Filed Pursuant to Rule 424(b)(3)
Registration No. 33-51557
PROSPECTUS
Fort Howard Corporation
8 1/4% SENIOR NOTES DUE 2002
9% SENIOR SUBORDINATED NOTES DUE 2006
------------------------
Interest on the Senior Notes payable February 1 and August 1
Interest on the Senior Subordinated Notes payable February 1 and August 1
------------------------
THE SENIOR NOTES ARE NOT REDEEMABLE PRIOR TO MATURITY. THE SENIOR SUBORDINATED
NOTES ARE REDEEMABLE AT THE OPTION OF THE COMPANY IN WHOLE OR IN PART, AT
ANY TIME ON OR AFTER FEBRUARY 1, 1999, INITIALLY AT 104.5% OF THEIR
PRINCIPAL AMOUNT, PLUS ACCRUED INTEREST, DECLINING TO 100% OF THEIR
PRINCIPAL AMOUNT, PLUS ACCRUED INTEREST, ON OR AFTER FEBRUARY 1,
2001. IN ADDITION, AT THE OPTION OF THE COMPANY AT ANY TIME PRIOR
TO FEBRUARY 1, 1997, UP TO $227.5 MILLION AGGREGATE PRINCIPAL
AMOUNT OF THE SENIOR SUBORDINATED NOTES ARE REDEEMABLE FROM
THE PROCEEDS OF ONE OR MORE PUBLIC EQUITY OFFERINGS
FOLLOWING WHICH THERE IS A PUBLIC MARKET, AT 109% OF
THE PRINCIPAL AMOUNT THEREOF, PLUS ACCRUED INTEREST.
------------------------
SEE "CERTAIN RISK FACTORS" FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
This Prospectus is to be used by Morgan Stanley & Co. Incorporated in connection
with offers and sales in market-making transactions at negotiated prices
relating to prevailing market prices at the time of sale. Morgan
Stanley & Co. Incorporated may act as principal or agent in
such transaction.
------------------------
February 17, 1994
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY MORGAN STANLEY & CO.
INCORPORATED ("MS&CO."). THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NOTES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
ADDITIONAL INFORMATION
Fort Howard Corporation (the "Company") has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement (which term
shall encompass any amendment thereto) on Form S-2 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. The
Registration Statement and the exhibits and schedules thereto, as well as all
such reports and other information filed with the Commission, may be inspected
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and are also
available for inspection and copying at prescribed rates at the regional offices
of the Commission located at 500 West Madison Street, Chicago, Illinois 60661
and Seven World Trade Center, 13th Floor, New York, New York 10048, and at the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
The Company's obligation under the Exchange Act to file periodic reports
with the Commission will be suspended if each of the Senior Notes, the 9 1/4%
Notes, the 12 3/8% Notes, the 12 5/8% Debentures, the Senior Subordinated Notes,
the 10% Notes, the 14 1/8% Debentures, the Pass Through Certificates (each as
defined below) and any future class of securities publicly issued by the Company
is held of record by fewer than 300 holders at the beginning of any fiscal year
of the Company. The Company will be required to continue to file reports with
the Commission for fiscal years in which the Registration Statement or an
amendment to the Registration Statement is filed and becomes effective. In
addition, the Company will be required to continue to file reports with the
Commission if any of the Company's securities are listed on a national
securities exchange or if MS&Co. is required, as an affiliate of the Company, to
deliver a prospectus in connection with market-making activities with respect to
the Company's securities. None of the Company's securities is currently listed
on any securities exchange.
The respective indentures under which the Senior Notes and the Senior
Subordinated Notes (collectively, the "Notes") were issued require the Company,
and the Company intends, to file with the Commission and distribute to the
holders of the Notes annual reports containing consolidated financial statements
and the related report of independent public accountants and quarterly reports
containing unaudited condensed consolidated financial statements for the first
three quarters of each fiscal year for so long as any Notes are outstanding.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed with the Commission by the
Company are hereby incorporated by reference in this Prospectus:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, filed with the Commission on February 26, 1993;
(2) The Company's Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1993, June 30, 1993 and September 30, 1993, filed
with the Commission on May 17, 1993, August 13, 1993, and October 25, 1993,
respectively; and
(3) All other reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act since December 31, 1992.
Any statement in this Prospectus or contained in a document incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered, upon written or oral request. Copies of this
Prospectus, as amended or supplemented from time to time, and any other
documents (or parts of documents) that constitute part of the Prospectus under
Section 10(a) of the Securities Act will also be provided without charge to each
such person, upon written or oral request. Requests should be directed to the
Company, Attention: Investor Relations Department, 1919 South Broadway, Green
Bay, Wisconsin 54304; telephone (414) 435-8821, extension 2592.
TABLE OF CONTENTS
PAGE
---------
Additional Information........................ 2
Incorporation of Certain Documents by
Reference................................... 3
Prospectus Summary............................ 4
The Company................................... 12
Certain Risk Factors.......................... 13
Use of Proceeds............................... 17
Capitalization................................ 18
Selected Historical Consolidated Financial
Data........................................ 19
Pro Forma Financial Data...................... 22
Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations............................... 27
Business...................................... 39
Legal Proceedings............................. 45
Management.................................... 46
Ownership of Common Stock..................... 50
Certain Transactions.......................... 51
Description of the Notes...................... 56
Description of Certain Indebtedness........... 87
Market-Making Activities of
MS&Co....................................... 96
Legal Matters................................. 96
Experts....................................... 96
Index to Financial Statements................. F-1
3
<PAGE>
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the detailed
information and financial statements found elsewhere in this Prospectus.
THE COMPANY
The Company, founded in 1919, is a major manufacturer, converter and
marketer of a diversified line of single-use tissue paper products for the home
and away-from-home markets. The Company's principal products include paper
towels, bath tissue, table napkins, wipers and boxed facial tissue. The Company
produces and ships its products from manufacturing facilities located in
Wisconsin, Oklahoma, Georgia and the United Kingdom.
The Company believes that it is the largest producer of tissue products
sold into the domestic commercial (away-from-home) market. The Company sells a
majority of its tissue products through paper and institutional food wholesalers
into commercial markets. The Company continues to expand its 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 tissue products for home
use are sold under the brand names Mardi Gras, Soft'n Gentle, So-Dri, Page and
Green Forest.
The Company's principal markets are in the United States where the Company
believes, based on an analysis of publicly available information, that its
operating income margins are higher than those of its publicly reporting
competition. A key factor contributing to these high operating income margins
has been the Company's proprietary de-inking technology, which enables it to use
a broad range of wastepaper grades and process wastepaper efficiently to recover
the fibers which are the principal raw material in papermaking. However, the
Company's operating income margins have been adversely affected by the adverse
tissue industry operating conditions experienced since 1991, and continue to be
adversely affected by low pricing resulting in part from relatively low industry
operating rates.
THE ACQUISITION
In 1988, FH Acquisition Corp. ("FH Acquisition") was organized on behalf of
The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II") to effect the
acquisition of the Company. Pursuant to an Agreement and Plan of Merger dated as
of June 25, 1988 (the "Merger Agreement"), FH Acquisition commenced a tender
offer (the "Offer") on July 1, 1988 for all outstanding shares at $53 per share
in cash, and subsequently purchased approximately 53.5 million shares in the
Offer. Thereafter, FH Acquisition was merged with and into the Company (the
"Merger"). The Offer and the Merger are referred to herein collectively as the
"Acquisition."
MSLEF II, an affiliate of MS&Co., is a limited partnership formed to
finance investments in industrial and other companies. Its principal investors
include major U.S. and foreign banks, insurance companies, pension funds and
corporations. As a result of the Acquisition, the Company became privately held
by MSLEF II and other investors.
4
<PAGE>
THE NOTE OFFERINGS
SECURITIES OFFERED....... $100,000,000 aggregate principal amount of Senior
Notes due 2002 (the "Senior Notes").
$650,000,000 aggregate principal amount of Senior
Subordinated Notes due 2006 (the "Senior
Subordinated Notes").
SENIOR NOTES
Interest Rate.......... 8 1/4% per annum.
Interest Payment
Dates................ February 1 and August 1 commencing August 1, 1994.
Maturity............... February 1, 2002.
Redemption............. The Senior Notes may not be redeemed prior to
maturity.
Ranking................ The Senior Notes will be senior unsecured
obligations of the Company, will rank pari passu
in right of payment with the other senior
indebtedness of the Company, including, without
limitation, the Company's obligations under the
Bank Credit Agreement (as defined below), the 1993
Term Loan Agreement (as defined below), the
Company's Senior Secured Notes due 1997 through
2000 (the "Senior Secured Notes"), the Company's 9
1/4% Senior Notes due 2001 (the "9 1/4% Notes")
and capital lease obligations, including
obligations under leases (the "Pass Through
Certificate Leases") related to the Company's Pass
Through Certificates, Series 1991 (the "Pass
Through Certificates") and other senior secured
indebtedness (such other senior secured
indebtedness, together with the indebtedness under
the Bank Credit Agreement, the 1993 Term Loan
Agreement, the Senior Secured Notes, capital lease
obligations and secured indebtedness of
subsidiaries being, collectively, the "Secured
Indebtedness") and will be senior in right of
payment to all existing and future subordinated
indebtedness of the Company, including, without
limitation, the Company's 12 3/8% Senior
Subordinated Notes due 1997 (the "12 3/8% Notes"),
until redeemed as described below under "Use of
Proceeds", the Senior Subordinated Notes, the
Company's 12 5/8% Subordinated Debentures due 2000
(the "12 5/8% Debentures") that remain outstanding
after the redemption described below under "Use of
Proceeds", the Company's 10% Subordinated Notes
due 2003 (the "10% Notes") and the Company's 14
1/8% Junior Subordinated Discount Debentures due
2004 (the "14 1/8% Debentures"). The indenture
under which the Senior Notes will be issued (the
"Senior Note Indenture") will not limit the
Company's ability to refinance the 10% Notes, the
12 5/8% Debentures and the 14 1/8% Debentures with
indebtedness that is pari passu with the Senior
Notes. After giving pro forma effect to the
Refinancing (as defined below) as of September 30,
1993, the Company and its subsidiaries would have
had outstanding approximately $1.1 billion of
Secured Indebtedness. The Secured Indebtedness
under the Bank Credit Agreement, the 1993 Term
Loan Agreement and the Senior Secured Notes is
secured by liens on inventory, accounts
receivable, certain patents and trademarks, and
certain stock of subsidiaries of the Company, as
well as mortgages on the Company's three domestic
tissue mills (the "Shared Collateral").
Indebtedness under capital lease obligations,
including the Pass Through Certificate Leases, and
other Secured Indebtedness are secured by certain
assets of the Company and its subsidiaries. The
indebtedness of the
5
<PAGE>
Company's foreign subsidiaries is secured by
certain assets of those subsidiaries. The Secured
Indebtedness will have priority with respect to
the assets pledged as collateral to secure the
Secured Indebtedness. The Pass Through
Certificates are indirectly secured by a lien on
an owner trustee's interest in a paper
manufacturing facility, power plant and certain
related equipment located at the Company's tissue
mill in Georgia, all of which are leased to the
Company under the Pass Through Certificate Leases.
At September 30, 1993, the Company's subsidiaries
had outstanding liabilities of $124 million,
including trade payables. The Senior Notes will be
effectively subordinated to existing and future
liabilities of the Company's subsidiaries,
including trade payables. See "Certain Risk
Factors-- Subordination of the Senior Subordinated
Notes and Effect of Asset Encumbrances" and
"Description of Certain Indebtedness."
SENIOR SUBORDINATED NOTES
Interest Rate.......... 9% per annum.
Interest Payment
Dates................ February 1 and August 1 commencing August 1, 1994.
Maturity............... February 1, 2006.
Redemption............. The Senior Subordinated Notes may be redeemed at the
option of the Company, in whole or in part, at any
time on or after February 1, 1999, initially at
104.5% of their principal amount, plus accrued
interest to the redemption date, declining to 100%
of their principal amount, plus accrued interest
to the redemption date, on or after February 1,
2001. In addition, at the option of the Company at
any time prior to February 1, 1997, up to $227.5
million aggregate principal amount of the Senior
Subordinated Notes are redeemable from the
proceeds of one or more Public Equity Offerings
following which there is a Public Market, at 109%
of the principal amount thereof, plus accrued
interest. See "Description of the Notes--Terms of
the Senior Subordinated Notes--Optional
Redemption."
Ranking................ The Senior Subordinated Notes will be subordinated
in right of payment to all existing and future
Senior Indebtedness (as such term is defined in
the indenture under which the Senior Subordinated
Notes will be issued (the "Senior Subordinated
Note Indenture" and, together with the Senior Note
Indenture, the "Indentures")), including, without
limitation, the Company's obligations under the
Bank Credit Agreement, the 1993 Term Loan
Agreement, the Senior Secured Notes, the Pass
Through Certificate Leases, certain other secured
indebtedness of the Company, the 9 1/4% Notes and
the Senior Notes. The Senior Subordinated Notes
will rank pari passu with the 12 3/8% Notes, until
redeemed as described below under "Use of
Proceeds", and will constitute senior indebtedness
with respect to the 10% Notes, the 12 5/8%
Debentures that remain outstanding after the
redemption described below under "Use of Proceeds"
and the 14 1/8% Debentures. The Senior
Subordinated Note Indenture will not limit the
Company's ability to refinance the 10% Notes, the
12 5/8% Debentures and the 14 1/8% Debentures with
indebtedness that is senior to or pari passu with
the Senior Subordinated Notes. After giving pro
forma effect to the Refinancing as of September
30, 1993, approximately $1.7 billion of Senior
Indebtedness of the Company would have been
outstanding. The Senior Subordinated Notes will be
effectively subordinated to existing and future
liabilities of the Company's subsidiaries,
6
<PAGE>
including trade payables. As of September 30,
1993, the Company's subsidiaries had outstanding
liabilities of approximately $124 million,
including trade payables. See "Certain Risk
Factors--Subordination of the Senior Subordinated
Notes and Effect of Asset Encumbrances" and
"Description of the Notes."
COVENANTS................ The Indentures will contain certain covenants that,
among other things, limit the ability of the
Company and its subsidiaries to incur indebtedness,
pay dividends and make other restricted payments,
engage in transactions with shareholders and
affiliates, create liens, sell assets, engage in
mergers and consolidations and make investments in
unrestricted subsidiaries. See "Description of the
Notes--Covenants."
USE OF PROCEEDS.......... The net proceeds from the offerings of the Notes
(the "Note Offerings") will be used to redeem all
of the outstanding 12 3/8% Notes (the "12 3/8% Note
Redemption"), to redeem $238 million aggregate
principal amount of the 12 5/8% Debentures (the
"12 5/8% Debenture Redemption"), to prepay a
portion of the term indebtedness under the Bank
Credit Agreement (the "Term Loan"), to repay a
portion of the Company's indebtedness under the
Revolving Credit Facility (as defined below) and
to pay certain fees and expenses. The Note
Offerings, the 12 3/8% Note Redemption, the 12
5/8% Debenture Redemption, the prepayment of
indebtedness under the Term Loan and the repayment
of a portion of the indebtedness under the
Revolving Credit Facility are referred to herein
collectively as the "Refinancing." See "Use of
Proceeds" and "Description of Certain
Indebtedness."
CERTAIN RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
an investment in the Notes, including the Company's highly leveraged position,
deficiency in shareholders' equity and deficiency of earnings available to cover
fixed charges, competition and pricing, covenant restrictions that may limit the
Company's operating flexibility, the subordination of the Senior Subordinated
Notes and the effect of asset encumbrances, certain interests of Morgan Stanley
Group Inc. ("Morgan Stanley Group") and its affiliates, the trading market for
the Notes and fraudulent conveyance considerations, see "Certain Risk Factors."
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical consolidated financial
data of the Company for the years ended December 31, 1992, 1991, 1990 and 1989,
and for the periods ended December 31, 1988 and August 8, 1988, that were
derived from the consolidated financial statements of the Company, which were
audited by Arthur Andersen & Co., independent public accountants. The report of
such accountants with respect to the years ended December 31, 1992, 1991 and
1990 appears elsewhere in this Prospectus. Reference is made to such report
which calls attention to changes in methods of accounting for postretirement
benefits other than pensions and income taxes. The following table also sets
forth summary historical consolidated financial data of the Company for the
nine-month periods ended September 30, 1993 and 1992. The information presented
for the interim periods is unaudited but in the opinion of management, such
information reflects all adjustments (which, with the exception of the
extraordinary loss on debt retirement and the goodwill write-off in 1993 and
accounting changes to adopt Statement of Financial Accounting Standards ("SFAS")
No. 106 relating to certain postretirement benefits and to change the estimates
of the depreciable lives of certain machinery and equipment in 1992, consist
only of normal recurring accruals) necessary for a fair presentation of the
financial data for the interim periods. The results for the interim periods
presented are not necessarily indicative of the results for a full year.
The consolidated financial statements for the period ended August 8, 1988
("pre-Acquisition period") were prepared using the Company's historical basis of
accounting while the consolidated financial statements for the periods
subsequent to August 8, 1988 ("post-Acquisition periods") were prepared under a
new basis of accounting that reflects the fair values of assets acquired and
liabilities assumed, the related financing costs and all debt incurred in
conjunction with the Acquisition. Accordingly, the Company's operating results
in the post-Acquisition periods are not directly comparable to its results of
operations in the pre-Acquisition period.
The table following the summary historical consolidated financial data
presents summary unaudited pro forma consolidated financial data of the Company
derived from the unaudited pro forma condensed consolidated statements of income
and condensed consolidated balance sheet and notes thereto included elsewhere in
this Prospectus. The pro forma data were prepared as if the Refinancing had
occurred on September 30, 1993 for pro forma consolidated balance sheet
purposes, and as if the Refinancing had occurred on January 1, 1992 for pro
forma consolidated statement of income purposes. In addition, the sale of the 9
1/4% Notes and the 10% Notes, the borrowings under the 1993 Term Loan, the
redemption (the "14 5/8% Debenture Redemption") of all the Company's 14 5/8%
Junior Subordinated Debentures due 2004 (the "14 5/8% Debentures") and a $250
million payment on the Term Loan, all of which occurred in March and April 1993,
and the redemption on November 1, 1993 of $50 million aggregate principal amount
of 12 3/8% Notes (collectively, the "1993 Refinancing") are treated for pro
forma consolidated statement of income purposes as if they occurred on January
1, 1992. The redemption on November 1, 1993 of $50 million aggregate principal
amount of 12 3/8% Notes is also treated for pro forma consolidated balance sheet
purposes as if it occurred on September 30, 1993. See "Pro Forma Financial
Data."
RECENT DEVELOPMENTS
For a discussion of the Company's results of operations for the fourth
quarter of 1993 and the full 1993 year, see "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations--Recent
Developments."
8
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA(A)
<TABLE>
NINE MONTHS ENDED PERIOD FROM
YEAR ENDED AUGUST 9,
SEPTEMBER 30, DECEMBER 31, 1988 TO
-------------------- ------------------------------------------ DECEMBER 31,
1993 1992 1992 1991 1990 1989 1988
--------- --------- --------- --------- --------- --------- -------------
(UNAUDITED)
POST-ACQUISITION BASIS OF ACCOUNTING
-------------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................. $ 896 $ 866 $ 1,151 $ 1,138 $ 1,151 $ 1,054 $ 383
Cost of sales(b)...................... 590 535 726 713 719 660 246
--------- --------- --------- --------- --------- --------- -------------
Gross income.......................... 306 331 425 425 432 394 137
Selling, general and administrative... 71 75 97 98 105 96 34
Amortization of goodwill.............. 43 42 57 57 57 57 21
Goodwill write-off(c)................. 1,980 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- -------------
Operating income (loss)............... (1,788) 214 271 270 270 241 82
Interest expense...................... 259 249 338 371 423 410 177
Other (income) expense, net(d)........ (5) -- 2 (3) (33) (11) 5
--------- --------- --------- --------- --------- --------- -------------
Income (loss) before taxes............ (2,042) (35) (69) (98) (120) (158) (100)
Income taxes (credit)................. (6) 6 -- (24) (37) 14 (28)
--------- --------- --------- --------- --------- --------- -------------
Income (loss) before equity earnings,
extraordinary items and adjustment
for accounting change............... (2,036) (41) (69) (74) (83) (172) (72)
Equity in net income (loss) of
unconsolidated subsidiaries(d)...... -- -- -- (32) (23) (67) (13)
--------- --------- --------- --------- --------- --------- -------------
Net income (loss) before extraordinary
items and adjustment for accounting
change.............................. (2,036) (41) (69) (106) (106) (239) (85)
Extraordinary items--loss on debt
repurchases (net of income taxes)... (10) -- -- (5) -- -- --
Adjustment for adoption of SFAS No.
106(e).............................. -- (11) (11) -- -- -- --
--------- --------- --------- --------- --------- --------- -------------
Net income (loss)..................... $ (2,046) $ (52) $ (80) $ (111) $ (106) $ (239) $ (85)
--------- --------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- --------- -------------
OTHER DATA:
EBDIAT(f)............................. $ 290 $ 315 $ 410 $ 444 $ 441 $ 411 $ 145
Depreciation of property, plant and
equipment........................... 63 58 81 116 112 109 42
Amortization of goodwill.............. 43 42 57 57 57 57 21
Non-cash interest expense............. 80 101 140 141 145 132 62
Capital expenditures.................. 107 168 233 144 97 101 57
Ratio of earnings to fixed
charges(g).......................... -- -- -- -- -- -- --
Deficiency of earnings available to
cover fixed charges(g).............. (2,048) (44) (81) (103) (123) (263) (122)
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.......................... $ 1,619 $ 3,591 $ 3,575 $ 3,470 $ 3,627 $ 3,948 $ 4,515
Working capital (deficit)............. 14 13 (127) 2 (80) (119) (144)
Long-term debt (including current
portion) and Voting Common Stock
with put right...................... 3,197 3,053 3,104 2,947 3,125 3,333 3,662
Shareholders' equity (deficit)........ (2,074) 7 (29) 62 13 111 357
<CAPTION>
PERIOD FROM
JANUARY 1,
1988 TO
AUGUST 8,
1988
-------------
PRE-
ACQUISITION
BASIS OF
ACCOUNTING
-------------
(IN MILLIONS,
EXCEPT RATIO)
<S> <C>
STATEMENT OF INCOME DATA:
Net sales............................. $ 552
Cost of sales(b)...................... 351
-------------
Gross income.......................... 201
Selling, general and administrative... 51
Amortization of goodwill.............. --
Goodwill write-off(c)................. --
-------------
Operating income (loss)............... 150
Interest expense...................... 17
Other (income) expense, net(d)........ 12
-------------
Income (loss) before taxes............ 121
Income taxes (credit)................. 52
-------------
Income (loss) before equity earnings,
extraordinary items and adjustment
for accounting change............... 69
Equity in net income (loss) of
unconsolidated subsidiaries(d)...... 27
-------------
Net income (loss) before extraordinary
items and adjustment for accounting
change.............................. 96
Extraordinary items--loss on debt
repurchases (net of income taxes)... --
Adjustment for adoption of SFAS No.
106(e).............................. --
-------------
Net income (loss)..................... $ 96
-------------
-------------
OTHER DATA:
EBDIAT(f)............................. $ 196
Depreciation of property, plant and
equipment........................... 46
Amortization of goodwill.............. --
Non-cash interest expense............. --
Capital expenditures.................. 71
Ratio of earnings to fixed
charges(g).......................... 8.8
Deficiency of earnings available to
cover fixed charges(g).............. --
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.......................... $ 2,028
Working capital (deficit)............. 56
Long-term debt (including current
portion) and Voting Common Stock
with put right...................... 406
Shareholders' equity (deficit)........ 1,342
<FN>
- ---------------
(a) The consolidated financial statements for the period ended August 8, 1988 (pre-Acquisition period) were
prepared using the Company's historical basis of accounting while the consolidated financial statements for
the periods subsequent to August 8, 1988 (post-Acquisition periods) were prepared under a new basis of
accounting that reflects the fair values of assets acquired and liabilities assumed, the related financing
costs and all debt incurred in conjunction with the Acquisition. Accordingly, the Company's operating results
in the post-Acquisition periods are not directly comparable with its results of operations in the
pre-Acquisition period.
(Footnotes continued on following page)
9
<PAGE>
(Footnotes continued from preceding page)
(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 by $38 million
and net loss by $24 million in 1992.
(c) During the third quarter of 1993, the Company wrote off the unamortized balance of its goodwill of $1.98
billion after concluding that its projected results would not support the future amortization of the
Company's remaining goodwill balance.
(d) 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. The gain is reflected in other income.
(e) 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.
(f) 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 Bank Credit Agreement, the 1993 Term Loan Agreement, the
Senior Secured Note Agreement (as defined below), the Indentures and other instruments governing the
Company's indebtedness are based on the Company's EBDIAT, subject to certain adjustments. See "Description of
the Notes--Certain Definitions" and "Description of Certain Indebtedness."
(g) 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.
</TABLE>
10
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1993 DECEMBER 31, 1992
------------------- ------------------
(IN MILLIONS)
<S> <C> <C>
PRO FORMA CONSOLIDATED STATEMENT OF INCOME DATA(A):
Net sales.............................................................. $ 896 $ 1,151
Cost of sales.......................................................... 590 726
---------- ----------
Gross income........................................................... 306 425
Selling, general and administrative.................................... 71 97
Amortization of goodwill............................................... 43 57
Goodwill write-off..................................................... 1,980 --
---------- ----------
Operating income (loss)................................................ (1,788) 271
Interest expense....................................................... 236 308
Other (income) expense, net............................................ (5) 2
---------- ----------
Loss before taxes...................................................... (2,019) (39)
Income taxes........................................................... 3 12
---------- ----------
Net loss............................................................... $ (2,022) $ (51)
---------- ----------
---------- ----------
OTHER CONSOLIDATED PRO FORMA DATA:
EBDIAT(b).............................................................. $ 290 $ 410
Deficiency of earnings available to cover fixed charges(c)............. (2,025) (50)
PRO FORMA CONSOLIDATED BALANCE SHEET DATA
AT SEPTEMBER 30, 1993
Total assets........................................................... $ 1,625
Working capital........................................................ 14
Long-term debt (including current portion) and Voting Common Stock with
put right............................................................ 3,250
Shareholders' equity (deficit)......................................... (2,104)
</TABLE>
- ---------------
(a) The following pre-tax, non-cash charges are included in the pro forma
statement of income data (in millions):
<TABLE>
NINE MONTHS ENDED YEAR ENDED DECEMBER
SEPTEMBER 30, 1993 31, 1992
------------------- ---------------------
<S> <C> <C>
Depreciation of property, plant and equipment.... $ 63 $ 81
Amortization of goodwill......................... 43 57
Goodwill write-off............................... 1,980 --
Amortization of debt issuance costs.............. 9 15
Non-cash interest on the 14 1/8% Debentures...... 48 56
Other............................................ (5) 5
-------- ------
Total non-cash charges.................... $ 2,138 $ 214
-------- ------
-------- ------
</TABLE>
(b) See Note (d) to "Pro Forma Financial Data."
(c) See Note (e) to "Pro Forma Financial Data."
11
<PAGE>
THE COMPANY
The Company is a major manufacturer, converter and marketer of a
diversified line of single-use sanitary tissue paper products for the home and
away-from-home markets. The Company's principal products include paper towels,
bath tissue, table napkins, wipers and boxed facial tissue. The Company produces
and ships its products from manufacturing facilities located in Wisconsin,
Oklahoma, Georgia and the United Kingdom.
The Company believes that it is the largest producer of tissue products
sold into the domestic commercial (away-from-home) market. The Company sells a
majority of its tissue products through paper and institutional food wholesalers
into commercial markets. The Company continues to expand its domestic consumer
tissue business for the home market. Tissue products for household use are sold
through brokers to accounts that include major food store chains, mass
merchandisers and wholesale grocers. The Company's domestic tissue products for
home use are sold under the brand names Mardi Gras, Soft'n Gentle, So-Dri, Page
and Green Forest.
The Company's principal markets are in the United States where the Company
believes, based on an analysis of publicly available information, that its
operating income margins are higher than those of its publicly reporting
competition. A key factor contributing to these high operating income margins
has been the Company's proprietary de-inking technology, which enables it to use
a broad range of wastepaper grades and process wastepaper efficiently to recover
the fibers which are the principal raw material in papermaking. However, the
Company's operating income margins have been adversely affected by the adverse
tissue industry operating conditions experienced since 1991, and continue to be
adversely affected by low pricing resulting in part from relatively low industry
operating rates.
Since 1984, the Company has built an entirely new facility on the Savannah
River in Georgia (the "Savannah River" mill) and has added tissue machines at
Muskogee, Oklahoma and Green Bay, Wisconsin and the United Kingdom. This
additional capacity has helped the Company to increase its market share in
consumer tissue markets and maintain its strong position in domestic commercial
tissue markets.
The Company has invested heavily in its manufacturing operations,
particularly from 1986 to 1992, a period in which its manufacturing facilities
operated at or near full capacity. Capital expenditures in the Company's tissue
business were approximately $703 million for the five-year period ended December
31, 1992. Given the Company's high leverage and adverse tissue industry
operating conditions, the Company intends to continue to maintain and modernize
existing tissue mills but does not presently intend to make capital expenditures
to add material new capacity subsequent to the completion in 1994 of a new paper
machine under construction at the Company's Muskogee mill.
THE ACQUISITION
In 1988, FH Acquisition was organized on behalf of MSLEF II to effect the
acquisition of the Company. Pursuant to the Merger Agreement, FH Acquisition
commenced the Offer on July 1, 1988 for all outstanding shares at $53 per share
in cash, and subsequently purchased approximately 53.5 million shares in the
Offer. Thereafter, FH Acquisition was merged with and into the Company in the
Merger.
MSLEF II, an affiliate of MS&Co., is a limited partnership formed to
finance investments in industrial and other companies. Its principal investors
include major U.S. and foreign banks, insurance companies, pension funds and
corporations. As a result of the Acquisition, the Company became privately held
by MSLEF II and other investors.
12
<PAGE>
CERTAIN RISK FACTORS
In evaluating an investment in the Notes, purchasers of the Notes should
carefully consider the following factors as well as the other information set
forth in this Prospectus.
HIGHLY LEVERAGED POSITION; DEFICIT IN SHAREHOLDERS' EQUITY; DEFICIENCY OF
EARNINGS AVAILABLE TO COVER FIXED CHARGES
The Company has substantial consolidated indebtedness and has a substantial
deficit in common shareholders' equity. As of September 30, 1993, the Company's
consolidated debt (consisting of current and non-current portions of long-term
debt and voting common stock with put right) was approximately $3,197 million
and the deficit in common shareholders' equity was approximately $2,074 million.
For the nine-month periods ended September 30, 1993 and 1992 and the year ended
December 31, 1992, the Company's earnings before fixed charges (excluding the
write-off in 1993 of its remaining goodwill balance of $1.98 billion) were
inadequate to cover its fixed charges by $68 million, $44 million and $81
million, respectively. The Company's net loss for the nine-month period ended
September 30, 1993 was $2,046 million and for the year ended December 31, 1992
was $80 million. If the Company continues to experience losses, and continues to
have inadequate earnings before fixed charges to cover fixed charges, the
Company may be less able to meet its obligations, including its obligations
pursuant to the Notes.
The Company's indebtedness subsequent to the Acquisition bears interest at
higher average rates than the Company's indebtedness prior to the Acquisition
and the obligations of the Company under the Amended and Restated Credit
Agreement dated as of October 24, 1988, as amended, among the Company, as
successor to FH Acquisition, and a syndicate of banks and Bankers Trust Company,
as Agent (the "Bank Credit Agreement") (a maximum of $582 million after giving
effect to the Refinancing), the Senior Note Purchase Agreement dated as of
September 11, 1991 (the "Senior Secured Note Agreement") (pursuant to which $300
million principal amount of Senior Secured Notes were outstanding at September
30, 1993) and the term loan agreement dated as of March 22, 1993 between the
Company and Bankers Trust Company (the "1993 Term Loan Agreement") (pursuant to
which $100 million principal amount (the "1993 Term Loan") was outstanding at
September 30, 1993) bear interest at floating rates, causing the Company to be
sensitive to prevailing interest rates. While interest rates are currently at
very low levels, if interest rates rise the Company may be less able to meet its
debt service obligations, including its obligations pursuant to the Notes. The
Company is required to enter into interest rate agreements which effectively fix
the interest cost to the Company on a portion of the amount outstanding under
the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured
Note Agreement. 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 a 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.
The Company's substantial indebtedness could limit its capacity to respond
to market conditions (including its ability to satisfy its capital expenditure
requirements) or to meet its contractual and financial obligations, and,
therefore, may pose significant risks to holders of securities of the Company,
including holders of the Notes. Furthermore, the ability of the Company to
satisfy its obligations (including its obligations to pay interest on its
indebtedness) and to reduce its debt will be dependent upon the future
performance of the Company, which will be subject to prevailing economic
conditions and to financial, business and other factors, including factors
beyond the control of the Company, affecting the business and operations of the
Company.
13
<PAGE>
The Company will be obligated to make substantial principal and interest
payments on its indebtedness during the next several years. See "Description of
Certain Indebtedness." As a result of the significant level of indebtedness and
related debt service obligations, the Company would be less able to meet its
obligations during a further downturn in its business, including its obligations
pursuant to the Notes.
COVENANT RESTRICTIONS MAY LIMIT COMPANY'S OPERATING FLEXIBILITY
The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior
Secured Note Agreement contain numerous financial and operating covenants,
including, among other things, (i) a requirement that the Company maintain
certain financial ratios, (ii) restrictions on the ability of the Company and
its subsidiaries to incur indebtedness, to create or suffer to exist liens, to
make certain capital expenditures and to incur liability with respect to leases,
and (iii) limitations on certain other corporate actions. These restrictions
could prohibit the Company from taking actions which would otherwise be in the
best interests of the Company. In the absence of improved financial results, it
is likely that in 1995 the Company would be required to seek a waiver of the
cash interest coverage covenant under each of the Bank Credit Agreement, the
1993 Term Loan Agreement and the Senior Secured Note Agreement because the
Company's 14 1/8% Debentures will accrue interest in cash commencing November 1,
1994 and will require payments of interest in cash commencing May 1, 1995.
Although the Company believes that it will be able to obtain the appropriate
waivers from its lenders, there can be no assurance that this will be the case.
If the Company is not in compliance with its obligations under the Bank Credit
Agreement, the 1993 Term Loan Agreement or the Senior Secured Note Agreement,
events of default would occur thereunder, and the entire amounts of indebtedness
thereunder may be declared due and payable immediately. Upon such declaration,
virtually all other indebtedness of the Company, including payments to be made
under the Notes, could also become immediately due and payable. In such event,
payments with respect to the Notes will be less likely than would otherwise be
the case.
SUBORDINATION OF THE SENIOR SUBORDINATED NOTES AND EFFECT OF ASSET ENCUMBRANCES
The Senior Subordinated Notes are subordinated to all Senior Indebtedness
(as defined in the Senior Subordinated Note Indenture) of the Company, which at
September 30, 1993 after giving effect to the Refinancing, was approximately
$1,654 million, consisting of $432 million of indebtedness under the Bank Credit
Agreement, $100 million of indebtedness under the 1993 Term Loan, $300 million
principal amount of the Senior Secured Notes, $450 million principal amount of
the 9 1/4% Notes, $100 million principal amount of the Senior Notes,
approximately $85 million under the Pass Through Certificate Leases and $187
million of other indebtedness of the Company. Therefore, in the event of the
bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Senior Subordinated Notes
only after all Senior Indebtedness has been paid in full, and sufficient assets
may not exist to pay amounts due on the Senior Subordinated Notes. The
subordination provisions of the Senior Subordinated Note Indenture provide that
no cash payment may be made with respect to the principal of or premium, if any,
or interest on the Senior Subordinated Notes during the continuance of a payment
default under any Senior Indebtedness. In addition, if certain non-payment
defaults exist with respect to certain Senior Indebtedness, the holders of such
Senior Indebtedness will be able to block payment of the Senior Subordinated
Notes for specified periods of time. See "Description of the Notes--Ranking."
The Senior Notes will rank pari passu in right of payment with all other
general obligations of the Company. However, the Company's obligations to the
lenders under the Bank Credit Agreement (the "Banks"), to the lenders under the
1993 Term Loan Agreement and to the holders of the Senior Secured Notes are
secured by a first lien (subject to permitted liens) on the Shared Collateral.
The Pass Through Certificates are indirectly secured by a lien on an owner
trustee's ownership interest in a paper manufacturing facility, power plant and
certain related equipment located at the Company's Savannah River mill (the
"Pass Through Assets"), all of which are leased to the Company by such owner
trustee under the Pass Through Certificate Leases, which are treated as capital
leases pari passu with the
14
<PAGE>
Senior Notes and senior in right of payment to the Senior Subordinated Notes. In
addition, the Company has obligations resulting from other sale and leaseback
transactions which are treated as capital leases pari passu with the Senior
Notes and senior in right of payment to the Senior Subordinated Notes. The
indebtedness of the Company's foreign subsidiaries is secured by certain assets
of those subsidiaries. The Notes are not secured. The holders of Secured
Indebtedness will be entitled to payment of their indebtedness out of the
proceeds of their collateral prior to the holders of any general unsecured
obligations of the Company, including the Notes. After giving effect to the
Refinancing, as of September 30, 1993, the Company and its subsidiaries would
have had approximately $1.1 billion of Secured Indebtedness outstanding and an
additional $150 million available for borrowing under the Revolving Credit
Facility. See "Description of Certain Indebtedness--The Bank Credit Agreement,"
"--1993 Term Loan," "--Senior Secured Notes" and "--Pass Through Certificates,
Series 1991."
The Notes are effectively subordinated to existing and future liabilities
of the Company's subsidiaries, including trade payables. At September 30, 1993,
the Company's subsidiaries had outstanding liabilities of $124 million,
including trade payables.
