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, 33-51876
and 33-51557
PROSPECTUS SUPPLEMENT
(To Prospectus dated July 6, 1994)
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
8-1/4% Senior Notes Due 2002
9% Senior Subordinated Notes Due 2006
1991 Pass Through Trust, Pass Through Certificates, Series 1991
- - - - - - - - - - - - - - -
RECENT DEVELOPMENTS
Attached hereto and incorporated by reference herein is Fort Howard
Corporation's quarterly report on Form 10-Q for the quarter ended
September 30, 1994.
- - - - - - - - - - - - - - -
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.
November 14, 1994
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994 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
(Former name, former address and former fiscal year, if changed since last
report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1994
----- -------------------------------
Voting Common Stock, par value $.01 5,861,730
per share
PART I. FINANCIAL INFORMATION
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales........................... $340,068 $ 308,611 $930,697 $ 895,768
Cost of sales....................... 227,338 199,786 624,399 590,147
-------- ----------- -------- -----------
Gross income........................ 112,730 108,825 306,298 305,621
Selling, general and administrative. 27,546 19,508 82,092 70,707
Amortization of goodwill............ -- 14,191 -- 42,576
Goodwill write-off.................. -- 1,980,427 -- 1,980,427
-------- ----------- -------- -----------
Operating income (loss)............. 85,184 (1,905,301) 224,206 (1,788,089)
Interest expense.................... 84,209 84,845 251,562 259,157
Other (income) expense, net......... (87) (5,471) 215 (5,475)
-------- ----------- -------- -----------
Income (loss) before taxes.......... 1,062 (1,984,675) (27,571) (2,041,771)
Income taxes (credit)............... 772 1,585 (10,640) (5,483)
-------- ----------- -------- -----------
Income (loss) before extraordinary
item.............................. 290 (1,986,260) (16,931) (2,036,288)
Extraordinary item -- losses on
debt repurchases (net of income
taxes of $14,731 in 1994 and
$5,982 in 1993)................... -- -- (28,170) (9,760)
-------- ----------- -------- -----------
Net income (loss)................... $ 290 $(1,986,260) $(45,101) $(2,046,048)
======== =========== ======== ===========
Earnings (loss) per common share:
Net income (loss) before
extraordinary item.............. $ 0.05 $ (338.80) $ (2.89) $ (347.33)
Extraordinary item................ -- -- (4.80) (1.67)
-------- ----------- -------- -----------
Net income (loss)................. $ 0.05 $ (338.80) $ (7.69) $ (349.00)
======== =========== ======== ===========
Average shares outstanding.......... 5,862 5,863 5,862 5,863
======== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 2 - <PAGE>
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1994 1993
------------- ------------
(In thousands)
Assets
Current assets:
Cash and cash equivalents............... $ 637 $ 227
Receivables, less allowances of $1,923
in 1994 and $2,366 in 1993............ 132,731 105,834
Inventories............................. 123,891 118,269
Deferred income taxes................... 14,000 14,000
Income taxes receivable................. 5,600 9,500
---------- ----------
Total current assets.................. 276,859 247,830
Property, plant and equipment............. 1,917,811 1,845,052
Less: Accumulated depreciation......... 588,009 516,938
---------- ----------
Net property, plant and equipment..... 1,329,802 1,328,114
Other assets.............................. 71,675 73,843
---------- ----------
Total assets.......................... $1,678,336 $1,649,787
========== ==========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable........................ $ 102,751 $ 101,665
Interest payable........................ 35,084 54,854
Income taxes payable.................... 12,137 122
Other current liabilities............... 66,326 70,138
Current portion of long-term debt....... 15,474 112,750
---------- ----------
Total current liabilities............. 231,772 339,529
Long-term debt............................ 3,322,482 3,109,838
Deferred and other long-term income taxes 211,817 243,437
Other liabilities......................... 23,438 26,088
Voting Common Stock with put right........ 11,711 11,820
Shareholders' equity (deficit):
Voting Common Stock..................... 600,471 600,459
Cumulative translation adjustment....... (1,961) (5,091)
Retained earnings (deficit)............. (2,721,394) (2,676,293)
---------- ----------
Total shareholders' equity (deficit).. (2,122,884) (2,080,925)
---------- ----------
Total liabilities and shareholders'
equity (deficit).................... $1,678,336 $1,649,787
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 3 -
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1994 1993
---- ----
(In thousands)
<S> <C> <C>
Cash provided from (used for) operations:
Net loss............................................. $(45,101) $(2,046,048)
