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
- - - - - - - - - - - - - - -
Attached hereto and incorporated by reference herein is Fort Howard
Corporation's Annual Report on Form 10-K 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.
April 6, 1995
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 20473
FORT HOWARD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 39-1090992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1919 South Broadway, Green Bay, Wisconsin 54304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 414/435-8821
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [Not Applicable] The registrant did not have a class
of equity securities during the reporting period registered pursuant to
Section 12 of the Securities Exchange Act of 1934.
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, based on the closing bid price reported by the Nasdaq National
Market on March 17, 1995, was $494.3 million.
As of March 17, 1995 63,101,239 shares of $.01 par value Voting Common Stock
were outstanding.
PART I
ITEM 1. BUSINESS
GENERAL
Fort Howard Corporation (the "Company"), founded in 1919, is a leading
manufacturer, converter and marketer of sanitary tissue products, including
specialty dry form products, in the United States and the United Kingdom. Its
principal products, which are sold in the commercial (away-from-home) and
consumer (at-home) markets, include paper towels, bath tissue, table napkins,
wipers and boxed facial tissue manufactured from virtually 100% recycled
fibers. The Company produces and ships its products from manufacturing
facilities located in Wisconsin, Oklahoma, Georgia and the United Kingdom.
The Company believes that it is the leading producer of tissue products
in the domestic commercial market with a 26% market share and has focused
two-thirds of its capacity on this faster growing segment of the tissue
market. In the domestic consumer market, where the Company has a 9% market
share, its principal brands include Mardi Gras printed napkins (which hold the
leading domestic market position) and paper towels, Soft 'N Gentle bath and
facial tissue, So-Dri paper towels, Page paper towels, bath tissue and table
napkins, and Green Forest, the leading domestic line of environmentally
positioned, recycled tissue paper products. Fort Howard also manufactures and
distributes its products in the United Kingdom where it currently has the
fourth largest market share primarily in the consumer segment of the market.
From 1984 to 1994, the Company has doubled its production capacity by
constructing world-class, integrated, regional tissue mills which utilize the
Company's proprietary de-inking technology to produce quality tissue from a
broad range of wastepaper grades. These mills enable the Company to produce
low cost, quality tissue products because they: (i) include state-of-the-art
wastepaper de-inking and processing systems that process relatively low grades
of wastepaper to produce low cost fiber for making tissue paper; (ii) contain
eight of the eleven largest (270-inch) tissue paper machines in the world,
which significantly increase labor productivity; (iii) are geographically
located to minimize distribution costs; (iv) generate their own steam and
electrical power and (v) manufacture certain of their own process chemicals
and converting materials.
THE RECAPITALIZATION
On March 16, 1995 (the "Closing Date"), the Company completed the initial
components of a recapitalization plan (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 components:
(1) The offer and sale by the Company on the Closing Date of 25,000,000
shares of Common Stock at $12 per share in the United States and
internationally (the "Offering");
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(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 $810 million term loan (the "1995 Term Loan
A") and a $330 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 on the Closing Date 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 of the then outstanding Senior Secured
Floating Rate Notes (the "Senior Secured Notes") due 1997 through 2000 (the
"Senior Secured Note Redemption"); and
(4) The planned application on April 15, 1995, 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."
The sources and uses of funds required to complete the Recapitalization,
assuming that the 1995 Debt Redemptions also occurred on March 15, 1995, are
as follows (in millions):
AMOUNT
Sources of Funds: ------
Proceeds of the Offering.......................................... $ 300.0
1995 Term Loan A.................................................. 810.0
1995 Term Loan B.................................................. 330.0
1995 Revolving Credit Facility.................................... 209.3
1995 Receivables Facility......................................... 60.0
--------
Total Sources of Funds............................................ $1,709.3
========
Uses of Funds:
14 1/8% Debenture Redemption...................................... $ 566.9
Senior Secured Note Redemption.................................... 300.0
1988 Revolving Credit Facility Prepayment......................... 300.0
1988 Term Loan Prepayment......................................... 224.5
12 5/8% Debenture Redemption (including 2.5% redemption premium).. 149.5
1993 Term Loan Prepayment......................................... 100.0
Company Transaction Fees and Expenses(a).......................... 68.4
--------
Total Uses of Funds............................................... $1,709.3
========
- ------------
(a) Includes underwriters' commissions and other transaction fees and
expenses of the Recapitalization payable or reimbursable by the Company.
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DOMESTIC TISSUE OPERATIONS
Products
Commercial Products. Fort Howard's commercial tissue products include
folded and roll towels, bath and facial tissue, bulk and dispenser napkins,
disposable wipers, specialty printed merchandise and dispensers. Because
commercial market manufacturers offer similar product attributes to this value
conscious market, competition principally involves value pricing and service.
The Company constantly strives to grow in new or underdeveloped
subsegments of its commercial products business. With the Envision line, made
from 100% recycled paper, Fort Howard was the first company to position a line
of tissue paper products as made from recycled paper that meet or exceed U.S.
Environmental Protection Agency ("U.S. EPA") guidelines for post-consumer
wastepaper ("PCW") content of 5% to 40%. The Company believes Envision is the
market leader in the rapidly growing environmental segment of the commercial
market. Utilizing its advanced deinking technology, Fort Howard set the
standard dramatically higher for PCW content in commercial products by
increasing the minimum PCW content of its Envision line to 90% or higher and
by commissioning an outside audit of its internal controls which are
maintained to assure that Envision manufacturing processes yield the stated
minimum PCW content.
In addition, the Company also produces parent rolls for sale to
converters in international markets, including Latin America and the Middle
East.
Specialty Dry Form Products. In another growing product area, dry form
products (used to make baby wet wipes and a key component in feminine hygiene
products), the Company believes it is the largest domestic producer and one of
only 13 manufacturers in the world. Dry form production is a process that
converts soft, randomly laid fibers made from wood pulp into a sturdy and
absorbent pulp web using air instead of water to transfer the pulp. Synthetic
bonding agents are then sprayed on the pulp web, creating a sheet of fabric-
like paper. Dry form is principally sold in parent roll form to meet rigorous
specifications for large consumer product companies which convert it into
their branded products. The Company believes that it is the leading marketer
of dry form to companies in the domestic private label baby wipe market. The
growth rate for this business to date has exceeded the growth rate of the
tissue industry as a whole. In addition, the Company converts dry form paper
into premium wipers and dinner napkins for the commercial market.
Consumer Products. Fort Howard's consumer product growth strategy has
targeted the branded value and private label segments of the market, where the
Company enjoys a competitive advantage as a low cost producer.
The Company's value branded products such as Mardi Gras, Soft 'N Gentle
and Green Forest offer a high level of softness, absorbency and brightness at
substantial price savings. The appeal of Mardi Gras napkins and paper towels
is enhanced by their multi-color prints with changing patterns and special
seasonal designs. The attractiveness of the Mardi Gras designs and its value
positioning have enabled the Company to increase the Mardi Gras napkin market
share to approximately 14% in 1994, giving the Company the leading consumer
napkin share.
- 4 -
Soft 'N Gentle bath tissue is the Company's largest selling consumer
brand. Soft 'N Gentle bath tissue is a quality product that targets retail
pricing at 20-25% below premium tissue products. The Company introduced the
Green Forest line of bath tissue, paper towels and napkins in 1990 on the 20th
anniversary of Earth Day. Environmentally oriented consumers have made the
Green Forest line the leading brand in the environmentally positioned segment.
