratio of the Company prior to such transaction and (2) the ratio set forth in column (C) below: (A) (B) (C) ---------------------------------------------------------- 1.11:1 to 1.99:1..........................90% 1.5:1 2.00:1 to 2.99:1..........................80% 2.1:1 3.00:1 to 3.99:1..........................70% 2.4:1 4.00:1 or more............................60% 2.5:1 ; and provided further that, if the pro forma Interest Coverage Ratio of the Company (or any Person becoming the successor obligor of the 1994 Notes) is 3:1 or more, the calculation in the preceding proviso shall be inapplicable and such transaction shall be deemed to have complied with the requirements of this clause (iii); (iv) immediately after giving effect to such transaction on a pro forma basis, the Company (or any Person that becomes the successor obligor of the 1994 Notes) shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction; and (v) the Company delivers to the 1994 Note Trustees an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clauses (iii) and (iv)) and Opinion of Counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture comply with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with; provided, however, that clauses (iii) and (iv) above do not apply if, in the - 149 - good faith determination of the Board of Directors, whose determination shall be evidenced by a Board Resolution, the principal purpose of such transaction is to change the state of incorporation of the Company; and provided further that any such transaction shall not have as one of its purposes the evasion of the foregoing limitations. (Section 4.01) Defeasance Defeasance and Discharge. Each 1994 Note Indenture provides that the Company will be deemed to have paid and will be discharged from any and all obligations in respect of the 8 1/4% Notes or the 9% Notes, as the case may be, and the provisions of such 1994 Note Indenture will no longer be in effect with respect to the 8 1/4% Notes or the 9% Notes, as the case may be, on the 123rd day after the deposit described below (except for, among other matters, certain obligations to register the transfer or exchange of the 8 1/4% Notes or the 9% Notes, as the case may be, to replace stolen, lost or mutilated 8 1/4% Notes or the 9% Notes, as the case may be, to maintain paying agencies and to hold monies for payment in trust) if, among other things, (A) the Company has deposited with the relevant 1994 Note Trustee, in trust, money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the 8 1/4% Notes or the 9% Notes, as the case may be, on the Stated Maturity of such payments in accordance with the terms of the relevant 1994 Note Indenture and the 8 1/4% Notes or the 9% Notes, as the case may be, (B) the Company has delivered to the relevant 1994 Note Trustee either an Opinion of Counsel to the effect that Holders of the 8 1/4% Notes or the 9% Notes, as the case may be, will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of its option under this "Defeasance" provision and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred, which Opinion of Counsel must be accompanied by a ruling of the Internal Revenue Service to the same effect or a change in applicable federal income tax law after the date of such 1994 Note Indenture or a ruling directed to the Company or the relevant 1994 Note Trustee received from the Internal Revenue Service to the same effect as the aforementioned Opinion of Counsel, (C) immediately after giving effect to such deposit on a pro forma basis, no Event of Default, or event that after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after the date of such deposit, and such deposit shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which the Company is bound, and (D) in the case of the 9% Note Indenture, the Company is not prohibited from making payments in respect of the 9% Notes by the provisions described under "Subordination," above. (Section 7.02) Defeasance of Certain Covenants and Certain Events of Default. Each 1994 Note Indenture further provides that the provisions of such 1994 Note Indenture will no longer be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets" and all the covenants described herein under "Covenants," clause (c) under "Events of Default" with respect to such covenants and clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets," and clauses (d), (e) and (h) under "Events of Default" shall be deemed not to be Events of Default, and the provisions described herein under "Subordination" shall not apply, upon, among other things, the deposit with the relevant 1994 Note Trustee, in trust, of money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the 8 1/4% Notes or the 9% Notes, as the case may be, on the Stated Maturity of such payments in accordance with the terms of such 1994 Note Indenture and the 8 1/4% Notes or the 9% Notes, as the case may be, the satisfaction of the provisions described in clause (C) (and, in the case of the 9% Notes, clause (D)) of the preceding paragraph and the delivery by the Company to such 1994 Note Trustee of an Opinion of Counsel to the effect that, among other things, the Holders of the 8 1/4% Notes or the 9% Notes, as the case may be, will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain covenants and Events of Default and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred. (Section 7.03) - 150 - Defeasance and Certain Other Events of Default. In the event the Company exercises its option to omit compliance with certain covenants and provisions of the 1994 Note Indentures with respect to the 8 1/4% Notes or the 9% Notes, as the case may be, as described in the immediately preceding paragraph and the 8 1/4% Notes or the 9% Notes, as the case may be, are declared due and payable because of the occurrence of an Event of Default that remains applicable, the amount of money and/or U.S. Government Obligations on deposit with the relevant 1994 Note Trustee will be sufficient to pay amounts due on the 8 1/4% Notes or the 9% Notes, as the case may be, at the time of their Stated Maturity but may not be sufficient to pay amounts due on the 8 1/4% Notes or the 9% Notes, as the case may be, at the time of the acceleration resulting from such Event of Default. However, the Company shall remain liable for such payments. The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement each contain a covenant prohibiting defeasance of the 8 1/4% Notes and the 9% Notes without the consent of a specified percentage of lenders under the Bank Credit Agreement and the 1993 Term Loan Agreement and the holders of the Senior Secured Notes. The 9 1/4% Note Indenture and the Pass Through Certificate Leases also contain, and the 8 1/4% Note Indenture will contain, covenants limiting defeasance of the 9% Notes. Modification And Waiver Modifications and amendments of each 1994 Note Indenture may be made by the Company and the relevant 1994 Note Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the outstanding 8 1/4% Notes or 9% Notes, as the case may be; provided, however, that no such modification or amendment may, without the consent of each Holder affected thereby, (i) change the Stated Maturity of the principal of, or any installment of interest on, any 8 1/4% Note or 9% Note, as the case may be, (ii) reduce the principal amount of, or premium, if any, or interest on, any 8 1/4% Note or 9% Note, as the case may be, (iii) change the place or currency of payment of principal of, or premium, if any, or interest on, any 8 1/4% Note or 9% Note, as the case may be, (iv) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the Redemption Date) of any 8 1/4% Note or 9% Note, as the case may be, (v) in the case of the 9% Notes, modify the subordination provisions in a manner adverse to the Holders of the 9% Notes, (vi) reduce the above-stated percentage of outstanding 8 1/4% Notes or 9% Notes, as the case may be, the consent of whose Holders is necessary to modify or amend such 1994 Note Indenture, (vii) waive a default in the payment of principal of, premium, if any, or interest on the 8 1/4% Notes or the 9% Notes, as the case may be, or (viii) reduce the percentage of aggregate principal amount of outstanding 8 1/4% Notes or 9% Notes, as the case may be, the consent of whose Holders is necessary for waiver of compliance with certain provisions of such 1994 Note Indenture or for waiver of certain defaults. (Article Eight) The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement each contain a covenant prohibiting the Company from consenting to any modification of the 1994 Note Indentures or waiver of any provision thereof without the consent of a specified percentage of the lenders under the Bank Credit Agreement and the 1993 Term Loan Agreement and the holders of the Senior Secured Notes. See "Description of Certain Indebtedness--The Bank Credit Agreement" and "--The Senior Secured Notes." No Personal Liability Of Incorporators, Shareholders, Officers, Directors Or Employees Each 1994 Note Indenture provides that no recourse for the payment of the principal of, premium, if any, or interest on any of the 8 1/4% Notes or the 9% Notes, as the case may be, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in such 1994 Note Indenture, or in the 8 1/4% Notes or the 9% Notes, as the case may be, or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator, shareholder, officer, director, employee or controlling person of the Company or of any successor Person thereof. Each Holder, by accepting such 8 1/4% Notes or 9% Notes, as the case may be, waives and releases all such liability. (Section 9.09) - 151 - Concerning The 1994 Note Trustees Each 1994 Note Indenture provides that, except during the continuance of an Event of Default, the respective 1994 Note Trustee thereunder will perform only such duties as are specifically set forth in such 1994 Note Indenture. If an Event of Default has occurred and is continuing, the respective 1994 Note Trustee will exercise such rights and powers vested in it under such 1994 Note Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. (Section 6.01) Each of the 1994 Note Indentures and provisions of the Trust Indenture Act of 1939, as amended, incorporated by reference therein contain limitations on the rights of the respective 1994 Note Trustee thereunder, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. Each 1994 Note Trustee is permitted to engage in other transactions; provided, however, that if it acquires any conflicting interest, it must eliminate such conflict or resign. The 8 1/4% Note Trustee also serves as trustee with respect to the 9 1/4% Notes. The 9 1/4% Notes rank pari passu in right of payment with the 8 1/4% Notes. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO THE 1994 NOTES The Company will treat the 1994 Notes as debt for federal income tax purposes. However, if any of the 1994 Notes ultimately were treated as equity, the amount treated as a distribution on any such 1994 Note would first be taxable to the Holder as dividend income to the extent of the Company's current and accumulated earnings and profits and would next be treated as a return of capital to the extent of the Holder's tax basis in the 1994 Note, with any remaining amount treated as gain from the sale of the 1994 Note. Further, payments on such 1994 Notes to foreign persons would not be eligible for the portfolio interest exception from U.S. withholding tax and dividends thereon would be subject to U.S. withholding tax at a flat rate of 30% (or lower treaty rate). In addition, in the event of equity treatment, the Company would not be entitled to deduct interest expense or original issue discount, if any, on such 1994 Notes for federal income tax purposes. As debt instruments and subject to the discussion below, stated interest on both the 8 1/4% Notes and the 9% Notes will be taxable as ordinary income to a Holder of such note when received or accrued in accordance with such Holder's method of tax accounting. If, however, a Holder owns both the 8 1/4% Notes and the 9% Notes, such Holder should be aware that under the Final Regulations relating to original issue discount, the Holder could under certain circumstances be required to aggregate the 8 1/4% Notes and the 9% Notes held by such Holder and treat such aggregated Notes as a single debt instrument, which treatment may result in such Holder having to recognize all or a portion of stated interest on the 1994 Notes as original issue discount under an economic accrual basis prior to the receipt of cash attributable to stated interest. However, assuming a substantial portion of the 8 1/4% Notes and 9% Notes were purchased by Holders who were not related to each other or to the Company and who did not purchase both 8 1/4% Notes and 9% Notes, then there is an exception in such regulations under which the aggregation rule would not apply to the 1994 Notes. A Holder who purchases a 8 1/4% Note or a 9% Note at a premium (generally, at a cost in excess of its principal amount or, in the case of the 9% Notes, earlier call price) may elect to amortize such premium as an offset to interest income on the debt with a corresponding decrease in tax basis. A Holder who purchases a 8 1/4% Note or a 9% Note at a discount (generally, at a cost less than its principal amount) that exceeds a statutorily defined de minimis amount will be subject to the "market discount" rules of the Code. These rules provide in part that gain on the sale of a debt instrument is treated as ordinary income, generally interest, to the extent of accrued market discount not previously included in income by the Holder. The market discount rules also provide for a deferral of deductions for net interest expense on indebtedness incurred or continued by a Holder to purchase or carry - 152 - a 8 1/4% Note or 9% Note acquired at a market discount until the Note is disposed of in a taxable transaction or unless the Holder elects to include market discount in income as it accrues. Under the Federal Regulations, a holder of a debt instrument acquired on or after April 4, 1994 may elect to include in gross income interest that accrues on the debt instrument by using the constant yield method. For purposes of this election, interest on a debt instrument includes stated interest, original issue discount and market discount (including any de minimis amounts), adjusted as applicable by any premium. Such election may be revoked only with the consent of the IRS. Taxpayers should consult with their advisors regarding the effect of such an election on any other debt instruments held by such taxpayer and the advantages and disadvantages of making this election. Upon a redemption, sale or exchange of a 8 1/4% Note or a 9% Note, its Holder will recognize gain or loss measured by the difference between the amount received in exchange therefor and such Holder's adjusted tax basis in the note. Any gain or loss recognized on the redemption, sale or exchange of a note will ordinarily be capital gain or loss if such note is held as a capital asset (except as noted above with respect to Holders who acquire a note at a market discount) and will be long-term capital gain or loss, as the case may be, if the Note was held for more than one year at the time of such redemption, sale or exchange.. Payments made on the 1994 Notes and proceeds from the sale of the 1994 Notes may be subject to a backup withholding tax of 31% unless the Holder of the 1994 Note complies with certain reporting requirements or is an exempt recipient under the Code. Any such withheld amounts will be allowed as a credit against the Holder's federal income tax liability. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY, ASSUMES THAT THE 1994 NOTES ARE HELD AS CAPITAL ASSETS, DOES NOT DEAL WITH CERTAIN ASPECTS FOR TAXPAYERS SUBJECT TO SPECIAL RULES AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE 1994 NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS. FORMATION OF THE PASS THROUGH TRUST The Pass Through Trust was formed pursuant to a Pass Through Trust Agreement between the Pass Through Trustee and the Company. The Pass Through Trustee is a party to the Participation Agreement and pursuant thereto purchased the Secured Notes. The Pass Through Trust holds all the Secured Notes. The Pass Through Trustee will distribute the amount of payments of principal and interest received by it as holder of the Secured Notes to the Certificateholders of the Pass Through Trust. See "Description of the Pass Through Certificates" and "Description of the Secured Notes." DIAGRAM OF PAYMENTS The following diagram illustrates certain aspects of the payment flows in this transaction among the Company, the Owner Trustee, the Owner Participant, the Secured Note Indenture Trustee, the Pass Through Trustee and the holders of the Pass Through Certificates. The Company has leased the 1990 Equipment, the Facility, the Power Plant and the 1991 Equipment from the Owner Trustee, each under a separate Lease. The Secured Notes are secured by all of the Assets and by an assignment of certain rights of the Owner Trustee under the Leases. Rent is payable under each Lease to the Owner Trustee; however, as a result of the assignment of the Leases, the Company will make rental payments (other than certain excepted payments) under each Lease directly to the Secured Note Indenture Trustee. From these rental payments, the Secured Note Indenture Trustee will on behalf of the Owner Trustee first make payments to the Pass Through Trustee on the Secured Notes held in the Pass Through Trust and will pay the remaining balance to the Owner Trustee for the benefit of the Owner Participant. - 153 - - ------------------------------------------------------------------------------ | FORT HOWARD CORPORATION | - ------------------------------------------------------------------------------ | | | | | | | | ------------------------------------------------------------------- Secured | 1990 Equipment | 1991 Equipment | Facility | Power Plant | Note | Lease | Lease | Lease | Lease | Indenture | | | | | Trustee | Secured Notes | Secured Notes | Secured Notes |Secured Notes| | Series A-1 & A-2| Series B | Series C | Series D | ------------------------------------------------------------------- Excess | | | | | | | Payments | | *-----| | *------| *------| | --------- -------------------------------------------------- | | Secured Note | | Payments - -------------------- | | | ------------------- | Owner | | Pass Through | | Trustee | | Trustee for | | | | Pass Through | - -------------------- | Trust | | Excess ------------------- | Payments | Pass Through | | Certificate - ---------------------- | Distributions | | ------------------- | Owner Participant | | Holders of | - ---------------------- | Pass Through | | Certificates, | | Series 1991 | ------------------- - ----------- *Excess Payments related to the 1991 Equipment Lease, the Facility Lease and the Power Plant Lease flow to the Owner Trustee in the same manner as is shown for the 1990 Equipment Lease. DESCRIPTION OF THE PASS THROUGH CERTIFICATES The Pass Through Certificates were issued pursuant to a Pass Through Trust Agreement between the Company and the Pass Through Trustee. The statements under this caption are summaries and do not purport to be complete. The summaries make use of terms defined in and are qualified in their entirety by reference to the provisions of the Pass Through Trust Agreement, the form of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. Except as otherwise indicated, the following summaries relate to the Pass Through Trust Agreement, the Pass Through Trust formed thereby and the Pass Through Certificates issued pursuant thereto. Citations below in parentheses are references to the relevant sections of the Pass Through Trust Agreement unless otherwise indicated. General The Pass Through Certificates have been issued in fully registered form only. Each Pass Through Certificate represents a fractional undivided interest in the Pass Through Trust. The property of the Pass Through Trust includes the Secured Notes, all monies at any time paid thereon and all monies due and to become due thereunder and funds from time to time deposited with the Pass Through Trustee. Each Pass Through Certificate corresponds to a pro rata share of the outstanding principal amount of the Secured Notes held in the Pass Through Trust and were issued in minimum denominations of $1,000 or any integral multiple of $1,000. (Sections 2.01 and 3.01) Except as set forth below under "Definitive Certificates," the Pass Through Certificates were registered in the name of Cede & Co. ("Cede") as the nominee for The Depository Trust Company ("DTC") and no person acquiring an interest in the Pass Through Certificates registered in the name of Cede ("Certificate Owner") will be entitled to receive a certificate representing such person's interest in the Pass Through Certificates. Unless and until Definitive Certificates - 154 - (as defined below) are issued under the limited circumstances described herein, all references to actions by Certificateholders shall refer to actions taken by DTC upon instructions from DTC Participants (as defined below), and all references herein to distributions, notices, reports and statements to Certificateholders shall refer, as the case may be, to distributions, notices, reports and statements to DTC or Cede, as the registered holder of the Pass Through Certificates, or to DTC Participants for distribution to Certificate Owners in accordance with DTC procedures. (Section 3.09) See "Description of the Pass Through Certificates--Book-Entry Registration. Interest will be passed through to Certificateholders at the rate per annum set forth on the cover page of this Prospectus, which is calculated on the basis of a 360-day year of twelve 30-day months. Each Pass Through Certificate represents a fractional undivided interest in the Pass Through Trust and all distributions to Certificateholders shall be made only from the Pass Through Trust Property. (Section 3.08) The Pass Through Certificates do not represent an interest in or obligation of the Company, the Pass Through Trustee, the Owner Trustee in its individual capacity, or any affiliate thereof. The Pass Through Trust Agreement and the Secured Note Indenture do not include "event risk" provisions specifically designed to afford Certificateholders protection in the event of a highly leveraged transaction affecting the Company. However, the Company has agreed to comply with certain financial and merger covenants contained in its 12 3/8% Note Indenture and described more fully in Appendix II hereto. The Secured Notes held by the Pass Through Trustee are secured by a lien on all of the Assets, as discussed under the caption "Description of the Secured Notes--Security." Book-Entry Registration DTC has advised the Company that it is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to Section 17A of the Exchange Act. DTC was created to hold securities for its participants ("DTC Participants") and to facilitate the clearance and settlement of securities transactions between DTC Participants through electronic book-entries, thereby eliminating the need for physical movement of certificates. DTC Participants include securities brokers and dealers (including MS&Co.), banks, trust companies and clearing corporations. Indirect access to the DTC system also is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant either directly or indirectly ("Indirect Participants"). Certificate Owners that are not DTC Participants or Indirect Participants but desire to purchase, sell or otherwise transfer ownership of, or other interests in, Pass Through Certificates may do so only through DTC Participants and Indirect Participants. In addition, Certificate Owners will receive all distributions of principal and interest from the Pass Through Trustee through DTC Participants or Indirect Participants, as the case may be. Under a book-entry format, Certificate Owners may experience some delay in their receipt of payments, since such payments will be forwarded by the Pass Through Trustee to Cede, as nominee for DTC. DTC will forward such payments to DTC Participants, which thereafter will forward them to Indirect Participants or Certificate Owners, as the case may be, in accordance with customary industry practices. The forwarding of such distributions to the Certificate Owners will be the responsibility of such DTC Participants. So long as the Pass Through Certificates are registered in the name of Cede, the only "Certificateholder" will be Cede, as nominee for DTC. Certificate Owners will not be recognized by the Pass Through Trustee as Certificateholders, as such term is used in the Pass Through Trust Agreement, and Certificate Owners will be permitted to exercise the rights of Certificateholders only indirectly through DTC and DTC Participants. Under the rules, regulations and procedures creating and affecting DTC and its operations (the "Rules"), DTC is required to make book-entry transfers of Pass Through Certificates between DTC Participants on whose behalf it acts with respect to the Pass Through Certificates and to receive and transmit distributions of principal of and interest on the Pass Through Certificates. DTC Participants and Indirect Participants with which Certificate Owners have - 155 - accounts with respect to the Pass Through Certificates similarly are required to make book-entry transfers and receive and transmit such payments on behalf of their respective Certificate Owners. Accordingly, although Certificate Owners will not possess Pass Through Certificates, the DTC Participants provide a mechanism by which Certificate Owners will receive payments and will be able to transfer their interests. Until such time as Definitive Certificates (as defined below) are issued, Certificate Owners will only be permitted to exercise the rights of Certificateholders through the facilities of DTC, DTC Participants or Indirect Participants. Because DTC can only act on behalf of DTC Participants, who in turn act on behalf of Indirect Participants, the ability of a Certificate Owner to pledge Pass Through Certificates to persons or entities that do not participate in the DTC system, or to sell, assign or otherwise transfer ownership of, or other interests in, such Pass Through Certificates, may be limited due to the lack of a physical certificate for such Pass Through Certificates. Additionally, Certificate Owners may experience some delays in the receipt of payments made with respect to the Pass Through Certificates, as well as notices and other reports distributed by the Pass Through Trustee. DTC has advised the Company that it will take any action permitted to be taken by a Certificateholder under the Pass Through Trust Agreement only at the direction of one or more DTC Participants to whose accounts with DTC the Pass Through Certificates are credited. Additionally, DTC has advised the Company that it will take such actions with respect to any percentage of the beneficial interest of Certificateholders only at the direction of and on behalf of DTC Participants whose holders include undivided interests that satisfy any such percentage. DTC may take conflicting actions with respect to other undivided interests to the extent that such actions are taken on behalf of DTC Participants whose holders include such undivided interests. Neither the Company nor the Pass Through Trustee will have any liability for any aspect of the records relating to or payments made on account of a beneficial ownership interest of the Pass Through Certificates held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Definitive Certificates The Pass Through Certificates will be issued in fully registered, certificated form ("Definitive Certificates") to Certificate Owners or their nominees, rather than to DTC or its nominee, only if (i) the Company advises the Pass Through Trustee in writing that DTC is no longer willing or able to discharge properly its responsibilities as depository with respect to the Pass Through Certificates and the Company or the Pass Through Trustee is unable to locate a qualified successor, (ii) the Company, at its option, elects to terminate the book-entry system through DTC or (iii) after the occurrence of an Event of Default, Certificate Owners representing an aggregate percentage interest in the Pass Through Trust of not less than a majority advise the Pass Through Trustee through DTC in writing that the continuation of a book-entry system through DTC (or a successor thereto) is no longer in the Certificate Owners' best interest. (Section 3.09) Upon the occurrence of any event described in clause (i), (ii) or (iii) of the immediately preceding paragraph, the Pass Through Trustee will be required to notify all Certificate Owners through DTC Participants of the availability of Definitive Certificates. Upon surrender by DTC of the certificates representing the Pass Through Certificates and receipt of instructions for re-registration, the Pass Through Trustee will reissue the Pass Through Certificates as Definitive Certificates to Certificate Owners. (Section 3.09) Distributions of principal of and interest on the Pass Through Certificates will thereafter be made, in accordance with the procedures set forth in the Pass Through Trust Agreement, directly to holders in whose names the Definitive Certificates were registered at the close of business on the Record Date. Such distributions will be made by check mailed to the address of such holder as it appears on the register maintained by the Pass Through Trustee. The final payment on any Pass Through Certificate, however, will be made only upon presentation and surrender of such Pass Through Certificate at the office or agency specified in the notice of final distribution to Certificateholders. (Section 4.02) - 156 - Definitive Certificates will be freely transferable and exchangeable at the office of the Pass Through Trustee upon compliance with the requirements set forth in the Pass Through Trust Agreement. No service charge will be imposed for any registration of transfer or exchange, but payment of a sum sufficient to cover any tax or other governmental charge shall be required. (Section 3.04) Same-Day Settlement and Payment All payments made by the Company under the Leases to the Secured Note Indenture Trustee (as assignee of the Owner Trustee) will be in immediately available funds and will be passed through to DTC in immediately available funds. Secondary trading in long-term notes and debentures of corporate issuers is generally settled in clearing house or next-day funds. In contrast, secondary trading in pass through certificates is generally settled in immediately available funds. The Pass Through Certificates will trade in DTC's Same-Day Funds Settlement System until maturity, and secondary market trading activity in such Pass Through Certificates will therefore be required by DTC to settle in immediately available funds. Payments and Distributions Payments of principal of and interest on the Secured Notes received by the Pass Through Trustee will be distributed by the Pass Through Trustee to Certificateholders on the date such receipt is confirmed, except in certain cases when some or all of such Secured Notes are in default. See "Description of the Pass Through Certificates--Events of Default and Certain Rights Upon an Event of Default." Payments of interest on the unpaid principal amount of the Secured Notes are scheduled to be received by the Pass Through Trustee on January 2 and July 2 of each year, commencing January 2, 1992, until the final distribution date, and payments of principal on the Secured Notes are scheduled to be received by the Pass Through Trustee on January 2 or July 2, or both, depending upon the terms of the Secured Notes (such scheduled payments of interest and principal on the Secured Notes are herein referred to as "Scheduled Payments," and January 2 and July 2 of each year are herein referred to as "Regular Distribution Dates"). The Pass Through Trustee will distribute on each Regular Distribution Date to the Certificateholders all Scheduled Payments the receipt of which is confirmed by the Pass Through Trustee on such Regular Distribution Date. Each such distribution of Scheduled Payments, other than the final distribution, will be made by the Pass Through Trustee to the holders of record of the Pass Through Certificates on the fifteenth day next preceding such Regular Distribution Date, subject to certain exceptions. (Sections 4.01 and 4.02) If a Scheduled Payment is not received by the Pass Through Trustee on a Regular Distribution Date but is received within five days thereafter, it will be distributed on the date received to such holders of record. If it is received after such five-day period, it will be treated as a Special Payment and distributed as described below. (Section 1.01) The Pass Through Trust will hold Secured Notes which have scheduled repayments of principal on January 2 or July 2, or both, of each year, depending upon the terms of the Secured Notes. Interest payments on the Secured Notes commenced on January 2, 1992. Each Certificateholder will be entitled to receive a pro rata share of any distribution in respect of Scheduled Payments of principal and interest made on the Secured Notes held in the Pass Through Trust. Scheduled Payments of principal on the Secured Notes are set forth below under "Description of the Secured Notes--Principal and Interest Payments." After an early redemption or default in respect of some or all of the Secured Notes, a Certificateholder should refer to the information with respect to the Pool Balance and the Pool Factor reported periodically by the Pass Through Trustee. See "Description of the Pass Through Certificates--Pool Factors" and "Description of the Pass Through Certificates--Reports to Certificateholders." Payments of principal and interest received by the Pass Through Trustee on account of the early redemption, if any, of the Secured Notes, payments received by the Pass Through Trustee following a default in respect of the Secured Notes (including payments received by the Pass Through Trustee on account of the purchase by the Owner Trustee or the Collateral Trustee of the Secured Notes) and Special Payments will be distributed on the second day of a month (a "Special Distribution Date"). The Pass Through Trustee will mail notice to the Certificateholders of record not less than 20 days prior to the Special Distribution Date on which any Special Payment is scheduled to be - 157 - distributed by the Pass Through Trustee stating such anticipated Special Distribution Date. (Section 4.02) The Certificateholders will then give notice to the Certificate Owners in accordance with DTC procedures. See "Description of the Pass Through Certificates--General" and "Description of the Pass Through Certificates--Book-Entry Registration." (Section 3.09) Each distribution of a Special Payment, other than a final distribution, on a Special Distribution Date will be made by the Pass Through Trustee to the holders of record of the Pass Through Certificates on the fifteenth day next preceding such Special Distribution Date. See "Description of the Secured Notes--Redemptions" and "Description of the Pass Through Certificates--Events of Default and Certain Rights Upon an Event of Default." The Pass Through Trust Agreement requires that the Pass Through Trustee establish and maintain, for the Pass Through Trust and for the benefit of the Certificateholders of the Pass Through Trust, one or more non-interest bearing accounts (the "Certificate Account") for the deposit of payments representing Scheduled Payments on the Secured Notes and certain other amounts. (Section 4.01) The Pass Through Trust Agreement also requires that the Pass Through Trustee establish and maintain, for the Pass Through Trust and for the benefit of the Certificateholders of the Pass Through Trust, one or more non-interest bearing accounts (the "Special Payments Account") for the deposit of payments representing Special Payments and certain other amounts. Pursuant to the terms of the Pass Through Trust Agreement, the Pass Through Trustee is required to deposit any Scheduled Payments received by it in the Certificate Account and to deposit any Special Payments so received by it in the Special Payments Account. (Section 4.01) In the event that moneys are to be held in the Special Payment Account prior to the distribution thereof, such amount will be invested by the Pass Through Trustee, at the direction and risk of the Company, in certain obligations of the United States. On the Special Distribution Date on which such amounts are to be distributed to Certificateholders, the Company will pay on the related Special Distribution Date an amount equal to the excess of the interest that would have accrued on the Secured Notes over the earnings from the investment and reinvestment of Permitted Investments. (Section 4.05) All amounts so deposited will be distributed by the Pass Through Trustee on a Regular Distribution Date or a Special Distribution Date as appropriate. (Section 4.02) At such time, if any, as the Pass Through Certificates are issued in the form of Definitive Certificates and not to Cede, as nominee for DTC, distributions by the Pass Through Trustee from the Certificate Account or the Special Payments Account on a Regular Distribution Date or a Special Distribution Date will be made by check mailed to each holder of a Definitive Certificate of record on the applicable record date at its address appearing on the register maintained with respect to the Pass Through Trust. (Section 4.02) The final distribution, however, will be made only upon presentation and surrender of the Pass Through Certificates at the office or agency of the Pass Through Trustee specified in the notice given by the Pass Through Trustee of such final distribution which notice will be given in accordance with DTC procedures. The Pass Through Trustee will mail such notice of the final distribution to the Certificateholders, specifying the date set for such final distribution and the amount of such distribution. (Section 11.01) See "Description of the Pass Through Certificates--Termination of the Pass Through Trust." If any Regular Distribution Date or Special Distribution Date is not a Business Day, distributions scheduled to be made on such Regular Distribution Date or Special Distribution Date may be made on the next succeeding Business Day and no interest shall accrue upon such distribution during the intervening period. (Section 12.10) Pool Factors Unless there has been an early redemption, purchase or a default, in respect of one or more of the Secured Notes, as described below in "Description of the Secured Notes--Redemptions" and "Description of the Pass Through Certificates--Events of Default and Certain Rights Upon an Event of Default," the Pool Factor will decline in proportion to the scheduled repayments of principal on the Secured Notes as described under "Description of the Secured Notes--Principal and Interest Payments." In the event of such redemption, purchase or default, the Pool Factor and the Pool Balance will be recomputed after giving effect thereto and notice thereof will be mailed to Certificateholders. - 158 - The "Pool Balance" indicates, as of any date, the aggregate unpaid principal amount of the Secured Notes on such date plus any amounts in respect of principal paid on such Secured Notes held by the Pass Through Trustee and not yet distributed. The Pool Balance as of any Regular Distribution Date or Special Distribution Date shall be computed after giving effect to the payment of principal, if any, on the Secured Notes and distribution thereof to be made on that date. (Section 1.01) The "Pool Factor" as of any Regular Distribution Date or Special Distribution Date is the quotient (rounded to the seventh decimal place) computed by dividing (i) the Pool Balance by (ii) the aggregate original principal amount of the Secured Notes. The Pool Factor as of any Regular Distribution Date or Special Distribution Date shall be computed after giving effect to the payment of principal, if any, on the Secured Notes and distribution thereof to be made on that date. (Section 1.01) The Pool Factor will initially be 1.0000000; thereafter, the Pool Factor will decline as described above to reflect reductions in the Pool Balance. The amount of a Certificateholder's pro rata share of the Pool Balance can be determined by multiplying the original denomination of the holder's Pass Through Certificate by the Pool Factor as of the applicable Regular Distribution Date or Special Distribution Date. A statement showing the Pool Factor and the Pool Balance will be mailed to Certificateholders of record on each Regular Distribution Date and Special Distribution Date. (Section 4.03) See "Description of the Pass Through Certificates--Reports to Certificateholders." As of the date of sale by the Pass Through Trustee of the Pass Through Certificates and assuming that no early redemption, purchase or default in respect of any Secured Notes shall occur, the scheduled principal distributions on the Pass Through Certificates, and the resulting Pool Factors after taking into account each such repayment are set forth below: Regular Scheduled Distribution Principal Pool Date Distribution Factor ------------ ------------ ------ July 2, 1994 360,838 0.9489695 January 2, 1995 1,032,807 0.9366183 July 2, 1995 0 0.9366183 January 2, 1996 2,330,546 0.9087473 July 2, 1996 188,120 0.9064976 January 2, 1997 2,587,562 0.8755531 July 2, 1997 232,539 0.8727721 January 2, 1998 2,521,528 0.8426173 July 2, 1998 258,118 0.8395305 January 2, 1999 2,579,612 0.8086810 July 2, 1999 286,511 0.8052546 January 2, 2000 2,427,224 0.7762275 July 2, 2000 318,027 0.7724243 January 2, 2001 2,194,949 0.7461750 July 2, 2001 353,010 0.7419533 January 2, 2002 62,041,625 0.0000000 Reports to Certificateholders On each Regular Distribution Date and Special Distribution Date, the Pass Through Trustee will include with each distribution of a Scheduled Payment or Special Payment to Certificateholders a statement giving effect to such distribution to be made on such Regular Distribution Date or Special Distribution Date, as the case may be, setting forth the following information (per a $1,000 in aggregate principal amount Pass Through Certificate, as to (i) and (ii) below): (i) the amount of such distribution allocable to principal; (ii) the amount of such distribution allocable to interest; and (iii) the Pool Balance and the Pool Factor. (Section 4.03) So long as the Pass Through Certificates are registered in the name of Cede, as nominee for DTC, on the Record Date prior to each Regular Distribution Date and Special Distribution Date, the Pass Through Trustee will request from DTC a Securities Position Listing setting forth the names of all DTC Participants reflected on DTC's books as holding an interest in the Pass - 159 - Through Certificates on such Record Date. On each Regular Distribution Date and Special Distribution Date, the Pass Through Trustee will mail to each such DTC Participant the statement described above, and will make available additional copies as requested by such DTC Participant, to be available for forwarding to Certificate Owners. (Section 3.09) In addition, after the end of each calendar year, the Pass Through Trustee will furnish to each Person who at any time during such calendar year was a Certificateholder a statement containing the sum of the amounts determined pursuant to clauses (i) and (ii) above for such calendar year or, in the event such person was a Certificateholder of record during a portion of such calendar year, for the applicable portion of such calendar year, and such other items as are readily available to the Pass Through Trustee and which a Certificateholder shall reasonably request as necessary for the purpose of such Certificateholder's preparation of its federal income tax returns. (Section 4.03) So long as the Pass