COMPETITION AND PRICING
The manufacture and sale of tissue products are highly competitive, and
sales of tissue paper products are generally subject to changes in the economy
and competitive conduct that can significantly impact selling prices and, as a
result, the Company's profitability. Low industry operating rates and aggressive
competitive pricing among tissue producers, additions to capacity and other
factors have been adversely affecting tissue industry operating conditions and
the Company's operating results since 1991. As a result of these current
conditions, and the effects of announced industry capacity additions through
1995 and the weak economic recovery, tissue industry operating rates may remain
at relatively low levels for the near term, adversely affecting industry
pricing. See "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations" and "Business--Competition."
INTEREST OF MORGAN STANLEY GROUP AND AFFILIATES; POTENTIAL CONFLICTS OF INTEREST
Morgan Stanley Group and certain affiliated entities, including MSLEF II,
provided significant amounts of financing for the Acquisition. As of September
30, 1993, Morgan Stanley Group and certain affiliated entities beneficially
owned approximately 57% (on a fully diluted basis) of the Company's Common
Stock. In addition, certain persons who are affiliated with MS&Co. comprise a
majority of the directors of the Company. As a result of these relationships,
circumstances could arise in which the interest of Morgan Stanley Group or MSLEF
II, as equity holders, could be in conflict with the interests of holders of the
Notes. For example, if the Company encounters financial difficulties, or is
unable to pay certain of its debts as they mature, the interests of the
Company's equity investors might conflict with those of the holders of the
Notes. In addition, the equity investors may have an interest in pursuing
acquisitions, divestitures or other transactions that, in their judgment, could
enhance their equity investment, even though such transactions might involve
risks to the holders of the Notes. It is an event of default under each of the
Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Note
Agreement if Morgan Stanley Group, MSLEF II or their affiliates cease to own or
control at least a majority of the Company's outstanding Common Stock.
The Company has entered into an agreement with MS&Co. for financial
advisory services in consideration for which the Company pays MS&Co. an annual
fee of $1 million. MS&Co. is also entitled to reimbursement for all reasonable
expenses incurred in the performance of the foregoing services. The Company paid
MS&Co. approximately $1.1 million, $1.1 million and $1.3 million for these and
other miscellaneous services in 1992, 1991 and 1990, respectively. In connection
with the sale of the 9 1/4% Notes and the 10% Notes in 1993, MS&Co. received
approximately $19.5 million of underwriting fees. In 1992, MS&Co. received
approximately $0.7 million in connection with the
15
<PAGE>
underwriting of the reissuance of the Company's Development Authority of
Effingham Count Pollution Control Revenue Refunding Bonds, Series 1988. In
connection with the Pass Through Certificate Leases, MS&Co. received
approximately $2.9 million of advisory and underwriting fees. In connection with
the Company's sale of Senior Secured Notes in 1991, MS&Co. received
approximately $6.8 million of advisory fees. In addition, with regard to a 1989
sale and leaseback transaction, MS&Co. received approximately $2.3 million of
advisory fees. Also, in 1988, the Company paid MS&Co. $325,000 for services in
connection with the negotiation of interest rate cap and swap agreements. See
"Certain Transactions--Other Transactions."
Based on transactions of similar size and nature, the Company believes the
foregoing fees received by MS&Co. are no less favorable to the Company than
would be available from unaffiliated third parties.
TRADING MARKET FOR THE NOTES
MS&Co. currently makes a market in the Notes. However, it is not obligated
to do so, and any such market-making may be discontinued at any time without
notice, at its sole discretion. Therefore, no assurance can be given as to the
liquidity of, or the trading market for, the Notes. See "Market-Making
Activities of MS&Co."
The liquidity of, and trading market for, the Notes may also be adversely
affected by declines in the market for high yield securities generally. Such a
decline may adversely affect such liquidity and trading markets independent of
the financial performance of, and prospects for, the Company.
FRAUDULENT CONVEYANCE STATUTES
Various laws, including laws relating to fraudulent conveyance, enacted for
the protection of creditors may apply to the Company's incurrence and assumption
of indebtedness in connection with the Acquisition, including the assumption of
indebtedness of FH Acquisition pursuant to the Merger and the issuance of the
Notes to refinance a portion of such indebtedness. If a court were to find, in a
lawsuit by an unpaid creditor or representative of creditors of the Company,
that the Company did not receive fair consideration or reasonably equivalent
value for incurring or assuming such indebtedness and, at the time of such
incurrence or assumption, the Company (i) was insolvent, (ii) was rendered
insolvent by reason of such incurrence, assumption or transaction, (iii) was
engaged in a business or transaction for which the assets remaining in the
Company constituted unreasonably small capital, or (iv) intended to incur or
assume or believed it would incur or assume debts beyond its ability to pay such
debts as they mature, such court, subject to applicable statutes of limitation,
could determine to invalidate, in whole or in part, such indebtedness as
fraudulent conveyances or subordinate such indebtedness to existing or future
creditors of the Company. In addition, if a court were to find that, at the time
the Company granted security interests to or for the benefit of the holders of
secured indebtedness of the Company, the Company did not receive fair
consideration or reasonably equivalent value for the grant of such security
interests and came within any of the foregoing clauses (i) through (iv),
creditor or representative of creditors of the Company could seek to avoid the
grant of such security interests. This could result in an event of default with
respect tot he Bank Credit Agreement, the Senior Secured Note Agreement and the
1993 Term Loan Agreement which, under the terms thereof (subject to applicable
law), would allow the holders of secured indebtedness to accelerate such debt.
The measure of insolvency for purposes of the foregoing varies depending on
the law of the jurisdiction which is being applied. Generally, however, the
Company would be considered insolvent at a particular time if the sum of its
debts was then greater than all of its property at a fair valuation or if the
present fair saleable value of its assets was then less than the amount that
would be required to pay its probable liabilities on its existing debts as they
became absolute and matured.
On the basis of its historical financial information, its recent operating
history as discussed in "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations" and other factors, the Company
believes that, after giving effect to indebtedness incurred or
16
<PAGE>
assumed in connection with the Acquisition, subsequent financings and the
Refinancing, the Company was not and will not be rendered insolvent, and had and
will have sufficient capital for the businesses in which it is engaged and is
and will be able to pay its debts as they mature. Although there may be
arguments to the contrary, the holders of the Notes would be able to take the
position that, with respect to the Notes, the Company received reasonably
equivalent value or fair consideration for incurring such indebtedness. There
can be no assurance, however, as to whether a court would concur with such
beliefs.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Notes
are estimated to be approximately $727.5 million after deducting $22.5 million
in underwriter's commissions and other expenses estimated to be incurred in
connection with the Note Offerings.
Following consummation of the Note Offerings, the Company intends to use
the net proceeds thereof to redeem all of the outstanding 12 3/8% Notes ($333.9
million aggregate principal amount currently outstanding), which mature in 1997,
at 105% of the principal amount thereof, together with accrued and unpaid
interest thereon to the date of redemption, to redeem $238.1 million aggregate
principal amount of the outstanding 12 5/8% Debentures ($383.9 million aggregate
principal amount currently outstanding), which mature in 2000, at 105% of the
principal amount thereof, together with accrued and unpaid interest thereon to
the date of redemption, to prepay $100 million of the $107 million Term Loan
payment due in December 1994, which bears interest at floating rates (a weighted
average rate of 5.63% at December 31, 1993), to repay a portion of the Company's
indebtedness under the revolving credit facility which is part of the Bank
Credit Agreement (the "Revolving Credit Facility") which bears interest at
floating rates (a weighted average rate of 6.13% at December 31, 1993) and to
pay certain fees and expenses in connection with the Refinancing. The Term Loan
prepayment and the Revolving Credit Facility repayment are expected to occur
immediately after consummation of the Note Offerings, while the 12 3/8% Note
Redemption and the 12 5/8% Debenture Redemption are expected to occur
approximately one month thereafter. Pending the 12 3/8% Note Redemption and the
12 5/8% Debenture Redemption, a portion of the net proceeds of the Note
Offerings will be used to further reduce a portion of outstanding borrowings
under the Revolving Credit Facility (and the loan availability thereby created
under the Revolving Credit Facility will be reserved for the 12 3/8% Note
Redemption and the 12 5/8% Debenture Redemption) and any excess may be invested
in short-term investments.
The estimated sources and uses of funds required to complete the
Refinancing are as follows (in millions):
<TABLE>
AMOUNT
---------
<S> <C>
Sources of Funds:
Senior Notes.................................................................. $ 100.0
Senior Subordinated Notes..................................................... 650.0
---------
Total sources of funds................................................... $ 750.0
---------
---------
Uses of Funds:
12 3/8% Note Redemption....................................................... $ 350.6(a)
12 5/8% Debenture Redemption.................................................. 250.0(a)
Term Loan prepayment.......................................................... 100.0
Revolving Credit Facility repayment........................................... 26.9
Company transaction fees and expenses(b)...................................... 22.5
---------
Total uses of funds...................................................... $ 750.0
---------
---------
</TABLE>
- ---------------
(a) Includes 5% redemption premium but not accrued interest to the redemption
date.
(b) Includes underwriter's commissions and other transaction expenses for the
Refinancing payable or reimbursable by the Company.
17
<PAGE>
CAPITALIZATION
Set forth below is the actual consolidated capitalization of the Company at
September 30, 1993, and the pro forma consolidated capitalization of the Company
as of that date after giving effect to the Refinancing and the redemption on
November 1, 1993 of $50 million aggregate principal amount of the 12 3/8% Notes.
The information presented below should be read in conjunction with the Company's
audited consolidated financial statements, unaudited condensed consolidated
financial statements and the pro forma consolidated financial data included
elsewhere in this Prospectus.
<TABLE>
AT SEPTEMBER 30, 1993
--------------------------
ACTUAL PRO FORMA (A)
----------- -------------
(IN MILLIONS)
<S> <C> <C>
Total Short-Term Debt(b).......................................................... $ 5.4 $ 5.4
----------- -------------
Long-Term Debt, less current maturities(c):
Term Loan....................................................................... 331.8 231.8
Revolving Credit Facility(d).................................................... 174.5 200.1
1993 Term Loan.................................................................. 100.0 100.0
Senior Secured Notes............................................................ 300.0 300.0
9 1/4% Senior Notes............................................................. 450.0 450.0
Senior Notes(e)................................................................. -- 100.0
12 3/8% Senior Subordinated Notes(d)............................................ 383.9 --
Senior Subordinated Notes(e).................................................... -- 650.0
12 5/8% Subordinated Debentures................................................. 383.9 145.8
10% Subordinated Notes.......................................................... 300.0 300.0
14 1/8% Junior Subordinated Debentures.......................................... 489.1 489.1
Capital lease obligations, at interest rates approximating 10.9%................ 177.9 177.9
Other long-term debt............................................................ 88.4 88.4
----------- -------------
Total Long-Term Debt(f).................................................... 3,179.5 3,233.1
----------- -------------
Voting Common Stock with put right................................................ 11.8 11.8
----------- -------------
Shareholders' Equity (Deficit):
Voting Common Stock, $.01 par value:
8.40 million authorized, 5.86 million issued and outstanding................. 600.5 600.5
Cumulative translation adjustment............................................... (4.5) (4.5)
Retained earnings (deficit)..................................................... (2,670.3) (2,700.0)
----------- -------------
Total Shareholders' Equity (Deficit)....................................... (2,074.3) (2,104.0)
----------- -------------
Total Capitalization....................................................... $ 1,122.4 $ 1,146.3
----------- -------------
----------- -------------
<FN>
- ---------------
(a) Calculated based upon estimated proceeds to the Company from the Note Offerings and after giving effect to
the redemption on November 1, 1993 of $50 million aggregate principal amount of 12 3/8% Notes. See "Use of
Proceeds" and "Pro Forma Financial Data."
(b) Total actual and pro forma short-term debt at December 31, 1993 was $112.8 million and $12.8 million,
respectively.
(c) See Note 8 of the Company's audited consolidated financial statements and Note 6 of the Company's unaudited
condensed consolidated financial statements for additional information with respect to long-term debt.
(d) On November 1, 1993, $50 million aggregate principal amount of 12 3/8% Notes were redeemed by the Company at
the redemption price of 105% of the principal amount thereof. The redemption was funded from borrowings under
the Revolving Credit Facility. See "Pro Forma Financial Data."
(e) See "Description of the Notes."
(f) Total actual and pro forma long-term debt at December 31, 1993 was $3,109.8 million and $3,260.9 million,
respectively.
</TABLE>
18
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of the Company for the years ended December 31, 1992, 1991, 1990 and 1989,
and for the periods ended December 31, 1988 and August 8, 1988, that were
derived from the consolidated financial statements of the Company, which were
audited by Arthur Andersen & Co., independent public accountants. The report of
such accountants with respect to the years ended December 31, 1992, 1991 and
1990 appears elsewhere in this Prospectus. Reference is made to such report
which calls attention to changes in methods of accounting for postretirement
benefits other than pensions and income taxes. The following table also sets
forth historical consolidated financial data of the Company for the nine-month
periods ended September 30, 1993 and 1992. The information presented for the
interim periods is unaudited but in the opinion of management, such information
reflects all adjustments (which, with the exception of the extraordinary loss on
debt retirement and the goodwill write-off in 1993 and accounting changes to
adopt SFAS No. 106 relating to certain postretirement benefits and to change the
estimates of the depreciable lives of certain machinery and equipment in 1992,
consist only of normal recurring accruals) necessary for a fair presentation of
the financial data for the interim periods. The results for the interim periods
presented are not necessarily indicative of the results for a full year.
The consolidated financial statements for the period ended August 8, 1988
(pre-Acquisition period) were prepared using the Company's historical basis of
accounting while the consolidated financial statements for the periods
subsequent to August 8, 1988 (post-Acquisition periods) were prepared under a
new basis of accounting that reflects the fair values of assets acquired and
liabilities assumed, the related financing costs and all debt incurred in
conjunction with the Acquisition. Accordingly, the Company's operating results
in the post-Acquisition periods are not directly comparable to its results of
operations in the pre-Acquisition period.
The following financial information should be read in conjunction with
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations," the audited consolidated financial statements and the
related notes thereto and the unaudited condensed consolidated financial
statements and the related notes thereto included elsewhere in this Prospectus.
19
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA(A)
<TABLE>
NINE MONTHS ENDED PERIOD FROM
YEAR ENDED AUGUST 9,
SEPTEMBER 30, DECEMBER 31, 1988 TO
-------------------- ------------------------------------------ DECEMBER 31,
1993 1992 1992 1991 1990 1989 1988
--------- --------- --------- --------- --------- --------- -------------
(UNAUDITED)
POST-ACQUISITION BASIS OF ACCOUNTING
-------------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................. $ 896 $ 866 $ 1,151 $ 1,138 $ 1,151 $ 1,054 $ 383
Cost of sales(b)...................... 590 535 726 713 719 660 246
--------- --------- --------- --------- --------- --------- -------------
Gross income.......................... 306 331 425 425 432 394 137
Selling, general and administrative... 71 75 97 98 105 96 34
Amortization of goodwill.............. 43 42 57 57 57 57 21
Goodwill write-off(c)................. 1,980 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- -------------
Operating income (loss)............... (1,788) 214 271 270 270 241 82
Interest expense...................... 259 249 338 371 423 410 177
Other (income) expense, net(d)........ (5) -- 2 (3) (33) (11) 5
--------- --------- --------- --------- --------- --------- -------------
Income (loss) before taxes............ (2,042) (35) (69) (98) (120) (158) (100)
Income taxes (credit)................. (6) 6 -- (24) (37) 14 (28)
--------- --------- --------- --------- --------- --------- -------------
Income (loss) before equity earnings,
extraordinary items and adjustment
for accounting change............... (2,036) (41) (69) (74) (83) (172) (72)
Equity in net income (loss) of
unconsolidated subsidiaries(d)...... -- -- -- (32) (23) (67) (13)
--------- --------- --------- --------- --------- --------- -------------
Net income (loss) before extraordinary
items and adjustment for accounting
change.............................. (2,036) (41) (69) (106) (106) (239) (85)
Extraordinary items--loss on debt
repurchases (net of income taxes)... (10) -- -- (5) -- -- --
Adjustment for adoption of SFAS No.
106(e).............................. -- (11) (11) -- -- -- --
--------- --------- --------- --------- --------- --------- -------------
Net income (loss)................. $ (2,046) $ (52) $ (80) $ (111) $ (106) $ (239) $ (85)
--------- --------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- --------- -------------
OTHER DATA:
EBDIAT(f)............................. $ 290 $ 315 $ 410 $ 444 $ 441 $ 411 $ 145
Depreciation of property, plant and
equipment........................... 63 58 81 116 112 109 42
Amortization of goodwill.............. 43 42 57 57 57 57 21
Non-cash interest expense............. 80 101 140 141 145 132 62
Capital expenditures.................. 107 168 233 144 97 101 57
Ratio of earnings to fixed
charges(g).......................... -- -- -- -- -- -- --
Deficiency of earnings available to
cover fixed charges(g).............. (2,048) (44) (81) (103) (123) (263) (122)
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.......................... $ 1,619 $ 3,591 $ 3,575 $ 3,470 $ 3,627 $ 3,948 $ 4,515
Working capital (deficit)............. 14 13 (127) 2 (80) (119) (144)
Long-term debt (including current
portion) and Voting Common Stock
with put right...................... 3,197 3,053 3,104 2,947 3,125 3,333 3,662
Shareholders' equity (deficit)........ (2,074) 7 (29) 62 13 111 357
<CAPTION>
PERIOD FROM
JANUARY 1,
1988 TO
AUGUST 8,
1988
-------------
PRE-
ACQUISITION
BASIS OF
ACCOUNTING
-------------
(IN MILLIONS,
EXCEPT RATIO)
STATEMENT OF INCOME DATA:
Net sales............................. $ 552
Cost of sales(b)...................... 351
-------------
Gross income.......................... 201
Selling, general and administrative... 51
Amortization of goodwill.............. --
Goodwill write-off(c)................. --
-------------
Operating income (loss)............... 150
Interest expense...................... 17
Other (income) expense, net(d)........ 12
-------------
Income (loss) before taxes............ 121
Income taxes (credit)................. 52
-------------
Income (loss) before equity earnings,
extraordinary items and adjustment
for accounting change............... 69
Equity in net income (loss) of
unconsolidated subsidiaries(d)...... 27
-------------
Net income (loss) before extraordinary
items and adjustment for accounting
change.............................. 96
Extraordinary items--loss on debt
repurchases (net of income taxes)... --
Adjustment for adoption of SFAS No.
106(e).............................. --
-------------
Net income (loss)................. $ 96
-------------
-------------
OTHER DATA:
EBDIAT(f)............................. $ 196
Depreciation of property, plant and
equipment........................... 46
Amortization of goodwill.............. --
Non-cash interest expense............. --
Capital expenditures.................. 71
Ratio of earnings to fixed
charges(g).......................... 8.8
Deficiency of earnings available to
cover fixed charges(g).............. --
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.......................... $ 2,028
Working capital (deficit)............. 56
Long-term debt (including current
portion) and Voting Common Stock
with put right...................... 406
Shareholders' equity (deficit)........ 1,342
<FN>
- ---------------
(a) The consolidated financial statements for the period ended August 8, 1988 (pre-Acquisition period) were
prepared using the Company's historical basis of accounting while the consolidated financial statements for
the periods subsequent to August 8, 1988 (post-Acquisition periods) were prepared under a new basis of
accounting that reflects the fair values of assets acquired and liabilities assumed, the related financing
costs and all debt incurred in conjunction with the Acquisition. Accordingly, the Company's operating results
in the post-acquisition periods are not directly comparable with its results of operations in the
pre-acquisition period.
(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 by $38 million
and net loss by $24 million in 1992.
(Footnotes continued on following page)
20
<PAGE>
(Footnotes continued from preceding page)
(c) During the third quarter of 1993, the Company wrote off the unamortized balance of its goodwill of $1.98
billion after concluding that its projected results would not support the future amortization of the
Company's remaining goodwill balance.
(d) In 1989, the Company transferred all the capital stock of Fort Howard Cup Corporation to Sweetheart for a
49.9% equity interest in Sweetheart and other assets for a total consideration of $620 million. 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. The
gain is reflected in other income.
(e) 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.
(f) 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 Bank Credit Agreement, the 1993 Term Loan Agreement, the
Senior Secured Note Agreement, the Indentures and other instruments governing the Company's indebtedness are
based on the Company's EBDIAT, subject to certain adjustments. See "Description of the Notes--Certain
Definitions" and "Description of Certain Indebtedness."
(g) 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.
</TABLE>
21
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed consolidated statement of
income and condensed consolidated balance sheet (collectively, the "Pro Forma
Statements") were prepared to illustrate the estimated effects of the
Refinancing as if the Refinancing had occurred for consolidated statement of
income presentation purposes on January 1, 1992, and for consolidated balance
sheet presentation purposes on September 30, 1993. The 1993 Refinancing is
treated for consolidated statement of income purposes as if it had occurred on
January 1, 1992. In addition, the redemption on November 1, 1993 of $50 million
aggregate principal amount of 12 3/8% Notes is treated for consolidated balance
sheet presentation purposes as if it had occurred on September 30, 1993.
The aggregate cost of the 12 3/8% Note Redemption, the 12 5/8% Debenture
Redemption and estimated transaction fees and expenses are provided solely for
the purpose of presenting the pro forma financial data set forth below. The
actual transaction fees and expenses may differ from the assumption set forth
below.
THE PRO FORMA FINANCIAL DATA DO NOT PURPORT TO REPRESENT WHAT THE COMPANY'S
FINANCIAL POSITION OR RESULTS OF OPERATIONS WOULD ACTUALLY HAVE BEEN IF THE
REFINANCING IN FACT HAD OCCURRED AT SEPTEMBER 30, 1993 OR IF THE REFINANCING AND
THE 1993 REFINANCING HAD OCCURRED ON JANUARY 1, 1992 OR TO PROJECT THE COMPANY'S
FINANCIAL POSITION OR RESULTS OF OPERATIONS FOR ANY FUTURE DATE OR PERIOD.
The following financial information should be read in conjunction with
"Capitalization," "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations," the audited consolidated financial statements and the
related notes thereto and the unaudited condensed consolidated financial
statements and the related notes thereto included elsewhere in this Prospectus.
22
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
<TABLE>
1993
REFINANCING REFINANCING
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1992:
Net sales.......................................... $ 1,151,351 $ 1,151,351
Cost of sales...................................... 726,356 726,356
------------- -------------
Gross income....................................... 424,995 424,995
Selling, general and administrative................ 97,620 97,620
Amortization of goodwill........................... 56,700 56,700
------------- -------------
Operating income................................... 270,675 270,675
Interest expense................................... 338,374 $ (13,418)(a) $(16,969)(a) 307,987
Other expense, net................................. 2,101 -- -- 2,101
------------- ----------- ----------- -------------
Loss before taxes.................................. (69,800) 13,418 16,969 (39,413)
Income taxes (credit).............................. (398) 5,099(b) 6,448(b) 11,149
------------- ----------- ----------- -------------
Net loss before adjustment for accounting change... (69,402) 8,319 10,521 (50,562)
Adjustment for adoption of SFAS No. 106............ (10,587) 10,587(c) -- --
------------- ----------- ----------- -------------
Net loss........................................... $ (79,989) $ 18,906 $ 10,521 $ (50,562)
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
EBDIAT(d).......................................... $ 409,772 $ 409,772
Deficiency of earnings available to cover fixed
charges(e)....................................... (80,847) $ 13,418 $ 16,969 (50,460)
NINE MONTHS ENDED SEPTEMBER 30, 1993:
Net sales.......................................... $ 895,768 $ 895,768
Cost of sales...................................... 590,147 590,147
------------- -------------
Gross income....................................... 305,621 305,621
Selling, general and administrative................ 70,707 70,707
Amortization of goodwill........................... 42,576 42,576
Goodwill write-off................................. 1,980,427 1,980,427
------------- -------------
Operating loss..................................... (1,788,089) (1,788,089)
Interest expense................................... 259,157 $ (9,627)(a) $(13,043)(a) 236,487
Other income, net.................................. (5,475) -- -- (5,475)
------------- ----------- ----------- -------------
Loss before taxes.................................. (2,041,771) 9,627 13,043 (2,019,101)
Income taxes (credit).............................. (5,483) 3,659 4,956(b) 3,132
------------- ----------- ----------- -------------
Loss before extraordinary item..................... (2,036,288) 5,968 8,087 (2,022,233)
Extraordinary item................................. (9,760) -- 9,760(f) --
------------- ----------- ----------- -------------
Net loss........................................... $ (2,046,048) $ 5,968 $ 17,847 $ (2,022,233)
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
EBDIAT(d).......................................... $ 289,975 $ 289,975
Deficiency of earnings available to cover fixed
charges(e)....................................... $ (2,047,559) $ 9,627 $ 13,043 $ (2,024,889)
</TABLE>
The following pre-tax, non-cash charges are included in the pro forma
condensed consolidated statements of income (in thousands):
<TABLE>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1993 DECEMBER 31, 1992
------------------- ------------------
<S> <C> <C>
Depreciation of property, plant and equipment............................ $ 62,893 $ 81,277
Amortization of goodwill................................................. 42,576 56,700
Goodwill write-off....................................................... 1,980,427 --
Amortization of debt issuance costs...................................... 8,957 14,568
Non-cash interest on the 14 1/8% Debentures.............................. 47,500 56,423
Other.................................................................... (4,828) 4,837
------------------- ------------------
Total non-cash charges........................................... $ 2,137,525 $ 213,805
------------------- ------------------
------------------- ------------------
</TABLE>
Depreciation of property, plant and equipment and other non-cash charges
are reflected in cost of sales, selling, general and administrative expenses and
other income/expense, net. Amortization of debt issuance costs and non-cash
interest on the 14 1/8% Debentures are reported in interest expense.
See Notes to Pro Forma Financial Data
23
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
AT SEPTEMBER 30, 1993
--------------------------------------------------------------
1993
REFINANCING REFINANCING
HISTORICAL ADJUSTMENTS(G) ADJUSTMENTS(H) PRO FORMA
-------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash........................................... $ 764 $ 764
Receivables--net............................... 123,289 123,289
Inventories.................................... 104,088 104,088
Deferred income taxes.......................... 10,000 10,000
Income taxes receivable........................ 2,500 2,500
-------------- --------------
Total current assets...................... 240,641 240,641
Property, plant and equipment.................... 1,798,241 1,798,241
Less: Accumulated depreciation................. 498,978 498,978
-------------- --------------
Net property, plant and equipment.............. 1,299,263 1,299,263
Other assets 79,145 $ 6,682 $ (1,055) 84,772
-------------- -------------- -------------- --------------
Total assets.............................. $ 1,619,049 $ 6,682 $ (1,055) $ 1,624,676
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable............................... $ 89,934 $ 89,934
Interest payable............................... 62,196 62,196
Income taxes payable........................... 2,869 2,869
Other current liabilities...................... 65,841 65,841
Current portion of long-term debt.............. 5,446 5,446
-------------- --------------
Total current liabilities................. 226,286 226,286
Long-term debt:
Term Loan...................................... 331,753 $ (100,000) 231,753
Revolving Credit Facility...................... 174,500 (26,894) $ 52,500 200,106
1993 Term Loan................................. 100,000 -- -- 100,000
Senior Secured Notes........................... 300,000 -- -- 300,000
9 1/4% Notes................................... 450,000 -- -- 450,000
Senior Notes................................... -- 100,000 -- 100,000
12 3/8% Notes.................................. 383,910 (333,910) (50,000) --
Senior Subordinated Notes...................... -- 650,000 -- 650,000
12 5/8% Debentures............................. 383,910 (238,095) -- 145,815
10% Notes...................................... 300,000 -- -- 300,000
14 1/8% Debentures............................. 489,106 -- -- 489,106
Capital lease obligations...................... 177,947 -- -- 177,947
Other.......................................... 88,349 -- -- 88,349
-------------- -------------- -------------- --------------
Total long-term debt...................... 3,179,475 51,101 2,500 3,233,076
Deferred and other long-term income taxes........ 249,265 (16,879) (1,351) 231,035
Other liabilities................................ 26,544 26,544
Voting Common Stock with put right............... 11,820 11,820
Shareholders' equity (deficit):
Voting Common Stock............................ 600,459 600,459
Cumulative translation adjustment.............. (4,541) (4,541)
Retained earnings (deficit).................... (2,670,259) (27,540) (2,204) (2,700,003)
-------------- -------------- -------------- --------------
Total shareholders' equity (deficit)...... (2,074,341) (27,540) (2,204) (2,104,085)
-------------- -------------- -------------- --------------
Total liabilities and shareholders' equity
(deficit)............................... $ 1,619,049 $ 6,682 $ (1,055) $ 1,624,676
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See Notes to Pro Forma Financial Data
24
<PAGE>
NOTES TO PRO FORMA FINANCIAL DATA
(a) Decreased interest expense is based upon the pro forma consolidated debt
of the Company as if the Refinancing and the 1993 Refinancing had been
consummated on January 1, 1992, as follows (in thousands):
<TABLE>
REFINANCING 1993 REFINANCING
--------------------------- ---------------------------
YEAR NINE MONTHS YEAR NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1992 1993 1992 1993
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Senior Notes............................. $ 8,250 $ 6,188 -- --
Senior Subordinated Notes................ 58,500 43,875 -- --
9 1/4% Notes............................. -- -- $ 41,625 $ 10,015
10% Notes................................ -- -- 30,000 7,183
1993 Term Loan(1)........................ -- -- 6,530 1,620
Term Loan(1)(2).......................... -- -- 706 1,106
Revolving Credit Facility(1)(2).......... -- -- 363 372
Amortization of debt issuance costs(3)... 2,000 1,500 3,650 880
Elimination of historical interest
expense including amortization of debt
issuance costs(4)...................... (82,168) (61,190) (99,843) (34,219)
------------ ------------- ------------ -------------
$ (13,418) $ (9,627) $ (16,969) $ (13,043)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
---------------------------------
(1) A change in the interest rate of 0.25% would change
interest expense, loss before taxes and deficiency of
earnings available to cover fixed charges, as follows (in
thousands):
<TABLE>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1992 SEPTEMBER 30, 1993
----------------- ------------------
<S> <C> <C>
1993 Term Loan.................................... $ 250 $ 188
Term Loan......................................... 706 530
Revolving Credit Facility......................... 363 272
Senior Secured Notes.............................. 750 563
-------- --------
$ 2,069 $ 1,553
-------- --------
-------- --------
</TABLE>
(2) As a result of the 1993 Refinancing, certain financial
tests in the Term Loan and Revolving Credit Facility would
require an adjustment to the base interest rate resulting
in an increase of 0.5% for two calendar quarters during
1992 and for eight months of 1993.
(3) Debt issuance costs are amortized over the life of the
related new debt, ranging from 4 to 12 years. The pro
forma statements of income do not include charges of
approximately $16.9 million representing debt issuance
costs to be charged to expense in connection with the
Refinancing and the redemption of $50 million aggregate
principal amount of 12 3/8% Notes on November 1, 1993.
(4) Reflects elimination of interest expense, including
amortization of debt issuance costs, associated with the
12 3/8% Notes and the 12 5/8% Debentures that are being
redeemed as part of the Refinancing, the 14 5/8%
Debentures, prepayment of $350 million of the Term Loan
and reduced borrowings under the Term Loan and Revolving
Credit Facility as a result of the assumed application of
the excess proceeds of the Note Offerings and the 1993
Refinancing over the amount of 12 3/8% Notes, 12 5/8%
Debentures and 14 5/8% Debentures outstanding on January
1, 1992 plus the amount of proceeds applied to the payment
of transaction fees and expenses.
25
<PAGE>
(b) Reflects the adjustment of the income tax credit as a result of the pro
forma adjustments described in these notes.
(c) Reflects the elimination of a charge related to periods prior to January
1, 1992 resulting from the adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
(d) 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 Bank Credit Agreement, the Senior Secured
Note Agreement, the Indentures and other instruments governing the
Company's indebtedness are based on the Company's EBDIAT, subject to
certain adjustments. See "Description of the Notes--Certain Definitions"
and "Description of Certain Indebtedness."
(e) For purposes of these computations, earnings consist of consolidated
income (loss) before taxes plus fixed charges (excluding capitalized
interest). 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.
(f) Reflects the elimination of an extraordinary loss resulting from the 1993
Refinancing.
(g) The pro forma consolidated balance sheet adjustments with respect to the
Refinancing reflect (i) the issuance of $100 million of Senior Notes and
$650 million of Senior Subordinated Notes, (ii) the redemption of $333.9
million aggregate principal amount of the 12 3/8% Notes at the redemption
price of 105% of the principal amount thereof (not including accrued
interest), (iii) the redemption of $238.1 million aggregate principal
amount of the 12 5/8% Debentures at the redemption price of 105% of the
principal amount thereof (not including accrued interest), (iv) the
prepayment of $100 million of the Term Loan under the Bank Credit
Agreement, (v) the payment of debt issuance costs, including underwriting
commissions, related to the Refinancing of $22.5 million, (vi) the
application of excess proceeds of the Note Offerings to the reduction of
the Revolving Credit Facility, (vii) a charge to retained earnings for
the redemption premium associated with the 12 3/8% Note Redemption, the
12 5/8% Debenture Redemption and for the write off of unamortized debt
issuance costs related to the 12 3/8% Note Redemption, the 12 5/8%
Debenture Redemption and the repayment of $100 million of the Term Loan
and (viii) the income tax benefit associated with the charges to earnings
described in clause (vii).
(h) The pro forma consolidated balance sheet adjustments with respect to the
1993 Refinancing reflect (i) the redemption of $50 million aggregate
principal amount of the 12 3/8% Notes at the redemption price of 105% of
the principal amount thereof utilizing funds available under the
Revolving Credit Facility, (ii) a charge to retained earnings for the
redemption premium associated with the redemption and for the write off
of unamortized debt issuance costs related to such redemption and (iii)
the income tax benefit associated with the charges to earnings described
in clause (ii).
26
<PAGE>
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 $3,714 million, including related
acquisition costs, was allocated first to the assets and liabilities of the
Company based upon their respective fair values, with the remainder allocated to
goodwill.
In May 1989, the Company announced its intention to seek a buyer for its
domestic and international cup operations. On November 14, 1989, the Company
transferred all the capital stock of Fort Howard Cup Corporation ("Fort Howard
Cup") to Sweetheart. The total value of the cash and other assets, including
capital stock of Sweetheart, received by the Company as a result of the Cup
Transfer was approximately $620 million. The Cup Transfer involved all the
Company's U.S. and Canadian disposable foodservice operations. On December 29,
1989, the Company sold its Pacific Basin cup business and on December 30, 1991,
the Company sold its European disposable foodservice operations (collectively,
the "Cup Sales").
Since the Company no longer controls Fort Howard Cup and has sold its
international cup subsidiaries, the Company has reported its cup operations as
an equity investment. In the fourth quarter of 1991, the Company discontinued
recording equity in the net losses of Sweetheart when 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.
RESULTS OF OPERATIONS
<TABLE>
NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1993 1992 1992 1991 1990
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Net sales:
Domestic tissue......................................... $ 757 $ 741 $ 978 $ 994 $ 996
International operations................................ 110 101 143 110 114
Eliminations and other.................................. 29 24 30 34 41
--------- --------- --------- --------- ---------
Consolidated............................................ $ 896 $ 866 $ 1,151 $ 1,138 $ 1,151
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Operating income (loss):
Domestic tissue......................................... $ (1,788) $ 199 $ 252 $ 251 $ 252
International operations................................ (1) 13 17 16 16
Eliminations and other.................................. 1 1 2 3 2
--------- --------- --------- --------- ---------
Consolidated............................................ (1,788) 213 271 270 270
Amortization of purchase accounting (1)................... 52 54 75 85 85
Goodwill write-off (2).................................... 1,980 -- -- -- --
Employee stock compensation............................... (8) 1 1 1 2
--------- --------- --------- --------- ---------
Adjusted operating income............................... 236 268 347 356 357
Other depreciation........................................ 54 47 63 88 84
--------- --------- --------- --------- ---------
EBDIAT.................................................. $ 290 $ 315 $ 410 $ 444 $ 441
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Consolidated net loss..................................... $ (2,046) $ (52) $ (80) $ (111) $ (106)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Operating income (loss) as a percent of net sales:
Domestic tissue (3)..................................... (236.1)% 26.8% 25.8% 25.3% 25.3%
International operations................................ (0.9)% 13.2% 11.9% 14.5% 14.0%
Consolidated (3)........................................ (199.6)% 24.7% 23.5% 23.8% 23.5%
Consolidated EBDIAT as a percent of net sales............. 32.4% 36.4% 35.6% 39.0% 38.3%
</TABLE>
(Footnotes on following page)
27
<PAGE>
(Footnotes for preceding page)
- ---------------
(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.
(2) See Note 4 to the unaudited, condensed consolidated financial statements
included elsewhere in this Prospectus.
(3) 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.
Excluding the effects of the changes in depreciable lives, domestic tissue
and consolidated operating income in 1992 as a percent of net sales would
have been 21.9% and 20.2%, respectively.
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. 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 selling prices
and operating income margins in the near term.
RECENT DEVELOPMENTS
On February 11, 1994, the Company reported its financial results for 1993.
Consolidated net sales for the fourth quarter of 1993 increased 2.1% to $292
million from $286 million for the fourth quarter of 1992. Domestic tissue
pricing and, to a lesser extent, volume improved in the fourth quarter of 1993
compared to 1992. These improvements were partially offset by a decline in
fourth quarter 1993 net sales in the Company's United Kingdom tissue operations
compared to 1992 due to slightly lower volume and significantly lower selling
prices.