The Company's Page bath tissue, paper towels and napkins and So-Dri paper
towels are targeted to the more price conscious shopper in the economy segment
of the consumer market. The retail prices of these products are typically
targeted at 25-30% below the premium brands.
Fort Howard is the leading tissue producer in the growing consumer
private label business with an estimated one-third market share in 1994. Many
national grocery chains have focused on the development of private label
tissue products to support the positioning of the chain with their shoppers as
well as to enhance margins. Since 1984, Fort Howard's private label business
has tripled and in 1994 represented approximately 40% of Fort Howard's
consumer tissue sales. Typically offered on a limited supplier basis, private
label products enable the Company to form close relationships with many of the
nation's fastest growing, leading grocery chains and mass merchandisers and
afford opportunities for Fort Howard's branded products with these same
customers.
Marketing
Approximately two-thirds of the Company's products are sold through
paper, institutional food and janitorial distributors into the commercial
market, with the balance being principally sold through brokers to major food
store chains, wholesale grocers and mass merchandisers for household (or
"consumer") use. These products are produced in a broad range of weights,
textures, sizes, colors and package configurations providing Fort Howard with
distinct advantages as a full-line manufacturer. The Company also creates and
prints logos, commercial messages and artistic designs on paper napkins and
place mats for commercial customers and party goods and specialty print
merchandisers. Most products are sold under Company-owned brand names, with
an increasing percentage of products being sold under private labels. In the
commercial segment the Company sells its products primarily under the
Fort Howard name. Principal brand names of consumer products include
Soft 'N Gentle, Mardi Gras, Green Forest, So-Dri and Page.
Commercial Market. Fort Howard's commercial sales force of over 200
salaried representatives combines broad geographical reach and frequency of
contact with the Company's major commercial customers, including large
distributors, national accounts and club warehouses. Because the commercial
sales force is dedicated to the sale of the Company's commercial tissue
products, the Company's sales representatives are able to devote substantial
time to developing end user demand, an important selling point for the
Company's distributors.
The Company is forging a growing number of strategic alliances with
customers. The Company believes Fort Howard offers customers a number of
important competitive advantages, including: (i) a profitable market growth
strategy; (ii) a broad line of tissue paper products that permits distributors
to limit the number of suppliers they use, increase inventory turns and
profits, and reduce warehouse requirements and (iii) significant end user
demand that makes Fort Howard an attractive product line.
- 5 -
The continued development of the Company's national accounts business in
the foodservice, health care, lodging, buildings and industrial subsegments of
the commercial market has been an important factor in growing the Company's
leading commercial market share. The Company's national accounts sales team
focuses on meeting the special requirements of these large customers who
prefer to negotiate purchases directly with the Company. Such requirements
include, for example, strict sanitary production requirements, the ability to
service locations nationwide, EDI capabilities and superior on-time and
complete order shipping performance. Certain of these customers, particularly
the large, environmentally conscious fast food or other national chains,
increasingly require the ability to offer 100% recycled paper products.
The Company's newly organized club warehouse sales and marketing team
focuses on the special requirements of these customers, including unique
product specifications, packaging sizes and design, palletized distribution,
EDI capabilities, the ability to service locations nationwide, superior on-
time and complete order shipping performance and the ability to grow rapidly
to support new warehouse openings.
Consumer Market. Sales of the Company's consumer products are
principally made through a nationwide network of independent food brokers.
Regional sales managers focus on sustaining close relationships with brokers
and retailers by emphasizing Fort Howard's historic strengths--value,
competitive pricing and enhanced margins for retailers. The Company's
national accounts sales force focuses on mass merchandisers and on
implementing their "everyday low pricing" strategies. The private label sales
team deals with both national accounts and food brokers and their customers.
In contrast to tissue producers who emphasize marketing of their consumer
products through advertising and promotion to the end consumer, Fort Howard
incurs minimal advertising expense. Rather, the Company focuses its marketing
efforts for consumer products on trade promotion and incentive programs
targeted to grocery and mass merchandising retailers.
INTERNATIONAL TISSUE OPERATIONS
Products
When it was acquired by Fort Howard in 1982, Fort Sterling Limited
("Fort Stering") was an independent recycler of wastepaper into sanitary
tissue paper products sold principally under private labels into the consumer
market. Since 1982, Fort Sterling has funded significant investments in
recycling and other process technologies and equipment through cash flow from
operations and borrowings, doubled its U.K. market share, introduced premium
quality Nouvelle tissue paper products produced from 100% wastepaper to the
United Kingdom consumer market, expanded into the commercial market and
developed a strong local management team and workforce. Today, Fort Sterling
is one of the four fully integrated tissue companies in the United Kingdom.
For an analysis of net sales, operating income (loss) and identifiable
operating assets in the United States and the U.K., see Note 16 to the audited
consolidated financial statements.
Consumer Products. Unlike the Company's domestic tissue operations,
Fort Sterling's operations are directed toward the larger consumer segment of
the United Kingdom tissue market where over 85% of its sales are targeted. In
a market where private label represents slightly less than half of all tissue
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sales, the Company believes that Fort Sterling maintains a leading share of
the consumer private label market. Approximately two-thirds of Fort
Sterling's consumer business in 1994 was sold under private labels to large
grocers and convenience stores. Fort Sterling's principal brand is its
Nouvelle line of tissue paper products. The Nouvelle line is positioned as
100% recycled with the product attributes approaching those of the leading
United Kingdom premium brands.
Commercial Products. Fort Sterling's commercial market volume in the
United Kingdom has grown from less than 1% of the U.K. commercial market upon
its acquisition in 1982 to 5% in 1994.
Marketing
Fort Sterling maintains a direct sales force serving large and
independent grocers and mass merchandisers in the consumer market. Fort
Sterling has a commercial sales force which markets the Company's products via
a network of independent distributors. A separate national accounts sales
team targets commercial foodservice, health care and national industrial
accounts.
CAPITAL EXPENDITURES
The Company has invested heavily in its manufacturing operations. Capital
expenditures in the Company's tissue business were approximately $724 million
for the five year period ended December 31, 1994, $538 million of which was
incurred for capacity expansion projects. In addition, the Company's annual
capital spending program includes significant investments for the ongoing
modernization of each of its mills. For example, as new deinking technologies
and converting equipment are developed, the Company adds such technology and
equipment at each mill to maintain low cost structures.
A significant portion of the Company's capital budget since 1985 has been
invested in the Savannah mill, which was completed in 1991. Total
expenditures for the Savannah mill were $570 million. In 1993, the Company
completed an expansion of its Green Bay tissue mill, including the addition of
a new tissue paper machine and related environmental protection, pulp
processing, converting, and steam generation equipment. The newest tissue
paper machine at the Green Bay mill commenced production in August 1992.
Total expenditures for the expansion project were $180 million. In 1994, the
Company completed the installation of a fifth tissue paper machine,
environmental protection equipment and associated facilities at its Muskogee
tissue mill. Total expenditures for the expansion were approximately
$140 million.
In recent years, Fort Sterling has increased its capital spending to
expand significantly the productive capacity of its two older tissue paper
machines and to improve the capacity and productivity of its converting
operations. In 1993, Fort Sterling completed a $96 million expansion which
doubled the capacity of its paper mill. The expansion project added a
206-inch tissue paper machine and related deinking and pulp processing plants.
In September 1992, Fort Sterling acquired Stuart Edgar Limited ("Stuart
Edgar"), a converter of consumer tissue products. The acquisition
significantly increased Fort Sterling's converting capacity at a low capital
cost and provided Fort Sterling with a modern converting plant.
