Filed Pursuant to Rule
424(b)(3) of the Rules and
Regulations Under the
Securities Act of 1933
Registration Statement Nos.
33-23826, 33-43448, 33-51876
and 33-51557
PROSPECTUS SUPPLEMENT
(To Prospectus dated July 6, 1994)
FORT HOWARD CORPORATION
12-5/8% Subordinated Debentures Due 2000
14-1/8% Junior Subordinated Discount Debentures Due 2004
9-1/4% Senior Notes Due 2001
10% Subordinated Notes Due 2003
8-1/4% Senior Notes Due 2002
9% Senior Subordinated Notes Due 2006
1991 Pass Through Trust, Pass Through Certificates, Series 1991
- - - - - - - - - - - - - - -
RECENT DEVELOPMENTS
Attached hereto and incorporated by reference herein is Fort Howard
Corporation's Current Report on Form 8-K which contains Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations and the audited consolidated financial statements and notes thereto
for Fort Howard Corporation for the year ended December 31, 1994.
- - - - - - - - - - - - - - -
This Prospectus Supplement, together with the Prospectus, is to be used
by Morgan Stanley & Co. in connection with offers and sales of the
above-referenced securities in market-making transactions at negotiated prices
related to prevailing market prices at the time of sale. Morgan Stanley & Co.
Incorporated may act as principal or agent in such transactions.
February 21, 1995 <PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 8, 1995
FORT HOWARD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-6901 39-1090992
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1919 South Broadway, Green Bay, Wisconsin 54304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 435-8821
<PAGE>
ITEM 5. OTHER EVENTS
The following Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations, Report of Independent Public
Accountants and audited consolidated financial statements and notes thereto
for the year ended December 31, 1994 for Fort Howard Corporation (the
"Company") were recently disclosed in the Company's Amendment No. 1 to Form
S-1 Registration Statement relating to a proposed offering of 22,000,000
shares of common stock, par value $.01 per share, ("Common Stock") of the
Company in an underwritten public offering (the "Offering"). The registration
statement for the Offering has not yet become effective.
The Offering is part of a recapitalization plan (the "Recapitalization")
being implemented by the Company to prepay or redeem a substantial portion of
its indebtedness in order to reduce the level and overall cost of its debt,
extend certain maturities, increase shareholders' equity and enhance its
access to capital markets.
The Recapitalization includes the following components:
(1) The offering by the Company of 22,000,000 shares of Common Stock in
the United States and internationally;
(2) Entering into a bank credit agreement (the "New Bank Credit
Agreement") consisting of a $300 million revolving credit facility (the "1995
Revolving Credit Facility"), an $840 million term loan (the "1995 Term Loan
A") and a $300 million term loan (the "1995 Term Loan B" and, together with
the 1995 Term Loan A, the "New Term Loans"); and entering into a receivables
credit agreement consisting of a $60 million term loan (the "1995 Receivables
Facility");
(3) The application of the net proceeds of the Offering, together with
borrowings under the New Term Loans and the 1995 Receivables Facility, to
prepay or redeem all of the Company's indebtedness outstanding under (a) the
Company's Amended and Restated Credit Agreement, dated as of October 24, 1988,
as amended (the "1988 Bank Credit Agreement"), (b) the Company's term loan
agreement dated as of March 22, 1993 (the "1993 Term Loan Agreement;" the
borrowings under the New Term Loans and the 1995 Receivables Facility and the
prepayment of the 1988 Bank Credit Agreement and the 1993 Term Loan Agreement
with such borrowings are collectively referred to as the "Bank Refinancing")
and (c) all outstanding Senior Secured Floating Rate Notes (the "Senior
Secured Notes") due 1997 through 2000 (the "Senior Secured Note Redemption");
and
(4) The application approximately one month following the closing of the
Offering of borrowings under the New Term Loans, the 1995 Receivables Facility
and the 1995 Revolving Credit Facility to redeem (a) all outstanding 14 1/8%
Junior Subordinated Discount Debentures (the "14 1/8% Debentures") due 2004
(the "14 1/8% Debenture Redemption") and (b) all outstanding 12 5/8%
Subordinated Debentures (the "12 5/8% Debentures") due 2000 (the "12 5/8%
Debenture Redemption"), at 102.5% of the principal amount thereof. The Senior
Secured Note Redemption, 12 5/8% Debenture Redemption and 14 1/8% Debenture
Redemption are collectively referred to as the "1995 Debt Redemptions."
Consummation of the Offering is conditioned on the concurrent
consummation of the other components of the Recapitalization (other than the
14 1/8% Debenture Redemption and the 12 5/8% Debenture Redemption) and the
provision by the Company of notices of redemption to the respective trustees
of the 14 1/8% Debentures and the 12 5/8% Debentures.
- 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Industry Conditions
Sales of the Company's tissue products are generally subject to changes
in industry capacity and cyclical changes in the economy, both of which can
significantly impact net selling prices and the Company's profitability. From
1990 through 1992, domestic tissue industry capacity additions significantly
exceeded historic capacity addition rates. At the same time, commercial
demand weakened as a result of the recession. These and other factors caused
industry operating rates and pricing to fall. The Company's average domestic
net selling prices declined by approximately 5% in each of 1991 and 1992 and
by 1.2% in 1993. Due to the impact of industry conditions on the Company's
then projected operating results, which assumed that net selling price and
cost increases would approximate 1% per year and that further capacity
expansion would not be justifiable given the Company's high leverage and
adverse tissue industry operating conditions, the Company wrote off its
remaining goodwill balance of $1.98 billion in the third quarter of 1993. Low
industry operating rates, competitive pricing and other factors continued to
adversely affect the Company's operating results in 1994. In addition, the
Company's operating results in the fourth quarter of 1994 were adversely
affected by rising wastepaper costs as discussed below.
The Company currently believes that pricing and demand in the tissue
sector of the domestic paper industry are beginning to improve. While the
Company's introduction of three price increases in the commercial market in
1993 and one in April 1994 led to a decline in commercial volume for the first
nine months of 1994 compared to the same period in 1993, the Company's
commercial volume improved slightly during the fourth quarter of 1994 compared
to the same period in 1993. The Company introduced another commercial price
increase in mid-October 1994. Because a substantial portion of the Company's
commercial sales are pursuant to contracts which generally specify pricing
over periods of three months to one year, there is a time lag before the
Company realizes the full benefit of commercial market price increases. The
Company believes that retail shelf prices in the consumer market improved
slightly in 1993 and 1994 but remained competitive. Overall domestically, the
Company realized average price increases of 5% in 1994 as compared to 1993.
Further price increases were announced for the commercial and consumer markets
effective in January 1995. Taking into account announced tissue papermaking
capacity additions and normal population growth, the Company believes that the
rate of capacity growth in 1995, 1996 and 1997 will fall short of the demand
increase, resulting in higher industry operating rates for the period.
Historically, tissue manufacturers have sought price increases during periods
of higher operating rates. Accordingly, while there can be no assurance that
pricing will continue to increase, the Company believes that in addition to
the Company's price increases announced for the commercial and consumer
markets for January 1995, further price increases are likely in 1995.
The Company's operating results are also affected by the price it pays
for wastepaper. Wastepaper is the principal raw material used in
manufacturing the Company's tissue products. Industry costs for wastepaper
and market pulp have recently begun to increase sharply. From July 1994 to
January 1995, wastepaper prices for the grades of wastepaper used in the
Company's products more than doubled. Wastepaper prices may increase further
- 3 -
because of increased demand resulting from substantial additions of de-inking
and recycling capacity in the paper industry which are expected to come on
line during 1995 and 1996, increasing market pulp prices and other factors.
Since late 1993, market pulp prices have also nearly doubled as a result of
increased demand and the Company expects such prices to continue to increase
due to worldwide tightening supply/demand conditions for market pulp.
However, the Company believes that as market pulp and wastepaper prices
increase, tissue producers will seek to increase prices to maintain
profitability.
RESULTS OF OPERATIONS
<TABLE><CAPTION>
THREE MONTHS
ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31,
-------------- -------------------------
1994 1993 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales:
Domestic tissue........................... $ 284 $ 247 $1,060 $ 1,004 $ 978
International operations.................. 35 33 131 143 143
Other..................................... 25 12 83 40 30
----- ----- ------ ------- ------
Consolidated.............................. $ 344 $ 292 $1,274 $ 1,187 $1,151
===== ===== ====== ======= ======
Operating income (loss):
Domestic tissue (a)(b)(c)................. $ 49 $ 70 $ 264 $(1,715) $ 252
International operations (a).............. 2 -- 8 (1) 17
Other (a)................................. 2 1 5 (1) 2
----- ----- ------ ------- ------
Consolidated (a)(b)(c).................... 53 71 277 (1,717) 271
Amortization of goodwill and goodwill
write-off (a)............................. -- -- -- 2,023 57
Depreciation................................ 26 26 96 89 82
Environmental charge (b).................... 20 -- 20 -- --
Employee stock compensation (c)............. -- -- -- (8) --
----- ----- ------ ------- ------
EBITDA(d)................................. $ 99 $ 97 $ 393 $ 387 $ 410
===== ===== ====== ======= ======
Consolidated net loss....................... $ (25) $ (6) $ (70) $(2,052) $ (80)
===== ===== ====== ======= ======
EBITDA as a percent of net sales(d)......... 28.8% 33.1% 30.8% 32.6% 35.6%
</TABLE>
(a) During the third quarter of 1993, the Company wrote off the remaining
unamortized balance of its goodwill of $1.98 billion. See Note 4 to the
Company's audited consolidated financial statements included elsewhere in this
report.
(b) During the fourth quarter of 1994, operating income for domestic tissue
operations was reduced by a $20 million environmental charge. See Note 15 to
the Company's audited consolidated financial statements included elsewhere in
this report.
(c) Selling, general and administrative expense in 1993 reflects an $8 million
reduction for the reversal of all employee stock compensation expense accrued
prior to 1993. See Note 13 to the Company's audited consolidated financial
statements included elsewhere in this report.
