Filed Pursuant to Rule
424(b)(3) of the Rules and
Regulations Under the
Securities Act of 1933
Registration Statement Nos.
33-23826, 33-43448 and
33-51876
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 24, 1993)
FORT HOWARD CORPORATION
12-5/8% Subordinated Debentures Due 2000
14-1/8% Junior Subordinated Discount Debentures Due 2004
9-1/4% Senior Notes Due 2001
10% Subordinated Notes Due 2003
1991 Pass Through Trust, Pass Through Certificates, Series 1991
- - - - - - - - - - - - - - -
RECENT DEVELOPMENTS
Attached hereto and incorporated by reference herein is the Annual
Report on Form 10-K of Fort Howard Corporation for the year ended December 31,
1993.
On March 11, 1994, the Company redeemed all of the outstanding 12 3/8%
Senior Subordinated Notes due 1997 at 105% of the principal amount thereof,
together with accrued and unpaid interest thereon to the date of redemption.
Immediately following the redemption of the 12 3/8% Senior Subordinated Notes,
the Company redeemed $238.1 million aggregate principal amount of the
outstanding 12 5/8% Subordinated Debentures due 2000 at 105% of the principal
amount thereof, together with accrued and unpaid interest thereon to the date
of redemption.
- - - - - - - - - - - - - - -
This Prospectus Supplement, together with the Prospectus, is to be used
by Morgan Stanley & Co. in connection with offers and sales of the
above-referenced securities in market-making transactions at negotiated prices
related to prevailing market prices at the time of sale. Morgan Stanley & Co.
Incorporated may act as principal or agent in such transactions.
March 11, 1994
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-6901
FORT HOWARD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 39-1090992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1919 South Broadway, Green Bay, Wisconsin 54304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 414/435-8821
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [Not Applicable] The registrant does not have a class
of equity securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934.
The common stock of the registrant is not publicly traded. Therefore, the
aggregate market value of voting stock held by non-affiliates is not readily
determinable.
As of December 31, 1993 5,862,635 shares of $.01 par value Voting Common Stock
were outstanding.
PART I
ITEM 1. BUSINESS
GENERAL
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. 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.
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 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, 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." Unless the context otherwise requires, all references in
this report to "Common Stock" refer to the common stock of the Company
subsequent to the Merger.
MSLEF II, an affiliate of Morgan Stanley & Co. Incorporated ("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.
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,
- 2 -
and continue to be affected by low pricing resulting in part from relatively
low industry operating rates. Announced industry capacity additions through
1995 and the weak economic recovery indicate that these industry conditions
may continue to affect the Company's selling prices and operating income
margins in the near term.
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 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
- 3 -
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.
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 "Item 2. Properties."
On September 4, 1992, Fort Sterling Limited ("Fort Sterling"), the
Company's United Kingdom tissue operations, acquired for $25 million, Stuart
Edgar Limited ("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
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
- 4 -
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
- 5 -
of the Company. A portion of the Company's tissue products are sold under
private labels or brand names owned by customers.
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
- 6 -
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.
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.
- 7 -
ITEM 2. 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.
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.
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.
ITEM 3. 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
- 8 -
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
1993.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
There is no public market for the stock of the Company. The number of
holders of record of the Company's Common Stock as of December 31, 1993 was
61.
- 9 - <PAGE>
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> (In millions)
STATEMENT OF INCOME DATA:
<C> <C> <C> <C> <C>
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
</TABLE>
- 10 - <PAGE>
(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.
(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.
- 11 -
ITEM 7. 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.
(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.
- 12 -
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 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 causing further price declines. Although the Company
introduced domestic net selling price increases in each of the first three
quarters of 1993, industry operating rates were relatively low during this
period and are expected to be relatively low in the first quarter of 1994, a
period of seasonally lower volume. Accordingly, in the first quarter of 1994,
the Company's results may be adversely affected as a result of weak industry
demand. In addition, announced industry capacity additions through 1995 and
the weak economic recovery indicate that these industry conditions may
continue to affect the Company's net selling prices and operating income
margins in the near term.
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.