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RAW MATERIALS AND ENERGY SOURCES
The principal raw materials and supplies used to manufacture tissue
products are wastepaper (which is processed to reclaim fiber), chemicals,
corrugated shipping cases and packaging materials. Fort Howard has led the
industry in developing sanitary tissue paper products from recycled
wastepaper. Fort Howard uses 100% wastepaper for all but a limited number of
dry form and specialty products representing approximately 3% of its volume.
Currently, Fort Howard recycles over 1.4 million tons of wastepaper
annually into tissue products. The deinking technology employed by the
Company allows it to use a broad range of wastepaper grades, which effectively
increases both the number of sources and the quantity of wastepaper available
for its manufacturing process. The Company believes that its use of
wastepaper for substantially all of its fiber requirements gives it a cost
advantage over its competitors.
The Company has developed the largest network for obtaining deinking
grades of wastepaper in the domestic tissue industry. A large portion of its
wastepaper requirements is sourced through Harmon Assoc. Corp. ("Harmon"), the
Company's 100% owned wastepaper brokerage subsidiary. The remainder of the
Company's wastepaper requirements are sourced through an in-house wastepaper
purchasing group. As a wastepaper broker, Harmon can accept the total
wastepaper generation from a supplier whether or not all the wastepaper is
needed to meet Fort Howard's production requirements. This ability
effectively increases the sources of supply to Fort Howard. In addition,
Harmon's activities in export markets, as well as in grades not usually
purchased by Fort Howard, provide the Company with valuable intelligence on
trends in the worldwide wastepaper market. The Company also maintains
innovative curbside collection programs with several municipalities and enters
into contracts with large office complexes to effectively increase its sources
of wastepaper supply.
The price of wastepaper is affected by demand which is primarily
dependent upon deinking and recycling capacity levels in the paper industry
overall and by the price of market pulp. Prices for deinking grades of
wastepaper used by tissue producers increased sharply beginning in the third
quarter of 1994. Wastepaper prices for the grades of wastepaper used in Fort
Howard's products more than doubled from July 1994 to January 1995. Such
wastepaper prices may increase further because of increased demand resulting
from substantial additions of deinking 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. If the current trend in the Company's
wastepaper costs continues, there can be no assurance that the Company will be
able to recover increases in the cost of wastepaper through price increases
for its products. Further, a reduction in supply of wastepaper due to
increased demand or other factors could have an adverse effect on the
Company's business.
The Company manufactures some of the process chemicals required for the
Company's tissue production at each of its domestic mill locations. The
balance of its chemical requirements is purchased from outside sources. The
Company also purchases significant quantities of coal for generation of
electrical power and steam at all three of its domestic tissue mills. The
Company seeks to maintain inventories of wastepaper, other raw materials and
supplies which are adequate to meet its anticipated manufacturing needs.
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Each of the Company's domestic mills includes a coal-fired cogeneration
plant for the production of all its steam, which Fort Howard uses both in
manufacturing tissue and in generating virtually all its electricity. The
Savannah mill can also generate electrical power by burning natural gas in
combustion turbines. In recent years, the Company has installed fluidized bed
boilers to burn lower cost coal and petroleum coke efficiently and in
conformity with environmental standards. The primary sources of energy for
the Company's United Kingdom tissue facilities are purchased electrical power
and natural gas.
COMPETITION
All the markets in which the Company sells its products are extremely
competitive. The Company's tissue products compete directly with those of a
number of large diversified paper companies, including Chesapeake Corporation,
Georgia-Pacific Corporation, James River Corporation of Virginia,
Kimberly-Clark Corporation, Pope & Talbot, Inc., Scott Paper Company and the
Procter & Gamble Company, as well as regional manufacturers, including
converters of tissue into finished products who buy tissue directly from
tissue mills. Many of the Company's competitors are larger and more strongly
capitalized than the Company which may enable them to better withstand periods
of declining prices and adverse operating conditions in the tissue industry.
Although customers generally take into account price, quality, distribution
and service as factors when considering the purchase of products from the
Company, over the last four years, price has become a more important
competitive factor affecting tissue producers.
CUSTOMERS AND BACKLOG
The Company principally markets its products to customers in the United
States and, to a lesser extent, the United Kingdom, Mexico, Canada and the
Middle East. The business of the Company is not dependent on a single
customer. Currently, a substantial portion of the Company's sales are
pursuant to contracts which generally specify pricing over periods of three
months to one year.
The Company's products are manufactured with relatively short production
time from basic materials. Products marketed under the Company's trademarks
and stock items are sold from inventory. The backlog of customer orders is
not significant in relation to sales.
RESEARCH AND DEVELOPMENT
The Company maintains laboratory facilities with a permanent staff of
engineers, scientists and technicians who are responsible for improving
existing products, development of new products and processes, product quality,
process control and providing technical assistance in adhering to regulatory
standards. Continuing emphasis is being placed upon expanding the Company's
capability to deink a broader range of wastepaper grades, designing new
products, further automating manufacturing operations and developing improved
manufacturing and environmental processes.
PATENTS, LICENSES, TRADEMARKS AND TRADE NAMES
While the Company owns or is a licensee of a number of patents, its
operations and products are not materially dependent on any patent. The
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Company relies on trade secret protection for its proprietary deinking
technology which is not covered by patent. The Company's domestic tissue
products for at-home use are sold under the principal brand names
Soft 'N Gentle, Mardi Gras, Green Forest, So-Dri and Page. For the Company's
domestic commercial tissue business, principal brand names include Envision
and Generation II. All brand names are registered trademarks of the Company.
A portion of the Company's tissue products are sold under private labels or
brand names owned by customers.
EMPLOYEES
At December 31, 1994, the Company's world-wide employment was
approximately 6,800, of which 5,800 persons were employed in the United States
and 1,000 persons were employed in the United Kingdom. There is no union
representation at any of the Company's domestic facilities. The Company's
employees at its facilities in the United Kingdom are unionized and the union
contracts generally require annual renegotiation of employee wage awards. The
Company considers its relationship with its employees to be good.
ENVIRONMENTAL MATTERS
The Company is subject to substantial regulation by various federal,
state and local authorities in the U.S., and by 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 waste at, among other locations, the
Company's process waste landfills.
Compliance with existing laws and regulations presently requires the
Company to incur substantial capital expenditures and operating costs. In
addition, environmental legislation and regulations and the interpretation and
enforcement thereof are expected to become increasingly stringent and to
further limit emission and discharge levels and to expand the scope of
regulation. As a result, it is likely that certain of the Company's operating
expenses will increase and that the Company will be required to make
additional capital expenditures. In addition, the operating flexibility of
the Company's manufacturing operations is likely to be adversely impacted.
Because other paper manufacturers are generally subject to similar
environmental restrictions, the Company believes that compliance with
environmental laws and regulations is not likely to have a material adverse
effect on its competitive position. It is possible, however, that such
compliance could have a material adverse effect on the Company's financial
condition and results of operations at some point in the future.
In 1994, the Company made capital expenditures of $9 million with respect
to pollution abatement and environmental compliance. Included in the 1994
capital expenditures was $4 million for pollution abatement equipment in
connection with completing expansion projects initiated in 1993 and prior
years. The Company expects to commit to approximately $12 million of capital
expenditures to maintain compliance with environmental control standards at
its facilities during 1995 and 1996. Included in the 1995-96 expected
expenditures is $1 million for pollution abatement equipment to be installed
in connection with constructing a coal-fired boiler at the Company's Savannah
- 10 -
mill. Although some pollution abatement and solid waste disposal facilities
produce improvements in operating efficiency, most increase product costs
without enhancing capacity or operating efficiency. Because the impact of new
environmental laws and regulations and the implementation and enforcement of
existing laws and regulations cannot be determined with certainty at this
time, it is possible that there will be additional capital expenditures during
these years, including but not limited to those described below.