(d) EBITDA represents operating income plus depreciation of property, plant
and equipment, amortization of goodwill, the goodwill write-off, the 1994
environmental charge and the effects of 1993 employee stock compensation
(credits). EBITDA is presented here as a measure of the Company's debt
service ability. Certain financial and other restrictive covenants in the
- 4 - <PAGE>
New Bank Credit Agreement and other instruments governing the Company's
indebtedness are based on the Company's EBITDA, subject to certain
adjustments.
FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993
Net Sales. Consolidated net sales for 1994 increased 7.3% compared to
1993, while consolidated net sales for the fourth quarter of 1994 increased
17.9% as compared to the comparable quarter in 1993. These increases were due
to increases in domestic tissue net sales and significant net sales increases
by the Company's wastepaper brokerage subsidiary. Domestic tissue net sales
increased 5.5% for fiscal year 1994 and 15.0% during the fourth quarter of
1994, in each case as compared to 1993. For 1994, the higher domestic tissue
net sales were due to higher net selling prices principally in the commercial
market and higher sales volume in the consumer and parent roll export markets
that were partially offset by volume decreases in the commercial market during
the first nine months of 1994. Overall, domestic tissue sales volume for 1994
increased slightly over 1993. The Company's decision to implement net selling
price increases in the commercial market during each of the first three
quarters of 1993 and to follow with a price increase in the second quarter of
1994 led to the decline in commercial volume during the first nine months of
1994. For the fourth quarter of 1994, the higher domestic tissue net sales
were due to higher net selling prices and slightly higher volume in the
commercial market, significantly higher volume offset by lower net selling
prices in the consumer market and higher sales volume in parent roll export
markets. The Company announced further price increases in the commercial
market effective mid-October 1994 and January 1995 and a price increase in the
consumer market effective in January 1995. Because a substantial portion of
the Company's commercial sales are pursuant to contracts which generally
specify pricing over periods of three months to one year, there is a time lag
before the Company realizes the full benefit of commercial market price
increases. Net sales of the Company's international operations decreased 8.4%
for fiscal year 1994 and increased 4.7% for the fourth quarter of 1994 as
compared to 1993. The decrease in international net sales in 1994 was due to
significantly lower net selling prices on flat volume. The increase in
international net sales for the fourth quarter was due to higher volume
partially offset by lower net selling prices. The international net selling
price declines were attributable to product mix changes and continued
competitive conditions. The significant increase in net sales of the
Company's wastepaper brokerage subsidiary during 1994 and for the fourth
quarter of 1994 compared to 1993 principally reflects higher net selling
prices.
Gross Income. For fiscal year 1994 and the fourth quarter of 1994,
consolidated gross margins decreased to 31.9% and 29.3% from 34.0% and 33.5%
for the same periods in 1993, respectively, principally due to lower margins
in domestic tissue operations where unit manufacturing cost increases exceeded
net selling price increases. Such cost increases primarily resulted from
higher wastepaper and other raw material costs, lower converting volume,
higher depreciation expense resulting from the start-up of a new paper machine
at the Muskogee mill late in the first quarter of 1994 and higher maintenance
costs. From July 1994 to January 1995, wastepaper prices for the grades of
wastepaper used in Fort Howard's products more than doubled and wastepaper
prices may increase further due to increased demand for those wastepaper
grades used by the Company. Gross margins of international operations
declined in 1994 compared to 1993 principally due to the lower net selling
prices. For the fourth quarter of 1994 compared to the same period in 1993,
- 5 -
gross margins of international operations improved due to lower promotional
costs and the results of cost containment activities. However, from July 1994
to January 1995, wastepaper prices for the grades of wastepaper used by
international operations increased approximately 65% and wastepaper prices are
expected to increase further for such operations due to increased demand for
those wastepaper grades used by the Company. In addition, consolidated gross
margins were negatively affected for fiscal year 1994 and the fourth quarter
of 1994 by the increased proportion of net sales represented by the Company's
wastepaper brokerage subsidiary which typically has lower margins than
domestic tissue operations.
Selling, General and Administrative Expenses. In the third quarter of
1993, the Company reversed all previously accrued employee stock compensation
expense resulting in a reduction of selling, general and administrative
expenses of $8 million for 1993. Excluding the effects of the reversal,
selling, general and administrative expenses, as a percent of net sales, were
8.6% and 8.2% for fiscal year 1994 and fourth quarter of 1994, compared to
8.8% and 9.0% for fiscal year 1993 and fourth quarter of 1993, respectively.
The decreases resulted principally from the increased proportion of net sales
represented by the Company's wastepaper brokerage subsidiary and, to a lesser
degree, cost containment.
Amortization of Goodwill. As a result of the goodwill write-off in the
third quarter of 1993, there was no amortization of goodwill in 1994 compared
to $43 million for fiscal year 1993. There was no goodwill amortization in
the fourth quarter of 1994 or 1993.
Environmental Charge. Based upon currently available information and
analysis, the Company recorded a $20 million charge in the fourth quarter of
1994 for estimated or anticipated liabilities and legal and consulting costs
relating to environmental matters arising from past operations. The Company
expects these costs to be incurred over an extended number of years. See
Note 15 of the Company's audited consolidated financial statements included
elsewhere in this report.
Operating Income (Loss). Operating income increased to $277 million in
1994 compared to an operating loss of $1,717 million in 1993. The operating
loss in 1993 resulted entirely from the goodwill write-off in the third
quarter of 1993. Excluding the environmental charge from 1994 results and
amortization of goodwill, the goodwill write-off and the reversal of employee
stock compensation expense from 1993 results, operating income would have
declined to $297 million in 1994 from $299 million in 1993. For the fourth
quarters of 1994 and 1993, operating income was $53 million and $71 million,
respectively. Excluding the environmental charge from 1994 results, operating
income would have increased to $73 million in the fourth quarter of 1994.
Income Taxes. The income tax credits for 1994 and 1993 principally
reflect the reversal of previously provided deferred income taxes.
Extraordinary Losses. The Company's net loss in 1994 was increased by an
extraordinary loss of $28 million (net of income taxes of $15 million)
representing the redemption premiums on the repurchases of all the Company's
remaining 12 3/8% Senior Subordinated Notes due 1997 (the "12 3/8% Notes) at
the redemption price of 105% of the principal amount thereof and of $238
million of 12 5/8% Debentures at the redemption price of 105% of the principal
amount thereof on March 11, 1994, and the write off of deferred loan costs
associated with the prepayment of $100 million of the term indebtedness (the
- 6 -
"1988 Term Loan") under the 1988 Bank Credit Agreement on February 10, 1994,
and the repurchases of the 12 3/8% Notes and the 12 5/8% Debentures. The
Company's net loss in 1993 was increased by an extraordinary loss of
$12 million (net of income taxes of $7 million) representing the write-off of
deferred loan costs associated with the prepayment of $250 million of the 1988
Term Loan on March 23, 1993, the repurchase of all outstanding Junior
Subordinated Debentures due 2004 (the "14 5/8% Debentures") on April 21, 1993
and the repurchase of $50 million of 12 3/8% Notes on November 1, 1993.
Net Loss. The Company reported net losses of $70 million and $25 million
for fiscal year 1994 and the fourth quarter of 1994, respectively, as compared
to net losses of $2,052 million and $6 million for the same periods in 1993.
The increase in the net loss in the fourth quarter of 1994 is principally due
to the environmental charge. The significant net loss for fiscal year 1993
resulted principally from the goodwill write-off in the third quarter of 1993.
FISCAL YEAR 1993 COMPARED TO FISCAL YEAR 1992
Net Sales. Consolidated net sales for 1993 increased 3.1% compared to
1992. Domestic tissue net sales for 1993 increased 2.7% compared to 1992 due
to volume increases that were largely offset by lower net selling prices. In
mid-1992, average net selling prices rose principally as a result of an
attempted price increase in the commercial market but then fell to pre-price
increase levels in the fourth quarter of 1992 and fell again in the first
quarter of 1993, periods of seasonally lower volume shipments. Average net
selling prices held flat from the first quarter of 1993 to the second quarter
of 1993 and increased in each of the third and fourth quarters of 1993 from
the previous quarter levels. However, in spite of introductions of net
selling price increases in each of the first three quarters of 1993, average
net selling prices for 1993 were below average net selling prices for 1992.
Net sales of the Company's international operations were flat in 1993 compared
to 1992 primarily due to significantly lower net selling prices and lower
exchange rates offset by volume increases resulting from the acquisition of
Stuart Edgar Limited ("Stuart Edgar") and the start-up of a new paper machine.
United Kingdom retailers engaged in increasingly competitive pricing activity
in 1993 across a broad range of consumer products including disposable paper
products.
Gross Income. Consolidated gross margins decreased to 34.0% in 1993
compared to 36.9% in 1992. Domestic tissue gross margins decreased to 37.4%
in 1993 from 40.0% in 1992 primarily due to lower net selling prices and an
increase in wastepaper costs as prices for wastepaper grades utilized by the
Company returned to pre-recession levels. Gross margins of international
operations also declined in 1993 principally due to the lower net selling
prices. Unit manufacturing costs of international operations declined in 1993
compared to 1992 as a result of the start-up of a new paper machine and
related facilities in the first quarter of 1993 at the Company's United
Kingdom tissue operations.
Selling, General and Administrative Expenses. Due to the effects of
adverse tissue industry operating conditions on its long-term earnings
forecast as of September 30, 1993, the Company decreased the estimated fair
market valuation of its Common Stock. Accordingly, in 1993 the Company
reversed all previously accrued employee stock compensation expense of
$8 million, resulting in a decrease in selling, general and administrative
- 7 -
expenses, as a percent of net sales, to 8.2% in 1993 from 8.5% in 1992.
Excluding the effects of employee stock compensation from both years, selling,
general and administrative expenses, as a percent of net sales, would have
increased slightly in 1993 to 8.8% from 8.4% for 1992.
Goodwill Write-Off. As further described below, low industry operating
rates and aggressive competitive pricing among tissue producers resulting from
the 1991-1992 recession, additions to industry capacity and other factors
adversely affected tissue industry operating conditions and the Company's
operating results beginning in 1991 and through the third quarter of 1993.