Depreciation and amortization........................ 69,786 105,469
Goodwill write-off................................... -- 1,980,427
Employee stock compensation.......................... -- (7,832)
Non-cash interest expense............................ 64,759 80,109
Deferred income tax credit........................... (19,698) (12,360)
Pre-tax loss on debt repurchases..................... 42,901 15,742
Increase in receivables.............................. (26,897) (19,798)
Increase in inventories.............................. (5,622) (3,113)
(Increase) decrease in income taxes receivable....... 3,900 (2,500)
Increase (decrease) in accounts payable.............. 1,086 (14,471)
Increase (decrease) in interest payable.............. (19,770) 29,139
Increase in income taxes payable..................... 776 1,077
All other, net....................................... (8,418) 8,577
-------- -----------
Net cash provided from operations.................. 57,702 114,418
Cash used for investment activity--
Additions to property, plant and equipment........... (64,674) (107,384)
Cash provided from (used for) financing activities:
Proceeds from long-term borrowings................... 750,000 858,090
Repayment of long-term borrowings.................... (721,034) (833,565)
Debt issuance costs.................................. (21,584) (30,983)
-------- -----------
Net cash provided from (used for) financing
activities....................................... 7,382 (6,458)
-------- -----------
Increase in cash....................................... 410 576
Cash at beginning of period............................ 227 188
-------- -----------
Cash at end of period................................ $ 637 $ 764
======== ===========
Supplemental Cash Flow Disclosures:
Interest paid........................................ $210,091 $ 155,504
Income taxes paid (refunded) - net................... (8,696) (2,716)
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 4 - <PAGE>
FORT HOWARD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements reflect all adjustments
(consisting only of normally recurring accruals, except for extraordinary
items related to debt repurchases described in Note 5 and the goodwill write-
off described in Note 4) which are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods presented.
Certain reclassifications have been made to conform prior years' data to the
current format. These financial statements should be read in conjunction with
the Company's annual report on Form 10-K for 1993 and the Company's quarterly
reports on Form 10-Q for the quarters ended March 31, 1994 and June 30, 1994.
2. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed on the basis of the weighted
average number of common shares outstanding during the periods. The weighted
average number of common shares outstanding for the three and nine month
periods ended September 30, 1994 were 5,861,737 and 5,862,135, respectively.
The weighted average number of common shares outstanding for the three and
nine month periods ended September 30, 1993 were 5,862,635 and 5,862,641,
respectively. The assumed exercise of all outstanding stock options has been
excluded from the computation of earnings (loss) per share for the three and
nine month periods ended September 30, 1994 and 1993 because the results were
antidilutive.
3. INVENTORIES
Inventories consist of:
September 30, December 31,
1994 1993
------------ ------------
(In thousands)
Raw materials and supplies $ 57,681 $ 61,285
Finished and partly-finished products 66,210 56,984
-------- --------
$123,891 $118,269
======== ========
4. GOODWILL WRITE-OFF
Low industry operating rates and aggressive competitive activity among
tissue producers resulting from the 1991-1992 recession, additions to industry
capacity and other factors adversely affected tissue industry operating
conditions and the Company's operating results beginning in 1991 and through
the third quarter of 1993.
As a result of these conditions, during the second quarter of 1993 the
Company commenced an evaluation of the carrying value of its goodwill for
possible impairment. The Company revised its projections and concluded its
evaluation in the third quarter of 1993 determining that its forecasted
cumulative net income before goodwill amortization was inadequate to recover
- 5 -
the future amortization of the Company's goodwill balance over the remaining
amortization period of the goodwill. Accordingly, the Company wrote off its
remaining goodwill balance of $1.98 billion in the third quarter of 1993.
5. LONG-TERM DEBT
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"). Net proceeds
from the sale of the 1994 Notes were applied to the repurchase of all the
remaining 12 3/8% Notes at the redemption price of 105% of the principal
amount thereof, to the repurchase of $238 million of 12 5/8% Debentures at the
redemption price of 105% of the principal amount 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, to 1.40 to 1.00 from 1.50
to 1.00.