- 13 -
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 recession,
additions to industry capacity and other factors have been adversely affecting
tissue industry operating conditions and the Company's operating results since
1991.
Declining Selling Prices. Although sales volumes have increased,
industry pricing has been very competitive due to the factors discussed below.
The Company's average domestic net selling prices have 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.
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 may remain at
relatively low levels for the near term, adversely affecting industry pricing.
Economic Conditions. The recession and weak recovery have 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. Since 1990, job formation
has been 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 does 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 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
- 14 -
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.
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.
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 term loan indebtedness under
the Company's Bank Credit Agreement (the "Term Loan"), the repurchase of all
the Company's 14 5/8% Junior Subordinated Debentures due 2004 (the "14 5/8%
Debentures") and the repurchase of $50 million of the Company's 12 3/8% Senior
Subordinated Notes due 2000 (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.
- 15 -
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
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
- 16 -
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 14 5/8% 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
9 1/4% Senior Unsecured Notes due 2001 (the "9 1/4% Notes") and 10%
Subordinated Notes due 2003 (the "10% Notes") of $729 million, net proceeds of
a new bank term loan in 1993 (the "1993 Term Loan") of $95 million, borrowings
of $28 million under the revolving credit facility under the Bank Credit
Agreement (the "Revolving Credit Facility") and Fort Sterling 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 Company's 7% Notes due 1992 (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.
- 17 -
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. See Note 8 to the Company's audited consolidated financial statements
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 (collectively, the "1993 Notes"). 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 14 5/8%
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, including the 12 3/8% Notes (to
be repurchased in 1994 as described below), rank equally with the 12 5/8%
Subordinated Debentures due 2000 (the "12 5/8% Debentures") and constitute
senior indebtedness with respect to the 14 1/8% Junior Subordinated Discount
Debentures due 2004 (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
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 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.
- 18 -
On February 9, 1994, the Company sold $100 million principal amount of
8 1/4% Senior Unsecured Notes due 2002 (the "8 1/4% Notes") and $650 million
principal amount of 9% Senior Subordinated Notes due 2006 (the "9% Notes") in
a registered public offering (collectively, the "1994 Notes"). Proceeds from
the sale of the 1994 Notes have been or will be 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.
The Company will incur an extraordinary loss of $27 million (net of
income taxes of $16 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, will
- 19 -
repurchase all the 12 3/8% Notes that were due in 1997 and will repurchase
$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 "Item 1 - 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 December 31, 1993, the Company may borrow up to
$39 million to repurchase 14 1/8% Debentures. Subsequent to the issuance of
the 1994 Notes, the Company may 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.
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
December 31, 1993, the Company had $106 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
- 20 -
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. Refer to
Note 8 to the audited consolidated financial statements for a description of
other covenants under the terms of the Company's debt agreements.
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 for a
description of certain matters related to income taxes.
- 21 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
- 22 -
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.
- 23 -
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.
- 24 -
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.
- 25 - <PAGE>
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.
- 26 -
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) 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.
- 27 -
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.
(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.
- 28 -
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
======== ========
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
========== ==========
- 29 -
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.
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
- 30 -
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
======= =======
- 31 -
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.
- 32 -
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
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.
- 33 -
8. LONG-TERM DEBT
Long-term debt and capital lease obligations, including amounts payable
within one year, are summarized as follows (in thousands):
<TABLE><CAPTION>
December 31,
------------------
1993 1992
---- ----
<S> <C> <C>
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
========== ==========
</TABLE>
- 34 - <PAGE>
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.
- 35 -
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)
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
- 36 -
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.
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
==========
- 37 -
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.
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
====== ======
- 38 -
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.
- 39 -
Changes in the Company's shareholders' equity (deficit) accounts for the
years ended December 31, 1993, 1992 and 1991, are as follows:
<TABLE><CAPTION>
Voting Non-Voting Cumulative Retained
Common Common Translation Earnings
Stock Stock Adjustment (Deficit)
----- ----- ----------- ---------
(In millions)
<S> <C> <C> <C> <C>
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)
===== ===== ===== =======
</TABLE>
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.
- 40 - <PAGE>
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
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.
- 41 -
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.