Declining Selling Prices. Although sales volume increased, industry
pricing was very competitive due to the factors discussed below. The
Company's average domestic net selling prices declined by approximately 5% in
each of 1991 and 1992. Commercial market price increases attempted in
mid-1992 were not achieved as commercial market pricing fell to pre-price
increase levels in the fourth quarter of 1992 and fell again in the first
quarter of 1993, periods of seasonally lower volume shipments. Average net
selling prices held flat from the first quarter of 1993 to the second quarter
of 1993 and increased from the second to the third quarter of 1993. However,
in spite of introductions of net selling price increases in each of the first
three quarters of 1993, average net selling prices for the first nine months
of 1993 were below average net selling prices for the same period in 1992.
Pricing in the Company's international markets declined significantly over
this time period as well.
Industry Operating Rates. Based on publicly available information,
including data collected by the American Forest & Paper Association ("AFPA"),
industry capacity additions in 1990 through 1992 significantly exceeded
historic capacity addition rates. Such additions and weak demand caused
industry operating rates to fall to very low levels in 1991 and 1992 in
comparison to historic rates. Tissue industry operating rates increased only
slightly during the first nine months of 1993 from the low levels experienced
in 1991 and 1992. Announced tissue industry capacity additions through 1995,
as reported by the AFPA through the first three quarters of 1993, approximated
average industry shipment growth rates after 1990. For the first nine months
of 1993, the industry shipment growth rate fell sharply from the already low
rates in 1991 and 1992. Consequently, without an improved economic recovery
and improved industry demand, tissue industry operating rates were expected to
remain at relatively low levels for the near term, adversely affecting
industry pricing.
Economic Conditions. The 1991-1992 recession and weak recovery adversely
affected tissue market growth. Job formation is an important stimulus for
growth in the commercial tissue market where approximately two-thirds of the
Company's domestic tissue sales are targeted. From 1990 through the first
nine months of 1993, job formation was weak and was projected to improve only
slightly in 1994. Accordingly, demand growth was weak in 1991, 1992 and in
the first nine months of 1993, and did not appear to offer any substantial
relief to the outlook for industry operating rates and pricing for the near
term.
Gross Margins. The Company's gross margins steadily declined in 1991,
1992 and 1993 as a result of the three factors noted above. In the first nine
months of 1993, the Company's gross margins were also affected by increased
wastepaper costs as prices for wastepaper grades utilized by the Company
returned to pre-recession levels.
- 8 -
As a result of these conditions, the Company expected that the
significant pricing deterioration experienced in 1991 through mid-1993 would
be followed by average annual price increases that approximated the Company's
annual historical price increase trend for the years 1984 through 1993 of
approximately 1% per year. Accordingly, during the second quarter of 1993,
the Company commenced an evaluation of the carrying value of its goodwill for
possible impairment. The Company revised its projections as of September 30,
1993 and concluded its evaluation in the third quarter of 1993 determining
that its forecasted cumulative net income before goodwill amortization was
inadequate to recover the future amortization of the Company's goodwill
balance over the remaining amortization period of the goodwill.
For a more detailed discussion of the methodology and assumptions
employed to assess the recoverability of the Company's goodwill, refer to Note
4 of the Company's audited consolidated financial statements included
elsewhere in this report.
Operating Income (Loss). As a result of the goodwill write-off, the
Company's operating loss was $1,717 million for 1993 compared to operating
income of $271 million for 1992. Excluding amortization of goodwill, the
goodwill write-off and the reversal of employee stock compensation expense
from 1993 and 1992 results, operating income declined to $299 million for 1993
from $328 million for 1992.
Income Taxes. The income tax credit for 1993 principally reflects the
reversal of previously provided deferred income taxes. The income tax credit
for 1992 reflects the reversal of previously provided deferred income taxes
related to domestic tissue operations offset almost entirely by foreign income
taxes.
Extraordinary Loss and Accounting Change. The Company's net loss in 1993
was increased by an extraordinary loss of $12 million (net of income taxes of
$7 million) representing the write-off of unamortized deferred loan costs
associated with the repayment of $250 million of indebtedness under the 1993
Term Loan, the repurchase of all the 14 5/8% Debentures and the repurchase of
$50 million of the 12 3/8% Notes. The net loss for 1992 was increased by the
Company's adoption of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS
No. 106"). The cumulative effect on years prior to 1992 of adopting SFAS No.
106 is stated separately in the Company's unaudited condensed consolidated
statement of income for 1992 as a one-time, after-tax charge of $11 million.
Net Loss. For 1993, the Company's net loss increased, principally due to
the goodwill write-off, to $2,052 million compared to $80 million for 1992.
- 9 -
FINANCIAL CONDITION
Year Ended December 31, 1994
During 1994, cash increased $195,000. Capital additions of $84 million
and debt repayments of $759 million, including the prepayment of $100 million
of the 1988 Term Loan, the repurchases of all outstanding 12 3/8% Notes and of
$238 million of the 12 5/8% Debentures, a reduction in the 1988 Revolving
Credit Facility which is part of the 1988 Bank Credit Agreement (the "1988
Revolving Credit Facility") and the purchase of interest rate cap agreements
for $10 million were funded by cash provided from operations of $125 million
and net proceeds of the sale of 8 1/4% Senior Notes due 2002 (the "8 1/4%
Notes") and 9% Senior Subordinated Notes due 2006 (the "9% Notes") of $728
million in February 1994. Receivables increased $17 million during 1994 due
principally to higher net selling prices in the domestic tissue and wastepaper
brokerage operations and sales volume increases in domestic tissue operations
in the fourth quarter of 1994. The $13 million increase in inventories in
1994 resulted from increases in inventory quantities to improve service levels
and the revaluation of inventories to reflect higher manufacturing costs. The
liability for interest payable increased $29 million due to a change in
interest payment schedules resulting from the 1994 debt repurchases from the
net proceeds of the sale of the 8 1/4% Notes and 9% Notes in 1994 and for the
liability with respect to the 14 1/8% Debentures for interest accruing in cash
commencing on November 1, 1994. As a result of all these changes, the net
working capital deficit increased to $98 million at December 31, 1994, from a
deficit of $92 million at December 31, 1993. The $15 million increase in
long-term other liabilities in 1994 principally reflects the classification of
$18 million of the environmental charge taken in the fourth quarter as a long-
term liability. Deferred and other long-term income taxes declined $34
million from 1993 to 1994 principally due to the reversal of deferred income
taxes related to continuing operations and the extraordinary item.
Cash provided from operations declined in 1994 compared to 1993
principally due to increased interest payments resulting from the 1993
repurchases of all outstanding 14 5/8% Debentures (which accrued interest in
kind) from the net proceeds of the sale of the 9 1/4% Senior Notes due 2001
(the "9 1/4% Notes") and 10% Subordinated Notes due 2003 (the "10% Notes") in
1993 (which accrue interest in cash) and higher floating interest rates. Cash
provided from operations was further impacted by the increase in receivables.
Year Ended December 31, 1993
During 1993, cash increased $39,000. Capital additions of $166 million
and debt repayments of $841 million, including the prepayment of $250 million
of the 1988 Term Loan, the repurchase of all outstanding 14 5/8% Debentures,
and the repurchase of $50 million of the 12 3/8% Notes, were funded
principally by cash provided from operations of $151 million, net proceeds
from the sale of the 9 1/4% Notes and 10% Notes of $729 million, net proceeds
of the 1993 Term Loan of $95 million, borrowings of $28 million under the 1988
Revolving Credit Facility and borrowings of $9 million by Fort Sterling
Limited ("Fort Sterling"), the Company's United Kingdom tissue operations
subsidiary, under its credit agreements.
Inventories and interest payable increased $17 million and $22 million,
respectively, during 1993. The Company increased inventories principally to
improve its service levels, and secondarily due to the effects of lower volume
resulting from increases in net selling prices in the third quarter of 1993,
- 10 -
immediately preceding a period of seasonally lower volume. Interest payable
increased in 1993 principally due to the repurchase of all outstanding 14 5/8%
Debentures (which accrued interest in kind) from the net proceeds of the sale
of the 9 1/4% Notes and 10% Notes (which accrue interest in cash). The net
working capital deficit declined $32 million from $124 million at December 31,
1992 to $92 million at December 31, 1993, principally due to a $25 million
reduction in the current portion of long-term debt as a result of lower
current maturities under the 1988 Term Loan.
Liquidity and Capital Resources; The Recapitalization
The Company's principal uses of cash for the next several years will be
interest and principal payments on its indebtedness and capital expenditures.
The Company is implementing the Recapitalization to prepay or redeem a
substantial portion of its indebtedness in order to reduce the level and
overall cost of its debt, extend certain maturities, increase shareholders'
equity and enhance its access to capital markets. The Recapitalization
includes the following primary components: (i) the Offering; (ii) the Bank
Refinancing and (iii) the 1995 Debt Redemptions. Proceeds of the
Recapitalization will be used to prepay or redeem all of the Company's
remaining indebtedness under its 1988 Bank Credit Agreement, the Senior
Secured Notes, the 1993 Term Loan, the 12 5/8% Debentures and the 14 1/8%
Debentures. After giving effect to the Recapitalization, on a pro forma basis
as of December 31, 1994, the Company would have had approximately $3,050
million of long-term debt outstanding. Following the Recapitalization, the
Company will have estimated repayment obligations of $9 million in 1995,
$62 million in 1996, $121 million in 1997, $143 million in 1998 and
$157 million in 1999 (and increasing thereafter). In addition, there may be
additional required payments under the New Bank Credit Agreement out of excess
cash flow, if any, and from proceeds of asset sales, if any.