The Company incurred an extraordinary loss of $28 million (net of income
taxes of $15 million) in the first quarter of 1994 representing the redemption
premiums on the repurchases of the 12 3/8% Notes and the 12 5/8% Debentures,
and the write-off of deferred loan costs associated with the prepayment of
$100 million of the Term Loan and the repurchases of the 12 3/8% Notes and the
12 5/8% Debentures.
On October 14, 1994, the Company entered into an amendment of its Bank
Credit Agreement, 1993 Term Loan Agreement and Senior Secured Note Agreement.
Among other things, this amendment adjusted certain financial covenants,
including the reduction of the required ratio of earnings before non-cash
charges, interest and taxes to cash interest to 1.25 to 1.00 from 1.50 to 1.00
and the increase of the maximum ratio of senior debt to adjusted net worth
plus subordinated debt to 0.85 to 1.00 from 0.80 to 1.00 effective for the
rolling four quarters ended December 31, 1994 through December 31, 1995. The
ratios were adjusted to give effect to the Company's higher aggregate cash
interest expense which results from the Company's 14 1/8% Debentures accruing
interest in cash commencing on November 1, 1994, with payments of interest in
cash commencing on May 1, 1995.
At September 30, 1994, the available capacity under the Revolving Credit
Facility was $120 million.
- 6 -
6. INCOME TAXES
In 1992, the Internal Revenue Service ("IRS") issued a statutory notice
of deficiency (the "Notice") to the Company for additional income tax due for
the 1988 tax year. In the Notice, the IRS disallowed deductions for its 1988
tax year for fees and expenses, other than interest, related to the 1988 debt
financing and refinancing transactions. In disallowing these deductions, the
IRS relied on Internal Revenue Code (the "Code") Section 162(k) (which denies
deductions for otherwise deductible amounts paid or incurred in connection
with stock redemptions). The Company had deducted a portion of the disallowed
fees and expenses in 1988 and has been deducting the balance of the fees and
expenses over the terms of the 1988 long-term debt financing and refinancing.
Following receipt of the Notice, the Company filed a petition in the U.S. Tax
Court contesting the deficiency. In August 1994, the U.S. Tax Court issued
its opinion in which it essentially adopted the interpretation of Code Section
162(k) advanced by the IRS and disallowed the deductions claimed by the
Company. At present, the U.S. Tax Court is preparing an order in which it
will determine the amount of tax deficiency owed by the Company as a result of
the court's decision. The Company intends to appeal the U.S. Tax Court
decision to the U.S. Court of Appeals for the Seventh Circuit. If the
decision of the U.S. Tax Court is ultimately sustained, the Company estimates
that the potential amount of additional taxes due on account of such
disallowance for the period 1988 through 1994 would be approximately
$39 million and for the period after 1994 (assuming current statutory tax
rates) would be approximately $4 million, in each case exclusive of interest.
In anticipation of its appeal, the Company has paid to the IRS additional tax
of approximately $5 million potentially due for its 1988 tax year pursuant to
the U.S. Tax Court opinion along with $4 million for the interest accrued on
such additional taxes. While the Company is unable to predict the final
result of its appeal of the U.S. Tax Court decision with certainty, it has
accrued for the potential tax liability as well as for the interest charges
thereon for the period 1988 through 1994 and thus the Company believes that
the ultimate resolution of this case will not have a material adverse effect
on the Company's financial condition or on its results of operations.
During the third quarter of 1994, the Company reclassified $11 million
from the liability for other long-term income taxes to the liability for
current income taxes principally to reflect the payments totalling $9 million
made to the IRS in October 1994.
7. STOCK OPTIONS
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 period
the options vest. Due to the effects of adverse tissue industry operating
conditions on its long-term earnings forecast as of September 30, 1993, 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 the third quarter of 1993. The reversal of the accrued employee
stock compensation resulted in credits to operations of $8,420,000 and
$7,832,000 for the third quarter and first nine months of 1993, respectively.
- 7 -
8. COMMITMENTS AND CONTINGENCIES
In March 1990, the Company began a remedial investigation of its
Green Bay, Wisconsin landfill. The investigation was conducted under the
oversight of the U.S. Environmental Protection Agency (the "U.S. EPA") under
authority granted to the agency by CERCLA. 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. In April 1994, the Company forwarded its final
Remedial Investigation Report (the "RI Report") for the landfill to the
U.S. EPA for its review. The RI Report concluded, among other things, that no
further remedial action is required at the landfill other than the continued
operation of the currently in-place control systems and operating practices.