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
- 42 -
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.
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;
- 43 -
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...... 1,482,166 163,621 1,645,787
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
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.
- 44 -
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of the quarterly results of operations for 1993 and 1992
follows (in millions, except per share data):
<TABLE><CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
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............ -- -- -- -- --
</TABLE>
- 45 - <PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS
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.
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.
- 46 -
Present Principal Occupation or Employment;
Name and Position Five-Year Employment History
with the Company Age and other Directorships
----------------- --- -------------------------------------------
Frank V. Sica 42 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., Sullivan Graphics, Inc.
and Sullivan Plastics, 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., MS/WW Holdings
Inc., NCC L.P., Randall's Food Markets, Inc.,
Randall's Management Corp., Randall's
Management of Nevada, Randall's Properties,
Inc., Randall's Warehouse, Inc., Shuttleway,
Silgan Containers Corporation, Silgan
Corporation, Silgan Holdings Inc., Silgan
Plastics Inc., Tennessee Valley Steel Corp.,
Waterford Wedgwood U.K. plc and Waterford
Crystal Ltd.
James S. Hoch 33 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
Containers Corporation, Silgan Corporation,
Silgan Holdings Inc., Silgan Plastics Inc.,
Sullivan Communications, Inc. and Sullivan
Marketing Inc.
EXECUTIVE OFFICERS
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.
- 47 -
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 and
Chairman of the Board and Executive Officers of Registrant --
Chief Executive Officer Directors."
Kathleen J. Hempel 43 See description under "Directors and
Vice Chairman and Chief Executive Officers of Registrant --
Financial Officer Directors."
Michael T. Riordan 43 See description under "Directors and
President and Chief Executive Officers of Registrant --
Operating Officer Directors."
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.
Jeffrey P. Eves 47 Vice President for more than five years.
Vice President
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 43 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.
- 48 -
ITEM 11. EXECUTIVE COMPENSATION
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.
SUMMARY COMPENSATION TABLE
<TABLE><CAPTION>
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)
- ------------------ ---- ------ ----- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
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 -- -- $15,111
Executive Vice 1992 244,039 19,975 -- -- 14,561
President 1991 210,962 -- -- 7,000 14,405
</TABLE>
(a) Includes amounts reimbursed for the payment of taxes.
(b) Company contributions to the Company's profit sharing plan and
supplemental retirement plan, including Company contributions to the Company's
supplemental retirement plan which were paid to the participant.
- 49 - <PAGE>
The following table presents information concerning individual grants of
stock options made during the last completed fiscal year to each of the Named
Executive Officers.
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential Realisable
Individual Grants Value at Assumed
- -------------------------------------------------------------------------- Annual Rates of
Percent of Stock Price
Number of Total Appreciation For
Securities Options/ Option Term
Underlying SARs Granted Exercise or --------------------
Options/SARs to Employees Base Price Expiration
Name Granted in Fiscal Year ($/Sh) Date 5% 10%
---- ------------ -------------- ----- ---------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
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 -- -- -- -- -- --
</TABLE>
(a) The stock options granted in 1993 to Equity Investors (as defined below
under "Item 13. Certain Relationships and Related Transactions--Management
Equity Plan"), including the options granted to Mr. Riordan, were granted
pursuant to the Management Equity Plan as defined below under "Item 13.
Certain Relationships and Related 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
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 "Item 13. Certain Relationships and Related
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 -- --
- 50 - <PAGE>
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.
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.
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 "Item 13. Certain Relationships and Related 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.
- 51 -
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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 2,850,000 (a) 48.6
EQUITY FUND II, L.P.
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 --
- 52 -
Shares Beneficially Owned
-----------------------------
Number of Percentage
Name Shares of Class
---- --------- ----------
Robert H. Niehaus 0 --
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 Inc. ("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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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
- 53 -
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 "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.
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 "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
- 54 -
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 "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
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.
- 55 -
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
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"
- 56 -
(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. $1,046,000 for these and other miscellaneous services in
1993. In 1993, MS&Co. also received approximately $19,500,000 related to the
underwriting of the issuance of the 1993 Notes. Based on transactions of
similar size and nature, the Company believes the foregoing fees received by
- 57 -
MS&Co. are no less favorable to the Company than would be available from
unaffiliated third parties.