Capital expenditures were $84 million, $166 million and $233 million in
1994, 1993 and 1992, respectively, including an aggregate of over $350 million
during those periods for capacity expansions. Subject to market conditions
and the successful completion of the Recapitalization, the Company's current
plans to support growth in domestic tissue shipments include adding one world-
class (270-inch) tissue paper machine over the next five years and the start
up of another dry form machine in the next few years. The New Bank Credit
Agreement will impose limits for domestic capital expenditures, with certain
exceptions, of $75 million per year. The Company will also be permitted to
spend up to $250 million for domestic expansion projects including, without
restriction, an additional tissue paper machine at one of its existing
domestic mills. Other domestic expansion projects are restricted unless the
Company's ratio of Consolidated EBITDA to Consolidated Interest Expense (as
such terms are defined in the New Bank Credit Agreement) exceeds certain
amounts. In addition, the Company will be permitted to make capital
expenditures for international expansion of up to $40 million through June 30,
1996, and up to $100 million in the aggregate after June 30, 1996 if the
Company's ratio of Consolidated EBITDA to Consolidated Interest Expense
exceeds certain amounts. Under the New Bank Credit Agreement, the Company may
carry over to one or more years (thereby increasing the scheduled permitted
limit for capital expenditures in respect of such year) the amount by which
the scheduled permitted limit for each year (beginning with fiscal year 1995)
exceeded the capital expenditures actually made in respect of such prior year.
The Company does not believe such limitations will impair its plans for
capital expenditures. Capital expenditures are projected to approximate $55
- 11 -
to $75 million annually for the next several years, plus $225 million of
domestic expansion capital spending that is subject to market conditions and
the successful completion of the Recapitalization.
The 1995 Revolving Credit Facility will mature on the seventh anniversary
of the completion of the Offering. Assuming the Recapitalization is
consummated on March 15, 1995, the Company expects to have $179.1 million in
available capacity under the 1995 Revolving Credit Facility.
Assuming the Recapitalization is completed in March 1995, approximately
$1.4 billion of the Company's outstanding indebtedness is expected to bear
interest at floating rates. The Company's policy is to enter into interest
rate cap and swap agreements as a hedge to effectively fix or limit its
exposure to floating interest rates to, at a minimum, comply with the terms of
its senior secured debt agreements. The Company is a party to LIBOR-based
interest rate cap agreements which limit the interest cost to the Company with
respect to $500 million of floating rate obligations to 6% plus the Company's
borrowing margin until June 1, 1996, and to 8% plus the Company's borrowing
margin from June 1, 1996 to June 1, 1999. The Company monitors the risk of
default by the counterparties to the interest rate cap agreements and does not
anticipate nonperformance. See Note 8 to the Company's audited consolidated
financial statements included elsewhere in this report for additional
information concerning these agreements.
The limitations contained in the New Bank Credit 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
respond to market conditions, to provide for unanticipated capital
expenditures (including capital expenditures for environmental matters) or to
take advantage of business opportunities which may arise or to take actions
that require funds in excess of those available to the Company. However, the
Company believes that cash provided by operations, unused borrowing capacity
under the 1995 Revolving Credit Facility and access to financing in public and
private markets will be sufficient to enable it to fund capital expenditures
(including planned capital expenditures for environmental matters) and meet
its debt service requirements for the foreseeable future.
Assuming a favorable resolution of the U.S. Tax Court appeal discussed in
Note 7 of the Company's audited consolidated financial statements included
elsewhere in this report, the Company will have approximately $131 million of
net operating loss ("NOL") carryforwards as of December 31, 1994 for federal
income tax purposes which expire as follows: $11 million in 2007, $47 million
in 2008 and $73 million in 2009. The aggregate amount of net operating loss
carryforwards available to the Company as of December 31, 1994 could be
reduced to approximately $71 million if the U.S. Tax Court decision is
affirmed. Further, under the Internal Revenue Code of 1986, as amended (the
"Code"), the utilization of NOL carryforwards against future taxable income is
potentially limited if the Company experiences an "ownership change," as
defined in the Code. The Company believes that it will not experience an
ownership change in connection with the Offering or that, if it does, the
resulting limitation on NOL carryforward utilization is not expected to have a
significant effect on the Company's financial condition or on its results of
operations. It is possible, however, that following the Offering, future
events (such as transfers of Common Stock by shareholders, or certain Common
- 12 -
Stock issuances) could cause an ownership change which under the circumstances
at that time could result in a limitation on the Company's ability to utilize
NOL carryforwards existing at such time to offset future taxable income.
Refer to Note 7 to the audited consolidated financial statements included
elsewhere in this report for a description of certain matters related to
income taxes.
Seasonality.
During the years ended December 31, 1994, 1993, and 1992, a slightly
higher amount of the Company's revenues and EBITDA have been recognized during
the second and third quarters. Following the Recapitalization, the Company
expects to fund seasonal working capital needs from the 1995 Revolving Credit
Facility.
- 13 -
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, 1994 and 1993, and the related consolidated statements of income
and cash flows for the years ended December 31, 1994, 1993 and 1992. 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, 1994 and 1993,
and the consolidated results of their operations and their cash flows for the
years ended December 31, 1994, 1993 and 1992, in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 10 to the consolidated financial statements,
effective January 1, 1992, the Company changed its method of accounting for
postretirement benefits other than pensions.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 31, 1995
- 14 -
FORT HOWARD CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
For the Years Ended December 31,
--------------------------------
1994 1993 1992
---- ---- ----
Net sales............................. $1,274,445 $ 1,187,387 $1,151,351
Cost of sales......................... 867,357 784,054 726,356
---------- ----------- ----------
Gross income.......................... 407,088 403,333 424,995
Selling, general and administrative... 110,285 96,966 97,620
Amortization of goodwill.............. -- 42,576 56,700
Goodwill write-off.................... -- 1,980,427 --
Environmental charge.................. 20,000 -- --
---------- ----------- ----------
Operating income (loss)............... 276,803 (1,716,636) 270,675
Interest expense...................... 337,701 342,792 338,374
Other (income) expense, net........... 118 (2,996) 2,101
---------- ----------- ----------
Loss before taxes..................... (61,016) (2,056,432) (69,800)
Income taxes (credit)................. (18,891) (16,314) (398)
---------- ----------- ----------
Loss before extraordinary items
and adjustment for
accounting change................... (42,125) (2,040,118) (69,402)
Extraordinary items--losses on
debt repurchases (net of income
taxes of $14,731 in 1994 and
$7,333 in 1993).................... (28,170) (11,964) --
Adjustment for adoption of
SFAS No. 106 (net of income
taxes of $6,489)................... -- -- (10,587)
---------- ----------- ----------
Net loss.............................. $ (70,295) $(2,052,082) $ (79,989)
========== =========== ==========
Loss per share:
Net loss before extraordinary
items and adjustment for
accounting change................... $ (1.11) $ (53.54) $ (1.82)
Extraordinary items................. (0.74) (0.31) --
Adjustment for adoption of
SFAS No. 106..................... -- -- (0.28)
---------- ----------- ----------
Net loss............................ $ (1.85) $ (53.85) $ (2.10)
========== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
- 15 -
FORT HOWARD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
-------------------
1994 1993
---- ----
Assets
Current assets:
Cash and cash equivalents.................. $ 422 $ 227
Receivables, less allowances of $1,589
in 1994 and $2,366 in 1993............... 123,150 105,834
Inventories................................ 130,843 118,269
Deferred income taxes...................... 20,000 14,000
Income taxes receivable.................... 5,200 9,500
----------- -----------
Total current assets..................... 279,615 247,830
Property, plant and equipment................ 1,932,713 1,845,052
Less: Accumulated depreciation............. 611,762 516,938
----------- -----------
Net property, plant and equipment........ 1,320,951 1,328,114
Other assets................................. 80,332 73,843
----------- -----------
Total assets........................... $ 1,680,898 $ 1,649,787
=========== ===========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable........................... $ 100,981 $ 101,665
Interest payable........................... 84,273 54,854
Income taxes payable....................... 224 122
Other current liabilities.................. 75,450 70,138
Current portion of long-term debt.......... 116,203 112,750
----------- -----------
Total current liabilities................ 377,131 339,529
Long-term debt................................. 3,189,644 3,109,838
Deferred and other long-term income taxes...... 209,697 243,437
Other liabilities.............................. 41,162 26,088
Common Stock with put right.................... 11,711 11,820
Shareholders' deficit:
Common Stock................................. 600,471 600,459
Cumulative translation adjustment............ (2,330) (5,091)
Retained deficit............................. (2,746,588) (2,676,293)
---------- -----------
Total shareholders' deficit................ (2,148,447) (2,080,925)
---------- -----------
Total liabilities and shareholders'
deficit................................$ 1,680,898 $ 1,649,787
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
- 16 -
FORT HOWARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Year Ended December 31,
-------------------------------
1994 1993 1992
---- ---- ----
Cash provided from (used for) operations:
Net loss.................................. $(70,295) $(2,052,082) $(79,989)
Depreciation and amortization............. 95,727 130,671 137,977
Goodwill write-off........................ -- 1,980,427 --
Non-cash interest expense................. 74,238 100,844 139,700
Deferred income taxes (credit)............ (33,832) (17,874) (17,799)
Environmental charge...................... 20,000 -- --
Employee stock compensation............... -- (7,832) 1,120
Pre-tax loss on debt repurchases.......... 42,901 19,297 --
Pre-tax adjustment for adoption of
SFAS No. 106............................ -- -- 17,076
Increase in receivables................... (17,316) (2,343) (5,284)
Increase in inventories................... (12,574) (17,294) (1,215)
(Increase) decrease in income taxes
receivable.............................. 4,300 (7,000) (2,500)
Increase (decrease) in accounts payable... (684) (2,740) 13,572
Increase (decrease) in interest payable... 29,419 21,797 (298)
Increase (decrease) in income taxes
payable................................. 102 (1,670) (5,094)
All other, net............................ (6,896) 6,848 12,684
-------- ------------ --------
Net cash provided from operations..... 125,090 151,049 209,950
Cash used for investment activities:
Additions to property, plant and
equipment............................... (83,559) (165,539) (232,844)
Acquisition of Stuart Edgar Limited,
net of acquired cash of $749............ -- -- (8,302)
-------- ------------ --------
Net cash used for investment
activities.......................... (83,559) (165,539) (241,146)
Cash provided from (used for)
financing activities:
Proceeds from long-term borrowings........ 750,000 887,088 189,518
Repayment of long-term borrowings......... (759,202) (841,399) (167,731)
Debt issuance costs....................... (32,134) (31,160) --
-------- ------------ --------
Net cash provided from (used for)
financing activities................ (41,336) 14,529 21,787
-------- ------------ --------
Increase (decrease) in cash................. 195 39 (9,409)
Cash, beginning of year..................... 227 188 9,597
-------- ------------ --------
Cash, end of year..................... $ 422 $ 227 $ 188
======== ============ ========
Supplemental Cash Flow Disclosures:
Interest paid............................. $237,650 $ 228,360 $208,051
Income taxes paid, net.................... $ 2,483 $ 4,432 $ 9,997
The accompanying notes are an integral part of these consolidated financial
statements.