In September 1994, after consultation with the Wisconsin Department of Natural
Resources and the Oneida Tribe of Indians of Wisconsin (a neighboring business
entity), the U.S. EPA formally notified the Company that the RI Report had
been accepted, that no further action was required by the Company and that the
investigation was concluded.
- 8 -
FORT HOWARD CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third Quarter and First Nine Months of 1994 Compared to 1993
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1994 1993 1994 1993
---- ---- ---- ----
(In thousands, except percentages)
Net sales:
Domestic tissue............ $278,427 $ 261,186 $775,604 $ 757,338
International operations... 33,713 37,670 96,376 109,920
Other...................... 27,928 9,755 58,717 28,510
-------- ----------- -------- -----------
Consolidated............... $340,068 $ 308,611 $930,697 $ 895,768
======== =========== ======== ===========
Operating income (loss):
Domestic tissue............ $ 80,412 $(1,898,288) $214,820 $(1,788,241)
International operations... 3,039 (7,495) 5,962 (1,005)
Other...................... 1,733 482 3,424 1,157
-------- ----------- -------- -----------
Consolidated............... 85,184 (1,905,301) 224,206 (1,788,089)
Amortization of purchase
accounting (1)............. 2,893 17,165 8,691 51,518
Goodwill write-off (1)....... -- 1,980,427 -- 1,980,427
Employee stock compensation.. -- (8,420) -- (7,832)
-------- ----------- -------- -----------
Adjusted operating income.. 88,077 83,871 232,897 236,024
Other depreciation........... 21,114 18,388 61,095 53,951
-------- ----------- -------- -----------
EBDIAT..................... $109,191 $ 102,259 $293,992 $ 289,975
======== =========== ======== ===========
Consolidated net income
(loss)..................... $ 290 $(1,986,260) $(45,101) $(2,046,048)
======== =========== ======== ===========
EBDIAT as a percent of
net sales.................. 32.1% 33.1% 31.6% 32.4%
(1) In 1988, the Company was acquired in a transaction referred to as the
"Acquisition." The Acquisition was accounted for using the purchase method of
accounting resulting, among other things, in an increase of property, plant
and equipment to fair value and the allocation of $2.3 billion of purchase
cost to goodwill. Such increase in property, plant and equipment is amortized
over the lives of the respective assets. The increase in goodwill was
amortized over 40 years until the third quarter of 1993 when the Company wrote
off its remaining goodwill balance of $1.98 billion. See Note 4 to the
unaudited condensed consolidated financial statements.
- 9 -
Net Sales. Consolidated net sales for the third quarter and first nine
months of 1994 increased 10.2% and 3.9% compared to 1993, respectively, due to
increases in domestic tissue net sales and significant net sales increases by
the Company's wastepaper brokerage subsidiary. Domestic tissue net sales for
the third quarter of 1994 increased 6.6% compared to 1993, principally due to
higher net selling prices in the commercial market and increased volume in the
consumer market offset in part by lower volume in the commercial market. For
the first nine months of 1994, domestic tissue net sales increased 2.4% due to
higher net selling prices in the commercial and consumer markets and higher
volume in the consumer market that were partially offset by volume decreases
in the commercial market. The Company's decision to implement net selling
price increases in the commercial market during each of the first three
quarters of 1993 and to follow with a price increase in the second quarter of
1994 led to the decline in commercial volume during the first nine months of
1994. The Company announced another price increase in the commercial market
effective mid-October 1994. Net sales of the Company's international
operations decreased 10.5% and 12.3% for the third quarter and first nine
months of 1994 compared to 1993, respectively, primarily due to significantly
lower net selling prices on flat volume. International net selling prices
continued to decline in the third quarter due to product mix changes and
continued competitive conditions. Net sales of the Company's wastepaper
brokerage subsidiary increased significantly during the third quarter and
first nine months of 1994 compared to 1993 reflecting higher net selling
prices.
Gross Income. For the third quarter of 1994, consolidated gross margins
decreased to 33.1% from 35.3% in 1993 principally due to the increased
proportion of net sales represented by the Company's wastepaper brokerage
subsidiary which typically has lower margins than domestic tissue operations
and due to the rate of cost increases exceeding the rate of net selling price
increases in the domestic tissue operations. During the third quarter of
1994, depreciation expense was higher as a result of the start-up of a new
paper machine at the Muskogee mill late in the first quarter of 1994.