EBDIAT (as defined below) in the fourth quarter of 1993 increased 1.8% to
$97 million compared to $95 million for the fourth quarter of 1992. Operating
income for the fourth quarter of 1993 was $71 million compared to $57 million
for the same period of 1992. Operating income for the fourth quarter of 1993
benefited from the elimination of amortization of goodwill of $14 million for
the quarter as a result of the Company's goodwill write-off in the third quarter
of 1993. However, operating income was adversely impacted in the fourth quarter
of 1993 by approximately $2 million of additional depreciation resulting from
the acceleration of the depreciable lives of certain equipment. Excluding the
effects of these items, operating income for the fourth quarter of 1993
increased slightly compared to the fourth quarter of 1992.
The Company's net loss declined to $6 million in the fourth quarter of 1993
compared to $28 million in the fourth quarter of 1992 due principally to the
elimination of the amortization of goodwill.
For the full year 1993, net sales increased 3.1% to $1,187 million from
$1,151 million in 1992. Principally as a result of the goodwill write-off, the
Company incurred an operating loss of $1,717 million in 1993 compared to
operating income of $271 million in 1992. Excluding the effects of the goodwill
write-off, the reversal of previously accrued employee stock compensation, and
the acceleration of the depreciable lives of certain equipment, operating income
would have declined 10.2% to $243 million in 1993. EBDIAT decreased 5.6% to $387
million in 1993 from $410 million in 1992. In 1993, EBDIAT excludes a $5 million
gain on the sale of the Company's remaining equity interest in Sweetheart. Also,
principally as a result of the goodwill write-off, the Company's net loss
increased to $2,052 million in 1993 from $80 million in 1992.
28
<PAGE>
The construction of the Company's fifth paper machine and related
facilities at its Muskogee mill is progressing as planned and is scheduled for
start-up in the first half of 1994.
NINE MONTHS ENDED SEPTEMBER 30, 1993 COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 1992
Net Sales. Consolidated net sales for the first nine months of 1993
increased 3.5% compared to the same period in 1992. Domestic tissue net sales
for the first nine months of 1993 increased 2.2% compared to the same period in
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 from the second to the third quarters of 1993. However, in
spite of introductions of net selling price increases in each of the 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. Net sales of
the Company's international operations increased 9.3% for the first nine months
of 1993 compared to 1992 primarily due to volume increases, partially offset by
lower net selling prices and lower exchange rates.
Gross Income. For the first nine months of 1993, consolidated gross margins
decreased to 34.1% from 38.2% for the same period in 1992. Domestic tissue gross
margins decreased during the 1993 period primarily due to lower net selling
prices and an increase in wastepaper costs. Gross margins of international
operations also declined principally due to the lower net selling prices.
Manufacturing costs of international operations declined in the first nine
months of 1993 compared to the same period in 1992 as a result of the start-up
of a new paper machine on February 7, 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, the Company reversed all previously accrued employee stock
compensation expense in the third quarter of 1993, resulting in a reduction of
selling, general and administrative expenses of $7.8 million for the first nine
months of 1993. Excluding the effects of the reversal, selling, general and
administrative expenses, as a percent of net sales, increased slightly in the
first nine months of 1993 to 8.8% from 8.6% for the first nine months of 1992.
Goodwill Write-Off. As previously reported by the Company (and as further
described below), low industry operating rates and aggressive competitive
pricing among tissue producers resulting from the recession, additions to
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 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 has 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.
29
<PAGE>
Tissue industry operating rates have increased only slightly in 1993 from the
low levels experienced in 1991 and 1992. Announced tissue industry capacity
additions through 1995, as reported by the AFPA, approximate average industry
shipment growth rates after 1990. In 1993, the industry shipment growth rate has
fallen 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 is 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.
Gross Margins. The Company's gross margins have steadily declined since
1991 as a result of the factors noted above. More recently, the Company's gross
margins have also been affected by increased wastepaper costs.
As a result of these conditions, the Company expects that the significant
pricing deterioration experienced in 1991 through 1993 will be followed by
average annual price increases that approximate the Company's ten-year average
annual historical price increase trend 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 has revised its projections and concluded its evaluation determining
that its projected results would not support the future amortization of the
Company's remaining goodwill balance of approximately $1,980 million 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 approximates 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 $1,980 million in the third quarter of 1993.
The Company's forecast assumes that sales volume increases will 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 is 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 ten-year historical
trends and management's estimates of future performance. Through the year 2001,
the Company's projections indicate that interest expense will exceed operating
income, which is determined after deducting annual depreciation expense.
However, operating income before depreciation is adequate to cover 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% Notes, the 12 5/8% Debentures and 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 believes
that the projected future results based on these assumptions are the most likely
scenario given the Company's high leverage and adverse tissue industry operating
conditions.
Operating Income (Loss). As a result of the goodwill write-off, the
Company's operating loss was $1,788 million for the first nine months of 1993
compared to operating income of $213 million for the first nine months of 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
30
<PAGE>
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 $236 million for the first nine months of 1993 from $268 million for
the first nine months of 1992. Adjusted operating income declined in the first
nine months of 1993 compared to the same period in 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 $290 million for the first nine months of 1993 from $315
million for the first nine months of 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, the Indentures 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 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 expense in
1992 consisted primarily of foreign income taxes.
Extraordinary Loss and Accounting Change. 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 unamortized
deferred loan costs associated with the repayment of $250 million of term loan
indebtedness under the Company's Bank Credit Agreement and the redemption of all
the Company's 14 5/8% Debentures in the 14 5/8% Debenture Redemption. The net
loss for the first nine months of 1992 was increased by the Company's adoption
of 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 the nine month period ended September 30, 1992 as a
one-time, after-tax charge of $11 million.
Net Loss. For the first nine months of 1993, the Company's net loss
increased, principally due to the goodwill write-off, to $2,046 million compared
to $52 million for the first nine months of 1992.
FISCAL YEAR 1992 COMPARED TO FISCAL YEAR 1991
Net Sales. Domestic tissue sales decreased 1.6% in 1992 compared to 1991.
The decrease is 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 in September 1992 of Stuart Edgar Limited ("Stuart Edgar"), a United
Kingdom converter of consumer tissue products with annual net sales of
approximately $43 million. These increases were 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 will more closely approximate industry norms. For 1992, the
change had the effect of reducing depreciation expense by $38 million and
reducing net loss by $24 million.
31
<PAGE>
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 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 net loss for the year. 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. See "-Impact of New Accounting Standards" below.
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.
32
<PAGE>
FISCAL YEAR 1991 COMPARED TO FISCAL YEAR 1990
Net Sales. Domestic tissue sales decreased slightly in 1991 compared to
1990 despite volume growth in both the commercial and consumer markets. The
start-up of the fourth paper machine at the Company's Savannah River mill during
the first quarter of 1991 provided the additional capacity for the volume
increases achieved in 1991 compared to 1990. However, volume growth was offset
by a progressive decline in commercial and consumer market selling prices during
the year.
Net sales of the Company's United Kingdom tissue operations decreased 3.5%
in 1991 compared to 1990 due to lower exchange rates as well as the impact of
price decreases in the consumer market.
Gross Income. Domestic tissue gross margins decreased slightly in 1991 to
39.4% compared to 40.0% in 1990 as the decline in net selling prices was offset
in part by lower raw material and overhead costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, as a percent of net sales, declined to 8.6% in 1991
compared to 9.1% in 1990. However, 1990 expenses included charges of $6 million
related to an employee stock compensation plan and to costs related to the terms
of an agreement entered into with the Company's former chairman and chief
executive officer. Excluding these charges, selling, general and administrative
expenses, as a percent of net sales, were 8.6% in 1990.
Operating Income. Operating income in 1991 of $270 million was flat
compared to 1990. 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 in 1991 of $356 million would have declined slightly from $357
million in 1990 although as a percent of net sales, adjusted operating income
increased to 31.3% in 1991 from 31.0% in 1990.
EBDIAT. EBDIAT increased $3 million in 1991 to $444 million from $441
million in 1990 and increased as a percent of net sales to 39.0% in 1991 from
38.3% in 1990.
Interest Expense. Interest expense declined approximately $52 million in
1991 as compared to 1990. Debt repaid in the fourth quarter of 1990 with
proceeds from the retirement of a promissory note and a debenture of Sweetheart
due the Company as a result of the Cup Transfer and debt repurchased with the
proceeds of a private placement of Common Stock, reduced the Company's
outstanding indebtedness in 1991 as compared to 1990. Lower average interest
rates, in part due to borrowings under the Company's Revolving Credit Facility
to repurchase high yield subordinated debt, also contributed to lower interest
expense in 1991 as compared to 1990.
Other Income. Other income for 1990 included $27 million of interest income
earned on the promissory note and a debenture received in connection with the
Cup Transfer.
Income Taxes. The income tax credit for 1991 principally reflects the
reversal of previously provided deferred income taxes. In 1990, the income tax
credit included the benefit available from the carryback of the net operating
loss to years in which the statutory rates were higher than the 1990 statutory
rates.
Equity Earnings. The Company's equity in the net losses of its
unconsolidated subsidiaries increased to $32 million in 1991 from $23 million in
1990. As a result of the completion of the Cup Sales with the sale of the
Company's European disposable foodservice operations in 1991 and the continued
recognition of equity in the net losses of Sweetheart, the Company's investments
in unconsolidated subsidiaries were reduced to zero at December 31, 1991. The
Company is not aware of any material contingent liabilities with respect to the
investments and, accordingly, discontinued the recording of equity in the net
losses of Sweetheart when the investments had been reduced to zero.
Extraordinary Loss. In a series of privately negotiated transactions in
1991, the Company repurchased certain of its subordinated indebtedness. The loss
on the debt repurchases, including the
33
<PAGE>
write-off of unamortized deferred loan costs, is reported in 1991 as an
extraordinary loss of $5 million, net of income tax credits of $3 million.
Net Loss. For 1991, the Company recorded a net loss of $111 million
compared to a net loss of $106 million in 1990.
LIQUIDITY AND CAPITAL RESOURCES
For the first nine months of 1993, cash increased $0.6 million. Capital
additions of $107 million and debt repayments of $834 million, including the
repayment of $250 million of the Term Loan, the 14 5/8% Debenture Redemption and
a reduction in the Revolving Credit Facility, were funded by cash provided from
operations of $114 million, net proceeds of the sale of 9 1/4% Notes and 10%
Notes of $729 million, net proceeds of the 1993 Term Loan of $95 million, and
borrowings of $8 million by the Company's principal United Kingdom subsidiary,
Fort Sterling Limited ("Fort Sterling").
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 by cash provided
from operations of $210 million, borrowings under the Company's Revolving Credit
Facility of $141 million and borrowings of $49 million by Fort Sterling.
During 1991, cash decreased $9 million. Capital additions of $144 million
and repayment of debt of $759 million were funded principally from cash provided
from operations of $241 million, net proceeds from the sale of Common Stock of
$163 million, net proceeds from the issuance of Senior Secured Notes of $289
million, net proceeds from sale and leaseback transactions of $90 million,
after-tax net proceeds from the sale of the European disposable foodservice
operations of $39 million and borrowings under the Company's Revolving Credit
Facility of $73 million.
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 a 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.
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 in the fourth
quarter of 1993 of $2 million (net of income taxes), representing the redemption
premium and unamortized deferred loan costs.
On March 22, 1993, the Company sold $450 million principal amount of 9 1/4%
Notes due 2001 and $300 million principal amount of 10% Notes due 2003 in a
registered public offering. On April 21, 1993, the Company borrowed $100 million
pursuant to the 1993 Term Loan. Proceeds from the sale of the 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 14 5/8% Debenture
Redemption and to the payment of fees and expenses. The 1993 Term Loan bears
interest, at the Company's option, at Bankers Trust's prime rate,
34
<PAGE>
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 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 14
5/8% Debenture Redemption.
Effective March 2, 1992, the Company redeemed its $44 million, variable
interest rate, Development Authority of Effingham County Pollution Control
Revenue Refunding Bonds, Series 1988 (the "Bonds") and terminated a related $45
million support letter of credit. Funds for the redemption were provided from $2
million of unexpended funds held in escrow and the issuance of $42 million
principal amount of Bonds bearing interest at a fixed rate of 7.90% and maturing
October 1, 2005.
In 1991, Fort Sterling entered into a credit agreement with a major bank in
the United Kingdom 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 $8 million) revolving credit facility
due March 1996. In 1992, Fort Sterling entered into a second credit agreement
with the same bank to finance the acquisition of Stuart Edgar. This facility
consists of a 4.25 million pound sterling (approximately $7 million) term loan
due December 1997, and an 8.5 million pound sterling (approximately $13 million)
term loan due December 1997. Both credit agreements bear interest at floating
rates and are secured by certain assets of Fort Sterling and Stuart Edgar but
are non-recourse to the Company. At September 30, 1993, $45 million was
outstanding under these credit agreements.
In December 1990, the Company completed the initial closing on the sale and
leaseback of machinery and facilities associated with its fourth paper machine
at its Savannah River mill. The net proceeds of the transaction of approximately
$10 million were applied to repayment of the Term Loan. The Company completed
the final closing on the sale and leaseback of machinery and facilities related
to its fourth paper machine at its Savannah River mill in December 1991. Of the
net proceeds of the transaction of $90 million, $78 million was applied to the
repayment of the Term Loan and $9 million was escrowed for the benefit of the
holders of the Company's 7% Notes (repaid in 1992).
On November 9, 1990, the Bank Credit Agreement was amended (the "1990
Amendment") to permit the Company, among other things, to utilize up to $250
million from the issuance of additional shares of its Common Stock from time to
time to make voluntary prepayments, redemptions or purchases of its outstanding
subordinated debt securities. The 1990 Amendment also permits the Company to
make in any year voluntary cash prepayments, redemptions or purchases of
outstanding 14 1/8% Debentures in an aggregate amount (not to exceed, in any
event, $10 million per annum) of up to 50% of the amount by which the Company's
actual GAAP Consolidated EBDIT (as defined in the Bank Credit Agreement (which
definition includes an add back for certain non-cash charges)) for the year
ended on the most recent December 31 exceeds the Projected GAAP Consolidated
EBDIT (as defined in the Bank Credit Agreement) for such year. With respect to
the year ended December 31, 1990, the Company's actual GAAP Consolidated EBDIT
exceeded the Company's Projected GAAP Consolidated EBDIT, thereby permitting the
Company to pay up to $8 million to purchase 14 5/8% Debentures and 14 1/8%
Debentures.
From time to time during 1991, the Company sold 1,367,669 shares of Common
Stock at $120 per share to existing equity investors, including 6,200 shares
sold to management investors, pursuant to a private placement of Common Stock.
The net proceeds of the sales totaled $163 million.
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On September 11, 1991, the Company completed a private placement of $300
million of Senior Secured Notes with maturities between the years 1997 and 2000.
The Senior Secured Notes bear interest at rates varying with the current three
month LIBOR rate, plus 2.75% to 3.50% depending on the date of maturity of each
Senior Secured Note. The covenants and events of default of the Senior Secured
Note Agreement are substantially similar to those contained in the Company's
Bank Credit Agreement. The Senior Secured Notes rank equally in right of payment
with indebtedness under the Bank Credit Agreement, the 1993 Term Loan Agreement
and the 9 1/4% Notes, and are senior to all existing and future subordinated
indebtedness. Proceeds from the offering of the Senior Secured Notes were used
to repay a portion of the Term Loan.
During 1991, the Company repurchased $89 million aggregate principal amount
at maturity of its 14 5/8% Debentures and $259 million aggregate principal
amount at maturity of its 14 1/8% Debentures in privately negotiated
transactions. The repurchases were funded from the proceeds of the Company's
private placement of Common Stock and from borrowings under the Company's
Revolving Credit Facility. As of September 30, 1993, the Company may utilize up
to $39 million to make additional repurchases of 14 1/8% Debentures under the
terms of the 1990 Amendment. In addition, the Company is permitted under the
Bank Credit Agreement to borrow up to $47.5 million under the Revolving Credit
Facility to purchase 12 3/8% Notes. At the Company's option, these borrowings
may be applied to the purchase of Senior Secured Notes.
The cash proceeds received in 1989, 1990, 1991 and 1993 from the Cup
Transfer, from the retirement of promissory notes and a debenture of Sweetheart
due the Company as a result of the Cup Transfer, from the sale of the Company's
Pacific Basin cup operations, from the sale of the Company's European disposable
foodservice operations, and from the sale of the Company's remaining shares of
common stock of Sweetheart totaled $590 million. Of the cash proceeds received
in 1989, $286 million was applied to the repayment of the Term Loan and $27
million was escrowed for the benefit of the holders of the 7% Notes (redeemed in
1992). Of the cash proceeds received in 1990, $182 million was applied to the
repayment of the Term Loan and $18 million was escrowed for the benefit of the
holders of the 7% Notes (redeemed in 1992). The after-tax net cash proceeds of
$39 million received in 1991 were applied to the repayment of the Term Loan. The
$5.1 million received in 1993 was applied to repayment of borrowings under the
Revolving Credit Facility.
The Company's principal use of funds for the next several years will be for
capital expenditures, including capital expenditures to comply with
environmental regulations, the repayment of indebtedness under the Bank Credit
Agreement, the repurchase of its subordinated debt securities as described
below, and support of the Company's working capital requirements. The Revolving
Credit Facility expires in 1996. In connection with the 1993 Refinancing, the
Company prepaid the $132 million mandatory payment due under the Term Loan in
1993, $38 million of the amounts due in each of 1994 and 1995 and $42 million of
the amount due in 1996. The 1993 Term Loan matures in 1997. After giving effect
to the Refinancing, the Company is required to make mandatory repayments of the
Term Loan of $7 million in 1994, $107 million in 1995 and $118 million in 1996.
The Company intends to use funds generated from operations and borrowings under
the Revolving Credit Facility or otherwise to meet its 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 presently intend to make capital expenditures to add
material new capacity. Capital expenditures are planned 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 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 carry over to one or more years (thereby increasing the scheduled permitted
limit for capital expenditures in respect of such year)
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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 Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior
Secured Note Agreement provide for an additional capital spending allowance of
80 million pounds sterling (approximately $120 million) for the paper machine at
the Company's United Kingdom mill. 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 matters, see
"Business--Environmental Matters."
Market conditions with respect to high yield 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 Bank Credit Agreement, the 1993 Term Loan
Agreement, the Senior Secured Note Agreement, the Indentures and the indentures
under which such subordinated debt securities were issued. Subject to and in
compliance with the limitations contained in such agreements and indentures, 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 September 30, 1993,
the Company had $176 million in available capacity under the Revolving Credit
Facility.
The Company believes that, notwithstanding the adverse tissue industry
operating conditions and the non-cash charge to write off the remaining balance
of the Company's goodwill discussed above, cash provided by operations and
access to debt financing in the public and private markets will be sufficient to
enable it to fund maintenance and modernization capital expenditures and meet
its debt service requirements for the foreseeable future. However, in the
absence of improved financial results, it is likely that in 1995 the Company
would be required to seek a waiver of the cash interest coverage covenant under
the Bank Credit Agreement, 1993 Term Loan Agreement and 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
commencing 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 1992, 1991, and 1990, a slightly higher amount of the Company's
revenues and operating income were recognized during the second and third
quarters. The Company expects to fund seasonal working capital needs from the
Revolving Credit Facility available under the Bank Credit Agreement.
The Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured
Note Agreement and the Fort Sterling credit agreements impose certain
limitations on the liquidity of the Company that include restrictions on the
Company's ability to incur additional indebtedness and mandatory principal
repayment requirements, including scheduled principal repayments and repayments
out of excess cash flow and from proceeds of asset sales. See "Description of
Certain Indebtedness" and Note 8 to the audited consolidated financial
statements of the Company included elsewhere in this Prospectus 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 its 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.
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Refer to Note 7 to the audited consolidated financial statements of the
Company included elsewhere in this Prospectus for a description of certain
matters related to income taxes.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Income Taxes. In February 1992, the Financial Accounting
Standards Board issued SFAS No. 109, "Accounting for Income Taxes" which
modifies and supersedes SFAS No. 96, "Accounting for Income Taxes." The Company
had previously adopted SFAS No. 96 in 1988. The Company adopted the new standard
effective January 1, 1992. 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 its 1992 consolidated balance sheet. The Company
has not recorded a valuation allowance with respect to any deferred income tax
asset. The adoption of SFAS No. 109 had no effect on the Company's provision for
income taxes for 1992.
Accounting for Postretirement Benefits. 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 $1.2 million.
Accounting for Postemployment Benefits. 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.
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BUSINESS
GENERAL
The Company, founded in 1919, is a major manufacturer, converter and
marketer of a diversified line of single-use sanitary tissue paper products for
the home and away-from-home markets. The Company's principal products include
paper towels, bath tissue, table napkins, wipers and boxed facial tissue. The
Company produces and ships its products from manufacturing facilities located in
Wisconsin, Oklahoma, Georgia and the United Kingdom.
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 Mardi Gras, Soft'n Gentle, So-Dri,
Page and Green Forest.
The Company is a Delaware corporation organized in 1967 to succeed to the
business of a Wisconsin corporation founded in 1919 by Austin E. Cofrin. The
Company's principal executive offices are located at 1919 South Broadway, Green
Bay, Wisconsin 54304, telephone (414) 435-8821.
DOMESTIC TISSUE OPERATIONS
The Company's principal markets are in the United States where the Company
believes, based on an analysis of publicly available information, that its
operating income margins are higher than those of its publicly reporting
competition. A key factor contributing to these high operating income margins
has been the Company's proprietary de-inking technology, which enables it to use
a broad range of wastepaper grades and process wastepaper efficiently to recover
the fibers which are the principal raw material in papermaking. However, the
Company's operating income margins have been adversely affected by the adverse
tissue industry operating conditions experienced since 1991, and continue to be
adversely 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.
Domestic tissue sales were approximately $978 million, $994 million and
$996 million for the years 1992, 1991 and 1990, respectively, and $757 million
and $741 million for the first nine months of 1993 and 1992, respectively.
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 (formerly the American Paper Institute), 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. During 1991
and 1992 and through the third quarter of 1993, the commercial segment grew at a
slower rate than the consumer segment due in part to the effects of the
recession. 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
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estimates that in 1992 its market share in the United States for sales of
commercial tissue products was approximately 26%.
Consumer Tissue
The Company's consumer tissue business has experienced significant growth
through 1992. 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 1992. The Company's retail line includes bath and facial
tissue, household roll towels and table napkins. The Company's brands include
Mardi Gras, Soft'n Gentle, So-Dri and Page. In 1990, the Company introduced a
new line of consumer products called Green Forest. 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. Presented below is
selected financial information for the Company's international tissue operations
(in millions of U.S. dollars):
<TABLE>
FOR THE NINE
MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1993 1992 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales.......................................... $ 110 $ 101 $ 143 $ 110 $ 114
Operating income................................... (1) 13 17 16 16
Total assets....................................... 167 166 163 100 82
</TABLE>
Operating income for the nine months ended September 30, 1993 was reduced
by $11 million in connection with the Company's write-off of its remaining
goodwill balance. See "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations." The increase in total assets
during 1992 is principally attributable to the installation of an additional
paper machine and, to a lesser extent, to the acquisition of a consumer tissue
converting operation.
Capital Expenditures
The Company has invested heavily in its manufacturing operations. Capital
expenditures in the Company's tissue business were approximately $703 million
for the five-year period ended December 31, 1992. Given the Company's high
leverage and adverse tissue industry operating conditions, the Company intends
to continue to maintain and modernize existing tissue mills but does not
currently intend to make capital expenditures to add material new capacity.
Total capital expenditures after 1993 are projected to approximate $55-$80
million annually over the next ten years, plus $32 million in 1994 to complete
the Muskogee mill expansion and an additional $32 million over 1994 and 1995 for
a new coal-fired boiler under construction at the Company's Savannah River mill.
A significant portion of the Company's capital budget in recent years has
been invested in the Savannah River mill located in Effingham County, near
Savannah, Georgia, which was completed in 1991. Total expenditures for the
Savannah River mill were $570 million.
In 1993, the Company completed an expansion of its Green Bay, Wisconsin
tissue mill. The expansion includes a new paper machine and related
environmental protection, pulp processing,
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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 $160 million. Total expenditures for the expansion through
September 30, 1993 were approximately $72 million.
In 1993, the Company completed an expansion of its United Kingdom tissue
mill. The expansion includes a new paper machine and related environmental
protection, pulp processing and converting equipment. The new paper machine
commenced production on February 7, 1993. Total expenditures for the expansion
were $96 million. See "--Properties" below.
On September 4, 1992, Fort Sterling acquired for $25 million Stuart Edgar,
a United Kingdom converter of consumer tissue products with annual net sales
approximating $43 million. Stuart Edgar acquires a majority of its paper
requirements from Fort Sterling.
Energy Sources
The Company's major sources of energy for its Green Bay, Wisconsin,
Muskogee, Oklahoma and Savannah River tissue mills are coal and other fuels
which are burned to produce the heat necessary to dry paper, process wastepaper,
provide steam and produce virtually all the electric power at those mills. Coal
and other fuels are 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 these 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 electrical power and natural gas purchased
from public utilities or independent natural gas suppliers.
Raw Materials and Supplies
The principal raw materials and supplies used to manufacture tissue
products are wastepaper (which is processed to reclaim fiber), chemicals,
corrugated shipping cases and packaging materials. A substantial majority of the
Company's products are made with 100% recycled fiber derived from wastepaper.
The de-inking technology employed by the Company, which allows it to use a broad
range of wastepaper grades, 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 two years,
pricing has become a more dominant competitive factor.
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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 Mardi Gras, Soft'n Gentle, So-Dri, Page and Green Forest. For the
Company's domestic commercial tissue business, principal brand names include
Envision and Generation II. All of such brand names are registered trademarks of
the Company. A portion of the Company's tissue products are sold under private
labels or brand names owned by customers.
Employees and Employee Relations
At September 30, 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 employees to be
good.
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
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
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Company's United Kingdom operations are well maintained and considered suitable
for their intended purposes.
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 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 of the Company included elsewhere in this
Prospectus.
The Green Bay, Muskogee, Savannah River and United Kingdom facilities
generally operate paper machines at full capacity seven days per week.
Converting facilities are generally operated on a 3-shift, 5 day per week basis
or a 7-day per week schedule. Converting capacity could be expanded by working
additional hours and/or adding converting equipment.
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
1992, the Company made capital expenditures of $15 million with respect to
various pollution abatement and environmental compliance facilities. The Company
expects to commit approximately $31 million of capital expenditures to maintain
compliance with environmental control standards at its existing facilities over
1993 and 1994. Included in the 1992 capital expenditures was $9 million for
pollution abatement expenditures in connection with mill expansions in Green
Bay, Wisconsin; Muskogee, Oklahoma; Effingham County, Georgia; and the United
Kingdom. Included in the 1993-1994 expenditures is $27 million for pollution
abatement facilities in connection with mill expansions in Green Bay, Wisconsin;
Muskogee, Oklahoma and the United Kingdom mill sites.
Future environmental legislation and developing regulations are expected to
further limit emission and discharge levels and to expand the scope of
regulation, all of which will require continuing capital expenditures. The U.S.
EPA has proposed Great Lakes Water Quality Guidance regarding the development of
water quality standards for the Great Lakes and its tributaries. That same
agency has also indicated that it intends to propose air emission standards in
1995 under the federal Clean Air Act Amendments for the de-inking portion of the
pulp and paper industry. Further, the U.S. EPA has proposed technology based
effluent discharge standards for the de-inking portion of the pulp and paper
industry. The Company is awaiting the issuance of final regulations, as well as,
in certain instances, implementing regulations by state environmental
authorities to determine the nature and stringency of these several regulatory
initiatives, including the period over which new standards are to be achieved
and the impact of those regulatory initiatives on the Company's results of
operations and capital expenditures. There can be no assurance that such costs
would not be material to the Company. Pursuant to the requirements of applicable
federal, state and local statutes and regulations, the Company has received or
applied for all the environmental permits and approvals material to the
operation of its manufacturing facilities. The impact of any modifications that
may be required in the future to the Company's existing permits will be
determined by the environmental standards specified in such permits, upon
renewal or modification, and the time period over which new standards are to be
achieved.
In March 1990, the Company began a remedial investigation of its Green Bay,
Wisconsin landfill. The investigation is being overseen by the U.S. EPA under
authority granted to the agency by the Comprehensive Environmental Response,
Compensation and Liability Act, commonly known as the
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<PAGE>
"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 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.
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LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to lawsuits and state and
federal administrative proceedings in connection with their businesses. Although
the final results in such suits and proceedings cannot be predicted with
certainty, the Company believes that they will not have a material adverse
effect on the Company's financial condition.
The Internal Revenue Service ("IRS") issued a statutory notice of
deficiency ("Notice") to the Company in March 1992 for additional income tax for
the 1988 tax year. The Notice resulted from an audit of the Company's 1988 tax
year wherein the IRS disallowed deductions for fees and expenses related to the
Acquisition and also disallowed deductions for fees and expenses related to 1988
debt financing and refinancing transactions. The grounds for disallowance
asserted by the IRS are Internal Revenue Code (the "Code") Section 162(k) (which
was enacted in 1986 and which denies deductions for otherwise deductible amounts
paid or incurred in connection with stock redemptions), and alternatively, that
the fees and expenses at issue are not deductible under any provision of the
Code. A portion of the disallowed fees and expenses was deducted in 1988 with
the balance being deducted over the terms of the 1988 long-term debt financing
and refinancing. In March 1992, the Company filed a petition in the U.S. Tax
Court opposing substantially all of the claimed deficiency. This case was tried
before the U.S. Tax Court in September 1993. A decision has not been rendered
and the trial judge has ordered a schedule for the parties to submit briefs to
the court that extends through January 1994. 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 financings and refinancings. In addition,
the Company agreed to capitalize certain amounts identified by the IRS. In
December 1993, the Company paid additional federal income tax of approximately
$5 million representing its liability with respect to such adjustments. The
Company estimates that if the IRS were to prevail in disallowing deductions for
the fees and expenses now 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.
45
<PAGE>
MANAGEMENT
DIRECTORS OF THE COMPANY
The following table provides certain information about each of the current
directors of the Company. All directors hold office until the next annual
meeting of stockholders of the Company and until their successors are duly
elected and qualified.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME AND POSITION FIVE-YEAR EMPLOYMENT HISTORY AND OTHER
WITH THE COMPANY AGE DIRECTORSHIPS
- ----------------------- --- ------------------------------------------------
Donald H. DeMeuse...... 57 Chairman of the Board of Directors and Chief
Chairman of the Board 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 since
Vice Chairman March 1992; Senior Executive Vice President and
Chief Financial Officer from September 1988 to
March 1992.
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 1988
Director 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 Company, L.P., A/S
Bulkhandling, Beaumont Methanol Corporation, BMC
Holdings Inc., Coltec Industries Inc, Container
Corporation of America, Hamilton Services
Limited, Jefferson Smurfit Corporation, PSF
Finance Holdings, Inc., Shuttleway, SIBV/MS
Holdings, Inc., Stanklav Holdings, Inc.,
Waterford Wedgwood plc (Deputy Chairman) and
Waterford Wedgwood U.K. plc.
Frank V. Sica.......... 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., Coltec Industries
Inc, Consolidated Hydro, Inc., Emmis
Broadcasting Corporation, Interstate Natural Gas
Company, Kohl's Corporation, PageMart, Inc.,
Southern Pacific Rail Corporation and Sullivan
Communications, Inc.
Robert H. Niehaus...... 38 Managing Director of MS&Co. since 1990;
Director Principal of MS&Co. from 1988 to 1990. Vice
President and Director of MSLEF II and Vice
Chairman of MSCP III. Director of American
Italian Pasta Company, MS Distribution Inc.,
Randall's Management Corp., Inc., Shuttleway,
Silgan Corporation, Silgan Holdings Inc.,
Tennessee Valley Steel Corp., Waterford Wedgwood
plc (Chairman) and Waterford Crystal Ltd.
James S. Hoch.......... 33 Principal of MS&Co. since February 1993; Vice
Director President of MS&Co. from January 1991 to
February 1993; Associate of MS&Co. prior to that
time. Director of Silgan Corporation, Silgan
Holdings Inc. and Sullivan Communications, Inc.
46
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table provides certain information about each of the current
executive officers of the Company. All executive officers are elected by, and
serve at the discretion of, the Board of Directors. None of the executive
officers of the Company is related by blood, marriage or adoption to any other
executive officer or director of the Company.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME AND POSITION FIVE-YEAR EMPLOYMENT HISTORY AND OTHER
WITH THE COMPANY AGE DIRECTORSHIPS
- ----------------------- --- ------------------------------------------------
Donald H. DeMeuse...... 57 See description under "--Directors of the
Chairman of the Board Company."
and
Chief Executive
Officer
Kathleen J. Hempel..... 43 See description under "--Directors of the
Vice Chairman and Company."
Chief
Financial Officer
Michael T. Riordan..... 43 See description under "--Directors of the
President and Chief Company."
Operating Officer
Andrew W. Donnelly..... 51 Executive Vice President for more than five
Executive Vice years.
President
John F. Rowley......... 53 Executive Vice President for more than five
Executive Vice years.
President
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 than five
Vice President and 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. Prior to that
Vice President time, Director of Research and Development.
David K. Wong.......... 44 Vice President since June 1993; Director of
Vice President Personnel from September 1990 until June 1993.
Prior to that time, Director of Recruiting and
Training.
R. Michael Lempke...... 41 Treasurer since November 1989; Assistant
Treasurer Treasurer prior to that time.
Charles L. Szews....... 37 Controller since November 1989; Director of
Controller Financial Reporting prior to that time.
David A. Stevens....... 44 Assistant Vice President for more than five
Assistant Vice years.
President
47
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information concerning compensation paid for
services to the Company during the last three fiscal years to the Chief
Executive Officer and the four other most highly compensated executive officers
(the "Named Executive Officers") of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- --------------
OTHER ANNUAL NUMBER OF ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS COMPENSATION(2)
- ------------------------------------ --------- ----------- ----------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Donald H. DeMeuse................... 1992 $ 675,000 $ 55,250 $ 3,831 0 $ 57,480
Chairman and Chief Executive 1991 525,000 0 3,125 17,000 50,383
Officer 1990 520,000 504,400 1,981 5,000(3) 50,685
Kathleen J. Hempel.................. 1992 456,923 37,400 0 0 27,222
Vice Chairman and Chief Financial 1991 404,616 0 0 5,000 27,610
Officer 1990 400,000 388,000 0 8 28,159
Michael T. Riordan.................. 1992 248,846 20,171 317 0 15,028
President and Chief Operating 1991 161,346 0 0 7,000 11,323
Officer 1990 153,077 135,800 0 2,000(3) 11,172
Andrew W. Donnelly.................. 1992 342,692 28,050 0 0 20,133
Executive Vice President 1991 293,077 0 0 8,000 19,693
1990 276,154 242,500 0 3,000(3) 19,183
John F. Rowley...................... 1992 244,039 19,975 0 0 14,561
Executive Vice President 1991 210,962 0 0 7,000 14,405
1990 203,077 218,842 0 2,000(3) 14,372
</TABLE>
- ---------------
(1) Includes amounts reimbursed for the payment of taxes.
(2) Vested and non-vested 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.
(3) All options granted in 1990 were canceled in 1991.
The following table presents information concerning the fiscal year-end
value of unexercised stock options for the Named Executive Officers. No stock
options were exercised by or granted to the Named Executive Officers during
1992.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
HELD AT DECEMBER 31, 1992 HELD AT DECEMBER 31, 1992(1)
-------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Donald H. DeMeuse............................. 57,660 25,915 $ 1,065,200 $ 266,300
Kathleen J. Hempel............................ 67,812 20,703 1,336,240 334,060
Michael T. Riordan............................ 11,567 7,642 195,340 48,840
Andrew W. Donnelly............................ 15,348 9,087 262,960 65,740
John F. Rowley................................ 10,713 7,429 178,260 44,580
</TABLE>
- ---------------
(1) Total value of options is based on a fair market value of $120.00 per share
as of December 31, 1992. The Common Stock of the Company is not registered
or publicly traded and, therefore, a public market price of the stock is not
available. However, in November 1990, the Company negotiated a
(Footnotes continued on following page)
48
<PAGE>
(Footnotes continued from preceding page)
series of private placements of its Common Stock and pursuant thereto sold
1,361,469 shares of Common Stock at $120.00 per share. In addition, the
Company granted non-qualified stock options to executive officers and other
key employees of the Company during 1991 and 1992 based upon a fair market
value of $120.00 per share. 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 in the
third quarter of 1993. As a result, all unexercised stock options are no
longer in-the-money. In addition, the Company reversed all previously
accrued employee stock compensation expense. See "Certain
Transactions--Management Equity Plan," Notes 12 and 13 to the audited
consolidated financial statements and Note 9 to the unaudited condensed
consolidated financial statements included elsewhere in this Prospectus.
DIRECTORS' COMPENSATION
Directors of the Company do not receive any compensation for service 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 Company's Management Equity Plan
(as defined below) which provides for the offer of Common Stock and the grant of
options to purchase Common Stock to executive officers and certain other key
employees of the Company. See "Certain Transactions--Management Equity Plan."
The Executive Committee selects the officers and key employees to whom Common
Stock will be offered or options will be granted.
The Executive Committee also administers the Company's Management Incentive
Plan (as defined below) 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.
The Chief Executive Officer's salary is determined by the entire Board of
Directors. The salaries of the other executive officers who also serve as
directors of the Company are determined by the Executive Committee. The salaries
of other executive officers of the Company are determined by the Company's Chief
Executive Officer.
49
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1993, by holders
having beneficial ownership of more than five percent 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.