The U.S. EPA issued "Final Guidance" for basin-wide water quality
standards pursuant to the Great Lakes Water Quality Agreement between the U.S.
and Canada regarding the development of water quality standards for the Great
Lakes and their tributaries on March 13, 1995. Under the Final Guidance the
affected states will be required within two years to implement specific
regulations which are as protective as the provisions of the Final Guidance.
Dischargers would then have an additional period of up to five years in which
to comply with any new more stringent permit limits derived under the Final
Guidance. In its proposed form the guidance would have imposed limitations on
the Company's wastewater discharge from its Green Bay Mill into the Fox River
that as a practical matter would have prohibited the Company from discharging
any wastewater into the Fox River. Based upon that analysis, the Company
explored alternative technologies to enable it to discontinue all wastewater
discharge to the Fox River, if required, and developed cumulative capital
expenditure estimates which indicated approximately $65 million (which
includes $20 million of currently planned capital expenditures) over a several
year period.
The Company is reviewing the Final Guidance to determine the impact it
will have on the Company's operations. The Final Guidance appears to have
been modified to address concerns that the terms of the guidance in its
proposed form were unnecessarily complex, burdensome and environmentally
unjustified. The ultimate impact of the Final Guidance on the Company's
operations could vary depending upon several factors, including, among others:
(i) the form and substance of state laws or regulations implementing the Final
Guidance; (ii) delays or changes resulting from potential administrative and
judicial challenges to the guidance which might be filed and (iii) new
developments in control and process technology. The Company presently
believes that the cost of complying with the final guidance will not exceed
the amounts of its earlier estimates.
The U.S. EPA has proposed new air emission and revised wastewater
discharge standards for the pulp and paper industry which are commonly known
as the "Cluster Rules." The components of the Cluster Rules that deal with
wastewater discharges are expected to be finalized by late 1995 or early 1996.
If the final rules on wastewater discharges are substantially the same as the
proposed rules, the Company estimates that it will incur additional aggregate
capital expenditures of approximately $1.2 million.
Components of the currently proposed Cluster Rules that address air
emissions will have little impact on de-inking paper mills such as the
Company's mills. However, additional installments of the Cluster Rules,
expected to be proposed during 1996 with expected compliance deadlines as late
as the year 2000, are expected to specifically address chloroform and other
air emissions from deinking mills and likely will have a greater impact on the
Company. The Company is presently unable to estimate that impact since the
applicable rules have not been proposed and therefore no assurances can be
given as to whether the impact will be material to the Company.
- 11 -
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") imposes liability, without regard to fault or to the legality of
the original action, on certain classes of persons (referred to as potentially
responsible parties or PRPs) associated with a release or threat of a release
of hazardous substance into the environment. 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 properties currently owned
and used by the Company even if contamination is attributable entirely to
prior owners. The Company is involved in a voluntary investigation and
potential clean-up of the Lower Fox River and has been named a PRP for alleged
natural resource damages to the Fox River, both of which are discussed in
"Legal Proceedings" below. Except for the United States Department of
Interior, Fish and Wildlife Service ("FWS") assessment of the Fox River
described in "Legal Proceedings," the Company is not presently named as a PRP
at any CERCLA-related sites. However, there can be no certainty that the
Company will not be named as a PRP at any other sites in the future or that
the costs associated with additional sites would not be material to the
Company's financial condition or results of 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
environmental matters arising from past operations. The Company expects these
costs to be incurred over an extended number of years. While the charge
reflects the Company's current estimates of the costs of these environmental
matters, there can be no assurance that the amount accrued will be adequate.
ITEM 2. PROPERTIES
Fort Howard produces its domestic tissue products at three facilities:
its original facility in Green Bay, Wisconsin; its Muskogee, Oklahoma mill
constructed as a greenfield site which commenced papermaking production in
1978; and its greenfield mill near Savannah, Georgia which commenced
production in 1987. Each of these facilities is a world-class, fully
integrated tissue mill that can de-ink and process fiber from low cost
wastepaper to provide virtually all of the mill's tissue fiber. In addition,
each mill contains at least two 270-inch tissue paper machines, is
geographically located to minimize distribution costs to its regional markets,
produces all its steam and electrical power, manufactures some of the
chemicals used in whitening tissue fiber and some of its converting materials,
and converts, prints and packages Fort Howard's tissue products.
Fort Howard has installed eight of the eleven largest (270-inch) tissue
paper machines in the world which provide long-term productivity advantages.
Approximately 90% of Fort Howard's domestic production comes from tissue paper
machines capable of making 50,000 tons or more annually. Approximately 50% of
Fort Howard's papermaking capacity came on-line during the last 10 years.
With each new capacity expansion, Fort Howard installed new, world-class
supporting equipment consisting of large scale wastepaper processing and
cleaning systems and converting equipment that provide further productivity
advantages.
- 12 -
In Green Bay, Wisconsin, the Company operates nine tissue paper machines,
including two world-class 270-inch tissue paper machines completed in 1984 and
1992. In addition, the Green Bay mill contains two dry form machines which
commenced operation in 1978 and 1989. Although the Green Bay mill is the
Company's original facility, having commenced production in 1920, it is well
maintained, includes virtually all of Fort Howard's latest technologies and
equipment and is cost competitive with the Company's newer facilities. The
Company's Muskogee, Oklahoma mill contains a new 270-inch tissue paper machine
which was added during the first quarter of 1994, and another 270-inch and
three 200-inch tissue paper machines which were installed between 1978 and
1985. Fort Howard's greenfield mill located near Savannah, Georgia contains
four 270-inch tissue paper machines that commenced production in 1987, 1988,
1989 and 1991.
Each of the Company's domestic mills also includes a coal-fired
cogeneration power plant capable of producing all of the mill's steam and
electricity, a modern de-inking and pulp processing plant that processes
virtually all of the mill's fiber requirements from wastepaper, a chemical
plant that produces high volume chemicals used in whitening fibers, high speed
converting equipment for cutting, folding, printing and packaging paper into
the Company's finished products and related facilities and warehousing. The
Muskogee mill also includes a polywrap manufacturing plant that processes
approximately one-half of the polywrap required by the Company's domestic
mills and the Green Bay mill includes a large machine shop that services all
the Company's domestic mills.
Fort Sterling currently operates three tissue paper machines and a
deinking and wastepaper processing plant at its Ramsbottom paper mill and
cuts, folds, prints and packages paper into finished tissue products at its
Bolton and Wigan converting facilities, all of which are located in Greater
Manchester, England.
Except for certain facilities and equipment constructed or acquired in
connection with sale and leaseback transactions pursuant to which the Company
continues to possess and operate such facilities and equipment, substantially
all the Company's manufacturing facilities and equipment are owned in fee.
The Company's domestic and United Kingdom tissue manufacturing facilities are
pledged as collateral under the terms of the Company's debt agreements. See
Note 8 to the audited consolidated financial statements.
The Green Bay, Muskogee, Savannah, and United Kingdom facilities
generally operate tissue paper machines at full capacity seven days per week,
except for downtime for routine maintenance and the temporary shut-downs of
one or two small tissue paper machines at the Green Bay mill. Converting
facilities are generally operated on a 3-shift, 5-day per week basis or a 7-
day per week schedule. Converting capacity could be expanded by working
additional hours and/or adding converting equipment.