Wastepaper costs began to increase sharply in the third quarter of 1994 and
are expected to increase further during the fourth quarter of 1994 due to
increased demand for those wastepaper grades used by the Company. For the
first nine months of 1994, consolidated gross margins decreased to 32.9% from
34.1% in 1993 principally due to the increased proportion of net sales
represented by the Company's wastepaper brokerage subsidiary. In addition, in
the domestic tissue operations the effects of the higher net selling prices
were offset by higher unit manufacturing costs attributable to the
underabsorption of fixed costs primarily resulting from lower converting
volume. Higher wastepaper and other raw material costs, depreciation expense
and repair material costs also affected domestic tissue gross margins during
this period. Gross margins of international operations declined in both the
third quarter and first nine months of 1994 compared to 1993 principally due
to the lower net selling prices. International gross margins increased from
the second to the third quarters of 1994 due to cost reduction initiatives in
spite of lower net selling prices.
Selling, General and Administrative Expenses. In the third quarter of
1993, the Company reversed all previously accrued employee stock compensation
expense resulting in a reduction of selling, general and administrative
expenses of $8.4 million and $7.8 million for the third quarter and first nine
months of 1993, respectively. Excluding the effects of the reversal, selling,
general and administrative expenses, as a percentage of net sales, were 9.0%
and 8.8% for the third quarter and first nine months of 1993, compared to 8.1%
- 10 -
and 8.8% for the third quarter and first nine months of 1994, respectively.
The decrease in the third quarter of 1994 compared to 1993 results principally
from the increased proportion of net sales represented by the Company's
wastepaper brokerage subsidiary and, to a lesser degree, due to cost
containment.
Amortization of Goodwill. As a result of the goodwill write-off in the
third quarter of 1993, there was no amortization of goodwill in the third
quarter and first nine months of 1994 compared to $14 million and $43 million
in the third quarter and first nine months of 1993, respectively.
Operating Income (Loss). Operating income increased to $85 million and
$224 million for the third quarter and first nine months of 1994,
respectively, compared to operating losses of $1,905 million and
$1,788 million for the third quarter and first nine months of 1993,
respectively. The operating losses in 1993 resulted entirely from the
goodwill write-off in the third quarter of 1993. 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) was $88 million and
$233 million for the third quarter and first nine months of 1994 compared to
$84 million and $236 million for the third quarter and first nine months of
1993, respectively. Adjusted operating income increased in the third quarter
of 1994 compared to 1993 principally due to the effects of higher domestic net
selling prices. For the first nine months of 1994, adjusted operating income
was down slightly compared to 1993 because volume decreases and higher
depreciation expense in 1994 offset the price increases achieved during 1994.
EBDIAT. Earnings before depreciation, interest, amortization and taxes
("EBDIAT") increased to $109 million and $294 million for the third quarter
and first nine months of 1994 from $102 million and $290 million for the third
quarter and first nine months of 1993, respectively. EBDIAT is reported by
the Company 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 and other instruments governing
the Company's indebtedness are based on the Company's EBDIAT, subject to
certain adjustments.
Other Income, Net. During the third quarter of 1993, the Company sold
its remaining equity interest in Sweetheart Holdings Inc. ("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 credits for the nine month periods ended
September 30, 1994 and 1993 principally reflect the reversal of previously
provided deferred income taxes.
Extraordinary Loss. The Company's net loss in the first nine months of
1994 was increased by an extraordinary loss of $28 million (net of income
taxes of $15 million) representing the redemption premiums on the repurchases
of all the Company's remaining 12 3/8% Notes at the redemption price of 105%
of the principal amount thereof and of $238 million of 12 5/8% Debentures at
the redemption price of 105% of the principal amount thereof on March 11,
1994, and the write off of deferred loan costs associated with the prepayment
- 11 -
of $100 million of the Term Loan on February 10, 1994, and the repurchases of
the 12 3/8% Notes and the 12 5/8% Debentures. The Company's net loss in the
first nine months of 1993 was increased by an extraordinary loss of $10
million (net of income taxes of $6 million) representing the write-off of
deferred loan costs associated with the repayment of $250 million of the Term
Loan on March 23, 1993, and the repurchase of all outstanding 14-5/8%
Debentures on April 21, 1993.