<TABLE>
SHARES BENEFICIALLY OWNED
--------------------------
NUMBER OF PERCENTAGE
NAME SHARES OF CLASS
- ---------------------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
The Morgan Stanley Leveraged
Equity Fund II, L.P............................................................... 2,850,000(a) 48.6%
1251 Avenue of the Americas
New York, New York 10020
First Plaza Group Trust........................................................... 1,033,155 17.6
c/o Mellon Bank, N.A., as Trustee
1 Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Leeway & Co....................................................................... 516,577 8.8
1 Monarch Drive
North Quincy, Massachusetts 02171
Morgan Stanley Group Inc.......................................................... 427,213(b) 7.3
1251 Avenue of the Americas
New York, New York 10020
Fort Howard Equity Investors II, L.P.............................................. 261,737(c) 4.5
1251 Avenue of the Americas
New York, New York 10020
Fort Howard Equity Investors, L.P................................................. 102,000(d) 1.7
1251 Avenue of the Americas
New York, New York 10020
Donald H. DeMeuse................................................................. 100,100(e) 1.7
Kathleen J. Hempel................................................................ 90,491(f) 1.5
Michael T. Riordan................................................................ 17,934(g) less than 1
Donald P. Brennan................................................................. 0 --
Frank V. Sica..................................................................... 0 --
Robert H. Niehaus................................................................. 0 --
James S. Hoch..................................................................... 0 --
Andrew W. Donnelly................................................................ 22,735(h) less than 1
John F. Rowley.................................................................... 16,042(i) less than 1
All Directors and Executive Officers as a Group................................... 345,994(j) 5.6
<FN>
- ---------------
(a) Morgan Stanley Leveraged Equity Fund II, Inc. is the sole general partner of MSLEF II and is a wholly owned
subsidiary of Morgan Stanley Group.
(b) Excludes 40,000 shares for which Morgan Stanley Group exercises exclusive voting rights on shares not
beneficially owned.
(c) Morgan Stanley Equity Investors Inc. is the sole general partner of Fort Howard Equity Investors II, L.P. and
is a wholly owned subsidiary of Morgan Stanley Group.
(d) Morgan Stanley Equity Investors Inc. is the sole general partner of Fort Howard Equity Investors, L.P. and is
a wholly owned subsidiary of Morgan Stanley Group.
(e) Includes 74,375 shares subject to acquisition within 60 days by exercise of employee stock options.
(f) Includes 85,515 shares subject to acquisition within 60 days by exercise of employee stock options.
(g) Includes 15,409 shares subject to acquisition within 60 days by exercise of employee stock options.
(Footnotes continued on following page)
50
<PAGE>
(Footnotes continued from preceding page)
(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 283,033 shares subject to acquisition within 60 days by exercise of employee stock options.
</TABLE>
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 FH Partners II.
CERTAIN TRANSACTIONS
MANAGEMENT EQUITY PLAN
Effective as of April 29, 1991, the Board of Directors adopted the Fort
Howard Corporation Management Equity Plan (the "Management Equity Plan"). The
Management Equity Plan provides for the offer of Common Stock and the grant of
options to purchase Common Stock to executive officers and certain other key
employees of the Company.
Executive officers or other key employees of the Company who purchase
shares of Common Stock or are granted options pursuant to the Management Equity
Plan ("Equity Investors") are required to enter into a Management Equity Plan
Agreement with the Company, and to become bound by the terms of the Company's
stockholders agreement. See "Certain Transactions--Stockholders Agreement."
Options granted pursuant to the Management Equity Plan vest in accordance
with a schedule determined at the time of grant and set forth in the applicable
Management Equity Plan Agreement. Any such options will be subject to partial
acceleration of vesting in the event of death or disability.
Shares of Common Stock purchased pursuant to the Management Equity Plan, as
well as options that have become vested, may not be transferred for an extended
period of time, except in certain limited circumstances. Options which have not
vested are not transferable.
Subject to certain exceptions, under the Management Equity Plan, Equity
Investors who terminate their employment with the Company before the later of
(i) the fifth anniversary of the date on which shares of Common Stock were
purchased or options were granted, as the case may be, and (ii) the date on
which 15% or more of the Common Stock has been sold in one or more public
offerings, must sell their shares of Common Stock and vested options to the
Company or its designee. The terms and conditions of such repurchases by the
Company (including the determination of the applicable repurchase price) are
substantially similar to those prescribed for the repurchase by the Company of
shares of Common Stock and vested options acquired by certain executive officers
and other key employees of the Company pursuant to the Management Equity
Participation Agreement (as defined below). See "Certain
Transactions--Management Equity Participation." Subject to certain exceptions,
options which have not vested at the time an Equity Investor's employment is
terminated are forfeited to the Company.
The Management Equity Plan also provides that Equity Investors may put
specified percentages of their shares of Common Stock and vested options to the
Company annually during the period from the fifth anniversary of the date on
which such shares were purchased or options were granted, as the case may be, to
the date on which 15% or more of the Common Stock has been sold in one or more
public offerings. The terms and conditions governing such put option are
substantially similar to those prescribed for the exercise of the put option set
forth in the Management Equity Participation Agreement.
51
<PAGE>
On April 30, 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 95,900 shares of Common Stock at an exercise price of $120 per share
were granted in 1991 and 1992 pursuant to the Management Equity Plan to certain
executive officers and other key employees of the Company, although no options
were granted in 1992 to any of the Named Executive Officers. Such options vest
at the rate of 20% per year. Further, the terms and conditions of options to
purchase 15,500 shares of Common Stock granted in December 1988 at an exercise
price of $100 per share pursuant to a predecessor plan are now governed by the
Management Equity Plan.
MANAGEMENT EQUITY PARTICIPATION
Mr. DeMeuse, Ms. Hempel, Mr. Riordan and other current executive officers
and members of the Company's senior management (the "Management Investors") are
parties to an Amended and Restated Management Equity Participation Agreement, as
amended, with the Company, Morgan Stanley Group and MSLEF II (the "Management
Equity Participation Agreement"), pursuant to which the Management Investors
purchased 63,107 shares of Common Stock in 1988 and 4,896 shares of Common Stock
in 1990 at $100 and $135 per share, respectively. Management Investors who
purchased shares of Common Stock pursuant to the Management Equity Participation
Agreement were also granted stock options to acquire 278,052 and 42,460 shares
of Common Stock pursuant to the Management Equity Participation Agreement at
exercises prices of $100 and $120 per share, respectively. Such options vest at
the rate of 20% per year and are subject to partial acceleration of vesting in
the event of death or disability. Certain of the Management Investors have also
purchased shares of Common Stock and have been granted options to acquire
additional shares of Common Stock pursuant to the terms of the Management Equity
Plan. See "--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.
52
<PAGE>
The Management Equity Participation Agreement also provides that the
Management Investors may put to the Company annually during the period from the
fifth anniversary of the Effective Date to the date on which 15% or more of the
Common Stock has been sold in one or more public offerings, specified
percentages of their shares of Common Stock and Vested Options at a price equal
to their fair market value. In certain circumstances and subject to certain
limitations, Mr. DeMeuse and Ms. Hempel may require MSLEF II or Morgan Stanley
Group to fulfill the Company's purchase obligations upon any termination of
employment or exercise of the put option.
The Management Equity Participation Agreement also provides that the
Company will indemnify Management Investors for taxes on income which may be
recognized upon the vesting of shares of Common Stock under certain
circumstances. The indemnity is limited to the tax benefit to the Company, and
if the tax benefit has not yet been received by the Company in cash at the time
when the taxes must be paid by a Management Investor, the Company will make a
non-recourse 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 non-recourse 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, and such
53
<PAGE>
transferee is not determined by the Board of Directors of the Company to be an
"Adverse Person" (as defined in the Stockholders Agreement), (iv) any person
pursuant to a public offering, or (v) any person pursuant to Rule 144 under the
Securities Act 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.
THE CUP TRANSFER AND CUP SALES
On November 14, 1989, the Company transferred all the capital stock of Fort
Howard Cup to Sweetheart, a new company organized on behalf of MSLEF II, the
Company and certain executive officers of Sweetheart and other investors in the
Cup Transfer. The business transferred to Sweetheart constituted all the
Company's U.S. and Canadian disposable foodservice operations.
As a result of the Cup Transfer, the Company received (i) $532.25 million
in cash, (ii) 430,172 shares of Sweetheart Class B Common Stock representing
49.9% of the Sweetheart Common Stock then outstanding, with a fair value of
$87.4 million, and (iii) certain other adjustments. The total value of the cash
and other assets received by the Company as a result of the Cup Transfer was
approximately $620 million. The Company has not undertaken any guarantees of
Sweetheart's indebtedness as a result of the Cup Transfer.
On the date of the Cup Transfer, the Sweetheart Class B Common Stock owned
by the Company constituted 49.9% of the shares of Sweetheart Common Stock then
outstanding, and the Sweetheart
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Class A Common Stock owned by MSLEF II, Morgan Stanley and certain executive
officers and key employees of Sweetheart and other investors constituted 22.4%,
14% and 13.7%, respectively, of the shares of Sweetheart Common Stock then
outstanding.
On December 29, 1989, the Company sold its Pacific Basin cup business for
approximately $10.7 million in cash as part of a program to divest its remaining
international cup operations. The Company sold its European disposable
foodservice operations for a net selling price of approximately $49 million on
December 30, 1991. On August 30, 1993, the Company sold all of its Sweetheart
Class B Common Stock for $5.1 million.
As a result of the completion of the Cup Transfer and the sales of its
remaining international cup operations, the Company has divested all of its
operating interests in those businesses.
OTHER TRANSACTIONS
The Company has entered into an agreement with MS&Co. for financial
advisory services in consideration for which the Company pays MS&Co. an annual
fee of $1 million. MS&Co. is also entitled to reimbursement for all reasonable
expenses incurred in performance of the foregoing services. The Company paid
MS&Co. approximately $1.1 million, $1.1 million and $1.3 million for these and
other miscellaneous services in 1992, 1991 and 1990, respectively. In connection
with the sale of the 9 1/4% Notes and the 10% Notes in 1993, MS&Co. received
approximately $19.5 million of underwriting fees. In 1992, MS&Co. received
approximately $0.7 million in connection with the underwriting of the reissuance
of the Company's Development Authority of Effingham County Pollution Control
Revenue Refunding Bonds, Series 1988. In connection with the issuance of the
Pass Through Certificates in 1991, MS&Co. received approximately $2.9 million of
advisory and underwriting fees. In connection with the Company's sale of Senior
Secured Notes in 1991, MS&Co. received approximately $6.8 million of advisory
fees. In addition, with regard to a 1989 sale and leaseback transaction, MS&Co.
received approximately $2.3 million of advisory fees. Also, in 1988, the Company
paid MS&Co. $325,000 for services connected with the negotiation of interest
rate cap and swap agreements.
Based on transactions of similar size and nature, the Company believes the
foregoing fees received by MS&Co. are no less favorable to the Company than
would be available from unaffiliated third parties.
MS&Co. served as lead underwriter for the initial public offering of the 9
1/4% Notes, 10% Notes, 12 3/8% Notes, 12 5/8% Debentures, 14 1/8% Debentures and
Pass Through Certificates and is a market-maker with respect to such securities.
In connection with the repurchases of certain of the Company's securities as
described in Note 8 to the audited consolidated financial statements included
elsewhere in the Prospectus, $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.
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DESCRIPTION OF THE NOTES
The Senior Notes are to be issued under an Indenture, to be dated as of
February 1, 1994 (the "Senior Note Indenture"), between the Company and Norwest
Bank Wisconsin, N.A., as Trustee (the "Senior Note Trustee"). The Senior
Subordinated Notes are to be issued under an Indenture, to be dated as of
February 1, 1994 (the "Senior Subordinated Note Indenture"), between the Company
and The Bank of New York, as Trustee (the "Senior Subordinated Note Trustee").
The Senior Note Indenture and the Senior Subordinated Note Indenture are
hereinafter referred to collectively as the "Indentures." The Senior Note
Trustee and the Senior Subordinated Note Trustee are sometimes hereinafter
referred to collectively as the "Trustees." Any reference to a "Trustee" means
the Senior Note Trustee or the Senior Subordinated Note Trustee, as the context
may require.
A copy of the form of each Indenture is filed as an exhibit to the
Registration Statement of which this Prospectus is a part and is available as
described under "Additional Information." The following summaries of certain
provisions of the respective Indentures do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the respective Indentures, including the definitions of certain
terms therein and those terms made a part thereof by the Trust Indenture Act of
1939, as amended. Wherever particular Sections or defined terms of the
Indentures not otherwise defined herein are referred to, such Sections or
defined terms shall be incorporated herein by reference.
GENERAL
Principal of, premium, if any, and interest on the Senior Notes and the
Senior Subordinated Notes will be payable, and the Senior Notes and the Senior
Subordinated Notes may be exchanged or transferred, at the office or agency of
the Company in the Borough of Manhattan, The City of New York (which, for the
Senior Notes, initially shall be the corporate trust office of the Senior Note
Trustee, at 3 New York Plaza, 15th Floor, New York, New York 10004 and, for the
Senior Subordinated Notes, initially shall be the corporate trust office of the
Senior Subordinated Note Trustee, at 101 Barclay Street, New York, New York
10286); provided that, at the option of the Company, payment of interest may be
made by check mailed to the address of the Holders as such address appears in
the Security Register. (Sections 2.01 and 2.03)
The Senior Notes and the Senior Subordinated Notes will be issued only in
fully registered form, without coupons, in denominations of $1,000 and any
integral multiple of $1,000. (Section 2.02) No service charge shall be made for
any registration of transfer or exchange of Senior Notes or Senior Subordinated
Notes, but the Company may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in connection
therewith. (Section 2.05)
TERMS OF THE SENIOR NOTES
The Senior Notes will be unsecured senior obligations of the Company,
limited to $100 million aggregate principal amount, and will mature on February
1, 2002. Each Senior Note will bear interest at the rate per annum shown on the
front cover of this Prospectus from February 9, 1994 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semiannually (to Holders of record at the close of business on the January 15 or
July 15 immediately preceding the Interest Payment Date) on February 1 and
August 1 of each year, commencing August 1, 1994. The Senior Notes will not be
redeemable prior to maturity.
TERMS OF THE SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes will be unsecured senior subordinated
obligations of the Company, limited to $650 million aggregate principal amount,
and will mature on February 1, 2006. Each Senior Subordinated Note will bear
interest at the rate per annum shown on the front cover of this Prospectus
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from February 9, 1994 or from the most recent Interest Payment Date to which
interest has been paid or provided for, payable semiannually (to the Holders of
record at the close of business on the January 15 or July 15 immediately
preceding the Interest Payment Date) on February 1 and August 1 of each year,
commencing August 1, 1994.
Optional Redemption. The Senior Subordinated Notes will be redeemable, at
the Company's option, in whole or in part, at any time on or after February 1,
1999, and prior to maturity, upon not less than 30 nor more than 60 days' prior
notice mailed by first class mail to each Holder's last address as it appears in
the Security Register, at the following Redemption Prices (expressed in
percentages of principal amount), plus accrued interest to the Redemption Date
(subject to the right of Holders of record on the relevant Regular Record Date
to receive interest due on an Interest Payment Date that is on or prior to the
Redemption Date), if redeemed during the 12-month period commencing on or after
February 1 of the years set forth below:
<TABLE>
REDEMPTION
YEAR PRICE
- -------------------------------------------------------------------------------- -----------
<S> <C>
1999............................................................................ 104.50%
2000............................................................................ 102.25%
</TABLE>
and, after February 1, 2001, at 100% of principal amount. (Section 10.01)
In addition, at any time prior to February 1, 1997, the Company may redeem
up to $227.5 million aggregate principal amount of Senior Subordinated Notes
with the proceeds of one or more Public Equity Offerings following which there
is a Public Market, at any time or from time to time, at a redemption price
(expressed as a percentage of principal amount) of 109%, plus accrued interest
to the Redemption Date.
Selection. In the case of any partial redemption, selection of the Senior
Subordinated Notes for redemption will be made by the Senior Subordinated Note
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which the Senior Subordinated Notes are listed or, if the
Senior Subordinated Notes are not listed on a national securities exchange, on a
pro rata basis, by lot or by such other method as the Senior Subordinated Note
Trustee in its sole discretion shall deem to be fair and appropriate; provided
that no Senior Subordinated Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Senior Subordinated Note is to be redeemed in
part only, the notice of redemption relating to such Senior Subordinated Note
shall state the portion of the principal amount thereof to be redeemed. A new
Senior Subordinated Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Senior Subordinated Note.
The Bank Credit Agreement, the Senior Secured Note Agreement and the 1993
Term Loan Agreement each contain a covenant prohibiting the optional redemption
of the Senior Subordinated Notes without the consent of a specified percentage
in interest of lenders under the Bank Credit Agreement and the 1993 Term Loan
Agreement, and of holders of Senior Secured Notes. The 9 1/4% Note Indenture and
the Pass Through Certificate Leases also contain, and the Senior Note Indenture
will contain, covenants limiting the optional redemption of the Senior
Subordinated Notes.
RANKING
The Indebtedness evidenced by the Senior Notes will rank pari passu in
right of payment with all other senior indebtedness of the Company, including,
without limitation, the Company's obligations under the Bank Credit Agreement,
the 1993 Term Loan Agreement, the Pass Through Certificate Leases, certain other
leases resulting from sale and leaseback transactions, the Senior Secured Notes
(including the Senior Secured Note Agreement) and the 9 1/4% Notes.
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The Company's obligations under the Bank Credit Agreement, the 1993 Term
Loan Agreement and the Senior Secured Note Agreement are secured by a first lien
(subject to permitted liens) on the Shared Collateral. The Pass Through
Certificates are indirectly secured by a lien on the Pass Through Assets, which
consist of an owner trustee's interest in a paper manufacturing facility, power
plant and certain equipment related thereto located at the Company's Savannah
River mill, all of which are leased to the Company by such owner trustee under
the Pass Through Certificate Leases. The Pass Through Certificate Leases are
treated as capital leases pari passu with the Senior Notes. In addition, the
Company has obligations resulting from other sale and leaseback transactions
which are treated as capital leases pari passu with the Senior Notes. The Notes
are not secured. The holders of Secured Indebtedness will be entitled to payment
of their Indebtedness out of the proceeds of their collateral prior to the
holders of any unsecured obligations of the Company, including the Notes. After
giving effect to the Refinancing, as of September 30, 1993, the Company and its
subsidiaries would have had outstanding approximately $1.1 billion of Secured
Indebtedness and an additional $150 million available for borrowing under the
Revolving Credit Facility. See "Certain Risk Factors--Subordination of the
Senior Subordinated Notes and Effect of Asset Encumbrances," "Capitalization,"
"Selected Historical Consolidated Financial Data" and "Pro Forma Financial
Data."
At September 30, 1993, the Company's subsidiaries had outstanding
liabilities of $124 million, including trade payables. The Notes will be
effectively subordinated to liabilities of the Company's subsidiaries, including
trade payables.
The payment of the Senior Subordinated Obligations will, to the extent set
forth in the Senior Subordinated Note Indenture, be subordinated in right of
payment to the prior payment in full, in cash or cash equivalents, of all Senior
Indebtedness, including, without limitation, the Company's obligations under the
Bank Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Notes,
the Pass Through Certificate Leases (to the extent required to pay the Pass
Through Certificate Secured Notes in full), and the 9 1/4% Notes. After giving
pro forma effect to the Refinancing as of September 30, 1993, approximately
$1,654 million of Senior Indebtedness of the Company would have been
outstanding. The Senior Subordinated Notes will rank senior in right of payment
to the 12 5/8% Debentures that remain outstanding after the 12 5/8% Debenture
Redemption, the 14 1/8% Debentures and the 10% Notes. See "Capitalization" and
"Selected Historical Consolidated Financial Data."
To the extent any payment of Senior Indebtedness (whether by or on behalf
of the Company, as proceeds of security or enforcement of any right of setoff or
otherwise) is declared to be fraudulent or preferential, set aside or required
to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or
other similar Person under any bankruptcy, insolvency, receivership, fraudulent
conveyance or similar law, then, if such payment is recovered by, or paid over
to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other
similar Person, the Senior Indebtedness or part thereof originally intended to
be satisfied shall be deemed to be reinstated and outstanding as if such payment
had not occurred. To the extent the obligation to repay any Senior Indebtedness
is declared to be fraudulent, invalid, or otherwise set aside under any
bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then
the obligation so declared fraudulent, invalid or otherwise set aside (and all
other amounts that would come due with respect thereto had such obligation not
been so affected) shall be deemed to be reinstated and outstanding as Senior
Indebtedness for all purposes of the Senior Subordinated Note Indenture as if
such declaration, invalidity or setting aside had not occurred. Upon any payment
or distribution of assets or securities of the Company of any kind or character,
whether in cash, property or securities, upon any dissolution or winding up or
total or partial liquidation or reorganization of the Company, whether voluntary
or involuntary or in bankruptcy, insolvency, receivership or other proceedings,
all amounts due or to become due upon all Senior Indebtedness (including any
interest accruing subsequent to an event of bankruptcy, whether or not such
interest is an allowed claim enforceable against the debtor under the United
States Bankruptcy Code) shall first be paid in full, in cash or cash
equivalents, before the Holders of the Senior Subordinated Notes or the Senior
Subordinated Note Trustee on behalf of the Holders of the Senior Subordinated
Notes shall be
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entitled to receive any payment by the Company on account of Senior Subordinated
Obligations, or any payment to acquire any of the Senior Subordinated Notes for
cash, property or securities, or any distribution with respect to the Senior
Subordinated Notes of any cash, property or securities. Before any payment may
be made by, or on behalf of, the Company of any Senior Subordinated Obligations
upon any such dissolution, winding up, liquidation or reorganization, any
payment or distribution of assets or securities of the Company of any kind or
character, whether in cash, property or securities, to which the Holders of the
Senior Subordinated Notes or the Senior Subordinated Note Trustee on behalf of
the Holders of the Senior Subordinated Notes would be entitled, but for the
subordination provisions of the Senior Subordinated Note Indenture, shall be
made by the Company or by any receiver, trustee in bankruptcy, liquidating
trustee, agent or other similar Person making such payment or distribution or by
the Holders of the Senior Subordinated Notes or the Senior Subordinated Note
Trustee if received by them or it, directly to the holders of the Senior
Indebtedness (pro rata to such holders on the basis of the respective amounts of
Senior Indebtedness held by such holders) or their representatives or to the
trustee or trustees under any indenture pursuant to which Senior Indebtedness
may have been issued, as their respective interests appear, to the extent
necessary to pay all such Senior Indebtedness in full, in cash or cash
equivalents, after giving effect to any concurrent payment, distribution or
provision therefor to or for the holders of such Senior Indebtedness.
No direct or indirect payment by or on behalf of the Company of Senior
Subordinated Obligations, whether pursuant to the terms of the Senior
Subordinated Notes or upon acceleration or otherwise shall be made if, at the
time of such payment, there exists a default in the payment of all or any
portion of the obligations on any Senior Indebtedness, and such default shall
not have been cured or waived or the benefits of this sentence waived by or on
behalf of the holders of such Senior Indebtedness. In addition, during the
continuance of any other event of default with respect to (i) the Bank Credit
Agreement, the Senior Secured Note Agreement or the 1993 Term Loan Agreement
pursuant to which the maturity thereof may be accelerated and (a) upon receipt
by the Senior Subordinated Note Trustee of written notice from any Bank Agent or
(b) if such event of default under the Bank Credit Agreement, the Senior Secured
Note Agreement or the 1993 Term Loan Agreement results from the acceleration of
the Senior Subordinated Notes, from and after the date of such acceleration, no
such payment may be made by or on behalf of the Company upon or in respect of
the Senior Subordinated Notes for a period (a "Payment Blockage Period")
commencing on the earlier of the date of receipt of such notice or the date of
such acceleration and ending 159 days thereafter (unless such Payment Blockage
Period shall be terminated by written notice to the Senior Subordinated Note
Trustee from any Bank Agent or such event of default has been cured or waived)
or (ii) any other Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated, upon receipt by the Senior Subordinated Note Trustee
of written notice from the trustee or other representative for the holders of
such other Designated Senior Indebtedness (or the holders of at least a majority
in principal amount of such other Designated Senior Indebtedness then
outstanding), no such payment may be made by or on behalf of the Company upon or
in respect of the Senior Subordinated Notes for a Payment Blockage Period
commencing on the date of receipt of such notice and ending 119 days thereafter
(unless, in each case, such Payment Blockage Period shall be terminated by
written notice to the Senior Subordinated Note Trustee from such trustee of, or
other representatives for, such holders). Not more than one Payment Blockage
Period may be commenced with respect to the Senior Subordinated Notes during any
period of 360 consecutive days; provided that, subject to the limitations set
forth in the next sentence, the commencement of a Payment Blockage Period by the
representatives for, or the holders of, Designated Senior Indebtedness other
than under the Bank Credit Agreement or the 1993 Term Loan Agreement or under
clause (i)(b) of this paragraph shall not bar the commencement of another
Payment Blockage Period by the Bank Agents within such period of 360 consecutive
days. Notwithstanding anything in the Senior Subordinated Note Indenture to the
contrary, there must be 180 consecutive days in any 360-day period in which no
Payment Blockage Period is in effect. No event of default (other than an event
of default pursuant to the financial maintenance covenants under the Bank Credit
Agreement, the Senior Secured Note Agreement or the 1993 Term Loan Agreement)
that existed or was continuing (it being acknowledged that
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any subsequent action that would give rise to an event of default pursuant to
any provision under which an event of default previously existed or was
continuing shall constitute a new event of default for this purpose) on the date
of the commencement of any Payment Blockage Period with respect to the
Designated Senior Indebtedness initiating such Payment Blockage Period shall be,
or shall be made, the basis for the commencement of a second Payment Blockage
Period by the representative for, or the holders of, such Designated Senior
Indebtedness, whether or not within a period of 360 consecutive days, unless
such event of default shall have been cured or waived for a period of not less
than 90 consecutive days. (Article Eleven)
By reason of the subordination provisions described above, in the event of
liquidation or insolvency, creditors of the Company who are not holders of
Senior Indebtedness may recover less ratably than holders of Senior Indebtedness
and may recover more ratably than Holders of the Senior Subordinated Notes.
"Senior Subordinated Obligations" is defined to mean any principal of,
premium, if any, and interest on the Senior Subordinated Notes payable pursuant
to the terms of the Senior Subordinated Notes or upon acceleration, including
any amounts received upon the exercise of rights of rescission or other rights
of action (including claims for damages) or otherwise, to the extent relating to
the purchase price of the Senior Subordinated Notes or amounts corresponding to
such principal, premium, if any, or interest on the Senior Subordinated Notes.
"Senior Indebtedness" under the Senior Subordinated Note Indenture is
defined to mean the following obligations of the Company, whether outstanding on
the date of the Senior Subordinated Note Indenture or thereafter Incurred: (i)
all Indebtedness and other monetary obligations of the Company under the Bank
Credit Agreement, the 1993 Term Loan Agreement, any Interest Rate Agreement or
any Currency Agreement and the Company's Guarantee of any Indebtedness or
monetary obligation of any of its Subsidiaries under the Bank Credit Agreement,
the 1993 Term Loan Agreement, any Interest Rate Agreement or any Currency
Agreement, (ii) any principal of, premium, if any, and interest on the Senior
Secured Notes, the 9 1/4% Notes and the Senior Notes, (iii) all other
Indebtedness of the Company (other than the Senior Subordinated Notes),
including principal and interest on such Indebtedness, unless such Indebtedness,
by its terms or by the terms of any agreement or instrument pursuant to which
such Indebtedness is issued, is pari passu with, or subordinated in right of
payment to, the Senior Subordinated Notes and (iv) all fees, expenses and
indemnities payable in connection with the Bank Credit Agreement, the 1993 Term
Loan Agreement and the Senior Secured Notes (including any agreement pursuant to
which the Senior Secured Notes were issued) and, if applicable, Currency
Agreements and Interest Rate Agreements; provided that the term "Senior
Indebtedness" shall not include (a) the 12 3/8% Notes, the 12 5/8% Debentures,
the 14 1/8% Debentures, the 10% Notes or any amounts payable under the
indentures relating thereto, or amounts payable under the Pass Through
Certificate Leases in excess of the amount necessary to pay the outstanding Pass
Through Certificate Secured Notes (including accrued and unpaid interest) in
full on the date of payment, (b) any Indebtedness of the Company that, when
Incurred and without respect to any election under Section 1111(b) of the United
States Bankruptcy Code, was without recourse to the Company, (c) any
Indebtedness of the Company to a Subsidiary of the Company or to a joint venture
in which the Company has an interest, (d) any Indebtedness of the Company (other
than such Indebtedness already described in clause (i) above) of the type
described in clause (iii) above and not permitted by the "Limitation on
Indebtedness" covenant described below, (e) any repurchase, redemption or other
obligation in respect of Redeemable Stock, (f) any Indebtedness to any employee
of the Company or any of its Subsidiaries, (g) any liability for federal, state,
local or other taxes owed or owing by the Company and (h) any Trade Payables.
Senior Indebtedness will also include interest accruing subsequent to events of
bankruptcy of the Company and its Subsidiaries at the rate provided for in the
document governing such Senior Indebtedness, whether or not such interest is an
allowed claim enforceable against the debtor in a bankruptcy case under federal
bankruptcy law. (Section 1.01)
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"Designated Senior Indebtedness" under the Senior Subordinated Note
Indenture is defined to mean (i) Indebtedness under the Bank Credit Agreement,
the 1993 Term Loan Agreement or the Senior Secured Notes (including any
agreement pursuant to which the Senior Secured Notes were issued) and (ii) any
other Indebtedness constituting Senior Indebtedness that, at any date of
determination, has an aggregate principal amount of at least $100 million and is
specifically designated by the Company in the instrument creating or evidencing
such Senior Indebtedness as "Designated Senior Indebtedness"; provided that, at
the time of such designation, the aggregate outstanding amount (plus any
unutilized commitments) under the Bank Credit Agreement shall be $200 million or
less. (Section 1.01)
Except as set forth in the Senior Subordinated Note Indenture, the
subordination provisions described above will cease to be applicable to the
Senior Subordinated Notes upon any defeasance of the Senior Subordinated Notes
as described under "--Defeasance." (Article Seven)
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indentures. Reference is made to the
appropriate Indenture for the full definition of all such terms as well as any
other capitalized terms used herein for which no definition is provided.
(Section 1.01)
"Acquired Indebtedness" is defined to mean Indebtedness of a Person
existing at the time such Person became a Subsidiary and not Incurred in
connection with, or in contemplation of, such Person becoming a Subsidiary.
"Adjusted Consolidated Assets" is defined to mean the total amount of
assets of the Company and its Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), after deducting therefrom all
current liabilities of the Company and its consolidated Subsidiaries, all as set
forth on the most recently available consolidated balance sheet of the Company
and its consolidated Subsidiaries, prepared in conformity with GAAP.
"Adjusted Consolidated Net Income" is defined to mean, for any period, the
aggregate net income (or loss) of any Person and its consolidated Subsidiaries
for such period determined in conformity with GAAP; provided that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income (or loss) of such Person (other than a
Subsidiary of such Person) in which any other Person (other than such Person or
any of its Subsidiaries) has a joint interest, except to the extent of the
amount of dividends or other distributions actually paid to such Person or any
of its Subsidiaries by such other Person during such period, (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below (and in such case, except to the extent
includible pursuant to the foregoing clause (i) above), the net income (or loss)
of such Person accrued prior to the date it becomes a Subsidiary of any other
Person or is merged into or consolidated with such other Person or any of its
Subsidiaries or all or substantially all of the property and assets of such
Person are acquired by such other Person or any of its Subsidiaries, (iii) the
net income (or loss) of any Subsidiary of such Person to the extent that the
declaration or payment of dividends or similar distributions by such Subsidiary
of such net income is not at the time permitted by the operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation and (iv) all extraordinary gains and extraordinary
losses; provided that, solely for purposes of calculating the Interest Coverage
Ratio (and in such case, except to the extent includible pursuant to clause (i)
above), Adjusted Consolidated Net Income of the Company shall include the amount
of all cash dividends received by the Company or any Subsidiary of the Company
from an Unrestricted Subsidiary.
"Administrative Agent" is defined to mean the Bank Agent under the Bank
Credit Agreement or the 1993 Term Loan Agreement, or any successor thereto.
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"Affiliate" is defined to mean, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, is defined to mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise. For purposes of this
definition, no Bank Agent, Administrative Agent or Bank and no affiliate of any
of them shall be deemed to be an Affiliate of the Company.
"Asset Acquisition" is defined to mean (i) an investment by the Company or
any of its Subsidiaries in any other Person pursuant to which such Person shall
become a Subsidiary of the Company or any of its Subsidiaries or shall be merged
into or consolidated with the Company or any of its Subsidiaries or (ii) an
acquisition by the Company or any of its Subsidiaries of the assets of any
Person other than the Company or any of its Subsidiaries that constitute
substantially all of a division or line of business of such Person.
"Asset Disposition" is defined to mean the sale or other disposition by the
Company or any of its Subsidiaries (other than to the Company or another
Subsidiary of the Company) of (i) all or substantially all of the Capital Stock
of any Subsidiary of the Company or (ii) all or substantially all of the assets
that constitute a division or line of business of the Company or any of its
Subsidiaries.
"Asset Sale" is defined to mean with respect to any Person, any sale,
transfer or other disposition (including by way of merger, consolidation or
sale-leaseback transactions) in one transaction or a series of related
transactions by such Person or any of its Subsidiaries to any Person other than
the Company or any of its Subsidiaries of (i) all or any of the Capital Stock of
any Subsidiary of such Person, (ii) all or substantially all of the assets of a
division or line of business of such Person or any of its Subsidiaries or (iii)
any other assets of such Person or any of its Subsidiaries outside the ordinary
course of business of such Person or such Subsidiary and in each case, that is
not governed by the provisions of the Indentures applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of the Company; provided that, for the purposes of determining the
restrictions under the "Limitation on Asset Sales" covenant described below, the
Company may disregard sales or other dispositions of inventory, receivables and
other current assets.
"Attributable Indebtedness" is defined to mean, when used in connection
with a sale-leaseback transaction referred to in the "Limitation on
Sale-Leaseback Transactions" covenant described below, at any date of
determination, the product of (i) the net proceeds from such sale-leaseback
transaction and (ii) a fraction, the numerator of which is the number of full
years of the term of the lease relating to the property involved in such
sale-leaseback transaction (without regard to any options to renew or extend
such term) remaining at the date of the making of such computation and the
denominator of which is the number of full years of the term of such lease
(without regard to any options to renew or extend such term) measured from the
first day of such term.
"Average Life" is defined to mean, at any date of determination with
respect to any debt security, the quotient obtained by dividing (i) the sum of
the product of (A) the number of years from such date of determination to the
dates of each successive scheduled principal payment of such debt security
multiplied by (B) the amount of such principal payment by (ii) the sum of all
such principal payments.
"Bank Agent" is defined to mean Bankers Trust Company, as agent for the
Banks pursuant to the Bank Credit Agreement or the 1993 Term Loan Agreement, and
any successor or successors thereto.
"Bank Credit Agreement" is defined to mean the Credit Agreement, dated as
of October 24, 1988, among the Company, the Banks party thereto and the Bank
Agents party thereto, as amended to date, together with the related documents
thereto (including, without limitation, any Guarantees and security documents),
in each case, as such agreements may be amended (including any amendment and
restatement thereof), supplemented, replaced or otherwise modified from time to
time, including any
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agreement extending the maturity of, refinancing or otherwise restructuring
(including, but not limited to, the inclusion of additional borrowers or
Guarantors thereunder that are Subsidiaries of the Company and whose obligations
are Guaranteed by the Company thereunder) all or any portion of the Indebtedness
under such agreements or any successor agreements; provided that, with respect
to any agreement providing for the refinancing of Indebtedness under the Bank
Credit Agreement, such agreement shall be the Bank Credit Agreement under the
Indentures only if a notice to that effect is delivered to the Trustee; and
provided further that there shall be at any one time only one instrument,
together with any related documents (including, without limitation, any
Guarantees or security documents), that is the Bank Credit Agreement under the
Indentures.
"Banks" is defined to mean the lenders who are from time to time parties to
the Bank Credit Agreement or the 1993 Term Loan Agreement.
"Board of Directors" is defined to mean the Board of Directors of the
Company or any committee of such Board of Directors duly authorized to act under
the Indentures.
"Business Day" is defined to mean any day except a Saturday, Sunday or
other day on which commercial banks in The City of New York, or in the city of
the Corporate Trust Office of the respective Trustees, are authorized by law to
close.
"Capital Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's capital stock, whether now
outstanding or issued after the date of the Indenture, including, without
limitation, all Common Stock and Preferred Stock.
"Capitalized Lease" is defined to mean, as applied to any Person, any lease
of any property (whether real, personal or mixed) of which the discounted
present value of the rental obligations of such Person as lessee, in conformity
with GAAP, is required to be capitalized on the balance sheet of such Person;
and "Capitalized Lease Obligation" is defined to mean the rental obligations, as
aforesaid, under such lease.
"Closing Date" is defined to mean the date on which the Senior Notes or the
Senior Subordinated Notes, as the case may be, are originally issued under their
respective Indentures.
"Common Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's common stock, whether now
outstanding or issued after the date of the Indentures, including, without
limitation, all series and classes of such common stock.
"Consolidated Capital Expenditures" means expenditures (whether paid in
cash or accrued as liabilities and including Capitalized Lease Obligations) of
the Company and its Subsidiaries that, in conformity with GAAP, are included in
the property, plant or equipment reflected in the consolidated balance sheet of
the Company and its Subsidiaries.
"Consolidated EBITDA" is defined to mean, with respect to any Person for
any period, the sum of the amounts for such period of (i) Adjusted Consolidated
Net Income, (ii) Consolidated Interest Expense, (iii) income taxes (other than
income taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense,
(v) amortization expense and (vi) all other non-cash items reducing Adjusted
Consolidated Net Income, less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for such
Person and its Subsidiaries in conformity with GAAP; provided that, if a Person
has any Subsidiary that is not a Wholly Owned Subsidiary, Consolidated EBITDA of
such Person shall be reduced by an amount equal to (A) the Adjusted Consolidated
Net Income of such Subsidiary multiplied by (B) the quotient of (1) the number
of shares of outstanding Common Stock of such Subsidiary not owned on the last
day of such period by such Person or any Subsidiary of such Person
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divided by (2) the total number of shares of outstanding Common Stock of such
Subsidiary on the last day of such period.