In 1993, the Company sold its remaining equity interest in Sweetheart for
$5.1 million. Terms of the sale were negotiated by Morgan Stanley Group
pursuant to a 1992 agreement among the Company and the other holders of
Sweetheart common stock granting Morgan Stanley Group the authority, among
other things, to contract to sell all or some of the shares of Sweetheart
common stock owned by the Company on the Company's behalf, or to restructure
Sweetheart's debt and equity capitalization.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. 1. Financial Statements of Fort Howard Corporation
Included in Part II, Item 8:
Report of Independent Public Accountants.
Consolidated Statements of Income for the years ended December 31, 1993,
1992 and 1991.
Consolidated Balance Sheets as of December 31, 1993 and 1992.
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1992 and 1991.
Notes to Consolidated Financial Statements.
Separate financial statements and supplemental schedules of the Company
and its consolidated subsidiaries are omitted since the Company is
primarily an operating corporation and its consolidated subsidiaries
included in the consolidated financial statements being filed do not
have a minority equity interest or indebtedness to any other person or
to the Company in an amount which exceeds five percent of the total
assets as shown by the consolidated financial statements as filed
herein.
a. 2. Financial Statement Schedules
Report of Independent Public Accountants
Schedule V -- Property, Plant and Equipment
Schedule VI -- Accumulated Depreciation and Amortization of Property,
Plant and Equipment
Schedule VIII -- Valuation and Qualifying Accounts
Schedule X -- Supplementary Income Statement Information
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the audited
consolidated financial statements or notes thereto.
- 58 -
a. 3. Exhibits
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of the Company dated
December 7, 1990. (Incorporated by reference to Exhibit 3.A as
filed with the Company's Form 10-K for the year ended
December 31, 1990.)
3.2 Amended and Restated By-Laws of the Company dated April 2, 1992.
(Incorporated by reference to Exhibit 3.B as filed with the
Company's Form 10-K for the year ended December 31, 1992.)
4.1 Form of 12 3/8% Senior Subordinated Note Indenture dated as of
November 1, 1988 between the Company and State Street Bank and
Trust Company, Trustee. (Incorporated by reference to
Exhibit 4.1 as filed with Amendment No. 2 to the Company's
Form S-1 on October 25, 1988.)
4.2 Form of 12 5/8% Subordinated Debenture Indenture dated as of
November 1, 1988 between the Company and United States Trust
Company, Trustee. (Incorporated by reference to Exhibit 4.2 as
filed with the Company's Amendment No. 2 to Form S-1 on
October 25, 1988.)
4.3 Form of 14 1/8% Junior Discount Debenture Indenture dated as of
November 1, 1988 between the Company and Ameritrust Company
National Association, Trustee. (Incorporated by reference to
Exhibit 4.3 as filed with the Company's Amendment No. 2 to
Form S-1 on October 25, 1988.)
4.4 Amended and Restated Credit Agreement dated as of October 24,
1988. (Incorporated by reference to Exhibit 4.5 as filed with
the Company's Amendment No. 2 to Form S-1 on October 25, 1988.)
4.4(A) Amendment No. 1 dated as of February 21, 1989 to the Amended
and Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.E 1 as filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989.)
4.4(B) Amendment No. 2 dated as of October 20, 1989 to the Amended and
Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.E 2 as filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989.)
4.4(C) Amendment No. 3 dated as of November 14, 1989 to the Amended
and Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.E 3 as filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989.)
- 59 -
4.4(D) Instrument of Designation, Appointment and Acceptance dated as
of June 22, 1988 among the Company, Bankers Trust Company and
Security Pacific National Bank. (Incorporated by reference to
Exhibit 4.7 as filed with the Company's Post-Effective Amendment
No. 2 to Form S-1 on February 8, 1990.)
4.4(E) Amendment No. 4 dated as of November 9, 1990 to Amended and
Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.J as filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990.)
4.4(F) Amendment No. 5 dated as of December 19, 1990 to Amended and
Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.K as filed with the
Company's Form 10-K for the year ended December 31, 1990.)