Net Loss. For the third quarter of 1994, the Company reported net income
of $290,000 compared to a net loss of $1,986 million for the same period in
1993. For the first nine months of 1994, the Company's net loss decreased to
$45 million compared to $2,046 million for the first nine months of 1993. The
significant net losses in 1993 resulted principally from the goodwill write-
off in the third quarter of 1993.
FINANCIAL CONDITION
For the first nine months of 1994, cash increased $410,000. Capital
additions of $65 million and debt repayments of $721 million, including the
repayment of $100 million of the Term Loan, the repurchases of all outstanding
12 3/8% Notes and of $238 million of the 12 5/8% Debentures and a reduction in
the Revolving Credit Facility, were funded by cash provided from operations of
$58 million and net proceeds of the sale of the 1994 Notes of $728 million
(described below).
Receivables increased $27 million during the first nine months of 1994
due principally to a seasonal increase in net sales and higher net selling
prices in the domestic tissue and wastepaper brokerage operations. The
Company increased inventories by $6 million principally to improve service
levels. The liability for interest payable decreased $20 million due to the
timing of the quarter end relative to semiannual interest payment dates. The
liability for current income taxes increased $12 million principally due to an
$11 million reclassification from the liability for other long-term income
taxes principally to reflect payments totalling $9 million made in October
1994 to the IRS in anticipation of an appeal of a U.S. Tax Court decision
related to the Company's 1988 tax year. As a result of all these changes and
the repayment of $100 million of the $107 million scheduled 1994 payment on
its Term Loan from the net proceeds of the 1994 Notes (described below), net
working capital increased to $45 million at September 30, 1994, from a deficit
of $92 million at December 31, 1993.
Cash provided from operations declined in the first nine months of 1994
compared to 1993 principally due to increased interest payments resulting from
the 1993 repurchases of all outstanding 14 5/8% Debentures (which accrued
interest in kind) from the net proceeds of the sale of the 1993 Notes (which
accrue interest in cash), the acceleration of interest payments resulting from
the 1994 debt repurchases from the net proceeds of the 1994 Notes, and higher
floating interest rates. Cash provided from operations was further impacted
by the increases in receivables and inventories.
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"). Net proceeds
from the sale of the 1994 Notes were applied to the repurchase of all the
remaining 12 3/8% Notes at the redemption price of 105% of the principal
amount thereof, to the repurchase of $238 million of 12 5/8% Debentures at the
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redemption price of 105% of the principal amount 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 quarters ending March 31, 1994, to 1.40 to 1.00 from 1.50 to
1.00.
The Company incurred an extraordinary loss of $28 million (net of income
tax credits of $15 million) in the first quarter of 1994 representing the
redemption premiums on the repurchases of the 12 3/8% Notes and the 12 5/8%
Debentures, and the write off of deferred loan costs associated with the
prepayment of $100 million of the Term Loan and the repurchases of the 12 3/8%
Notes and the 12 5/8% Debentures.
On October 14, 1994, the Company entered into an amendment of its Bank
Credit Agreement, 1993 Term Loan Agreement and Senior Secured Note Agreement.
Among other things, this amendment adjusted certain financial covenants,
including the reduction of the required ratio of earnings before non-cash
charges, interest and taxes to cash interest to 1.25 to 1.00 from 1.50 to 1.00
and the increase of the maximum ratio of senior debt to adjusted net worth
plus subordinated debt to 0.85 to 1.00 from 0.80 to 1.00 effective for the
rolling four quarters ended December 31, 1994 through December 31, 1995. The
ratios were adjusted to give effect to the Company's higher aggregate cash
interest expense which results from the Company's 14 1/8% Debentures accruing
interest in cash commencing on November 1, 1994, with payments of interest in
cash commencing on May 1, 1995.
The Company has a Revolving Credit Facility under the Company's Bank
Credit Agreement with a final maturity of December 31, 1996, which may be used
for general corporate purposes. At September 30, 1994, the Company had
$120 million in available capacity under the Revolving Credit Facility.
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PART II. OTHER INFORMATION
1. LEGAL PROCEEDINGS
In March 1990, the Company began a remedial investigation of its
Green Bay, Wisconsin landfill. The investigation was conducted under the
oversight of the U.S. Environmental Protection Agency (the "U.S. EPA") under
authority granted to the agency by CERCLA. 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. In April 1994, the Company forwarded its final
Remedial Investigation Report (the "RI Report") for the landfill to the
U.S. EPA for its review. The RI Report concluded, among other things, that no
further remedial action is required at the landfill other than the continued
operation of the currently in-place control systems and operating practices.