"Consolidated Interest Expense" is defined to mean, with respect to any
Person for any period, the aggregate amount of interest in respect of
Indebtedness (including amortization of original issue discount on any
Indebtedness and the interest portion of any deferred payment obligation,
calculated in accordance with the effective interest method of accounting; all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing; and the net costs associated with
Interest Rate Agreements) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by such Person and its consolidated subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Subsidiary of
such Person if the net income (or loss) of such Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income for such Person pursuant to
clause (iii) of the definition thereof (but only in the same proportion as the
net income (or loss) of such Subsidiary is excluded from the calculation of
Adjusted Consolidated Net Income for such Person pursuant to clause (iii) of the
definition thereof) and (ii) any premiums, fees and expenses (and any
amortization thereof) payable in connection with the Acquisition, the 1993
Refinancing and the Refinancing, all as determined in conformity with GAAP.
"Consolidated Net Worth" is defined to mean, at any date of determination,
shareholders' equity as set forth on the most recently available consolidated
balance sheet of the Company and its consolidated Subsidiaries (which shall be
as of a date not more than 60 days prior to the date of such computation), less,
to the extent required in conformity with GAAP, any amounts attributable to
Redeemable Stock or any equity security convertible into or exchangeable for
Indebtedness, the cost of treasury stock and the principal amount of any
promissory notes receivable from the sale of Capital Stock of the Company or any
Subsidiary of the Company (excluding the effects of foreign currency exchange
adjustments under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 52).
"Currency Agreement" is defined to mean any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect the Company or any of its Subsidiaries against fluctuations in currency
values to or under which the Company or any of its Subsidiaries is a party or a
beneficiary on the date of the Indentures or becomes a party or a beneficiary
thereafter.
"Domestic Subsidiary" is defined to mean any Subsidiary of the Company
other than a Foreign Subsidiary.
"Foreign Subsidiary" is defined to mean any Subsidiary of the Company that
is organized under the laws of a jurisdiction other than the United States of
America or any state thereof and more than 80% of the sales, earnings or assets
(determined on a consolidated basis in conformity with GAAP) of which are
located or derived from operations located in territories outside of the United
States of America and jurisdictions outside the United States of America.
"GAAP" is defined to mean generally accepted accounting principles in the
United States of America as in effect as of the date of the Indentures,
including, without limitation, those set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as
approved by a significant segment of the accounting profession. All ratios and
computations based on GAAP contained in the Indentures shall be computed in
conformity with GAAP, except that calculations made for purposes of determining
compliance with the terms of the covenants described below and with other
provisions of the Indentures shall be made without giving effect to (i) the
amortization of any expenses incurred in connection with the Acquisition, the
1993 Refinancing or the Refinancing and (ii) except as otherwise provided, the
amortization of any amounts required or permitted by Accounting Principles Board
Opinion Nos. 16 and 17.
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"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such other Person (whether
arising by virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided that the term "Guarantee" shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Holder" or "Securityholder" is defined to mean the registered holder of
any Senior Note or any Senior Subordinated Note, as the case may be.
"Incur" is defined to mean, with respect to any Indebtedness, to incur,
create, issue, assume, Guarantee or otherwise become liable for or with respect
to or extend the maturity of or become responsible for, the payment of,
contingently or otherwise, such Indebtedness; provided that neither the accrual
of interest (whether such interest is payable in cash or kind) nor the accretion
of original issue discount shall be considered an Incurrence of Indebtedness.
"Indebtedness" is defined to mean, with respect to any Person at any date
of determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except Trade Payables, (v) all obligations of such Person as
lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other Persons,
(vii) all Indebtedness of other Persons Guaranteed by such Person to the extent
such Indebtedness is Guaranteed by such Person, (viii) all obligations in
respect of borrowed money under the Bank Credit Agreement, the 1993 Term Loan
Agreement, the Senior Secured Notes, the Notes (including any agreements
pursuant to which the Notes were issued) and any Guarantees thereof and (ix) to
the extent not otherwise included in this definition, obligations under Currency
Agreements and Interest Rate Agreements. The amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date; provided that the amount outstanding at any time of
any Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP.
"Interest Coverage Ratio" is defined to mean, with respect to any Person on
any Transaction Date, the ratio of (i) the aggregate amount of Consolidated
EBITDA of such Person for the four fiscal quarters for which financial
information in respect thereof is available immediately prior to such
Transaction Date to (ii) the aggregate Consolidated Interest Expense of such
Person during such four fiscal quarters. In making the foregoing calculation,
(A) pro forma effect shall be given to (1) any Indebtedness Incurred subsequent
to the end of the four-fiscal-quarter period referred to in clause (i) and prior
to the Transaction Date (other than Indebtedness Incurred under a revolving
credit or similar arrangement to the extent of the commitment thereunder (or
under any predecessor revolving credit or similar arrangement) on the last day
of such period), (2) any Indebtedness Incurred during such period
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to the extent such Indebtedness is outstanding at the Transaction Date and (3)
any Indebtedness to be Incurred on the Transaction Date, in each case as if such
Indebtedness had been Incurred on the first day of such four-fiscal-quarter
period and after giving effect to the application of the proceeds thereof; (B)
Consolidated Interest Expense attributable to interest on any Indebtedness
(whether existing or being Incurred) computed on a pro forma basis and bearing a
floating interest rate shall be computed as if the rate in effect on the date of
computation (taking into account any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in excess of
12 months) had been the applicable rate for the entire period; (C) there shall
be excluded from Consolidated Interest Expense any Consolidated Interest Expense
related to any amount of Indebtedness that was outstanding during such
four-fiscal-quarter period or thereafter but that is not outstanding or is to be
repaid on the Transaction Date, except for Consolidated Interest Expense accrued
(as adjusted pursuant to clause (B)) during such four-fiscal-quarter period
under a revolving credit or similar arrangement to the extent of the commitment
thereunder (or under any successor revolving credit or similar arrangement) on
the Transaction Date; (D) pro forma effect shall be given to Asset Dispositions
and Asset Acquisitions that occur during such four-fiscal-quarter period or
thereafter and prior to the Transaction Date (including any Asset Acquisition to
be made with the Indebtedness Incurred pursuant to clause (i) above) as if they
had occurred on the first day of such four-fiscal-quarter period; (E) with
respect to any such four-fiscal-quarter period commencing prior to the 1993
Refinancing or the Refinancing, the 1993 Refinancing or the Refinancing, as the
case may be, shall be deemed to have taken place on the first day of such
period; and (F) pro forma effect shall be given to asset dispositions and asset
acquisitions that have been made by any Person that has become a Subsidiary of
the Company or has been merged with or into the Company or any Subsidiary of the
Company during the four-fiscal-quarter period referred to above or subsequent to
such period and prior to the Transaction Date and that would have been Asset
Dispositions or Asset Acquisitions had such transactions occurred when such
Person was a Subsidiary of the Company as if such asset dispositions or asset
acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the
first day of such period.
"Interest Rate Agreement" is defined to mean any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement or other similar agreement or
arrangement designed to protect the Company or any of its Subsidiaries against
fluctuations in interest rates to or under which the Company or any of its
Subsidiaries is a party or a beneficiary on the date of the Indentures or
becomes a party or a beneficiary thereafter.
"Investment" is defined to mean any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of any Person or its Subsidiaries)
or other extension of credit or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, bonds, notes, debentures or other similar instruments issued by
any other Person. For purposes of the definition of "Unrestricted Subsidiary"
and the "Limitation on Restricted Payments" covenant described below, (i)
"Investment" shall include the fair market value of the net assets of any
Subsidiary of the Company at the time that such Subsidiary of the Company is
designated an Unrestricted Subsidiary and shall exclude the fair market value of
the net assets of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Subsidiary of the Company and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined by the
Board of Directors in good faith.
"Lien" is defined to mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof, any sale with recourse against the seller or any Affiliate of the
seller).
"Net Cash Proceeds" is defined to mean, with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment
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obligations (to the extent corresponding to the principal, but not interest,
component thereof) when received in the form of cash or cash equivalents (except
to the extent such obligations are financed or sold with recourse to the Company
or any Subsidiary of the Company) and proceeds from the conversion of other
property received when converted to cash or cash equivalents, net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes (whether or not such taxes will actually be paid or are payable)
as a result of such Asset Sale without regard to the consolidated results of
operations of the Company and its Subsidiaries, taken as a whole, (iii) payments
made to repay Indebtedness or any other obligation outstanding at the time of
such Asset Sale that either (A) is secured by a Lien on the property or assets
sold or (B) is required to be paid as a result of such sale and (iv) appropriate
amounts to be provided by the Company or any Subsidiary of the Company as a
reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP.
"1993 Term Loan Agreement" is defined to mean the Term Loan Agreement,
dated as of March 22, 1993, among the Company, the Banks party thereto and the
Bank Agents party thereto, together with the related documents thereto
(including, without limitation, any Guarantees and security documents), in each
case, as such agreements may be amended (including any amendment and restatement
thereof), supplemented, replaced or otherwise modified from time to time,
including any agreement extending the maturity of, refinancing or otherwise
restructuring (including, but not limited to, the inclusion of additional
borrowers or Guarantors thereunder that are Subsidiaries of the Company and
whose obligations are Guaranteed by the Company thereunder) all or any portion
of the Indebtedness under such agreements or any successor agreements; provided
that, with respect to any agreement providing for the refinancing of
Indebtedness under the 1993 Term Loan Agreement, such agreement shall be the
1993 Term Loan Agreement under the Indentures only if a notice to that effect is
delivered to the Trustees; and provided further that there shall be at any one
time only one instrument, together with any related documents (including,
without limitation, any Guarantees or security documents), that is the 1993 Term
Loan Agreement under the Indentures.
"Operating Lease" is defined to mean, as applied to any Person, any lease
of any property (whether real, personal or mixed) that is not a Capitalized
Lease.
"Pass Through Certificates" is defined to mean the Pass Through
Certificates, Series 1991, representing fractional undivided interests in the
Fort Howard Corporation 1991 Pass Through Trust formed pursuant to a pass
through trust agreement by and between the Company and Wilmington Trust Company,
as trustee.
"Pass Through Certificate Leases" is defined to mean the leases under which
the Company leases the Phase IV paper manufacturing facility, the Phase IV power
plant and certain paper manufacturing production equipment, all located in
Effingham County, Georgia.
"Pass Through Certificate Secured Notes" is defined to mean the secured
notes issued on a nonrecourse basis by the owner trustee in connection with its
acquisition of the Company's interest in the Phase IV paper manufacturing
facility, the Phase IV power plant and certain paper manufacturing production
equipment, all located in Effingham County, Georgia.
"Permitted Liens" is defined to mean (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made; (ii) statutory Liens of landlords
and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or
other similar Liens arising in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for which a
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reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made; (iii) Liens incurred or deposits made
in the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (iv) Liens incurred
or deposits made to secure the performance of tenders, bids, leases, statutory
or regulatory obligations, bankers' acceptances, surety and appeal bonds,
government contracts, performance and return of money bonds and other
obligations of a similar nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (v) easements,
rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real
or tangible personal property acquired after the Closing Date; provided that (a)
such Lien is created solely for the purpose of securing Indebtedness Incurred
(1) to finance the cost (including the cost of improvement or construction) of
the item of property or assets subject thereto and such Lien is created prior
to, at the time of or within 12 months after the later of the acquisition, the
completion of construction or the commencement of full operation of such
property or (2) to refinance any Indebtedness previously so secured, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such cost and (c) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets and any improvements on such
item; (vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company or any of its
Subsidiaries; (viii) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of the Company or any of
its Subsidiaries relating to such property or assets, (ix) any interest or title
of a lessor in the property subject to any Capitalized Lease or Operating Lease;
provided that, in the case of the Senior Notes, any sale-leaseback transaction
related thereto complies with the "Limitation on Sale-Leaseback Transactions"
covenant described below; (x) Liens arising from filing Uniform Commercial Code
financing statements regarding leases; (xi) Liens on property of, or on shares
of stock or Indebtedness of, any corporation existing at the time such
corporation becomes, or becomes a part of, any Restricted Subsidiary; (xii)
Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
securing any real property or other assets of the Company or any Subsidiary of
the Company in favor of the United States of America or any State, or any
department, agency, instrumentality or political subdivision thereof, in
connection with the financing of industrial revenue bond facilities or of any
equipment or other property designed primarily for the purpose of air or water
pollution control; provided, however, that any such Lien on such facilities,
equipment or other property shall not apply to any other assets of the Company
or such Subsidiary of the Company; (xiv) Liens arising from the rendering of a
final judgment or order against the Company or any Subsidiary of the Company
that does not give rise to an Event of Default; (xv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xvi) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xvii) Liens encumbering customary initial
deposits and margin deposits, and other Liens that are either within the general
parameters customary in the industry and incurred in the ordinary course of
business or otherwise permitted under the terms of the Bank Credit Agreement or
the 1993 Term Loan Agreement, in each case securing Indebtedness under Interest
Rate Agreements and Currency Agreements and forward contracts, options, futures
contracts, futures options or similar agreements or arrangements designed to
protect the Company or any of its Subsidiaries from fluctuations in the price of
commodities; (xviii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by the
Company or any of its Subsidiaries in the ordinary course of business in
accordance with the past practices of the Company and its Subsidiaries prior to
the Closing Date; and (xix) Liens on or sales of receivables.
"Person" is defined to mean an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
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"Plans" is defined to mean any employee benefit plan, pension plan, stock
option plan or similar plan or arrangement of the Company or any Subsidiary of
the Company, or any successor plan thereof.
"Preferred Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference stock,
whether now outstanding or issued after the date of the Indentures, including,
without limitation, all series and classes of such preferred or preference
stock.
"Principal Property" is defined to mean any manufacturing or processing
plant, warehouse or other building used by the Company or any Restricted
Subsidiary, other than a plant, warehouse or other building that, in the good
faith opinion of the Board of Directors as reflected in a Board Resolution, is
not of material importance to the respective businesses conducted by the Company
or any Restricted Subsidiary as of the date such Board Resolution is adopted.
"Public Equity Offering" means an underwritten primary public offering of
equity securities of the Company pursuant to an effective registration statement
under the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of the Company has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms or otherwise is (i) required to be redeemed
prior to the Stated Maturity of the Notes, (ii) redeemable at the option of the
holder of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require the Company to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" occurring prior to the
Stated Maturity of the Notes shall not constitute Redeemable Stock if the asset
sale provisions applicable to such Capital Stock are no more favorable to the
holders of such Capital Stock than the provisions contained in the "Limitation
on Asset Sales" covenant described below and such Capital Stock specifically
provides that the Company will not repurchase or redeem any such stock pursuant
to such provisions prior to the Company's repurchase of the Notes as are
required to be repurchased pursuant to the provisions of the "Limitation on
Asset Sales" covenant described below.
"Restricted Subsidiary" is defined to mean any Subsidiary of the Company
other than an Unrestricted Subsidiary.
"Senior Secured Notes" is defined to mean the Company's Senior Secured
Notes due 1997 through 2000, issued in 1991 and having an aggregate principal
amount of $300 million.
"Significant Subsidiary" is defined to mean, at any date of determination,
any Subsidiary of the Company that, together with its Subsidiaries, (i) for the
most recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company or (ii) as of the end of such fiscal year,
was the owner of more than 10% of the consolidated assets of the Company, all as
set forth on the most recently available consolidated financial statements of
the Company for such fiscal year.
"Stated Maturity" is defined to mean, with respect to any debt security or
any installment of interest thereon, the date specified in such debt security as
the fixed date on which any principal of such debt security or any such
installment of interest is due and payable.
"Subsidiary" is defined to mean, with respect to any Person, any
corporation, association or other business entity of which more than 50% of the
outstanding Voting Stock is owned, directly or indirectly, by the Company or by
one or more other Subsidiaries of the Company, or by such Person and one or more
other Subsidiaries of such Person; provided that, except as the term
"Subsidiary" is used in the
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definition of "Unrestricted Subsidiary" described below, an Unrestricted
Subsidiary shall not be deemed to be a Subsidiary of the Company for purposes of
the Indentures.
"Trade Payables" is defined to mean, with respect to any Person, any
accounts payable or any other indebtedness or monetary obligation to trade
creditors created, assumed or Guaranteed by such Person or any of its
Subsidiaries arising in the ordinary course of business in connection with the
acquisition of goods or services.
"Transaction Date" is defined to mean, with respect to the Incurrence of
any Indebtedness by the Company or any of its Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" is defined to mean (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, the Company or any other Subsidiary of the Company that is not a Subsidiary
of the Subsidiary to be so designated; provided that either (A) the Subsidiary
to be so designated has total assets of $1,000 or less or (B) if such Subsidiary
has assets greater than $1,000, that such designation would be permitted under
the "Limitation on Restricted Payments" covenant described below; and provided
further that, for purposes of valuing the amount of an Investment in any Foreign
Subsidiary being made by reason of such designation, the amount that shall be
taken into account (instead of the fair market value of the net assets of such
Subsidiary (which shall apply in the case of a Domestic Subsidiary)) shall be
the sum of (1) the amount of Investments that have been made by the Company or
any Restricted Subsidiary in such Foreign Subsidiary during the period from the
Closing Date to the date of such designation plus (2) the amount, determined
pursuant to clause (C)(1) of the first paragraph of such "Limitation on
Restricted Payments" covenant, in respect of the Adjusted Consolidated Net
Income of the Company attributable to such Foreign Subsidiary during the period
(taken as one accounting period) beginning on April 1, 1994 and ending on the
last day of the last fiscal quarter preceding the Transaction Date and not
previously dividended or distributed to the Company or any other Restricted
Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary of the Company; provided that immediately after
giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant described below and (y) no Event of Default, or event
that after notice or passage of time or both would become an Event of Default,
shall have occurred and be continuing. Any such designation by the Board of
Directors shall be evidenced to the Trustees by promptly filing with each of the
Trustee a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"Voting Stock" is defined to mean Capital Stock of any class or kind
ordinarily having the power to vote for the election of directors of the
Company.
"Wholly Owned Subsidiary" is defined to mean, with respect to any Person,
any Subsidiary of such Person if all of the Common Stock or other similar equity
ownership interests (but not including Preferred Stock) in such Subsidiary
(other than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned directly or indirectly by such Person.
COVENANTS
Limitation on Indebtedness
Under the terms of the Indentures, the Company shall not, and shall not
permit any Restricted Subsidiary to, Incur any Indebtedness (other than the
Notes (including any agreements pursuant to
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which the Notes were issued) and Indebtedness existing on the Closing Date);
provided that the Company may Incur Indebtedness if, after giving effect to the
Incurrence of such Indebtedness and the receipt and application of the proceeds
therefrom, the Interest Coverage Ratio of the Company would be greater than (a)
prior to or on December 31, 1996, 1.5:1 and (b) after December 31, 1996, 1.75:1.
Notwithstanding the foregoing, under each Indenture (except as expressly
provided otherwise below), the Company and any Restricted Subsidiary may Incur
each and all of the following: (i) Indebtedness outstanding at any time in an
aggregate principal amount not to exceed the sum of the outstanding Indebtedness
and the unused commitment under the Bank Credit Agreement and the 1993 Term Loan
Agreement as of the Closing Date; (ii) Indebtedness outstanding at any time in
an aggregate principal amount not to exceed $400 million; provided that, solely
in the case of the Senior Note Indenture, (A) the amount of such Indebtedness
outstanding at any time of Restricted Subsidiaries under this clause (ii) shall
not exceed $200 million and (B) the amount of such Indebtedness outstanding at
any time of Domestic Subsidiaries under this clause (ii) shall not exceed $100
million; (iii) Indebtedness of the Company to any of its Restricted Subsidiaries
that is a Wholly Owned Subsidiary of the Company, or of a Restricted Subsidiary
to the Company or to any other Restricted Subsidiary that is a Wholly Owned
Subsidiary of the Company; (iv) Indebtedness issued in exchange for, or the net
proceeds of which are used to refinance, outstanding Indebtedness of the Company
or any of its Restricted Subsidiaries, other than Indebtedness Incurred under
clauses (i), (ii), (vii), (viii) or (x) and any refinancings thereof, in an
amount (or, if such new Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, with an original issue price) not to exceed the amount so
exchanged or refinanced (plus premiums, accrued interest, fees and expenses);
provided that Indebtedness issued in exchange for or the net proceeds of which
are used to refinance the Senior Notes or the Senior Subordinated Notes, as the
case may be, or other Indebtedness of the Company that is subordinated in right
of payment to the Senior Notes or the Senior Subordinated Notes, as the case may
be, shall only be permitted under this clause (iv) if (A) in case the Senior
Notes or the Senior Subordinated Notes, as the case may be, are exchanged or
refinanced in part, such Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such Indebtedness is issued, is
expressly made pari passu with, or subordinate in right of payment to, the
remaining Senior Notes, or Senior Subordinated Notes, as the case may be, (B) in
case the Indebtedness to be exchanged or refinanced is subordinated in right of
payment to the Senior Notes or the Senior Subordinated Notes, as the case may
be, such Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, is expressly made
subordinate in right of payment to the Senior Notes or the Senior Subordinated
Notes, as the case may be, at least to the extent that the Indebtedness to be
exchanged or refinanced is subordinated to the Senior Notes or the Senior
Subordinated Notes, as the case may be, and (C) in case the Senior Notes or the
Senior Subordinated Notes, as the case may be, are exchanged or refinanced in
part or the Indebtedness to be exchanged or refinanced is subordinated in right
of payment to the Senior Notes or the Senior Subordinated Notes, as the case may
be, such Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to six months after the Stated Maturity of
the Senior Notes or the Senior Subordinated Notes, as the case may be, and the
Average Life of such Indebtedness is equal to or greater than the sum of the
remaining Average Life of the Senior Notes or the Senior Subordinated Notes, as
the case may be, plus six months; provided further that in no event may
Indebtedness of the Company that is pari passu with, or subordinated in right of
payment to, the Senior Notes or the Senior Subordinated Notes, as the case may
be, be exchanged or refinanced by means of Indebtedness of any Subsidiary of the
Company pursuant to this clause (iv); and provided further that the two
foregoing provisos of this clause (iv) shall not be applicable to Indebtedness
Incurred in exchange for or to refinance the 12 3/8% Notes, the 12 5/8%
Debentures, the 14 1/8% Debentures or the 10% Notes (including in each case
redemption or other premiums, consent or other fees, and expenses incurred in
connection therewith); (v) Indebtedness Incurred by the Company in connection
with (x) the repurchase of shares of, or options to purchase shares of, the
Common Stock of the Company or any of its Subsidiaries from employees, former
employees, directors or former directors of
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the Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors) or (y) Guarantees of
borrowings made by such Persons exclusively for the purpose of exercising
options to purchase or sell such shares of Common Stock and paying any
associated tax liability, in each case pursuant to the terms of the form of
agreements or plans (or amendments thereto) under which such Persons purchase or
sell, or are granted the option to purchase, shares of such Common Stock; (vi)
Indebtedness (A) in respect of performance bonds, bankers' acceptances, letters
of credit and surety or appeal bonds provided in the ordinary course of
business, (B) under Currency Agreements and Interest Rate Agreements; provided
that, in the case of Currency Agreements that relate to other Indebtedness, such
Currency Agreements do not increase the Indebtedness of the Company outstanding
at any time other than as a result of fluctuations in foreign currency exchange
rates or by reason of fees, indemnities and compensation payable thereunder and
(C) arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, or from Guarantees or letters of credit,
surety bonds or performance bonds securing any obligations of the Company or any
Subsidiary of the Company pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Subsidiary of the
Company, other than Guarantees of Indebtedness Incurred by any Person acquiring
all or any portion of such business, assets or Subsidiary of the Company for the
purpose of financing such acquisition; (vii) Indebtedness under Guarantees
incurred by the Company in respect of obligations of Unrestricted Subsidiaries
outstanding at any time in an aggregate amount not to exceed $50 million; (viii)
Acquired Indebtedness; provided that, at the time of the Incurrence thereof, the
Company could Incur at least $1.00 of Indebtedness under the first paragraph of
this "Limitation on Indebtedness" covenant and refinancings thereof; provided
that such refinancing Indebtedness may not be Incurred by any Person other than
the Company or the Restricted Subsidiary that is the obligor on such Acquired
Indebtedness; (ix) Indebtedness directly Incurred to finance Consolidated
Capital Expenditures in an aggregate amount not to exceed in any fiscal year of
the Company the amount indicated below:
<TABLE>
FISCAL MAXIMUM
YEAR AMOUNT
- ---------------------------------------------------------------------------- -------------
(IN MILLIONS)
<S> <C>
1994........................................................................ $ 250
1995........................................................................ $ 250
1996 and thereafter......................................................... $ 275
</TABLE>
; provided, however, that the amount of Indebtedness which may be Incurred in
any fiscal year pursuant to this clause (ix) shall be increased by the amount of
Indebtedness which could have been Incurred in the prior fiscal year pursuant to
this clause (ix) but which was not so Incurred; or (x) Indebtedness of the
Company outstanding at any time in an aggregate amount not to exceed $175
million; provided that such Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such Indebtedness is issued, (A) is
expressly made subordinate in right of payment to the Senior Notes or the Senior
Subordinated Notes, as the case may be, at least to the extent the Senior
Subordinated Notes are subordinated to Senior Indebtedness and (B) provides that
no payments of principal of such Indebtedness by way of sinking fund, mandatory
redemption or otherwise (including defeasance) may be made by the Company
(including, without limitation, at the option of the holder thereof, other than
an option given to such holder pursuant to an "asset sale" provision that is no
more favorable to such holders of such Indebtedness than the provisions
contained in the "Limitation on Asset Sales" covenant described below and such
Indebtedness specifically provides that the Company will not purchase or redeem
such Indebtedness pursuant to such provision prior to the Company's repurchase
of the Notes required to be repurchased by the Company under the "Limitation on
Asset Sales" covenant) at any time prior to the Stated Maturity of the Senior
Notes or the Senior Subordinated Notes, as the case may be.
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Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, (i) the maximum amount of Indebtedness that the Company or any
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded due solely to the result of
fluctuations in the exchange rates of currencies, (ii) for purposes of
calculating the amount of Indebtedness outstanding at any time under clause (ii)
of the second paragraph of this "Limitation on Indebtedness" covenant, no amount
of Indebtedness of the Company or any Subsidiary of the Company outstanding on
the Closing Date shall be considered to be outstanding and (iii) in the case of
the Senior Notes, the Company shall not Incur any Indebtedness that is expressly
subordinated to any other Indebtedness of the Company unless such Indebtedness,
by its terms or the terms of any agreement or instrument pursuant to which such
Indebtedness is issued, is also expressly made subordinate to the Senior Notes
at least to the extent it is subordinated to such other Indebtedness, except
that the Senior Notes shall not be required to become Designated Senior
Indebtedness or its equivalent due solely to the Incurrence of such other
Indebtedness in accordance with this clause (iii).
For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred pursuant
to the Bank Credit Agreement or the 1993 Term Loan Agreement prior to or on the
Closing Date shall be treated as Incurred pursuant to clause (i) of the second
paragraph of this "Limitation on Indebtedness" covenant, (2) Guarantees of, or
obligations with respect to letters of credit supporting, Indebtedness otherwise
included in the determination of such particular amount shall not be included
and (3) any Liens granted pursuant to the equal and ratable provisions referred
to in the first paragraph of the "Limitation on Liens" covenant shall not be
treated as Indebtedness. For purposes of determining compliance with this
"Limitation on Indebtedness" covenant, (x) in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses, the Company, in its sole discretion, shall
classify such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses and (y) the amount of
Indebtedness issued at a price that is less than the principal amount thereof
shall be equal to the amount of the liability in respect thereof determined in
conformity with GAAP. (Section 3.03)
Limitation on Restricted Payments
Under the terms of the Indentures, the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay
any dividend or make any distribution on its Capital Stock (other than dividends
or distributions payable solely in shares of its or such Subsidiary's Capital
Stock (other than Redeemable Stock) of the same class held by such holders or in
options, warrants or other rights to acquire such shares of Capital Stock) held
by Persons other than the Company or another Restricted Subsidiary, (ii)
purchase, redeem, retire or otherwise acquire for value any shares of Capital
Stock of the Company, any Restricted Subsidiary or any Unrestricted Subsidiary
(including options, warrants or other rights to acquire such shares of Capital
Stock) held by Persons other than the Company or another Restricted Subsidiary,
(iii) make any voluntary or optional principal payment, or voluntary or optional
redemption, repurchase, defeasance, or other acquisition or retirement for
value, of Indebtedness of the Company that is subordinated in right of payment
to the Senior Notes or the Senior Subordinated Notes, as the case may be, or
(iv) make any Investment in any Unrestricted Subsidiary (such payments or any
other actions described in clauses (i) through (iv) being collectively
"Restricted Payments") if, at the time of, and after giving effect to, the
proposed Restricted Payment: (A) an Event of Default or event that, after notice
or passage of time or both would become an Event of Default, shall have occurred
and be continuing, (B) the Company could not Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant or (C) the aggregate amount expended for all Restricted Payments (the
amount so expended, if other than in cash, to be determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) after the date of the Indentures shall exceed the sum of (1)
50% of the aggregate amount of the Adjusted Consolidated Net Income (or, if the
Adjusted Consolidated Net Income is a loss, minus 100% of such amount) of the
Company (determined by excluding income
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resulting from the transfers of assets received by the Company or a Restricted
Subsidiary from an Unrestricted Subsidiary) accrued on a cumulative basis during
the period (taken as one accounting period) beginning on April 1, 1994 and
ending on the last day of the last fiscal quarter preceding the Transaction Date
plus (2) the aggregate net proceeds (including the fair market value of non-cash
proceeds as determined in good faith by the Board of Directors whose
determination shall be conclusive and evidenced by a Board Resolution) received
by the Company from the issuance and sale permitted by the Indenture of its
Capital Stock (not including Redeemable Stock) to a Person who is not a
Subsidiary of the Company, including an issuance or sale permitted by the
Indentures for cash or other property upon the conversion of any Indebtedness of
the Company subsequent to the Closing Date, or from the issuance of any options,
warrants or other rights to acquire Capital Stock of the Company (in each case,
exclusive of any Redeemable Stock or any options, warrants or other rights that
are redeemable at the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the Senior Notes or the Senior Subordinated
Notes, as the case may be), plus (3) an amount equal to the net reduction in
Investments in Unrestricted Subsidiaries resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers of
assets, in each case to the Company or any Restricted Subsidiary from
Unrestricted Subsidiaries, or from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed in the case of any Unrestricted Subsidiary the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary plus (4) $75 million.
The foregoing provision shall not take into account, and shall not be
violated by reason of: (i) the payment of any dividend within 60 days after the
date of declaration thereof if, at such date of declaration, such payment would
comply with the foregoing provision; (ii) the redemption, repurchase, defeasance
or other acquisition or retirement for value of Indebtedness that is
subordinated in right of payment to the Senior Notes or the Senior Subordinated
Notes, as the case may be, including premium, if any, with the proceeds of
Indebtedness Incurred under the first paragraph of the "Limitation on
Indebtedness" covenant or clause (iv) or (x) of the second paragraph of the
"Limitation on Indebtedness" covenant; (iii) the payment of dividends on the
Capital Stock of the Company, following any issuance of the Capital Stock of the
Company, of up to 6% per annum of the net proceeds received by the Company in
such issuance of the Capital Stock of the Company; (iv) the repurchase of shares
of, or options to purchase shares of, Common Stock of the Company or any of its
Subsidiaries from employees, former employees, directors or former directors of
the Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to the
terms of the form of agreements or plans (or amendments thereto) under which
such Persons purchase or sell, or are granted the option to purchase or sell,
shares of such Common Stock; (v) the repurchase, redemption or other acquisition
of Capital Stock of the Company in exchange for, or out of the proceeds of a
substantially concurrent offering of, shares of Capital Stock of the Company
(other than Redeemable Stock); (vi) the acquisition of Indebtedness of the
Company that is subordinated in right of payment to the Senior Notes or the
Senior Subordinated Notes, as the case may be, in exchange for, or out of the
proceeds of a substantially concurrent offering of, shares of the Capital Stock
of the Company (other than Redeemable Stock); (vii) payments or distributions
pursuant to or in connection with a consolidation, merger or transfer of assets
that complies with the provisions of the Indentures applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of the Company; (viii) the purchase, redemption, acquisition,
cancellation or other retirement for a nominal value per right (as determined in
good faith by the Board of Directors) of any rights granted to all the holders
of Common Stock of the Company pursuant to any shareholders' rights plan (i.e.,
a "poison pill") adopted for the purpose (determined in good faith by the Board
of Directors) of protecting shareholders from unfair takeover tactics; provided
that any such purchase, redemption, acquisition, cancellation or other
retirement of such rights shall not be for the purpose of evading the
limitations of this "Limitation on Restricted Payments" covenant (all as
determined in good faith by the Board of Directors); (ix) the purchase of shares
of Capital Stock of the Company or any Restricted
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Subsidiary for the purpose of contributing such shares to the Plans, or
permitting the Plans to make payments to participants therein in cash rather
than shares of Capital Stock of the Company or such Restricted Subsidiary;
provided that such purchases do not in any one fiscal year of the Company exceed
an aggregate amount of $30 million; or (x) the purchase of subordinated
Indebtedness pursuant to an "excess proceeds offer" or similar offer after the
Company has complied with the "Limitation on Asset Sales" covenant; and provided
that, in the case of clauses (ii) through (iv) and (vi), no Event of Default, or
event that after notice or passage of time or both would become an Event of
Default, shall have occurred and be continuing or shall occur as a consequence
thereof. (Section 3.04)
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
Under the terms of the Indentures, the Company will not, and will not
permit any Restricted Subsidiary (other than a Foreign Subsidiary) to, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer, subject to
certain exceptions, any of its property or assets to the Company or any other
Restricted Subsidiary.
The foregoing provision shall not restrict or prohibit any encumbrances or
restrictions existing: (i) in the Bank Credit Agreement, the 1993 Term Loan
Agreement, the Senior Secured Notes (including any agreement pursuant to which
the Senior Secured Notes were issued) or any other agreements in effect on the
Closing Date, including extensions, refinancings, renewals or replacements
thereof; provided that the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements are no less favorable in any material
respect to the Holders than those encumbrances or restrictions that are then in
effect and that are being extended, refinanced, renewed or replaced; (ii) under
any other agreement providing for the Incurrence of Indebtedness; provided that
the encumbrances and restrictions in any such agreement are no less favorable in
any material respect to the Holders than those encumbrances and restrictions
contained in the Bank Credit Agreement, the Senior Secured Notes (including any
agreement pursuant to which the Senior Secured Notes were issued) or the 1993
Term Loan Agreement as of the Closing Date; (iii) under or by reason of
applicable law; (iv) with respect to any Person or the property or assets of
such Person acquired by the Company or any Restricted Subsidiary and existing at
the time of such acquisition, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than such
Person or the property or assets of such Person so acquired; (v) in the case of
clause (iv) of the first paragraph of this "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that
restrict in a customary manner the subletting, assignment or transfer of any
property or asset that is a lease, license, conveyance or contract or similar
property or asset, (B) by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise prohibited by the Indentures
or (C) arising or agreed to in the ordinary course of business and that do not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any manner material to the
Company or such Restricted Subsidiary; or (vi) with respect to a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary. Nothing contained in this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary
from (1) entering into any agreement permitting the incurrence of Liens
otherwise permitted in the "Limitation on Liens" covenant or (2) restricting the
sale or other disposition of property or assets of the Company or any of its
Subsidiaries that secure Indebtedness of the Company or any of its Subsidiaries.
(Section 3.05)
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Limitation on Additional Tiers of Senior Subordinated Indebtedness
Under the terms of the Senior Subordinated Note Indenture, the Company will
not Incur any Indebtedness that is expressly made subordinate in right of
payment to any Senior Indebtedness unless such Indebtedness, by its terms or by
the terms of any agreement or instrument pursuant to which such Indebtedness is
issued, is expressly made pari passu with, or subordinate in right of payment
to, the Senior Subordinated Notes pursuant to provisions substantially similar
to those contained in Article Eleven of the Senior Subordinated Note Indenture;
provided, however, that the foregoing limitation shall not apply to distinctions
between categories of unsubordinated Indebtedness that exist by reason of any
Liens or Guarantees arising or created in respect of some but not all of such
unsubordinated Indebtedness. (Section 3.06)
Limitation on the Issuance of Capital Stock of Domestic Restricted Subsidiaries
Under the terms of the Senior Note Indenture, the Company will not permit
any Domestic Subsidiary that is a Restricted Subsidiary, directly or indirectly,
to issue or sell any shares of its Capital Stock (including options, warrants or
other rights to purchase shares of such Capital Stock) except (i) to the Company
or another Restricted Subsidiary that is a Wholly Owned Subsidiary of the
Company or (ii) if, immediately after giving effect to such issuance or sale,
such Restricted Subsidiary would no longer constitute a Restricted Subsidiary
for purposes of the Senior Note Indenture. (Section 3.06)
Limitation on Transactions with Shareholders and Affiliates
Under the terms of each of the Indentures, the Company will not, and will
not permit any Subsidiary of the Company to, directly or indirectly, enter into,
renew or extend any transaction (including, without limitation, the purchase,
sale, lease or exchange of property or assets, or the rendering of any service)
with any holder (or any Affiliate of such holder) of 5% or more of any class of
Capital Stock of the Company or any Subsidiary of the Company or with any
Affiliate of the Company or any Subsidiary of the Company (other than the
Plans), except upon fair and reasonable terms no less favorable to the Company
or such Subsidiary of the Company than could be obtained in a comparable
arm's-length transaction with a Person that is not such a holder or an
Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Subsidiary delivers to the
Trustees a written opinion of a nationally recognized investment banking firm
stating that the transaction is fair to the Company or such Subsidiary of the
Company from a financial point of view; (ii) any transaction between the Company
and any Restricted Subsidiary or between Restricted Subsidiaries; (iii) the
payment of reasonable and customary regular fees to directors of the Company who
are not employees of the Company; or (iv) any Restricted Payments not prohibited
by the "Limitation on Restricted Payments" covenant. (Section 3.07)
Limitation on Liens
Under the terms of each of the Indentures, the Company will not, and will
not permit any Restricted Subsidiary to, create, incur, assume or suffer to
exist any Lien on any Principal Property, or any shares of Capital Stock or
Indebtedness of any Restricted Subsidiary, without making effective provision
for all of the Notes and all other amounts due under the Indentures to be
directly secured equally and ratably with (or prior to) the obligation or
liability secured by such Lien unless, after giving effect thereto, the
aggregate amount of any Indebtedness so secured plus, in the case of the Senior
Notes, the Attributable Indebtedness for all sale-leaseback transactions
restricted as described in the "Limitation on Sale-Leaseback Transactions"
covenant, does not exceed 15% of Adjusted Consolidated Assets.