ITEM 3. LEGAL PROCEEDINGS
On December 16, 1994, the Company received a Civil Investigative Demand
("CID") issued by the U.S. Department of Justice, Antitrust Division pursuant
to the Antitrust Civil Process Act, Title 15 of the United States Code. The
CID seeks documents and information as part of an Antitrust Division civil
investigation to determine whether there are agreements in restraint of trade
- 13 -
in connection with sales of sanitary paper products. The Company is
cooperating with the investigation.
Since July 1992, the Company has been participating with a coalition
consisting of industry, local government, state regulatory commission and
public interest members studying the nature and extent of PCB (polychlorinated
biphenyl) and other sediment contamination of the Lower Fox River in northeast
Wisconsin. The objective of the coalition is to identify, recommend and
implement cost effective remediation of contaminated deposits which can be
implemented on a voluntary basis. Based upon presently available information,
the Company believes that there are additional parties, some of which may have
substantial resources, who may in the future contribute to the remediation
effort. One of the current industry coalition members, in cooperation with the
Wisconsin Department of National Resources, is in the process of undertaking a
demonstration of river remediation techniques on the Lower Fox River to
remediate one sediment deposit located approximately 35 miles upstream from
the Company's Green Bay mill. The Company's participation in the studies
undertaken by the coalition is voluntary and its contributions to funding
those activities to date have not been significant. The Company's
participation in the coalition is not an admission of liability for any
portion of any remediation and the Company does not believe its participation
will prejudice any defenses available to the Company.
On June 20, 1994, the FWS, a federal natural resources trustee, informed
the Company that it had identified the Company and four other companies with
facilities located along the Lower Fox River as PRPs for purposes of natural
resource liability under CERCLA, commonly known as the "Superfund Act," and
the Federal Water Pollution Control Act arising from alleged releases of PCBs
to the Fox River and Green Bay system. The FWS alleges that natural resources
including endangered species, fish, birds and tribal lands or lands held by
the United States in trust for various tribes have been exposed to PCBs that
were released from facilities located along the Fox River. The FWS has stated
that it intends to undertake an assessment to determine and quantify the
nature and extent of injury to natural resources. The FWS has invited the
Company and the other four companies to participate in the development of the
type and scope of the assessment and in the performance of the assessment,
pursuant to federal regulations. It is anticipated that any assessment would
require considerable time to complete. Based upon presently available
information, the Company believes that there are additional parties, some of
which may have substantial resources, who may be identified as PRPs for
alleged natural resource damages.
On July 15, 1992, Region V of the U.S. EPA issued a Finding of Violation
to the Company concerning the No. 8 boiler at its Green Bay mill. The Finding
alleged violation of regulations issued by the U.S. EPA under the Clean Air
Act relating to New Source Performance Standards for Fossil Fuel Fired Steam
Generators. In response to an accompanying Request for Information, the
Company furnished certain information concerning the operation of the boiler.
The Company met with representatives of the U.S. EPA in August 1992 and
February 1993 to discuss the alleged violations. On January 11, 1994, the
U.S. EPA informally advised the Company that, due to its internal guidelines
that limit the authority of the agency to administratively resolve matters
that include alleged violations extending over a period of more than one year,
disposition of the Finding of Violation was being transferred to the U.S.
Department of Justice. The Company met with representatives of the U.S. EPA
and the U.S. Department of Justice in September 1994. On October 5, 1994, the
Company and the U.S. EPA, with concurrence from the U.S. Department of
- 14 -
Justice, reached an agreement in principle whereby the Company, without
admitting any wrongdoing, has agreed to make certain modifications to the
boiler which will limit its physical capacity to the level specified in the
alleged relevant New Source Performance Standards. The physical
modifications, which require expenditures of approximately $40,000, will not
affect the utility of the No. 8 boiler. In addition, the Company has agreed
to pay $350,000 to settle this matter.
The Company believes, based upon currently available information and
analysis, that the environmental charge it has accrued in the fourth quarter
of 1994 for environmental matters adequately reflects the Company's 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. While the charge
reflects the Company's current estimates of the costs of these environmental
matters, there can be no assurance that the amount accrued will be adequate.
In 1992, 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
Code Section 162(k) (which denies deductions for otherwise deductible amounts
paid or incurred in connection with stock redemptions). The Company had
deducted a portion of the disallowed fees and expenses in 1988 and has been
deducting the balance of the fees and expenses over the terms of the 1988
long-term debt financing and refinancing. Following receipt of the Notice,
the Company filed a petition in the U.S. Tax Court contesting the deficiency.
In August 1994, the U.S. Tax Court issued its opinion in which it essentially
adopted the interpretation of Code Section 162(k) advanced by the IRS and
disallowed the deductions claimed by the Company. At present, the U.S. Tax
Court is preparing an order in which it will determine the amount of 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 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.
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 suits and proceedings cannot be predicted
with certainty, the Company presently believes that the ultimate resolution of
all 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 results of operations.
- 15 -
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during the
fourth quarter of 1994.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
During each of the fiscal years ended December 31, 1993 and December 31,
1994, there was no public market for the Company's Common Stock. The
Company's Common Stock began trading under the symbol FORT on the Nasdaq
National Market on March 10, 1995. The number of holders of record of the
Company's Common Stock immediately prior to the Offering was 59.
The Company anticipates that all its earnings in the near future will be
used for the repayment of indebtedness and for the development and expansion
of its business and, therefore, does not anticipate paying dividends on its
Common Stock in the foreseeable future. The New Bank Credit Agreement, the
1995 Receivables Facility and the Company's outstanding debt obligations
limit, in each case with certain exceptions, the ability of the Company to pay
dividends on the Common Stock. Subject to such restrictions, any
determination to pay cash dividends in the future will be at the discretion of
the Company's Board of Directors and will be dependent upon the Company's
results of operations, financial condition, contractual restrictions and other
factors deemed relevant at the time by the Board of Directors.