- 17 -
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
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. 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. The Company does
not hedge its translation exposure. The Company does not engage in material
hedging activity with respect to foreign currency transaction risks. 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 2).
(D) PROPERTY, PLANT AND EQUIPMENT -- Prior to August 9, 1988, property,
plant and equipment were stated at original cost and depreciated using the
straight-line method. Effective with the Acquisition (as defined below),
properties were adjusted to their estimated fair values and are being
depreciated on a straight-line basis 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 1994, 1993 and 1992 were $4,230,000, $8,369,000 and $11,047,000,
respectively.
(E) REVENUE RECOGNITION -- Sales of the Company's paper products are
recorded upon shipment of products.
- 18 -
(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. Recoveries of environmental remediation costs from other
potentially responsible parties and recoveries from insurance carriers are not
recorded as assets until such time as their receipt is deemed probable and the
amounts are reasonably estimable.
(G) GOODWILL -- In 1988, FH Acquisition Corp., a company organized on
behalf of The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II"),
acquired the Company in a leveraged buyout and was subsequently merged with
and into the Company (the "Acquisition"). Goodwill (the acquisition costs in
excess of the fair value of net assets of acquired businesses) acquired in
connection with the Acquisition and the purchases of other businesses was
amortized on a straight-line basis over 40 years through the third quarter of
1993 when the Company wrote off its remaining goodwill balance (see Note 4).
The Company evaluates the carrying value of goodwill for possible impairment
using a methodology which assesses whether forecasted cumulative net income
before goodwill amortization is adequate to recover the future amortization of
the Company's goodwill balance over the remaining amortization period of the
goodwill.
(H) EMPLOYEE BENEFIT PLANS -- A substantial majority of the Company's
employees are covered under defined contribution plans. The Company's annual
contributions to defined contribution plans are based on pre-tax income,
subject to percentage limitations on participants' earnings and a minimum
return on shareholders' equity. In recent years, the Company made
discretionary contributions as permitted under the plans. Participants may
also contribute a certain percentage of their wages to the plans. Costs
charged to operations for defined contributions plans were approximately
$12,716,000, $12,725,000 and $11,716,000 for the years ended December 31,
1994, 1993 and 1992, respectively.
Employees retiring prior to February 1, 1990 from the Company's U.S.
tissue operations who had 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 for active employees 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
- 19 -
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 -- The Company follows SFAS No. 109, "Accounting for
Income Taxes." As a result, deferred income taxes are provided to recognize
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities using enacted tax rates in effect in
the years in which the differences are expected to reverse. The principal
difference relates to depreciation expense. Deferred income tax expense
represents the change in the deferred income tax asset and liability balances,
excluding the deferred tax benefit related to extraordinary losses.
(K) On January 31, 1995, the Company's shareholders approved an increase
in the number of authorized shares of voting Common Stock to 99,400,000 shares
and approved a 6.5-for-one stock split of the Common Stock, effective January
31, 1995. All share and per share amounts included in the consolidated
financial statements and notes thereto have been restated to give effect to
the increase in authorized shares and the stock split.
(L) LOSS PER SHARE -- Loss per share has been computed on the basis of
the average number of common shares outstanding during the years. The average
number of shares used in the computation was 38,103,215, 38,107,154 and
38,107,453 for the years ended December 31, 1994, 1993 and 1992, respectively.
The assumed exercise of all outstanding stock options has been excluded from
the computation of loss per share in 1994, 1993 and 1992 because the result
was antidilutive.
(M) 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.
- 20 -
2. INVENTORIES
Inventories are summarized as follows:
December 31,
----------------
1994 1993
---- ----
(In thousands)
Components
Raw materials and supplies.......................... $ 63,721 $ 61,285
Finished and partly-finished products............... 67,122 56,984
-------- --------
$130,843 $118,269
======== ========
Value at lower of cost or market:
First-in, first-out (FIFO).......................... $107,493 $ 94,436
Average cost by specific lot........................ 23,350 23,833
-------- --------
$130,843 $118,269
======== ========
3. PROPERTY, PLANT AND EQUIPMENT
The Company's major classes of property, plant and equipment are:
December 31,
----------------
1994 1993
---- ----
(In thousands)
Land.............................................. $ 44,422 $ 44,429
Buildings......................................... 325,395 318,955
Machinery and equipment........................... 1,527,865 1,367,839
Construction in progress.......................... 35,031 113,829
---------- ----------
$1,932,713 $1,845,052
========== ==========
Included in the property, plant and equipment totals above are assets
under capital leases, as follows:
December 31,
----------------
1994 1993
---- ----
(In thousands)
Buildings......................................... $ 4,012 $ 3,989
Machinery and equipment........................... 186,281 185,624
---------- ----------
Total assets under capital leases............. $ 190,293 $ 189,613
========== ==========
- 21 -
4. GOODWILL
Changes in the Company's goodwill are summarized as follows:
Year Ended December 31,
-----------------------
1993 1992
---- ----
(In thousands)
Balance, beginning of year........................ $ 2,023,416 $2,075,525
Acquisition of Stuart Edgar....................... -- 6,043
Amortization of goodwill.......................... (42,576) (56,700)
Effects of foreign currency translation........... (413) (1,452)
Goodwill write-off................................ (1,980,427) --
----------- ----------
Balance, end of year.............................. $ -- $2,023,416
=========== ==========
Low industry operating rates and aggressive competitive activity among
tissue producers resulting from the recession, additions to capacity and other
factors adversely affected tissue industry operating conditions and the
Company's operating results from 1991 through September 30, 1993.
Accordingly, the Company revised its projections and determined that its
projected results would not support the future amortization of the Company's
remaining goodwill balance of approximately $1.98 billion at September 30,
1993.
The methodology employed to assess the recoverability of the Company's
goodwill first involved the projection in September 1993 of operating results
forward 35 years, which approximated the remaining amortization period of the
goodwill as of October 1, 1993. The Company then evaluated the recoverability
of goodwill on the basis of this forecast of future operations as of September
30, 1993. Based on such forecast, the cumulative net income before goodwill
amortization of approximately $100 million over the remaining 35-year
amortization period was insufficient to recover the goodwill balance.
Accordingly, the Company wrote off its remaining goodwill balance of $1.98
billion in the third quarter of 1993.
The Company's forecast as of September 30, 1993 assumed that sales volume
increases would be limited to production from a new paper machine then under
construction at the Company's Muskogee mill which was subsequently started-up
in 1994 and that further capacity expansion was not justifiable given the
Company's high leverage and adverse tissue industry operating conditions.
Such projections assumed that net selling price and cost increases would
approximate 1% per year, based on the Company's annual historical price
increase trend for the years 1984 through 1993 and management's estimates of
future performance. Through the year 2001, the Company's projections as of
September 30, 1993 indicated that interest expense would exceed operating
income, which is determined after deducting annual depreciation expense.
However, projected operating income before depreciation was adequate to cover
projected interest expense. Inflation and interest rates were assumed to
remain low at 1993 levels during the projected period. Each of the Company's
- 22 -
then outstanding higher yielding debt securities, the 12 3/8% Senior
Subordinated Notes due 1997 (the "12 3/8% Notes"), the 12 5/8% Subordinated
Debentures due 2000 (the "12 5/8% Debentures") and the 14 1/8% Junior
Subordinated Discount Debentures due 2004 (the "14 1/8% Debentures"), were
further assumed to be refinanced at lower interest rates. Total capital
expenditures were projected to approximate $55-$80 million annually over the
ten years ending December 31, 2003 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 mill.
Management believed that the projected future results based on these
assumptions were the most likely scenario at the time given the Company's high
leverage and adverse tissue industry operating conditions experienced for the
period 1991 through September 30, 1993.
5. OTHER ASSETS
The components of other assets are as follows:
December 31,
---------------
1994 1993
---- ----
(In thousands)
Deferred loan costs, net of accumulated amortization.... $76,640 $71,459
Prepayments and other................................... 3,692 2,384
------- -------
$80,332 $73,843
======= =======
Amortization of deferred loan costs for the years ended December 31,
1994, 1993 and 1992 totaling $13,466,000, $13,488,000 and $14,910,000,
respectively, is reported as non-cash interest expense. During 1994,
$14,195,000 of deferred loan costs were written off in conjunction with the
retirement of long-term debt, $21,584,000 of deferred loan costs were incurred
for the issuance of the 8 1/4% Senior Notes due 2002 (the "8 1/4% Notes") and
the 9% Senior Subordinated Notes due 2006 (the "9% Notes"), and $10,550,000 of
deferred loan costs were incurred for the purchase of interest rate cap
agreements. During 1993, $19,297,000 of deferred loan costs were written off
in conjunction with the retirement of long-term debt and $31,160,000 of
deferred loan costs were incurred for the issuance of a new bank term loan
(the "1993 Term Loan"), the 9 1/4% Senior Unsecured Notes due 2001 (the
"9 1/4% Notes") and the 10% Subordinated Notes due 2003 (the "10% Notes") and
for the purchase of an interest rate cap agreement (see Note 8).