4.4(G) Amendment No. 6 dated as of September 11, 1991 to Amended and
Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.A as filed with the
Company's report on Form 8-K on September 13, 1991.)
4.4(H) Amendment No. 7 dated as of December 2, 1991 to Amended and
Restated Credit Agreement dated as of October 14, 1988, and
Amendment No. 1 dated as of December 2, 1991, to the Note
Purchase Agreement dated as of September 11, 1991.
(Incorporated by reference to Exhibit 4.N as filed with the
Company's Form 10-K for the year ended December 31, 1991.)
4.4(I) 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.
(Incorporated by reference to Exhibit 4.O as filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992.)
4.4(J) 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. (Incorporated by reference to Exhibit
4.P as filed with the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1992.)
4.4(K) 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. (Incorporated by reference to
Exhibit 4.3(J) as filed with the Company's Amendment No. 2 to
Form S-2 on March 4, 1993.)
4.4(L) 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 22, 1991.
- 60 -
4.5 Form of Senior Secured Floating Rate Note Purchase Agreement
dated as of September 11, 1991. (Incorporated by reference to
Exhibit 4.B as filed with the Company's report on Form 8-K on
September 13, 1991.)
4.6 Form of 9 1/4% Senior Note Indenture dated as of March 15, 1993
between the Company and Norwest Bank Wisconsin, N.A., Trustee.
(Incorporated by reference to Exhibit 4.1 as filed with the
Company's Amendment No. 2 to Form S-2 on March 4, 1993.)
4.7 Form of 10% Subordinated Note Indenture dated as of March 15,
1993 between the Company and the United States Trust Company of
New York, Trustee. (Incorporated by reference to Exhibit 4.2 as
filed with the Company's Amendment No. 2 to Form S-2 on March 4,
1993.)
4.8 Form of 9% Senior Subordinated Note Indenture dated as of
February 1, 1994 between the Company and The Bank of New York,
Trustee. (Incorporated by reference to Exhibit 4.2 as filed
with the Company's Form S-2 on December 17, 1993.)
Registrant agrees to provide copies of instruments defining the
rights of security holders, including indentures, upon request
of the Commission.
10.1 Employment Agreements dated October 15, 1993 with the Company's
Chief Executive Officer, Chief Operating Officer and Chief
Financial Officer. (Incorporated by reference to Exhibit No. 10
as filed with the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.)
10.2 Employment Agreements dated December 10, 1993 with certain
executive officers of the Company. (Incorporated by reference
to Exhibit 10.13 as filed with the Company's Form S-2 on
December 17, 1993.)
10.3 Stockholders Agreement dated as of December 7, 1990.
(Incorporated by reference to Exhibit 10.C as filed with the
Company's Form 10-K for the year ended December 31, 1990.)
10.4 Management Incentive Plan as amended and restated December 10,
1992. (Incorporated by reference to Exhibit 10.C as filed with
the Company's Form 10-K for the year ended December 31, 1992.)
10.5 Supplemental Retirement Plan. (Incorporated by reference to
Exhibit No. 10.7 as filed with Amendment No. 2 to the Company's
Form S-1 on October 25, 1988.)
10.5(1) Amendment No. 1 to the Supplemental Retirement Plan.
(Incorporated by reference to Exhibit 10.P as filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1988.)
10.6 Form of Supplemental Retirement Agreement for the Company's
Chief Executive Officer as Amended. (Incorporated by reference
to Exhibit 10.M as filed with the Company's Annual Report on
Form 10-K for the year ended December 31, 1988.)
- 61 -
10.7 Supplemental Retirement Agreements for certain directors and
officers. (Incorporated by reference to Exhibit 10.T as filed
with the Company's Annual Report on Form 10-K for the year ended
December 31, 1989.)
10.7(A) Form of Amendment No. 1 to Supplemental Retirement Agreements
for certain directors and officers. (Incorporated by reference
to Exhibit 10.U as filed with the Company's Form 10-K for the
year ended December 31, 1990.)