- 16 -
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE><CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(In millions except ratios and per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales .............................. $ 1,274 $ 1,187 $ 1,151 $ 1,138 $ 1,151
Cost of sales (a)........................ 867 784 726 713 719
------- ------- ------- ------- -------
Gross income............................. 407 403 425 425 432
Selling, general, and
administrative (a)(b).................. 110 97 97 98 105
Amortization of goodwill (c)............. -- 43 57 57 57
Goodwill write-off (c)................... -- 1,980 -- -- --
Environmental change (d)................. 20 -- -- -- --
------- ------- ------- ------- -------
Operating income (loss) (d).............. 277 (1,717) 271 270 270
Interest expense......................... 338 342 338 371 423
Other (income) expense, net ............. -- (3) 2 (3) (33)
------- ------ ------- ------- -------
Loss before taxes (d).................... (61) (2,056) (69) (98) (120)
Income taxes (credit).................... (19) (16) -- (24) (37)
------- ------ ------- ------- -------
Loss before equity earnings,
extraordinary items and
adjustment for accounting change....... (42) (2,040) (69) (74) (83)
Equity in net loss of
unconsolidated subsidiaries (e)........ -- -- -- (32) (23)
------- ------ ------- ------- -------
Net loss before extraordinary items
and adjustment for accounting change... (42) (2,040) (69) (106) (106)
Extraordinary items - losses on debt
repurchases (net of income taxes)...... (28) (12) -- (5) --
Adjustment for adoption of SFAS No. 106
(net of income taxes) (f).............. -- -- (11) -- --
------- ------ ------- ------- -------
Net loss (a)(d).......................... $ (70) $(2,052) $ (80) $ (111) $ (106)
======= ======= ======= ======= =======
Loss per share (d)(g).................... $ (1.85) $(53.85) $ (2.10) $ (3.17) $ (3.64)
OTHER DATA:
EBITDA (h)............................... $ 393 $ 387 $ 410 $ 444 $ 441
EBITDA as a percent of net sales (h)..... 30.8% 32.6% 35.6% 39.0% 38.3%
Depreciation of property, plant
and equipment (a)...................... $ 96 $ 88 $ 81 $ 116 $ 112
Non-cash interest expense................ 74 101 140 141 145
Capital expenditures..................... 84 166 233 144 97
Weighted average number of shares
of Common Stock outstanding
(in thousands) (g)..................... 38,103 38,107 38,107 34,868 29,197
BALANCE SHEET DATA (at end of
period):
Total assets............................. $ 1,681 $ 1,650 $ 3,575 $ 3,470 $ 3,627
Working capital (deficit)................ (98) (92) (124) 2 (80)
Long-term debt (including current
portion) and Common Stock with
put right.............................. 3,318 3,234 3,104 2,947 3,125
Shareholders' equity (deficit)........... (2,148) (2,081) (29) 62 13
</TABLE>
- 17 -
(a) Effective January 1, 1992, the Company prospectively changed its estimates
of the depreciable lives of certain machinery and equipment. The change had
the effect of reducing depreciation expense by approximately $38 million and
net loss by $24 million in 1992.
(b) 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 of the Company's audited consolidated financial
statements.
(c) During the third quarter of 1993, the Company wrote off the remaining
unamortized balance of its goodwill of $1.98 billion and, accordingly, there
is no amortization of goodwill for periods subsequent to September 30, 1993.
See "Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations" and Note 4 of the Company's audited consolidated
financial statements.
(d) During the fourth quarter of 1994, the Company recorded an environmental
charge totaling $20 million. Excluding the effects of the environmental
charge, the Company's operating income, loss before taxes, net loss and loss
per share in 1994 would have been $296.8 million, $41 million, $56.1 million
and $1.47 per share, respectively.
(e) In 1989, the Company transferred all the capital stock of Fort Howard Cup
to Sweetheart for a 49.9% equity interest in Sweetheart and other assets for a
total consideration of $620 million. The Company also undertook a plan to
divest all its remaining international cup operations. As a result, the
Company recorded a $120 million charge in 1989. As of December 31, 1991, the
Company had sold all its international cup operations and had discontinued
recording equity in net losses of Sweetheart because the carrying value of the
Company's investment in Sweetheart was reduced to zero.
(f) Reflects the cumulative effect on years prior to 1992 of adopting SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
This change in accounting principle, excluding the cumulative effect,
decreased operating income for 1992 by $1.2 million.
(g) The computation of loss per share is based on the weighted average number
of shares of Common Stock outstanding during the period plus (in periods in
which they have a dilutive effect) the effect of shares of Common Stock
contingently issuable upon the exercise of stock options.
(h) 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 New
Bank Credit Agreement and other instruments governing the Company's
indebtedness are based on the Company's EBITDA, subject to certain
adjustments.
- 18 -
ITEM 7. 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 which adversely affected the Company's operating results. 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. The price of wastepaper is
affected by demand which is primarily dependent upon deinking and recycling
capacity levels in the paper industry overall and by the price of market pulp.
- 19 -
Prices for deinking grades of wastepaper used by tissue producers increased
sharply beginning in the third quarter of 1994. 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
because of increased demand resulting from substantial additions of deinking
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. If the
current trend in the Company's wastepaper costs continues, there can be no
assurance that the Company will be able to recover increases in the cost of
wastepaper through price increases for its products. Further, a reduction in
supply of wastepaper due to increased demand or other factors could have an
adverse effect on the Company's business.
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.
(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.
- 20 -
(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.
(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 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
- 21 -
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,
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
"Environmental Matters" and "Legal Proceedings" and Note 15 of the Company's
audited consolidated financial statements.
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.
- 22 -
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% 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 1988 Term Loan on February 10, 1994, and the repurchases of the 12 3/8%
Notes and the 12 5/8% Debentures. The Company's net loss in 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 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
- 23 -
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
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,
- 24 -
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.
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.
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.
- 25 -
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 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% Notes and 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% Notes and 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 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,
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
- 26 -
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 were used to prepay or redeem all of the Company's remaining
indebtedness under its 1988 Bank Credit Agreement, the Senior Secured Notes
and the 1993 Term Loan on the Closing Date and will be used to redeem the 12
5/8% Debentures and the 14 1/8% Debentures in mid April. After giving effect
to the Recapitalization, on a pro forma basis as of December 31, 1994, the
Company would have had approximately $3,078 million of long-term debt
outstanding. Following the Recapitalization, the Company will have estimated
repayment obligations of $9 million in 1995, $60 million in 1996, $115 million
in 1997, $138 million in 1998 and $153 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
imposes limits for domestic capital expenditures, with certain exceptions, of
$75 million per year. The Company is also 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 is 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 to
$75 million annually for the next several years, plus $225 million of domestic
expansion capital spending that is subject to market conditions. The portion
- 27 -
of the above capital expenditures which are attributable to environmental
matters is described in "Environmental Matters."
The 1995 Revolving Credit Facility matures on March 16, 2002. After
completion of the Recapitalization and the 1995 Debt Redemptions, the Company
expects to have approximately $90 million in available capacity under the 1995
Revolving Credit Facility.
Approximately $1.5 billion (or 46%) of the Company's outstanding
indebtedness bears 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 effectively 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. Interest
rates began to increase in 1994 and if they continue to rise in 1995 the
Company may be less able to meet its debt service obligations. 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 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
"Legal Proceedings," 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 did not experience an
ownership change in connection with the Offering or that, if it did, 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
Stock issuances) could cause an ownership change which under the circumstances
- 28 -
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 for a
description of certain matters related to income taxes. See "Legal
Proceedings."
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. The Company expects to fund seasonal working
capital needs from the 1995 Revolving Credit Facility.
- 29 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of FORT HOWARD CORPORATION:
We have audited the accompanying consolidated balance sheets of
Fort Howard Corporation (a Delaware corporation) and subsidiaries as of
December 31, 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
- 30 -
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.
- 31 -
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.
- 32 -
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.
- 33 -
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.
- 34 -
(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
- 35 -
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) SUBSEQUENT EVENT -- 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.
- 36 -
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
======== ========
- 37 -
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
- 38 -
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).
- 39 -
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)
======== ======== ========
- 40 -
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
- 41 -
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.
- 42 -
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
========== ==========
- 43 -
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.
- 44 -
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.
- 45 -
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.
- 46 -
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
========
- 47 -
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.
- 48 -
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
- 49 -
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.
- 50 -
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
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.
- 51 -
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
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
- 52 -
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.
- 53 -
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...... -- -- -- -- --
- 54 -
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS
The following table provides certain information about each of the
current directors of the Company. Within 90 days following the Closing Date,
the Company will appoint two independent directors to the Board of Directors
who are not employees of the Company or Morgan Stanley Group and its
affiliates. The Company's Board of Directors is divided into three classes of
directors serving staggered three-year terms. The terms of office of the
directors expire as follows: Ms. Hempel in 1996; Messrs. Riordan and Sica in
1997; and Messrs. DeMeuse, Brennan and Niehaus in 1998.