- 23 -
6. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows:
December 31,
---------------
1994 1993
---- ----
(In thousands)
Salaries and wages...................................... $41,959 $38,152
Contributions to employee benefit plans................. 12,816 12,805
Taxes other than income taxes........................... 5,615 5,492
Other accrued expenses.................................. 15,060 13,689
------- -------
$75,450 $70,138
======= =======
7. INCOME TAXES
The income tax provision (credit) includes the following components:
Year Ended December 31,
-----------------------------
1994 1993 1992
---- ---- ----
(In thousands)
Current
Federal.................................. $ 1,800 $ (6,012) $ 10,501
State.................................... 509 465 411
Foreign.................................. (2,099) (225) --
--------- -------- --------
Total current........................ 210 (5,772) 10,912
Deferred
Federal.................................. (18,826) (7,731) (13,678)
State.................................... (2,793) (2,956) (2,380)
Foreign.................................. 2,518 145 4,748
--------- -------- --------
Total deferred....................... (19,101) (10,542) (11,310)
--------- -------- --------
$ (18,891) $(16,314) $ (398)
========= ======== ========
- 24 -
The effective tax rate varied from the U.S. federal tax rate as a result
of the following:
Year Ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
U.S. federal tax rate............................ (34.0)% (34.0)% (34.0)%
Amortization of intangibles...................... -- 33.4 27.6
State income taxes net of U.S. tax benefit....... (4.1) (0.1) (3.0)
Interest on long-term income taxes............... 3.3 -- 5.7
Permanent differences related to accruals........ 3.3 -- --
Other, net....................................... 0.5 (0.1) 3.1
----- ----- -----
Effective tax rate............................... (31.0)% (0.8)% (0.6)%
===== ===== =====
The domestic and foreign components of loss before income taxes are as
follows:
Year Ended December 31,
-----------------------------
1994 1993 1992
---- ---- ----
(In thousands)
Domestic................................. $(62,711) $(2,048,746) $(85,597)
Foreign.................................. 1,695 (7,686) 15,797
-------- ----------- --------
$(61,016) $(2,056,432) $(69,800)
======== =========== ========
The net deferred income tax liability at December 31, 1994 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.
In 1992, the Internal Revenue Service (the "IRS") issued a statutory
notice of deficiency (the "Notice") to the Company for additional income tax
due for the 1988 tax year. In the Notice, the IRS disallowed deductions for
its 1988 tax year for fees and expenses, other than interest, related to the
1988 debt financing and refinancing transactions. In disallowing these
deductions, the IRS relied on Section 162(k) of the Internal Revenue Code (the
"Code") (which denies deductions for otherwise deductible amounts paid or
incurred in connection with stock redemptions). The Company had deducted a
portion of the disallowed fees and expenses in 1988 and has been deducting the
balance of the fees and expenses over the terms of the 1988 long-term debt
financing and refinancing. Following receipt of the Notice, the Company filed
a petition in the U.S. Tax Court contesting the deficiency. In August 1994,
the U.S. Tax Court issued its opinion in which it essentially adopted the
interpretation of Code Section 162(k) advanced by the IRS and disallowed the
deductions claimed by the Company. At present, the U.S. Tax Court is
preparing an order in which it will determine the amount of the tax deficiency
owed by the Company as a result of the court's decision. The Company intends
to appeal the U.S. Tax Court decision to the U.S. Court of Appeals for the
- 25 -
Seventh Circuit. In anticipation of its appeal, the Company has paid to the
IRS tax of approximately $5 million potentially due for its 1988 tax year
pursuant to the U.S. Tax Court opinion along with $4 million for the interest
accrued on such tax. If the decision of the U.S. Tax Court is ultimately
sustained, the Company estimates that the potential amount of additional taxes
due on account of such disallowance for the period 1989 through 1994 would be
approximately $34 million and for the period after 1994 (assuming current
statutory tax rates) would be approximately $4 million, in each case exclusive
of interest. While the Company is unable to predict the final result of its
appeal of the U.S. Tax Court decision with certainty, it has accrued for the
potential tax liability as well as for the interest charges thereon for the
period 1989 through 1994 and thus the Company believes that the ultimate
resolution of this case will not have a material adverse effect on the
Company's financial condition or on its results of operations.
Assuming a favorable resolution of the U.S. Tax Court appeal, the Company
will have approximately $131 million of net operating loss carryforwards as of
December 31, 1994 for federal income tax purposes which expire as follows:
$11 million in 2007, $47 million in 2008 and $73 million in 2009. The
aggregate amount of net operating loss carryforwards available to the Company
as of December 31, 1994 could be reduced to approximately $71 million if the
U.S. Tax Court decision is affirmed. During 1994, the Company reclassified
$11 million from the liability for other long-term income taxes to the
liability for current income taxes principally to reflect the payments
totaling $9 million made to the IRS with respect to the 1988 tax year.
- 26 -
8. LONG-TERM DEBT
Long-term debt and capital lease obligations, including amounts payable
within one year, are summarized as follows:
December 31,
----------------
1994 1993
---- ----
(In thousands)
1988 Term Loan, at prime plus 1.50% or, subject to
certain limitations, at a reserve adjusted
Eurodollar rate plus 2.25% subject to downward
adjustment if certain financial criteria are
met (at a weighted average rate of 8.19% at
December 31, 1994), due in varying annual
repayments with a final maturity of
December 31, 1996.................................... $ 224,534 $ 331,753
1988 Revolving Credit Facility, at prime plus
1.50% or, subject to certain limitations,
at a reserve adjusted Eurodollar rate plus
2.25% subject to downward adjustment if certain
financial criteria are met (at a weighted
average rate of 8.66% at December 31, 1994),
due December 31, 1996................................ 196,500 243,700
1993 Term Loan, at prime plus 1.75% or, subject
to certain limitations, at a reserve adjusted
Eurodollar rate plus 3.0% (8.57% at
December 31, 1994), due May 1, 1997.................. 100,000 100,000
Senior Secured Notes, at three month LIBOR plus
2.75% to 3.50% (9.13% to 9.88% at December 31, 1994),
due in varying amounts between 1996 and 2000......... 300,000 300,000
Senior Unsecured Notes, 9 1/4%, due March 15, 2001..... 450,000 450,000
Senior Unsecured Notes, 8 1/4%, due February 1, 2002.... 100,000 --
Senior Subordinated Notes, 12 3/8%, repurchased
in 1994............................................... -- 333,910
Senior Subordinated Notes, 9%, due February 1, 2006..... 650,000 --
Subordinated Debentures, 12 5/8%, due November 1, 2000.. 145,815 383,910
Subordinated Notes, 10%, due March 15, 2003............. 300,000 300,000
Junior Subordinated Discount Debentures, 14 1/8%,
due November 1, 2004.................................. 566,869 506,186
Capital lease obligations, at interest rates
approximating 10.9%................................... 182,936 184,023
Pollution Control Revenue Refunding Bonds, 7.90%,
due October 1, 2005................................... 42,000 42,000
Debt of foreign subsidiaries, at rates ranging from
7.00% to 8.36%, due in varying annual installments
through March 2001.................................... 47,193 47,106
---------- ----------
3,305,847 3,222,588
Less: Current portion of long-term debt................. 116,203 112,750
---------- ----------
$3,189,644 $3,109,838
========== ==========
- 27 -
The aggregate fair values of the Company's long-term debt and capital
lease obligations approximated $3,152 million and $3,276 million compared to
aggregate carrying values of $3,306 million and $3,223 million at December 31,
1994 and 1993, respectively. The fair values of the Term Loan, Revolving
Credit Facility and 1993 Term Loan are estimated based on secondary market
transactions in such securities. Fair values for the Senior Secured Notes,
the 9 1/4% Notes, the 8 1/4% Notes, the 9% Notes, the 12 5/8% Debentures, the
10% Notes, the 14 1/8% Debentures and the Pollution Control Revenue Refunding
Bonds were estimated based on trading activity in such securities. Of the
capital lease obligations, the fair values of 1991 Series Pass Through
Certificates were estimated based on trading activity in such securities. The
fair values of other capital lease obligations were estimated based on
interest rates implicit in the valuation of the 1991 Series Pass Through
Certificates. The fair value of debt of foreign subsidiaries is deemed to
approximate its carrying amount.
The 14 1/8% Debentures did not accrue interest in cash until November 1,
1994, and were issued at a discount to yield a 14 1/8% effective annual rate.
The 14 1/8% Debentures require payments of interest in cash commencing on
May 1, 1995. Interest incurred in 1994 through October and for the years
ended December 31, 1993 and 1992 related to these debentures was added to the
balance due.
On February 9, 1994, the Company sold $100 million principal amount of
8 1/4% Notes and $650 million principal amount of 9% Notes in a registered
public offering (collectively, the "1994 Notes"). Net proceeds from the sale
of the 1994 Notes were applied to the repurchase of all the remaining 12 3/8%
Notes at the redemption price of 105% of the principal amount thereof, to the
repurchase of $238 million of 12 5/8% Debentures at the redemption price of
105% of the principal amount thereof, to the prepayment of $100 million of the
1988 Term Loan, to the repayment of a portion of the Company's indebtedness
under the 1988 Revolving Credit Facility and to the payment of fees and
expenses.
The 8 1/4% Notes are senior unsecured obligations of the Company, rank
equally in right of payment with the other senior indebtedness of the Company
and are senior to all existing and future subordinated indebtedness of the
Company. The 9% Notes are subordinated in right of payment to all existing
and future senior indebtedness of the Company, and constitute senior
indebtedness with respect to the 10% Notes, the 12 5/8% Debentures and the 14
1/8% Debentures.
In connection with the sale of the 1994 Notes, the Company amended the
Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured
Note Agreement. Among other changes, the amendments reduced the required
ratio of earnings before non-cash charges, interest and taxes to cash interest
for the four fiscal quarters ending March 31, 1994, to 1.40 to 1.00 from 1.50
to 1.00.
The Company incurred an extraordinary loss of $28 million (net of income
taxes of $15 million) in the first quarter of 1994 representing the redemption
premiums on the repurchases of the 12 3/8% Notes and the 12 5/8% Debentures,
and the write-off of deferred loan costs associated with the prepayment of
$100 million of the 1988 Term Loan and the repurchases of the 12 3/8% Notes
and the 12 5/8% Debentures.
- 28 -
On March 22, 1993, the Company sold $450 million principal amount of
9 1/4% Notes and $300 million principal amount of 10% Notes in a registered
public offering. On April 21, 1993, the Company borrowed $100 million
pursuant to the 1993 Term Loan. Proceeds from the sale of the 9 1/4% Notes
and the 10% Notes and from the 1993 Term Loan were applied to the prepayment
of $250 million of the 1988 Term Loan, to the repayment of a portion of the
Company's indebtedness under the 1988 Revolving Credit Facility, to the
repurchase of all the Company's outstanding Junior Subordinated Debentures due
2004 (the "14 5/8% Debentures") and to the payment of fees and expenses. As a
result of the repayment of $250 million of the 1988 Term Loan and the
repurchases of the 14 5/8% Debentures, the Company incurred an extraordinary
loss of $10 million (net of income taxes of $6 million) representing the
write-off of unamortized deferred loan costs.