Through Certificates are registered in the name of Cede, as nominee for DTC, such report and such other items shall be prepared on the basis of information supplied to the Pass Through Trustee by the DTC Participants, and shall be delivered by the Pass Through Trustee to such DTC Participants to Certificate Owners in the manner described above. At such time, if any, as the Pass Through Certificates are issued in the form of Definitive Certificates, the Pass Through Trustee will prepare and deliver the information described above to each holder of record of a Definitive Certificate as the name and period of beneficial ownership of such holder of record of a Definitive Certificate appears on the records of the Registrar of the Pass Through Certificates. Pursuant to Section 313 of the Trust Indenture Act, the Pass Through Trustee is required to transmit to Certificateholders, at stated intervals of not more than twelve months, a brief report with respect to certain material events including changes as to the eligibility of the Pass Through Trustee to serve as such, and certain matters relating to potential conflicts of interest. Voting of Secured Notes, Modification of, and Consents and Waivers under, the Secured Note Indenture and Related Agreements The Pass Through Trustee, as holder of the Secured Notes, has the right to vote and give consents and waivers in respect of the Secured Notes under the Secured Note Indenture. The Pass Through Trust Agreement provides that in the event that the Pass Through Trustee, as the holder of Secured Notes, receives a request for its consent to any amendment, modification, waiver, supplement or action under the Secured Note Indenture, any Secured Note Indenture Document or the Participation Agreement, the Pass Through Trustee shall mail a notice of such proposed amendment, modification, waiver, supplement or action to each Certificateholder as of the date of such notice. The Pass Through Trustee shall request from the Certificateholders direction as to (i) whether or not the Secured Note Indenture Trustee should take or refrain from taking any action which a holder of the Secured Notes has the option to direct, (ii) whether or not to give or execute any waivers, consents, amendments, modifications, or supplements as a holder of the Secured Notes, and (iii) how to vote any Secured Notes if a vote has been called. Prior to an Event of Default (as defined below), the principal amount of the Secured Notes directing any action or being voted for or against any proposal shall be in proportion to the principal amount of Pass Through Certificates held by the Certificateholders taking the corresponding position. Notwithstanding the foregoing, if an Event of Default under the Pass Through Trust Agreement shall have occurred and be continuing, the Pass Through Trustee may in its own discretion consent to such amendment, modification or waiver, and may so notify the Secured Note Indenture Trustee. (Sections 6.01 and 10.01) In the event that the Secured Note Indenture Trustee shall be requested to consent to any assignee of an interest under any Lease or Support Agreement pursuant to the Recognition Instrument, the Certificateholders shall have 45 days to reject the assignee after which time such assignee shall be deemed approved by the Certificateholders. See "Description of the Recognition Instrument." (Section 10.01(b)) - 160 - Events of Default and Certain Rights Upon an Event of Default An event of default under the Pass Through Trust Agreement (an "Event of Default") is defined as the occurrence and continuance of an event of default under the Secured Note Indenture (a "Secured Note Indenture Event of Default"). (Section 6.01) For a description of the Secured Note Indenture Event of Defaults under the Secured Note Indenture, see "Description of the Secured Notes--Secured Note Indenture Events of Default, Notice and Waiver." Each of the Owner Trustee under the Secured Note Indenture and the Collateral Trustee under the Recognition Instrument has the right under certain circumstances to cure a Secured Note Indenture Event of Default that results from the occurrence of a Lease Event of Default under any Lease. (Secured Note Indenture, Section 5.03) The Collateral Trustee, as holder of a lien on the Company's interests in the Leases, has the right to cure a Secured Note Indenture Events of Default as described in "Description of the Recognition Instrument." The circumstances in which the Owner Trustee may cure Secured Note Indenture Events of Default are described in "Description of Secured Notes--Secured Note Indenture Events of Default, Notice and Waiver." In general both the Collateral Trustee and the Owner Trustee have the right to cure all defaults by the Company subject to a limit on the number of defaults in the payment of Basic Rent which can be cured. For a description of these limitations on cure rights of the Owner Trustee, see "Description of the Secured Notes--Secured Note Indenture Events of Default, Notice and Waiver." If the Owner Trustee or the Collateral Trustee cures such default, the Secured Note Indenture Event of Default and consequently the Event of Default under the Pass Through Trust Agreement will be deemed to be cured. In addition, each of the Owner Trustee and the Collateral Trustee has the right under certain circumstances to purchase or redeem the Secured Notes at a price equal to the unpaid principal amount thereof, together with any accrued and unpaid interest thereon. The proceeds received by the Pass Through Trustee with respect to any such purchase or redemption shall be deposited in the Special Payments Account and shall be distributed to the Certificateholders on a Special Distribution Date. See "Description of the Pass Through Certificates- - -Payments and Distributions" and "Description of the Secured Notes-- Redemptions" and "--Secured Note Indenture Events of Default, Notice and Waiver." The Pass Through Trust Agreement provides that, as long as a Secured Note Indenture Event of Default shall have occurred and be continuing, the Pass Through Trustee may vote all of the Secured Notes, and upon the direction of the holders of Pass Through Certificates evidencing fractional undivided interests aggregating not less than a majority in interest of the Pass Through Trust shall, vote a corresponding majority of the Secured Notes in favor of directing the Secured Note Indenture Trustee to declare the unpaid principal amount of the outstanding Secured Notes and accrued interest thereon to be due and payable. In addition, the Pass Through Trust Agreement provides that, if a Secured Note Indenture Event of Default shall have occurred and be continuing, the Pass Through Trustee may, and upon the direction of the holders of Pass Through Certificates evidencing fractional undivided interests aggregating not less than a majority in interest shall, vote a corresponding majority of the Secured Notes in favor of directing the Secured Note Indenture Trustee as to the time, method and place of conducting any proceeding for any remedy available to the Secured Note Indenture Trustee or of exercising any trust or power conferred on the Secured Note Indenture Trustee. (Sections 6.01 and 6.04) The Secured Note Indenture provides that, if a Secured Note Indenture Event of Default (other than a default caused by the commencement of bankruptcy, liquidation or similar proceedings with respect to the Owner Participant or the Owner Trustee (Secured Note Indenture, Section 5.02(f)) or the Company (Leases, Section 15(f))) shall occur and be continuing hereunder, the Secured Note Indenture Trustee may declare all, but not less than all, of the Secured Notes to be immediately due and payable. Upon such declaration, the unpaid principal of all Secured Notes then outstanding together with accrued but unpaid interest thereon and any other amounts due thereunder shall immediately become due and payable. (Secured Note Indenture, Section 5.04(b)) The Secured Note Indenture further provides that, if a Secured Note Indenture Event of Default caused by the commencement of bankruptcy, liquidation or similar proceedings with respect to the Company, the Owner Participant or the Owner Trustee shall occur and be continuing thereunder, the unpaid principal - 161 - of all Secured Notes then outstanding, together with accrued interest thereon and any other amounts due thereunder, automatically becomes due and payable without any action on the part of the Secured Note Indenture Trustee. (Secured Note Indenture, Section 5.04(c)) See "Description of the Secured Notes--Remedies." As an additional remedy, if a Secured Note Indenture Event of Default shall have occurred and be continuing, the Pass Through Trustee may, and upon the direction of the holders of Pass Through Certificates evidencing fractional undivided interests aggregating a majority in interest of the Pass Through Trust shall, sell all or part of the Secured Notes. (Sections 6.01 and 6.02) Any proceeds received by the Pass Through Trustee upon any such sale shall be deposited in the Special Payments Account and shall be distributed to the Certificateholders in accordance with the terms of the Pass Through Trust Agreement on a Special Distribution Date. (Sections 4.01 and 4.02) The market for Secured Notes in default may be very limited and there can be no assurance that they could be sold for a reasonable price. If the Pass Through Trustee sells any such Secured Notes for less than their outstanding principal amount, the Certificateholders will receive a smaller amount of principal distributions than anticipated and will not have any claim for the shortfall against the Company, the Owner Trustee, the Owner Participant or the Pass Through Trustee. Any amount distributed to the Pass Through Trustee by the Secured Note Indenture Trustee following a Secured Note Indenture Event of Default shall be deposited in the Special Payments Account and shall be distributed to the Certificateholders on a Special Distribution Date. In addition, if, following a Secured Note Indenture Event of Default, the Owner Trustee or the Collateral Trustee exercise their respective options to redeem or purchase the outstanding Secured Notes as described below under "Description of the Secured Notes--Redemptions," the price paid by the Owner Trustee or the Collateral Trustee, as the case may be, to the Pass Through Trustee for the Secured Notes shall be deposited in the Special Payments Account and shall be distributed to the Certificateholders on a Special Distribution Date. (Sections 4.01 and 4.02) Any funds representing payments received with respect to any Secured Notes in default, or the proceeds from the sale by the Pass Through Trustee of any such Secured Notes, held by the Pass Through Trustee in the Special Payments Account shall, to the extent practicable, be invested and reinvested by the Pass Through Trustee, at the direction (unless an Event of Default is continuing) and risk of the Company, in Permitted Investments pending the distribution of such funds on a Special Distribution Date. For this purpose, Permitted Investments are limited to obligations of the United States maturing in not more than 60 days or such lesser time as is required for the distribution of any such funds on a Special Distribution Date. (Sections 1.01 and 4.04) The Pass Through Trust Agreement provides that the Pass Through Trustee shall, within 90 days after the occurrence of a default (as defined below), give to the Certificateholders notice, transmitted by mail, of all uncured or unwaived defaults under the Pass Through Trust Agreement known to it; provided that, except in the case of default in the payment of principal of or interest on any of the Secured Notes, the Pass Through Trustee shall be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interest of the Certificateholders. For the purpose of the provision described in this paragraph only, the term "default" means any event that is, or after notice or lapse of time, or both, would become an Event of Default. (Section 7.01) The Pass Through Trust Agreement contains a provision entitling the Pass Through Trustee, subject to the duty of the Pass Through Trustee during a default to act with the required standard of care, to be indemnified by the holders of the Pass Through Certificates before proceeding to exercise any right or power under the Pass Through Trust Agreement at the request or direction of such Certificateholders. (Section 7.02) In certain cases, the holders of Pass Through Certificates evidencing fractional undivided interests aggregating not less than a majority in interest of the Pass Through Trust may on behalf of the holders of all Pass Through Certificates of the Pass Through Trust waive any past default or Event of Default under the Pass Through Trust Agreement and thereby annul any direction given by such holders to the Pass Through Trustee or by the Pass - 162 - Through Trustee to the Secured Note Indenture Trustee with respect thereto, except (i) a default in the making of any payment required to be made by the Company to the Pass Through Trustee pursuant to the Pass Through Trust Agreement, (ii) a default in the payment of principal of or interest on any of the Secured Notes and (iii) a default in respect of any covenant or provision of the Pass Through Trust Agreement that cannot be modified or amended without the consent of each Certificateholder. (Section 6.05) In the event of a waiver under the Pass Through Trust Agreement as described above, the principal amount of the Secured Notes held in the Pass Through Trust shall be counted as waived in the determination of the majority in aggregate unpaid principal amount of Secured Notes required to waive a default or a Secured Note Indenture Event of Default. Therefore, if the Certificateholders of the Pass Through Trust waive a past default or Secured Note Indenture Event of Default under the Pass Through Agreement such that the principal amount of the Secured Notes held in the Pass Through Trust constitutes the required majority in aggregate unpaid principal amount under the Secured Note Indenture, such past default or Secured Note Indenture Event of Default shall be waived. For a discussion of waivers of Secured Note Indenture Events of Default, see "Description of the Secured Notes--Secured Note Indenture Defaults, Notice and Waiver." Modifications of the Pass Through Trust Agreement The Pass Through Trust Agreement contains provisions permitting the Company and the Pass Through Trustee to enter into a supplemental pass through trust agreement, without the consent of the Certificateholders, (i) to evidence the succession of another corporation to the Company and the assumption by such corporation of the Company's obligations under the Pass Through Trust Agreement, (ii) to add to the covenants of the Company for the benefit of the Certificateholders, or to surrender any right or power of the Company under the Pass Through Trust Agreement, (iii) to correct or supplement any defective or inconsistent provision of the Pass Through Trust Agreement or any supplemental pass through trust agreement, or to make any other provisions with respect to matters or questions arising under the Pass Through Trust Agreement, provided such action shall not adversely affect the interests of Certificateholders, (iv) to cure any ambiguity or correct any mistake, (v) to make any modifications necessary to continue the qualification of the Pass Through Trust Agreement under the Trust Indenture Act, (vi) to provide for the assumption by the Company of the obligations of the Owner Trustee under the Secured Note Indenture, (vii) to evidence the succession of a new Owner Trustee or new Secured Note Indenture Trustee or new Pass Through Trustee or the appointment or removal of any co-trustee or separate trustee, (viii) to include on the Certificates any legend as may be required by law, or (ix) in connection with (A) Additional Notes or (B) the refinancing or refunding of the Secured Notes or (C) the sale of the Secured Notes to a third party or (D) the participation of the Certificateholders with respect to the sale of the Secured Notes described in "Description of the Secured Notes--Certain Sales of Secured Notes." (Section 9.01) The Pass Through Trust Agreement also contains provisions permitting the Company and the Pass Through Trustee, without the consent of the Certificateholders, to enter into similar supplements with respect to the Participation Agreement and the Recognition Instrument. (Section 10.01) The Pass Through Trust Agreement also contains provisions permitting the Company and the Pass Through Trustee, with the consent of the Certificateholders evidencing fractional undivided interests aggregating not less than a majority in interest of the Pass Through Trust, and with the consent of the Owner Trustee (such consent not to be unreasonably withheld), to enter into supplemental pass through trust agreements for the purpose of adding any provisions to or changing or eliminating any of the provisions of the Pass Through Trust Agreement or modifying the rights of the Certificateholders, except that no such supplemental pass through trust agreement may, without the consent of the holder of each such Pass Through Certificate so affected, (i) reduce in any manner the amount of, or delay the timing of, any receipt by the Pass Through Trustee of payments on the Secured Notes, or distributions in respect of any Pass Through Certificate, or make distributions payable in coin or currency other than that provided for in the Pass Through Certificates, or impair the right of any Certificateholder to institute suit for the enforcement of any payment when due, (ii) permit the disposition of any Secured Note, except as provided in the Pass Through Trust Agreement, or (iii) reduce the percentage of the aggregate fractional undivided interests of the Pass Through Trust provided for in the Pass Through - 163 - Trust Agreement, the consent of the holders of which is required for any such supplemental pass through trust agreement or for any waiver provided for in the Pass Through Trust Agreement. (Section 9.02) Termination of the Pass Through Trust The respective obligations of the Company and the Pass Through Trustee created by the Pass Through Trust Agreement and the Pass Through Trust will terminate upon the distribution to all Certificateholders and the Pass Through Trustee of all amounts required to be distributed to them pursuant to the Pass Through Trust Agreement and the disposition of all property held in the Pass Through Trust. The Pass Through Trustee will mail to each Certificateholder of record notice of the termination of the Pass Through Trust, the amount of the proposed final payment and the proposed date for the distribution of such final payment at least 20 days prior to the date of such final payment. The final distribution to any Certificateholder will be made only upon surrender of such Certificateholder's Pass Through Certificates at the office or agency of the Pass Through Trustee specified in such notice of termination. (Section 11.01) The Pass Through Trustee Wilmington Trust Company is the Pass Through Trustee. The Pass Through Trustee and any of its affiliates may hold Pass Through Certificates in their own names. (Section 7.04) With certain exceptions, the Pass Through Trustee makes no representations as to the validity or sufficiency of the Pass Through Trust Agreement, the Pass Through Certificates, the Secured Notes, the Secured Note Indenture, the Participation Agreement or other related documents. (Section 7.03) Wilmington Trust Company is also the Secured Note Indenture Trustee under the Secured Note Indenture. The Pass Through Trustee may resign as Pass Through Trustee at any time, in which event the Company will be obligated to appoint a successor trustee. If the Pass Through Trustee ceases to be eligible to continue as Pass Through Trustee under the Pass Through Trust Agreement or becomes incapable of acting as Pass Through Trustee or becomes insolvent, the Company may remove such Pass Through Trustee, or any Certificateholder for at least six months may, on behalf of itself and all others similarly situated, petition any court of competent jurisdiction for the removal of such Pass Through Trustee and the appointment of a successor trustee. Any resignation or removal of the Pass Through Trustee and appointment of a successor trustee does not become effective until acceptance of the appointment by the successor trustee. (Section 7.08) The Pass Through Trust Agreement provides that the Company will pay the Pass Through Trustee's fees and expenses. The Pass Through Trust Agreement further provides that the Pass Through Trustee will be entitled to indemnification by the Company for, and will be held harmless against, any loss, liability or expenses incurred by the Pass Through Trustee (other than through its own willful misconduct, bad faith or negligence or by reason of a breach of any of its representations or warranties set forth in the Pass Through Trust Agreement), except to the extent that such loss, liability or expense is for or with respect to taxes, in which case the Pass Through Trustee may be entitled to be reimbursed by the Pass Through Trust. (Section 7.06) DESCRIPTION OF THE SECURED NOTES The statements under this caption are summaries and do not purport to be complete. The summaries make use of terms defined in, and are qualified in their entirety by reference to all of the provisions of, the Secured Notes, the Secured Note Indenture, the Leases, the Support Agreements, the Site Leases and the Participation Agreement, the forms of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. Except as otherwise indicated, the following summaries relate to the Secured Notes, the Secured Note Indenture, the Leases, the Support Agreements, the Site Leases and the Participation Agreement. Citations below in parentheses are references to the relevant sections of the documents referenced. - 164 - General Each series of Secured Notes was issued under a single Trust Indenture, Assignment of Leases, Security Agreement and Deed to Secure Debt (the "Secured Note Indenture") between Shawmut Bank Connecticut, National Association (formerly The Connecticut National Bank), as Owner Trustee of an owner trust for the benefit of the Owner Participant, and Wilmington Trust Company, as Secured Note Indenture Trustee. The Owner Trustee has leased the Facility, the Power Plant, the 1990 Equipment and the 1991 Equipment to the Company, each pursuant to a separate Lease between the Owner Trustee and the Company. The 1990 Equipment was leased to the Company pursuant to the 1990 Equipment Lease commencing on December 23, 1990. The Company is obligated to pay Rent to the Owner Trustee under each Lease in respect of each Asset subject to such Lease. The amounts payable under the Leases will be at least sufficient to pay when due all payments of principal of and interest on the Secured Notes. The Secured Notes are not, however, obligations of, or guaranteed by, the Company. The Company's rental obligations under each Lease are general obligations of the Company. Principal and Interest Payments Interest is payable on each Secured Note through the final distribution date at a rate per annum corresponding to the rate to be passed through on the Pass Through Certificates set forth on the cover page of this Prospectus on the unpaid principal amount thereof on January 2 and July 2 of each year. Such interest will be computed on the basis of a 360-day year of twelve 30-day months. The principal of each Secured Note will be payable as set forth below until the final distribution date (unless earlier redeemed):
Payment Date Series A-1 Series A-2 Series B Series C Series D Total ------------ ---------- ---------- -------- -------- -------- ----- July 2, 1994 $ 0 $ 0 $ 360,838 $ 0 $ 0 $ 360,838 January 2, 1995 449,116 50,646 423,842 109,203 0 1,032,807 January 2, 1996 307,148 56,541 865,037 1,101,820 0 2,330,546 July 2, 1996 0 0 0 0 188,120 188,120 January 2, 1997 328,635 63,123 965,729 1,230,075 0 2,587,562 July 2, 1997 0 0 0 0 232,539 232,539 January 2, 1998 254,737 74,712 818,821 1,373,258 0 2,521,528 July 2, 1998 0 0 0 0 258,118 258,118 January 2, 1999 419,280 76,259 1,040,917 1,043,156 0 2,579,612 July 2, 1999 0 0 0 0 286,511 286,511 January 2, 2000 532,099 101,667 1,118,830 674,628 0 2,427,224 July 2, 2000 0 0 0 0 318,027 318,027 January 2, 2001 524,609 89,839 827,344 753,157 0 2,194,949 July 2, 2001 0 0 0 0 353,010 353,010 January 2, 2002* 2,504,184 483,237 5,447,214 30,658,778 22,948,212 62,041,625 ---------- -------- ----------- ----------- ----------- ----------- TOTAL $5,319,808 $996,024 $11,868,572 $36,944,075 $24,584,537 $79,713,016
*Includes amounts which will be paid from either the proceeds of a sale of the Secured Notes or a refinancing or refunding with respect to the Secured Notes or Supplemental Rent payments. If any date scheduled for any payment of principal of or interest on the Secured Notes is not a Business Day, such payment may be made on the next succeeding Business Day without any additional interest. Redemptions The Secured Notes may not be optionally redeemed on or prior to the seventh anniversary of the date of the original issuance of the Pass Through Certificates, except during the continuance of a Lease Event of Default. After such seventh anniversary, each of the Leases provides the Company with the option (the "Early Fixed Price Purchase Option") to purchase the Assets subject to such Lease on a predetermined Basic Rent Payment Date (as defined below). For a more complete description of the above-described purchase option, see "Description of the Secured Notes--The Leases--Purchase Options." If an Asset is purchased pursuant to such purchase option and the Company shall not have elected to assume the outstanding Secured Notes relating to - 165 - such Asset, the Owner Trustee shall redeem on the applicable Purchase Redemption Date (i) if such Asset shall be the Facility or the Power Plant, the entire unpaid principal amount of the outstanding Secured Notes relating to such Asset and (ii) if such Asset shall be an item of Equipment, such of the unpaid principal amount of the outstanding Secured Notes relating to the applicable Equipment Group as shall be equal to the Proportional Amount, in all cases at a redemption price equal to 100% of the unpaid principal amount of the Secured Notes to be redeemed on such Purchase Redemption Date as a result of such purchase, together with any accrued and unpaid interest thereon to the date of such redemption. (Secured Note Indenture, Section 3.02(c); Leases, Section 6; Participation Agreement, Section 11.06) For purposes hereof, "Proportional Amount" with respect to the Secured Notes relating to an Equipment Group shall mean the product of (x) the entire unpaid principal amount of the outstanding Secured Notes of the same series as such Secured Notes and (y) a fraction, the numerator of which shall be Lessor's Cost of the applicable item of Equipment and the denominator of which shall be the aggregate Lessor's Cost of all items of Equipment in such Equipment Group. Following the seventh anniversary of the date of the original issuance of the Pass Through Certificates, the Owner Trustee may at its option redeem the Secured Notes at any time, in whole, at a redemption price equal to 100% of the unpaid principal amount of the Secured Notes, together with any accrued and unpaid interest thereon to the date of such redemption. (Secured Note Indenture, Section 3.03) Commencing on the seventh anniversary of the date of the original issuance of the Pass Through Certificates and continuing until the final distribution date with respect to the Pass Through Certificates, the Company is required to or the Owner Participant may take certain actions, including engaging an investment banking firm, with a view to refunding or refinancing the Secured Notes prior to the final distribution date on commercially reasonable terms and conditions. In certain cases the Company is required to use its best efforts to cooperate with the efforts of the investment banking firm. The proceeds from any such refunding or refinancing will constitute a Special Payment and be distributed on a Special Distribution Date. The Owner Participant will under no circumstances be obligated to utilize its own funds in connection with such transaction, or to provide any credit support or credit enhancement or otherwise put itself at any additional economic risk in facilitating the final distribution and, although as beneficial owner of the Assets the Owner Participant may have an economic incentive to facilitate such refinancing, refunding or sale and the final distribution, so as to ensure to the greatest extent possible that the indebtedness represented by the Secured Notes remains outstanding to its stated maturity and that the holder or holders of the Secured Notes do not foreclose upon their security interest in the Assets, and thereby jeopardize the Owner Participant's investment therein, Certificateholders should not assume that the Owner Participant will in fact so facilitate such transactions or the final distribution. See "Description of the Pass Through Certificates--Payments and Distributions." (Participation Agreement, Sections 15.01(b), (c) and (d)) If, on or prior to the final distribution date, the Secured Notes are not refunded, refinanced or sold to a third-party, the Company is required to make a rent payment to the Secured Note Indenture Trustee (as assignee of the Owner Trustee) at least equal to the aggregate unpaid principal amount of the Secured Notes on such date and accrued and unpaid interest thereon. The Owner Trustee is required to use such funds to redeem all the Secured Notes then outstanding. (Secured Note Indenture, Section 3.02(d); Leases, Section 3.2(b)) The Secured Notes may be redeemed prior to the seventh anniversary of the date of the original issuance of the Pass Through Certificate only under the following circumstances: The Company may terminate the Lease with respect to an Asset at its option on or after the fifth anniversary of the Basic Lease Term Commencement Date for such Asset if the Company determines that such Asset is obsolete, uneconomic or surplus to the needs of the Company for any reason (or, in the case of the Power Plant, if the Lessee has elected to terminate the Facility Lease on a Termination Redemption Date) and the related Assets are sold, or retained by the Owner Trustee. In the event of any such termination, the Owner Trustee shall redeem on the applicable Termination Redemption Date (i) if such Asset shall be the Facility, the entire unpaid principal amount of (x) - 166 - the outstanding Secured Notes relating to the Facility and (y) the outstanding Secured Notes relating to the Power Plant, (ii) if such Asset shall be the Power Plant, the entire unpaid principal amount of the outstanding Secured Notes relating to such Asset and (iii) if such Asset shall be an item of Equipment, such of the unpaid principal amount of the outstanding Secured Notes relating to the applicable Equipment Group as shall be equal to the Proportional Amount, in all cases at a redemption price equal to 100% of the unpaid principal amount of the Secured Notes to be redeemed on such Termination Redemption Date as a result of such termination, together with any accrued and unpaid interest thereon to the date of such redemption. See "Description of the Secured Notes--The Leases--Termination." (Leases, Section 7; Secured Note Indenture, Section 3.02(b)) If an Event of Loss to an Asset shall occur, unless, if such Asset is an item of Equipment, a functionally comparable item of equipment of equal or greater value, estimated residual value, utility and remaining useful life is substituted for such item of Equipment in accordance with the terms of the applicable Lease, then the Owner Trustee shall redeem on a Casualty Redemption Date (i) if such Asset shall be the Facility or the Power Plant, the entire unpaid principal amount of the outstanding Secured Notes relating to such Asset and (ii) if such Asset shall be an item of Equipment, such of the unpaid principal amount of the outstanding Secured Notes relating to the applicable Equipment Group as shall be equal to the Proportional Amount, in all cases at a redemption price equal to 100% of the unpaid principal amount of the Secured Notes to be redeemed on such Casualty Redemption Date as a result of such Event of Loss, together with any accrued and unpaid interest thereon to the date of such redemption. Prior to or at the time of the substitution for any item of Equipment that has suffered an Event of Loss, the Company is required to provide the Owner Trustee and the Secured Note Indenture Trustee with a certificate of an officer of the Company certifying that the item of equipment replacing such item of Equipment meets the requirements set forth above. A certificate or opinion of an engineer, appraiser or other expert as to the fair market value of such replacement item of equipment, however, will not be obtained. See "Description of the Secured Notes--The Leases--Event of Loss." (Leases, Section 12; Secured Note Indenture, Section 3.02(a)) So long as a Secured Note Indenture Event of Default resulting from a Lease Event of Default shall have occurred and be continuing, the Owner Trustee may, at any time, give the Secured Note Indenture Trustee and the holders of the outstanding Secured Notes notice of its intention to purchase or redeem the outstanding Secured Notes on the date specified in such notice, which date shall be the first Special Distribution Date occurring more than 25 days from the date on which such notice is given. The purchase or redemption price shall be equal to 100% of the unpaid principal amount of the Secured Notes, together with any accrued and unpaid interest thereon, to the date of such redemption or purchase. (Secured Note Indenture, Section 3.06) The Secured Notes are also subject to purchase in whole by the Collateral Trustee, on the first Special Distribution Date occurring more than 25 days after written notice by the Collateral Trustee to the Secured Note Indenture Trustee if a Lease Event of Default and an "Event of Default" under certain of the Company's senior indebtedness shall have occurred and be continuing. The purchase price shall be equal to 100% of the unpaid principal amount of the Secured Notes, together with any accrued and unpaid interest thereon to the date of such purchase. (Secured Note Indenture, Section 3.07) The Company may terminate the Leases with respect to all of the Assets at its option at any time (the "Special Termination Option") in the event the Company is required to pay, or is likely to be required to pay, certain tax indemnities to the Owner Participant whereupon title to the Assets shall be transferred to the Company. See "Description of the Secured Notes--The Leases--Termination." In the event of such termination prior to the seventh anniversary of the date of the original issuance of the Pass Through Certificates, the Company shall assume all of the Secured Notes. In the event of such termination on or after such seventh anniversary and the Company shall not have elected to assume all of the outstanding Secured Notes, the Owner Trustee shall redeem on the applicable Redemption Date the entire unpaid principal amount of the outstanding Secured Notes at a redemption price equal to 100% of the unpaid principal amount of the Secured Notes to be redeemed on such Redemption Date as a result of such termination, together with any accrued and unpaid interest thereon to the date of such redemption. (Secured Note Indenture, Section 3.02(b); Participation Agreement, Sections 11.06 and 16.03) - 167 - Each of the Leases provides the Company with the option (the "Competitor Purchase Option") to purchase the Assets subject to such Lease in the event the Owner Participant becomes a competitor of the Company's tissue paper making business. Also, the Facility Lease and the Power Plant Lease each provide the Company with the option (the "Substantial Modifications Purchase Option") to purchase the Facility and the Power Plant, respectively, in the event the Company desires or is required to make to either of such Assets certain substantial Modifications. For a more complete description of the above-described purchase options, see "Description of the Secured Notes--The Leases--Purchase Options." If any such purchase of an Asset is made prior to the seventh anniversary of the date of the original issuance of the Pass Through Certificates, the Company shall, in the case of the Competitor Purchase Option, assume all of the Secured Notes and, in the case of the Substantial Modifications Purchase Option, purchase the beneficial interest of the Owner Participant in all of the Assets and, under certain circumstances, assume all of the Secured Notes. If an Asset is purchased on or after such seventh anniversary and the Company shall not have elected to assume the outstanding Secured Notes relating to such Asset (in the case of its election to exercise the Competitor Purchase Option or, under certain circumstances, the Substantial Modifications Purchase Option) or, pursuant to the terms of the Participation Agreement, purchase the Owner Participant's beneficial interest in the Assets (in the case of its election to exercise the Substantial Modifications Purchase Option), the Owner Trustee shall redeem on the applicable Purchase Redemption Date (i) if such Asset shall be the Facility or the Power Plant, the entire unpaid principal amount of the outstanding Secured Notes relating to such Asset and (ii) if such Asset shall be an item of Equipment, such of the unpaid principal amount of the outstanding Secured Notes relating to the applicable Equipment Group as shall be equal to the Proportional Amount, in all cases at a redemption price equal to 100% of the unpaid principal amount of the Secured Notes to be redeemed on such Purchase Redemption Date as a result of such purchase, together with any accrued and unpaid interest thereon to the date of such redemption. (Secured Note Indenture, Section 3.02(c); Leases, Section 6; Participation Agreement, Sections 11.06 and 16) In the event of any partial or complete redemption of the Secured Notes as described above, the proceeds received by the Pass Through Trustee with respect to such redemption shall be deposited in the Special Payments Account, may be invested in certain obligations of the United States of America at the direction and risk of the Company and shall be distributed to the Certificateholders on a Special Distribution Date. See "Description of the Pass Through Certificates--Payments and Distributions." Certain Sales of Secured Notes Upon a sale of the Secured Notes on the final distribution date arranged by the Company or the Owner Participant pursuant to the Participation Agreement, Certificateholders will be offered the option, exercisable at the sole discretion of each Certificateholder, to participate in such sale on terms and conditions reasonably satisfactory to the Owner Trustee (after consultation with the Company). The Owner Participant will under no circumstances be obligated to utilize its own funds in connection with such transaction or to provide any credit support or credit enhancement or otherwise put itself at any additional economic risk in facilitating the final distribution and, although as beneficial owner of the Assets the Owner Participant may have an economic incentive to facilitate such refinancing, refunding or sale and the final distribution, so as to ensure to the greatest extent possible that the indebtedness represented by the Secured Notes remains outstanding to its stated maturity and that the holder or holders of the Secured Notes do not foreclose upon their security interest in the Assets, and thereby jeopardize the Owner Participant's investment therein, Certificateholders should not assume that the Owner Participant will in fact so facilitate such transactions or the final distribution. Such option, however, will not be available to the Certificateholders with respect to any sale (i) involving in whole or in part (A) a non-registered offering of securities of any type to "accredited investors" (as such term is defined in Regulation D promulgated pursuant to the Securities Act) or (B) a loan or loans made by one or more banking or other institutional investors or lenders, (ii) involving any transaction of a type substantially similar to those described in subclauses (A) and (B) of clause (i) above and (iii) if such participation with respect to all Certificateholders would be contrary to then applicable law, including without limitation federal securities laws and state securities or "blue sky" laws. (Participation Agreement, Section 15.01(g)) - 168 - Assumption of Secured Notes by the Company Upon the exercise by the Company of (i) its Early Fixed Price Purchase Option under the Facility Lease and the Power Plant Lease at a time when no other Secured Notes are outstanding other than the Secured Notes relating to the Facility and the Power Plant and any Additional Notes (as defined below) issued in connection with the financing of a Modification to the Facility or the Power Plant, (ii) its Competitor Purchase Option under each of the Leases still in effect, (iii) its Special Termination Option or (iv) under certain circumstances, its Substantial Modifications Purchase Option, the Company may (and prior to the seventh anniversary of the date of original issuance of the Pass Through Certificates shall) assume on a full recourse basis all of the obligations of the Owner Trustee (other than its obligations in its individual capacity) under the Secured Notes. In such event, certain relevant provisions of the Leases, including (among others) provisions relating to maintenance, possession and use of the Assets, Liens, insurance and events of default will be incorporated into the Secured Note Indenture, and the outstanding Secured Notes issued under the Secured Note Indenture will not be redeemed and will continue to be secured by the Assets. (Secured Note Indenture, Section 3.04) Defeasance of the Secured Note Indenture and the Secured Notes in Certain Circumstances After an assumption by the Company of the Secured Notes the Secured Note Indenture will provide that it and the obligations of the Secured Note Indenture Trustee and the Company thereunder will be deemed to be discharged in full (except for certain obligations, including the obligation to hold money for payment in trust) on the 91st day after the date of irrevocable deposit with the Secured Note Indenture Trustee of money or certain obligations of the United States which will provide money in an aggregate amount sufficient to pay when due all Secured Notes in accordance with the terms of the Secured Note Indenture. Such discharge may occur only if, among other things, there has been published by the Internal Revenue Service a ruling to the effect that holders of the Secured Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to federal income tax on the same amount and in the same manner and at the same time as would have been the case if such deposit, defeasance and discharge had not occurred. (Secured Note Indenture, Sections 10.01 and 10.03) After an assumption by the Company of the Secured Notes the Secured Note Indenture will provide that upon such defeasance, or upon deposit with the Secured Note Indenture Trustee of money sufficient to pay in full all Secured Notes issued under the Secured Note Indenture no earlier than one year prior to the maturity or redemption thereof, the holders of the Secured Notes will have no beneficial interest in or other rights with respect to the Assets or other property subject to the lien of the Secured Note Indenture and such lien shall terminate. (Secured Note Indenture, Section 10.01) Security The Secured Notes are secured by, among other things, (i) an