Under the terms of the Senior Note Indenture, the foregoing limitation does
not apply to, and any computation of Indebtedness secured under such limitation
shall exclude, (i) Liens securing
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(A) obligations under the Bank Credit Agreement or the 1993 Term Loan Agreement
up to the amount of Indebtedness permitted to be Incurred under clause (i) of
the second paragraph of the "Limitation on Indebtedness" covenant or (B) the
Senior Secured Notes up to the amount thereof outstanding on the Closing Date;
(ii) other Liens existing on the Closing Date; (iii) Liens securing Indebtedness
of Restricted Subsidiaries (other than Acquired Indebtedness and refinancings
thereof); (iv) Liens securing Indebtedness (other than subordinated
Indebtedness) Incurred under clause (ii) (except that the sum of (A) the amount
of Indebtedness Incurred by the Restricted Subsidiaries plus (B) the amount of
secured Indebtedness (without duplication of any amount Incurred under subclause
(A) of this clause (iv)) shall not exceed $200 million outstanding at any time)
or (vi) of the second paragraph of the "Limitation on Indebtedness" covenant;
(v) Liens granted in connection with the extension, renewal or refinancing, in
whole or in part, of any Indebtedness described in clauses (i) through (iv)
above; provided that the amount of Indebtedness secured by such Lien is not
increased thereby (except to the extent that Indebtedness under the Bank Credit
Agreement is increased to the extent permitted by clause (i) of the second
paragraph of the "Limitation on Indebtedness" covenant); and provided further
that the extension, renewal or refinancing of Indebtedness of the Company may
not be secured by Liens on assets of any Restricted Subsidiary other than to the
extent the Indebtedness being extended, renewed or refinanced was at any time
previously secured by Liens on assets of such Restricted Subsidiary; (vi) Liens
with respect to Acquired Indebtedness and refinancings thereof permitted under
clause (viii) of the second paragraph of the "Limitation on Indebtedness"
covenant; provided that such Liens do not extend to or cover any property or
assets of the Company or any Subsidiary of the Company other than the property
or assets of the Subsidiary acquired; or (vii) Permitted Liens. (Section 3.08)
Under the terms of the Senior Subordinated Note Indenture, the limitation
set forth in the first paragraph of this "Limitation of Liens" covenant does not
apply to (i) Liens described in the preceding paragraph of this "Limitation of
Liens" covenant or (ii) Liens securing Senior Indebtedness. (Section 3.08)
Limitation on Sale-Leaseback Transactions
Under the terms of the Senior Note Indenture, the Company will not, and
will not permit any Restricted Subsidiary to, enter into any sale-leaseback
transaction involving any Principal Property, unless the aggregate amount of all
Attributable Indebtedness with respect to such transactions, plus all
Indebtedness secured by Liens on Principal Properties (excluding secured
Indebtedness that is excluded as described in the "Limitation on Liens"
covenant), does not exceed 15% of Adjusted Consolidated Assets.
The foregoing restriction does not apply to, and any computation of
Attributable Indebtedness under such limitation shall exclude, any
sale-leaseback transaction if (i) the lease is for a period, including renewal
rights, of not in excess of three years; (ii) the sale or transfer of the
Principal Property is entered into prior to, at the time of, or within 12 months
after the later of the acquisition of the Principal Property or the completion
of construction thereof; (iii) the lease secures or relates to industrial
revenue or pollution control bonds; (iv) the transaction is between the Company
and any Restricted Subsidiary or between Restricted Subsidiaries; or (v) the
Company or such Restricted Subsidiary, within 12 months after the sale of any
Principal Property is completed, applies an amount not less than the net
proceeds received from such sale to the retirement of unsubordinated
Indebtedness, to Indebtedness of a Restricted Subsidiary or to the purchase of
other property that will constitute Principal Property or improvements thereto.
(Section 3.10)
Limitation on Asset Sales
Under the terms of each of the Indentures, in the event and to the extent
that the Net Cash Proceeds received by the Company or any of its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Closing Date
in any period of 12 consecutive months (other than Asset Sales
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by the Company or any Restricted Subsidiary to the Company or another Restricted
Subsidiary) exceed 15% of Adjusted Consolidated Assets in any one fiscal year
(determined as of the date closest to the commencement of such 12-month period
for which a balance sheet of the Company and its Subsidiaries has been
prepared), then the Company shall (i) within 12 months (or, in the case of Asset
Sales of plants or facilities, 24 months) after the date Net Cash Proceeds so
received exceed 15% of Adjusted Consolidated Assets in any one fiscal year
(determined as of the date closest to the commencement of such 12-month period
for which a balance sheet of the Company and its Subsidiaries has been prepared)
(A) apply an amount equal to such excess Net Cash Proceeds to repay Senior
Indebtedness or pari passu Indebtedness (in the case of the Senior Subordinated
Note Indenture) or unsubordinated Indebtedness (in the case of the Senior Note
Indenture) or, in the case of either Indenture, Indebtedness of any Restricted
Subsidiary, in each case owing to a Person other than the Company or any of its
Subsidiaries or (B) invest an equal amount, or the amount not so applied
pursuant to clause (A) (or enter into a definitive agreement committing to so
invest within 12 months after the date of such agreement), in property or assets
that are of a nature or type or are used in a business (or in a company having
property and assets of a nature or type, or engaged in a business) similar or
related to the nature or type of the property and assets of, or the business of,
the Company and its Subsidiaries existing on the date thereof (as determined in
good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply such excess Net Cash
Proceeds (to the extent not applied pursuant to clause (i)) as provided in the
following paragraphs of this "Limitation on Asset Sales" covenant. The amount of
such excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period or 24-month period, as the case may be, as
set forth in clause (A) or (B) of the preceding sentence and not applied as so
required by the end of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
below) totals at least $10 million, the Company must, not later than the
fifteenth Business Day of such month, make an offer (an "Excess Proceeds Offer")
to purchase from the Holders and, in the case of the Senior Note Indenture, the
holders of other unsubordinated Indebtedness, on a pro rata basis an aggregate
principal amount of Notes equal to the Excess Proceeds on such date, at a
purchase price equal to 101% of the principal amount of such Notes, plus, in
each case, accrued interest (if any) to the date of purchase (the "Excess
Proceeds Payment"); provided, however, that no Excess Proceeds Offer shall be
required to be commenced with respect to the Senior Subordinated Notes if the
purchase of at least $10 million of Senior Subordinated Notes pursuant to such
Excess Proceeds Offer would not (during the time such Excess Proceeds Offer is
required to be commenced) be permitted by the terms of any Indebtedness of the
Company (or any agreement pursuant to which such Indebtedness was issued) and in
such case the amount that would otherwise constitute Excess Proceeds shall no
longer be treated as Excess Proceeds; and provided further, however that no
Senior Subordinated Notes may be purchased under this "Limitation on Asset
Sales" covenant unless the Company shall have purchased all Senior Indebtedness
tendered pursuant to an "excess proceeds offer" or similar offer applicable
thereto.
Notwithstanding the foregoing, (i) to the extent that any or all of the Net
Cash Proceeds of any Asset Sale are prohibited or delayed by applicable local
law from being repatriated to the United States of America, the portion of such
Net Cash Proceeds so affected will not be required to be applied pursuant to
this "Limitation on Asset Sales" covenant but may be retained for so long, but
only for so long, as the applicable local law will not permit repatriation to
the United States of America (the Company hereby agrees to promptly take all
reasonable actions required by the applicable local law to permit such
repatriation) and once such repatriation of any such affected Net Cash Proceeds
is permitted under the applicable local law, such repatriation will be
immediately effected and such repatriated Net Cash Proceeds will be applied in
the manner set forth in this "Limitation on Asset Sales" covenant as if such
Asset Sale had occurred on the date of repatriation; and (ii) to the extent that
the Board of Directors has determined in good faith that repatriation of any or
all of the Net Cash Proceeds would have an adverse tax consequence to the
Company, the Net Cash Proceeds so affected may be retained outside the United
States of America for so long as such adverse tax consequence would continue.
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The Company shall commence an Excess Proceeds Offer by mailing a notice to
the Trustee or Trustees, as the case may be, and each Holder stating: (i) that
the Excess Proceeds Offer is being made pursuant to this "Limitation on Asset
Sales" covenant and that all Notes validly tendered will be accepted for payment
on a pro rata basis; (ii) the purchase price and the date of purchase (which
shall be a Business Day no earlier than 30 days nor later than 40 days from the
date such notice is mailed) (the "Excess Proceeds Payment Date"); (iii) that any
Note not tendered will continue to accrue interest; (iv) that, unless the
Company defaults in the payment of the Excess Proceeds Payment, any Note
accepted for payment pursuant to the Excess Proceeds Offer shall cease to accrue
interest on and after the Excess Proceeds Payment Date; (v) that Holders
electing to have a Note purchased pursuant to the Excess Proceeds Offer will be
required to surrender the Note, together with the form entitled "Option of the
Holder to Elect Purchase" on the reverse side of the Note completed, to the
Paying Agent at the address specified in the notice prior to the close of
business on the Business Day immediately preceding the Excess Proceeds Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Excess Proceeds Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of such Holder,
the principal amount of Notes delivered for purchase and a statement that such
Holder is withdrawing his election to have such Notes purchased; and (vii) that
Holders whose Notes are being purchased only in part will be issued new Notes
equal in principal amount to the unpurchased portion of the Notes surrendered;
provided that each Note purchased and each new Note issued shall be in an
original principal amount of $1,000 or integral multiples thereof.
On the Excess Proceeds Payment Date, the Company shall (i) accept for
payment on a pro rata basis Notes or portions thereof tendered pursuant to the
Excess Proceeds Offer; (ii) deposit with the Paying Agent money sufficient to
pay the purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee or Trustees, as the case may
be, Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the appropriate Trustee shall
promptly authenticate and mail to such Holders a new Note equal in principal
amount to any unpurchased portion of the Note surrendered; provided that each
Note purchased and each new Note issued shall be in an original principal amount
of $1,000 or integral multiples thereof. The Company will publicly announce the
results of the Excess Proceeds Offer as soon as practicable after the Excess
Proceeds Payment Date. For purposes of this "Limitation on Asset Sales"
covenant, the respective Trustee for the Senior Notes or the Senior Subordinated
Notes, as the case may be, shall act as the Paying Agent.
The Company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that such Excess Proceeds are received
by the Company under this "Limitation on Asset Sales" covenant and the Company
is required to repurchase Notes as described above. (Section 3.09)
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in each
Indenture: (a) the Company defaults in the payment of principal of (or premium,
if any, on) any Senior Note or Senior Subordinated Note, as the case may be,
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise, whether or not, in the case of the Senior Subordinated Notes, such
payment is prohibited by Article Eleven of the Senior Subordinated Note
Indenture; (b) the Company defaults in the payment of interest on any Senior
Note or Senior Subordinated Note, as the case may be, when the same becomes due
and payable, and such default continues for a period of 30 consecutive days,
whether or not, in the case of the Senior Subordinated Notes, such payment is
prohibited by Article Eleven of
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the Senior Subordinated Note Indenture; (c) the Company defaults in the
performance of or breaches any other covenant or agreement of the Company in the
applicable Indenture or under the Senior Notes or Senior Subordinated Notes, as
the case may be, and such default or breach continues for a period of 30
consecutive days after written notice by the respective Trustee or the Holders
of 25% or more in aggregate principal amount of the Senior Notes or Senior
Subordinated Notes, as the case may be; (d) there occurs with respect to any
issue or issues of Indebtedness of the Company and/or one or more Significant
Subsidiaries having an outstanding principal amount of $50 million or more
individually or $100 million or more in the aggregate for all such issues of all
such Persons, whether such Indebtedness now exists or shall hereafter be
created, an event of default that has caused the holder or holders thereof, or
representatives of such holder or holders, to declare such Indebtedness to be
due and payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration; (e) any final judgment or order (not
covered by insurance) for the payment of money in excess of $50 million
individually or $100 million in the aggregate for all such final judgments or
orders against all such Persons (treating any deductibles, self-insurance or
retention as not so covered) shall be rendered against the Company or any
Significant Subsidiary and shall not be discharged, and there shall be any
period of 30 consecutive days following entry of the final judgment or order in
excess of $50 million individually or that causes the aggregate amount for all
such final judgments or orders outstanding against all such Persons to exceed
$100 million during which a stay of enforcement of such final judgment or order,
by reason of a pending appeal or otherwise, shall not be in effect; (f) a court
having jurisdiction in the premises enters a decree or order for (i) relief in
respect of the Company or any Significant Subsidiary in an involuntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (ii) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (iii) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 60 consecutive days; (g) the Company or any Significant Subsidiary (i)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (ii) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (iii) effects any general
assignment for the benefit of creditors; or (h) the Company and/or one or more
Significant Subsidiaries fails to make (i) at the final (but not any interim)
fixed maturity of any issue of Indebtedness a principal payment of $50 million
or more or (ii) at the final (but not any interim) fixed maturity of more than
one issue of such Indebtedness principal payments aggregating $100 million or
more and, in the case of clause (i), such defaulted payment shall not have been
made, waived or extended within 30 days of the payment default and, in the case
of clause (ii), all such defaulted payments shall not have been made, waived or
extended within 30 days of the payment default that causes the amount described
in clause (ii) to exceed $100 million. (Section 5.01)
If an Event of Default (other than an Event of Default specified in clause
(f) or (g) above that occurs with respect to the Company) occurs and is
continuing under the Indentures, the respective Trustee thereunder or the
Holders of at least 25% in aggregate principal amount of the Senior Notes or the
Senior Subordinated Notes, as the case may be, then outstanding, by written
notice to the Company (and to the respective Trustee if such notice is given by
such Holders (the "Acceleration Notice")), may, and the respective Trustee at
the request of such Holders shall, declare the entire unpaid principal of,
premium, if any, and accrued interest on the Senior Notes or the Senior
Subordinated Notes, as the case may be, to be immediately due and payable. Upon
a declaration of acceleration, such principal of, premium, if any, and accrued
interest shall be immediately due and payable; provided that, in the case of the
Senior Subordinated Notes, for so long as the Bank Credit Agreement or the 1993
Term Loan
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Agreement is in effect, such declaration shall not become effective until the
earlier of (i) five Business Days after receipt of the Acceleration Notice by
each Administrative Agent and the Company or (ii) acceleration of the
Indebtedness under the Bank Credit Agreement or the 1993 Term Loan Agreement;
and provided further that such acceleration shall automatically be rescinded and
annulled without any further action required on the part of the Holders of the
Senior Subordinated Notes in the event that any and all Events of Default
specified in the Acceleration Notice under the Senior Subordinated Note
Indenture shall have been cured, waived or otherwise remedied as provided in the
Senior Subordinated Note Indenture prior to the expiration of the period
referred to in the preceding clauses (i) and (ii). In the event of a declaration
of acceleration because an Event of Default set forth in clause (d) or (h) above
has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (d) or (h) shall be remedied, cured by the
Company or waived by the holders of the relevant Indebtedness within 60 days
after the declaration of acceleration with respect thereto. If an Event of
Default specified in clause (f) or (g) above occurs with respect to the Company,
all unpaid principal of, premium, if any, and accrued interest on the Senior
Notes or the Senior Subordinated Notes, as the case may be, then outstanding
shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the respective Trustee or any Holder.
The Holders of at least a majority in principal amount of the outstanding Senior
Notes or Senior Subordinated Notes, as the case may be, by written notice to the
Company and to their respective Trustee, may waive all past defaults and rescind
and annul a declaration of acceleration and its consequences if (i) all existing
Events of Default, other than the non-payment of the principal of, premium, if
any, and interest on the Senior Notes or the Senior Subordinated Notes, as the
case may be, that have become due solely by such declaration of acceleration,
have been cured or waived and (ii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. (Sections 5.02 and
5.04) For information as to the waiver of defaults, see "--Modification and
Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Senior Notes or Senior Subordinated Notes, as the case may be, may
direct the time, method and place of conducting any proceeding for any remedy
available to their respective Trustee or exercising any trust or power conferred
on such Trustee. However, the Trustee under each Indenture may refuse to follow
any direction that conflicts with law or such Indenture, that may involve such
Trustee in personal liability, or that such Trustee determines in good faith may
be unduly prejudicial to the rights of Holders of Senior Notes or Senior
Subordinated Notes, as the case may be, not joining in the giving of such
direction. (Section 5.05) A Holder may not pursue any remedy with respect to its
respective Indenture or the Senior Notes or the Senior Subordinated Notes, as
the case may be, unless: (i) the Holder gives to its respective Trustee written
notice of a continuing Event of Default; (ii) the Holders of at least 25% in
aggregate principal amount of outstanding Senior Notes or Senior Subordinated
Notes, as the case may be, make a written request to their respective Trustee to
pursue the remedy; (iii) such Holder or Holders offer to their respective
Trustee indemnity satisfactory to such Trustee against any costs, liability or
expense; (iv) such Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and (v) during such 60-day
period, the Holders of a majority in aggregate principal amount of the
outstanding Senior Notes or Senior Subordinated Notes, as the case may be, do
not give the appropriate Trustee a direction that is inconsistent with the
request. (Section 5.06) However, such limitations do not apply to the right of
any Holder of a Senior Note or Senior Subordinated Note, as the case may be, to
receive payment of the principal of, premium, if any, or interest on, such
Senior Note or Senior Subordinated Note, as the case may be, or to bring suit
for the enforcement of any such payment, on or after the respective due dates
expressed in the Senior Notes or the Senior Subordinated Notes, as the case may
be, which right shall not be impaired or affected without the consent of the
Holder. (Section 5.07)
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The Indentures will require certain officers of the Company to certify, on
or before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Subsidiaries
and the Company's and its Subsidiaries' performance under the Indentures and
that the Company has complied with all conditions and covenants thereunder, or,
if there has been a default thereunder, specifying each such default and the
nature and status thereof. The Company will also be obligated to notify the
Trustees of any default or defaults in the performance of any covenants or
agreements under the Indentures. (Section 3.14 or 3.15)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company shall not consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person (other than a
Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company with a
positive net worth; provided that, in connection with any merger of the Company
with a Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company,
no consideration (other than Common Stock in the surviving Person or the
Company) shall be issued or distributed to the stockholders of the Company) or
permit any Person to merge with or into the Company unless: (i) the Company
shall be the continuing Person, or the Person (if other than the Company) formed
by such consolidation or into which the Company is merged or that acquired or
leased such property and assets of the Company shall be a corporation organized
and validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustees in form satisfactory to the Trustees, all
of the obligations of the Company on all of the Notes and under the Indentures;
(ii) immediately after giving effect to such transaction, no Event of Default
and no event that, after notice or passage of time or both will become an Event
of Default, shall have occurred and be continuing; (iii) immediately after
giving effect to such transaction on a pro forma basis, the Interest Coverage
Ratio of the Company (or any Person becoming the successor obligor of the Notes)
is at least 1:1; provided that, if the Interest Coverage Ratio of the Company
before giving effect to such transaction is within the range set forth in column
(A) below, then the pro forma Interest Coverage Ratio of the Company (or any
Person becoming the successor obligor of the Notes) shall be at least equal to
the lesser of (1) the ratio determined by multiplying the percentage set forth
in column (B) below by the Interest Coverage Ratio of the Company prior to such
transaction and (2) the ratio set forth in column (C) below:
<TABLE>
(A) (B) (C)
- ------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
1.11:1 to 1.99:1.............................................................. 90% 1.5:1
2.00:1 to 2.99:1.............................................................. 80% 2.1:1
3.00:1 to 3.99:1.............................................................. 70% 2.4:1
4.00:1 or more................................................................ 60% 2.5:1
</TABLE>
; and provided further that, if the pro forma Interest Coverage Ratio of the
Company (or any Person becoming the successor obligor of the Notes) is 3:1 or
more, the calculation in the preceding proviso shall be inapplicable and such
transaction shall be deemed to have complied with the requirements of this
clause (iii); (iv) immediately after giving effect to such transaction on a pro
forma basis, the Company (or any Person that becomes the successor obligor of
the Notes) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction; and
(v) the Company delivers to the Trustees an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clauses (iii) and (iv))
and Opinion of Counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture comply with this provision and that all
conditions precedent provided for herein relating to such transaction have been
complied with; provided, however, that clauses (iii) and (iv) above do not apply
if,
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in the good faith determination of the Board of Directors, whose determination
shall be evidenced by a Board Resolution, the principal purpose of such
transaction is to change the state of incorporation of the Company; and provided
further that any such transaction shall not have as one of its purposes the
evasion of the foregoing limitations. (Section 4.01)
DEFEASANCE
Defeasance and Discharge
Each Indenture provides that the Company will be deemed to have paid and
will be discharged from any and all obligations in respect of the Senior Notes
or the Senior Subordinated Notes, as the case may be, and the provisions of such
Indenture will no longer be in effect with respect to the Senior Notes or the
Senior Subordinated Notes, as the case may be, on the 123rd day after the
deposit described below (except for, among other matters, certain obligations to
register the transfer or exchange of the Senior Notes or the Senior Subordinated
Notes, as the case may be, to replace stolen, lost or mutilated Senior Notes or
the Senior Subordinated Notes, as the case may be, to maintain paying agencies
and to hold monies for payment in trust) if, among other things, (A) the Company
has deposited with the relevant Trustee, in trust, money and/or U.S. Government
Obligations that through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Senior Notes or the Senior Subordinated Notes, as the case may be, on the Stated
Maturity of such payments in accordance with the terms of the relevant Indenture
and the Senior Notes or the Senior Subordinated Notes, as the case may be, (B)
the Company has delivered to the relevant Trustee either an Opinion of Counsel
to the effect that Holders of the Senior Notes or the Senior Subordinated Notes,
as the case may be, will not recognize income, gain or loss for federal income
tax purposes as a result of the Company's exercise of its option under this
"Defeasance" provision and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit, defeasance and discharge had not occurred, which Opinion of
Counsel must be accompanied by a ruling of the Internal Revenue Service to the
same effect or a change in applicable federal income tax law after the date of
such Indenture or a ruling directed to the Company or the relevant Trustee
received from the Internal Revenue Service to the same effect as the
aforementioned Opinion of Counsel, (C) immediately after giving effect to such
deposit on a pro forma basis, no Event of Default, or event that after the
giving of notice or lapse of time or both would become an Event of Default,
shall have occurred and be continuing on the date of such deposit or during the
period ending on the 123rd day after the date of such deposit, and such deposit
shall not result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which the Company is a party or by which the
Company is bound, and (D) in the case of the Senior Subordinated Note Indenture,
the Company is not prohibited from making payments in respect of the Senior
Subordinated Notes by the provisions described under "Ranking," above. (Section
7.02)
Defeasance of Certain Covenants and Certain Events of Default
Each Indenture further provides that the provisions of such Indenture will
no longer be in effect with respect to clauses (iii) and (iv) under
"Consolidation, Merger and Sale of Assets" and all the covenants described
herein under "Covenants," clause (c) under "Events of Default" with respect to
such covenants and clauses (iii) and (iv) under "Consolidation, Merger and Sale
of Assets," and clauses (d), (e) and (h) under "Events of Default" shall be
deemed not to be Events of Default, and the provisions described herein under
"Ranking" shall not apply, upon, among other things, the deposit with the
relevant Trustee, in trust, of money and/or U.S. Government Obligations that
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the principal
of, premium, if any, and accrued interest on the Senior Notes or
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the Senior Subordinated Notes, as the case may be, on the Stated Maturity of
such payments in accordance with the terms of such Indenture and the Senior
Notes or the Senior Subordinated Notes, as the case may be, the satisfaction of
the provisions described in clause (C) (and, in the case of the Senior
Subordinated Notes, clause (D)) of the preceding paragraph and the delivery by
the Company to such Trustee of an Opinion of Counsel to the effect that, among
other things, the Holders of the Senior Notes or the Senior Subordinated Notes,
as the case may be, will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred. (Section 7.03)
Defeasance and Certain Other Events of Default
In the event the Company exercises its option to omit compliance with
certain covenants and provisions of the Indentures with respect to the Senior
Notes or the Senior Subordinated Notes, as the case may be, as described in the
immediately preceding paragraph and the Senior Notes or the Senior Subordinated
Notes, as the case may be, are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the relevant Trustee will be
sufficient to pay amounts due on the Senior Notes or the Senior Subordinated
Notes, as the case may be, at the time of their Stated Maturity but may not be
sufficient to pay amounts due on the Senior Notes or the Senior Subordinated
Notes, as the case may be, at the time of the acceleration resulting from such
Event of Default. However, the Company shall remain liable for such payments.
The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior
Secured Note Agreement each contain a covenant prohibiting defeasance of the
Senior Notes and the Senior Subordinated Notes without the consent of a
specified percentage of lenders under the Bank Credit Agreement and the 1993
Term Loan Agreement and the holders of the Senior Secured Notes. The 9 1/4% Note
Indenture and the Pass Through Certificate Leases also contain, and the Senior
Note Indenture will contain, covenants limiting defeasance of the Senior
Subordinated Notes.
MODIFICATION AND WAIVER
Modifications and amendments of each Indenture may be made by the Company
and the relevant Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the outstanding Senior Notes or Senior
Subordinated Notes, as the case may be; provided, however, that no such
modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Senior Note or Senior Subordinated Note, as the case may be,
(ii) reduce the principal amount of, or premium, if any, or interest on, any
Senior Note or Senior Subordinated Note, as the case may be, (iii) change the
place or currency of payment of principal of, or premium, if any, or interest
on, any Senior Note or Senior Subordinated Note, as the case may be, (iv) impair
the right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Senior Note or Senior Subordinated Note, as the case may be, (v) in
the case of the Senior Subordinated Notes, modify the subordination provisions
in a manner adverse to the Holders of the Senior Subordinated Notes, (vi) reduce
the above-stated percentage of outstanding Senior Notes or Senior Subordinated
Notes, as the case may be, the consent of whose Holders is necessary to modify
or amend such Indenture, (vii) waive a default in the payment of principal of,
premium, if any, or interest on the Senior Notes or the Senior Subordinated
Notes, as the case may be, or (viii) reduce the percentage of aggregate
principal amount of outstanding Senior Notes or Senior Subordinated Notes,
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as the case may be, the consent of whose Holders is necessary for waiver of
compliance with certain provisions of such Indenture or for waiver of certain
defaults. (Article Eight)
The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior
Secured Note Agreement each contain a covenant prohibiting the Company from
consenting to any modification of the Indentures or waiver of any provision
thereof without the consent of a specified percentage of the lenders under the
Bank Credit Agreement and the 1993 Term Loan Agreement and the holders of the
Senior Secured Notes. See "Description of Certain Indebtedness--The Bank Credit
Agreement" and "--The Senior Secured Notes."
NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
Each Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Senior Notes or the Senior
Subordinated Notes, as the case may be, or for any claim based thereon or
otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in such Indenture, or in the Senior Notes
or the Senior Subordinated Notes, as the case may be, or because of the creation
of any Indebtedness represented thereby, shall be had against any incorporator,
shareholder, officer, director, employee or controlling person of the Company or
of any successor Person thereof. Each Holder, by accepting such Senior Notes or
Senior Subordinated Notes, as the case may be, waives and releases all such
liability. (Section 9.09)
CONCERNING THE TRUSTEES
Each Indenture provides that, except during the continuance of an Event of
Default, the respective Trustee thereunder will perform only such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the respective Trustee will exercise such rights and powers
vested in it under such Indenture and use the same degree of care and skill in
its exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs. (Section 6.01)
Each of the Indentures and provisions of the Trust Indenture Act of 1939,
as amended, incorporated by reference therein contain limitations on the rights
of the respective Trustee thereunder, should it become a creditor of the
Company, to obtain payment of claims in certain cases or to realize on certain
property received by it in respect of any such claims, as security or otherwise.
Each Trustee is permitted to engage in other transactions; provided, however,
that if it acquires any conflicting interest, it must eliminate such conflict or
resign.
The Senior Note Trustee also serves as trustee with respect to the 9 1/4%
Notes. The 9 1/4% Notes rank pari passu in right of payment with the Senior
Notes.
TAX CONSIDERATIONS
The Company will treat the Notes as debt for federal income tax purposes.
However, if any of the Notes ultimately were treated as equity, the amount
treated as a distribution on any such Note would first be taxable to the holder
as dividend income to the extent of the Company's current and accumulated
earnings and profits and would next be treated as a return of capital to the
extent of the holder's tax basis in the Note, with any remaining amount treated
as gain from the sale of the Note. Further, payments on such Notes to foreign
persons would not be eligible for the portfolio interest exception from U.S.
withholding tax and dividends thereon would be subject to U.S. withholding tax
at a flat rate of 30% (or lower treaty rate). In addition, in the event of
equity treatment, the Company would not be entitled to deduct interest expense
or original issue discount, if any, on such Notes for federal income tax
purposes.
As debt instruments and subject to the discussion below, stated interest on
both the Senior Notes and the Senior Subordinated Notes will be taxable as
ordinary income to a holder of such a Note when
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received or accrued in accordance with such holder's method of tax accounting.
If, however, a holder owns both the Senior Notes and the Senior Subordinated
Notes, such holder should be aware that recently finalized Treasury regulations
could under certain circumstances require that the Senior Notes and the Senior
Subordinated Notes held by such holder be aggregated and treated as a single
debt instrument, which treatment may result in such holder having to recognize
all or a portion of stated interest on the Notes as original issue discount
under an economic accrual basis prior to the receipt of cash attributable to
stated interest. However, assuming a substantial portion of the Senior Notes and
Senior Subordinated Notes were purchased by holders who were not related to each
other or to the Company and who did not purchase both Senior Notes and Senior
Subordinated Notes, then there is an exception in such regulations under which
the aggregation rule would not apply to the Notes. In any event, such
aggregation rule also would not apply if a portion of either the Senior Notes or
the Senior Subordinated Notes is separately traded on an established market (as
defined in the Treasury regulations) at any time during the period ending 30
days after the original issue date of the Notes for sale to the public.
A holder who purchases a Senior Note or a Senior Subordinated Note at a
premium (generally, at a cost in excess of its principal amount or, in the case
of the Senior Subordinated Notes, earlier call price) may elect to amortize such
premium as an offset to interest income on the debt with a corresponding
decrease in tax basis. A holder who purchases a Senior Note or a Senior
Subordinated Note at a discount (generally, at a cost less than its principal
amount) that exceeds a statutorily defined de minimis amount will be subject to
the "market discount" rules of the Internal Revenue Code. These rules provide in
part that gain on the sale of a debt instrument is treated as ordinary income,
generally interest, to the extent of accrued market discount not previously
included in income by the holder. The market discount rules also provide for a
deferral of deductions for net interest expense incurred or continued by a
holder to purchase or carry a Senior Note or Senior Subordinated Note acquired
at a market discount until the debt is disposed of in a taxable transaction or
unless the holder elects to include market discount in income as it accrues.
Upon a redemption, sale or exchange of a Senior Note or a Senior
Subordinated Note, its holder will recognize gain or loss measured by the
difference between the amount received in exchange therefor and such holder's
adjusted tax basis in the Note. Any gain or loss recognized on the redemption,
sale or exchange of a Note will ordinarily be capital gain or loss if such Note
is held as a capital asset (except as noted above with respect to holders who
acquire a Note at a market discount).
Payments made on the Notes and proceeds from the sale of the Notes may be
subject to a backup withholding tax of 31% unless the holder of the Note
complies with certain reporting requirements or is an exempt recipient under the
Code. Any such withheld amounts will be allowed as a credit against the holder's
federal income tax liability.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY, ASSUMES THAT THE NOTES ARE HELD AS CAPITAL ASSETS, DOES NOT
DEAL WITH CERTAIN ASPECTS FOR TAXPAYERS SUBJECT TO SPECIAL RULES AND MAY NOT BE
APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF
THE PURCHASE. OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summary of the instruments governing certain indebtedness of
the Company does not purport to be complete and is qualified in its entirety by
reference to such instruments, copies of which have been filed, or incorporated
by reference, as exhibits to the Registration Statement of which this Prospectus
is a part. Capitalized terms used but not defined herein have the meanings
ascribed to them in such instruments. Simultaneously with or prior to the
Refinancing, the Bank Credit Agreement, the 1993 Term Loan Agreement and the
Senior Secured Note Agreement will be amended in certain respects. Such
amendments, as well as the completion of the Refinancing, require certain
consents (i) of the Banks voting as one class, (ii) of the lenders under the
1993 Term Loan voting as one class, (iii) of the holders of the Senior Secured
Notes voting as one class, and (iv) of the Banks, such lenders and such holders
voting together as one class. Unless otherwise indicated, the following
descriptions of the Bank Credit Agreement, the 1993 Term Loan and the Senior
Secured Notes assume the effectiveness of such amendments and consents and of
the Refinancing.
THE BANK CREDIT AGREEMENT
The Bank Credit Agreement currently provides for the Term Loan and for the
$350 million Revolving Credit Facility, in each case with a final maturity of
December 31, 1996. As of September 30, 1993, $332 million was outstanding under
the Term Loan ($232 million on a pro forma basis after giving effect to the
Refinancing) and the Company had $176 million in available capacity under the
Revolving Credit Facility ($150 million on a pro forma basis after giving effect
to the Refinancing and the redemption on November 1, 1993 of $50 million
aggregate principal amount of 12 3/8% Notes).
As part of the Revolving Credit Facility, the Bank Credit Agreement
provides for the issuance of letters of credit in the normal course of business
of up to $50 million. In addition, a letter of credit of up to $50 million (the
"Support Letter of Credit") is available to support the Company's obligations
with respect to the refinancing of the tax-exempt financing of a portion of the
Company's Savannah River mill.
Bankers Trust Company ("Bankers Trust") also provides a $75 million swing
line facility within the Revolving Credit Facility, $50 million of which is
available to reimburse draws under the Support Letter of Credit, and $25 million
of which is available for general corporate purposes. As of September 30, 1993,
no reimbursement obligations were outstanding under the Support Letter of Credit
and no other letters of credit were issued under the Bank Credit Agreement.
Interest. The Term Loan and the Revolving Credit Facility bear interest, at
the Company's option, at Bankers Trust's prime rate, plus 1.50% or, subject to
certain limitations, at a reserve adjusted Eurodollar rate, plus 2.25%; the
foregoing rates are subject to adjustment downward by 0.75% based on certain
financial criteria.
Repayment. The Term Loan and the Revolving Credit Facility are subject to
mandatory and optional repayments and prepayments. As indicated, the Company is
required to make scheduled repayments of the Term Loan. As of September 30,
1993, the $332 million then outstanding balance of the Term Loan was payable in
installments as follows:
<TABLE>
PRINCIPAL
ON DECEMBER 31, INSTALLMENT(A)
- ------------------------------------------------------------------------------ ---------------
(IN MILLIONS)
<S> <C>
1994.......................................................................... $ 107
1995.......................................................................... $ 107
1996.......................................................................... $ 118
</TABLE>
- ---------------
(a) As part of the Refinancing the Company will prepay $100 million of the
mandatory payment due under the Term Loan in 1994. See "Use of Proceeds."
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The Company is also required to make mandatory repayments of the Term Loan
and the Revolving Credit Facility on or before the last day of March of each
year in an amount equal to 50% of Excess Cash Flow for the year ending on the
immediately preceding December 31. After giving effect to the Refinancing, the
portion of Excess Cash Flow which is not required to be used to prepay the Term
Loan will be used to prepay the Revolving Credit Facility. "Excess Cash Flow"
for any period is defined as (i) consolidated net income (subject to certain
adjustments), plus (minus) (ii) depreciation and other non-cash expenses
(revenues) (including deferred taxes and non-cash accrued interest) minus (plus)
(iii) additions (reductions, other than those solely attributable to Asset
Sales, as defined below) to working capital, minus (iv) the sum of regularly
scheduled repayments of the Term Loan and certain other scheduled indebtedness),
permitted scheduled limits of capital expenditures and permitted payments in
respect of equity and subordinated debt, minus (v) $10 million. Excess Cash Flow
prepayments under the Bank Credit Agreement are to be applied first to the
prepayment in full of the Term Loan, and second, to the prepayment of the
Revolving Credit Facility (with a reduction of the commitment under the
Revolving Credit Facility in an amount corresponding to the amount of
prepayment). Excess Cash Flow prepayments under the 1993 Term Loan Agreement are
to be applied to the 1993 Term Loan.