Present Principal Occupation or Employment;
Name and Position Five-Year Employment History
with the Company Age and other Directorships
----------------- --- -------------------------------------------
Donald H. DeMeuse 58 Chairman of the Board of Directors and
Chairman of the Board Chief Executive Officer since March 1992;
and Chief Executive President and Chief Executive Officer from
Officer July 1990 to March 1992. Prior to March
1992, President for more than five years.
Director of Associated Bank Green Bay.
Kathleen J. Hempel 44 Vice Chairman and Chief Financial Officer
Vice Chairman since March 1992; Senior Executive
Vice President and Chief Financial Officer
prior to that time. Director of Whirlpool
Corporation.
Michael T. Riordan 44 President and Chief Operating Officer since
Director March 1992; Vice President prior to that
time.
Donald Patrick Brennan 54 Managing Director of MS&Co. since prior to
Director 1989 and head of MS&Co.'s Merchant Banking
Division. Chairman and President of
Morgan Stanley Leveraged Equity Fund II, Inc.
("MSLEF II, Inc."), Chairman of Morgan
Stanley Capital Partners III, Inc.
("MSCP III") and Chairman of Morgan
Stanley Venture Partners. Director of
MS&Co., Jefferson Smurfit Corporation,
PSF Finance Holdings, Inc., Stanklav
Holdings, Inc. and Waterford Wedgwood plc.
- 55 -
Present Principal Occupation or Employment;
Name and Position Five-Year Employment History
with the Company Age and other Directorships
----------------- --- -------------------------------------------
Robert H. Niehaus 39 Managing Director of MS&Co. since 1990
Director Principal of MS&Co. prior to that time.
Vice President and Director of MSLEF II,
Inc. and Vice Chairman of MSCP III.
Director of American Italian Pasta
Company, PSF Finance Holdings, Inc.,
Randall's Food Markets, Inc., Silgan
Corporation, Silgan Holdings Inc., Waterford
Wedgwood U.K. plc (Chairman) and Waterford
Crystal Ltd.
Frank V. Sica 44 Managing Director of MS&Co. since prior
Director to 1989. Vice President and Director of
MSLEF II, Inc. since 1989 and Vice Chairman
of MSCP III. Director of ARM Financial
Group, Inc., Emmis Broadcasting
Corporation, Kohl's Corporation, PageMart,
Inc., Southern Pacific Rail Corporation,
and Sullivan Communications, Inc.
EXECUTIVE OFFICERS
The following table provides certain information about each of the current
executive officers of the Company. All executive officers are elected by, and
serve at the discretion of, the Board of Directors. None of the executive
officers of the Company is related by blood, marriage or adoption to any other
executive officer or director of the Company.
Present Principal Occupation or Employment;
Name and Position Five-Year Employment History
with the Company Age and other Directorships
----------------- --- -------------------------------------------
Donald H. DeMeuse 58 See description under "Directors and
Chairman of the Board and Executive Officers of Registrant --
Chief Executive Officer Directors."
Kathleen J. Hempel 44 See description under "Directors and
Vice Chairman and Chief Executive Officers of Registrant --
Financial Officer Directors."
Michael T. Riordan 44 See description under "Directors and
President and Chief Executive Officers of Registrant --
Operating Officer Directors."
Andrew W. Donnelly 52 Executive Vice President for more than
Executive Vice President five years.
John F. Rowley 54 Executive Vice President for more than
Executive Vice President five years.
- 56 -
Present Principal Occupation or Employment;
Name and Position Five-Year Employment History
with the Company Age and other Directorships
----------------- --- -------------------------------------------
George F. Hartmann, Jr. 52 Vice President for more than five years.
Vice President
R. Michael Lempke 42 Vice President since Septmber 1994;
Vice President and Treasurer since November 1989.
Treasurer
James W. Nellen II 47 Vice President and Secretary for more
Vice President and than five years.
Secretary
Daniel J. Platkowski 44 Vice President for more than five years.
Vice President
Timothy G. Reilly 44 Vice President for more than five years.
Vice President
Donald J. Schneider 58 Vice President since July 1989. Director
Vice President of Research and Development prior to that
time.
Charles L. Szews 38 Vice President since September 1994;
Vice President and Controller since November 1989.
Controller
Charles D. Wilson 50 Vice President since June 1994; Director
Vice President of Government Affairs prior to that time.
David K. Wong 45 Vice President since June 1993; Director of
Vice President Personnel from September 1990 until June
1993. Director of Recruiting and Training
prior to that time.
David A. Stevens 46 Assistant Vice President for more than
Assistant Vice President five years.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors currently has three committees: an
Executive Committee, an Audit Committee and a Compensation Committee.
The Executive Committee is authorized to exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Company, except that it does not have the power or authority to
amend the Company's Certificate of Incorporation or By-laws, adopt an
agreement of merger or consolidation, recommend to the shareholders the sale,
lease or exchange of all or substantially all of the Company's property and
assets, recommend to the shareholders the dissolution of the Company, declare
a dividend or authorize the issuance of shares of stock. The Executive
- 57 -
Committee acts as a compensation committee for determining certain aspects of
the compensation of the executive officers of the Company. The
responsibilities of the Compensation Committee include administering the
Company's 1995 Stock Incentive Plan and selecting the officers and key
employees to whom awards will be granted. The Compensation Committee is
comprised of non-management directors. See "--Compensation Committee
Interlocks and Insider Participation."
The responsibilities of the Audit Committee include: recommending to the
Board of Directors the independent public accountants to be selected to
conduct the annual audit of the accounts of the Company; reviewing the
proposed scope of such audit and approving the audit fees to be paid; and
reviewing the adequacy and effectiveness of the internal auditing, accounting
and financial controls of the Company with the independent public accountants
and the Company's financial and accounting staff. The Audit Committee will be
comprised of non-management directors.
- 58 -
ITEM 11. EXECUTIVE COMPENSATION
The following table presents information concerning compensation paid for
services to the Company during fiscal years 1992 through 1994 to the Chief
Executive Officer and the four other most highly compensated executive
officers (the "Named Executive Officers") of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
---------------------------------- ------------
Number of
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation(a) Options/SARs Compensation(b)
- ------------------ ---- ------ ----- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Donald H. DeMeuse 1994 $750,000 $307,500 $7,802 0 $69,366
Chairman and 1993 653,846 55,250 4,840 0 62,742
Chief Executive 1992 675,000 55,250 3,831 0 57,480
Officer
Kathleen J. Hempel 1994 $480,000 $196,820 1,036 0 $27,311
Vice Chairman and 1993 453,077 38,381 0 0 27,388
Chief Financial 1992 456,923 37,400 0 0 27,222
Officer
Michael T. Riordan 1994 $375,000 $153,750 4,671 0 $21,400
President and 1993 302,885 25,500 0 48,750 18,437
Chief Operating 1992 248,846 20,171 317 0 15,028
Officer
Andrew W. Donnelly 1994 $330,000 $135,300 162 0 $18,603
Executive Vice 1993 350,000 29,750 0 0 20,859
President 1992 342,692 28,050 0 0 20,133
John F. Rowley 1994 $237,855 $ 96,350 338 0 $13,676
Executive Vice 1993 255,000 21,675 0 0 15,111
President 1992 244,039 19,975 0 0 14,561
</TABLE>
(a) Consists of amounts reimbursed for the payment of taxes.