assignment by the Owner Trustee to the Secured Note Indenture Trustee of the Owner Trustee's rights (other than certain excepted rights described below) under each Lease, including the right to receive payments of Rent thereunder, (ii) a security interest held by the Secured Note Indenture Trustee in each Asset (or leasehold or other interest in each Asset), subject to the rights of the Company under the Lease with respect to such Asset, (iii) an assignment by the Owner Trustee to the Secured Note Indenture Trustee of the Owner Trustee's rights under each Assignment (including all of the interest of the Owner Trustee in and to the IDA Lease and the IDA Project Agreement) and each related document and (iv) an assignment by the Owner Trustee to the Secured Note Indenture Trustee of the Owner Trustee's rights under each Site Lease and each Support Agreement described below, including all estate, right, title and interest of the Owner Trustee in and to the land demised under each Site Lease. (Secured Note Indenture, Granting Clause) Pursuant to the Facility Site Lease and the Power Plant Site Lease, the Company (i) subleased to the Owner Trustee the real property subject to the IDA Lease and necessary for the operation of the Facility (the "Facility Land") and the Power Plant (the "Power Plant Land") for a term equal to the economic useful life of the Facility and the Power Plant, respectively, and (ii) granted easements of ingress and egress and other necessary rights of - 169 - access (the "Facility Easements" and "Power Plant Easements", respectively). (Facility Site Lease, Sections 2 and 3; Power Plant Site Lease, Sections 2 and 3) In addition, the Facilities Agreement and the Power Plant Facilities Agreement require that the Company provide (or make suitable alternative arrangements by which third parties will directly provide) such additional materials and services as may be necessary for the Owner Trustee to operate the Facility or the Power Plant, as the case may be, on a commercially reasonable basis for the period from the expiration or earlier termination of the applicable Lease to the end of the economic useful life of such Asset, including, under the Facilities Agreement, arranging for sales of Facility output for the Owner Trustee. The Facilities Agreement provides that (except in certain limited circumstances) the Company will operate the Facility during such period. The Power Plant Facilities Agreement provides that if requested by the Owner Trustee, the Company will continue to operate, or arrange to have another person operate the Power Plant during such period. The Power Plant Facilities Agreement provides that during such period the Company will be obligated to purchase at fair market value all steam produced by the Power Plant not otherwise sold to third parties or utilized by the Owner Trustee. In addition, the Facilities Agreement and the Power Plant Facilities Agreement will provide the Company with the right during such period to use certain equipment in the Facility and the Power Plant, respectively, which have previously been utilized in the integrated operation of the entire Savannah River mill and that are necessary for and incidental to the commercially reasonable operations of those portions of the Savannah River mill not constituting the Facility or Power Plant. (Facilities Agreement, Section 2; Power Plant Facilities Agreement, Section 2) In order to induce the Company to locate its Savannah River mill in Effingham County, Georgia, the Effingham County Industrial Development Authority (the "IDA") has entered into an arrangement with the Company whereby the Company makes certain payments in lieu of ad valorem taxes otherwise due. In order to effect such arrangements, the IDA holds legal title to all of the Company's land and equipment at the mill (the "Project"), including the Facility, the Power Plant and the Equipment, and leases the Project (including such Assets) to the Company or its assignee under a lease (the "IDA Lease") expiring on January 2, 2027. The IDA Lease stipulates that no annual rent shall be payable thereunder and provides that (i) the Company or its assignee may remove at any time any property subject thereto, including the Facility, the Power Plant and the Equipment and (ii) the Company may acquire title to all of the property leased under the IDA Lease upon payment of one dollar. In connection with the closing of the 1990 Transaction, the sale of the Company's interest in the 1990 Equipment was effected, and in connection with the closing of the 1991 Transaction, the sale of the Company's interest in the Facility, the Power Plant and the 1991 Equipment was effected, through the assignment of all of the Company's right, title and interest in and to such Assets, including all of the Company's right, title and interest under the IDA Lease with respect to such Assets (including the right to remove such Assets from the IDA Lease and acquire title thereto) to the Owner Trustee. The Leases provide that the Owner Trustee will not remove any Asset from the IDA Lease except under certain circumstances. (Leases, Section 19.7). Notwithstanding that the Company has assigned all of its right, title and interest in and to each Asset to the Owner Trustee, if upon termination of the IDA Lease the IDA shall purport to convey legal title to any Asset to the Company, the Company will cause legal title to such Asset to be conveyed to the Owner Trustee. In addition, in connection with the closing of the 1990 and 1991 Transactions with respect to any Asset, the Company delivered to the Owner Trustee (who in turn delivered to the Secured Note Indenture Trustee as security), an executed deed and bill of sale to such Asset which the Owner Trustee will be authorized to record in event the IDA purports to convey legal title to such Asset to the Company. The assignment by the Owner Trustee to the Secured Note Indenture Trustee of its rights under each Lease excludes certain rights of the Owner Trustee and the Owner Participant (collectively, the "Excepted Payments") such as rights relating to (including payments of) indemnification by the Company for certain matters, any letter of credit in favor of the Owner Participant provided by the Company pursuant to the Participation Agreement and amounts drawn thereunder, insurance proceeds payable to the Owner Trustee or the Owner Participant under certain casualty insurance maintained separately by the Owner Trustee or the Owner Participant with respect to any Asset and insurance proceeds payable to the Owner Trustee or to the Owner Participant under - 170 - liability insurance maintained by the Company under such Lease or by the Owner Trustee or the Owner Participant. (Secured Note Indenture, Granting Clause and Section 1.01) Funds, if any, held from time to time by the Secured Note Indenture Trustee with respect to any Asset, including funds held as the result of an Event of Loss to such Asset or termination of the Lease with respect thereto, will be invested and reinvested by the Secured Note Indenture Trustee, at the direction of the Company (except in the case of a Lease Event of Default), if such funds would be payable to the Company, and at the discretion of the Owner Participant (except in the case of a Secured Note Indenture Event of Default) in the case of all other funds, in certain investments described in the Secured Note Indenture and the Leases. The Company will be responsible for any loss resulting from any such investment. (Secured Note Indenture, Section 7.04; Leases, Section 19.7) Additional Notes Additional notes of one or more series ("Additional Notes") may be issued under the Secured Note Indenture at any time for the purpose of financing the cost of any Modification to any Asset. The Owner Participant will have the right to participate in the financing of any such Modification on terms and conditions mutually acceptable to the Owner Participant and the Company. If mutually acceptable terms and conditions are not agreed to by the Owner Participant and the Company, the Owner Participant will consider in good faith the request of the Company to effect the financing of such cost through the issuance and sale by the Owner Trustee of Additional Notes in accordance with the terms of the Secured Note Indenture and subject to certain conditions, including (i) if such Modification is not required by any Governmental Rule or Governmental Action, the principal amount of the Additional Notes may not exceed the increase in the fair market sales value of such Asset resulting from such Modification, (ii) no Lease Event of Default or Secured Note Indenture Event of Default shall have occurred and be continuing as of the date of such issuance and (iii) the Additional Notes shall not rank senior in any respect to the Secured Notes. In connection with any such issuance of Additional Notes, Basic Rent and the other amounts payable by the Company under the applicable Lease will be adjusted to the extent necessary to provide sufficient funds to pay when due the scheduled payments of principal of and interest on the Secured Notes corresponding to such Lease. (Secured Note Indenture, Section 2.09; Participation Agreement, Section 14.01) Limitation of Liability The Secured Notes are nonrecourse notes. None of The Connecticut National Bank, the Owner Trustee or the Secured Note Indenture Trustee (whether in its individual or trust capacity) shall be personally liable to any holder of a Secured Note for any amounts payable under the Secured Notes or, except as provided in the Secured Note Indenture or any related document, for any amounts payable or any liability under the Secured Note Indenture. All payments of principal of and interest on the Secured Notes (other than payments made in connection with an optional purchase or redemption by the Owner Trustee or the Collateral Trustee) will be made only from the property subject to the Lien of the Secured Note Indenture or the income and proceeds received by the Secured Note Indenture Trustee therefrom (including Rent payable by the Company under the Leases) and only to the extent that the Secured Note Indenture Trustee shall have received sufficient income and proceeds therefrom to make such payments in accordance with the terms thereof. (Secured Note Indenture, Section 2.03) Except as otherwise provided in the Secured Note Indenture, the Participation Agreement and any related document, the Owner Trustee in its individual capacity shall not be answerable or accountable under the Secured Note Indenture or under the Secured Notes under any circumstances except for its own willful misconduct or gross negligence. The Owner Participant will not be liable to the Secured Note Indenture Trustee or to any holder of any Secured Note under any circumstances for any reason whatsoever except to the extent expressly provided in any Operative Document. (Participation Agreement, Sections 17.11 and 17.15) Secured Note Indenture Events of Default, Notice and Waiver Secured Note Indenture Events of Default include: (a) the failure to pay principal of or interest on any Secured Note within 10 days after the same - 171 - shall have become due and payable; (b) the failure of the Owner Participant to perform or observe certain of its covenants or agreements contained in the Participation Agreement, including covenants requiring the discharge of Owner Participant's Liens, and restricting the appointment of successor Owner Trustees, and the termination of the Trust Agreement; (c) the failure of the Owner Trustee to perform certain of its covenants or agreements contained in the Participation Agreement or the Secured Note Indenture, including covenants requiring the discharge of Lessor's Liens, and restricting the transfer of Assets, the termination of the Trust Agreement, its permitted activities, the release of it or the Company from any obligations under the Operative Documents (except as permitted thereby) and so long as the Secured Note Indenture is in effect, (i) its right to assign any of its right, title or interest to anyone other than the Secured Note Indenture Trustee, and (ii) except as provided in the Operative Documents, its right to (A) accept any payment from the Company, (B) terminate or consent to the cancellation of any Lease, Site Lease or Support Agreement, (C) enter into any agreement amending any Operative Document, (D) execute any waiver or modification of the terms of any Operative Document, (E) settle any claim arising under any Operative Document, or (F) submit any dispute arising under any Operative Document to arbitration thereunder; (d) the failure by either the Owner Participant or the Owner Trustee, as the case may be, to perform or observe in any material respect any other covenant or agreement to be performed or observed by it under the Secured Note Indenture or any other Operative Document (other than the Tax Indemnity Agreement), which failure shall continue for 30 days after receipt by the Owner Participant or the Owner Trustee of written notice from the Secured Note Indenture Trustee specifying such failure and requiring it to be remedied; provided, however, that the continuation of any such failure for such 30-day period or such longer period which shall not exceed 180 days shall not constitute a Secured Note Indenture Event of Default so long as such failure is curable or correctable and the Owner Participant or the Owner Trustee is diligently pursuing the cure or correction thereof; (e) representations or warranties of the Owner Trustee (in respect of (i) organizational matters, (ii) the enforceability of the Operative Documents to which it is a party, (iii) compliance with certain laws and (iv) title to the Assets) which prove to be inaccurate in any material respect when made, unless such inaccuracy is no longer material or any material adverse impact thereof is cured within 30 days after receipt by the Owner Trustee of written notice thereof from the Secured Note Indenture Trustee; (f) representations and warranties of the Owner Participant (in respect of (i) organizational matters, (ii) the enforceability of the Operative Documents to which it is a party and (iii) compliance with certain laws) which prove to be inaccurate in any material respect when made, unless such inaccuracy is no longer material or any material adverse impact thereof is cured within 30 days after receipt by the Owner Participant of written notice thereof from the Secured Note Indenture Trustee; (g)(i) either of the Owner Participant or the Owner Trustee commences a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of its or any substantial part of its property, or consenting to any such relief or to the appointment or taking possession by any such official or agency in an involuntary case or other proceeding commenced against it, or making a general assignment for the benefit of creditors, or taking any corporate action to authorize any of the foregoing, or (ii) an involuntary case or other proceeding commenced against either of the Owner Participant or the Owner Trustee seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official or agency of its or any substantial part of its property, and such involuntary case or other proceeding remains undismissed and unstayed for a period of ninety (90) days; and (h) any Lease Event of Default (other than any Lease Event of Default arising from the failure of the Company to make any Excepted Payment) which shall have occurred and be continuing. (Secured Note Indenture, Section 5.02) For a more complete description of the Lease Events of Default, see "Description of the Secured Notes--The Leases--Lease Events of Default." If there shall occur a Secured Note Indenture Event of Default arising from the failure of the Company to make any payment of Rent when due under any Lease, and if, within 30 days after notice of such Secured Note Indenture Event of Default, the Owner Trustee shall pay or cause to be paid all principal and interest then due on the outstanding Secured Notes and/or such - 172 - other amount of Rent as was not paid by the Company, then such failure by the Company shall not constitute a Secured Note Indenture Event of Default, in which case the Secured Note Indenture Trustee and the holders of the outstanding Secured Notes shall not be entitled to exercise any remedies otherwise available under the Secured Note Indenture or such Lease as the result of the failure of the Company to make such payment of Rent. Notwithstanding the foregoing, the Owner Trustee's right to cure a Secured Note Indenture Event of Default resulting from the failure by the Company to pay Basic Rent will be limited to the right to cure two Secured Note Indenture Events of Default occasioned by successive defaults in the payment of Basic Rent or an aggregate of four Secured Note Indenture Events of Default occasioned by such defaults in the payment of Basic Rent. The exercise by the Collateral Trustee of its right to cure any default in the payment of Basic Rent will count against the number of such cure rights available to the Owner Trustee. See "Description of the Recognition Instrument." The Owner Trustee may also cure any other default by the Company in the performance of its obligations under any Lease in which case such default shall not constitute a Secured Note Indenture Event of Default so long as (i) such default is curable and correctable and the Owner Trustee is diligently pursuing the cure or correction of such default and (ii) the Owner Trustee takes or causes to be taken, within 20 days (or such longer specified period not to exceed 270 days) after the date the Owner Trustee receives actual knowledge of such default, such action as is necessary to cure such default. (Secured Note Indenture, Section 5.03) During the occurrence and continuance of a Secured Note Indenture Event of Default, the Secured Note Indenture Trustee may withhold any portion of the Rent otherwise payable to the Owner Trustee under the Secured Note Indenture until the earlier to occur of (i) the curing, waiving or discontinuance of such Secured Note Indenture Event of Default and (ii) 180 days after the occurrence of such Secured Note Indenture Event of Default, after which time, unless the Secured Note Indenture Trustee shall have given notice to declare any of the Leases to be in default or any of the Secured Notes shall have been declared or otherwise shall have become immediately due and payable, such Rent shall be distributed to the Owner Trustee and no further withholding of Rent on account of such Secured Note Indenture Event of Default shall be effected. (Secured Note Indenture, Section 4.01) The holders of a majority in aggregate principal amount of the outstanding Secured Notes, by written instruction to the Secured Note Indenture Trustee, may on behalf of all holders waive any past default under the Secured Note Indenture except a default in the payment of principal or interest on any Secured Note or a default in respect of any covenant or provision of the Secured Note Indenture that cannot be modified or amended without the consent of each holder of a Secured Note then outstanding. (Secured Note Indenture, Section 5.08) Remedies If a Secured Note Indenture Event of Default (other than a default caused by the commencement of bankruptcy, liquidation or similar proceedings with respect to the Owner Participant or the Owner Trustee (Secured Note Indenture, Section 5.02(f)) or the Company (Leases, Section 15(f)) (other than certain Lease Events of Default) shall occur and be continuing under the Secured Note Indenture, the Secured Note Indenture Trustee may declare the unpaid principal of all (but not less than all) of the Secured Notes outstanding to be immediately due and payable, together with all accrued and unpaid interest thereon. If a Secured Note Indenture Event of Default caused by the commencement of bankruptcy, liquidation or similar proceedings with respect to the Company, the Owner Participant or the Owner Trustee shall occur and be continuing thereunder, the unpaid principal of all Secured Notes then outstanding, together with accrued interest thereon and any other amounts due thereunder, automatically becomes due and payable without any action on the part of the Secured Note Indenture Trustee. (Secured Note Indenture, Section 5.04) The Secured Note Indenture also provides that if a Secured Note Indenture Event of Default thereunder shall occur and be continuing, the Secured Note Indenture Trustee may exercise certain rights or remedies available to it under applicable law, including (if a Lease has been declared in default) one or more of the remedies under such Lease, subject to the Owner Trustee's or the Collateral Trustee's rights to cure such default or redeem or purchase the Secured Notes under the Secured Note Indenture and subject to the - 173 - rights of the Collateral Trustee under the Recognition Instrument. See "Description of the Secured Notes--The Leases--Lease Events of Default" and "Description of the Recognition Instrument." Such remedies may be exercised by the Secured Note Indenture Trustee to the exclusion of the Owner Trustee and, subject to the terms of each Lease, the Company. Any Asset sold in the exercise of such remedies will be free and clear of any rights of those parties, including the rights of the Company under the Lease with respect to such Asset; provided that no exercise of any remedies by the Secured Note Indenture Trustee may affect the rights of the Company under any Lease unless a Lease Event of Default under any Lease has occurred and is continuing and each Lease shall have been declared to be in default. (Secured Note Indenture, Sections 5.04, 5.05 and 5.09; Leases, Section 9.1) The Secured Note Indenture provides that the Secured Note Indenture Trustee will not exercise foreclosure remedies under the Secured Note Indenture for a Secured Note Indenture Event of Default which results from a Lease Event of Default unless it has exercised or is exercising material remedies seeking to dispossess the Company under each Lease, unless exercising such remedies under such Lease shall be prohibited by law, governmental authority or court order. However, the Secured Note Indenture Trustee shall not exercise such remedies if the Collateral Trustee shall assert its rights under the Recognition Instrument to prohibit the Secured Note Indenture Trustee from exercising remedies under the Secured Note Indenture. (Secured Note Indenture, Section 5.04(a)) See "Description of the Recognition Instrument." In addition, if a Secured Note Indenture Event of Default results from a Lease Event of Default, the Secured Note Indenture Trustee shall not exercise remedies under the Secured Note Indenture with respect to such Secured Note Indenture Event of Default for a period of 20 days after notice of such Secured Note Indenture Event of Default by the Secured Note Indenture Trustee to the Owner Trustee and each Loan Participant or, if the Collateral Trustee shall, prior to the expiration of such 20 day period, assert its rights under the Recognition Instrument to prohibit the Secured Note Indenture Trustee from exercising remedies under the Secured Note Indenture, then the Secured Note Indenture Trustee shall not exercise such remedies until the date that is 20 days after the date the Secured Note Indenture Trustee notifies the Owner Trustee that such prohibition is no longer in effect. (Secured Note Indenture, Section 5.04(d)) See "Description of the Recognition Instrument." The holders of a majority in aggregate unpaid principal amount of the Secured Notes outstanding under the Secured Note Indenture may cause the Secured Note Indenture Trustee to give such notice, consent or direction or exercise such right, remedy or power under the Secured Note Indenture or under any Lease or any other related agreement, but in such event the Secured Note Indenture Trustee shall not be required to take any action under the Secured Note Indenture or expend or risk its own funds or otherwise incur any financial liability in the performance of its duties thereunder or in the exercise of any of its rights and powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk is not reasonably assured to it. (Secured Note Indenture, Sections 6.02 and 6.04) If a Secured Note Indenture Event of Default under the Secured Note Indenture occurs and is continuing and either the Secured Note Indenture Trustee (as assignee of the Owner Trustee) shall have declared any of the Leases to be in default or any of the Secured Notes shall have been declared or otherwise shall have become immediately due and payable, any sums held or received by the Secured Note Indenture Trustee may be applied to reimburse the Secured Note Indenture Trustee for any unpaid fees for its services under the Secured Note Indenture and any unreimbursed tax, expense or other loss incurred by it prior to any payments to holders of the Secured Notes. (Secured Note Indenture, Section 4.03) An important purpose of the owner trust structure is to ensure that the right of Certificateholders to receive payments on the Pass Through Certificates would not be impaired in the event of the bankruptcy of the Owner Participant. The terms of the Owner Trust Agreement and provisions of the Bankruptcy Code should cause the Owner Trust to be ineligible to be a debtor under the Bankruptcy Code and should prevent the Assets and the rights of the Owner Trustee in the related Operative Documents from being treated as part of the Owner Participant's bankruptcy estate. In the event of the bankruptcy of the Owner Participant, it is possible, however, that the structure might be - 174 - disregarded and the Assets, Leases and Secured Notes and certain other related documents might become part of the bankruptcy proceeding. In such event, payments under the Leases or on the Secured Notes might be interrupted and the ability of the Secured Note Indenture Trustee to exercise its remedies under the Secured Note Indenture might be restricted, although the Secured Note Indenture Trustee would retain its status as a secured creditor in respect of the Leases and the Assets. The Company is of the opinion that the risk associated with the bankruptcy of the Owner Participant is remote. Possible Rejection of Certain Operative Documents in Bankruptcy If the Company were to become a debtor in a bankruptcy or reorganization case under the United States Bankruptcy Code, the Company or its bankruptcy trustee could reject any Lease. Similarly, in such event, the Company or its bankruptcy trustee could reject other of the Operative Documents, such as the Site Leases (pursuant to which the Company subleases and grants easements with respect to the Sites to the Owner Trustee) and the Support Agreements (pursuant to which the Company agrees to provide certain services to the Owner Trustee in the event of the termination of the Facility Lease or the Power Plant Lease). In such event, there could be no assurance that the amount of any claim for damages that would be allowed in such bankruptcy case would be in an amount sufficient to provide for the repayment of the Secured Notes, or if allowed, that the Company would have sufficient assets to pay such claim. Under Section 502(b)(6) of the United States Bankruptcy Code, as amended, a claim by a lessor for damages resulting from the rejection of a lease of real property in connection with bankruptcy proceedings affecting the lessee may be limited to an amount equal to the rent reserved under the lease, without acceleration, for the greater of 1 year or 15 percent (but not more than 3 years) of the remaining term of the lease, plus rent already due but unpaid. Although each of the Leases purports not to be a lease of real property, there can be no assurance that a bankruptcy court could not find it subject to these limitations. The characterization of the property comprising the Assets as personal or real property involves the interpretation of Georgia law. Because there is a lack of clear precedent, the Company is unable to predict how a bankruptcy court would rule on this question. In any case, rejection of a Lease by the Company or its bankruptcy trustee would not deprive the Secured Note Indenture Trustee of its security interest in the applicable Assets. However, rejection of a Site Lease or Support Agreement by the Company or its bankruptcy trustee could make it impossible to operate the Assets or certain of the Assets at the Sites and, in addition, could require the removal of some or all of the Assets to another location. There can be no assurance that it would be economical to remove certain of the Assets to another location. Modification of Secured Note Indenture and Other Operative Documents The Secured Note Indenture contains provisions permitting the Owner Trustee and the Secured Note Indenture Trustee to enter into supplements and amendments to the Secured Note Indenture, without the consent of the holders of the Secured Notes, (i) to subject additional property to the Lien of the Secured Note Indenture or to correct or amplify the description of property subject to the Lien of the Secured Note Indenture, (ii) to add to the covenants of the Owner Trustee for the benefit of the holders, or to surrender any right or power of the Owner Trustee, the Owner Participant or the Company under the Secured Note Indenture, (iii) to cure or correct any ambiguity or defective or inconsistent provision of the Secured Note Indenture, provided that such action shall not adversely affect the interests of any holder of the Secured Notes, (iv) to provide for the assumption by the Company of the obligations of the Owner Trustee under the Secured Note Indenture, (v) to evidence the succession of a new Owner Trustee or new Secured Note Indenture Trustee or the appointment or removal of any co-trustee or separate trustee, (vi) to make any other provisions with respect to matters or questions arising under the Secured Note Indenture so long as such action shall not adversely affect the interests of the holders of the Secured Notes, (vii) to add to the rights of the holders of the Secured Notes, (viii) to include on the Secured Notes any legend as may be required by law, or (ix) in connection with (A) Additional Notes or (B) the refinancing or refunding of the Secured Notes or (C) the sale of the Secured Notes to a third party or (D) the participation of the Certificateholders with respect to the sale of the Secured Notes described in "Description of the Secured Notes--Certain Sales of Secured Notes." (Secured Note Indenture, Section 9.01) - 175 - The Secured Note Indenture also contains provisions permitting the Owner Trustee and the Secured Note Indenture Trustee, with the consent of a majority in unpaid principal amount of the Secured Notes outstanding under the Secured Note Indenture, to amend or supplement the Secured Note Indenture for the purpose of adding provisions to, or changing or eliminating provisions of, the Secured Note Indenture, except that without the consent of the holder of each Secured Note outstanding under the Secured Note Indenture, no amendment or modification of the Secured Note Indenture may (a) change the stated maturity of the principal of, or any installment of interest on, or any mandatory or optional repayment or redemption provision with respect to, any Secured Note, or change the principal amount thereof or any other amount payable in respect thereof or reduce the interest thereon, or change the place of payment where, or the coin or currency in which, any Secured Note or the interest thereon is payable, (b) permit the creation of any Lien on the assets subject to the Secured Note Indenture not otherwise permitted thereunder or deprive any holder of the benefit of the Lien of the Secured Note Indenture upon such assets, or any portion thereof, for the security of its Secured Notes, (c) change the percentage of the aggregate principal amount of the Secured Notes required to take or approve any action under the Secured Note Indenture or any other Operative Document, (d) adversely affect any indemnities in favor of any holder of the Secured Notes under the Operative Documents (except as may be consented to by such holder) or (e) modify the order of priorities in which distributions of the income and proceeds of the Indenture Estate are to be made or certain other specified provisions. (Secured Note Indenture, Section 9.02(a)) The Secured Note Indenture also provides that certain provisions of the other Operative Documents may be amended or modified by the parties thereto without the consent of any holder of the Secured Notes outstanding under the Secured Note Indenture. However, no such amendment or modification shall, without the consent of the holder of each outstanding Secured Note, amend or modify any Lease in such manner (i) as to reduce the amounts payable by the Company under such Lease or change the time for the payment thereof, including the payment of Supplemental Rent due on the final distribution date, so that such payments are less than the amounts necessary to pay the principal of and interest on the outstanding Secured Notes as they become due under the Secured Note Indenture, or change any of the circumstances under which Stipulated Loss Value or Termination Value is payable or (ii) as would release the Company from its obligation in respect of payment of Basic Rent, Stipulated Loss Value or Termination Value or change the absolute and unconditional character of such obligations as set forth in such Lease. (Secured Note Indenture, Section 9.02(a)) The Leases Term and Rentals. Each of the Facility, the Power Plant, the 1990 Equipment and the 1991 Equipment has been leased separately by the Owner Trustee to the Company for an interim lease term (the "Interim Lease Term"), a basic lease term (the "Basic Lease Term") and, at the option of the Company, certain renewal terms. The Interim Lease Term for each Asset commenced on the Closing Date for such Asset and ended on the day immediately preceding the date of commencement of the Basic Lease Term for such Asset (the "Basic Lease Term Commencement Date"). The Basic Lease Term commenced on January 2, 1991 for the 1990 Equipment and commenced on January 2, 1992 for the Facility, the Power Plant and the 1991 Equipment and will expire for each Asset on the dates specified below with respect to such Asset or Assets unless previously terminated in accordance with the terms of the applicable Lease. Basic Lease Term Asset or Assets Expiration Date --------------- ---------------- Facility July 1, 2016 Power Plant January 1, 2017 1990 Equipment January 1, 2006 1991 Equipment July 1, 2006 Interest expense on the Secured Notes accrued during the Interim Lease Term for the Leases of the Facility, the Power Plant and the 1991 Equipment will be paid by the Owner Trustee from amounts contributed by the Owner Participant and not derived from Rent under such Lease. If the Owner Trustee shall fail to pay the Secured Note Indenture Trustee its part of such interest expense on the date such payment is due, then the Company will, in addition to paying the amount of any Basic Rent due on such date, pay to the Secured Note - 176 - Indenture Trustee as Supplemental Rent an amount equal to the unpaid portion of such interest expense. (Leases, Section 3.2) The Basic Rent payments by the Company under each Lease are payable on each January 2 and July 2 (or if such a day is not a Business Day, on the next succeeding Business Day) (each, a "Basic Rent Payment Date"), commencing on January 2, 1992 (or January 2, 1991 under the 1990 Equipment Lease), and are to be paid to the Secured Note Indenture Trustee as assignee of the Owner Trustee so long as any Secured Notes relating to such Lease are outstanding. Such payments will be used to make payments of principal and interest due on the Secured Notes relating to such Lease, which will in turn furnish the funds to be distributed by the Pass Through Trustee to the Certificateholders on January 2 and July 2 of each year. (Secured Note Indenture, Section 4.01) Rental payments that the Company is obligated to make under each Lease will not be less than the scheduled payments of principal of and interest on the Secured Notes related to such Lease. Although in certain cases, the semiannual Basic Rent payments under a Lease may be adjusted, under no circumstances will rent payments that the Company is obligated to make under such Leases be less than the scheduled payments of principal of and interest on the Secured Notes corresponding to such Lease. (Leases, Section 3.5) The balance of the Basic Rent payments under all of the Leases, after payment of the scheduled principal of and interest on the Secured Notes, will be paid over to the Owner Trustee for the account of the Owner Participant. The Company's obligation to pay Rent and to make other payments under each Lease is a general obligation of the Company. Net Lease, Maintenance and Use. The Company's obligations under each Lease are those of a lessee under a "net lease." Accordingly, the Company is obligated, at its own expense, to pay all costs and expenses of operating the Assets and to operate and maintain each Asset (a) in accordance with good industry and sound engineering practice and the Company's established maintenance and repair programs so as to keep such Asset in good working order and condition, ordinary wear and tear excepted, (b) in compliance with contractors' and manufacturers' warranty requirements and (c) subject to certain exceptions, in compliance with all applicable Governmental Rules and Governmental Actions as such terms are defined in the applicable Lease. (Leases, Section 11.1) The Company is obligated to promptly repair or replace any Component or Replacement Component of each Asset (other than obsolete, redundant or unnecessary Components or Replacement Components that the Company is permitted to remove to the extent described below) which from time to time fails to function in accordance with its intended use, or becomes worn out, destroyed, damaged beyond repair, lost, condemned, confiscated, stolen or seized for any reason whatsoever. The Company shall maintain all Replacement Components of such Asset in as good operating condition as, and with a value, utility and remaining useful life at least equal to, the Components or Replacement Components of such Asset replaced, assuming such replaced Components or Replacement Components were in at least the condition, utility and repair required to be maintained under the Lease corresponding to such Asset and shall not discriminate against such Asset or any Component or Replacement Component of such Asset (as compared to other property of the same or similar type owned or leased by the Company) with respect to maintenance. Title to all Components and Replacement Components of each Asset shall vest in the Owner Trustee. Notwithstanding the foregoing, if at any time during the lease term for any Asset the Company shall conclude that any property included in such Asset is obsolete, redundant or unnecessary and can be removed without diminishment of the value, estimated residual value or utility of such Asset or reduction of the remaining useful life of such Asset, the Company may remove such property. (Leases, Section 11.8) Modifications and Additional Notes. The Company is obligated, at its expense, to make all Modifications to each Asset as may be required from time to time to meet the requirements of all applicable Governmental Rules and Governmental Actions unless the Company elects to terminate the Lease with respect to such Asset pursuant to the terms thereof. See "Description of the Secured Notes--The Leases--Termination". The Company also has the right to make other Modifications to any Asset not required by any Governmental Rule or Governmental Action. All Modifications to an Asset shall be completed in a manner (but only to the extent practicable in the case of Modifications to such Asset required by any Governmental Rule or Governmental Action) which does not decrease the fair market sales value of such Asset or decrease the remaining useful life, utility or estimated residual value of such Asset. Severable Modifications to any Asset not required by any Governmental Rule or Governmental Action will remain the property of the Company but may be purchased by the Owner Trustee at fair market value upon termination of the Lease corresponding to such Asset if not theretofore removed (or, under - 177 - certain circumstances, if removed within 18 months prior to the end of the lease term for such Asset) and if such Asset shall not have been transferred to the Company pursuant to the applicable Lease or the Participation Agreement. Title to all severable Modifications to any Asset required by any Governmental Rule or Governmental Action and to all nonseverable Modifications to any Asset shall vest in the Owner Trustee and will be subject equally and ratably to the Lien of the Secured Note Indenture. In addition, the Company will have the right to request the Owner Participant to consider in good faith effecting the financing of the cost of any Modification through the issuance and sale by the Owner Trustee of Additional Notes under the Secured Note Indenture. (Leases, Section 11; Participation Agreement, Section 14; Secured Note Indenture, Section 2.09). See "Description of the Secured Notes-- Additional Notes." Sublease. The Company may sublease any Asset to another Person (including in any such sublease of the Facility or the Power Plant, a sub- sublease of the applicable land and commensurate grant of the applicable Easements) so long as such sublease shall be subject and subordinate to the Lease corresponding to such Asset. Each such sublease shall (i) prohibit a further assignment, sublease or disposition of the interests covered thereby, (ii) be deemed assigned to the Owner Trustee during the continuation of a Lease Event of Default and (iii) in no event continue beyond the lease term for such Asset. The Company shall remain primarily liable under the applicable Lease with respect to such Asset, and all terms and conditions thereof and of the other Operative Documents shall be complied with as though no such sublease was in existence. (Leases, Section 14.2) Liens. The Assets will be maintained free of any Liens other than (i) the respective rights of the Company, the Owner Participant, the Owner Trustee, the Secured Note Indenture Trustee and the holders of the Secured Notes, as provided in the Operative Documents, (ii) Lessor's Liens, Owner Participant's Liens and Secured Note Indenture Trustee's Liens, (iii) Liens for Taxes (as defined in the applicable Lease) either not delinquent or being contested in good faith and by appropriate proceedings, (iv) materialmen's, mechanics' and other like Liens arising in the ordinary course of business or in the course of constructing, repairing, equipping or installing, modifying or expanding the Assets or any part thereof, for amounts either not more than 60 days past due or being contested in good faith and by appropriate proceedings, (v) Liens arising out of judgments or awards against the Company with respect to which at the time an appeal or proceeding for review is being prosecuted in good faith, (vi) the rights and interests of the IDA in the Assets and the Sites as provided in the IDA Lease, (vii) Site Liens (as defined in the applicable Lease), (viii) assignments and subleases permitted by each Lease and (ix) the rights and interests of the Collateral Trustee under the Georgia Mill Mortgage and the Recognition Instrument. The Company may not, however, contest any lien described in clauses (iii), (iv) and (v) above, if such contest involves any material danger of, the sale, forfeiture or loss of the applicable Asset or materially interferes with the use thereof, or disposition of title thereto, in which case the Company is required to discharge such lien. (Leases, Section 10) Insurance. The Company, at its own cost and expense, will be obligated to carry and