The 9 1/4% Notes are senior unsecured obligations of the Company, rank
equally in right of payment with the other senior indebtedness of the Company
and are senior to all existing and future subordinated indebtedness of the
Company. The 10% Notes are subordinated in right of payment to all existing
and future senior indebtedness of the Company, including the 9% 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 constitutes senior
secured indebtedness of the Company.
The Company redeemed $50 million of its 12 3/8% Notes at the redemption
price of 105% of the principal amount thereof on November 1, 1993, the first
date that such notes were redeemable. The redemption was funded principally
from excess funds from the sale of the 9 1/4% Notes and the 10% Notes. In
connection with the redemption, the Company incurred an extraordinary loss of
$2 million (net of income taxes of $1 million), representing the redemption
premium and unamortized deferred loan costs.
Debt of foreign subsidiaries bears interest at floating rates and is
secured by certain assets of Fort Sterling and Stuart Edgar but is nonrecourse
to the Company.
Obligations under the Bank Credit Agreement, the 1993 Term Loan
Agreement, the Senior Secured Notes and debt of foreign subsidiaries bear
interest at floating rates. The Company's policy is to enter into interest
rate cap and swap agreements as a hedge to effectively fix or limit its
exposure to floating interest rates to, at a minimum, comply with the terms of
its senior secured debt agreements. The Company is a party to LIBOR-based
interest rate cap agreements which limit the interest cost to the Company with
respect to $500 million of floating rate obligations to 6% plus the Company's
borrowing margin until June 1, 1996 and to 8% plus the Company's borrowing
margin from June 1, 1996 until June 1, 1999. At current market rates at
December 31, 1994, the fair value of the Company's interest rate cap
agreements is $23 million. The counterparties to the Company's interest rate
cap agreements consist of major financial institutions. While the Company is
exposed to credit risk to the extent of nonperformance by these
counterparties, management monitors the risk of default by the counterparties
and believes that the risk of incurring losses due to nonperformance is
remote.
- 29 -
In addition to the scheduled mandatory annual repayments, the Bank Credit
Agreement provides for mandatory repayments from proceeds of any significant
asset sales (except for proceeds from certain foreign asset sales which are
redeployed outside the U.S.), from proceeds of sale and leaseback
transactions, and annually an amount equal to 50% of excess cash flow for the
prior calendar year, as defined.
Among other restrictions, the Bank Credit Agreement, the 1993 Term Loan
Agreement, the Senior Secured Note Agreement, the debt of foreign subsidiaries
and the Company's indentures: (1) restrict payments of dividends, repayments
of subordinated debt, purchases of the Company's Common Stock, additional
borrowings and acquisition of property, plant and equipment; (2) require that
the ratios of current assets to current liabilities, senior debt to adjusted
net worth plus subordinated debt and earnings before non-cash charges,
interest and taxes to cash interest be maintained at prescribed levels; (3)
restrict the ability of the Company to make fundamental changes and to enter
into new lines of business, the pledging of the Company's assets and
guarantees of indebtedness of others and (4) limit dispositions of assets, the
ability of the Company to enter lease and sale and leaseback transactions, and
investments which might be made by the Company. The Company believes that
such limitations should not impair its plans for continued maintenance and
modernization of facilities or other operating activities.
On October 14, 1994, the Company entered into an amendment of its Bank
Credit Agreement, 1993 Term Loan Agreement and Senior Secured Note Agreement.
Among other things, this amendment adjusted certain financial covenants,
including the reduction of the required ratio of earnings before non-cash
charges, interest and taxes to cash interest to 1.25 to 1.00 from 1.50 to 1.00
and the increase of the maximum ratio of senior debt to adjusted net worth
plus subordinated debt to 0.85 to 1.00 from 0.80 to 1.00 effective for the
rolling four quarters ended December 31, 1994 through December 31, 1995. The
ratios were adjusted to give effect to the Company's higher aggregate cash
interest expense which results from the Company's 14 1/8% Debentures accruing
interest in cash commencing on November 1, 1994, with payments of interest in
cash commencing on May 1, 1995.
At December 31, 1994, receivables totaling $114 million, inventories
totaling $131 million and property, plant and equipment with a net book value
of $1,313 million were pledged as collateral under the terms of the Bank
Credit Agreement, the 1993 Term Loan Agreement, the Senior Secured Note
Agreement, the debt of foreign subsidiaries 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 1988 Revolving Credit Facility, and a 2% fee
with respect to any letters of credit issued under the 1988 Revolving Credit
Facility. At December 31, 1994, $197 million of borrowings reduced available
capacity under the 1988 Revolving Credit Facility to $153 million.
- 30 -
The aggregate annual maturities of long-term debt and capital lease
obligations at December 31, 1994, are as follows:
Amount
------
(In thousands)
1995........................................ $ 116,203
1996........................................ 331,307
1997........................................ 207,793
1998........................................ 87,804
1999........................................ 81,551
2000 and thereafter......................... 2,481,189
----------
$3,305,847
==========
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, 1994, are as follows:
Year Ending December 31, Amount
------
(In thousands)
1995................................... $ 23,449
1996................................... 24,541
1997................................... 24,541
1998................................... 24,330
1999................................... 24,005
2000 and thereafter.................... 362,839
--------
Total payments......................... 483,705
Less imputed interest at
rates approximating 10.9%............ 300,769
--------
Present value of capital
lease obligations.................... $182,936
========
- 31 -
10. EMPLOYEE POSTRETIREMENT BENEFIT PLANS
As of January 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The cumulative
effect on years prior to 1992 of adopting SFAS No. 106 is stated separately in
the Company's consolidated statement of income for 1992 as a one-time after-
tax charge of $10.6 million. This change in accounting principle, excluding
the cumulative effect, decreased operating income by $1.2 million in 1992.
Net periodic postretirement benefit cost included the following
components:
Year Ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
(In thousands)
Service cost...................................... $1,138 $1,140 $ 902
Interest cost..................................... 1,719 1,800 1,366
Other............................................. 85 99 --
------ ------ ------
Net periodic postretirement benefit cost........ $2,942 $3,039 $2,268
====== ====== ======
The following table sets forth the components of the plan's unfunded
accumulated postretirement benefit obligation:
December 31,
----------------
1994 1993
---- ----
(In thousands)
Accumulated postretirement benefit obligation:
Retirees............................................ $ 7,068 $ 7,504
Fully eligible active plan participants............. 3,411 4,401
Other active plan participants...................... 11,505 12,037
-------- --------
21,984 23,942
Unrecognized actuarial gains (losses)................. 457 (3,517)
-------- --------
Accrued postretirement benefit cost................... $ 22,441 $ 20,425
======== ========
The medical trend rate assumed in the determination of the accumulated
postretirement benefit obligation at December 31, 1994 begins at 11.5% in
1995, decreases 1% per year to 6.5% 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, 1994 by $3.2 million and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost by $0.5 million. The medical trend rate assumed in the determination of
the accumulated postretirement benefit obligation as of December 31, 1993
began at 12% in 1994, decreasing 1% per year to 6% for 2000 and remained at
that level thereafter.
- 32 -
The discount rate used in determining the accumulated postretirement
benefit obligation was 8% and 7% compounded annually with respect to the 1994
and 1993 valuations, respectively.
11. SHAREHOLDERS' DEFICIT
The Company is authorized to issue up to 99,400,000 shares of $.01 par
value voting Common Stock. At December 31, 1994, 38,107,778 shares were
issued and 38,101,239 shares were outstanding. At December 31, 1993,
38,107,778 shares were issued and 38,107,128 shares were outstanding. In
addition, 600,000 shares of $.01 par value nonvoting Common Stock have been
authorized, of which none were issued or outstanding at both December 31, 1994
and 1993.
Changes in the Company's shareholders' deficit accounts for the years
ended December 31, 1994, 1993 and 1992, are as follows:
Cumulative
Common Translation Retained
Stock Adjustment Deficit
------ ----------- --------
(In millions)
Balance, December 31, 1991................. $601 $ 7 $ (545)
Net loss................................... -- -- (80)
Amortization of the increase in fair
market value of Common Stock with
put right................................ -- -- (1)
Foreign currency translation adjustment.... -- (11) --
---- ----- --------
Balance, December 31, 1992................. 601 (4) (626)
Net loss................................... -- -- (2,052)
Decrease in fair market value of Common
Stock with put right..................... -- -- 2
Foreign currency translation adjustment.... -- (1) --
---- ----- --------
Balance, December 31, 1993................. 601 (5) (2,676)
Net loss................................... -- -- (71)
Foreign currency translation adjustment.... -- 3 --
---- ----- --------
Balance, December 31, 1994................. $601 $ (2) $ (2,747)
==== ===== ========
The aggregate par value of the Common Stock reported in the amounts above
at December 31, 1994 was $381,012.
12. COMMON STOCK WITH PUT RIGHT
All Common Stock acquired by management investors, including shares
acquired by the Company's former chairman and chief executive officer, are
collectively referred to as the "Putable Shares." Beginning with the fifth
anniversary of the respective dates of purchase of certain of the Putable
Shares to the date on which 15% or more of the Company's 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 and
prior to the date on which 15% or more of the Company's Common Stock has been
- 33 -
sold in one or more public offerings, management investors who terminate their
employment with the Company shall sell their shares of Common Stock and vested
options to the Company or its designee. All the Putable Shares owned by the
Company's former chairman and chief executive officer became putable to the
Company at the time of his resignation.
During 1993, the Company decreased the estimated fair market valuation of
its Common Stock as a result of the effects of adverse tissue industry
operating conditions on its long-term earnings forecast and, as a result,
reduced the carrying amount of its Common Stock with put right to its original
cost. The effect of the adjustment was to reduce both the Common Stock with
put right and the retained deficit by approximately $1.4 million.