The Term Loan and the Revolving Credit Facility, as well as the Senior
Secured Notes and the 1993 Term Loan, also provide for mandatory prepayments
from proceeds of Asset Sales. "Asset Sale" is defined as the sale, transfer or
other disposition by the Company or any subsidiary of the Company of (i) any
stock of any subsidiary which is not Margin Stock; (ii) substantially all the
assets of any geographic or other division or line of business of the Company or
any subsidiary of the Company; or (iii) any real property or any other assets
(excluding assets produced or purchased for sale to others in the ordinary
course of business) having a value in excess of $2 million; provided that such
sales, transfers and dispositions referred to in this clause (iii) and occurring
in any fiscal year do not constitute an Asset Sale until the aggregate value
thereof in such fiscal year equals at least $10 million. Excluded from Asset
Sales are sales of cash and cash equivalents in the ordinary course of business
and up to $30 million of sales of assets located in the United Kingdom and The
Netherlands if the proceeds of such sales are redeployed outside the United
States. So long as the Bank Credit Agreement remains in effect, the net cash
proceeds of Asset Sales (other than dispositions of Shared Collateral) are to be
applied to prepay the indebtedness under the Bank Credit Agreement. When the
Bank Credit Agreement is no longer in effect, such net cash proceeds are to be
applied ratably to the prepayment of the 1993 Term Loan and the Senior Secured
Notes. The net cash proceeds from Asset Sales consisting of dispositions of
Shared Collateral are to be applied as follows: (i) the first $100 million of
such net cash proceeds are to be applied to the ratable prepayment of the
indebtedness under the Bank Credit Agreement and the 1993 Term Loan; and (ii)
the remainder of such net cash proceeds are to be applied ratably to prepay the
indebtedness under the Bank Credit Agreement, the 1993 Term Loan, the Senior
Secured Notes and, to the extent secured by the Shared Collateral, the
indebtedness under interest rate agreements and currency agreements. The net
cash proceeds of any Asset Sale required to be applied to prepay the
indebtedness under the Bank Credit Agreement will be so applied first, to the
prepayment in full of the Term Loan, and second, to the prepayment of (and the
corresponding reduction of the commitment under) the Revolving Credit Facility.
If the utilization of the Revolving Credit Facility exceeds the commitment
thereunder, the Company is required to prepay the Revolving Credit Facility by
an amount equal to such excess.
The Term Loan and the Revolving Credit Facility may be prepaid in whole or
in part at any time (except that Eurodollar loans are prepayable only on the
last day of the selected interest period) without premium or penalty, and the
Revolving Credit Facility commitment may be reduced by the Company in whole or
in part at any time without premium or penalty.
Guarantees and Security. The indebtedness under the Bank Credit Agreement
is secured by a first lien (subject to permitted liens) on the Shared
Collateral. Pursuant to the Collateral Trust Agreement, the Senior Secured Notes
and the 1993 Term Loan are, in each case with certain exceptions, secured
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equally and ratably with the indebtedness under the Bank Credit Agreement. See
"--Senior Secured Notes."
Covenants; Events of Default. The Bank Credit Agreement contains several
financial covenants that require the Company to maintain certain specified
ratios at specified times. These financial covenants include:
(i) A requirement that, at all times, the Company maintain a ratio of
Consolidated Current Assets (excluding any receivable with respect to
current taxes) to Consolidated Current Liabilities (excluding any liability
for current taxes) of not less than 0.75 to 1.00. "Consolidated Current
Assets" is defined as the total assets of the Company and its subsidiaries
on a consolidated basis which may properly be classified as current assets
in conformity with generally accepted accounting principles ("GAAP"),
excluding cash and certain instruments defined as "cash equivalents" to the
extent such items exceed $10 million. "Consolidated Current Liabilities" is
defined as the total liabilities of the Company and its subsidiaries on a
consolidated basis which may properly be classified as current liabilities
in conformity with GAAP, excluding (a) current maturities of indebtedness,
with an initial term longer than one year or renewable at the borrower's
option for more than one year, (b) certain other indebtedness permitted
under the Bank Credit Agreement which is classified as a current liability
in conformity with GAAP, (c) taxes payable solely as a result of Asset
Sales and (d) fees, costs and expenses payable by the Company in connection
with the transactions contemplated by the Bank Credit Agreement (the
"Transaction Costs").
(ii) A requirement that the Company maintain a ratio of (a)
Consolidated EBDIT to (b) Consolidated Cash Interest Expense of not less
than 1.50 to 1.00 for each period of four fiscal quarters (not less than
1.40 to 1.00 in the case of the four fiscal quarters ending March 31,
1994). "Consolidated EBDIT" for any period is defined as the total of the
amounts for such period of (a) consolidated net income (subject to certain
adjustments), plus (b) provision for taxes based on income, plus (c)
depreciation expenses, plus (d) total interest expense, plus (e)
amortization expense, plus (f) other non-cash items reducing consolidated
net income, minus (g) other non-cash items increasing consolidated net
income, all as determined on a consolidated basis for the Company and its
subsidiaries in conformity with GAAP. "Consolidated Cash Interest Expense"
for any period is defined as the sum of (i) total interest expense with
respect to outstanding indebtedness of the Company and its subsidiaries and
(ii) net costs under interest rate agreements of the Company and its
subsidiaries on a consolidated basis calculated in conformity with GAAP,
but excluding interest expense not payable in cash, certain fees payable to
the Banks and the Agent under the Bank Credit Agreement on or prior to
August 9, 1988 and the Transaction Costs in connection with the leveraged
acquisition of the Company in 1988 and subsequent financing transactions,
all as determined in conformity with GAAP.
(iii) A requirement that the Company maintain at all times a ratio of
(a) Consolidated Senior Debt to (b) the sum of (1) Consolidated Net Worth
plus (2) Subordinated Indebtedness, of not more than 0.90 to 1.00 for the
period from January 1, 1993 to and including December 31, 1993, and not
more than 0.85 to 1.00 for the period from and after January 1, 1994 to and
including December 31, 1994, and not more than 0.80 to 1.00 for the period
from and after January 1, 1995. "Consolidated Senior Debt" is defined as
the sum of (1) all indebtedness of the Company and its subsidiaries, other
than Subordinated Indebtedness, on a consolidated basis calculated in
conformity with GAAP and (2) the unutilized maximum commitment under any
revolving credit or similar facility of the Company and its subsidiaries,
including, without limitation, the Revolving Credit Facility. "Consolidated
Net Worth" is defined as an amount equal to (x) the sum of all common stock
and preferred stock and additional paid-in capital plus retained earnings
(or minus accumulated deficit) of the Company and its subsidiaries on a
consolidated basis calculated in conformity with GAAP (but excluding the
effects of certain foreign currency exchange adjustments) minus (y), to the
extent not already excluded in accordance with GAAP, the aggregate amount
of
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nonrecourse loans made to provide the purchase price paid by management for
any Common Stock. "Subordinated Indebtedness" is defined as indebtedness of
the Company subordinated in right of payment to the indebtedness
outstanding under the Bank Credit Agreement, the 1993 Term Loan Agreement
and the Senior Secured Note Agreement pursuant to documentation containing
interest rates, payment terms, maturities, amortization schedules,
covenants, defaults, remedies, subordination provisions and other material
terms in form and substance satisfactory to the Banks holding 66 2/3% or
more of the aggregate principal amount outstanding under the Bank Credit
Agreement.
The Bank Credit Agreement provides that for the purposes of the covenants
set forth therein, no calculations will give effect to adjustments in component
amounts resulting from application of the purchase method of accounting under
Accounting Principles Board Opinions Nos. 16 and 17 to the leveraged acquisition
of the Company in 1988 or the amortization of expenses in connection with such
transaction or its financing.
The Bank Credit Agreement contains additional covenants which, among other
things, require the Company (i) to provide equal security to the Banks in the
event certain liens are granted on any assets of the Company or its
subsidiaries, (ii) to maintain the properties of the Company and its
subsidiaries, together with insurance thereon, (iii) to enter into interest rate
agreements with respect to a certain portion of the Bank Credit Agreement, (iv)
to provide certain reports to the Banks and permit inspections by the Banks, (v)
to cause subsidiaries (other than Fort Sterling and Sterling International
Limited) accounting for more than 10% of consolidated assets or consolidated
revenues of the Company (each a "Material Subsidiary") to provide a guarantee of
the Company's obligations under the Bank Credit Agreement and to secure the same
with a pledge of inventory and receivables, (vi) to pledge the stock of, with
certain exceptions, each Material Subsidiary; provided that neither the Company
nor any subsidiary shall be required to pledge more than 65% of the voting power
of any controlled foreign corporation (as defined in the Internal Revenue Code)
or any subsidiary that acts solely as a holding company for the stock of one or
more controlled foreign corporations, or certain identified subsidiaries that
act principally as holding companies for the stock of one or more controlled
foreign corporations, and in no event shall be required to pledge the stock of
any subsidiary to the extent such pledge would constitute an investment of
earnings in United States property under the Internal Revenue Code and (vii) to
provide ratable consideration, if any, to holders of the Senior Secured Notes,
the lenders under the 1993 Term Loan Agreement and the Banks for consenting to
any transaction, event or change that requires amendments, modifications,
supplements, waivers or forbearance of all of the Senior Secured Note Agreement,
the Bank Credit Agreement and the 1993 Term Loan Agreement. The Company and the
Banks have amended the Bank Credit Agreement to exclude from the definition of
"Material Subsidiary" referred to in clause (v) above, the wholly owned
subsidiaries of Fort Sterling and Sterling International Limited, and Fort
Howard Holdings Inc. provided that its only assets consist of stock of Fort
Sterling and the stock of wholly owned subsidiaries of the Company which has
been pledged to the Banks.
The Bank Credit Agreement also contains covenants which, among other
things, (i) limit the ability of the Company and its subsidiaries to incur
additional indebtedness and contingent obligations or grant liens or additional
negative pledges in respect of their assets, (ii) limit the investments and
capital expenditures which may be made by the Company and its subsidiaries,
(iii) limit the ability of the Company and its subsidiaries to make interest
payments on and prepayments of subordinated debt and limit the ability of the
Company to pay dividends or make other distributions on account of any shares of
any class of its capital stock (other than dividends payable solely in other
shares of such class of capital stock), (iv) limit the ability of the Company
and its subsidiaries to incur obligations under leases or to enter into sale and
leaseback transactions, (v) prevent the Company and its subsidiaries from
selling or discounting receivables, other than certain sales of notes received
in connection with Asset Sales, (vi) limit the ability of the Company and its
subsidiaries to enter into certain transactions
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or arrangements with certain affiliates of the Company or any holder of 5% or
more of any class of its equity securities or affiliates of such holders, (vii)
restrict the ability of the Company and its subsidiaries to make fundamental
changes and to enter into new lines of business, (viii) limit the ability of the
Company or its subsidiaries to dispose of their respective assets and (ix) limit
the ability of the Company and its subsidiaries to make prepayments of the 1993
Term Loan.
Under the Bank Credit Agreement, various specified events constitute events
of default which permit the Banks to cease making loans and to declare all
amounts outstanding under the Term Loan and the Revolving Credit Facility to be
due and payable. These events include, among other things, failure to pay any
installment of principal under the Bank Credit Agreement when due, failure to
pay for 5 days after the due date any interest under the Bank Credit Agreement,
default in or relating to other indebtedness of the Company or any of its
subsidiaries in a principal amount of $15 million or more individually or $30
million or more in the aggregate, breach of certain covenants contained in the
Bank Credit Agreement, any representation or warranty in the Bank Credit
Agreement proving to have been false in a material respect when made, default in
the performance of any other terms contained in the Bank Credit Agreement or
certain other related documents without being remedied or waived within 30 days
after receipt of notice of default, bankruptcy of the Company or any of its
Material Subsidiaries, a judgment or attachment involving an amount in excess of
$10 million individually or $20 million in the aggregate which is not discharged
within a specified period, certain ERISA defaults, the invalidity of any
guarantee given by a subsidiary of the Company in connection with the Bank
Credit Agreement, failure to maintain the validity and perfection of any
security interest (to the extent required under the Bank Credit Agreement) with
respect to collateral with a value greater than $20 million, and a failure by
MSLEF II, MS&Co. and their affiliates to own or control at least a majority of
the Common Stock entitled to vote for the election of members of the Board of
Directors of the Company.
Fees and Expenses. A commitment fee of 0.5% per annum on the unused portion
of each Bank's commitment under the Revolving Credit Facility is payable to the
Banks. In addition, an annual Agent's commission of $500,000 is payable to
Bankers Trust. The Company agreed to pay certain of the Banks' expenses incurred
in connection with the Bank Credit Agreement and to provide the Banks and their
respective directors, officers, employees and affiliates with customary
indemnification. In addition, in connection with obtaining amendments and
consents required in connection with the issuance of the 9 1/4% Notes and the
10% Notes, the Company paid a consent fee of 0.3% of $932 million to the Banks
in 1992.
1993 TERM LOAN
In connection with the 1993 Refinancing, the Company borrowed $100 million
under the 1993 Term Loan Agreement from a syndicate of banks (the "Lenders") for
whom Bankers Trust is the agent. The 1993 Term Loan bears interest, at the
Company's option, at Bankers Trust's prime rate, plus 1.75% or, subject to
certain limitations, at a reserve adjusted Eurodollar rate, plus 3.00%, and
matures on May 1, 1997. The 1993 Term Loan constitutes Secured Indebtedness of
the Company and, except as indicated above in respect of the Bank Credit
Agreement, is secured by a first lien (subject to permitted liens) on the Shared
Collateral on an equal and ratable basis with the Senior Secured Notes, all
indebtedness from time to time outstanding under the Bank Credit Agreement, and
certain indebtedness under interest rate agreements and currency agreements.
The 1993 Term Loan is subject to certain mandatory and optional
prepayments. The Company is required to prepay the 1993 Term Loan with Excess
Cash Flow and with the net cash proceeds of Asset Sales to the extent indicated
above under "--The Bank Credit Agreement." In addition, the Company may prepay
the 1993 Term Loan in whole or in part at any time (except that Eurodollar loans
are prepayable only on the last day of the selected interest period), without
premium or penalty. The 1993
91
<PAGE>
Term Loan contains certain restrictive and financial covenants and events of
default that are substantially similar to those contained in the Bank Credit
Agreement and the Senior Secured Note Agreement.
The Company paid approximately $5 million to Bankers Trust for certain
funding and commitment fees and for certain of the Lenders' expenses in
connection with the 1993 Term Loan Agreement and has provided the Lenders and
their respective directors, officers, employees and affiliates with customary
indemnification relating to liability arising from the 1993 Term Loan Agreement.
SENIOR SECURED NOTES
The Senior Secured Notes were issued pursuant to the Senior Secured Note
Agreement. The Senior Secured Notes are limited to $300 million aggregate
principal amount and have been issued in five series, Series A, B, C1, C2 and D,
maturing in years 1997 through 2000. Series A, B, C1, C2 and D of the Senior
Secured Notes bear interest at three-month LIBOR plus 275 basis points, 300
basis points, 325 basis points, 300 basis points, and 350 basis points,
respectively.
The Company is required to prepay the Senior Secured Notes with the net
cash proceeds of Asset Sales to the extent indicated above under "--The Bank
Credit Agreement." In addition, subject to the consent of the Banks, the Company
may prepay the Senior Secured Notes at any time in whole or in part at par plus
accrued and unpaid interest to the prepayment date.
The Senior Secured Notes constitute Secured Indebtedness of the Company
and, except as indicated above in respect of the Bank Credit Agreement, are
secured by a first lien (subject to permitted liens) on the Shared Collateral on
an equal and ratable basis with the 1993 Term Loan, all indebtedness from time
to time outstanding under the Bank Credit Agreement, and certain indebtedness
under interest rate agreements and currency agreements.
The Senior Secured Notes contain certain restrictive and financial
covenants and events of default that are substantially similar to those
contained in the Bank Credit Agreement.
In connection with the 1993 Refinancing, the Company paid approximately
$0.9 million to the holders of the Senior Secured Notes as a consent fee and for
certain of their expenses in connection with amendments to the Senior Secured
Note Agreement and has provided such holders and their respective directors,
officers, employees and affiliates with customary indemnification relating to
liability arising from the Senior Secured Note Agreement.
12 3/8% NOTES AND 12 5/8% DEBENTURES
The 12 3/8% Notes were issued under an Indenture dated as of November 1,
1988 (the "12 3/8% Note Indenture"), between the Company and State Street Bank
and Trust Company, as Trustee. The 12 5/8% Debentures were issued under an
Indenture dated as of November 1, 1988 (the "12 5/8% Debenture Indenture"),
between the Company and United States Trust Company of New York, as Trustee.
The 12 3/8% Notes and the 12 5/8% Debentures constitute unsecured
subordinated obligations of the Company, and will mature on November 1, 1997 and
November 1, 2000, respectively. The 12 3/8% Notes bear interest at a rate of 12
3/8% per annum and the 12 5/8% Debentures bear interest at a rate of 12 5/8% per
annum. The 12 5/8% Debentures are subordinated in right of payment to the 12
3/8% Notes and the Notes and rank pari passu with the 10% Notes.
The 12 3/8% Notes are currently redeemable at the option of the Company, at
105.0% of the principal amount thereof, together with accrued and unpaid
interest to the redemption date.
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<PAGE>
The 12 5/8% Debentures are redeemable at the option of the Company at
105.0% of the principal amount thereof, decreasing to 102.5% of the principal
amount thereof on or after November 1, 1994, and after October 31, 1995, at 100%
of the principal amount, in each case together with accrued and unpaid interest
to the redemption date.
The Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior
Secured Notes contain a provision prohibiting the optional redemption of the 12
3/8% Notes and the 12 5/8% Debentures. The 12 3/8% Notes Indenture limits the
optional redemption of the 12 5/8% Debentures.
In connection with the Note Offerings, requisite consents will be obtained
under the Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior
Secured Note Agreement to permit, among other things, the 12 3/8% Note
Redemption and the 12 5/8% Debenture Redemption. The 12 3/8% Notes will be
redeemed in whole and $238.1 million aggregate principal amount of the 12 5/8%
Debentures will be redeemed with the proceeds of the Note Offering. See "Use of
Proceeds."
The 12 3/8% Note Indenture and the 12 5/8% Debenture Indenture contain
certain restrictive covenants which impose limitations on the Company and
certain of its subsidiaries' ability to, among other things: (i) incur
additional indebtedness; (ii) pay dividends and make other distributions; (iii)
create liens; and (iv) merge or consolidate or transfer substantially all of the
Company's assets.
As of September 30, 1993, $384 million and $384 million of aggregate
principal amount of 12 3/8% Notes and 12 5/8% Debentures, respectively, were
outstanding. On November 1, 1993, $50 million aggregate principal amount of 12
3/8% Notes were redeemed by the Company.
14 1/8% DEBENTURES
The 14 1/8% Debentures were issued under an Indenture dated as of November
1, 1988 (the "14 1/8% Debenture Indenture"), between the Company and Society
National Bank, Trustee.
The 14 1/8% Debentures constitute unsecured subordinated obligations of the
Company. The 14 1/8% Debentures currently have a face amount outstanding of
approximately $567 million and will mature on November 1, 2004. No interest will
be payable on the 14 1/8% Debentures prior to May 1, 1995. From and after
November 1, 1994 interest on the 14 1/8% Debentures will accrue at a rate of 14
1/8% per annum. The 14 1/8% Debentures are subordinated to the Notes, the 9 1/4%
Notes, the 10% Notes, the 12 5/8% Debentures and the 12 3/8% Notes until
redeemed as described herein.
The 14 1/8% Debentures are redeemable at any time at the option of the
Company at a redemption price equal to 100% of their principal amount, together
with accrued and unpaid interest, if any, to the redemption date. The Bank
Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Notes
contain a provision prohibiting the optional redemption of the 14 1/8%
Debentures.
The 14 1/8% Debenture Indenture contains certain limited covenants which
restrict the Company's ability to pay dividends on or repurchase or retire
Common Stock prior to November 1, 1994 or to merge or consolidate or transfer
substantially all of its assets.
As of September 30, 1993, $489 million aggregate accreted value of the 14
1/8% Debentures was outstanding.
PASS THROUGH CERTIFICATES, SERIES 1991
The Pass Through Certificates were issued pursuant to the Amended and
Restated Pass Through Trust Agreement dated as of December 13, 1991 between the
Company and Wilmington Trust Company, as trustee. The Pass Through Certificates
bear interest at 11% per annum and have a final distribution date of January 2,
2002.
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<PAGE>
The Pass Through Certificates represent fractional undivided interests in a
pass through trust (the "Pass Through Trust") holding the Pass Through Secured
Notes issued on a nonrecourse basis by an owner trustee (the "Owner Trustee") in
connection with leveraged lease transactions to finance or refinance not more
than 85% of the cost to the Owner Trustee of acquiring the Company's interest in
a paper manufacturing facility, power plant and certain equipment related
thereto located at the Company's Savannah River mill (the "Pass Through
Assets"). Simultaneously with the acquisition of the Pass Through Assets by the
Owner Trustee, it leased the Pass Through Assets back to the Company pursuant to
the Pass Through Certificate Leases. Amounts payable under the Pass Through
Certificate Leases will be at least sufficient to pay in full when due all
payments of principal and interest on the Pass Through Secured Notes. However,
neither the Pass Through Certificates nor the Pass Through Secured Notes are
direct obligations of, or guaranteed by, the Company.
Prior to December 20, 1998, the Pass Through Certificates may not be
redeemed except in connection with an event of loss to a Pass Through Asset, or
in certain cases of obsolesence of any Pass Through Asset and during the
continuance of any lease event of default with respect to a Pass Through Asset.
On or after December 20, 1998, the Pass Through Certificates may be redeemed at
any time. Unless earlier redeemed, 74.20% (or $62,041,625) of the principal
amount of the Pass Through Certificates will be distributed to the holders
thereof on the final distribution date.
The Company's obligations under the Pass Through Certificate Leases, which
are treated as capital leases, rank pari passu in right of payment with all
other general obligations of the Company and are secured by a security interest
in all of the Pass Through Assets. The Company's obligations under the Bank
Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured Notes are
secured by essentially all of the Company's assets, including the Company's
leasehold interest in the Pass Through Assets. The holders of such indebtedness
will be entitled to payment of their indebtedness out of the proceeds of such
collateral prior to the holders of any general unsecured obligations of the
Company, including the Notes.
As of September 30, 1993, $85 million under the Pass Through Certificate
Leases was outstanding.
9 1/4% NOTES AND 10% NOTES
The 9 1/4% Notes were issued under an Indenture, dated as of March 15, 1993
(the "9 1/4% Note Indenture"), between the Company and Norwest Bank Wisconsin,
N.A., as Trustee. The 10% Notes were issued under an Indenture, dated as of
March 15, 1993 (the "10% Note Indenture"), between the Company and United States
Trust Company of New York, as Trustee.
The 9 1/4% Notes constitute senior unsecured obligations of the Company,
limited to $450 million aggregate principal amount, and will mature on March 15,
2001. The 9 1/4% Notes bear interest at the rate of 9 1/4% per annum. The 9 1/4%
Notes are not redeemable prior to maturity. The 9 1/4% Notes rank pari passu
with the Senior Notes and constitute Senior Indebtedness with respect to the
Senior Subordinated Notes.
The 10% Notes constitute unsecured subordinated obligations of the Company,
limited to $300 million aggregate principal amount, and will mature on March 15,
2003. The 10% Notes bear interest at the rate of 10% per annum. The 10% Notes
will be redeemable at any time on or after March 15, 1998 at 105.0% of the
principal amount thereof, on or after March 15, 1999 at 103.75% of the principal
amount thereof, on or after March 15, 2000 at 102.50% of the principal amount
thereof, on or after March 15, 2001 at 101.25% of the principal amount thereof,
and after March 15, 2002, at 100% of the principal amount thereof, in each case
together with accrued and unpaid interest to the redemption date. In addition,
at any time prior to March 15, 1995, the Company may redeem up to $75 million
aggregate principal amount of 10% Notes with the proceeds of one or more Public
Equity Offerings following which there is a Public Market, at any time or from
time to time, at a redemption price
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<PAGE>
(expressed as a percentage of principal amount) of 110%, plus accrued interest
to the redemption date. The 10% Notes are subordinated to the Notes.
The Bank Credit Agreement, 1993 Term Loan Agreement and the Senior Secured
Note Agreement contain a provision prohibiting the optional redemption of the 9%
Notes and 10% Notes without the consent of a specified percentage in interest of
lenders under the Bank Credit Agreement and the 1993 Term Loan Agreement, and of
holders of Senior Secured Notes. The 9 1/4% Note Indenture and the 12 5/8%
Debenture Indenture also contain covenants limiting the optional redemption of
the 10% Notes.
The 9 1/4% Note Indenture and the 10% Note Indenture contain certain
restrictive covenants which impose limitations on the Company and certain of its
subsidiaries' ability to, among other things: (i) incur additional indebtedness;
(ii) pay dividends and make other distributions; (iii) create liens; and (iv)
merge or consolidate or transfer substantially all of the Company's assets.
As of September 30, 1993, $450 million and $300 million of aggregate
principal amount of 9 1/4% Notes and 10% Notes, respectively, were outstanding.
OTHER DEBT OF THE COMPANY
In addition to borrowings under the Bank Credit Agreement, the 1993 Term
Loan Agreement, the Senior Secured Notes, the Pass Through Certificates and the
other indebtedness described above, at September 30, 1993, the Company and its
subsidiaries had outstanding approximately $187 million of other long-term debt
(including the current portion thereof).
95
<PAGE>
MARKET-MAKING ACTIVITIES OF MS&CO.
The Prospectus is to be used by MS&Co. in connection with offers and sales
of the Notes in market-making transactions at negotiated prices related to
prevailing market prices at the time of sale. MS&Co. may act as principal or
agent in such transactions. MS&Co. has no obligation to make a market in the
Notes, and may discontinue its market-making activities at any time without
notice, in its sole discretion.
MS&Co. acted as underwriter in connection with the original offering of the
Notes and received an underwriting discount of $20,375,000 in connection
therewith.
For a description of certain transactions between the Company and MS&Co.,
see "Certain Transactions."
In connection with the original offering of the Notes, the Company agreed
to indemnify MS&Co., as Underwriter, and A.G. Edwards & Sons, Inc., as
"qualified independent underwriter," against certain liabilities, including
liabilities under the Securities Act.
MS&Co. has provided, and continues to provide, investment banking services
to the Company.
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon for the
Company by Shearman & Sterling, New York, New York, and for the Underwriter by
Davis Polk & Wardwell, New York, New York. Shortly after the Acquisition,
certain partners of Davis Polk & Wardwell, acting through a general partnership,
acquired shares of Common Stock of the Company from Morgan Stanley Group which,
in the aggregate, amount to less than 1% of the outstanding shares.
EXPERTS
The consolidated financial statements and schedules of the Company included
or incorporated by reference in this Prospectus and elsewhere in this
Registration Statement for the years ended December 31, 1992, 1991 and 1990 have
been audited by Arthur Andersen & Co., independent public accountants, as
indicated by their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
96
<PAGE>
FORT HOWARD CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
FINANCIAL STATEMENTS OF FORT HOWARD CORPORATION
Consolidated Financial Statements
Report of Independent Public Accountants.............................. F-2
Consolidated Statements of Income for the years ended December 31,
1992, 1991 and 1990................................................ F-3
Consolidated Balance Sheets at December 31, 1992 and 1991............. F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1992, 1991 and 1990................................................ F-5
Notes to Consolidated Financial Statements............................ F-6
Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the nine months ended
September 30, 1993 and 1992........................................ F-25
Condensed Consolidated Balance Sheets at September 30, 1993 and
December 31, 1992.................................................. F-26
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1993 and 1992.................................. F-27
Notes to Condensed Consolidated Financial Statements.................. F-28
F-1
<PAGE>
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, 1992
and 1991, and the related consolidated statements of income and cash flows for
the years ended December 31, 1992, 1991 and 1990. 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, 1992 and 1991, and
the consolidated results of their operations and their cash flows for the years
ended December 31, 1992, 1991 and 1990, 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 15, 1993
F-2
<PAGE>
FORT HOWARD CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE> <CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1992 1991 1990
------------- ------------- -------------
<S> <C> <C> <C>
Net sales............................................................ $ 1,151,351 $ 1,138,210 $ 1,151,173
Cost of sales........................................................ 726,356 713,135 719,228
------------- ------------- -------------
Gross income......................................................... 424,995 425,075 431,945
Selling, general and administrative.................................. 97,620 97,885 104,863
Amortization of goodwill............................................. 56,700 56,658 56,658
------------- ------------- -------------
Operating income..................................................... 270,675 270,532 270,424
Interest expense..................................................... 338,374 371,186 422,663
Other (income) expense, net.......................................... 2,101 (2,655) (32,580)
------------- ------------- -------------
Loss before taxes.................................................... (69,800) (97,999) (119,659)
Income taxes (credit)................................................ (398) (23,963) (36,945)
------------- ------------- -------------
Loss before equity earnings, extraordinary item and adjustment for
accounting change.................................................. (69,402) (74,036) (82,714)
Equity in net loss of unconsolidated subsidiaries.................... -- (31,504) (23,515)
------------- ------------- -------------
Net loss before extraordinary item and adjustment for accounting
change............................................................. (69,402) (105,540) (106,229)
Extraordinary item--loss on debt repurchases (net of income taxes of
$3,090)............................................................ -- (5,044) --
Adjustment for adoption of SFAS No. 106.............................. (10,587) -- --
------------- ------------- -------------
Net loss............................................................. $ (79,989) $ (110,584) $ (106,229)
------------- ------------- -------------
------------- ------------- -------------
Loss per share:
Net loss before extraordinary item and adjustment for accounting
change........................................................... $ (11.83) $ (19.67) $ (23.65)
Extraordinary item................................................. -- (0.94) --
Adjustment for adoption of SFAS No. 106............................ (1.81) -- --
------------- ------------- -------------
Net loss............................................................. $ (13.64) $ (20.61) $ (23.65)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FORT HOWARD CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE> <CAPTION>
DECEMBER 31,
----------------------------
1992 1991
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 188 $ 9,597
Receivables, less allowances of $1,376 and $1,379................................. 103,491 90,248
Inventories....................................................................... 100,975 95,048
Deferred income taxes............................................................. 10,000 --
------------- -------------
Total current assets......................................................... 214,654 194,893
Property, plant and equipment....................................................... 1,694,946 1,487,893
Less: Accumulated depreciation.................................................... 437,518 378,806
------------- -------------
Net property, plant and equipment............................................ 1,257,428 1,109,087
Goodwill, net of accumulated amortization of $247,495 and $190,795.................. 2,023,416 2,075,525
Other assets........................................................................ 79,069 90,297
------------- -------------
Total assets................................................................. $ 3,574,567 $ 3,469,802
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................................. $ 104,405 $ 81,427
Interest payable.................................................................. 33,057 33,382
Income taxes payable.............................................................. 1,792 6,886
Other current liabilities......................................................... 64,282 66,244
Current portion of long-term debt................................................. 137,747 4,519
------------- -------------
Total current liabilities.................................................... 341,283 192,458
Long-term debt...................................................................... 2,953,027 2,929,589
Deferred and other long-term income taxes........................................... 259,625 262,376
Other liabilities................................................................... 36,473 10,291
Voting Common Stock with put right.................................................. 13,219 12,963
Shareholders' equity (deficit):
Voting Common Stock............................................................... 600,465 600,465
Cumulative translation adjustment................................................. (3,915) 7,025
Retained earnings (deficit)....................................................... (625,610) (545,365)
------------- -------------
Total shareholders' equity (deficit)......................................... (29,060) 62,125
------------- -------------
Total liabilities and shareholders' equity (deficit)......................... $ 3,574,567 $ 3,469,802
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FORT HOWARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE> <CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------
1992 1991 1990
------------ ------------ ------------
<S> <C> <C> <C>
Cash provided from (used for) operations:
Net loss.............................................................. $ (79,989) $ (110,584) $ (106,229)
Depreciation and amortization......................................... 137,977 172,671 169,294
Non-cash interest expense............................................. 139,700 141,362 145,029
Deferred income tax (credit).......................................... (17,799) (47,946) (19,796)
Employee stock and other compensation................................. 1,120 1,256 4,170
Equity in net loss of unconsolidated subsidiaries..................... -- 31,504 23,515
Pre-tax loss on debt repurchases...................................... -- 8,134 --
Pre-tax adjustment for adoption of SFAS No. 106....................... 17,076 -- --
(Increase) decrease in receivables.................................... (5,284) 4,087 1,596
Increase in inventories............................................... (1,215) (6,001) (5,926)
Decrease in refundable income taxes................................... -- 26,300 8,200
Increase (decrease) in accounts payable............................... 13,572 3,429 (2,056)
Decrease in interest payable.......................................... (298) (1,468) (3,886)
Increase (decrease) in income taxes payable........................... (5,094) (394) 3,236
All other, net........................................................ 10,184 18,531 7,567
------------ ------------ ------------
Net cash provided from operations................................ 209,950 240,881 224,714
Cash provided from (used for) investment activities:
Additions to property, plant and equipment............................ (232,844) (144,055) (96,508)
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......................................... -- 38,568 215,282
------------ ------------ ------------
Net cash provided from (used for) investment activities.......... (241,146) (105,487) 118,774
Cash provided from (used for) financing activities:
Proceeds from long-term borrowings.................................... 189,518 462,995 13,093
Repayment of long-term borrowings..................................... (167,731) (759,487) (341,789)
Debt issuance costs................................................... -- (11,058) --
Issuance of common stock................................................ -- 163,357 714
------------ ------------ ------------
Net cash provided from (used for) financing activities........... 21,787 (144,193) (327,982)
------------ ------------ ------------
Increase (decrease) in cash............................................. (9,409) (8,799) 15,506
Cash, beginning of year................................................. 9,597 18,396 2,890
------------ ------------ ------------
Cash, end of year................................................ $ 188 $ 9,597 $ 18,396
------------ ------------ ------------
------------ ------------ ------------
Supplemental Cash Flow Disclosures:
Interest paid......................................................... $ 208,051 $ 236,140 $ 283,552
Income taxes paid (refunded), net..................................... 9,997 (11,090) (34,494)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1992
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. As a result of
the Cup Transfer and Cup Sales (as described in Note 2), the accompanying
consolidated financial statements report all cup subsidiaries as an equity
investment. 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.
(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 3).
(D) Property, Plant and Equipment. Prior to August 9, 1988, property, plant
and equipment were stated at original cost and depreciated using the
straight-line method. Effective with the Acquisition (as defined below),
properties were adjusted to their estimated fair values and are being
depreciated on a straight-line basis.
Effective January 1, 1992, the Company prospectively changed its estimates
of the depreciable lives of certain machinery and equipment. These changes were
made to better reflect the estimated periods during which such assets will
remain in service. For the year ended December 31, 1992, the change had the
effect of reducing depreciation expense by $38 million and net loss by $24
million. Subsequent to the change, depreciation is provided over useful lives of
30 to 50 years for buildings and 2 to 25 years for equipment.
Assets under capital leases principally arose in connection with sale and
leaseback transactions as described in Note 9 and are stated at the present
value of future minimum lease payments. These assets are amortized over the
respective periods of the leases which range from 15 to 25 years. Amortization
of assets under capital leases is included in depreciation expense.
The Company follows the policy of capitalizing interest incurred in
conjunction with major capital expenditure projects. The amounts capitalized in
1992, 1991 and 1990 were $11,047,000, $5,331,000 and $3,503,000, respectively.
(E) Revenue Recognition. Sales of the Company's paper products are recorded
upon shipment of products.
F-6
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(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 is amortized on a
straight-line basis over 40 years.
(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 addition, the Company is allowed to make discretionary
contributions. Participants may also contribute a certain percent of their wages
to the plans. Costs charged to operations for defined contribution plans were
approximately $11,716,000, $12,231,000 and $12,327,000 for the years ended
December 31, 1992, 1991 and 1990, respectively.
Employees retiring prior to February 1, 1990 from the Company's U.S. tissue
operations who have met certain eligibility requirements are entitled to
postretirement health care benefit coverage. These benefits are subject to
deductibles, copayment provisions, a lifetime maximum benefit and other
limitations. In addition, employees who retire after January 31, 1990 at age 55
or older with ten years of service may purchase health care benefit coverage
from the Company up to age 65. The Company has reserved the right to change or
terminate this benefit at any time. As of January 1, 1992, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." The standard
requires that the expected cost of postretirement health care benefits be
charged to expense during the years that employees render service (see Note 10).
Prior to 1992, the annual cost of these benefits had been expensed as claims and
premiums were paid. Employees of the Company's U.K. tissue operations are not
entitled to Company-provided postretirement benefit coverage.
In November 1992, the Financial Accounting Standards Board issued SFAS No.
112, "Employers' Accounting for Postemployment Benefits." This new standard
requires that the expected cost of benefits to be provided to former or inactive
employees after employment but before retirement be charged to expense during
the years that the employees render service. In the fourth quarter of 1992, the
Company retroactively adopted the new standard effective January 1, 1992.
Adoption of the new accounting standard had no effect on the Company's 1992
consolidated statement of income.
(I) Interest Rate Cap and Swap Agreements. The cost of interest rate cap
agreements is amortized over the respective lives of the agreements. The
differential to be paid or received in connection with interest rate swap
agreements is accrued as interest rates change and is recognized over the lives
of the agreements.
(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
F-7
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
tax benefits from long-term deferred income taxes payable to current assets in
the accompanying 1992 consolidated balance sheet. The Company has not recorded a
valuation allowance with respect to this deferred income tax asset. 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 differences relate to
depreciation expense in 1992 and 1991 and to depreciation expense and the
valuation of the Company's investments in and advances to unconsolidated
subsidiaries in 1990. Deferred income tax expense represents the change in the
deferred income tax asset and liability balances.
(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
periods. The average number of shares used in the computation was 5,862,685,
5,364,357 and 4,491,898 for the years ended December 31, 1992, 1991 and 1990,
respectively.
(L) Segment Information. The Company operates in one industry segment as a
manufacturer, converter and marketer of a diversified line of single-use paper
products for the home and away-from-home markets.
2. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
On November 14, 1989, the Company transferred all the capital stock of Fort
Howard Cup Corporation ("Fort Howard Cup") to Sweetheart Holdings Inc.