maintain or cause to be carried and maintained at all times during the lease term for each Asset (i) insurance with respect to such Asset against loss or damage by fire, lightning and other risks from time to time included under "all-risk" policies and against loss or damage by sprinkler leakage, water damage, collapse, vandalism and malicious mischief, in amounts sufficient to prevent the Owner Trustee, the Owner Participant, the Pass Through Trustee, the Company or the Secured Note Indenture Trustee from becoming co-insurers of any partial loss under the applicable policies, and in amounts equal to the sum of Stipulated Loss Value for the Facility, the Power Plant or any item of Equipment, as the case may be, on a "stated value" basis, to the extent such insurance coverage is available on commercially reasonable terms and conditions, (ii) public liability, including personal injury and property damage and comprehensive general liability, insurance against claims arising out of or connected with the possession, use, leasing, operation or condition of any Asset then subject to a Lease in such amounts as are usually carried by persons operating similar properties in the same general locality but in any event with a combined single limit of not less than $10,000,000 for personal injury and property damage with respect to any one occurrence, (iii) explosion insurance in respect of any steam and pressure boilers and similar apparatus located on the real property subject to the IDA Lease in amounts not less than those required by clause (ii) above, (iv) appropriate workers' - 178 - compensation insurance with respect to any work on or about the real property subject to the IDA Lease, and (v) such other insurance with respect to such Asset against loss or damage of the kinds from time to time customarily insured against by persons owning or using similar property in such amounts as shall be deemed adequate by an expert selected by the Company and approved by the Owner Trustee. The insurance required under clause (i), (ii) or (iii) above may be subject to deductible amounts and self-insured retentions not exceeding $5,000,000 in the aggregate over all of the Leases. The insurance required under clause (iv) above may be subject to deductible amounts and self-insured retentions not exceeding $300,000 per occurrence and $5,000,000 in the aggregate over all of the Leases. All proceeds of such insurance on account of any damage to or destruction of any Asset shall be payable to the Secured Note Indenture Trustee for any loss in excess of a specified amount (the greatest such amount being $10,000,000) and applied to the repair or restoration of such Asset. Such insurers shall be of recognized responsibility authorized to insure risks in the State of Georgia having an A.M. Best rating of at least "A" and an A.M. Best capital and surplus designation of at least "X" or shall be reasonably satisfactory to the Owner Trustee. Such insurance may be carried under blanket policies maintained by the Company so long as such policies otherwise comply with the provisions of the Leases. The Owner Trustee, the Owner Participant, the Secured Note Indenture Trustee, the Pass Through Trustee, the Collateral Trustee and the IDA are included as additional insureds under all third-party liability policies which the Company maintains pursuant to the Leases and, with respect to each Asset, the Owner Trustee and the Secured Note Indenture Trustee (for so long as such Asset is subject to the Lien of the Secured Note Indenture) will be included as insureds and, to the extent proceeds are payable to it as provided in the Lease corresponding to such Asset, loss payees under the "all- risk" insurance maintained by the Company pursuant thereto. In addition, the insurance policies maintained under the Leases will provide that, in respect of the respective interests of the Owner Trustee, the Secured Note Indenture Trustee, the Pass Through Trustee and the Owner Participant, the insurance will not be invalidated by any action or inaction of the Company or any other Person and such insurance shall insure the Owner Trustee, the Secured Note Indenture Trustee, the Pass Through Trustee and the Owner Participant as their interests may appear, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by the Company and that if the insurers cancel such insurance for any reason whatsoever or any materially adverse change is made in policy terms or conditions, or if such insurance is allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to the Owner Trustee, the Owner Participant, the Pass Through Trustee or the Secured Note Indenture Trustee for 30 days after receipt by the Owner Trustee, the Owner Participant, the Pass Through Trustee or the Secured Note Indenture Trustee, respectively, of written notice from such insurers of such cancellation, change or lapse. (Leases, Section 13) Purchase Options. Each Lease provides for various purchase options that may be exercised by the Company prior to the end of the Basic Lease Term for the Assets subject to such Lease. So long as no Lease Event of Default or payment default or bankruptcy default shall have occurred and be continuing under any Lease on the date the Company gives notice of its irrevocable election to exercise the purchase option described in this sentence, the Company shall have the right under each Lease (the "Early Fixed Price Purchase Option") to purchase all of the Assets subject to such Lease on the Basic Rent Payment Date specified below with respect to such Asset or Assets at a purchase price to be calculated in accordance with the terms of the applicable Lease: Basic Rent Asset Payment Date ----- ------------ Facility January 2, 2009 Power Plant January 2, 2009 1990 Equipment July 2, 2000 1991 Equipment July 2, 2000 Each Lease also provides the Company with the right (the "Competitor Purchase Option") to purchase all the Assets subject to such Lease under certain circumstances if the Owner Participant becomes a competitor of the Company's tissue paper making business at a purchase price to be calculated in accordance with the terms of the applicable Lease. In addition, under the Facility Lease and the Power Plant Lease, the Company has the right (the "Substantial Modifications Purchase Op0tion"), so long as no Lease Event of - 179 - Default or payment default or bankruptcy default (with or without the giving of notice or lapse of time, or both) shall have occurred and be continuing thereunder at the time the Company gives notice of its irrevocable election to exercise such purchase option, to purchase the Facility and the Power Plant, respectively, in the event the Company desires or is required to make to either of such Assets (i) a nonseverable Modification or series of related nonseverable Modifications or (ii) a severable Modification or series of severable Modifications required by law, in either case with an estimated cost in excess of 20% of Lessor's Cost thereof that are not financed by the Owner Trustee. However, in the event the Company exercises the Competitor Purchase Option or the Substantial Modifications Purchase Option prior to the seventh anniversary of the original issuance of the Pass Through Certificates, it shall assume the Secured Notes (in the case of the Competitor Purchase Option) or purchase the Owner Participant's beneficial interests in the Assets or, under certain circumstances, assume the Secured Notes (in the case of the Substantial Modifications Purchase Option). (Leases, Section 6.1) In order to exercise either the Early Fixed Price Purchase Option or the Substantial Modifications Purchase Option under the Facility Lease or the Power Plant Lease, the Company must also purchase the Power Plant or the Facility, respectively, pursuant to the Lease corresponding to such Asset. In addition, in order to exercise the Competitor Purchase Option with respect to any Asset under the applicable Lease, the Company must at the same time purchase all of the other Assets then subject to any Lease. (Leases, Section 6.1) In the event the Company has the right to exercise its Substantial Modifications Purchase Option with respect to the Facility or the Power Plant, it shall also have the option, instead of purchasing such Assets, to purchase the Owner Participant's beneficial interest in all of the Assets or, under certain circumstances, assume the Secured Notes. In such event, the Secured Notes applicable to such Asset will not be redeemed and will continue to be secured by such Asset and the related Lease. (Participation Agreement, Section 16) In the event the Secured Notes relating to any Asset are outstanding at the time the Company purchases such Asset pursuant to one of the purchase options described above and the Company does not assume the Secured Notes or purchase the Owner Participant's beneficial interest in the Assets, as applicable, the purchase price for such Asset will be an amount at least sufficient to pay the principal of and interest on such Secured Notes. (Secured Note Indenture, Section 3.02(c); Leases, Section 6.1) Termination. Subject to certain conditions, if the Company determines that any Asset is obsolete, uneconomic or surplus to the needs of the Company for any reason (including, without limitation, by reason of burdensome Governmental Rules), the Company will be permitted to terminate the Lease with respect to such Asset commencing on January 2, 1997 (or January 2, 1996 with respect to any item of 1990 Equipment) during the Basic Lease Term for such Asset. To exercise its right to terminate the Lease with respect to any Asset, the Company shall be obligated to provide the Owner Trustee and the Secured Note Indenture Trustee with notice prior to the Basic Rent Payment Date as of which the Company elects to terminate the Lease with respect to such Asset (a "Termination Date"). The Company shall be permitted under certain circumstances at its option by written notice to the Owner Trustee and the Secured Note Indenture Trustee to revoke any such notice of termination, in which event the Lease will not terminate with respect to such Asset. Following such notice of termination, the Company will, as agent for the Owner Trustee, solicit bids for the cash purchase of such Asset on such Termination Date. The Owner Trustee may also solicit bids for the cash purchase of such Asset on such Termination Date independent of the Company. The Owner Trustee shall sell such Asset on such Termination Date to such Person which shall have submitted the highest such bid and the proceeds of such sale shall be paid to the Owner Trustee. If the net proceeds from such sale are less than the Termination Value for the Asset, the Company shall pay the Owner Trustee an amount equal to the difference between such proceeds and such Termination Value, together with certain other amounts. Except as contemplated by the final sentence of this paragraph, in the event that such Asset is not so sold (including, without limitation, under circumstances where no bids are received) on such Termination Date, the Company shall pay to the Owner Trustee the Termination Value for such Asset, together with certain other amounts. All funds to be paid to or deposited with the Owner Trustee as described in this paragraph shall, so long as such Asset is subject to the Lien of the - 180 - Secured Note Indenture, be deposited directly with the Secured Note Indenture Trustee. Amounts in excess of the outstanding principal amount of the Secured Notes related to such Asset, and the then accrued and unpaid interest thereon will be distributed by the Secured Note Indenture Trustee to the Owner Trustee for the benefit of the Owner Participant. The Lien of the Secured Note Indenture with respect to such Asset shall terminate after the full Termination Value for such Asset has been received by the Secured Note Indenture Trustee and, if all amounts due the Owner Participant have also been paid, the Lease with respect to such Asset shall terminate and the obligation of the Company to make rental payments with respect thereto shall cease. The Company shall not be permitted to terminate the Facility Lease in this manner unless, on or prior to the Termination Date, the Power Plant Lease is similarly terminated. In the event that the Company shall have exercised its right to revoke its notice of termination with respect to any Asset or in the event that the high bidder therefor shall have failed to purchase such Asset (such failure not being attributable to the fault of the Company), the Lease shall continue in full force and effect with respect to such Asset. (Leases, Sections 7.2 and 7.3) The Owner Trustee shall have the option to retain an Asset with respect to which the Company has given a notice of termination. In such event, the Owner Trustee shall pay to the Secured Note Indenture Trustee an amount equal to the unpaid principal amount of and accrued interest on the Secured Notes then outstanding relating to such Asset or the applicable Equipment Group to be redeemed on such Termination Date and shall pay (or the Company shall pay) all other sums due and payable to the holders thereof on the Termination Date. (Leases, Section 7.4) In the event the Company is required to pay, or is likely to be required to pay, certain tax indemnities to the Owner Participant, the Company has the option (the "Special Termination Option") to terminate the Leases with respect to all of the Assets upon payment of the greater of Special Termination Value for such Assets and fair market value and certain other amounts at which time title to the Assets will be transferred to the Company. However, in the event the Company exercises the Special Termination Option prior to the seventh anniversary of the date of the original issuance of the Pass Through Certificates, it shall assume the Secured Notes. (Participation Agreement, Section 16.03) Event of Loss. If an Event of Loss occurs with respect to an Asset, the Company shall pay to the Owner Trustee the Stipulated Loss Value for such Asset, together with certain additional amounts, or, if such Asset is an item of Equipment, the Company may elect to replace such item of Equipment. In the event the Company elects to replace an item of Equipment subject to an Event of Loss, it must do so within 180 days with a functionally comparable item of equipment having a value, estimated residual value, utility and remaining useful life at least equal to, and in as good operating condition as, the item of Equipment suffering such Event of Loss, assuming such item of Equipment was in the condition and repair required to be maintained under the applicable Lease. Prior to or at the time of the substitution for any item of Equipment that has suffered an Event of Loss, the Company is required to provide the Owner Trustee and the Secured Note Indenture Trustee with a certificate of an officer of the Company certifying that the item of equipment replacing such item of Equipment meets the requirements set forth above. A certificate or opinion of an engineer, appraiser or other expert as to the fair market value of such replacement item of equipment, however, will not be obtained. If the Company pays the Stipulated Loss Value for an Asset subject to an Event of Loss, together with certain additional amounts, which in all circumstances will be at least sufficient to pay in full as of the date of payment thereof the aggregate unpaid principal amount of the outstanding Secured Notes related to such Asset, together with all unpaid interest thereon accrued to the date on which such payment is made, the Lien of the Secured Note Indenture and the Lease shall terminate with respect to such Asset, title thereto shall be transferred to the Company and the obligation of the Company to make rental payments with respect thereto shall cease. The Stipulated Loss Value and other payments made by the Company shall be deposited with the Secured Note Indenture Trustee so long as such Asset is subject to the Lien of the Secured Note Indenture. Amounts in excess of the outstanding principal amount of the Secured Notes related to such Asset and the then accrued and unpaid interest thereon shall be distributed by the Secured Note Indenture Trustee to the Owner Trustee for the benefit of the Owner Participant. The Stipulated Loss Value for an Asset that is not replaced must be paid on the second day of a - 181 - month occurring not later than 180 days after the Event of Loss of such Asset. (Leases, Section 12; Secured Note Indenture, Section 3.02(a)) An Event of Loss with respect to any Asset means any of the following events as a consequence of any event whatsoever, including but not limited to anything affecting the applicable Site: (a) the (i) loss, theft, destruction or disappearance of, or (ii) occurrence of damage (which, in the Company's reasonable, good faith opinion renders repair or replacement uneconomic) to, such Asset (or substantially the entirety of such Asset); (b) the permanent condemnation, confiscation or seizure of, or requisition of title to, such Asset by any Governmental Authority (as defined in the applicable Lease) (or any other condemnation, confiscation or seizure by a Governmental Authority that continues for a period of more than two years without a fixed date for termination of such action and provided that the deferral of an Event of Loss pursuant hereto shall not diminish the Company's obligations with respect to maintenance of the affected Asset to the extent practicable in light of such action); (c) the requisition of use of such Asset by any Governmental Authority for a period which shall exceed the lesser of (i) two years and (ii) the remaining portion of the lease term for such Asset; or (d) the receipt of insurance proceeds based upon an actual or constructive total loss with respect to such Asset. (Leases, Definitions) Lease Events of Default. Events of default (each, a "Lease Event of Default") under each Lease include, among other things: (a) the Company's failure to pay Basic Rent, Stipulated Loss Value or Termination Value for any Asset with respect to such Lease or the Company's failure to pay rent in an amount sufficient to redeem all of the Secured Notes then outstanding in the event that, on or prior to January 2, 2002, the Secured Notes are not refunded, refinanced or sold to a third party, in each case within 10 days after the date the same becomes due; (b) the Company's failure to pay Supplemental Rent or make any other payment (other than Basic Rent, Stipulated Loss Value, Termination Value or Special Termination Value for any Asset or the rent payment referred to in clause (a) above) required to be made by the Company under such Lease or any other Operative Document (with certain exceptions including Excepted Payments and payments to be made by the Company to the Pass Through Trustee under the Pass Through Trust Agreement) for more than 15 Business Days after the Company has received written notice from the Owner Trustee or the Secured Note Indenture Trustee stating that such payment is due; (c) the Company's failure to maintain the insurance required to be maintained under such Lease or, at the option of the Owner Participant, the Company's failure to maintain certain letters of credit for the benefit of the Owner Participant; (d) the Company's failure in any material respect to perform or observe any other covenant or agreement to be performed or observed by it under such Lease or any other Operative Document (with certain exceptions including covenants or agreements with respect to Excepted Payments and payments to be made by the Company to the Pass Through Trustee under the Pass Through Trust Agreement) and such failure shall continue unremedied for thirty days after receipt by the Company of written notice from the Owner Trustee or the Secured Note Indenture Trustee specifying such failure and requiring it to be remedied, provided that the continuation of any such failure for such thirty day period or such longer period which shall not exceed 180 days shall not constitute a Lease Event of Default so long as such failure is curable or correctable and the Company is diligently pursuing the cure or correction thereof; (e) any representation or warranty made by the Company in the Participation Agreement or certain related documents proving to have been inaccurate in any material respect when made, unless such inaccuracy shall not be material to the recipient at the time when the notice referred to below shall have been received by the Company or any adverse impact thereof shall have been cured within thirty days after receipt by the Company of written notice thereof from the Owner Trustee or the Secured Note Indenture Trustee; (f) (i) the performance by the Company of any of the following actions: commencing by the Company of a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or consenting to any such relief or to the appointment or taking possession by any such official or agency in an involuntary case or other proceeding commenced against it, or making a general assignment for the benefit of creditors, or taking any corporate action to authorize any of the foregoing, or (ii) an involuntary case or other proceeding is commenced against the Company seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar - 182 - law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official or agency of it or any substantial part of its property, and such involuntary case or other proceeding remains undismissed and unstayed for a period of ninety (90) days; (g) the Company's default with respect to any term of any loan agreement, mortgage, indenture or other agreement relating to any indebtedness of the Company in an individual principal amount of $15,000,000 or more or items of indebtedness with an aggregate principal amount of $30,000,000 or more, if the effect of such default is to cause such indebtedness to become due or be declared due prior to its stated maturity; or (h) a Lease Event of Default under any other Lease. (Leases, Section 15) If a Lease Event of Default under a Lease has occurred and is continuing, and such Lease has been declared in default, the Secured Note Indenture Trustee, as assignee of the Owner Trustee's rights under the Lease, may exercise one or more of the remedies provided in the Lease with respect to the Assets subject thereto. These remedies include the right to repossess and use or operate the Assets, to sell or release the Assets free and clear of the Company's rights and retain the proceeds and to require the Company to pay as liquidated damages any unpaid rent plus, at the Secured Note Indenture Trustee's option (as assignee of the Owner Trustee), any of the following: (a) an amount equal to the excess of the Stipulated Loss Value of the Asset over, at the Secured Note Indenture Trustee's option (i) the discounted fair market rental value thereof for the remainder of the term of such Asset, (ii) the fair market sales value thereof, or (iii) if the Asset has been sold, the net sales proceeds thereof; (b) an amount equal to the excess of the discounted present value of all installments of Basic Rent for the Asset over the discounted fair market rental value thereof for the remainder of the term of such Asset; or (c) an amount equal to the greatest of (i) Stipulated Loss Value of the Asset, (ii) the discounted fair market rental value for the remaining useful life thereof and (iii) the fair market sales value thereof, in which case the Owner Trustee shall transfer such Asset to the Company, whereupon the Lease and the Company's obligations thereunder with respect to such Asset shall cease. (Leases, Section 16) For a possible limitation on damages, see "Description of the Secured Notes--Possible Rejection of Certain Operative Documents in Bankruptcy." The Participation Agreement The Company is required to indemnify the Owner Participant, the Owner Trustee, the Secured Note Indenture Trustee and the Pass Through Trustee for certain losses, fees and expenses and for certain other matters. (Participation Agreement, Section 12) For a more detailed description of the merger and financial covenants of the Participation Agreement, see Appendix II attached hereto. DESCRIPTION OF THE RECOGNITION INSTRUMENT The statements under this caption are summaries and do not purport to be complete. The summaries make use of terms defined in, and are qualified in their entirety by reference to all the provisions of, the Recognition Instrument, the form of which has been filed as an Exhibit to the Registration Statement of which the Prospectus is a part. A significant portion of the Company's land and equipment at the Savannah River mill (including the Company's interest under the IDA Lease), other than Assets subject to the 1990 and 1991 Transactions described in this Prospectus, is subject to a mortgage and security interest (the "Georgia Mill Mortgage"). The Georgia Mill Mortgage is administered by the Collateral Trustee for the benefit of certain of the Banks under the Bank Credit Agreement and the Purchasers under the Senior Secured Note Agreement. Although the Collateral Trustee does not have a lien on the Owner Trustee's title to or interest in the Assets or a lien on any of the Owner Trustee's rights under the Operative Documents, including the Owner Trustee's rights as lessor under the Leases, pursuant to the terms of such senior indebtedness, the Collateral Trustee is entitled to among other things receive a lien on the Company's interest as lessee under the Leases, as ground lessor and easement grantor under the Site Leases, and as obligor and beneficiary of certain rights under the Support Agreements and certain other Operative - 183 - Documents. In addition, the acceleration of the indebtedness under the Bank Credit Agreement or the Senior Secured Note Agreement constitutes a default under the Leases. Accordingly, the Collateral Trustee, the Company, the Secured Note Indenture Trustee, the Pass Through Trustee and the Owner Trustee have entered into an intercreditor agreement (the "Recognition Instrument") to address their respective rights and obligations in certain circumstances. In general, the Recognition Instrument affords the Collateral Trustee (i) the right to cure defaults by the Company under the Leases, the Site Leases and the Support Agreements, (ii) the right to postpone termination of the Leases, the Site Leases and the Support Agreements, (iii) the right to defer the Owner Trustee's and the Secured Note Indenture Trustee's exercise of remedies following a default by the Company under the Leases, the Site Leases and the Support Agreements (provided that within specified time periods during such deferral all payment defaults are cured and certain nonpayment defaults are in the process of being cured) and (iv) the right to purchase the Owner Trustee's interest and the Secured Notes (at 100% of unpaid principal and accrued and unpaid interest) in certain circumstances. The foregoing provisions relating to rights to cure and limitations on the exercise of remedies by the Owner Trustee and the Secured Note Indenture Trustee may delay the Owner Trustee and the Secured Note Indenture Trustee from exercising the full range of remedies otherwise available to it. Any such delay in the exercise of remedies with respect to the Assets or the Company may impair the ability of the Owner Trustee and the Secured Note Indenture Trustee, at such time as they may be permitted to exercise remedies, to realize sufficient funds to satisfy the then unpaid obligations with respect to the Secured Notes (and thus on the Pass Through Certificates). In addition, the Recognition Instrument provides that, following a default by the Company, the Collateral Trustee has the right, in connection with the exercise of remedies by the Collateral Trustee in respect of its lien on the Company's interest under certain of the Operative Documents, to have the Company's rights under such Operative Documents assigned to a new entity. The Recognition Instrument also provides that if the Company shall be the subject of any insolvency, bankruptcy or other similar proceeding and in connection therewith shall elect to reject any Operative Document, the Collateral Trustee shall have the right to require the parties to the 1990 and 1991 Transactions to enter into similar agreements with a new entity. The Recognition Instrument provides that any such new entity must meet certain minimum standards or be approved by the Owner Trustee and the Secured Note Indenture Trustee. The Certificateholders shall have forty-five days to reject any assignee required to be approved by them, after which time such assignee shall be deemed approved by the Certificateholders. In the event any entity receives such an assignment, the ultimate source of payments under the Leases and the other Operative Documents (and thus on the Pass Through Certificates) would be an entity other than the Company. There can be no assurances that any such entity could satisfy the Company's obligations under the Operative Documents. The Secured Note Indenture Trustee, however, would retain its security interest in the Assets. The rights and benefits of the Collateral Trustee in the Recognition Instrument will be available to any successor or assign of the Collateral Trustee and to each additional mortgagee of the Company's interest under any of the Operative Documents. In return, the Collateral Trustee will agree that so long as the Owner Trustee or the Secured Note Indenture Trustee acting on behalf of the Owner Trustee fulfills its obligations under the Recognition Instrument, the Site Leases and the Support Agreements it will not interfere with the Owner Trustee's use, possession and enjoyment of the land upon which the Assets are situated (the Company's interest in such land, as stated above, being subject to the Georgia Mill Mortgage). Also, pursuant to the Recognition Instrument, the Collateral Trustee will confirm that the Assets are not subject to the lien of the Georgia Mill Mortgage and the Recognition Instrument provides a procedure for ensuring that the lien of the Georgia Mill Mortgage does not attach to certain modifications to and subsequently acquired components of the Assets. See "Certain Risk Factors--Risk Factors Relating to the Pass Through Certificates--Potential Inability to Fully Exercise Remedies." - 184 - CERTAIN FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO THE PASS THROUGH CERTIFICATES The following discussion is a summary of certain federal income tax consequences of the purchase, ownership and disposition of Pass Through Certificates. This summary is based on laws, regulations, rulings and decisions now in effect, all of which are subject to change by legislative, administrative or judicial action, which change may be retroactive and applied in a manner that could adversely affect Certificate Owners. The discussion below does not purport to address federal income tax consequences applicable to particular categories of investors, some of which (for example, banks, tax exempt organizations, dealers in securities, insurance companies or foreign investors) may be subject to special rules, and no information is provided in this discussion with respect to foreign, state or local tax laws or estate and gift considerations. Investors should consult their own tax advisors in determining the federal, state, local and foreign tax consequences to them of the purchase, ownership and disposition of Pass Through Certificates. The Pass Through Trust is not indemnified for any federal income taxes that may be imposed upon it, the imposition of which could reduce the amounts available for distribution to the Certificate Owners. General In connection with the initial offering of the Pass Through Certificates, the Company received an opinion of counsel to the effect that, based upon the law at the time of such offering, the Pass Through Trust should be classified as a "grantor trust." Consequently, each Certificate Owner, as the beneficial owner of an interest in the Pass Through Certificates, should be treated as owning a pro rata undivided interest in each Secured Note and any other property held in the Pass Through Trust. The Company believes that each Certificate Owner should be required to report on its federal income tax return its pro rata share of the entire income from the Secured Notes and any other property in the Pass Through Trust, in accordance with such Certificate Owner's method of accounting. Thus, a Certificate Owner using the cash method of accounting should account for its pro rata share of income as and when received by the Pass Through Trustee, while a Certificate Owner using the accrual method of accounting should account for its pro rata share of income as it accrues or is received by the Pass Through Trustee, whichever is earlier. Market Discount and Premium A purchaser of an interest in a Pass Through Certificate should be treated as purchasing an interest in each Secured Note and any other property in the Pass Through Trust at a price determined by allocating the purchase price paid for the Pass Through Certificate among the Secured Notes and other property in proportion to their respective fair market values at the time of purchase of the interest in the Pass Through Certificate. To the extent that the portion of the purchase price of an interest in a Pass Through Certificate allocated to a Secured Note (exclusive of any purchase price allocable to accrued but unpaid interest at the time of purchase) is less than or greater than the portion of the principal balance of the Secured Note which is allocable to the interest in the Pass Through Certificate, the interest in the Secured Note will have been acquired at a market discount or premium, as the case may be. If an interest in a Secured Note is purchased at a market discount, such interest will be subject to the market discount provisions of the Code, unless the amount of market discount does not exceed a statutorily defined de minimis amount. In general, under the market discount provisions of the Code, installment payments of principal on the Secured Notes, and all or a portion of the gain recognized upon a sale or other disposition of a Pass Through Certificate by a Certificate Owner, will be taxable as ordinary interest income to the extent of accrued market discount, and a portion of the interest deductions attributable to indebtedness treated as incurred or continued to purchase or carry the Secured Notes must be deferred. The ordinary income treatment on dispositions and deferral of interest deductions described in the preceding paragraph will not apply if a Certificate Owner elects to include market discount in income currently as it accrues for each taxable year during which it holds the Pass Through Certificate. For debt instruments the principal of which is paid in more than - 185 - one installment, such as a Secured Note, market discount will accrue in the manner to be provided in future Treasury regulations, but the Conference Report accompanying the Tax Reform Act of 1986 states that, until such regulations are issued, taxpayers may elect to accrue market discount either (i) under a constant yield method or (ii) for debt instruments without original issue discount, in the proportion that the stated interest paid on the obligation for the current period bears to total remaining interest on the obligation at the beginning of such period. Treasury regulations implementing the market discount rules of the Code have not been promulgated and the treatment of Secured Notes under those market discount rules is not entirely clear. Accordingly, holders are urged to consult their own tax advisors with respect to such treatment, including the application of the de minimis rule and the treatment of partial principal payments. If an interest in a Secured Note is purchased at a premium, such premium generally may be amortized by a Certificate Owner (if an election under Section 171 of the Code is made) as an offset to interest income (with a corresponding reduction in the Certificate Owner's basis) under a constant yield method over the term of the Secured Note. An election to amortize bond premium applies to all taxable debt obligations then owned and thereafter acquired by the holder and may only be revoked with IRS permission. Under the Final Regulations, a holder of a debt instrument acquired on or after April 4, 1994 may elect to include in gross income interest that accrues on the debt instrument by using the constant yield method. For purposes of this election, interest on a debt instrument includes stated interest, original issue discount and market discount (including any de minimis amounts), adjusted as applicable by any premium. Such election may be revoked only with the consent of the IRS. Taxpayers should consult with their advisors regarding the effect of such an election on any other debt instruments held by such taxpayer and the advantages and disadvantages of making this election. Sales of Pass Through Certificates A Certificate Owner that sells or exchanges its interest in a Pass Through Certificate should recognize gain or loss (in the aggregate) equal to the difference between the amount realized (reduced by any consideration allocable to accrued interest, which consideration is treated as if the interest income had been received) and its adjusted tax basis in the Pass Through Certificate. In general, a Certificate Owner's adjusted tax basis will equal the holder's cost for the interest in a Pass Through Certificate, increased by any discount previously included in income and decreased by any deduction previously allowed for amortized premium and by the amount of the holder's interest in principal payments previously received. If such Certificate Owner held its interest in such Pass Through Certificate as a capital asset for more than one year (and provided the Pass Through Trust also held the underlying Secured Notes for more than one year), any such gain or loss will be a long-term capital gain or loss, except that gain will be treated as ordinary interest income to the extent such gain represents accrued market discount not previously included in income on Secured Notes. Backup Withholding Payments made on the Pass Through Certificates and proceeds from the sale of the Pass Through Certificates to or through certain brokers may be subject to a "backup" withholding tax of 31% unless the Certificate Owner complies with certain reporting procedures or is an exempt recipient under Section 3406(g) of the Code. Any such withheld amounts will be allowed as a credit against the Certificate Owner's federal income tax. CERTAIN DELAWARE TAXES RELATING TO THE PASS THROUGH CERTIFICATES The Pass Through Trustee is a Delaware banking corporation with its principal corporate trust office in Delaware. In connection with the initial offering of the Pass Through Certificates, Richards, Layton & Finger, counsel to the Pass Through Trustee, advised the Company that, in its opinion, assuming that the Pass Through Trust will be classified as a grantor trust, (i) the Pass Through Trust should not be subject to any tax (including, without limitation, net or gross income, tangible or intangible property, net - 186 - worth, capital, franchise or doing business tax), fee or other governmental charge under the laws of the State of Delaware or any political subdivision thereof and (ii) Certificateholders and Certificate Owners that are not residents of or otherwise subject to tax in Delaware will not be subject to any tax (including, without limitation, net or gross income, tangible or intangible property, net worth, capital, franchise or doing business tax), fee or other governmental charge under the laws of the State of Delaware or any political subdivision thereof as a result of purchasing, holding (including receiving payments with respect to) or selling a Pass Through Certificate or an interest therein. Neither the Pass Through Trust, the Certificateholders nor the Certificate Owners will be indemnified for any state or local taxes imposed on them, and the imposition of any such taxes on the Pass Through Trust could result in a reduction in the amounts available for distribution to the Certificate Owners of the Pass Through Trust. In general, should a Certificateholder or Certificate Owner or the Pass Through Trust be subject to any state or local tax which would not be imposed if the Pass Through Trustee were located in a different jurisdiction in the United States, the Pass Through Trustee will resign and a new Pass Through Trustee in such other jurisdiction will be appointed. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PASS THROUGH CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS. ERISA CONSIDERATIONS APPLICABLE TO PASS THROUGH CERTIFICATES No employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or individual retirement account or employee benefit plan subject to Section 4975 of the Code, or any trust established under any such plan or account (hereinafter collectively referred to as an "ERISA Plan"), may acquire or hold any of the Pass Through Certificates. Certain governmental and non-electing church plans, however, are not subject to Title I of ERISA or Section 4975 of the Code and, therefore are not ERISA Plans and may acquire and hold Pass Through Certificates. Any fiduciary of such a governmental or church plan should consult with legal counsel as to the propriety of acquiring or holding Pass Through Certificates. The purchase by any person of any Pass Through Certificate constitutes a representation by such person to the Company, the Owner Participant, the Pass Through Trustee, the Owner Trustee and the Secured Note Indenture Trustee, or their respective successors, that such person is not an ERISA Plan, and that such person is not acquiring, and has not acquired, such Pass Through Certificate with assets of an ERISA Plan. MARKET-MAKING ACTIVITIES OF MS&CO. This Prospectus is to be used by MS&Co. in connection with offers and sales of the 1988 Securities, the 1993 Notes, the 1994 Notes and the Pass Through Certificates in market-making transactions at negotiated prices related to prevailing market prices at the time of sale. MS&Co. may act as principal or agent in such transactions. MS&Co. has no obligation to make a market in the 1988 Securities, the 1993 Notes, the 1994 Notes or the Pass Through Certificates, and may discontinue its market-making activities at any time without notice, in its sole discretion. MS&Co. is affiliated with entities that beneficially own Common Stock of the Company representing approximately 57% on a fully diluted basis of the outstanding shares of Common Stock of the Company and have the ability to elect a majority of the members of the Company's Board of Directors. See "Ownership of Common Stock." MS&Co. acted as underwriter in connection with the original offering of the 1988 Securities, the 12 3/8% Notes and the Junior Debentures and received aggregate underwriting discounts and commissions of $52.8 million in connection therewith. MS&Co. also acted as underwriter in connection with the original offering of the 1993 Notes, the 1994 Notes and the Pass Through Certificates and received underwriting commissions of $19.5 million, $20.4 million and $2.1 million, respectively, in connection therewith. - 187 - For a description of certain transactions between the Company and MS&Co. and affiliates of MS&Co., see "Certain Risk Factors--Risk Factors Relating to the Company--Interest of Morgan Stanley Group and Affiliates; Potential Conflicts of Interest." MS&Co. has provided, and continues to provide, investment banking services to the Company. LEGAL MATTERS The legality of the 1988 Securities was passed upon for the Company by Davis Polk & Wardwell, New York, New York, and for MS&Co. by Shearman & Sterling, New York, New York. Certain legal matters with respect to the 1993 Notes and the 1994 Notes were passed upon for the Company by Shearman & Sterling, New York, New York, and for MS&Co. by Davis Polk & Wardwell, New York, New York. Shortly after the Acquisition, certain partners of Davis Polk & Wardwell, acting through a general partnership, acquired shares of Common Stock of the Company from Morgan Stanley Group which, in the aggregate, amount to less than 1% of the outstanding shares. The validity of the Pass Through Certificates was passed upon for the Company by Dewey Ballantine, New York, New York, and for MS&Co. by Shearman & Sterling, New York, New York. Both Dewey Ballantine and Shearman & Sterling relied on (i) the opinion of Richards, Layton & Finger, counsel for Wilmington Trust Company, as Pass Through Trustee, and (ii) the opinion of James W. Nellen II, Esq., Vice President and General Counsel of the Company, as to matters relating to the authorization, execution and delivery of the Pass Through Certificates under the Pass Through Trust Agreement. Mr. Nellen owns 5,300 shares of Common Stock of the Company, and has options to purchase 18,306 additional shares of Common Stock of the Company. Shearman & Sterling regularly acts as counsel to the Company on a variety of matters. EXPERTS The consolidated balance sheets of Fort Howard Corporation and subsidiaries as of December 31, 1993 and 1992, the related consolidated statements of income and cash flows for the years ending December 31, 1993, 1992 and 1991, the related financial statement schedules of Fort Howard Corporation and the audited financial statements from which (i) the financial information set forth in the table under the caption "Selected Historical Consolidated Financial Data" in this Prospectus and (ii) the financial information set forth in the table under the caption "Selected Historical Consolidated Financial Data" included in the Registration Statement have been derived, have been audited by Arthur Andersen & Co., independent public accountants, as indicated in their reports with respect thereto. Such consolidated financial statements, schedules and selected financial data are included herein and in the Registration Statement in reliance upon the authority of said firm as experts in giving said reports. - 188 - FORT HOWARD CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Page ---- Consolidated Financial Statements of Fort Howard Corporation Report of Independent Public Accountants F-2 Consolidated Statements of Income for the years ended December 31, 1993, 1992 and 1991 F-3 Consolidated Balance Sheets at December 31, 1993 and 1992 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 F-5 Notes to Consolidated Financial Statements F-6 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of FORT HOWARD CORPORATION: We have audited the accompanying consolidated balance sheets of Fort Howard Corporation (a Delaware corporation) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income and cash flows for the years ended December 31, 1993, 1992 and 1991. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fort Howard Corporation and subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for the years ended December 31, 1993, 1992 and 1991, in conformity with generally accepted accounting principles. As discussed in Notes 1, 7 and 10 to the consolidated financial statements, effective January 1, 1992, the Company changed its methods of accounting for postretirement benefits other than pensions and income taxes. ARTHUR ANDERSEN & CO. Milwaukee, Wisconsin, February 1, 1994 F-2 FORT HOWARD CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Year Ended December 31, ------------------------------ 1993 1992 1991 ---- ---- ---- Net sales............................... $ 1,187,387 $1,151,351 $1,138,210 Cost of sales........................... 784,054 726,356 713,135 ----------- ---------- ---------- Gross income............................ 403,333 424,995 425,075 Selling, general and administrative..... 96,966 97,620 97,885 Amortization of goodwill................ 42,576 56,700 56,658 Goodwill write-off...................... 1,980,427 -- -- ----------- ---------- ---------- Operating income (loss)................. (1,716,636) 270,675 270,532 Interest expense........................ 342,792 338,374 371,186 Other (income) expense, net............. (2,996) 2,101 (2,655) ----------- ---------- ---------- Loss before taxes....................... (2,056,432) (69,800) (97,999) Income taxes (credit)................... (16,314) (398) (23,963) ----------- ---------- ---------- Loss before equity earnings, extraordinary items and adjustment for accounting change................. (2,040,118) (69,402) (74,036) Equity in net loss of unconsolidated subsidiaries.......................... -- -- (31,504) ----------- ---------- ---------- Net loss before extraordinary items and adjustment for accounting change..................... (2,040,118) (69,402) (105,540) Extraordinary items - losses on debt repurchases (net of income taxes of $7,333 in 1993 and $3,090 in 1991)....................... (11,964) -- (5,044) Adjustment for adoption of SFAS No. 106.......................... -- (10,587) -- ----------- ---------- ---------- Net loss................................ $(2,052,082) $ (79,989) $ (110,584) =========== ========== ========== Loss per share: Net loss before extraordinary items and adjustment for accounting change .................. $ (347.99) $ (11.83) $ (19.67) Extraordinary items................... (2.04) -- (0.94) Adjustment for adoption of SFAS No. 106 ....................... -- (1.81) -- ----------- ---------- ---------- Net loss ............................... $ (350.03) $ (13.64) $ (20.61) =========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements. F-3 FORT HOWARD CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) December 31, ------------------ 1993 1992 ---- ---- Assets Current assets: Cash and cash equivalents................... $ 227 $ 188 Receivables, less allowances of $2,366 and $1,376......................... 105,834 103,491 Inventories................................. 118,269 100,975 Deferred income taxes....................... 14,000 10,000 Income taxes receivable..................... 9,500 2,500 ----------- ---------- Total current assets...................... 247,830 217,154 Property, plant and equipment................. 1,845,052 1,694,946 Less: Accumulated depreciation............. 516,938 437,518 ----------- ---------- Net property, plant and equipment......... 1,328,114 1,257,428 Goodwill, net of accumulated amortization of $247,495 in 1992......................... -- 2,023,416 Other assets.................................. 73,843 76,569 ----------- ---------- Total assets............................ $1,649,787 $3,574,567 ========== ========== Liabilities and Shareholders' Equity (Deficit) Current liabilities: Accounts payable............................ $ 101,665 $ 104,405 Interest payable............................ 54,854 33,057 Income taxes payable........................ 122 1,792 Other current liabilities................... 70,138 64,282 Current portion of long-term debt........... 112,750 137,747 ----------- ---------- Total current liabilities................. 339,529 341,283 Long-term debt................................ 3,109,838 2,953,027 Deferred and other long-term income taxes. ... 243,437 259,625 Other liabilities............................. 26,088 36,473 Voting Common Stock with put right............ 11,820 13,219 Shareholders' equity (deficit): Voting Common Stock......................... 600,459 600,465 Cumulative translation adjustment........... (5,091) (3,915) Retained earnings (deficit)................. (2,676,293) (625,610) ----------- ---------- Total shareholders' equity (deficit)...... (2,080,925) (29,060) ----------- ---------- Total liabilities and shareholders' equity (deficit)...................... $1,649,787 $3,574,567 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. F-4 FORT HOWARD CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, ---------------------------- 1993 1992 1991 ---- ---- ---- Cash provided from (used for) operations: Net loss................................ $(2,052,082) $(79,989) $(110,584) Depreciation and amortization........... 130,671 137,977 172,671 Goodwill write-off...................... 1,980,427 -- -- Non-cash interest expense............... 100,844 139,700 141,362 Deferred income tax (credit)............ (17,874) (17,799) (34,881) Employee stock compensation............. (7,832) 1,120 1,256 Equity in net loss of unconsolidated subsidiaries........... -- -- 31,504 Pre-tax loss on debt repurchases........ 19,297 -- 8,134 Pre-tax adjustment for adoption of SFAS No. 106....................... -- 17,076 -- (Increase) decrease in receivables .... (2,343) (5,284) 4,087 Increase in inventories................. (17,294) (1,215) (6,001) (Increase) decrease in income taxes receivable............................ (7,000) (2,500) 26,300 Increase (decrease) in accounts payable .............................. (2,740) 13,572 3,429 Increase (decrease) in interest payable. 21,797 (298) (1,468) Decrease in income taxes payable........ (1,670) (5,094) (394) All other, net.......................... 6,854 12,684 5,466 ----------- -------- --------- Net cash provided from operations..... 151,055 209,950 240,881 Cash provided from (used for) investment activities: Additions to property, plant and equipment............................. (165,539) (232,844) (144,055) Acquisition of Stuart Edgar Limited, net of acquired cash of $749.......... -- (8,302) -- Net proceeds from dispositions of investments in and advances to unconsolidated subsidiaries........... -- -- 38,568 ----------- -------- --------- Net cash used for investment activities.......................... (165,539) (241,146) (105,487) Cash provided from (used for) financing activities: Proceeds from long-term borrowings...... 887,088 189,518 462,995 Repayment of long-term borrowings....... (841,399) (167,731) (759,487) Debt issuance costs..................... (31,160) -- (11,058) Issuance (purchase) of Common Stock..... (6) -- 163,357 ----------- -------- --------- Net cash provided from (used for) financing activities................ 14,523 21,787 (144,193) ----------- -------- --------- Increase (decrease) in cash................ 39 (9,409) (8,799) Cash, beginning of year.................... 188 9,597 18,396 ----------- -------- --------- Cash, end of year....................... $ 227 $ 188 $ 9,597 =========== ======== ========= Supplemental Cash Flow Disclosures: Interest paid........................... $ 228,360 $208,051 $ 236,140 Income taxes paid (refunded), net....... 4,432 9,997 (11,090) The accompanying notes are an integral part of these consolidated financial statements. F-5 FORT HOWARD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993 1. SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of Fort Howard Corporation and all domestic and foreign subsidiaries other than the Company's former cup subsidiaries. Assets and liabilities of foreign subsidiaries 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 in the consolidated balance sheet. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to conform prior years' data to the current format. On September 4, 1992, Fort Sterling Limited ("Fort Sterling"), the Company's United Kingdom tissue operations, acquired for $25 million, including debt assumed of $17 million, Stuart Edgar Limited ("Stuart Edgar"), a converter of consumer tissue products with annual net sales approximating $43 million. The operating results of Stuart Edgar are included in the consolidated financial statements since September 4, 1992. The Company's investments in unconsolidated subsidiaries were reduced to zero at December 31, 1991 as a result of sales of all foreign cup subsidiaries and recognition of equity in the net losses of its remaining cup subsidiary, Sweetheart Holdings Inc. ("Sweetheart"). During 1993, the Company sold its remaining equity interest in Sweetheart for $5.1 million recognizing a gain of the same amount. (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. The carrying amount of cash equivalents approximates fair value due to the short maturity of the investments. (C) INVENTORIES -- Inventories are carried at the lower of cost or market, with cost principally determined on a first-in, first-out basis (see Note 2). (D) PROPERTY, PLANT AND EQUIPMENT -- Prior to August 9, 1988, property, plant and equipment were stated at original cost and depreciated using the straight-line method. Effective with the Acquisition (as defined below), properties were adjusted to their estimated fair values and are being depreciated on a straight-line basis. Effective January 1, 1992, the Company prospectively changed its estimates of the depreciable lives of certain machinery and equipment. These changes were made to better reflect the estimated periods during which such assets will remain in service. For the year ended December 31, 1992, the change had the effect of reducing depreciation expense by $38 million and net loss by $24 million. Subsequent to the change, depreciation is provided over useful lives of 30 to 50 years for buildings and 2 to 25 years for equipment. Assets under capital leases principally arose in connection with sale and leaseback transactions as described in Note 9 and are stated at the present value of future minimum lease payments. These assets are amortized over the respective periods of the leases which range from 15 to 25 years. Amortization of assets under capital leases is included in depreciation expense. The Company follows the policy of capitalizing interest incurred in conjunction with major capital expenditure projects. The amounts capitalized in 1993, 1992 and 1991 were $8,369,000, $11,047,000 and $5,331,000, respectively. (E) REVENUE RECOGNITION -- Sales of the Company's paper products are recorded upon shipment of products. F-6 (F) ENVIRONMENTAL EXPENDITURES -- Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when material environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. (G) GOODWILL -- In 1988, FH Acquisition Corp., a company organized on behalf of The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II"), acquired the Company in a leveraged buyout and was subsequently merged with and into the Company (the "Acquisition"). Goodwill (the acquisition costs in excess of the fair value of net assets of acquired businesses) acquired in connection with the Acquisition and the purchases of other businesses was amortized on a straight-line basis over 40 years through the third quarter of 1993 when the Company wrote off its remaining goodwill balance (see Note 4). The Company evaluates the carrying value of goodwill for possible impairment using a methodology which assesses whether forecasted cumulative net income before goodwill amortization is adequate to recover the future amortization of the Company's goodwill balance over the remaining amortization period of the goodwill. (H) EMPLOYEE BENEFIT PLANS -- A substantial majority of the Company's employees are covered under defined contribution plans. The Company's annual contributions to defined contribution plans are based on pre-tax income, subject to percentage limitations on participants' earnings and a minimum return on shareholders' equity. In recent years, the Company made discretionary contributions as permitted under the plans. Participants may also contribute a certain percent of their wages to the plans. Costs charged to operations for defined contribution plans were approximately $12,725,000, $11,716,000 and $12,231,000 for the years ended December 31, 1993, 1992 and 1991, respectively. Employees retiring prior to February 1, 1990 from the Company's U.S. tissue operations who have met certain eligibility requirements are entitled to postretirement health care benefit coverage. These benefits are subject to deductibles, copayment provisions, a lifetime maximum benefit and other limitations. In addition, employees who retire after January 31, 1990 at age 55 or older with ten years of service may purchase health care benefit coverage from the Company up to age 65. The Company has reserved the right to change or terminate this benefit at any time. As of January 1, 1992, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The standard requires that the expected cost of postretirement health care benefits be charged to expense during the years that employees render service (see Note 10). Prior to 1992, the annual cost of these benefits had been expensed as claims and premiums were paid. Employees of the Company's U.K. tissue operations are not entitled to Company-provided postretirement benefit coverage. In November 1992, the Financial Accounting Standards Board issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This new standard requires that the expected cost of benefits to be provided to former or inactive employees after employment but before retirement be charged to expense during the years that the employees render service. In the fourth quarter of 1992, the Company retroactively adopted the new standard effective January 1, 1992. Adoption of the new accounting standard had no effect on the Company's 1992 consolidated statement of income. (I) INTEREST RATE CAP AND SWAP AGREEMENTS -- The cost of interest rate cap agreements is amortized over the respective lives of the agreements. The differential to be paid or received in connection with interest rate swap agreements is accrued as interest rates change and is recognized over the lives of the agreements. F-7 (J) INCOME TAXES -- Effective January 1, 1992, the Company has adopted SFAS No. 109, "Accounting for Income Taxes." The Company had previously adopted SFAS No. 96, "Accounting for Income Taxes" in 1988. As a result of the accounting change, the Company reclassified certain deferred tax benefits from long-term deferred income taxes payable to current assets in the accompanying 1992 consolidated balance sheet. The adoption of SFAS No. 109 had no effect on the Company's provision for income taxes for the year ended December 31, 1992. 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 using enacted tax rates in effect in the years in which the differences are expected to reverse. The principal difference relates to depreciation expense. Deferred income tax expense represents the change in the deferred income tax asset and liability balances, excluding the deferred tax benefit related to extraordinary losses. (K) EARNINGS (LOSS) PER SHARE -- Earnings (loss) per share has been computed on the basis of the average number of common shares outstanding during the years. The average number of shares used in the computation was 5,862,639, 5,862,685 and 5,364,357 for the years ended December 31, 1993, 1992 and 1991, respectively. (L) SEGMENT INFORMATION -- The Company operates in one industry segment as a manufacturer, converter and marketer of a diversified line of single-use paper products for the home and away-from-home markets. 2. INVENTORIES Inventories are summarized as follows: December 31, -------------------- 1993 1992 ---- ---- (In thousands) Components Raw materials and supplies.................. $ 61,285 $ 53,872 Finished and partly-finished products.................................. 56,984 47,103 -------- -------- $118,269 $100,975 ======== ======== Valued at lower of cost or market: First-in, first-out (FIFO).................. $ 94,436 $ 82,805 Average cost by specific lot................ 23,833 18,170 -------- -------- $118,269 $100,975 ======== ======== F-8 3. PROPERTY, PLANT AND EQUIPMENT The Company's major classes of property, plant and equipment are: December 31, -------------------- 1993 1992 ---- ---- (In thousands) Land.......................................... $ 44,429 $ 44,631 Buildings..................................... 318,955 294,768 Machinery and equipment....................... 1,367,839 1,212,136 Construction in progress...................... 113,829 143,411 ---------- ---------- $1,845,052 $1,694,946 ========== ========== Included in the property, plant and equipment totals above are assets under capital leases, as follows: December 31, -------------------- 1993 1992 ---- ---- (In thousands) Buildings..................................... $ 3,989 $ 3,998 Machinery and equipment....................... 185,624 179,487 ---------- ---------- Total assets under capital leases........... $ 189,613 $ 183,485 ========== ========== 4. GOODWILL Changes in the Company's goodwill are summarized as follows: Year Ended December 31, ------------------------------ 1993 1992 1991 ---- ---- ---- Balance, beginning of year......... $2,023,416 $2,075,525 $2,132,183 Acquisition of Stuart Edgar........ -- 6,043 -- Amortization of goodwill........... (42,576) (56,700) (56,658) Effects of foreign currency translation............. (413) (1,452) -- Goodwill write-off................. (1,980,427) -- -- ---------- ---------- ---------- Balance, end of year............... $ -- $2,023,416 $2,075,525 ========== ========== ========== Low industry operating rates and aggressive competitive activity among tissue producers resulting from the recession, additions to capacity and other factors have been adversely affecting tissue industry operating conditions and the Company's operating results since 1991. Accordingly, the Company revised its projections and determined that its projected results would not support the future amortization of the Company's remaining goodwill balance of approximately $1.98 billion at September 30, 1993. The methodology employed to assess the recoverability of the Company's goodwill first involved the projection of operating results forward 35 years, which approximated the remaining amortization period of the goodwill as of October 1, 1993. The Company then evaluated the recoverability of goodwill on the basis of this forecast of future operations. Based on such forecast, the cumulative net income before goodwill amortization of approximately $100 million over the remaining 35-year amortization period was insufficient to recover the goodwill balance. Accordingly, the Company wrote off its remaining goodwill balance of $1.98 billion in the third quarter of 1993. F-9 The Company's forecast assumed that sales volume increases would be limited to production from a new paper machine under construction at the Company's Muskogee mill which is scheduled to start-up in 1994 and that further capacity expansion was not justifiable given the Company's high leverage and adverse tissue industry operating conditions. Net selling price and cost increases were assumed to approximate 1% per year, based on the Company's annual historical price increase trend for the years 1984 through 1993 and management's estimates of future performance. Through the year 2001, the Company's projections indicated that interest expense would exceed operating income, which is determined after deducting annual depreciation expense. However, projected operating income before depreciation was adequate to cover projected interest expense. Inflation and interest rates were assumed to remain low at 1993 levels during the projected period. Each of the Company's highest yielding debt securities, the 12 3/8% Senior Subordinated Notes due 1997 (the "12 3/8% Notes"), the 12 5/8% Subordinated Debentures due 2000 (the "12 5/8% Debentures") and the 14 1/8% Junior Subordinated Discount Debentures due 2004 (the "14 1/8% Debentures"), were further assumed to be refinanced at lower interest rates. Total capital expenditures were projected to approximate $55-$80 million annually over the next ten years, plus $32 million in 1994 to complete the Muskogee mill expansion and another $32 million over 1994 and 1995 for a new coal-fired boiler under construction at the Company's Savannah River mill. Management believed that the projected future results based on these assumptions were the most likely scenario given the Company's high leverage and adverse tissue industry operating conditions. 5. OTHER ASSETS The components of other assets are as follows: December 31, -------------- 1993 1992 ---- ---- (In thousands) Deferred loan costs, net of accumulated amortization................... $71,459 $70,983 Prepayments and other........................ 2,384 5,586 ------- ------- $73,843 $76,569 ======= ======= Amortization of deferred loan costs for the years ended December 31, 1993, 1992 and 1991, totaled $ 13,488,000, $14,910,000 and $14,883,000, respectively. During 1993, $19,297,000 of deferred loan costs were written off in conjunction with the retirement of long-term debt and $31,160,000 of deferred loan costs were incurred for the issuance of a new bank term loan (the "1993 Term Loan), the 9 1/4% Senior Unsecured Notes due 2001 (the "9 1/4% Notes") and the 10% Subordinated Notes due 2003 (the "10% Notes") and for the purchase of interest rate caps. During 1991, $11,250,000 of deferred loan costs were written off in conjunction with the retirement of long-term debt and $11,058,000 of deferred loan costs were incurred for the issuance of Senior Secured Notes (see Note 8). 6. OTHER CURRENT LIABILITIES The components of other current liabilities are as follows: December 31, -------------- 1993 1992 ---- ---- (In thousands) Salaries and wages ........................... $38,152 $35,939 Contributions to employee benefit plans ...... 12,805 11,858 Taxes other than income taxes ................ 5,492 2,536 Other accrued expenses ....................... 13,689 13,949 ------- ------- $70,138 $64,282 ======= ======= F-10 7. INCOME TAXES The income tax provision (credit) includes the following components: Year Ending December 31, ---------------------------------- 1993 1992 1991 ---- ---- ---- (In thousands) Current Federal.......................... $ (6,012) $ 10,501 $ 2,040 State............................ 465 411 551 Foreign.......................... (225) -- 5,237 -------- -------- -------- Total current.................. (5,772) 10,912 7,828 Deferred Federal.......................... (7,731) (13,678) (27,120) State............................ (2,956) (2,380) (4,231) Foreign.......................... 145 4,748 (440) -------- -------- -------- Total deferred................. (10,542) (11,310) (31,791) -------- -------- -------- $(16,314) $ (398) $(23,963) ======== ======== ======== The effective tax rate varied from the U.S. federal tax rate as a result of the following: Year Ended December 31, --------------------------------- 1993 1992 1991 ---- ---- ---- U.S. federal tax rate.............. (34.0)% (34.0)% (34.0)% Amortization of intangibles........ 33.4 27.6 19.6 Interest on long-term income taxes..................... -- 5.7 4.1 State income taxes net of U.S. tax benefit.............. (0.1) (3.0) (3.9) Equity in net loss of Sweetheart.................... -- -- (10.9) Other, net......................... (0.1) 3.1 0.6 ----- ----- ----- Effective tax rate................. (0.8)% (0.6)% (24.5)% ===== ===== ===== The net deferred income tax liability at December 31, 1993, includes $229 million related to property, plant and equipment. All other components of the gross deferred income tax assets and gross deferred income tax liabilities are individually not significant. The Company has not recorded a valuation allowance with respect to any deferred income tax asset. The Internal Revenue Service ("IRS") issued a statutory notice of deficiency ("Notice") to the Company in March 1992 for additional income tax for the 1988 tax year. The Notice resulted from an audit of the Company's 1988 tax year wherein the IRS adjusted income and disallowed deductions, including deductions for fees and expenses related to the Acquisition. The IRS also disallowed deductions for fees and expenses related to 1988 debt financing and refinancing transactions. In March 1992, the Company filed a petition in the U.S. Tax Court opposing substantially all of the claimed deficiency and the case was tried in September 1993. After the trial, the Company and the IRS executed an agreed Supplemental Stipulation of Facts by which the IRS and the Company partially settled the case by agreeing that certain fees and expenses (previously disallowed by the IRS and potentially representing approximately $26 million of tax liability) were properly deductible by the Company over the term of the 1988 debt financing and refinancing. In addition, the Company agreed to capitalize certain amounts identified by the IRS and paid additional federal income tax of approximately $5 million representing its liability with respect to the agreed adjustments. The U.S. Tax Court has not yet decided the points that remain in dispute in the case following the partial settlement. The Company estimates that if the IRS were to prevail in disallowing deductions for the fees and expenses remaining in dispute before the trial judge, the potential amount of F-11 additional taxes due the IRS on account of such disallowance for the period 1988 through 1993 would be approximately $31 million and for the periods after 1993 (assuming current statutory tax rates) would be approximately $11 million, in each case exclusive of IRS interest charges. Since the Company's 1988 tax case involves disputed issues of law and fact, the Company is unable to predict its final result with certainty. The Company believes, however, that its ultimate resolution will not have a material adverse effect on the Company's financial condition. 8. LONG-TERM DEBT Long-term debt and capital lease obligations, including amounts payable within one year, are summarized as follows (in thousands):
December 31, ------------------ 1993 1992 ---- ---- Term Loan, at prime plus 1.50% or, subject to certain limitations, at a reserve adjusted Eurodollar rate plus 2.25% subject to downward adjustment if certain financial criteria are met (at a weighted average rate of 5.72% at December 31, 1993), due in varying annual repayments with a final maturity of December 31, 1996.................................... $ 331,753 $ 581,753 Revolving Credit Facility, at prime plus 1.50% or, subject to certain limitations, at a reserve adjusted Eurodollar rate plus 2.25% subject to downward adjustment if certain financial criteria are met (at a weighted average rate of 6.13% at December 31, 1993), due December 31, 1996.................................... 243,700 216,000 1993 Term Loan, at prime plus 1.75% or, subject to certain limitations, at a reserve adjusted Eurodollar rate plus 3.0% (6.53% at December 31, 1993) due May 1, 1997................... 100,000 -- Senior Secured Notes, at three month LIBOR plus 2.75% to 3.50% (6.13% to 6.88% at December 31, 1993), due in varying amounts between 1996 and 2000................................ 300,000 300,000 Senior Unsecured Notes, 9 1/4%, due March 15, 2001....................................... 450,000 -- Senior Subordinated Notes, 12 3/8%, due November 1, 1997........................ 333,910 383,910 Subordinated Debentures, 12 5/8%, due November 1, 2000........................ 383,910 383,910 Subordinated Notes, 10%, due March 15, 2003....................................... 300,000 -- Junior Subordinated Discount Debentures, 14 1/8%, due November 1, 2004, $567 million face value.............................. 506,186 441,606 Junior Subordinated Debentures, 14 5/8%, repurchased in 1993......................... -- 517,846 Capital lease obligations, at interest rates approximating 10.9%................... 184,023 186,082 Pollution Control Revenue Refunding Bonds, 7.90%, due October 1, 2005.................... 42,000 42,000 Debt of foreign subsidiaries, at rates ranging from 6.38% to 7.42%, due in varying annual installments through March 2001............... 47,106 37,667 ---------- ---------- 3,222,588 3,090,774 Less: Current portion of long-term debt............... 112,750 137,747 ---------- ---------- $3,109,838 $2,953,027 ========== ==========
F-12 The aggregate fair values of the Company's long-term debt and capital lease obligations approximated $3,276 million and $3,116 million compared to aggregate carrying values of $3,223 million and $3,091 million at December 31, 1993 and 1992, respectively. The fair values of the Term Loan, Revolving Credit Facility and 1993 Term Loan are estimated based on secondary market transactions in such securities. Fair values for the Senior Secured Notes, the 9 1/4% Notes, the 12 3/8% Notes, the 12 5/8% Debentures, the 10% Notes, the 14 1/8% Debentures and the Pollution Control Revenue Refunding Bonds were estimated based on trading activity in such securities. Of the capital lease obligations, the fair values of the 1991 Series Pass Through Certificates were estimated based on trading activity in such securities. The fair values of other capital lease obligations were estimated based on interest rates implicit in the valuation of the 1991 Series Pass Through Certificates. The fair value of debt of foreign subsidiaries is deemed to approximate its carrying amount. The 14 1/8% Debentures do not accrue interest in cash until November 1, 1994, and were issued at a discount to yield a 14 1/8% effective annual rate. The 14 1/8% Debentures will require payments of interest in cash commencing on May 1, 1995. For the years ended December 31, 1993, 1992, and 1991, interest related to these debentures was added to the balance due. On March 22, 1993, the Company sold $450 million principal amount of 9 1/4% Notes and $300 million principal amount of 10% Notes in a registered public offering. On April 21, 1993, the Company borrowed $100 million pursuant to the 1993 Term Loan. Proceeds from the sale of the 9 1/4% Notes and the 10% Notes and from the 1993 Term Loan were applied to the prepayment of $250 million of the Term Loan, to the repayment of a portion of the Company's indebtedness under the Revolving Credit Facility, to the repurchase of all the Company's outstanding Junior Subordinated Debentures due 2004 (the "14 5/8% Debentures") and to the payment of fees and expenses. As a result of the repayment of $250 million of the Term Loan and the repurchases of the 14 5/8% Debentures, the Company incurred an extraordinary loss of $10 million (net of income taxes of $6 million) representing the write-off of unamortized deferred loan costs. The 9 1/4% Notes are senior unsecured obligations of the Company, rank equally in right of payment with the other senior indebtedness of the Company and are senior to all existing and future subordinated indebtedness of the Company. The 10% Notes are subordinated in right of payment to all existing and future senior indebtedness of the Company, including the 12 3/8% Notes, rank equally with the 12 5/8% Debentures and constitute senior indebtedness with respect to the 14 1/8% Debentures. The 1993 Term Loan bears interest, at the Company's option, at Bankers Trust's prime rate, plus 1.75% or, subject to certain limitations, at a reserve adjusted Eurodollar rate, plus 3.00%, and matures May 1, 1997. The 1993 Term Loan constitutes senior secured indebtedness of the Company. In connection with the sale of the 9 1/4% Notes and the 10% Notes and the borrowing under the 1993 Term Loan, the Company amended its Bank Credit Agreement and the Senior Secured Note Agreement. Among other changes, the amendments reduced domestic capital spending limits. In addition, the Company's required ratios of earnings before non-cash charges, interest and taxes to cash interest were lowered to give effect to the greater amount of the Company's cash interest payments as a result of the issuance of the 9 1/4% Notes and 10% Notes and subsequent repurchases of 14 5/8% Debentures. The Company redeemed $50 million of its 12 3/8% Notes at the redemption price of 105% of the principal amount thereof on November 1, 1993, the first date that such notes were redeemable. The redemption was funded principally from excess funds from the sale of the 9 1/4% Notes and the 10% Notes. In connection with the redemption, the Company incurred an extraordinary loss of $2 million (net of income taxes of $1 million), representing the redemption premium and unamortized deferred loan costs. In 1991, Fort Sterling entered into a credit agreement to provide financing for the addition of a third paper machine and related equipment at its tissue mill. The facility consists of a 20 million pound sterling (approximately $30 million) term loan due March 2001 and a 5 million pound sterling (approximately $7 million) revolving credit facility due March 1996. In 1992, Fort Sterling entered into a second credit agreement to finance the acquisition of Stuart Edgar. This facility consists of a term loan due December 1997 with 3.4 million pounds sterling (approximately $5 million) F-13 outstanding at December 31, 1993, and a second term loan due December 1997 with 6.8 million pounds sterling (approximately $10 million) outstanding at December 31, 1993. These credit agreements bear interest at floating rates and are secured by certain assets of Fort Sterling and Stuart Edgar but are nonrecourse to the Company. Although the obligations under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement bear interest at floating rates, the Company is required to enter into interest rate agreements which effectively fix or limit the interest cost to the Company. Pursuant to the Bank Credit Agreement, the Company is a party to interest rate cap agreements which limit the interest cost to the Company to 8.25% (including the Company's borrowing margin on Eurodollar rate loans) until June 1, 1996 with respect to $500 million. Pursuant to the 1993 Term Loan Agreement, the Company is party to an interest rate swap agreement which limits the interest cost to the Company to 6.53% (including the Company's borrowing margin on Eurodollar rate loans) until April 21, 1994 with respect to $100 million. The Company is also a party to an interest rate cap agreement which limits the interest cost to the Company to rates between 11.25% and 12.00% until September 11, 1994 with respect to $300 million received through the issuance of the Senior Secured Notes. At current market rates at December 31, 1993, the fair value of the Company's interest rate cap agreements is $1.6 million. The fair value of the interest rate swap agreement at December 31, 1993 is zero. The Company monitors the risk of default by the counterparties to the interest rate cap and swap agreements and does not anticipate nonperformance. In addition to the scheduled mandatory annual repayments, the Bank Credit Agreement provides for mandatory repayments from proceeds of any significant asset sales (except for proceeds from certain foreign asset sales which are redeployed outside the U.S.), from proceeds of sale and leaseback transactions, and annually an amount equal to 50% of excess cash flow for the prior calendar year, as defined. Among other restrictions, the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Note Agreement, the foreign credit agreements and the Company's indentures: (1) restrict payments of dividends, repayments of subordinated debt, purchases of the Company's stock, additional borrowings and acquisition of property, plant and equipment; (2) require that the ratios of current assets to current liabilities, senior debt to adjusted net worth plus subordinated debt and earnings before non-cash charges, interest and taxes to cash interest be maintained at prescribed levels; (3) restrict the ability of the Company to make fundamental changes and to enter into new lines of business, the pledging of the Company's assets and guarantees of indebtedness of others; and (4) limit dispositions of assets, the ability of the Company to enter lease and sale and leaseback transactions, and investments which might be made by the Company. The Company believes that such limitations should not impair its plans for continued maintenance and modernization of facilities or other operating activities. Pursuant to amendments to the Bank Credit Agreement and the Senior Secured Note Agreement and the completion of various transactions, at December 31, 1993, the Company may borrow up to $39 million to repurchase 14 1/8% Debentures. The Company believes that, notwithstanding the adverse tissue industry operating conditions and the non-cash charge to write-off the remaining balance of the Company's goodwill (see Note 4), cash provided by operations and access to debt financing in the public and private markets will be sufficient to enable it to fund maintenance and modernization capital expenditures and meet its debt service requirements for the foreseeable future. However, in the absence of improved financial results, it is likely that in 1995 the Company would be required to seek a waiver of the cash interest coverage covenant under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement because the Company's 14 1/8% Debentures will accrue interest in cash commencing on November 1, 1994 and will require payments of interest in cash on May 1, 1995. Although the Company believes that it will be able to obtain appropriate waivers from its lenders, there can be no assurance that this will be the case. Pursuant to 1993 amendments to the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note Agreement, the required ratio of earnings before non-cash charges, interest and taxes to cash interest for the four fiscal quarters ending March 31, 1994 was reduced from 1.50 to 1.00 to 1.40 to 1.00. F-14 At December 31, 1993, receivables totaling $100 million, inventories totaling $118 million and property, plant and equipment with a net book value of $1,177 million were pledged as collateral under the terms of the Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Note Agreement, the foreign credit agreements and under the indentures for sale and leaseback transactions. The Company is charged a 0.5% fee with respect to any unused balance available under its $350 million Revolving Credit Facility, and a 2% fee with respect to any letters of credit issued under the Revolving Credit Facility. At December 31, 1993, $244 million of borrowings reduced available capacity under the Revolving Credit Facility to $106 million. The aggregate annual maturities of long-term debt and capital lease obligations at December 31, 1993, are as follows (in thousands): 1994........................... $ 112,750 1995........................... 115,906 1996........................... 376,192 1997........................... 541,214 1998........................... 87,498 1999 and thereafter............ 1,989,028 ---------- $3,222,588 ========== 9. SALE AND LEASEBACK TRANSACTIONS Buildings and machinery and equipment related to various capital additions at the Company's tissue mills were sold and leased back from various financial institutions (the "sale and leaseback transactions") for periods from 15 to 25 years. The terms of the sale and leaseback transactions contain restrictions which are less restrictive than the covenants of the Bank Credit Agreement described in Note 8. These leases are treated as capital leases in the accompanying consolidated financial statements. Future minimum lease payments at December 31, 1993, are as follows (in thousands): Year Ending December 31, Amount ------ 1994........................... $ 21,205 1995........................... 23,397 1996........................... 24,492 1997........................... 24,492 1998........................... 24,280 1999 and thereafter............ 386,412 -------- Total payments................. 504,278 Less imputed interest at rates approximating 10.9%.... 320,255 -------- Present value of capital lease obligations............ $184,023 ======== 10. EMPLOYEE POSTRETIREMENT BENEFIT PLANS As of January 1, 1992, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The cumulative effect on years prior to 1992 of adopting SFAS No. 106 is stated separately in the Company's consolidated statement of income for 1992 as a one-time after- tax charge of $10.6 million. This change in accounting principle, excluding the cumulative effect, decreased operating income by $2.1 million and $1.2 million in 1993 and 1992, respectively. F-15 Net periodic postretirement benefit cost included the following components (in thousands): Year Ended December 31, ------------------- 1993 1992 ---- ---- Service cost........................ $1,140 $ 902 Interest cost....................... 1,800 1,366 Other............................... 99 -- ------ ------ Net periodic postretirement benefit cost.................... $3,039 $2,268 ====== ====== The following table sets forth the components of the plan's unfunded accumulated postretirement benefit obligation (in thousands): December 31, ------------------- 1993 1992 ---- ---- Accumulated postretirement benefit obligation: Retirees.................................. $ 7,504 $ 6,632 Fully eligible active plan participants....................... 4,401 2,890 Other active plan participants............ 12,037 13,558 ------- ------- 23,942 23,080 Unrecognized actuarial losses................. (3,517) (4,800) ------- ------- Accrued postretirement benefit cost................................ $20,425 $18,280 ======= ======= The medical trend rate assumed in the determination of the accumulated postretirement benefit obligation at December 31, 1993 begins at 12% in 1994, decreases 1% per year to 6% for 2000 and remains at that level thereafter. Increasing the assumed medical trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $2.9 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by $0.5 million. The medical trend rate assumed in the determination of the accumulated postretirement benefit obligation at December 31, 1992 began at 14% in 1993, decreasing 1% per year to 7% for 2000 and remained at that level thereafter. The discount rate used in determining the accumulated postretirement benefit obligation was 7% and 8% compounded annually with respect to the 1993 and 1992 valuations, respectively. 11. SHAREHOLDERS' EQUITY (DEFICIT) The Company is authorized to issue up to 8,400,000 shares of $.01 par value Voting Common Stock. At December 31, 1993, 5,862,735 shares were issued and 5,862,635 shares were outstanding. At December 31, 1992, 5,862,735 shares were issued and 5,862,685 shares were outstanding. In addition, 600,000 shares of $.01 par value Non-Voting Common Stock have been authorized, of which none were issued and outstanding at both December 31, 1993 and 1992. During 1991, the Company sold 1,361,469 shares of Voting Common Stock and 6,200 shares of Voting Common Stock with put right pursuant to a private placement of Common Stock. The net proceeds of the sales totaled $163.4 million. Also during 1991, 26,918 shares of Non-Voting Common Stock were exchanged on a one-for-one basis for Voting Common Stock. F-16 Changes in the Company's shareholders' equity (deficit) accounts for the years ended December 31, 1993, 1992 and 1991, are as follows:
Voting Non-Voting Cumulative Retained Common Common Translation Earnings Stock Stock Adjustment (Deficit) ----- ----- ----------- --------- (In millions) Balance, December 31, 1990................ $ 435 $ 3 $ 8 $ (432) Net loss.................................. -- -- -- (111) Issuance of Voting Common Stock................................... 163 -- -- -- Exchange of Non-Voting Common Stock for Voting Common Stock..................... 3 (3) -- -- Amortization of the increase in fair market value of Voting Common Stock with put right.................... -- -- -- (2) Foreign currency translation adjustment.................. -- -- (1) -- ----- ----- ----- ------- Balance, December 31, 1991................ 601 -- 7 (545) Net loss.................................. -- -- -- (80) Amortization of the increase in fair market value of Voting Common Stock with put right.................... -- -- -- (1) Foreign currency translation adjustment.................. -- -- (11) -- ----- ----- ----- ------- Balance, December 31, 1992................ 601 -- (4) (626) Net loss.................................. -- -- -- (2,052) Decrease in fair market value of Voting Common stock with put right...... -- -- -- 2 Foreign currency translation adjustment... -- -- (1) -- ----- ----- ----- ------- Balance, December 31, 1993................ $ 601 $ -- $ (5) $(2,676) ===== ===== ===== =======
The aggregate par value of the Voting Common Stock reported in the amounts above at December 31, 1993 was $58,626. 12. VOTING COMMON STOCK WITH PUT RIGHT Pursuant to an Amended and Restated Management Equity Participation Agreement, as amended (the "Management Equity Participation Agreement"), members of the Company's senior management have acquired shares of the Company's $.01 par value Voting Common Stock. In addition, the Fort Howard Corporation Management Equity Plan (the "Management Equity Plan") provides for the offer of Voting Common Stock and the grant of options to purchase Voting Common Stock to officers and certain other key employees of the Company. Officers or other key employees of the Company who purchase shares of Voting Common Stock or are granted options pursuant to the Management Equity Plan are required to enter into a Management Equity Plan Agreement with the Company and F-17 to become bound by the terms of the Company's stockholders agreement. All Voting Common Stock acquired by management investors, including shares acquired by the Company's former chairman and chief executive officer, are collectively referred to as the "Putable Shares." Beginning with the fifth anniversary of the respective dates of purchase of certain of the Putable Shares to the date on which 15% or more of the Company's Voting Common Stock has been sold in one or more public offerings, specified percentages of the shares may be put to the Company at the option of the holders thereof, with certain limitations, at their fair market value. Subject to certain exceptions, the Management Equity Participation Agreement and Management Equity Plan also provide that management investors who terminate their employment with the Company shall sell their shares of Voting Common Stock and vested options to the Company or its designee. Subject to certain exceptions, options which have not vested at the time a management investor's employment is terminated are forfeited to the Company. At the time of his resignation, all the Putable Shares then owned by the Company's former chairman and chief executive officer became putable to the Company. During 1993, the Company decreased the estimated fair market valuation of its Common Stock as a result of the effects of adverse tissue industry operating conditions on its long-term earnings forecast and, as a result, reduced the carrying amount of its Voting Common Stock with put right to its original cost. The effect of the adjustment was to reduce both the Voting Common Stock with put right and the deficit in retained earnings by approximately $1.4 million. Changes in the Company's Voting Common Stock with put right, are as follows (in thousands, except number of shares): Year Ended December 31, ---------------------------- 1993 1992 1991 ---- ---- ---- Balance, beginning of year.......... $13,219 $12,963 $ 9,574 Issuance of 6,200 shares including 4,934 shares from treasury........ -- -- 744 Amortization of the increase (decrease) in fair market value and increased vested portion of Putable Shares......... (1,399) 256 2,645 ------- ------- ------- Balance, end of year................. $11,820 $13,219 $12,963 ======= ======= ======= 13. STOCK OPTIONS Pursuant to the Management Equity Participation Agreement and the Management Equity Plan, 808,225 shares of Voting Common Stock are reserved for sale to officers and key employees as stock options. The exercisability of such options is subject to certain conditions. Options must be exercised within ten years of the date of grant. All options and shares to be issued under the terms of these plans are restricted as to transferability. Under certain conditions, the Company has the right or obligation to redeem shares issued under terms of the options at a price equal to their fair market value. All options outstanding at December 31, 1993, except for fully vested options held by the Company's former chairman and chief executive officer, have a vesting schedule of twenty percent per year, measured from the date of initial grant. Any such options will be subject to partial acceleration of vesting in the event of death or disability and must be exercised within 10 years of the date of grant. F-18 Changes in stock options outstanding are summarized as follows: Number of Exercise Price Options Per Option --------- -------------- Balance, December 31, 1990............... 482,662 $100 to 135 Options Granted........................ 136,960 120 Options Cancelled...................... (55,960) 100 to 135 ------- ----------- Balance, December 31, 1991............... 563,662 100 to 120 Options Granted........................ 12,400 120 Options Cancelled...................... (1,060) 100 to 120 ------- ----------- Balance, December 31, 1992............... 575,002 $100 to 120 Options Granted........................ 15,200 120 Options Cancelled...................... (1,640) 100 to 120 ------- ----------- Balance 31, 1993......................... 588,562 $100 to 120 ======= =========== Exercisable at December 31, 1993......... 497,498 $100 to 120 ======= =========== Shares available for future grant at December 31, 1993................... 219,663 ======= The Company amortizes the excess of the fair market value of its Common Stock over the strike price of options granted to employees over the periods the options vest. Due to the effects of adverse tissue industry operating conditions on its long-term earnings forecast, the Company decreased the estimated fair market valuation of its Common Stock and, as a result, reversed all previously accrued employee stock compensation expense in 1993. The reversal of the accrued employee stock compensation resulted in a credit to operations of $7,832,000 for 1993. Employee stock compensation expense was $1,120,000 and $1,256,000 for 1992 and 1991, respectively. 14. RELATED PARTY TRANSACTIONS Morgan Stanley Group Inc. ("Morgan Stanley Group") and an affiliate acquired a substantial majority equity interest in the Company to effect the Acquisition. At December 31, 1993, Morgan Stanley Group and its affiliates controlled 57% (on a fully diluted basis) of the Company's Voting Common Stock. The Company has entered into an agreement with Morgan Stanley & Co. Incorporated ("MS&Co.") for financial advisory services in consideration for which the Company will pay MS&Co. an annual fee of $1 million. MS&Co. will also be entitled to reimbursement for all reasonable expenses incurred in the performance of the foregoing services. The Company paid MS&Co. $1,046,000, $1,096,000 and $1,064,000 for these and other miscellaneous services in 1993, 1992 and 1991, respectively. In 1993, MS&Co. received approximately $19.5 million related to the underwriting of the issuance of the 1993 Notes. In 1992, MS&Co. received approximately $0.7 million related to the underwriting of the reissuance of the Company's Development Authority of Effingham County Pollution Control Revenue Refunding Bonds, Series 1988. In connection with a 1991 sale and leaseback transaction, MS&Co. received approximately $2.9 million of advisory and underwriting fees. Also in 1991, in connection with the offering of Senior Secured Notes, MS&Co. received approximately $6.8 million of advisory fees. MS&Co. served as lead underwriter for the initial offering of the Company's subordinated debt securities and since the Acquisition has been a market maker with respect to those securities. In connection with the 1991 repurchases of the Company's subordinated debt securities, $52.8 million aggregate principal amount at maturity of the 14 5/8% Debentures and $132.7 million aggregate principal amount at maturity of the 14 1/8% Debentures were purchased through MS&Co. In addition, $46.5 million and $77.5 million aggregate principal amount at maturity of the 14 1/8% Debentures were purchased from Leeway & Co. and First Plaza Group Trust, respectively, shareholders of the Company. The purchases were made in negotiated transactions at market prices. F-19 15. COMMITMENTS AND CONTINGENCIES In 1992, the Company commenced the installation of a fifth paper machine, environmental protection equipment and associated facilities at its Muskogee, Oklahoma tissue mill. The expansion is planned for completion in 1994 at an estimated cost of $140 million. Total expenditures for the expansion through December 31, 1993 were $109 million. The Company's domestic manufacturing operations are subject to regulation by various federal, state and local authorities concerned with the limitation and control of emissions and discharges to the air and waters and the handling, use and disposal of specified chemicals and solid waste. The Company's United Kingdom operations are subject to similar regulation. The Company has made significant capital expenditures in the past to comply with environmental regulations. Future environmental legislation and developing regulations are expected to further limit emission and discharge levels and to expand the scope of regulation, all of which will require continuing capital expenditures. There can be no assurance that such costs would not be material to the Company. The Company operates a licensed solid waste landfill at each of its tissue mills in the United States to dispose residue from recycling wastepaper and ash from coal-fired boilers. In March 1990, the Company began a remedial investigation of its Green Bay, Wisconsin landfill. The investigation is being overseen by the United States Environmental Protection Agency under authority granted to the agency by the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the "Superfund Act." A Preliminary Health Assessment released by the United States Department of Health and Human Services in January 1992 reported that the Company's Green Bay landfill does not pose any apparent public health hazard. Based upon the results of the remedial investigation through December 31, 1993, the Company believes that costs or expenditures associated with any future remedial action, were it to be required, would not have a material adverse effect on the Company's financial condition. Except for the Green Bay landfill site, the Company is not presently named as a potentially responsible party at any other Superfund related sites; however, there can be no certainty that the Company will not be named as a potentially responsible party at any other sites in the future or that the costs associated with those sites would not be material. The Company and its subsidiaries are parties to lawsuits and state and federal administrative proceedings in connection with their businesses. Although the final results in such suits and proceedings cannot be predicted with certainty, the Company believes that they will not have a material adverse effect on the Company's financial condition. 16. GEOGRAPHIC INFORMATION A summary of the Company's operations by geographic area as of December 31, 1993, 1992 and 1991, and for the years then ended is presented below (in thousands): United United States Kingdom Consolidated ------ ------- ------------ 1993 Net sales.......................... $1,044,174 $143,213 $1,187,387 Operating income (loss)............ (1,715,777) (859) (1,716,636) Identifiable operating assets...... 1,486,166 163,621 1,649,787 1992 Net sales.......................... $1,008,129 $143,222 $1,151,351 Operating income................... 253,437 17,238 270,675 Identifiable operating assets...... 3,411,833 162,734 3,574,567 1991 Net sales.......................... $1,027,969 $110,241 $1,138,210 Operating income................... 254,603 15,929 270,532 Identifiable operating assets...... 3,373,199 96,603 3,469,802 F-20 Intercompany sales and charges between geographic areas and export sales are not material. In 1993, the Company determined that its projected results would not support the future amortization of the Company's remaining goodwill balance. Accordingly, the Company wrote off its remaining goodwill balance of $1,980 million in the third quarter of 1993, resulting in charges of $1,968 million and $12 million to the operating income of the United States and United Kingdom operations, respectively. In 1992, the Company changed its estimates of the depreciable lives of certain machinery and equipment resulting in a reduction of depreciation expense and an increase in operating income of $38 million in the United States. 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) A summary of the quarterly results of operations for 1993 and 1992 follows (in millions, except per share data):
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- 1993 Net sales...................... $ 285 $ 302 $ 309 $ 291 $ 1,187 Operating income (loss)........ 56 61 (1,905) 71 (1,717) Net loss before extraordinary items........................ (26) (24) (1,986) (4) (2,040) Extraordinary items - losses on debt repurchases.................. (10) -- -- (2) (12) Net loss....................... (36) (24) (1,986) (6) (2,052) Loss per share: Net loss before extraordinary items........ (4.47) (4.06) (338.80) (0.66) (347.99) Extraordinary items- losses on debt repurchases. (1.66) -- -- (0.38) (2.04) Loss per share............... (6.13) (4.06) (338.80) (1.04) (350.03) Dividends per share............ -- -- -- -- -- 1992 Net sales...................... $ 276 $ 282 $ 308 $ 285 $ 1,151 Operating income............... 66 72 75 58 271 Net loss before adjustment for accounting change........ (17) (13) (11) (28) (69) Adjustment for adoption of SFAS No. 106.............. (11) -- -- -- (11) Net loss....................... (28) (13) (11) (28) (80) Loss per share: Net loss before adjustment for accounting change.......... (2.96) (2.14) (1.96) (4.77) (11.83) Adjustment for adoption of SFAS No. 106............... (1.81) -- -- -- (1.81) Loss per share............... (4.77) (2.14) (1.96) (4.77) (13.64) Dividends per share............ -- -- -- -- --
F-21 APPENDIX I GLOSSARY OF CERTAIN TERMS The following is a glossary of certain terms used in this Prospectus to describe the Pass Through Certificates. The definitions of terms used in this glossary that are also used in the Pass Through Trust Agreement, Secured Note Indenture, Leases, Site Leases, Support Agreements or Participation Agreement are qualified in their entirety by reference to the definitions of such terms contained therein. "Additional Notes" means non-recourse notes issued by the Owner Trustee under the Secured Note Indenture in connection with the financing of a Modification to any Asset. "Asset" means each of the Facility, the Power Plant and each item of Equipment and "Assets" means all of them. "Assignment" with respect to any Asset, means the assignment agreement pursuant to which the Company has assigned its interest in such Asset to the Owner Trustee and "Assignments" means all of them. "Basic Rent" for any Asset means the semiannual installment of rent payable for such Asset pursuant to the applicable Lease. "Business Day" means any day other than a Saturday or Sunday or any other day on which banks located in New York, New York, Green Bay, Wisconsin, the city in which the Secured Note Indenture Trustee Office is located, the city in which the corporate trust department of the Owner Trustee is located or, so long as any Pass Through Certificate is outstanding, the city in which the corporate trust department of the Pass Through Trustee is located, are required or authorized to remain closed. "Certificate Account" means the one or more non-interest-bearing accounts established and maintained by the Pass Through Trustee pursuant to the Pass Through Trust Agreement on behalf of the Certificateholders for the deposit of payments representing Scheduled Payments on the Secured Notes held in the Pass Through Trust. "Certificateholder" means the Person in whose name a Pass Through Certificate is registered. "Code" means the Internal Revenue Code of 1986, as amended or any successor law. "Collateral Trust Agreement" means the Amended and Restated Collateral Trust Agreement, dated as of September 11, 1991, by and between the Company and the Collateral Trustee. "Collateral Trustee" means Bankers Trust Company, as collateral trustee pursuant to the terms of the Collateral Trust Agreement, and its successors and assigns. "Commission" means the Securities and Exchange Commission. "Components", when used with respect to any Asset, means appliances, parts, instruments, appurtenances, accessories, equipment and other property of whatever nature originally included in such Asset on the closing date for such Asset. "Easements" means the Facility Easements and the Power Plant Easements and such additional easements and other rights as may be granted pursuant to each of the Support Agreements from time to time. "Eligible Bank" means any bank or trust company which shall be a member of the Federal Reserve System and shall have a combined capital, surplus and undivided profits of not less than $100,000,000. "Equipment" means the 1990 Equipment and the 1991 Equipment, collectively. AI-1 "Equipment Group" means each of the three groups of certain paper manufacturing and production equipment subject to the sale and leaseback transactions. "Equipment Lease" means each of the 1990 Equipment Lease and the 1991 Equipment Lease and "Equipment Leases" means both of them. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Event of Default" means, with respect to the Pass Through Agreement, the occurrence and continuance of a Secured Note Indenture Event of Default under the Secured Note Indenture. "Event of Loss" means each of the events designated as such in a Lease. For a description of certain events constituting an Event of Loss, see "Description of the Secured Notes--The Leases--Event of Loss." "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Facilities Agreement" means the Facilities Agreement between the Owner Trustee and the Company pursuant to which the Company will provide certain materials and services to the Owner Trustee in connection with the operation of the Facility, as the same may be amended or supplemented from time to time. "Facility" means the Company's Phase IV paper machine and related structures and equipment. "Facility Easements" means the rights of ingress and egress and other necessary rights of access granted by the Company to the Owner Trustee pursuant to the Facility Site Lease. "Facility Land" means the real property subject to the IDA Lease and necessary for the operation of the Facility. "Facility Lease" means the Facility Lease Agreement between the Owner Trustee and the Company pursuant to which the Owner Trustee leased the Facility to the Company, as the same may be amended or supplemented from time to time. "Facility Site" means the Facility Land and the Facility Easements, collectively. "Facility Site Lease" means the Facility Site Lease and Easement Agreement between the Company and the Owner Trustee, pursuant to which the Company subleases the Facility Land and grants the Facility Easements to the Owner Trustee, as the same may be amended or supplemented from time to time. "Georgia Mill Mortgage" means that certain Term Loan and Revolving Credit Fee and Leasehold Deed to Secure Debt, Assignment of Rents, Security Agreement, Assignment Agreement and Fixture Filing, made by the Company in favor of the Leasehold Mortgagee as the same may be amended from time to time. "IDA" means the Effingham County Industrial Development Authority, a body corporate and politic organized and existing under the constitution and laws of the State of Georgia. "IDA Lease" means the Corrected Lease Agreement, dated as of January 1, 1986, between the IDA and the Company. "IDA Project Agreement" means the Agreement, dated June 20, 1985, among the Company, the IDA and Effingham County, Georgia. "Initial Loan Participant" means Bankers Trust Company, a New York banking corporation. "Lease" means each of the Facility Lease, the Power Plant Lease, the 1990 Equipment Lease and the 1991 Equipment Lease and "Leases" means all of them. "Leasehold Mortgagee" means the Collateral Trustee in its capacity as the grantee of the Georgia Mill Deed. AI-2 "Lease Event of Default" means each of the events designated as an event of default in a Lease. For a description of certain events constituting Lease Events of Default, see "Description of the Secured Notes--The Leases--Lease Events of Default." "Lessor" means the Owner Trustee and its successors and assigns. "Lessor's Cost" of any Asset means the price paid by the Owner Trustee to the Company for such Asset. "Lessor's Liens" means Liens (a) which result from any act of, or any failure to act by, or any claim against, the Owner Trustee (in its individual or trust capacities) unrelated to the transactions contemplated by the Participation Agreement or any other Operative Document, or which result from any violation by the Owner Trustee (in its individual or trust capacities) of any of the terms of the Operative Documents, or (b) which result from Liens in favor of any taxing authority by reason of any tax owed by the Owner Trustee (in its individual or trust capacities), except that Lessor's Liens shall not include any Lien directly resulting from any tax for which the Company is specifically obligated to indemnify the Owner Trustee (in its individual or trust capacities), until such time as the Company shall have already paid to, or on behalf of, the Owner Trustee (in its individual or trust capacities), as the case may be, the tax or an indemnity with respect to the same. "Lien" means any mortgage, pledge, security interest, encumbrance, lien, right of others or charge of any kind, including, without limitation, any conditional sale or other title retention agreement or any lease in the nature thereof. "Loan Participant" means the Initial Loan Participant and each purchaser of a Secured Note pursuant to the Participation Agreement including the Pass Through Trustee. "Modifications," when used with respect to any Asset, means alterations, modifications, additions and improvements of or to such Asset, but shall not include any Component or Replacement Component of such Asset. "1990 Equipment" means certain pulp processing, converting, shipping and machine shop equipment and a package boiler purchased by the Owner Trustee and leased to the Company on December 23, 1990. "1990 Equipment Lease" means the Amended and Restated Equipment Lease Agreement between the Owner Trustee and the Company pursuant to which the Owner Trustee is leasing the 1990 Equipment to the Company, as the same may be amended or supplemented from time to time. "1991 Equipment" means certain of the Company's pulp processing, converting, shipping and other manufacturing equipment purchased by the Owner Trustee and leased to the Company in 1991. "1991 Equipment Lease" means the Equipment Lease Agreement between the Owner Trustee and the Company, pursuant to which the Owner Trustee is leasing the 1991 Equipment to the Company, as the same may be amended or supplemented from time to time. "Operative Documents" means the Participation Agreement, the Owner Trust Agreement, each Lease, each Assignment, the Secured Note Indenture, the Secured Notes, each Site Lease, each Support Agreement, the Recognition Instrument and the Tax Indemnity Agreement. "Owner Participant" means the owner participant for whose benefit the Owner Trustee owns the Assets leased to the Company, pursuant to the Leases and its permitted successors and assigns. AI-3 "Owner Participant's Liens" means Liens (a) which result from any act of, or any failure to act by, or any claim against, the Owner Participant unrelated to the transactions contemplated by the Operative Documents, or which result from any violation by the Owner Participant of any of the terms of the Operative Documents, or (b) which result from Liens in favor of any taxing authority by reason of any tax owed by the Owner Participant, except that Owner Participant's Liens shall not include any Lien directly resulting from any tax for which the Company is specifically obligated to indemnify the Owner Participant until such time as the Company shall have already paid to, or on behalf of, the Owner Participant, the tax or an indemnity with respect to the same unless the Owner Participant is contesting in good faith by appropriate proceedings the failure of the applicable government authority to release such Lien. "Owner Trust Agreement" means the Trust Agreement between the Owner Participant and The Connecticut National Bank, as the same may be amended or supplemented from time to time. "Owner Trustee" means The Connecticut National Bank, a national banking association, not in its individual capacity but solely as trustee of the owner trust for the benefit of the Owner Participant, and its successors and assigns. "Participation Agreement" means the Amended and Restated Participation Agreement among the Company, the Owner Trustee, the Secured Note Indenture Trustee, the Initial Loan Participant, the Pass Through Trustee and the Owner Participant, as the same may be amended or supplemented from time to time. "Pass Through Certificate" means each of the Pass Through Certificates, Series 1991, to be issued by the Pass Through Trustee, pursuant to the Pass Through Trust Agreement. "Pass Through Trust" means the Fort Howard Corporation 1991 Pass Through Trust was formed pursuant to the Pass Through Trust Agreement. "Pass Through Trust Agreement" means the Amended and Restated Pass Through Trust Agreement between Wilmington Trust Company, as Pass Through Trustee, and the Company, pursuant to which the Fort Howard Corporation 1991 Pass Through Trust was formed. "Permitted Investments" shall mean (i) obligations of the United States of America, or fully guaranteed as to interest and principal by the United States of America; (ii) certificates of deposit issued by an Eligible Bank on interest-bearing insured accounts in an Eligible Bank; or (iii) commercial paper, rated at least P-1 (or comparable rating) by Moody's Investors Service, Inc. (or any successor thereto) or at least A-1 (or comparable rating) by Standard and Poor's Corporation (or any successor thereto). "Person" shall mean any individual, partnership, corporation, trust, unincorporated association, joint venture, government or any department or agency thereof, or any other entity. "Pool Balance" means, as of any date, the aggregate unpaid principal amount of the Secured Notes held in the Pass Through Trust on such date plus any amounts in respect of principal on such Secured Notes held by the Pass Through Trustee and not yet distributed. The Pool Balance as of any Regular Distribution Date or Special Distribution Date shall be computed after giving effect to the payment of principal, if any, on the Secured Notes held in the Pass Through Trust and distribution thereof to be made on that date. "Pool Factor" means, as of any date, the quotient (rounded to the seventh decimal place) computed by dividing (i) the Pool Balance by (ii) the aggregate original principal amount of the Secured Notes held in the Pass Through Trust. The Pool Factor as of any Regular Distribution Date or Special Distribution Date shall be computed after giving effect to the payment of principal, if any, on the Secured Notes held in the Pass Through Trust and distribution thereof to be made on that date. "Power Plant" means the Company's Phase IV coal fired fluidized bed boiler and related structures and equipment. AI-4 "Power Plant Easements" means the rights of ingress and egress and other necessary rights of access granted by the Company to the Owner Trustee, pursuant to the Power Plant Site Lease. "Power Plant Facilities Agreement" means the Power Plant Facilities Agreement between the Company and the Owner Trustee, pursuant to which the Company will provide certain materials and services to the Owner Trustee in connection with the operation of the Power Plant as the same may be amended or supplemented from time to time. "Power Plant Land" means the real property subject to the IDA Lease and necessary for the operation of the Power Plant. "Power Plant Lease" means the Power Plant Lease Agreement between the Owner Trustee and the Company pursuant to which the Owner Trustee leased the Power Plant to the Company, as the same may be amended or supplemented from time to time. "Power Plant Site" means the Power Plant Easements and the Power Plant Land, collectively. "Power Plant Site Lease" means the Power Plant Site Lease and Easement Agreement between the Company and the Owner Trustee, pursuant to which the Company subleases the Power Plant Land and grants the Power Plant Easements to the Owner Trustee, as the same may be amended or supplemented from time to time. "Recognition Instrument" means the Amended and Restated Non-Disturbance, Cure Rights and Purchase Option Agreement among the Collateral Trustee, the Company, the Secured Note Indenture Trustee, the Owner Trustee, the Owner Participant and the Pass Through Trustee, as the same may be amended from time to time. "Regular Distribution Date" means January 2 and July 2 of each year, commencing January 2, 1992 until payment of all the Scheduled Payments to be made under the Secured Notes has been made. "Rent" for any Asset means, collectively, Basic Rent and Supplemental Rent for such Asset. "Replacement Component", when used with respect to any Asset, means a replacement to any Component or Replacement Component of such Asset. "Scheduled Payment" means each payment of interest or principal on a Secured Note scheduled to be received by the Pass Through Trustee on January 2 or July 2 of each year commencing January 2, 1992 until the final distribution date for the Pass Through Trust, which payment represents the payment of principal of such Secured Note, or the payment of regularly scheduled interest accrued on such Secured Note. "Secured Note Indenture" means the Trust Indenture, Assignment of Leases, Security Agreement and Deed to Secure Debt between the Owner Trustee and the Secured Note Indenture Trustee, as the same may be amended from time to time. "Secured Note Indenture Documents" means, collectively, the Assignments and related documents, the Leases, the Site Leases, the Support Agreements and the Recognition Instrument. "Secured Note Indenture Event of Default" means each of the events designated as an event of default in the Secured Note Indenture. For a description of certain events constituting Secured Note Indenture Events of Default, see "Description of the Secured Notes--Secured Note Indenture Events of Default, Notice and Waiver." "Secured Note Indenture Trustee" means Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as trustee under the Secured Note Indenture, and any successor thereunder. AI-5 "Secured Note Indenture Trustee's Liens" means Liens (a) which result from any act of, or failure to act by, or any claim against, the Secured Note Indenture Trustee (in its individual capacity or as trustee) unrelated to the transactions contemplated by the Participation Agreement or any other Operative Document, or which result from any violation by the Secured Note Indenture Trustee (in its individual capacity or as trustee) of any of the terms of the Operative Documents, or (b) which result from Liens in favor of any taxing authority by reason of any tax owed by the Secured Note Indenture Trustee (in its individual capacity or as trustee), except that Secured Note Indenture Trustee's Liens shall not include any Lien directly resulting from any tax for which the Company is specifically obligated to indemnify the Secured Note Indenture Trustee until such time as the Company shall have already paid to, or on behalf of, the Secured Note Indenture Trustee, the tax or an indemnity with respect to the same. "Secured Notes" means all of the non-recourse secured notes from time to time issued and outstanding under and pursuant to the Secured Note Indenture other than Additional Notes. "Securities Act" means the Securities Act of 1933, as amended. "Senior Subordinated Note Indenture" means the Senior Subordinated Note Indenture dated as of November 1, 1988 between the Company and State Street Bank and Trust Company, as trustee, relating to the Senior Subordinated Notes. "Sites" means the Facility Site and the Power Plant Site. "Site Lease" means each of the Facility Site Lease and the Power Plant Site Lease and "Site Leases" means both of them. "Special Distribution Date" means the date on which a Special Payment will be distributed, which date will be the second day of a month. "Special Payments Account" means the one or more non-interest-bearing accounts established and maintained by the Pass Through Trustee pursuant to the Pass Through Trust Agreement on behalf of the Certificateholders, for the deposit of payments representing Special Payments. "Stipulated Loss Value" means the amount payable under a Lease upon the occurrence of an Event of Loss with respect to any Asset subject to such Lease, which amount shall in all circumstances be at least sufficient to pay in full as of the date of payment thereof the aggregate unpaid principal of the outstanding Secured Notes issued with respect to such Asset, together with all unpaid interest thereon accrued and to accrue to such date of payment. "Supplemental Rent" for any Asset means any and all amounts, liabilities and obligations (other than Basic Rent) which the Company assumes or agrees to pay to or on behalf of the Owner Trustee, the Owner Participant, the Loan Participants, any holder of a Secured Note or the Secured Note Indenture Trustee relating to such Asset under any Operative Document, including, without limitation, any payments of indemnification or Stipulated Loss Value or Termination Value for such Asset. "Support Agreement" means each of the Facilities Agreement and the Power Plant Facilities Agreement and "Support Agreements" means both of them. "Tax Indemnity Agreement" means the Amended and Restated Tax Indemnification Agreement entered into by the Owner Participant and the Lessee in connection with the 1990 Transaction and 1991 Transaction, as the same may be amended or supplemented from time to time. "Termination Value" means the amount required to be received by the Owner Trustee under a Lease following certain early terminations of such Lease, with respect to any Asset leased thereunder which amount shall in all circumstances be at least sufficient to pay in full as of the date of payment thereof the aggregate unpaid principal of the outstanding Secured Notes relating to such Asset, together with all unpaid interest thereon accrued and to accrue to such date of payment. The Owner Trustee may receive Termination Value either from the proceeds of the sale of such upon termination of such Lease with respect thereto, or, if such proceeds are insufficient, from payments by the Company. AI-6 APPENDIX II DESCRIPTION OF CERTAIN COVENANTS Pursuant to Section 10.04 of the Participation Agreement, the Company has agreed to comply with certain financial covenants contained in the Company's 12 3/8% Note Indenture. Set forth below is a summary of certain of the defined terms used in the covenants contained in the 12 3/8% Note Indenture, as well as certain defined terms used in the merger covenants contained in the Participation Agreement. Reference is made to the 12 3/8% Note Indenture and the Participation Agreement, as applicable, for the full definition of all terms as well as any other capitalized terms used herein for which no definition is provided. Certain Definitions "Accreted Value" as of any date with respect to any Junior Discount Debenture (defined as the 14-1/8% Debentures in this Prospectus) means an amount equal to the sum of (i) the issue price of such Junior Discount Debenture as determined in accordance with Section 1273 of the Code plus (ii) the aggregate of the portions of the original issue discount (the excess of the amounts considered as part of the "stated redemption price at maturity" of each Junior Discount Debenture within the meaning of Section 1273(a)(2) of the Code, whether denominated as principal or interest, over the issue price of such Junior Discount Debenture) which shall theretofore have accrued pursuant to Section 1272 of the Code (without regard to Section 1272(a)(7) of the Code) from the date of issue of such Junior Discount Debenture to the date of determination, minus (iii) any amount considered as part of the "stated redemption at maturity price" of such Junior Discount Debenture which has been paid on such Junior Discount Debenture from the date of issue to the date of determination. "Acquired Debt" means Debt of a Person existing at the time such Person became a Subsidiary. "Additional Bank Credit Amount" has the meaning specified in clause (i) of the second paragraph of the "Limitation on Company and Subsidiary Debt" covenant described below. "Adjusted Consolidated Net Worth" of any Person means, as of any date, the Consolidated Net Worth of such Person less any amount attributable to Preferred Stock or any other Capital Stock of such Person (other than Redeemable Stock, which is not included in Consolidated Net Worth) which is exchangeable or convertible into a debt security of such Person or any of its Subsidiaries at the option of such Person or any of its Subsidiaries. "Affiliate" as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities, by contract or otherwise. For purposes of this definition, neither Bankers Trust New York Corporation, nor any Bank nor any Affiliate of any of them shall be deemed to be an Affiliate of the Company. "Agent" means the agent under the Bank Credit Agreement or any successor agent appointed pursuant to the terms of such agreement. "Asset Sale" means the sale or other disposition by the Company or any of its Subsidiaries to any Person other than the Company or one of its Subsidiaries of (i) any of the Capital Stock of any of the Company's Subsidiaries or (ii) substantially all of the assets of any division or line of business of the Company or any of its Subsidiaries. "Average Life" means, as of the date of determination, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such debt security multiplied by the amount of such principal payment by (ii) the sum of all such principal payments. AII-1 "Bank Credit Agreement" means the Amended and Restated Credit Agreement dated as of October 24, 1988 among FH Acquisition Corp., the Lenders listed therein, and Bankers Trust Company, as Agent, as such Agreement may be amended, restated, supplemented or otherwise modified from time to time, and includes any agreement extending the maturity of, or restructuring (including, but not limited to, the inclusion of additional borrowers thereunder that are Subsidiaries of the Company and whose obligations are guaranteed by the Company thereunder) all or any portion of, the Debt under such Agreement or any successor agreements and includes any agreement with one or more banks refinancing all or any portion of the Debt under such Agreement or any successor agreements. "Banks" means the lenders who are parties to the Bank Credit Agreement. "Board of Directors" means the Board of Directors for the Company or any committee of such Board duly authorized to act under the Senior Subordinated Note Indenture (defined as the 12 3/8% Note Indenture in this Prospectus). "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized by law to close. "Capital Funds Ratio" means, as of the date of determination, the ratio of (i) the sum of the Consolidated Net Worth of the Company on such date plus the outstanding aggregate amount of Debt (which, in the case of the Junior Discount Debentures (defined as the 14 1/8% Debentures in this Prospectus), shall be their Accreted Value) of the Company which is subordinated in right of payment to the Senior Subordinated Notes (defined as the 12 3/8% Notes in this Prospectus) and which has a remaining Average Life equal to or greater than the remaining Average Life of the Senior Subordinated Notes, to (ii) the then outstanding principal amount of the Senior Subordinated Notes. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock including, without limitation, all Common Stock and all Preferred Stock. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) the discounted present value of the rental obligations of such Person as lessee under which, in conformity with GAAP, is required to be capitalized on the balance sheet of that Person and "Capitalized Lease Obligation" means the rental obligations, as aforesaid, under such lease. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means, with respect to any Person, any and all shares, interests, participations and other equivalents (however designated, whether voting or non-voting) of such Person's common stock and includes, without limitation, all series and classes of such common stock. "Consolidated Capital Expenditures" means expenditures (whether paid in cash or accrued as liabilities and including Capitalized Lease Obligations) of the Company and its Subsidiaries that, in conformity with GAAP, are included in the property, plant or equipment reflected in the consolidated balance sheet of the Company and its Subsidiaries. "Consolidated Cash Flow Available for Fixed Charges" means, for any period, the sum of the amounts for such period of (i) Consolidated Net Operating Income, (ii) Consolidated Interest Expense, (iii) provisions for taxes based on income, (iv) depreciation expense, (v) amortization expense, and (vi) all other non-cash items reducing Consolidated Net Operating Income, minus all non-cash items increasing Consolidated Net Operating Income, all as determined on a consolidated basis for any Person and its Subsidiaries inconformity with GAAP; provided that if, during such period, such Person or any of its Subsidiaries shall have made any Asset Sales, Consolidated Cash Flow Available for Fixed Charges of such Person and its Subsidiaries for such period shall be reduced by an amount equal to the Consolidated Cash Flow Available for Fixed Charges (if positive) directly attributable to the assets which are the subject of such Asset Sales for such period or increased by an amount equal to the Consolidated Cash Flow Available for Fixed Charges (if negative) directly attributable thereto for such period. AII-2 "Consolidated Fixed Charge Ratio" means the ratio, on a pro forma basis, giving effect to any Debt to be incurred as if it had been incurred on the first day of the four-fiscal-quarter period referred to in clause (i), of (i) the aggregate amount of Consolidated Cash Flow Available for Fixed Charges of any Person for the four fiscal quarters for which financial information in respect thereof is available immediately prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Ratio (the "Transaction Date") to (ii) the aggregate Consolidated Fixed Charges of such Person during such four fiscal quarters; provided that (A) in making such computation, (x) Consolidated Interest Expense attributable to interest on any Debt (whether existing or being incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period, (y) there shall be excluded from Consolidated Interest Expense any Interest Expense related to Debt which was outstanding during such four fiscal quarters but is not outstanding on the Transaction Date ("Repaid Debt"), unless the Company may again incur, create or assume such Repaid Debt in an amount equal to the weighted average amount of Repaid Debt outstanding during such four fiscal quarters (the "Weighted Average Amount"), pursuant to clause (i), (v), (vi), (x), (xi), (xii), (xiii) or (xv) of the second paragraph of the "Limitation on Company and Subsidiary Debt" covenant described below, in which case such Interest Expense shall not be excluded (it being understood that if the Company can again so incur, create or assume an amount of Repaid Debt which is less than the Weighted Average Amount, then a portion of such Interest Expense shall be excluded equivalent to a fraction of which the numerator shall be the difference between the Weighted Average Amount and the amount of such Repaid Debt which the Company can again so incur, create or assume, and of which the denominator shall be the Weighted Average Amount) and (z) if such Person or any of its Subsidiaries shall have made any Asset Sales subsequent to such four fiscal quarters and prior to the Transaction Date, such Asset Sales will be deemed to have been made during such four fiscal quarters, and (B) in making any calculation of the Consolidated Fixed Charge Ratio for any period commencing prior to the Merger, the Merger and the financing thereof (including the refinancing of bridge financing from the proceeds of the Senior Subordinated Notes, the Subordinated Debentures, the Junior Discount Debentures (defined as the 12 3/8% Notes, the 12 5/8% Debentures and the 14 1/8% Debentures, respectively, in this Prospectus) and the Junior Debentures) shall be deemed to have taken place on the first day of such period. "Consolidated Fixed Charges" of any Person means, for any period, Consolidated Interest Expense; provided that if, during such period, such Person or any of its Subsidiaries shall have made any Asset Sales, Consolidated Fixed Charges of such Person and its Subsidiaries for such period shall be reduced by an amount equal to the Consolidated Fixed Charges directly attributable to the assets which are the subject of such Asset Sales for such period. "Consolidated Interest Expense" of any Person means, for any period, the aggregate Interest Expense of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" means, for any period taken as one accounting period, the net income (or loss) of any Person and its Subsidiaries on a consolidated basis for such period determined in conformity with GAAP; provided that there shall be excluded (i) the income (or loss) of any Person (other than a Subsidiary of such Person) in which any other Person (other than such Person or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to such Person or any of its Subsidiaries by such other Person during such period, (ii) except to the extent includible pursuant to the foregoing clause (i), the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of such Person or is merged into or consolidated with such Person or any of its Subsidiaries or that Person's assets are acquired by such Person or any of its Subsidiaries, (iii) the income of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, and (iv) any gains or losses attributable to Asset Sales. AII-3 "Consolidated Net Operating Income" of any Person means, for any period taken as one accounting period, the aggregate Consolidated Net Income of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, adjusted by excluding (to the extent not otherwise excluded in calculating Consolidated Net Income) any net extraordinary gain or net extraordinary loss, as the case may be, during such period except that no adjustment shall be made for extraordinary items consisting of income tax effects associated with net operating loss carryforwards incurred by such Person after the Effective Time and prior to any reporting of positive Consolidated Net Income. "Consolidated Net Worth" of any Person means, as at any date of determination, the sum of the Capital Stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) of such Person and its Subsidiaries on a consolidated basis, less amounts attributable to Redeemable Stock, each item to be determined in conformity with GAAP (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement No. 52). "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in currency values to or under which the Company or any of its Subsidiaries is a party or a beneficiary. "Debt" of any Person means at any date, without duplication, (i) all obligations, contingent or otherwise, of such Person in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (or reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all obligations of such Person as lessee under Capitalized Leases, (vi) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (vii) all Debt of others Guaranteed by such Person and (viii) to the extent not otherwise included, obligations under Currency Agreements and Interest Rate Agreements. The amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability of any such contingent obligations at such date. "Debt Securities" means the Senior Subordinated Notes (defined as the 12 3/8% Notes in this Prospectus) and the Subordinated Debentures (defined as the 12 5/8% Debentures in this Prospectus), collectively. "Debt to Net Worth Ratio" means, as at any date of determination, the ratio of (i) the outstanding aggregate amount of Debt of the Company and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, to (ii) the Consolidated Net Worth of the Company. "Domestic Subsidiary" means a Subsidiary of the Company which is not a Foreign Subsidiary. "Effective Time" means the date and time the Merger became effective as set forth in the Merger Agreement. "Event of Default" means any event or condition specified as such in Section 5.1 of the Senior Subordinated Note Indenture (defined as the 12 3/8% Note Indenture in this Prospectus). "Financing" means the financing of the Tender Offer and the Merger. "Foreign Subsidiary" means any subsidiary of the Company which is organized under the laws of a jurisdiction other than the United States of America or any State thereof and more than 80% of the sales, earnings or assets (determined on a consolidated basis in accordance with GAAP) of which are located or derived from operations located in territories of the United States of America and jurisdictions outside the United States of America. AII-4 "GAAP" means generally accepted accounting principles in the United States as in effect as of the date of the Senior Subordinated Note Indenture (defined as the 12 3/8% Note Indenture in this Prospectus), including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession; provided that all ratios and computations based on GAAP contained in the Senior Subordinated Note Indenture shall be computed in accordance with GAAP except that calculations made for the purpose of determining compliance with the terms of the covenants set forth below and other provisions of the Senior Subordinated Note Indenture shall be made, except as otherwise provided in the Senior Subordinated Note Indenture, without giving effect to adjustments in component amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17 as a result of the Tender Offer and the Merger and for the amortization of any expenses incurred in connection with the Tender Offer, the Merger or the Financing. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation of such other Person (whether arising by virtue of partnership arrangements, by agreement to keep- well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Initial Secured Notes" shall mean the Secured Notes issued on the Closing Dates (including the original Series A Secured Notes so long as the same are outstanding and thereafter the new Series A Secured Notes) and any Secured Notes issued in exchange therefor or replacement thereof pursuant to Section 2.07 of the Secured Note Indenture. "Interest Expense" of any Person means, for any period taken as one accounting period, the aggregate amount of interest in respect of Debt (including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and the net costs associated with Interest Rate Agreements) and all but the principal component of rentals in respect of Capitalized Lease Obligations, paid or accrued by such Person during such period, excluding, however, interest expense not required to be paid in cash (including amortization of discount) and which such Person did not in fact pay in cash (or, in the case of interest accrued for which payment has not become due at the time of determination, which such Person does not intend to pay in cash), all as determined in accordance with GAAP. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in interest rates, to or under which the Company or any of its Subsidiaries is a party or a beneficiary. "Joint Venture" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form; provided that, as to any such arrangement in corporate form, such corporation shall not, as to any Person of which such corporation is a Subsidiary, be considered to be a Joint Venture to which such Person is a party. "Junior Debenture Indenture" means the indenture dated as of November 1, 1988 between the Company and Ameritrust Company National Association, as trustee, pursuant to which the Junior Debentures were issued. AII-5 "Junior Debentures" means the Company's 14 5/8% Junior Subordinated Debentures due November 1, 2004 issued pursuant to an indenture dated as of November 1, 1988 between the Company and Ameritrust Company National Association, as trustee. "Junior Discount Debentures" (defined as the 14 1/8% Debentures in this Prospectus) means the Company's 14 1/8% Junior Discount Subordinated Debentures due November 1, 2004 issued pursuant to an indenture dated as of November 1, 1988 between the Company and Ameritrust Company National Association, as trustee. "Junior Discount Debenture Indenture" (defined as the 14 1/8% Debenture Indenture in this Prospectus) means the indenture dated as of November 1, 1988 between the Company and Ameritrust Company National Association, as trustee, pursuant to which the Junior Discount Debentures (defined as the 14 1/8% Debentures in this Prospectus) were issued. "Lease Event of Default", when used in or with respect to any Lease, shall have the meaning specified in Section 15 of such Lease, and "Lease Event of Default", when used in any other Operative Document without reference to any Lease, shall mean a Lease Event of Default under any Lease. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset (including any conditional sale agreement, capital lease or other title retention agreement relating to such asset). "Loan Participant" means and includes each registered holder of a Secured Note. "Material Subsidiary" means each and any Subsidiary which (i) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company, or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company, all as shown on the consolidated financial statements of the Company for such fiscal year. "Merger" means the merger of FH Acquisition Corp. into the Company pursuant to the Merger Agreement. "Officer's Certificate" of any Person shall mean a certificate signed on behalf of such Person by the Chairman, the President, any Vice President, any Assistant Vice President, Financial Services Officer, the Controller or the Treasurer of such Person or any other individual duly authorized and acting in such capacity. "Operative Documents" shall mean the Participation Agreement, the Owner Trust Agreement, each Lease, each Assignment, the Secured Note Indenture, the Secured Notes, each Site Lease, each Support Agreement, the Recognition Instrument and the Tax Indemnity Agreement. "Outstanding", when used with respect to the Secured Notes, shall mean, as of the date of determination, all Secured Notes theretofore authenticated and delivered under the Secured Note Indenture, except: (i) Secured Notes theretofore canceled by the Secured Note Indenture Trustee or delivered to the Secured Note Indenture Trustee for cancellation; (ii) Secured Notes or portions thereof for whose payment or redemption money in the necessary amount has been theretofore deposited with the Secured Note Indenture Trustee, provided that such Secured Notes are to be redeemed and notice of such redemption has been duly given pursuant to the Secured Note Indenture; and (iii) Secured Notes paid or in exchange for or in lieu of which other Secured Notes have been authenticated and delivered pursuant to the Secured Note Indenture. "Owner Participant" shall mean the Owner Participant for whose benefit the Owner Trustee owns the Assets leased to the Company, pursuant to the Leases, and its successors and assigns, and each Person to whom a transfer is effected in accordance with Section 13 of the Participation Agreement. AII-6 "Owner Trustee" shall mean The Connecticut National Bank, a national banking association, and each successor as the Owner Trustee, not in its individual capacity but solely as trustee under the Trust Agreement, and its successors and assigns. "Participant" shall mean any Loan Participant or the Owner Participant and "Participants" shall mean all of them. "Participation Agreement" shall mean the Amended and Restated Participation Agreement, dated as of October 21, 1991, among the Company, the Owner Participant, the Initial Loan Participant, the Pass Through Trustee, the Secured Note Indenture Trustee and the Owner Trustee as the same may be amended from time to time. "Pass Through Trustee" shall mean the Wilmington Trust Company, not in its individual capacity except as expressly provided in the Pass Through Trust Agreement and the Operative Documents, but solely as Pass Through Trustee, or its successor in interest, and any successor trustee appointed as provided therein. "Permitted Liens" means (i) Liens for taxes, assessments, governmental charges or claims which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (ii) statutory Liens of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's, or other like Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate proceedings, if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens created or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, restrictions and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any of its Subsidiaries incurred in the ordinary course of business; (vi) Liens (including extensions and renewals thereof) upon real or tangible personal property acquired after the Effective Time, provided that (a) any such Lien is created solely for the purpose of securing Debt representing, or incurred to finance, refinance or refund, the cost (including the cost of improvement or construction) of the item of property subject thereto, (b) the principal amount of the Debt secured by such Lien does not exceed 100% of such cost, (c) such Lien does not extend to or cover any other property other than such item of property and any improvements on such item and (d) the incurrence of such Debt is permitted by the "Limitation on Company and Subsidiary Debt" covenant; (vii) Liens upon specific items of inventory or other goods and proceeds of the Company or its Subsidiaries securing the Company's or any Subsidiary's obligations in respect of bankers' acceptances issued or created or the account of any such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (viii) Liens securing reimbursement obligations with respect to letters of credit which encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (ix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (x) judgment and attachment Liens not giving rise to an Event of Default; (xi) leases or subleases granted to others not interfering in any material respect with the business of the Company or any of its Subsidiaries; (xii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or one of its Subsidiaries relating to such property or assets; (xiii) Liens encumbering customary initial deposits and margin deposits, and other Liens incurred in the ordinary course of business and which are either within the general parameters customary in the industry or otherwise approved by requisite Banks, in each case securing Debt under Interest Rate Agreements and Currency Agreements and forward contracts, options, futures contracts, futures options or similar agreements or arrangements designed to protect the Company or any of its Subsidiaries from fluctuations in the price of commodities; (xiv) Liens encumbering deposits made to secure obligations arising from statutory or regulatory requirements of the Company or its Subsidiaries; AII-7 (xv) Liens arising out of consignment or similar arrangements for the sale of goods entered into by the Company or any of its Subsidiaries in the ordinary course of business in accordance with the past practices of the Company and its Subsidiaries prior to the Effective Time; (xvi) any interest or title of a lessor in the property subject to any Capitalized Lease Obligation or operating lease; (xvii) Liens on the assets of any entity existing at the time such assets are acquired, whether by merger, consolidation, purchase of assets or otherwise, provided that such Liens do not extend to any other assets of the Company or any of its Subsidiaries; and (xviii) Liens arising from filing UCC financing statements regarding leases. "Person" shall mean any individual, partnership, corporation, trust, unincorporated association, joint venture, government or any department or agency thereof, or any other entity. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's preferred or preference stock, and includes, without limitation, all classes and series of preferred or preference stock. "Redeemable Stock" means any class or series of Capital Stock that by its terms or otherwise is required to be redeemed prior to the stated maturity of the Senior Subordinated Notes (defined as the 12 3/8% Notes in this Prospectus), or is redeemable at the option of the holder thereof at any time prior to stated maturity of any of the Senior Subordinated Notes. "Secured Note Indenture" shall mean the Trust Indenture, Assignment of Leases, Security Agreement and Deed to Secure Debt, between the Owner Trustee and the Secured Note Indenture Trustee as the same may be amended from time to time. The term "Secured Note Indenture" shall also include each Secured Note Indenture Supplement entered into pursuant to the terms of the Secured Note Indenture. "Secured Note Indenture Trustee" shall mean Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity, except as expressly provided in the Operative Documents, but solely as trustee under the Secured Note Indenture, and each successor as Secured Note Indenture Trustee of the trusts created by the Secured Note Indenture. "Secured Notes" means all notes from time to time issued and outstanding under and pursuant to the Secured Note Indenture. "Senior Debt" means (i) all Debt and other monetary obligations of the Company under the Bank Credit Agreement (including the Additional Bank Credit Amount) and the Company's Guarantee of any Debt or monetary obligation of any of its Subsidiaries under the Bank Credit Agreement, (ii) all Debt of the Company (other than the Senior Subordinated Notes, defined as the 12 3/8% Notes in this Prospectus), unless such Debt, by its terms or the terms of the instrument creating or evidencing it, is subordinate in right of payment to, or pari passu with, the Senior Subordinated Notes and (iii) all fees, expenses and indemnities payable in connection with the Bank Credit Agreement and, if applicable, Currency Agreements and Interest Rate Agreements; provided that the term Senior Debt shall not include (a) any Debt of the Company which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, was without recourse to the Company, (b) any Debt of the Company to a Subsidiary, (c) any Debt of the Company not otherwise permitted by Section 3.5 of the Senior Subordinated Note Indenture (defined as the 12 3/8% Note Indenture in this Prospectus), (d) Debt to any employee of the Company, (e) any liability for federal, state, local or other taxes owed or owing by the Company and (f) Trade Payables. "Senior Subordinated Note Indenture" (defined as the 12 3/8% Note Indenture in this Prospectus) means the indenture dated as of November 1, 1988 between the Company and State Street Bank and Trust Company, as trustee, relating to the Senior Subordinated Notes (defined as the 12 3/8% Notes in this Prospectus). "Senior Subordinated Notes" (defined as the 12 3/8% Notes in this Prospectus) means the 12 3/8% Senior Subordinated Notes Due 1997 issued pursuant to the indenture dated as of November 1, 1988 between the Company and State Street Bank and Trust Company, as trustee. AII-8 "Stockholders Agreement" means the Stockholders and Registration Rights Agreement dated as of August 1, 1988 among FH Holdings Corp. (a predecessor of the Company) and the other parties thereto. "Subordinated Debenture Indenture" (defined as the 12 5/8% Debenture Indenture in this Prospectus) means the indenture dated as of November 1, 1988 between the Company and United States Trust Company of New York, as trustee, pursuant to which the Subordinated Debentures were issued. "Subordinated Debentures" (defined as the 12 5/8% Debentures in this Prospectus) means the 12 5/8% Subordinated Debentures, Due 2000, issued pursuant to an indenture dated as of November 1, 1988 between the Company and United States Trust Company of New York, as trustee. "Subsidiary" means 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 any Person or one or more of the other subsidiaries of that Person or a combination thereof. "Trade Payables" means accounts payable or any other indebtedness or monetary obligations to trade creditors created or assumed by the Company in the ordinary course of business in connection with the obtaining of materials or services or any Trade Payables of any Subsidiary or Joint Venture of the Company Guaranteed by the Company. Covenants The Participation Agreement incorporates the following financial covenants contained in the 12 3/8% Note Indenture provided, however, that if such financial covenants of the 12 3/8% Note Indenture shall be amended, modified or waived from time to time, the Participation Agreement may be similarly amended, modified or waived with the consent of the Owner Trustee and the Secured Note Indenture Trustee, which consents should not be unreasonably withheld. Citations below in parentheses are references to the relevant sections of the 12 3/8% Note Indenture unless otherwise indicated. Limitation on Company and Subsidiary Debt. The Company shall not, and shall not permit any of its Subsidiaries to, incur, create, assume, guarantee or in any other manner become liable with respect to, or extend the maturity of or become responsible for the payment of, any Debt unless, after giving effect to the incurrence of such Debt and the receipt and application of the proceeds thereof, the Consolidated Fixed Charge Ratio of the Company would be (1) greater than 1.8 to 1 if such determination is made after December 31, 1991 and on or prior to December 31, 1992; (2) greater than 1.9 to 1 if such determination is made after December 31, 1992 and on or prior to December 31, 1993; and (3) greater than 1.5 to 1 if such determination is made after December 31, 1993; provided that if the Debt which is the subject of a determination is Acquired Debt, then the Consolidated Cash Flow Available for Fixed Charges of the Company shall be determined giving pro forma effect to both the incurrence or assumption of such Acquired Debt by the Company or such Subsidiary and the inclusion in the Consolidated Cash Flow Available for Fixed Charges of the Company of the Consolidated Cash Flow Available for Fixed Charges of the Person whose Debt would constitute such Acquired Debt. Notwithstanding the foregoing, the Company and its Subsidiaries may incur, create, assume or Guarantee each and all of the following: (i) Debt under the Bank Credit Agreement in an aggregate principal amount not to exceed the sum of (A) $2.2 billion at any one time outstanding, less (x) any mandatory principal payments made by the Company pursuant to the Bank Credit Agreement other than mandatory principal payments expressly required to be made from excess cash flow; provided that to the extent any mandatory principal payments expressly required to be made from excess cash flow reduce any other mandatory principal payment obligation of the Company, then at the time such other mandatory principal payment is made (or would have been made but for the earlier payment in full), less the full amount of such mandatory principal payment obligation as if such amount had not been reduced by such mandatory principal payment from excess cash flow and (y) any amounts by which the revolving credit facility commitments are permanently educed, (B) an amount (the "Additional Bank Credit Amount") equal to $500 million, and (C) an amount equal to Debt, arising by virtue of letters of AII-9 credit or other facilities, permitted by clause (ix) of this "Limitation on Company and Subsidiary Debt" covenant; (ii) Debt evidenced by the 12 3/8% Notes, the 12 5/8% Debentures, the 14 1/8% Debentures, the Junior Debentures and the obligations under the 12 3/8% Note Indenture, the 12 5/8% Debenture Indenture, the Junior Debenture Indenture and the 14 1/8% Debenture Indenture; (iii) Debt of the Company to any of its Subsidiaries or of a Subsidiary to the Company or to a Subsidiary; (iv) Debt the proceeds of which are used to refinance outstanding Debt of the Company or any of its Subsidiaries in an amount (or, if such new Debt provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, with an original issue price) not to exceed the amount so refinanced (plus, accrued interest and fees and expenses and, with respect to refinancings of the Bank Credit Agreement or any successor or replacement facility, any Additional Bank Credit Amount not previously borrowed pursuant to clause (i) above or this clause (iv)), provided that Debt the proceeds of which are used to refinance the 12 3/8% Notes, the 12 5/8% Debentures, the 14 1/8% Debentures, the Junior Debentures or other Debt of the Company which is subordinated in right of payment to the 12 3/8% Notes, shall only be permitted (1) if, in case the 12 3/8% Notes are refinanced in part, such Debt is expressly made pari passu or subordinate in right of payment to the remaining 12 3/8% Notes, (2) if, in case the Debt to be refinanced is subordinated in right of payment to the 12 3/8% Notes, such Debt is subordinated in right of payment to the 12 3/8% Notes, at least to the extent that the Debt to be refinanced is subordinated to the 12 3/8% Notes, and (3) if, in case the 12 3/8% Notes are refinanced in part or the Debt to be refinanced is subordinated in right of payment to the 12 3/8% Notes, such Debt determined as of the date of incurrence of such new Debt does not mature prior to the final scheduled maturity date of the 12 3/8% Notes, and the Average Life of such Debt is equal to or greater than the remaining Average Life of the 12 3/8% Notes; and provided, further, that in no event may Debt of the Company (other than Senior Debt) be refinanced by means of Debt of any Subsidiary of the Company pursuant to this clause (iv) and provided, further, that the two foregoing provisos of this clause (iv) shall not be applicable to Debt incurred to refinance (A) up to $352,709,000 aggregate principal amount of Junior Debentures plus any additional Junior Debentures issued in lieu of cash interest on such amount of Junior Debentures (less any amount incurred pursuant to (B) of this clause (iv)) and (B) up to $827 million in aggregate principal amount of 14 1/8% Debentures in an amount not to exceed the Accreted Value of the 14 1/8% Debentures so refinanced at the time of such refinancing (less any amount incurred pursuant to (A) of this clause (iv)) (provided that no refinancings may be effected pursuant to this third proviso if, after giving effect to such refinancing, the Consolidated Net Worth of the Company plus the aggregate amount of Debt of the Company which is subordinated to the 12 3/8% Notes and the 12 5/8% Debentures and which has an Average Life equal to or greater than the remaining Average Life of the 12 3/8% Notes and the 12 5/8% Debentures is less than $430 million); (v) Debt up to an aggregate principal amount (or, if such Debt provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the entirety thereof, with an original issue price) of $500 million at any one time outstanding less the outstanding Additional Bank Credit Amount; (vi) Debt under Currency Agreements and Interest Rate Agreements, provided that in the case of Currency Agreements which relate to other Debt, such Currency Agreements do not increase the Debt of the Company outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (vii) Debt to repurchase shares of, or options to purchase shares of, the Company's Common Stock from employees of the Company or any of its Subsidiaries or Debt incurred in connection with borrowings by such employees exclusively for the purpose of exercising options to purchase the Company's Common Stock and paying any associated tax liability, in each case pursuant to the terms of the form of agreements under which such employees purchase, or are granted the option to purchase, shares of the Company's Common Stock; (viii) Debt which by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued, (1) is subordinate in right of payment to the 12 3/8% Notes, at least to the extent the 12 3/8% Notes are subordinate to Senior Debt, and (2) provides that no payments of principal of such Debt by way of sinking fund, mandatory redemption or otherwise (including defeasance) may be made by the Company (including, without limitation, at the option of the holder thereof) at any time prior to the maturity of the 12 3/8% Notes, provided, however, that after giving effect to the incurrence of such Debt, the Consolidated Fixed Charge Ratio of the Company would be at least 1.5 to 1; (ix) Debt arising from agreements providing for indemnification, adjustment of AII-10 purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any Subsidiary pursuant to such agreements, in any case incurred or assumed in connection with the disposition of any business, assets or Subsidiary of the Company, other than Guarantees of Debt incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; (x) Debt in an aggregate amount not to exceed $75 million at any one time outstanding under Guarantees of Debt incurred in the ordinary course of business to suppliers, licensees, franchisees, or customers; (xi) Debt in an aggregate amount not to exceed $100 million at any one time outstanding in respect of performance bonds and surety bonds provided in the ordinary course of business, and refinancings thereof; (xii) Debt under Guarantees in respect of obligations of Foreign Subsidiaries and Joint Ventures in an aggregate principal amount not to exceed $200 million at any one time outstanding; (xiii) Debt of the Company in respect of letters of credit not to exceed an aggregate amount of $200 million at any time outstanding plus any letters of credit from time to time outstanding with respect to pollution control revenue bonds issued by the Development Authority of Effingham County for the benefit of the Company; (xiv) Debt directly incurred to finance Consolidated Capital Expenditures in an aggregate amount not to exceed in any fiscal year of the Company the amount indicated below: Fiscal Year Maximum ----------- Amount ------- (In millions) 1994 $250 1995 250 1996 and thereafter 275 provided, however, that the amount of Debt which may be incurred in any fiscal year pursuant to this clause (xiv) shall be increased by the amount of Debt which could have been incurred in the prior fiscal year pursuant to this clause (xiv) but which was not so incurred; and (xv) Debt of Foreign Subsidiaries in an aggregate principal amount not to exceed $200 million at any one time outstanding. For purposes of determining any particular amount of Debt under this "Limitation on Company and Subsidiary Debt" covenant, Guarantees of (or obligations with respect to letters of credit supporting) Debt otherwise included in the determination of such amount shall not also be included. For the purpose of determining compliance with this "Limitation on Company and Subsidiary Debt" covenant, (A) in the event that an item of Debt meets the criteria of more than one of the types of Debt described in the above clauses, the Company, in its sole discretion, shall classify such item of Debt and only be required to include the amount and type of such Debt in one of such clauses and (B) the amount of Debt issued at a price which is less than the principal amount thereof will be equal to the amount of the liability in respect thereof determined in accordance with GAAP. (Section 3.5) Limitation on Preferred Stock of Domestic Subsidiaries and Domestic Subsidiary Distributions. The Company will not permit any Domestic Subsidiary of the Company to, directly or indirectly, issue or sell any Preferred Stock (except to the Company or a Domestic Subsidiary). The Company will not permit any Domestic Subsidiary of the Company to, directly or indirectly, (i) declare or pay any dividend or make any distribution on the Capital Stock of such Domestic Subsidiary or to the holders of such Domestic Subsidiary's Capital Stock (other than dividends or distributions payable in Common Stock of such Domestic Subsidiary) or (ii) purchase, redeem or otherwise acquire or retire for value, any such Capital Stock; provided, that this covenant shall not prevent (A) the payment by any Domestic Subsidiary of dividends or other distributions to the Company or a wholly owned Domestic Subsidiary of the Company or the redemption or repurchase by any Domestic Subsidiary of any of its Capital Stock owned by the Company or a wholly owned Domestic Subsidiary of the Company, (B) the payment of dividends to holders of the Common Stock of a Domestic Subsidiary, following an initial public offering of such Domestic Subsidiary's Common Stock, of up to 6% per annum of the net proceeds received by such Domestic Subsidiary in such public offering or (C) the payment of pro rata dividends to holders of minority interests in the Capital Stock of a Domestic Subsidiary of the Company up to an aggregate of $50 million (excluding amounts paid pursuant to clause (B) above), provided that, in the AII-11 case of clauses (B) and (C), no Event of Default or event or condition which through the giving of notice of lapse or time or both would become an Event of Default shall have occurred and be continuing or occur as a consequence thereof and provided, further, that nothing contained in this paragraph shall prevent any Domestic Subsidiary from making any payment at any time up to the amount of Restricted Payments that the Company could make at that time pursuant to the first paragraph of the "Limitation on Restricted Payments" covenant described below. (Section 3.6) Limitation on Restricted Payments. The Company will not directly or indirectly (i) declare or pay any dividend or make any distribution on its Capital Stock or to the holders of its Capital Stock (other than dividends or distributions payable in its Common Stock, in shares of Capital Stock, other than Redeemable Stock, of the same class held by such holders or in options, warrants or other rights to purchase Common Stock or such Capital Stock), (ii) purchase, redeem or otherwise acquire or retire for value, or permit any Subsidiary of the Company to, directly or indirectly, purchase, redeem or otherwise acquire or retire for value, any such Capital Stock (including options, warrants or other rights to acquire such Capital Stock), or (iii) redeem, repurchase, defease (including, but not limited to, in-substance or legal defeasance) or otherwise acquire or retire for value, or permit any Subsidiary of the Company to, directly or indirectly, redeem, repurchase, defease (including, but not limited to, in-substance or legal defeasance) or otherwise acquire or retire for value, prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, Debt of the Company which is pari passu or subordinate (whether pursuant to its terms or by operation of law) in right of payment to the 12 3/8% Notes, and which was scheduled to mature on or after the maturity date of the 12 3/8% Notes (the foregoing actions, set forth in clauses (i) through (iii), being referred to as "Restricted Payments"), if: (a) at the time of or after giving effect to such Restricted Payments, an Event of Default or an event or condition which through the giving of notice or lapse of time or both would become an Event of Default shall have occurred and be continuing; or (b) after giving effect to such Restricted Payment, the aggregate amount expended for all Restricted Payments (the amount so expended, if other than in cash, to be determined by the Board of Directors, whose reasonable determination shall be conclusive and evidenced by a resolution of the Board of Directors certified by delivery of an Officers' Certificate to the Trustee) shall exceed the sum (without duplication) of (1) 50% of the aggregate Consolidated Net Operating Income of the Company accrued on a cumulative basis for the period (taken as one accounting period) beginning with the first full fiscal quarter following the date of the 12 3/8% Note Indenture to the last day of the quarter immediately preceding the quarter in which the Restricted Payment is proposed to be made; provided that if Consolidated Net Operating Income for such period is a loss, then 100% of such loss plus (2) the aggregate net proceeds, including the fair market value of property other than cash, as determined by the Board of Directors whose reasonable determination shall be conclusive and evidenced by a resolution of the Board of Directors certified by delivery of an Officer's Certificate to the Trustee under the 12 3/8% Note Indenture received by the Company from the issuance and sale (other than to a Subsidiary) after the date of the 12 3/8% Note Indenture of the Company's Capital Stock (other than Redeemable Stock), including the issuance or sale for cash after the date of the 12 3/8% Note Indenture or upon the conversion or exchange after the date of the 12 3/8% Note Indenture of any Debt or other securities of the Company (which Debt or other securities are, by their terms, convertible into Capital Stock of the Company) or from the exercise after the date of the 12 3/8% Note Indenture of any options, warrants or other rights to acquire Capital Stock of the Company, minus (3) the aggregate amount of payments previously made by all Domestic Subsidiaries pursuant to the third proviso of the "Limitation on Preferred Stock of Domestic Subsidiaries and Domestic Subsidiary Distributions" covenant. For the purposes of any calculation pursuant to the preceding sentence which is required to be made in respect of a dividend payment to be made within 60 days after the declaration of such dividend by the Company, such dividend shall be deemed to be paid at the date of declaration. Domestic Subsidiary of the Company or the redemption or repurchase by any Domestic Subsidiary of any of its Capital Stock owned by the Company or a wholly owned Domestic Subsidiary of the Company, (B) the payment of dividends to holders of the Common Stock of a Domestic Subsidiary, following an initial public offering of such Domestic Subsidiary's Common Stock, of up to 6% per annum of the net proceeds received by such Domestic Subsidiary in such public offering or (C) the payment of pro rata dividends to holders of minority interests in the Capital Stock of a Domestic Subsidiary of AII-12 the Company up to an aggregate of $50 million (excluding amounts paid pursuant to clause (B) above), provided that, in the case of clauses (B) and (C), no Event of Default or event or The foregoing provision shall not be violated by reason of (1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would comply with the foregoing provision, (2) redemptions or repurchases of Preferred Stock of the Company, or of the 12 5/8% Debentures, the 14 1/8% Debentures, the Junior Debentures or other Debt of the Company which is pari passu or subordinated in right of payment to the 12 3/8% Notes, and which was scheduled to mature on or after the maturity date of the 12 3/8% Notes, provided that this clause (2) shall only be applicable (x) to the redemption or repurchase of(A) up to $352,709,000 in aggregate principal amount of Junior Debentures plus any additional Junior Debentures issued in lieu of cash interest on such amount of Junior Debentures (less the amount redeemed or repurchased pursuant to (B) of this clause (x)) and (B) up to $827,000,000 in aggregate principal amount of 14 1/8% Debentures in an amount not to exceed the Accreted