Changes in the Company's Common Stock with put right are as follows:
Year Ended December 31,
--------------------------
1994 1993 1992
---- ---- ----
(In thousands)
Balance, beginning of year............... $11,820 $13,219 $12,963
Amortization of the increase (decrease)
in fair market value and increased
vested portion of Putable Shares......... -- (1,399) 256
Repurchased into Treasury................ (109) -- --
------- ------- -------
Balance, end of year..................... $11,711 $11,820 $13,219
======= ======= =======
13. STOCK OPTIONS
Pursuant to the Management Equity Participation Agreement and the
Management Equity Plan, 5,253,463 shares of Common Stock are reserved for sale
to officers and key employees as stock options as of December 31, 1994. The
exercisability of such options is subject to certain conditions. Such options
must be exercised within ten years of the date of grant. All such options and
shares to be issued under the terms of these plans are restricted as to
transferability. Under certain conditions, the Company has the right or
obligation to redeem shares issued under terms of the options at a price equal
to their fair market value.
- 34 -
Changes in stock options outstanding are summarized as follows:
Exercise
Number Of Price
Options Per Option
--------- ---------------
Balance, December 31, 1991..................... 3,663,803 $15.38 to 18.46
Options Granted.............................. 80,600 18.46
Options Cancelled............................ (6,890) 15.38 to 18.46
--------- ---------------
Balance, December 31, 1992..................... 3,737,513 15.38 to 18.46
Options Granted.............................. 98,800 18.46
Options Cancelled............................ (10,660) 15.38 to 18.46
--------- ---------------
Balance, December 31, 1993..................... 3,825,653 15.38 to 18.46
Options Cancelled............................ (82,888) 15.38 to 18.46
--------- ---------------
Balance, December 31, 1994..................... 3,742,765 $15.38 to 18.46
========= ===============
Exercisable at December 31, 1994............... 3,358,537 $15.38 to 18.46
========= ===============
Shares available for future grant at
December 31, 1994............................ 1,510,698
=========
On January 31, 1995, the Company's shareholders approved the 1995 Stock
Incentive Plan under which a total of 3,359,662 shares of Common Stock are
reserved for awards to officers and key employees as stock options, stock
appreciation rights, restricted stock, performance shares, stock equivalents
and dividend equivalents and approved the Non-Employee Director Plan under
which a total of 80,000 shares of Common Stock are reserved for grant to non-
employee directors. Following adoption of such plans, no additional shares
will be available for future grant under the Management Equity Participation
Agreement or Management Equity Plan. As a result, the total number of shares
available for future grant will be 3,439,662 shares as of January 31, 1995.
Any options to be issued subject to the 1995 Stock Incentive Plan will expire
not later than ten years after the date on which they are granted. The
vesting schedule and exercisability of stock options will generally be based
on length of service or attainment of performance goals. On December 19,
1994, the Company's Board of Directors approved the full vesting and
exercisability of all unvested options outstanding effective just prior to an
initial public offering of Common Stock. If such an offering proceeds, the
number of exercisable options would increase to 3,741,465 as of January 31,
1995.
Until such date on which 15% or more of the Company's Common Stock has
been sold in one or more public offerings, the Company amortizes the excess of
the fair market value of its Common Stock over the strike price of options
granted to employees over the periods the options vest. After such date, no
amortization will be required because the options will not be putable to the
Company. There was no employee stock compensation expense in 1994. Due to
the effects of adverse tissue industry operating conditions on its long-term
earnings forecast as of September 30, 1993, the Company decreased the
estimated fair market valuation of its Common Stock and, as a result, reversed
- 35 -
all previously accrued employee stock compensation expense in 1993. The
reversal of the accrued employee stock compensation expense resulted in a
credit to operations of $7,832,000 for 1993. Employee stock compensation
expense was $1,120,000 for 1992.
14. RELATED PARTY TRANSACTIONS
Morgan Stanley Group Inc. ("Morgan Stanley Group") and an affiliate
acquired a substantial majority equity interest in the Company to effect the
Acquisition. At December 31, 1994, Morgan Stanley Group and its affiliates
controlled 57% (on a fully diluted basis) of the Company's Common Stock.
Pursuant to an agreement terminated effective December 31, 1994, Morgan
Stanley & Co. Incorporated ("MS&Co") provided financial advisory services to
the Company in consideration for which the Company paid MS&Co an annual fee of
$1 million. MS&Co was also entitled to reimbursement for all reasonable
expenses incurred in the performance of the foregoing services. The Company
paid MS&Co $1,023,000, $1,046,000 and $1,096,000 for these and other
miscellaneous services in 1994, 1993 and 1992, respectively. The Company is a
party to several interest rate cap agreements (see Note 8) including one such
agreement with MS&Co which was purchased in 1994 for $2.1 million. In
connection with the sale of the 1994 Notes, MS&Co received approximately $20.4
million in underwriting fees in 1994. In 1993, MS&Co received approximately
$19.5 million related to the underwriting of the issuance of the 1993 Notes.
In 1992, MS&Co received approximately $0.7 million related to the underwriting
of the reissuance of the Company's Pollution Control Revenue Refunding Bonds.
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.
15. COMMITMENTS AND CONTINGENCIES
In 1994, the Company commenced construction of a new coal-fired boiler at
its Savannah mill. Total expenditures for the new boiler are projected to be
$35 million. As of December 31, 1994, expenditures on the project had totaled
$19 million.
The Company is subject to substantial regulation by various federal,
state and local authorities in the U.S. and national and local authorities in
the U.K. concerned with the impact of the environment on human health, the
limitation and control of emissions and discharges to the air and waters, the
quality of ambient air and bodies of water and the handling, use and disposal
of specified substances and solid wastes. Financial responsibility for the
clean-up or other remediation of contaminated property or for natural resource
damages can extend to previously owned or used properties, waterways and
properties owned by third parties as well as to prior owners. The Company is
involved in a voluntary investigation and potential clean-up of the Lower Fox
River in Wisconsin and has been named as a potentially responsible party for
alleged natural resource damages related to the Lower Fox River and Green Bay
system. In addition, the Company makes capital expenditures and incurs
operating expenses for clean-up obligations and other environmental matters
arising in its on-going operations.
Based upon currently available information and analysis, the Company
recorded a $20 million charge in the fourth quarter of 1994 for estimated or
anticipated liabilities and legal and consulting costs relating to
- 36 -
environmental matters arising from past operations. The Company expects these
costs to be incurred over an extended number of years.
The Company and its subsidiaries are parties to other lawsuits and state
and federal administrative proceedings in connection with their businesses.
Although the final results in all such suits and proceedings cannot be
predicted with certainty, the Company currently believes that the ultimate
resolution of all of such lawsuits and proceedings, after taking into account
the liabilities accrued with respect to such matters, will not have a material
adverse effect on the Company's financial condition or on its result of
operations.
16. GEOGRAPHIC INFORMATION
A summary of the Company's operations by geographic area as of
December 31, 1994, 1993 and 1992, and for the years then ended is presented
below:
United United
States Kingdom Consolidated
------ ------- ------------
(In thousands)
1994
Net sales........................ $ 1,143,205 $131,240 $ 1,274,445
Operating income................. 268,620 8,183 276,803
Identifiable operating assets.... 1,517,992 162,906 1,680,898
1993
Net sales........................ $ 1,044,174 $143,213 $ 1,187,387
Operating loss................... (1,715,777) (859) (1,716,636)
Identifiable operating assets.... 1,486,166 163,621 1,649,787
1992
Net sales........................ $ 1,008,129 $143,222 $ 1,151,351
Operating income................. 253,437 17,238 270,675
Identifiable operating assets.... 3,411,833 162,734 3,574,567
Intercompany sales and charges between geographic areas and export sales
are not material.
In 1993, the Company determined that its projected results would not
support the future amortization of the Company's remaining goodwill balance.
Accordingly, the Company wrote off its remaining goodwill balance of $1,980
million in the third quarter of 1993, resulting in charges of $1,968 million
and $12 million to the operating income of the United States and United
Kingdom operations, respectively.
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17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of the quarterly results of operations for 1994 and 1993
follows (in millions, except per share data):
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -----
1994
Net sales................ $ 275 $ 315 $ 340 $ 344 $ 1,274
Gross income............. 87 107 113 100 407
Operating income......... 60 79 85 53 277
Net income (loss) before
extraordinary item..... (15) (2) -- (25) (42)
Extraordinary item-loss
on debt repurchases.... (28) -- -- -- (28)
Net income (loss)........ (43) (2) -- (25) (70)
Earnings (loss) per share:
Net income (loss) before
extraordinary item... (0.40) (0.05) 0.01 (0.65) (1.11)
Extraordinary item-loss
on debt repurchases.. (0.74) -- -- -- (0.74)
Net income (loss)
per share............ (1.14) (0.05) 0.01 (0.65) (1.85)
Dividends per share...... -- -- -- -- --
1993
Net sales................ $ 285 $ 302 $ 309 $ 291 $ 1,187
Gross income............. 96 101 109 97 403
Operating income (loss).. 56 61 (1,905) 71 (1,717)
Net loss before
extraordinary items.... (26) (24) (1,986) (4) (2,040)
Extraordinary items--
losses on debt
repurchases............ (10) -- -- (2) (12)
Net loss................. (36) (24) (1,986) (6) (2,052)
Loss per share:
Net loss before
extraordinary items.. (0.69) (0.62) (52.12) (0.10) (53.54)
Extraordinary items--
losses on debt
repurchases.......... (0.25) -- -- (0.06) (0.31)
Net loss per share..... (0.94) (0.62) (52.12) (0.16) (53.85)
Dividends per share...... -- -- -- -- --
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ITEM 7. EXHIBITS
Exhibit No. Description
4 Form of New Bank Credit Agreement (incorporated by
reference to Exhibit 4.6 as filed with the
Company's Amendment No. 1 to Form S-1 on
February 8, 1995).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORT HOWARD CORPORATION
(Registrant)
By: /s/ James W. Nellen II
Name: James W. Nellen II
Title: Vice President
Dated: February 20, 1995
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INDEX TO EXHIBITS
Exhibit No. Description
4 Form of New Bank Credit Agreement (incorporated by
reference to Exhibit 4.6 as filed with the
Company's Amendment No. 1 to Form S-1 on
February 8, 1995).
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