10.8 Amended and Restated Management Equity Participation Agreement
dated as of August 1, 1988. (Incorporated by reference to
Exhibit No. 10.9 as filed with the Company's Amendment No. 2 to
Form S-1 on October 25, 1988.)
10.8(A) Letter Agreement dated June 27, 1990, which modifies Amended and
Restated Management Equity Participation Agreement.
(Incorporated by reference to Exhibit 10.V as filed with the
Company's Form 10-K for the year ended December 31, 1990.)
10.8(B) Letter Agreement dated July 31, 1990, among the Company and the
Principal Management Investors which amends Amended and Restated
Management Equity Participation Agreement. (Incorporated by
reference to Exhibit 10.W as filed with the Company's Form 10-K
for the year ended December 31, 1990.)
10.8(C) Letter Agreement dated July 31, 1990, between the Company and
the Management Investor Committee which amends Amended and
Restated Management Equity Participation Agreement.
(Incorporated by reference to Exhibit 10.X as filed with the
Company's Form 10-K for the year ended December 31, 1990.)
10.8(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.
(Incorporated by reference to Exhibit 10.GG as filed with the
Company's Form 10-K for the year ended December 31, 1990.)
10.8(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. (Incorporated by reference to Exhibit
10.HH as filed with the Company's Form 10-K for the year ended
December 31, 1990.)
10.9 Management Equity Plan. (Incorporated by reference to
Exhibit 10.H as filed with the Company's Form 10-K for the year
ended December 31, 1991.)
10.9(A) Amendment dated December 28, 1993 to Management Equity Plan.
10.10 Form of Management Equity Plan Agreement. (Incorporated by
reference to Exhibit 10.I as filed with the Company's Form 10-K
for the year ended December 31, 1991.)
- 62 -
10.11 Agreement dated as of July 31, 1990, between the Company and its
former Chief Executive Officer. (Incorporated by reference to
Exhibit 10.Y as filed with the Company's Form 10-K for the year
ended December 31, 1990.)
10.11(A) Modification to Agreement dated as of July 31, 1990, between the
Company and its former Chief Executive Officer. (Incorporated
by reference to Exhibit 10.Z as filed with the Company's Form
10-K for the year ended December 31, 1990.)
10.11(B) Letter Agreement dated February 7, 1991, between the Company and
its former Chief Executive Officer which cancels stock options,
grants new stock options and amends the Agreement dated as of
July 31, 1990 among the Company and its former Chief Executive
Officer. (Incorporated by reference to Exhibit 10.II as filed
with the Company's Form 10-K for the year ended December 31,
1990.)
10.12 Financial Advisory Agreement dated as of October 25, 1988,
between MS&Co. and the Company. (Incorporated by reference to
Exhibit 10.13 as filed with the Company's Post-Effective
Amendment No. 1 to Form S-1 on April 6, 1989.)
10.13 Participation Agreement dated as of October 26, 1989, among the
Company, Philip Morris Credit Corporation, the Loan Participants
listed therein, the Connecticut National Bank, Owner Trustee,
and Wilmington Trust Company, Indenture Trustee. (Incorporated
by reference to Exhibit 10.15 as filed with the Company's
Post-Effective Amendment No. 2 to Form S-1 on February 8, 1990.)
10.14 Facility Lease Agreement dated as of October 26, 1989, between
the Connecticut National Bank in its capacity as Owner Trustee,
the Lessor and the Company as Lessee. (Incorporated by
reference to Exhibit 10.16 as filed with the Company's
Post-Effective Amendment No. 2 to Form S-1 on February 8, 1990.)
10.15 Power Installation Lease Agreement dated as of October 20, 1989,
between The Connecticut National Bank, not in its individual
capacity but solely as Owner Trustee, and the Company.
(Incorporated by reference to Exhibit 10.HH as filed with the
Company's Form 10-K for the year ended December 31, 1991.)
10.16 Equipment Lease Agreement dated as of October 20, 1989, between
The Connecticut National Bank, not in its individual capacity
but solely as Owner Trustee, and the Company. (Incorporated by
reference to Exhibit 10.II as filed with the Company's Form 10-K
for the year ended December 31, 1991.)