("Sweetheart"), a new company formed on behalf of MSLEF II, the Company and
certain executive officers of Sweetheart and other investors (the "Cup
Transfer"). As a result of the Cup Transfer, the Company received $232.25
million in cash, certain promissory notes and a debenture of Sweetheart in the
total principal amount of $300 million, Class B Common Stock of Sweetheart
representing 49.9% of the shares of common stock of Sweetheart then outstanding,
with a then current fair value of $87.4 million, and certain other adjustments.
The total value of the cash and other assets received by the Company as a result
of the Cup Transfer was approximately $620 million. Subsequent to the closing of
the Cup Transfer, the promissory notes and the debenture were paid. The business
transferred to Sweetheart constituted all the Company's U.S. and Canadian
disposable foodservice operations. In addition, on December 29, 1989, the
Company sold its Pacific Basin cup business for $10.7 million and on December
30, 1991, the Company sold its European disposable foodservice operations for a
net selling price of $49 million to complete a program to divest its remaining
international cup operations (such program referred to as the "Cup Sales").
As a result of the completion of the Cup Sales in December 1991 and the
continued recognition of equity in the net losses of Sweetheart in 1991, the
Company's investments in unconsolidated subsidiaries were reduced to zero at
December 31, 1991. The Company is not aware of any material contingent
liabilities with respect to the investments and, accordingly, discontinued the
recording of equity in the net losses of Sweetheart when the investments had
been reduced to zero.
F-8
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
3. INVENTORIES
Inventories are summarized as follows:
<TABLE> <CAPTION>
DECEMBER 31,
----------------------------
1992 1991
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Components:
Raw materials and supplies................................ $ 53,872 $ 48,236
Finished and partly-finished products..................... 47,103 46,812
------------- -------------
$ 100,975 $ 95,048
------------- -------------
------------- -------------
Valued at lower of cost or market:
First-in, first-out (FIFO)................................ $ 82,805 $ 78,343
Average cost by specific lot.............................. 18,170 16,705
------------- -------------
$ 100,975 $ 95,048
------------- -------------
------------- -------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
The Company's major classes of property, plant and equipment are:
<TABLE> <CAPTION>
DECEMBER 31,
----------------------------
1992 1991
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 44,631 $ 42,732
Buildings................................................... 294,768 263,481
Machinery and equipment..................................... 1,212,136 1,091,313
Construction in progress.................................... 143,411 90,367
------------- -------------
$ 1,694,946 $ 1,487,893
------------- -------------
------------- -------------
</TABLE>
Included in the property, plant and equipment totals above are assets under
capital leases, as follows:
<TABLE> <CAPTION>
DECEMBER 31,
----------------------------
1992 1991
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Buildings................................................... $ 3,998 $ 1,819
Machinery and equipment..................................... 179,487 178,511
------------- -------------
Total assets under capital leases................... $ 183,485 $ 180,330
------------- -------------
------------- -------------
</TABLE>
F-9
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
5. OTHER ASSETS
The components of other assets are as follows:
<TABLE> <CAPTION>
DECEMBER 31,
----------------------------
1992 1991
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Deferred loan costs, net of accumulated
amortization.............................................. $ 70,983 $ 83,068
Funds held by trustee for plant additions................... 903 3,904
Prepayments and other....................................... 7,183 3,325
------------- -------------
$ 79,069 $ 90,297
------------- -------------
------------- -------------
</TABLE>
Amortization of deferred loan costs for the years ended December 31, 1992,
1991 and 1990, totaled $14,910,000, $14,883,000, and $19,465,000, respectively.
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. Both transactions are
described in Note 8.
6. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows:
<TABLE> <CAPTION>
DECEMBER 31,
----------------------------
1992 1991
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Salaries and wages.......................................... $ 35,939 $ 38,233
Contributions to employee benefit plans..................... 11,858 12,229
Taxes other than income taxes............................... 2,536 4,147
Other accrued expenses...................................... 13,949 11,635
------------- -------------
$ 64,282 $ 66,244
------------- -------------
------------- -------------
</TABLE>
F-10
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
7. INCOME TAXES
The income tax provision (credit) includes the following components:
<TABLE> <CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1992 1991 1990
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal........................................... $ 16,990 $ 18,195 $ (23,109)
State............................................. 411 551 (683)
Foreign........................................... -- 5,237 6,643
---------- ---------- ----------
Total current................................ 17,401 23,983 (17,149)
Deferred
Federal........................................... (20,167) (43,275) (15,707)
State............................................. (2,380) (4,231) (3,909)
Foreign........................................... 4,748 (440) (180)
---------- ---------- ----------
Total deferred............................... (17,799) (47,946) (19,796)
---------- ---------- ----------
$ (398) $ (23,963) $ (36,945)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The net deferred income tax liability at December 31, 1992, includes $232
million related to property, plant and equipment. All other components of the
gross deferred income tax assets and gross deferred income tax liabilities are
individually not significant. The Company has not recorded a valuation allowance
with respect to any deferred income tax asset.
The effective tax rate varied from the U.S. federal tax rate as a result of
the following:
<TABLE> <CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1992 1991 1990
--------- --------- ---------
<S> <C> <C> <C>
U.S. federal tax rate........................................ (34.0)% (34.0)% (34.0)%
Amortization of intangibles.................................. 27.6 19.6 16.1
Interest on long-term income taxes........................... 5.7 4.1 --
State income taxes net of U.S. tax benefit................... (3.0) (3.9) (3.6)
Net operating loss carryback benefit in excess of statutory
rate....................................................... -- -- (2.9)
Equity in net loss of Sweetheart............................. -- (10.9) (6.9)
Other, net................................................... 3.1 0.6 0.4
--------- --------- ---------
Effective tax rate........................................... (0.6)% (24.5)% (30.9)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
In connection with its examination of the Company's tax returns, the
Internal Revenue Service ("IRS") has issued a statutory notice of deficiency for
additional income tax for the 1988 tax year. The Company has filed a petition in
the U.S. Tax Court opposing substantially all of the claimed deficiency. The
1988 notice of deficiency includes the disallowance of deductions for fees and
expenses related to the Acquisition in 1988 and for fees and expenses related to
1988 debt financing and refinancing transactions. Some of these fees and
expenses were deducted in 1988 and the remainder are being deducted in
subsequent years over the terms of the 1988 long-term debt financing and
refinancing. If the IRS were successful in disallowing all amounts deducted by
the Company on account of such fees and
F-11
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
7. INCOME TAXES--(CONTINUED)
expenses, the Company estimates the potential amount of additional taxes due the
IRS for the period 1988 through 1992 would be approximately $50 million and for
the periods after 1992 (assuming current statutory tax rates) would be
approximately $22 million, in each case exclusive of IRS interest charges. The
grounds for disallowance asserted by the IRS are Internal Revenue Code ("IRC")
Section 162(k) (which was enacted in 1986 and which denies deductions for
otherwise deductible amounts paid or incurred in connection with stock
redemptions), and alternatively, that the fees and expenses at issue are not
deductible under any provision of the IRC. Trial of the Company's case before
the U.S. Tax Court is scheduled for fall 1993. 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.
F-12
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
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>
FAIR VALUE CARRYING AMOUNT
AT DECEMBER 31, AT DECEMBER 31,
---------------- ----------------------------
1992 1992 1991
---------------- ------------- -------------
<S> <C> <C> <C>
Term Loan, at prime plus 1.25% or, subject to certain limitations,
at a reserve adjusted Eurodollar rate plus 2.0% subject to
downward adjustment if certain financial criteria are met (at a
weighted average rate of 7.71% at December 31, 1992), due in
varying annual repayments with a final maturity of December 31,
1996............................................................ $ 547,000 $ 581,753 $ 581,753
Revolving Credit Facility, at prime plus 1.25% or, subject to
certain limitations, at a reserve adjusted Eurodollar rate plus
2.0% subject to downward adjustment if certain financial
criteria are met, due December 31, 1996......................... 203,000 216,000 75,000
Senior Secured Notes, at three month LIBOR plus 2.75% to 3.50%
(6.44% to 7.19% at December 31, 1992), due in varying amounts
between 1996 and 2000........................................... 285,000 300,000 300,000
Senior Subordinated Notes, 12 3/8%, due November 1, 1997.......... 405,000 383,910 383,910
Subordinated Debentures, 12 5/8%, due November 1, 2000............ 405,000 383,910 383,910
Junior Subordinated Discount Debentures, 14 1/8%, due November 1,
2004, $568 million face value................................... 465,000 441,606 386,217
Junior Subordinated Debentures, 14 5/8%, due November 1, 2004..... 533,000 517,846 449,759
7.0% Notes retired February 1992.................................. -- -- 146,352
Capital lease obligations, at interest rates approximating
10.9%........................................................... 191,000 186,082 183,207
Pollution Control Revenue Refunding Bonds, at 7.90%, due October
1, 2005......................................................... 44,000 42,000 44,000
Debt of foreign subsidiaries, at rates ranging from 8.60% to
9.44%, due in varying annual installments through March 2001.... 38,000 37,667 --
---------------- ------------- -------------
$ 3,116,000 3,090,774 2,934,108
----------------
----------------
Less: Current portion of long-term debt........................... 137,747 4,519
------------- -------------
$ 2,953,027 $ 2,929,589
------------- -------------
------------- -------------
</TABLE>
The fair values of the Term Loan, Revolving Credit Facility and Senior
Secured Notes are estimated based on secondary market transactions in such
securities. Fair values for the Senior Subordinated Notes, Subordinated
Debentures, Junior Subordinated Discount Debentures (the "14 1/8% Debentures"),
Junior Subordinated Debentures (the "14 5/8% 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
F-13
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
8. LONG-TERM DEBT--(CONTINUED)
debt of foreign subsidiaries is deemed to approximate its carrying amount
because the debt was issued in 1992.
The 14 1/8% Debentures bear no interest payment obligations until November
1, 1994, and were issued at a discount to yield a 14 1/8% effective annual rate.
Interest on the 14 5/8% Debentures is payable in cash or, at the option of the
Company, in additional 14 5/8% Debentures until November 1, 1994. For the years
ended December 31, 1992, 1991, and 1990, interest related to both debentures was
added to the balance due.
Effective March 2, 1992, the Company redeemed its $44 million, variable
interest rate, Development Authority of Effingham County Pollution Control
Revenue Refunding Bonds, Series 1988 (the "Bonds") and terminated a related
$44.9 million support letter of credit. Funds for the redemption were provided
from $2 million of unexpended funds held in escrow and the issuance of $42
million principal amount of Bonds bearing interest at a fixed rate of 7.90% and
maturing October 1, 2005.
In 1991, Fort Sterling entered into a credit agreement with a major bank in
the United Kingdom 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 $8 million) revolving credit facility
due March 1996. In 1992, Fort Sterling entered into a second credit agreement
with the same bank to finance the acquisition of Stuart Edgar. This facility
consists of a 4.25 million pound sterling (approximately $7 million) term loan
due December 1997 and an 8.5 million pound sterling (approximately $13 million)
term loan due December 1997. 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.
On November 9, 1990, the Bank Credit Agreement was amended (the "1990
Amendment") to permit the Company, among other things, to utilize up to $250
million from the issuance of additional shares of its Common Stock from time to
time to make voluntary prepayments, redemptions or purchases of its outstanding
subordinated debt securities. In addition, the 1990 Amendment permits the
Company, following completion of the 1991 sale and leaseback of certain
machinery and equipment at the Company's Savannah River mill and the issuance of
$300 million of Senior Secured Notes, to make voluntary prepayments, redemptions
or purchases, in an aggregate amount of up to $125 million, of outstanding 14
5/8% Debentures and 14 1/8% Debentures. The 1990 Amendment also permits the
Company to make in any year voluntary cash prepayments, redemptions or purchases
of outstanding 14 5/8% Debentures and 14 1/8% Debentures in an aggregate amount
(not to exceed, in any event, $10 million per annum) of up to 50% of the amount
by which the Company's actual GAAP Consolidated EBDIT (as defined in the Bank
Credit Agreement (which definition includes an add back for amortization of
goodwill and other non-cash charges)) for the year ended on the most recent
December 31 exceeds the Projected GAAP Consolidated EBDIT (as defined in the
Bank Credit Agreement) for such year. With respect to the year ended December
31, 1990, the Company's actual GAAP Consolidated EBDIT exceeded the Company's
Projected GAAP Consolidated EBDIT, thereby permitting the Company to pay up to
$8.2 million to purchase 14 5/8% Debentures and 14 1/8% Debentures.
On September 11, 1991, the Company completed a private placement of $300
million of Senior Secured Notes with maturities between the years 1996 and 2000.
The Senior Secured Notes bear interest at rates varying with the current three
month LIBOR rate, plus 2.75% to 3.50% depending on the date of maturity of each
Senior Secured Note. The covenants and events of default of the Senior
Secured Note Agreement are substantially similar to those contained in the
Company's Bank Credit
F-14
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
8. LONG-TERM DEBT--(CONTINUED)
Agreement. The Senior Secured Notes rank equally in right of payment with
indebtedness under the Bank Credit Agreement and are senior to all existing
and future subordinated indebtedness. Proceeds from the Senior Secured Notes
were used to repay a portion of the Term Loan.
During 1991, the Company repurchased $88.5 million aggregate principal
amount at maturity of its 14 5/8% Debentures and $258.7 million aggregate
principal amount at maturity of its 14 1/8% Debentures in privately negotiated
transactions. The repurchases were funded from the proceeds of the Company's
private placement of Common Stock and from borrowings under the Company's
Revolving Credit Facility. At December 31, 1992, the Company may utilize up to
$39.0 million to make additional repurchases under the terms of the 1990
Amendment. The loss on the debt repurchases, including the write-off of
unamortized deferred loan costs, is reported as an extraordinary loss of $5.0
million (net of income tax credits of $3.1 million) for the year ended December
31, 1991.
The Company's Bank Credit Agreement and the Senior Secured Note Agreement
require the Company 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 an interest rate swap agreement which
limits the interest cost to the Company to 11.43% (including the Company's
borrowing margin on Eurodollar rate loans) until November 30, 1993, with respect
to $225 million and is a party to an interest rate cap agreement which limits
the interest cost to the Company to 11.00% (including the Company's borrowing
margin on Eurodollar rate loans) until September 4, 1993, with respect to an
additional $225 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 the $300 million received
through the issuance of the Senior Secured Notes. At current market rates at
December 31, 1992, the fair value of the Company's interest rate cap agreements
is zero. The fair value of the interest rate swap agreement at December 31,
1992, is the amount the Company would pay to terminate the agreement of
approximately $11 million. Because current market interest rates are
substantially lower than the rates in the Company's interest rate cap and swap
agreements, nonperformance by the other parties to the interest rate cap and
swap agreements would not result in a material loss to the Company.
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, Senior Secured Notes,
subordinated debt securities and foreign credit agreements: (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 net worth plus subordinated debt and earnings before non-cash
charges, interest and taxes to cash interest be maintained at prescribed levels;
(3) restrict the ability of the Company to make fundamental changes and to enter
into new lines of business, the pledging of the Company's assets and guarantees
of indebtedness of others; and (4) limit dispositions of assets, the ability of
the Company to enter lease and sale and leaseback transactions, and investments
which might be made by the Company. The Company believes such limitations
should not impair its plans for expansion, continued modernization of
facilities or other operating activities.
F-15
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
8. LONG-TERM DEBT--(CONTINUED)
At December 31, 1992, receivables totaling $101 million, inventories
totaling $101 million and property, plant and equipment with a net book value of
$1,069 million were pledged as collateral under the terms of the Bank Credit
Agreement, the Senior Secured Notes, 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, 1992, $216 million of borrowings reduced available capacity under
the Revolving Credit Facility to $134 million.
The aggregate annual maturities of long-term debt and capital lease
obligations at December 31, 1992, are as follows (in thousands):
1993............................................... $ 137,747
1994............................................... 150,908
1995............................................... 153,090
1996............................................... 391,654
1997............................................... 489,136
1998 and thereafter................................ 1,768,239
-------------
$ 3,090,774
-------------
-------------
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, 1992, are as
follows (in thousands):
YEAR ENDING
DECEMBER 31 AMOUNT
- ----------------------------------------------------- -----------
1993................................................. $ 21,026
1994................................................. 21,217
1995................................................. 23,459
1996................................................. 24,568
1997................................................. 24,568
1998 and thereafter.................................. 406,850
-----------
Total payments....................................... 521,688
Less imputed interest at rates approximating 10.9%... 335,606
-----------
Present value of capital lease obligations........... $ 186,082
-----------
-----------
F-16
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
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 for 1992 by $1.2 million.
Net periodic postretirement benefit cost for 1992 included the following
components (in thousands):
Service cost............................................ $ 902
Interest cost........................................... 1,366
---------
Net periodic postretirement benefit cost......... $ 2,268
---------
---------
The following table sets forth the components of the plan's unfunded
accumulated postretirement benefit obligation (in thousands):
<TABLE> <CAPTION>
DECEMBER 31,
--------------------
1992 1991
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................ $ 6,632 $ 5,627
Fully eligible active plan participants............................. 2,890 2,162
Other active plan participants...................................... 13,558 9,287
--------- ---------
23,080 17,076
Unrecognized actuarial losses......................................... (4,800) --
--------- ---------
Accrued postretirement benefit cost................................... $ 18,280 $ 17,076
--------- ---------
--------- ---------
</TABLE>
The medical trend rate assumed in the determination of the accumulated
postretirement benefit obligation begins at 14% in 1993, decreases 1% per year
to 7% 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, 1992 by $2.4
million and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost by $0.4 million.
The discount rate used in determining the accumulated postretirement
benefit obligation was 8% compounded annually.
11. SHAREHOLDERS' EQUITY (DEFICIT)
The Company is authorized to issue up to 8,400,000 shares of $.01 par value
Voting Common Stock. At both December 31, 1992 and 1991, 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, 1992 and 1991.
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
F-17
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
11. SHAREHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
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.
Changes in the Company's shareholders' equity (deficit) accounts for the
years ended December 31, 1992, 1991 and 1990, are as follows:
<TABLE> <CAPTION>
VOTING CUMULATIVE RETAINED TREASURY
COMMON NON-VOTING TRANSLATION EARNINGS STOCK, AT
STOCK COMMON STOCK ADJUSTMENT (DEFICIT) COST
----------- ------------- ------------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1989............................. $ 436 $ 3 $ 2 $ (328) $ (1)
Net loss............................................... -- -- -- (106) --
Issuance of Voting Common Stock with put right from
treasury............................................. (1) -- -- -- 1
Amortization of the decrease in fair market value of
Voting Common Stock with put right................... -- -- -- 2 --
Foreign currency translation adjustment................ -- -- 6 -- --
----------- ------ ------ ----------- -----------
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) $ --
----------- ------ ------ ----------- -----------
----------- ------ ------ ----------- -----------
</TABLE>
The aggregate par value of the Voting Common Stock reported in the amounts
above at December 31, 1992 was $58,627.
12. VOTING COMMON STOCK WITH PUT RIGHT
Pursuant to an Amended and Restated Management Equity Participation
Agreement (the "Management Equity Participation Agreement"), members of the
Company's senior management acquired 121,487 shares of the Company's $.01 par
value Voting Common Stock on October 24, 1988 at a price of $100 per share. On
June 27, 1990, certain management investors of the Company purchased 6,496
shares of Voting Common Stock for $135 per share under the terms of the
Management Equity Participation Agreement. Effective as of April 29, 1991, the
Board of Directors adopted the Fort
F-18
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
12. VOTING COMMON STOCK WITH PUT RIGHT--(CONTINUED)
Howard Corporation Management Equity Plan (the "Management Equity Plan"). The
Management Equity Plan provides for the offer of Voting Common Stock and the
grant of options to purchase Voting Common Stock to officers and certain other
key employees of the Company. Officers or other key employees of the Company who
purchase shares of Voting Common Stock or are granted options pursuant to the
Management Equity Plan are required to enter into a Management Equity Plan
Agreement with the Company and to become bound by the terms of the Company's
stockholders' agreement. On April 30, 1991, certain management investors and
certain other key employees of the Company purchased 6,200 shares of Voting
Common Stock for $120 per share pursuant to the Management Equity Plan. The
shares acquired by management investors in 1988, 1990, and 1991, including
shares acquired in 1988 and 1990 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.
Changes in the Company's Voting Common Stock with put right, are as follows
(in thousands, except number of shares):
<TABLE> <CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1992 1991 1990
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year......................................... $ 12,963 $ 9,574 $ 11,335
Issuance of 6,200 shares including 4,934 shares from treasury...... -- 744 --
Issuance of 6,496 shares from treasury, net of expenses............ -- -- 714
Amortization of the increase (decrease) in fair market value and
increased vested portion of Putable Shares....................... 256 2,645 (2,475)
--------- --------- ---------
Balance, end of year............................................... $ 13,219 $ 12,963 $ 9,574
--------- --------- ---------
--------- --------- ---------
</TABLE>
13. STOCK OPTIONS
On December 19, 1988, the Board of Directors adopted the 1988 Incentive
Stock Plan (the "1988 Plan") reserving 808,225 shares of Voting Common Stock for
sale or award to officers and key employees as stock options, stock purchase
agreements, stock awards, stock appreciation rights and stock equivalents.
Options must be exercised within ten years of the date of grant. All options and
shares to be issued under the terms of the 1988 Plan 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.
F-19
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
13. STOCK OPTIONS--(CONTINUED)
In February 1991, all outstanding options to purchase shares under the 1988
Plan and the Management Equity Participation Agreement were amended to change
the vesting schedule for the outstanding options from a three to seven-year
vesting period to a vesting schedule of twenty percent per year, measured from
the date of initial grant. The exercisability of such options is subject to
certain conditions. At the same time, options granted to senior management and
other key employees on June 27, 1990 (which had an exercise price of $135 per
share), were canceled and such senior management and other key employees were
granted an identical number of new options with an exercise price of $120 per
share. The new options are subject to the same vesting schedule and exercise
restrictions adopted by the February 1991 amendments to the Management Equity
Participation Agreement.
The Management Equity Plan superseded the 1988 Plan. As a result, the terms
and conditions of options to purchase Voting Common Stock granted in December
1988 pursuant to the 1988 Plan are now governed by the Management Equity Plan.
Such terms and conditions are substantially similar to those applicable to such
options under the 1988 Plan.
Options granted pursuant to the Management Equity Plan will 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 and must be
exercised within 10 years of the date of grant. The exercisability of such
options is subject to certain conditions.
Changes in stock options outstanding are summarized as follows:
<TABLE> <CAPTION>
NUMBER OF EXERCISE PRICE
OPTIONS PER OPTION
----------- --------------
<S> <C> <C>
Balance, December 31, 1989...................................... 429,202 $ 100
Options Granted............................................... 53,460 135
----------- --------------
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
----------- --------------
----------- --------------
Exercisable at December 31, 1992................................ 269,025 $ 100 to 120
----------- --------------
----------- --------------
</TABLE>
The shares available for future grant are 233,223 at December 31, 1992. The
change in fair market value of the shares under option is amortized over the
period the options vest. The changes in the fair market value and vesting period
resulted in charges to operations of $1,120,000, $1,256,000 and $1,812,000 in
1992, 1991 and 1990, respectively.
F-20
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
14. RELATED PARTY TRANSACTIONS
Morgan Stanley Group Inc. ("Morgan Stanley Group") and an affiliate
acquired a substantial majority equity interest in the Company on August 9, 1988
to effect the Acquisition. At December 31, 1992, Morgan Stanley Group and its
affiliates controlled 57% (on a fully diluted basis) of the Company's Voting
Common Stock.
On the date of the Cup Transfer, the Sweetheart Class B Common Stock owned
by the Company constituted 49.9% of the shares of Sweetheart common stock then
outstanding, and the Class A Common Stock owned by MSLEF II, Morgan Stanley
Group and certain executive officers of Sweetheart and other investors
constituted 22.4%, 14% and 13.7%, respectively, of the shares of Sweetheart
common stock outstanding.
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. $1,096,000,
$1,064,000 and $1,272,000 for these and other miscellaneous services in 1992,
1991 and 1990, respectively. In 1992, MS&Co. received approximately $0.7 million
related to the underwriting of the reissuance of the Company's Development
Authority of Effingham County Pollution Control Revenue Refunding Bonds, Series
1988. In connection with a 1991 sale and leaseback transaction, MS&Co. received
approximately $2.9 million of advisory and underwriting fees. In addition, with
regard to a 1989 sale and leaseback transaction, MS&Co. received approximately
$2.3 million of advisory fees. In connection with the 1991 Senior Secured Note
offering, MS&Co. received approximately $6.8 million of advisory fees.
For the year ended December 31, 1990, the Company recorded management
service fee income of approximately $1,023,000 related to support services
performed for Sweetheart and interest income of approximately $27,021,000
related to promissory notes and a debenture of Sweetheart held by the Company.
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 repurchases of the
Company's subordinated debt securities as described in Note 8, $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 1991, the Company commenced an expansion of its Green Bay, Wisconsin
tissue mill. The expansion includes a new paper machine, as well as related
environmental protection, pulp processing, converting and steam generation
equipment. The new paper machine commenced production on August 31, 1992. The
Company expects to complete the expansion in early 1993 at an estimated cost of
$180 million. Total expenditures on the expansion through December 31, 1992 were
approximately $172 million.
F-21
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company also commenced an expansion of its United Kingdom tissue mill
in 1991. The expansion includes a new paper machine, as well as related
environmental protection, pulp processing and converting equipment. The new
paper machine commenced production on February 7, 1993. The Company expects to
complete the expansion at an estimated cost of $100 million. Expenditures
through December 31, 1992 totaled approximately $84 million.
In 1992, the Company commenced the installation of a fifth paper machine,
environmental protection equipment and associated facilities at its Muskogee
tissue mill. The expansion is planned for completion in 1994 at an estimated
cost of $160 million. Total expenditures on the expansion through December 31,
1992 were approximately $12 million.
The Company's manufacturing operations are subject to regulation by various
federal, state and local authorities concerned with environmental control. The
Company has made significant capital expenditures in the past to comply with
environmental regulations. Environmental legislation and regulations are
expected to become increasingly stringent and to require additional capital
expenditures.
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. The Company expects to conclude the remedial
investigation during 1993. Based upon the results of the remedial investigation
through the end of 1992, 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. Other than
for the Green Bay landfill site, the Company is not presently named as a
potentially responsible party at any other sites; however, there can be no
certainty that the Company will not be named as a potentially responsible party
at any other sites in the future or that the costs associated with those sites
would not be material.
The Company and its subsidiaries are parties to lawsuits and state and
federal administrative proceedings incidental to their businesses. Although the
final results in such suits and proceedings cannot be predicted with certainty,
it is the present opinion of management that they will not have a material
adverse effect on the Company's financial condition.
F-22
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
16. GEOGRAPHIC INFORMATION
A summary of the Company's operations by geographic area as of December 31,
1992, 1991 and 1990, and for the years then ended is presented below (in
thousands):
<TABLE> <CAPTION>
UNITED
UNITED STATES KINGDOM CONSOLIDATED
------------- ----------- -------------
<S> <C> <C> <C>
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
1990
Net sales....................................... $ 1,037,340 $ 113,833 $ 1,151,173
Operating income................................ 254,647 15,777 270,424
Identifiable operating assets................... 3,547,511 79,530 3,627,041
</TABLE>
Intercompany sales and charges between geographic areas and export sales
are not material.
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.
F-23
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of the quarterly results of operations for 1992 and 1991 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>
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.......................................... -- -- -- -- --
1991
Net sales.................................................... $ 273 $ 293 $ 299 $ 273 $ 1,138
Operating income............................................. 61 72 75 62 270
Net loss before extraordinary item........................... (31) (19) (20) (36) (106)
Extraordinary item--gain (loss) on debt repurchases.......... 4 -- (5) (4) (5)
Net loss..................................................... (27) (19) (25) (40) (111)
Loss per share:
Net loss before extraordinary item........................ (6.61) (3.58) (3.55) (6.12) (19.67)
Extraordinary item--gain (loss) on debt repurchases.......... .81 (.04) (.87) (.64) (.94)
Loss per share............................................... (5.80) (3.62) (4.42) (6.76) (20.61)
Dividends per share.......................................... -- -- -- -- --
</TABLE>
F-24
<PAGE>
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE> <CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
---------------------------
1993 1992
-------------- -----------
<S> <C> <C>
Net sales............................................................................ $ 895,768 $ 865,642
Cost of sales........................................................................ 590,147 535,130
-------------- -----------
Gross income......................................................................... 305,621 330,512
Selling, general and administrative.................................................. 70,707 74,610
Amortization of goodwill............................................................. 42,576 42,494
Goodwill write-off................................................................... 1,980,427 --
-------------- -----------
Operating income (loss).............................................................. (1,788,089) 213,408
Interest expense..................................................................... 259,157 248,693
Other income, net.................................................................... (5,475) (378)
-------------- -----------
Loss before taxes.................................................................... (2,041,771) (34,907)
Income taxes (credit)................................................................ (5,483) 6,491
-------------- -----------
Net loss before extraordinary item and adjustment for
accounting change.................................................................. (2,036,288) (41,398)
Extraordinary item--loss on debt repurchases (net of income taxes)................... (9,760) --
Adjustment for adoption of SFAS 106.................................................. -- (10,587)
-------------- -----------
Net loss............................................................................. $ (2,046,048) $ (51,985)
-------------- -----------
-------------- -----------
Loss per share:
Net loss before extraordinary item and adjustment for
accounting change............................................................... $ (347.33) $ (7.06)
Extraordinary item................................................................. (1.67) --
Adjustment for adoption of SFAS 106................................................ -- (1.81)
-------------- -----------
Net loss............................................................................. $ (349.00) $ (8.87)
-------------- -----------
-------------- -----------
Average shares outstanding........................................................... 5,863 5,863
-------------- -----------
-------------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-25
<PAGE>
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE> <CAPTION>
SEPTEMBER 30, DECEMBER 31,
1993 1992
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 764 $ 188
Receivables, less allowance...................................................... 123,289 103,491
Inventories...................................................................... 104,088 100,975
Deferred income taxes............................................................ 10,000 10,000
Income taxes receivable.......................................................... 2,500 --
------------- -------------
Total current assets........................................................ 240,641 214,654
Property, plant and equipment...................................................... 1,798,241 1,694,946
Less: Accumulated depreciation................................................... 498,978 437,518
------------- -------------
Net property, plant and equipment........................................... 1,299,263 1,257,428
Goodwill, net of accumulated amortization.......................................... -- 2,023,416
Other assets....................................................................... 79,145 79,069
------------- -------------
Total assets................................................................ $ 1,619,049 $ 3,574,567
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................. $ 89,934 $ 104,405
Interest payable................................................................. 62,196 33,057
Income taxes payable............................................................. 2,869 1,792
Other current liabilities........................................................ 65,841 64,282
Current portion of long-term debt................................................ 5,446 137,747
------------- -------------
Total current liabilities................................................... 226,286 341,283
Long-term debt..................................................................... 3,179,475 2,953,027
Deferred and other long-term income taxes.......................................... 249,265 259,625
Other liabilities.................................................................. 26,544 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................................................ (4,541) (3,915)
Retained earnings (deficit)...................................................... (2,670,259) (625,610)
------------- -------------
Total shareholders' equity (deficit)........................................ (2,074,341) (29,060)
------------- -------------
Total liabilities and shareholders' equity (deficit)........................ $ 1,619,049 $ 3,574,567
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-26
<PAGE>
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE> <CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1993 1992
-------------- ------------
<S> <C> <C>
Cash provided from (used for) operations:
Net loss.......................................................................... $ (2,046,048) $ (51,985)
Depreciation and amortization..................................................... 105,469 100,598
Goodwill write-off................................................................ 1,980,427 --
Employee stock compensation....................................................... (7,832) 827
Non-cash interest expense......................................................... 80,109 102,166
Deferred income tax credit........................................................ (12,360) (6,860)
Pre-tax loss on debt repurchases.................................................. 15,742 --
Pre-tax adjustment for adoption of SFAS 106....................................... -- 17,076
Increase in receivables........................................................... (19,798) (21,953)
Decrease (increase) in inventories................................................ (3,113) 214
Increase in income taxes receivable............................................... (2,500) --
Increase (decrease) in accounts payable........................................... (14,471) 8,868
Increase in interest payable...................................................... 29,139 22,256
Increase (decrease) in income taxes payable....................................... 1,077 (223)
All other, net.................................................................... 8,577 213
-------------- ------------
Net cash provided from operations............................................ 114,418 171,197
Cash used for investment activities:
Additions to property, plant and equipment........................................ (107,384) (167,745)
Acquisition of Stuart Edgar Limited, net of acquired cash of $749................. -- (7,829)
-------------- ------------
Net cash used for investment activities...................................... (107,384) (175,574)
Cash provided from (used for) financing activities:
Proceeds from long-term borrowings................................................ 858,090 166,709
Repayment of long-term borrowings................................................. (833,565) (170,047)
Debt issuance costs............................................................... (30,983) --
-------------- ------------
Net cash used for financing activities....................................... (6,458) (3,338)
-------------- ------------
Increase (decrease) in cash......................................................... 576 (7,715)
Cash at beginning of period......................................................... 188 9,597
-------------- ------------
Cash at end of period........................................................ $ 764 $ 1,882
-------------- ------------
-------------- ------------
Supplemental Cash Flow Disclosures:
Interest paid..................................................................... $ 155,504 $ 132,042
Income taxes paid (refunded)--net................................................. (2,716) 6,113
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-27
<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 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 1992 and the Company's
quarterly reports on Form 10-Q for the quarters ended March 31, 1993 and June
30, 1993.
On September 4, 1992, Fort Sterling Limited, 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 condensed consolidated financial statements
commencing September 4, 1992.
2. LOSS PER SHARE
Loss per share is computed on the basis of the average number of common
shares outstanding during the periods. The average number of shares outstanding
for the nine month period ended September 30, 1993 was 5,862,641. The average
number of shares outstanding for the nine month period ended September 30, 1992
was 5,862,685.
3. INVENTORIES
Inventories consist of:
<TABLE> <CAPTION>
SEPTEMBER 30, DECEMBER 31,
1993 1992
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies.................................... $ 55,666 $ 53,872
Finished and partly-finished products......................... 48,422 47,103
------------- -------------
$ 104,088 $ 100,975
------------- -------------
------------- -------------
</TABLE>
4. GOODWILL
Changes in the Company's goodwill are summarized as follows:
<TABLE>
<S> <C>
Balance, December 31, 1992................................................... $ 2,023,416
Amortization of goodwill..................................................... (42,576)
Effects of foreign currency translation...................................... (413)
Goodwill write-off........................................................... (1,980,427)
--------------
Balance, September 30, 1993.................................................. $ --
--------------
--------------
</TABLE>
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 has revised
its projections and has determined that its projected results would not support
the future
F-28
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. GOODWILL--(CONTINUED)
amortization of the Company's remaining goodwill balance of approximately $1,980
million 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 approximates 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 $1,980 million in the third quarter of 1993.
The Company's forecast assumes that sales volume increases will 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 is 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 ten-year historical
trends and management's estimates of future performance. Through the year 2001,
the Company's projections indicate that interest expense will exceed operating
income, which is determined after deducting annual depreciation expense.
However, operating income before depreciation is adequate to cover 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% Notes, the 12 5/8% Debentures and 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 believes
that the projected future results based on these assumptions are the most likely
scenario given the Company's high leverage and adverse tissue industry operating
conditions.
5. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
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.
6. LONG-TERM DEBT
On March 22, 1993, the Company sold $450 million principal amount of 9 1/4%
Senior Notes due 2001 and $300 million principal amount of 10% Subordinated
Notes due 2003 in a registered public offering. On April 21, 1993, the Company
borrowed $100 million pursuant to a new bank term loan agreement (the "1993 Term
Loan"). Proceeds from the sale of the 9 1/4% Senior Notes and the 10%
Subordinated Notes and from the 1993 Term Loan were applied to the prepayment of
$250 million of the term loan indebtedness under the Company's Bank Credit
Agreement, 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% Senior 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
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FORT HOWARD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
6. LONG-TERM DEBT--(CONTINUED)
subordinated indebtedness of the Company. The 10% Subordinated 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% Senior Notes and the 10%
Subordinated Notes and the borrowing under the 1993 Term Loan, the Company has
amended its Bank Credit Agreement. Among other changes, the amendment reduces
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% Senior Notes and 10% Subordinated Notes and subsequent
repurchases of 14 5/8% Debentures.
As a result of the repayment of the $250 million of term loan indebtedness
under the Company's Bank Credit Agreement and the repurchases of all the
Company's 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.
At September 30, 1993, the available capacity under the Revolving Credit
Facility was $176 million.
On October 1, 1993, the Company called $50 million of its 12 3/8% Notes for
redemption at the 105% call price on November 1, 1993, the first date that such
notes are redeemable. The redemption is being funded principally from excess
funds from the sale of $750 million of notes in March of 1993. In connection
with the redemption, the Company will incur an extraordinary loss in the fourth
quarter of 1993 of $2 million (net of income taxes), representing the call
premium and unamortized deferred loan costs.
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 its senior secured credit agreements because interest on the
Company's 14 1/8% Debentures will become cash pay on November 1, 1994. 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.
7. EMPLOYEE BENEFIT PLANS
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. The cumulative effect on years prior to 1992 of
adopting SFAS No. 106 is stated separately in the Company's condensed
consolidated statement of income for the nine month period ended September 30,
1992 as a one-time after-tax charge of $11 million.
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FORT HOWARD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
8. VOTING COMMON STOCK WITH PUT RIGHT
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 in the third
quarter of 1993. The effect of the adjustment was to reduce both the Voting
Common Stock with put right and the retained earnings (deficit) by approximately
$1 million.
9. 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, 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 a credit to
operations of $7,832,000 for the first nine months of 1993. Employee stock
compensation expense was $827,000 for the first nine months of 1992.
10. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to lawsuits and state and
federal administrative proceedings incidental to their businesses. Although the
final results in such suits and proceedings cannot be predicted with certainty,
it is the present opinion of management that they will not have a material
adverse effect on the Company's financial condition.
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["Fort Howard Corporation" logo]