In September 1994, after consultation with the Wisconsin Department of Natural
Resources and the Oneida Tribe of Indians of Wisconsin (a neighboring business
entity), the U.S. EPA formally notified the Company that the RI Report had
been accepted, that no further action was required by the Company and that the
investigation was concluded.
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 alleged 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. The No. 8 boiler was placed in service in
1975. On October 5, 1994, the Company and the U.S. EPA, with concurrence from
the U.S. Department of Justice, reached an agreement in principle, which is
subject to court approval, whereby the Company, without admitting any
wrongdoing, has agreed to make certain modifications to the boiler. The
modifications will limit the boiler's physical capacity to operate above the
level specified in the alleged relevant New Source Performance Standards. The
physical modifications, which require capital expenditures of approximately
$40,000, will not affect the utility of the No. 8 boiler. In addition, the
Company has agreed to pay a forfeiture of $350,000.
In 1992, the Internal Revenue Service ("IRS") issued a statutory notice
of deficiency (the "Notice") to the Company for additional income tax due for
the 1988 tax year. In the Notice, the IRS disallowed deductions for its 1988
tax year for fees and expenses, other than interest, related to the 1988 debt
financing and refinancing transactions. In disallowing these deductions, the
IRS relied on Internal Revenue Code (the "Code") Section 162(k) (which denies
deductions for otherwise deductible amounts paid or incurred in connection
with stock redemptions). The Company had deducted a portion of the disallowed
fees and expenses in 1988 and has been deducting the balance of the fees and
expenses over the terms of the 1988 long-term debt financing and refinancing.
Following receipt of the Notice, the Company filed a petition in the U.S. Tax
Court contesting the deficiency. In August 1994, the U.S. Tax Court issued
its opinion in which it essentially adopted the interpretation of Code Section
162(k) advanced by the IRS and disallowed the deductions claimed by the
Company. At present, the U.S. Tax Court is preparing an order in which it
will determine the amount of tax deficiency owed by the Company as a result of
the court's decision. The Company intends to appeal the U.S. Tax Court
decision to the U.S. Court of Appeals for the Seventh Circuit. If the
decision of the U.S. Tax Court is ultimately sustained, the Company estimates
that the potential amount of additional taxes due on account of such
disallowance for the period 1988 through 1994 would be approximately
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$39 million and for the period after 1994 (assuming current statutory tax
rates) would be approximately $4 million, in each case exclusive of interest.
In anticipation of its appeal, the Company has paid to the IRS additional tax
of approximately $5 million potentially due for its 1988 tax year pursuant to
the U.S. Tax Court opinion along with $4 million for the interest accrued on
such additional taxes. While the Company is unable to predict the final
result of its appeal of the U.S. Tax Court decision with certainty, it has
accrued for the potential tax liability as well as for the interest charges
thereon for the period 1988 through 1994 and thus the Company believes that
the ultimate resolution of this case will not have a material adverse effect
on the Company's financial condition or on its results of operations.
2. CHANGES IN SECURITIES
None
3. DEFAULTS UPON SENIOR SECURITIES
None
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
5. OTHER INFORMATION
None
6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit No. Description
4 Amendment No. 10 to Amended and Restated Credit
Agreement, Amendment No. 4 to the Note Purchase
Agreement and Amendment No. 2 to Credit Agreement
dated as of October 14, 1994
27 Financial Data Schedule for the nine months ended
September 30, 1994.
b) A Form 8-K dated August 24, 1994 was filed reporting under
Item 5. Other Events, the U.S. Tax Court decision in the
Company's 1988 tax case.
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FORT HOWARD CORPORATION
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
FORT HOWARD CORPORATION
Registrant
November 10, 1994 /s/ Kathleen J. Hempel
---------------------------------------
Kathleen J. Hempel, Vice Chairman and
Chief Financial Officer
(Principal Financial Officer)
November 10, 1994 /s/ James W. Nellen II
---------------------------------------
James W. Nellen II, Vice President
and Secretary
November 10, 1994 /s/ Charles L. Szews
---------------------------------------
Charles L. Szews, Vice President
and Controller
(Principal Accounting Officer)
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