10.17 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, Indenture Trustee. (Incorporated by
reference to Exhibit 10.BB as filed with the Company's Form 10-K
for the year ended December 31, 1990.)
- 63 -
10.18 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.
(Incorporated by reference to Exhibit 10.W as filed with the
Company's Form 10-K for the year ended December 31, 1991.)
10.19 Facility Lease Agreement dated as of December 19, 1991, between
The Connecticut National Bank, not in its individual capacity
but solely as Owner Trustee, and the Company. (Incorporated by
reference to Exhibit 10.EE as filed with the Company's Form 10-K
for the year ended December 31, 1991.)
10.20 Equipment Lease Agreement [1991] dated as of December 19, 1991,
between The Connecticut National Bank, not in its individual
capacity but solely as Owner Trustee, and the Company.
(Incorporated by reference to Exhibit 10.FF as filed with the
Company's Form 10-K for the year ended December 31, 1991.)
10.21 Power Plant Lease Agreement dated as of December 19, 1991,
between The Connecticut National Bank, not in its individual
capacity but solely as Owner Trustee, and the Company.
(Incorporated by reference to Exhibit 10.GG as filed with the
Company's Form 10-K for the year ended December 31, 1991.)
10.22 Amended and Restated Participation Agreement dated as of
October 21, 1991, among the Company, Bell Atlantic Tricon
Leasing Corporation, Bankers Trust Company, The Connecticut
National Bank, Owner Trustee, and Wilmington Trust Company,
Indenture Trustee and the Form of the First Amendment thereto
dated as of December 13, 1991. (Incorporated by reference to
Exhibit 4.3 as filed with the Company's Amendment No. 3 to
Form S-3 on December 13, 1991).
12 Statement of Deficiency of Earnings Available to Cover Fixed
Charges.
21 Subsidiaries of Fort Howard Corporation.
25 Powers of Attorney (included as part of signature page).
b. Reports on Form 8-K
No reports on Form 8-K were filed for the Company during the last
quarter of 1993.
- 64 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FORT HOWARD CORPORATION
Green Bay, Wisconsin
March 7, 1994 By /s/ Donald H. DeMeuse
----------------------------------
Donald H. DeMeuse, Chairman of the
Board and Chief Executive Officer
POWER OF ATTORNEY
The undersigned directors and officer of Fort Howard Corporation hereby
constitute and appoint Donald H. DeMeuse, Kathleen J. Hempel 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 amendments to this Annual Report on Form 10-K 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 attorneys-in-fact, or any of them, or their substitutes
shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on behalf of the registrant and in the
capacities on the dates indicated:
/s/ Donald H. DeMeuse Chairman of the Board, March 7, 1994
Donald H. DeMeuse Chief Executive Officer
and Director
/s/ Kathleen J. Hempel Vice Chairman, Chief March 7, 1994
Kathleen J. Hempel Financial Officer and
Director
/s/ Michael T. Riordan President, Chief March 7, 1994
Michael T. Riordan Operating Officer and
Director
/s/ Donald P. Brennan Director March 7, 1994
Donald P. Brennan
/s/ Frank V. Sica Director March 7, 1994
Frank V. Sica
/s/ Robert H. Niehaus Director March 7, 1994
Robert H. Niehaus
/s/ James S. Hoch Director March 7, 1994
James S. Hoch
/s/ Charles L. Szews Controller and Principal March 7, 1994
Charles L. Szews Accounting Officer
- 65 -
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
Form 10-K 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
- 66 -
Schedule V
FORT HOWARD CORPORATION
PROPERTY, PLANT AND EQUIPMENT
(In thousands)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning of Additions End of
Year at Cost Retirements Other* Year
------------ --------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
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
========== ========= ========== ========== ==========
</TABLE>
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.
- 67 - <PAGE>
Schedule VI
FORT HOWARD CORPORATION
ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
(In thousands)
<TABLE>
<CAPTION>
Balance at Provisions Balance at
Beginning of Charged To End of
Year Earnings* Retirements Other** Year
------------ ---------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>
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.
- 68 - <PAGE>
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
====== ====== ======
- 69 -
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
======= ======= =======
- 70 -