Value of the 14 1/8% Debentures redeemed or repurchased at the time of such redemption or repurchase (less the amount redeemed or repurchased pursuant to (A) of this clause (x)) and (y) with respect to each additional redemption or repurchase pursuant to this clause (2) beyond those that could be made pursuant to clause (x) above, if after giving effect to such redemption or repurchase, the Company could incur at least $1.00 of Debt pursuant to the first paragraph of the "Limitation on Company and Subsidiary Debt" covenant and the Company would have a Capital Funds Ratio equal to or greater than 1.5 to 1 (provided, that no redemptions or repurchases may be effected pursuant to this clause (2) if, after giving effect to such redemption or repurchase, the Consolidated Net Worth of the Company plus the aggregate amount of Debt of the Company which is subordinate to the 12 3/8% Notes and the 12 5/8% Debentures and which has an Average Life equal to or greater than the remaining Average Life of the 12 3/8% Notes and the 12 5/8% Debentures is less than or equal to $430 million), (3) the payment of accrued and unpaid dividends on Preferred Stock of the Company, (4) the payment of dividends on the Company's Common Stock, following an initial public offering of the Company's Common Stock, of up to 6% per annum of the net proceeds received by the Company in such public offering, (5) the acquisition, redemption or retirement of Preferred Stock of the Company in exchange for Debt then permitted to be incurred under the first paragraph or under clause (viii) of the "Limitation on Company and Subsidiary Debt" covenant, (6) the repurchase of shares of, or options to purchase shares of, the Company's Common Stock pursuant to the Stockholder's Agreement from employees of the Company or any of its Subsidiaries pursuant to the terms of the form of agreements under which employees purchase, or are granted the option to purchase, shares of the Company's Common Stock, (7) the acquisition of 12 5/8% Debentures, 14 1/8% Debentures, Junior Debentures or other Debt of the Company which is pari passu or subordinated in right of payment to the 12 3/8% Notes, in exchange for shares of the Common Stock, (8) the redemption or repurchase of the 12 5/8% Debentures, 14 1/8% Debentures or Junior Debentures with the proceeds of Debt incurred pursuant to the first paragraph or under clause (viii) of the second paragraph of the "Limitation on Company or Subsidiary Debt" covenant or (9) the repurchase of the Company's Common Stock owned by Morgan Stanley Group Inc. for immediate resale, provided that in each case no Event of Default or event or condition which through the giving of notice or lapse of time or both would become an Event of Default shall have occurred and be continuing or occur as a consequence thereof. (Section 3.7) Limitation on Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any Subsidiary of the Company to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on the right of any such Subsidiary to (i) pay dividends or make any other distributions on such Subsidiary's Capital Stock or pay any Debt owed to the Company or any Subsidiary of the Company, (ii) make any loans or advances to the Company or any Subsidiary of the Company or (iii) transfer any of its property or assets to the Company or any Subsidiary of the Company, except (a) any restrictions existing under agreements in effect, or entered into, on the Closing Date, or any renewals or extensions thereof, provided that the terms and conditions of any such renewals or extensions are no less favorable to holders of the 12 3/8% Notes than the agreements being renewed or extended, (b) any restrictions existing under any agreement which refinances the Bank Credit Agreement, provided that the terms and conditions of any such agreement are no less favorable to the holders of the 12 3/8% Notes than those under or pursuant to the Bank Credit Agreement as in effect on the date of issuance of the 12 3/8% Notes, (c) any AII-13 restrictions existing under any agreement which refinances any Debt Security, provided that the terms and conditions of any such agreement are no less favorable to holders of the 12 3/8% Notes than those under or pursuant to the applicable Debt Security, (d) any restrictions existing with respect to Debt of a Person at the time it becomes a Subsidiary, and (e) any restrictions set forth in the Bank Credit Agreement; provided such restrictions are no more restrictive on the Company and its Subsidiaries than the provisions described in this covenant. Nothing contained in this covenant shall prevent the Company from entering into any agreement providing for the incurrence of Liens permitted by the "Limitations on Liens" covenant described below. (Section 3.8) Limitations on Liens. The Company will not, and will not permit any Subsidiary of the Company to, create, incur, assume or suffer to exist any Liens upon any of their respective assets unless the 12 3/8% Notes are equally and ratably secured, except for (i) Liens existing as of or immediately after the date of issuance of the 12 3/8% Notes, including Liens with respect to the Financing and Liens otherwise required under the Collateral Documents (as defined in the Bank Credit Agreement) as in effect as of, or immediately after, the date of issuance of the 12 3/8% Notes or under substantially similar agreements securing the Bank Credit Agreement; (ii) Liens created after the date of issuance of the 12 3/8% Notes, on any assets or Capital Stock of the Company or its Subsidiaries created in favor of the holders of the 12 3/8% Notes, and successor or replacement facilities thereof; (iii) Liens granted after the date of issuance of the 12 3/8% Notes on any assets or Capital Stock of the Company or its Subsidiaries created in favor of any of the Banks under the Bank Credit Agreement or any successor or replacement facilities thereof provided that the 12 3/8% Notes are secured by Liens on such assets or Capital Stock, which are subordinated to the Liens securing the Debt under the Bank Credit Agreement or any successor or replacement facilities thereof; provided, further, that the foregoing proviso will not apply to (A) Liens granted or arising in connection with the Merger or the Financing, (B) Liens securing Debt permitted under clause (ix) of the second paragraph of the "Limitation on Company or Subsidiary Debt" covenant (or the obligations arising under the agreements referred to in clause (ix) of the second paragraph of the "Limitation on Company or Subsidiary Debt" covenant), or (C) Liens granted pursuant to, or to carry out the provisions of, Section 5.14 of the Bank Credit Agreement as in effect on the date of the 12 3/8% Note Indenture, or any provision in a successor or replacement facility that is substantially identical to such Section 5.14; (iv) Liens securing the payment of Debt permitted to be incurred under the first paragraph or by clauses (iii), (v), (vi) or (xiv) of the second paragraph of the "Limitation on Company or Subsidiary Debt" covenant and Liens securing Senior Debt incurred under clause (iv) of the second paragraph of the "Limitation on Company and Subsidiary Debt" covenant; (v) Liens with respect to Acquired Debt, provided that such Liens do not extend to or cover any property or assets of the Company or any Subsidiary of the Company, other than the property or assets acquired; (vi) Liens with respect to the assets of a Subsidiary of the Company granted by such Subsidiary to the Company to secure Debt owing to the Company by such Subsidiary; (vii) Liens securing the Additional Bank Credit Amount and Liens securing any obligation in respect of Senior Debt issued to any Bank (including, without limitation, any Lien granted under the Bank Credit Agreement); (viii) Liens securing all or any portion of Debt which is incurred to refinance secured Debt and is permitted to be incurred under clause (iv) of the second paragraph of the "Limitation on Company or Subsidiary Debt" covenant, provided that such Liens do not extend to or cover any property or assets of the Company or any Subsidiary of the Company other than the property or assets securing the Debt being refinanced; (ix) Liens securing Debt existing as of the date of issuance of the 12 3/8% Notes or any refinancing thereof, which is unsecured as of the date of issuance of the 12 3/8% Notes, provided that the aggregate amount of such secured Debt does not exceed $100 million, (x) Liens securing Debt with respect to property or assets with an aggregate fair market value of not more than $50 million; (xi) Permitted Liens; and (xii) Liens securing any Debt required to be secured equally and ratably with any Debt secured by Liens permitted by clauses (i) through (xi) of this covenant. (Section 3.9) Transactions with Stockholders and Affiliates. Following the Merger, the Company will not, and will not permit any Subsidiary of the Company to, directly or indirectly, enter into any transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder of 5% or more of any class of Capital Stock of the Company (excluding the Bankers Trust New York Corporation AII-14 and any of its Subsidiaries or Affiliates) or with any Affiliate of the Company or of any such holder, on terms that are less favorable to the Company or such Subsidiary, as the case may be, than those which might be obtained at the time of such transaction from a Person who is not such a holder or Affiliate; provided, however, that the purchase, sale or lease of any property to, or exchange of any property with, or other disposition of any property to any such holder of 5% or more of Capital Stock of the Company or any Affiliate of the Company or of any such holder shall be deemed to be on terms that are no less favorable to the Company or such Subsidiary, as the case may be, than those obtainable at the time of the transaction from a Person who is not such holder or Affiliate if the Board of Directors shall have received a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Company from a financial point of view, and provided, further, however, that this covenant shall not limit, or be applicable to, (i) the payment of fees to MS&Co. and its Affiliates for financial and consulting services (including underwriting discount and commissions), (ii) transactions between the Company or any of its Subsidiaries and any employee of the Company or any of its Subsidiaries that are approved by the Board of Directors, (iii) the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company or (iv) any transaction between the Company and any of its wholly owned Subsidiaries or between any of its wholly owned Subsidiaries. (Section 3.10) Mergers and Consolidations So long as any of the Initial Secured Notes remain Outstanding or any amounts due and owing by the Company with respect thereto, the Holders thereof under the Pass Through Trust Agreement or any other Operative Document remain unpaid, the Company may not consolidate with, merge with or into or transfer or lease all or substantially all of its assets (as an entirety or substantially an entirety in one transaction or a series of related transactions), to any Person (except a wholly owned Subsidiary of the Company with a positive Consolidated Net Worth) unless: (i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which properties and assets of the Company are transferred shall be a solvent corporation organized and existing under the laws of the United States of America or any State thereof or the District of Columbia and shall expressly assume, by an agreement executed and delivered to the Owner Trustee, the Secured Note Indenture Trustee and the Pass Through Trustee in form and substance reasonably satisfactory to the Owner Trustee and the Secured Note Indenture Trustee, all of the obligations of the Company under the Pass Through Trust Agreement and the Operative Documents; (ii) immediately before and immediately after giving effect to such transaction, (A) no Lease Event of Default shall have occurred and be continuing and (B) no default shall have occurred and be continuing under the 12 3/8% Note Indenture; (iii) immediately after giving effect to such transaction on a pro forma basis, the Adjusted Consolidated Net Worth of the surviving entity would be at least equal to the Adjusted Consolidated Net Worth of the Company immediately prior to such transaction; (iv) immediately after giving effect to such transaction on a pro forma basis, the Consolidated Fixed Charge Ratio of the surviving entity would be at least 1 to 1; provided that if the Consolidated Fixed Charge Ratio of the Company is within the range set forth in column (A) below, then the pro forma Consolidated Fixed Charge Ratio of the surviving entity shall be at least equal to the percentage of the Consolidated Fixed Charge Ratio of the Company at the corresponding point set forth in column (B) below: (A) (B) --- --- 1.11:1 to 1.99:1 90% 2.00:1 to 2.99:1 80% 3.00:1 to 3.99:1 70% 4.00:1 to 4.99:1 60% 5.00:1 or more 50%; AII-15 and provided, further, that if the pro forma Consolidated Fixed Charge Ratio of the surviving entity would be 3:1 or more, the calculation in the preceding proviso shall be inapplicable and such transaction shall be deemed to have complied with the requirements of this clause (iv); and provided, further, that if clause (4) of Section 9.1 of the 12 3/8% Note Indenture shall be amended, modified or waived from time to time, this clause (iv) may be similarly amended, modified or waived with the consent of the Owner Trustee and the Secured Note Indenture Trustee, which consents shall not be unreasonably withheld; and (v) the Company has delivered to the Owner Trustee (A) an Officer's Certificate (attaching the arithmetic computations to demonstrate compliance with clause (iv) above) stating that such consolidation, merger or transfer and such agreement comply with this Section and that all conditions precedent herein provided for relating to such transaction have been complied with and (B) an opinion of counsel stating that in the opinion of such counsel such agreement has been duly authorized, executed and delivered by the surviving entity, and is enforceable against the surviving entity in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or similar laws affecting the rights of creditors generally and by general principles of equity. Upon any consolidation or merger, or any transfer of all or substantially all of the assets, of the Company, the successor corporation formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Participation Agreement and under the Pass Through Trust Agreement and the other Operative Documents with the same effect as if such successor corporation has been named as the Company under the Participation Agreement and therein; provided, however, that notwithstanding such consolidation, merger or transfer, the Company shall not be released from its obligations under the Participation Agreement or under the Pass Through Trust Agreement or any other Operative Document without the consent of the Owner Participant. (Section 10.03 of the Participation Agreement). AII-16 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits. Exhibit No. Description - ------- ----------- *1.1 -Form of Underwriting Agreement for the 1988 Securities. *1.2 -Independent Price Agreement dated August 16, 1988 between the Registrant and Dillon, Read & Co. Inc. **1.3 -Form of Underwriting Agreement for the Pass Through Certificates. ***1.4 -Form of Underwriting Agreement for the 1993 Notes. ***1.5 -Form of Qualified Independent Underwriter Agreement for the 1993 Notes. ****1.6 -Form of Underwriting Agreement for the 1994 Notes. *2 -Agreement and Plan of Merger dated June 25, 1988 between Fort Howard Corporation and FH Acquisition 3.1 -Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.A to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). ++3.2 -Amended and Restated By-Laws of the Registrant. 4.1 -[Intentionally omitted] *4.2 -Form of 12 5/8 % Debenture Indenture dated as of November 1, 1988 between the Registrant and United States Trust Company of New York, as Trustee. *4.3 -Form of 14 1/8 % Debenture Indenture dated as of November 1, 1988 between the Registrant and Ameritrust Company National Association, as Trustee. 4.4 -[Intentionally Omitted] *4.5 -Amended and Restated Credit Agreement dated as of October 24, 1988, among the Registrant, FH Acquisition and Bankers Trust, as agent for the bank parties thereto, with respect to the Bank Bridge Loan, the Term Loan and the Revolving Credit Facility. *4.5(A) -Amendment No. 1 dated February 21, 1989 to the Amended and Restated Credit Agreement dated as of October 24, 1988. 4.5(B) -Amendment No. 2 dated October 20, 1989 to Amended and Restated Credit Agreement dated as of October 24, 1988 (filed with the Registrant's September 30, 1989 Quarterly Report on Form 10-Q, File No. 1-6901, and incorporated herein by reference). 4.5(C) -Amendment No. 3 dated as of November 14, 1989 to Amended and Restated Credit Agreement dated as of October 24, 1988 (filed 10-Q, with the Registrant's September 30, 1989 Quarterly Report on Form File No. 1-6901, and incorporated herein by reference). 4.5(D) -Amendment No. 4 dated as of November 9, 1990 to Amended and Restated Credit Agreement dated as of October 24, 1988 (filed as Exhibit 4.J to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-6901, and incorporated herein by reference). 4.5(E) -Amendment No. 5 dated as of December 19, 1990 to Amended and Restated Credit Agreement dated as of October 24, 1988 (filed as Exhibit 4.K to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). 4.5(F) -Amendment No. 6 dated as of September 11, 1991 to Amended and Restated Credit Agreement dated as of October 24, 1988 (filed as Exhibit 4.A to the Registrant's Current Report on Form 8-K on September 13, 1991, File No. 1-6901, and incorporated herein by reference). 4.5(G) -Amendment No. 7 dated as of December 2, 1991 to Amended and Restated Credit Agreement dated as of October 24, 1988 and Amendment No. 1 dated as of December 2, 1991 to the Note Purchase Agreement dated as of September 11, 1991 (filed as Exhibit No. 4.N to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-6901, and incorporated herein by reference). II-1 4.5(H) -Amendment No. 8 dated as of October 7, 1992 to Amended and Restated Credit Agreement dated as of October 24, 1988 and Amendment No. 2 dated as of October 7, 1992 to the Note Purchase Agreement dated as of September 11, 1991 (filed as Exhibit 4.0 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, File No. 1-6901, and incorporated herein by reference). 4.5(I) -Amended and Restated Amendment No. 8 dated as of November 12, 1992, to Amended and Restated Credit Agreement dated as of October 24, 1988, and Amended and Restated Amendment No. 2 dated as of November 12, 1992 to the Note Purchase Agreement dated as of September 11, 1991 (filed as Exhibit 4.P to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, File No. 1-6901, and incorporated herein by reference). ***4.5(J) -Form of Second Amended and Restated Amendment No. 8 dated as of March 4, 1993, to Amended and Restated Credit Agreement dated as of October 24, 1988, and Second Amended and Restated Amendment No. 2 dated as of March 4, 1993 to Note Purchase Agreement dated as of September 11, 1991. 4.5(K) Amendment No. 9 dated as of December 31, 1993 to Amended and Restated Credit Agreement dated as of October 24, 1988, and Amendment No. 3 dated as of December 31, 1993 to Note Purchase Agreement dated as of September 11, 1991 (filed as Exhibit 4.4(L) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-6901, and incorporated herein by reference). 4.6 -[Intentionally omitted] *4.7 -Instrument of Designation, Appointment and Acceptance dated as of June 22, 1988 among the Registrant, Bankers Trust Company and Security Pacific National Bank. **4.8 -Form of Amended and Restated Pass Through Trust Agreement between the Pass Through Trustee and the Company relating to the Pass Through Certificates. **4.9 -Form of Pass Through Certificates (included in Exhibit 4.8). 4.10 -Amended and Restated Participation Agreement dated as of October 21, 1991 among the Company, the Owner Participant, the Initial Loan Participant, the Secured Note Indenture Trustee, the Owner Trustee and the Pass Through Trustee, and the Form of First Amendment thereto (filed as Exhibit 10.DD to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-6901, and incorporated herein by reference). **4.11 -Form of Amended and Restated Non-Disturbance, Cure Rights and Purchase Option Agreement Among the Company, the Secured Note Indenture Trustee, the Owner Trustee, the Owner Participant, the Pass Through Trustee and the Collateral Trustee. 4.12 -Facility Lease Agreement dated as of December 19, 1991, between the Owner Trustee and the Company (filed as Exhibit 10.EE to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-6901, and incorporated herein by reference). 4.13 -Amended and Restated Equipment Lease Agreement [1990] dated as of December 19, 1991, between the Owner Trustee and the Company (filed as Exhibit 10.W to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-6901, and incorporated herein by reference). 4.14 -Equipment Lease Agreement [1991] dated as of December 19, 1991, between the Owner Trustee and the Company (filed as Exhibit 10.FF to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-6901, and incorporated herein by reference). 4.15 -Power Plant Lease Agreement dated as of December 19, 1991, between the Owner Trustee and the Company (filed as Exhibit 10.GG to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-6901, and incorporated herein by reference). **4.16 -Form of Trust Indenture, Assignment of Leases, Security Agreement and Deed to Secure Debt between the Owner Trustee and the Secured Note Indenture Trustee. **4.17 -Form of Secured Note (included in Exhibit 4.16). **4.18 -Form of Trust Agreement between the Owner Participant and the Connecticut National Bank, and the Form of First Amendment thereto. II-2 **4.19 -Form of Facility Site Lease and Easement Agreement between the Company and the Owner Trustee. **4.20 -Form of Power Plant Site Lease and Easement Agreement between the Company and the Owner Trustee. **4.21 -Form of Facilities Agreement between the Company and the Owner Trustee. **4.22 -Form of Power Plant Facilities Agreement between the Company and the Owner Trustee. **4.23 -Agreement dated June 20, 1985 by and among the Company, Effingham County Industrial Development Authority (the "IDA") and Effingham County, Georgia (the "County"). **4.24 -Ratification of Agreement dated January 1, 1986 by and among the Company, the IDA and the County. **4.25 -Escrow Agreement dated January 1, 1986 by and among the Company, the IDA and the Marine Trust Company, J.A. **4.26 -Corrected Lease Agreement dated January 1, 1986 by and between the IDA and the Company. **4.27 -Form of Amendment No. 3 to Term Loan and Revolving Credit Fee and Leasehold Deed to Secure Debt, Assignment of Rents, Security Agreement, Assignment Agreement and Fixture Filing. 4.28 -Form of Senior Secured Note Agreement dated as of September 11, 1991 (filed as Exhibit 4.B to the Registrant's Current Report on Form 8-K on September 13, 1991, File No. 1-6901, and incorporated herein by reference). ***4.29 -Form of 9-1/4% Note Indenture dated as of March 22, 1993, between the Registrant and Norwest Bank Wisconsin, N.A., as Trustee. ***4.30 -Form of 10% Note Indenture dated as of March 22, 1993, between the Registrant and United States Trust Company of New York, as Trustee. ****4.31 Form of 8 1/4% Note Indenture dated as of February 1, 1994 between the Registrant and Norwest Bank Wisconsin, N.A., as Trustee. ****4.32 Form of 9% Note Indenture dated as of February 1, 1994 between the Registrant and The Bank of New York, as Trustee. NOTE: Pursuant to the provisions of paragraph (b)(4)(iii) of Item 601 of Regulation S-K, the Registrant hereby undertakes to furnish to the Commission upon request copies of the instruments pursuant to which various entities hold long-term debt of the Registrant or its consolidated or unconsolidated subsidiaries, none of which instruments govern indebtedness exceeding 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. *5.1 -Opinion of Davis Polk & Wardwell for the 1988 Securities (legality opinion). ***5.2 -Opinion of Shearman & Sterling for the 1993 Notes. **5.3 -Opinion of Dewey Ballantine, counsel for the Company, for the Pass Through Certificates. **5.4 -Opinion of James W. Nellen II, Esq., Vice President and General Counsel of the Company, for the Pass Through Certificates. **5.5 -Opinion (including tax opinion) of Richards, Layton & Finger, counsel for the Pass Through Trustee. ****5.6 -Opinion of Shearman & Sterling for the 1994 Notes. *8.1 -Tax Opinion of Davis Polk & Wardwell, counsel for the Company, for the 1988 Securities. **8.2 -Tax Opinion of Dewey Ballantine, counsel for the Company for the Pass Through Certificates. **8.3 -Tax Opinion of Richards, Layton & Finger, counsel for the Pass Through Trustee (included in Exhibit 5.5). 10.1 -[Intentionally omitted] 10.2 -[Intentionally omitted] 10.3 -Stockholders Agreement dated as of December 7, 1990, among the Registrant, Morgan Stanley, MSLEF II, certain institutional investors and the Management Investors which amends and restates the Stockholders and Registration Rights Agreement dated as of August 1, 1988, as amended (filed as Exhibit 10.C to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). 10.4 -[Intentionally omitted] 10.5 -[Intentionally omitted] II-3 10.6 -Management Incentive Plan as amended and restated December 10, 1992 (filed as Exhibit 10.C to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-6901, and incorporated herein by reference). *10.7 -Supplemental Retirement Plan. 10.7(A) -Amendment No. 1 to the Supplemental Retirement Plan dated December 21, 1988 (filed as Exhibit 10.P to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 1-6901, and incorporated herein by reference). 10.8 -Employment Agreements dated October 15, 1993, with the Company's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer (filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-6901, and incorporated herein by reference). *10.9 -Amended and Restated Management Equity Participation Agreement dated as of August 1, 1988, among Holdings, Morgan Stanley, MSLEF II and the Management Investors. 10.9(A) -Letter Agreement dated June 27, 1990, which modifies Amended and Restated Management Equity Participation Agreement (filed as Exhibit 10.V to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). 10.9(B) -Letter Agreement dated July 31, 1990, among the Company and the Principal Management Investors which amends Amended and Restated Management Equity Participation Agreement (filed as Exhibit 10.W to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). 10.9(C) -Letter Agreement dated July 31, 1990, between the Company and the Management Investor Committee which amends Amended and Restated Management Equity Participation Agreement (filed as Exhibit 10.X to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). 10.9(D) -Letter Agreement dated February 7, 1991, between the Company and the Management Investors Committee which amends the Amended and Restated Management Equity Participation Agreement (filed as Exhibit 10.GG to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No., 1-6901, and incorporated herein by reference). 10.9(E) -Form of Letter Agreement dated February 7, 1991, among the Company, the Management Investors Committee and Management Investors which cancels certain stock options, grants new stock options and amends the Amended and Restated Management Equity Participation Agreement (filed as Exhibit 10.HH to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No., 1-6901, and incorporated herein by reference). 10.10 -[Intentionally omitted] 10.11 -[Intentionally omitted] 10.12 -[Intentionally omitted] *10.13 -Financial Advisory Agreement dated as of October 25, 1988. 10.14 -Form of Supplemental Retirement Agreement of the Company's Chief Executive Officer, as amended (filed as Exhibit 10.M to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 1-6901, and incorporated herein by reference). *10.15 -Participation Agreement dated as of October 20, 1989 among the Registrant, Philip Morris Credit Corporation, the Loan Participants listed therein, The Connecticut National Bank, Owner Trustee and Wilmington Trust Company, Secured Note Indenture Trustee. *10.16 -Facility Lease Agreement dated as of October 20, 1989 between The Connecticut National Bank in its capacity as Owner Trustee, Lessor, and the Registrant, Lessee. 10.17 -Supplemental Retirement Agreements for certain directors and officers (filed as Exhibit 10.T to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-6901, and incorporated herein by reference). 10.17(A)-Form of Amendment No. 1 to Supplemental Retirement Agreements for certain directors and officers (filed as Exhibit 10.U to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). II-4 10.18 -Agreement dated as of July 31, 1990, among the Company and its former Chief Executive Officer (filed as Exhibit 10.Y to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). 10.18(A)-Modification to Agreement dated as of July 31, 1990, among the Company and its former Chief Executive Officer (filed as Exhibit 10.Z to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). 10.18(B)-Letter Agreement dated February 7, 1991, among the Company, its former Chief Executive Officer and his spouse which cancels stock options, grants new stock options and amends the Agreement dated as of July 31, 1990, among the Company, its former Chief Executive Officer and his spouse (filed as Exhibit 10.II to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). 10.19 -Participation Agreement dated as of December 23, 1990, among the Company, Bell Atlantic Tricon Leasing Corporation, Bankers Trust Company, The Connecticut National Bank, Owner Trustee, and Wilmington Trust Company, Secured Note Indenture Trustee (filed as Exhibit 10.AA to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). 10.20 -Equipment Lease Agreement [1990] dated as of December 23, 1990, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee under the Trust Agreement, as Lessor, and the Company, as Lessee (filed as Exhibit 10.BB to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). 10.20(A) Amended and Restated Equipment Lease Agreement [1990] dated as of December 19, 1991, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee under the Trust Agreement, as Lessor, and the Company, as Lessee (filed as Exhibit 10.W to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-6901, and incorporated herein by reference. 10.21 -Subscription Agreement dated as of December 7, 1990, among the Company, Mellon Bank, N.A., Trustee for First Plaza Group Trust and Leeway & Co. (filed as Exhibit 10.DD to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). 10.22 -Subscription Agreement dated as of March 12, 1991, between the Company and Fort Howard Equity Investors II, L.P. (filed as Exhibit 10.EE to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-6901, and incorporated herein by reference). *10.23 -Management Equity Plan. 10.23(A) Amendment dated December 28, 1993 to Management Equity Plan (filed as Exhibit 10.9(A) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-6901, and incorporated herein by reference). *10.24 -Form of Management Equity Agreement between the Registrant and Management Investors. ****10.25 Employment Agreements dated December 10, 1993 with certain executive officers of the Company. +12 -Computation of deficiency of earnings available to cover fixed charges (included in Part II of the Registration Statement). 21 -Subsidiaries of Fort Howard Corporation (filed as Exhibit 21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-6901, and incorporated herein by reference). +23.1 -Consent of Arthur Andersen & Co. (included in Part II of the Registration Statement). ++23.2 -Consent of Davis Polk & Wardwell for the 1988 Securities. *23.3 -Consent of Shearman & Sterling for the 1988 Securities (included in its opinion delivered under Exhibit No. 5.2). ++23.4 -Consent of Dewey Ballantine for the Pass Through Certificates. ++23.5 -Consent of Richards, Layton & Finger for the Pass Through Certificates. ***23.6 -Consent of Shearman & Sterling for the 1993 Notes (included in its opinion delivered under Exhibit No. 5.2. II-5 +24 -Powers of Attorney (included as part of the signature page). *25.1 [Intentionally omitted]. *25.2 -T-1 with respect to the eligibility of United States Trust Company of New York under the 12 5/8% Debenture Indenture. *25.3 -T-1 with respect to the eligibility of Ameritrust Company National Association under the 14 1/8% Debenture Indenture. 25.4 -[Intentionally omitted] **25.5 -Statement of Eligibility of Trustee on Form T-1. **25.6 -Report of Condition of Wilmington Trust Company. ***25.7 -T-1 with respect to eligibility of Norwest Bank Wisconsin, N.A. under the 9 1/4% Note Indenture. ***25.8 -T-1 with respect to the eligibility of United States Trust Company of New York under the 10% Note Indenture. ****25.9 -T-1 with respect to the eligibility of Norwest Bank, N.A. under the 8 1/4% Note Indenture. ****25.10 -T-1 with respect to the eligibility of The Bank of New York under the 9% Note Indenture. (b) Financial Statement Schedules. V. - Property, plant and equipment. VI. - Accumulated depreciation and amortization of fixed assets. VIII. - Valuation and qualifying accounts. IX. - Short-term borrowings. X. - Supplementary income statement information. All other schedules have been omitted because they are not applicable or not required or because the required information is included in the consolidated financial statements or notes thereto. Filed herewith. - -------------------------- +Filed herewith. ++Previously filed with Post-Effective Amendment No. 6 and Post-Effective Amendment No. 2. *Previously filed with Registration Statement No. 33-23826. **Previously filed with Registration Statement No. 33-43448. ***Previously filed with Registration Statement No. 33-51876. ****Previously filed with Registration Statement No. 33-51557. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Post-Effective Amendment No. 9 to Registration Statement No. 33-23826, Post-Effective Amendment No. 5 to Registration Statement No. 33-43448, Post-Effective Amendment No. 2 to Registration Statement No. 33-51876 and Post-Effective Amendment No. 1 to Registration Statement No. 33-51557 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Green Bay, State of Wisconsin on the 28th day of April, 1994. FORT HOWARD CORPORATION By /s/ Donald H. DeMeuse Donald H. DeMeuse POWER OF ATTORNEY The undersigned directors and officers of Fort Howard Corporation hereby constitute and appoint Kathleen J. Hempel, Michael T. Riordan and James W. Nellen II and each of them, with full power to act without the other and with full power of substitution and resubstitution, our true and lawful attorneys-in-fact with full power to execute in our name and behalf in the capacities indicated below any and all post-effective amendments (including amendments thereto) to Registration Statement No. 33-23826, Registration Statement No. 33-43448, Registration Statement No. 33-51876 and Registration Statement No. 33-51557 and to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission and hereby ratify and confirm all that such attorney-in-fact, or any of them, or their substitutes shall lawfully do or cause to be done by virtue hereof. This power of attorney supersedes any previously signed powers of attorney for Registration Statement No. 33-23826, Registration Statement No. 33-43448, Registration Statement No. 33-51876 or Registration Statement No. 33-51557. Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 9 to Registration Statement 33-23826, Post-Effective Amendment No. 5 to Registration Statement No. 33-43448, Post-Effective Amendment No. 2 to Registration Statement No. 33-51876 and Post-Effective Amendment No. 1 to Registration Statement No. 33-51557 has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Donald H. DeMeuse Chairman of the Board of April 28, 1994 - ---------------------- Directors and Chief Executive Donald H. DeMeuse Officer (principal executive officer) /s/ Kathleen J. Hempel Director, Vice Chairman April 28, 1994 - ---------------------- and Chief Financial Officer Kathleen J. Hempel (principal financial officer) /s/ Michael T. Riordan Director, President and Chief April 28, 1994 - ---------------------- Operating Officer Michael T. Riordan /s/ Donald P. Brennan Director April 28, 1994 - ---------------------- Donald P. Brennan /s/ Frank V. Sica Director April 28, 1994 - ---------------------- Frank V. Sica /s/ Robert H. Niehaus Director April 28, 1994 - ---------------------- Robert H. Niehaus /s/ James S. Hoch Director April 28, 1994 - -------------------- James S. Hoch /s/ Charles L. Szews Controller (principal accounting April 28, 1994 - ---------------------- officer) Charles L. Szews II-7 EXHIBIT 12 FORT HOWARD CORPORATION DEFICIENCY OF EARNINGS AVAILABLE TO COVER FIXED CHARGES (In thousands)
For the Years Ended December 31, -------------------------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Earnings: Loss before taxes........ $(2,056,432) $ (69,800) $ (97,999) $(119,659) $(158,008) Equity in loss before taxes of unconsolidated subsidiaries........... -- -- -- -- (98,255) Interest expense......... 342,792 338,374 371,186 422,663 473,278 One-fourth of operating lease rental expense... 1,731 1,632 1,356 1,435 3,165 ----------- --------- --------- --------- --------- $(1,711,909) $ 270,206 $ 274,543 $ 304,439 $ 220,180 =========== ========= ========= ========= ========= Fixed Charges: Interest expense......... $ 342,792 $ 338,374 $ 371,186 $ 422,663 $ 473,278 Capitalized interest..... 8,369 11,047 5,331 3,503 7,025 One-fourth of operating lease rental expense... 1,731 1,632 1,356 1,435 3,165 ----------- --------- --------- --------- --------- $ 352,892 $ 351,053 $ 377,873 $ 427,601 $ 483,468 =========== ========= ========= ========= ========= Deficiency of Earnings Available to Cover Fixed Charges (1)........ $(2,064,801) $ (80,847) $(103,330) $(123,162) $(263,288) =========== ========= ========= ========= =========
(1) For purposes of these computations, earnings consist of consolidated loss before taxes plus fixed charges (excluding capitalized interest) of both consolidated and unconsolidated subsidiaries. Amounts applicable to unconsolidated subsidiaries are excluded from such computations commencing on November 14, 1989. Fixed charges consist of interest on indebtedness (including capitalized interest and amortization of deferred loan costs) plus that portion (deemed to be one-fourth) of operating lease rental expense representative of the interest factor. II-8 EXHIBIT 24.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made a part of this Post-Effective Amendment No. 9 to Form S-1 Registration Statement No. 33- 23826, Post-Effective Amendment No. 5 to Form S-1 Registration Statement No. 33-43448, Post-Effective Amendment No. 2 to Form S-1 Registration Statement No. 33-51876 and Post-Effective Amendment No. 1 to Form S-1 Registration Statement No. 33-51557. ARTHUR ANDERSEN & CO. Milwaukee, Wisconsin, April 27, 1994 II-9 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Fort Howard Corporation included in this Post-Effective Amendment No. 9 to Form S-1 Registration Statement No. 33-23826, Post-Effective Amendment No. 5 to Form S-1 Registration Statement No. 33-43448, Post-Effective Amendment No. 2 to Form S-1 Registration Statement No. 33-51876 and Post-Effective Amendment No. 1 to Form S-1 Registration Statement No. 33-51557 and have issued our report thereon dated February 1, 1994. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN & CO. Milwaukee, Wisconsin, February 1, 1994 S-1 Schedule V FORT HOWARD CORPORATION PROPERTY, PLANT AND EQUIPMENT (In thousands)
Balance at Balance at Beginning of Additions End of Year at Cost Retirements Other* Year ------------ --------- ----------- ------ ---------- Year Ended December 31, 1991 Land.......................... $ 42,708 $ 300 $ (276) $ 42,732 Buildings..................... 255,193 4,162 4,126 263,481 Machinery and Equipment....... 980,056 118,893 $ (2,269) (5,367) 1,091,313 Construction in Progress...... 75,624 20,700 -- (5,957) 90,367 ---------- ---------- ---------- ---------- ---------- $1,353,581 $ 144,055 $ (2,269) $ (7,474) $1,487,893 ========== ========== ========== ========== ========== Year Ended December 31, 1992 Land.......................... $ 42,732 $ 274 $ (366) $ 1,991 $ 44,631 Buildings..................... 263,481 20,206 (416) 11,497 294,768 Machinery and Equipment....... 1,091,313 147,502 (16,228) (10,451) 1,212,136 Construction in Progress...... 90,367 64,862 (1,107) (10,711) 143,411 ---------- ---------- ---------- ---------- ---------- $1,487,893 $ 232,844 $ (18,117) $ (7,674) $1,694,946 ========== ========== ========== ========== ========== Year Ended December 31, 1993 Land.......................... $ 44,631 $ (122) $ (80) $ 44,429 Buildings..................... 294,768 $ 27,057 (1,977) (893) 318,955 Machinery and Equipment....... 1,212,136 168,709 (11,811) (1,195) 1,367,839 Construction in Progress...... 143,411 (30,228) -- 646 113,829 ---------- --------- ---------- ---------- ---------- $1,694,946 $ 165,538 $ (13,910) $ (1,522) $1,845,052 ========== ========= ========== ========== ==========
NOTE: *Other includes the effects of foreign currency translation, transfers from construction in progress, the effects of the acquisition of Stuart Edgar in 1992, and the effects of the sale and leaseback transactions in 1991. S-2 Schedule VI FORT HOWARD CORPORATION ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (In thousands)
Balance at Provisions Balance at Beginning of Charged To End of Year Earnings* Retirements Other** Year ------------ ---------- ----------- ------- ---------- Year Ended December 31, 1991 Buildings.................. $ 28,976 $ 16,437 $ 12,581 $ 57,994 Machinery and Equipment.... 236,464 99,576 $ (733) (14,495) 320,812 -------- -------- -------- -------- -------- $265,440 $116,013 $ (733) $ (1,914) $378,806 ======== ======== ======== ======== ======== Year Ended December 31, 1992 Buildings.................. $ 57,994 $ 8,723 $ (148) $ 279 $ 66,848 Machinery and Equipment.... 320,812 72,554 (14,278) (8,418) 370,670 -------- -------- -------- -------- -------- $378,806 $ 81,277 $(14,426) $ (8,139) $437,518 ======== ======== ======== ======== ======== Year Ended December 31, 1993 Buildings.................. $ 66,848 $ 9,784 $ (799) $ (55) $ 75,778 Machinery and Equipment.... 370,670 78,311 (7,776) (45) 441,160 -------- -------- -------- -------- -------- $437,518 $ 88,095 $ (8,575) $ (100) $516,938 ======== ======== ======== ======== ========
NOTES: *The provision is based on the straight-line depreciation method with rates varying from 2% to 50% per year. **Other includes the effects of foreign currency translation and reclassifications. S-3 Schedule VIII FORT HOWARD CORPORATION VALUATION AND QUALIFYING ACCOUNTS (In thousands) For the Years Ended December 31, --------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: 1993 1992 1991 ---- ---- ---- Balance at beginning of year.......... $1,376 $1,379 $1,502 Additions charged to earnings......... 1,633 792 698 Charges for purpose for which reserve was created............... (643) (795) (821) ------ ------ ------ Balance at end of year................ $2,366 $1,376 $1,379 ====== ====== ====== S-4 Schedule X FORT HOWARD CORPORATION SUPPLEMENTARY INCOME STATEMENT INFORMATION (In thousands) Charged to Costs and Expenses ----------------------------- For the Years Ended December 31, ----------------------------- 1993 1992 1991 ---- ---- ---- Maintenance and repairs.............. $49,626 $46,671 $45,324 ======= ======= ======= S-5 -----END PRIVACY-ENHANCED MESSAGE-----