(b) Consists of Company contributions to the Company's profit sharing plan
and supplemental retirement plan, including Company contributions to the
Company's supplemental retirement plan which were paid to the participant.
- 59 -
The following table presents information concerning unexercised stock
options for the Named Executive Officers. No stock options were exercised by
the Named Executive Officers during 1994.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
Value of Unexercised
Number of Unexercised Options In-the-money Options Held
Held at December 31, 1994 at December 31, 1994 (a)
----------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- -------------- ----------- -------------
Donald H. DeMeuse 505,537 37,700 -- --
Kathleen J. Hempel 562,347 13,000 -- --
Michael T. Riordan 119,008 54,600 -- --
Andrew W. Donnelly 141,927 16,900 -- --
John F. Rowley 102,323 15,600 -- --
a) Prior to the Offering, the Common Stock was not registered or publicly
traded and, therefore, a public market price for the Common Stock was not
available. Without the benefit of the Bank Refinancing and the 1995 Debt
Redemptions, the Company believes that none of the exercisable or
unexercisable stock options held at December 31, 1994 were in-the-money as of
such date. See Notes 12 and 13 of the Company's audited consolidated
financial statements.
DIRECTOR'S COMPENSATION
Prior to the completion of the Offering, directors of the Company did not
receive any compensation for service on the Board of Directors. The Company
intends to pay all of its directors who are not officers of the Company an
annual fee (the "Annual Fee") of $30,000 plus $2,000 for attendance at each
meeting, plus $1,000 for attendance at each committee meeting. In addition,
the Company intends to reimburse all of its directors for their travel
expenses in connection with their attendance at board and committee meetings.
The Company intends to pay 50% of the Annual Fee in the form of cash and 50%
of the Annual Fee in the form of shares of Common Stock pursuant to the
Company's 1995 Stock Plan for Non-Employee Directors. The payment of the cash
portion of the Annual Fee may be deferred by any director at such director's
election pursuant to the Company's Deferred Compensation Plan for Non-Employee
Directors until the earliest of (i) the date of termination of such director's
service as a non-employee director, (ii) the date specified by such director
in his deferred election form and (iii) the date of such director's death.
EMPLOYMENT AGREEMENTS
The Named Executive Officers have entered into employment agreements with
the Company (the "Employment Agreements") which took effect in 1993. The
Employment Agreements contain customary employment terms, have an initial term
that expires on December 31, 1997, provide for automatic one-year extensions
(unless notice not to extend is given by either party at least six months
prior to the end of the effective term) and provide for base annual salaries
and annual incentive bonuses. The present base salaries for Mr. DeMeuse,
Ms. Hempel, Mr. Riordan, Mr. Donnelly and Mr. Rowley are $750,000, $480,000,
$375,000, $330,000 and $250,000, respectively. In addition, the Employment
- 60 -
Agreements for Mr. DeMeuse, Ms. Hempel and Mr. Riordan provide for
participation in additional bonus arrangements which may be agreed upon in
good faith from time to time with the Company. The Employment Agreements
provide that certain payments in lieu of salary and bonus are to be made and
certain benefits are to be continued for a stated period following termination
of employment. The time periods for such payments vary depending on the cause
of termination. The amount of the payments to be made to each individual
would vary depending upon such individual's level of compensation and benefits
at the time of termination and whether such employment is terminated prior to
the end of the term by the Company for "cause" or by the employee for "good
reason" (as such terms are defined in the Employment Agreements) or otherwise
during the term of the agreements. In addition, the Employment Agreements for
Mr. DeMeuse, Ms. Hempel and Mr. Riordan include noncompetition and
confidentiality provisions.
MANAGEMENT INCENTIVE PLAN
The Company maintains a Management Incentive Plan which is administered
by the Executive Committee. Participation is based upon individual selection
by the Executive Committee from among the full-time salaried employees who, in
the judgment of the Chief Executive Officer, serve in key executive,
administrative, professional or technical capacities. Presently,
approximately 85 individuals participate in the Management Incentive Plan.
Awards are based upon the extent to which the Company's financial performance
(in terms of net earnings, operating income, earnings per share, cash flow,
absolute and/or relative return on equity or assets, pre-tax profits, earnings
growth, revenue growth, comparison to peer companies, any combination of the
foregoing and/or other appropriate measures in such manner as the Executive
Committee deems appropriate) during the year has met or exceeded certain
performance goals specified by the Executive Committee. Some performance
goals applicable to senior managers may include elements which specify
individual achievement objectives directly related to such individual's areas
of management responsibility. In determining whether performance goals have
been satisfied, the Executive Committee in its discretion may direct that
adjustments be made to the performance goals or actual financial performance
as reported to reflect extraordinary changes that have occurred during the
year. The Executive Committee may alternatively grant a discretionary bonus.
A participant must be employed by the Company on the last day of the year in
order to receive a bonus for such year, except in the case of death,
disability or retirement after age 55, in which case such participant would
receive a pro rata bonus. In the event of termination of a participant's
employment without "cause" (as defined in the Management Incentive Plan)
within two years following a "change in control" (as defined below under "1995
Stock Incentive Plan"), participants will receive a pro rata bonus for such
year calculated as if the applicable performance targets have been attained.
The Board of Directors may terminate or amend the Management Incentive
Plan, in whole or in part, at any time; provided that no such termination or
amendment may impair any rights which may have accrued under such plan.
SUPPLEMENTAL RETIREMENT PLAN
In 1983, the Company adopted a Supplemental Retirement Plan (the
"Supplemental Retirement Plan"). Participation is limited to employees of the
Company who are selected to participate by the Chief Executive Officer.
Presently, nine individuals participate in the Supplemental Retirement Plan.
Benefits under the Supplemental Retirement Plan are specified in agreements
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entered into between the Company and each participant. Any benefit granted in
favor of an employee also serving as a director must be approved by the
Executive Committee. Benefits accrued from the Company are substantially
equal to the additional amount that could have been allocated to each
participant's account under the Company's Profit Sharing Retirement Plan (the
"Profit Sharing Plan") (which is a tax-qualified defined contribution plan
with "401(k)" features) if, in the absence of the Code limitations on
retirement plan contributions, the participant's entire contribution had been
made to the Profit Sharing Plan. Vesting of benefits is determined by
reference to each participant's vested percentage under the Profit Sharing
Plan. Participants' account balances are credited with earnings based upon
the investment performance of the Profit Sharing Plan. Benefits under the
Supplemental Retirement Plan are distributable upon death, disability,
retirement or separation from service and are payable from the general assets
of the Company. The agreement with Mr. DeMeuse provides for an annual cash
payment determined by reference to the difference in the amount of the
Company's contribution to the Profit Sharing Plan allocated to his Profit
Sharing Plan account and the amount which would have been allocated to such
account in the absence of the limitations imposed by the Code.
1995 STOCK INCENTIVE PLAN
The Stock Incentive Plan (the "1995 Plan") is administered by the
Compensation Committee, which is comprised exclusively of non-employee
Directors, each of whom is "disinterested" within the meaning of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The 1995 Plan provides for the granting of incentive and
nonqualified stock options, stock appreciation rights, restricted stock,
performance shares, stock equivalents and dividend equivalents (individually,
an "Award" or collectively, "Awards"). Employees who are eligible to receive
Awards are those officers or other key employees with potential to contribute
to the future success of the Company or its subsidiaries. The Compensation
Committee has discretion to select the employees to whom Awards will be
granted (from among those eligible), to determine the type, size and terms and
conditions applicable to each Award and the authority to interpret, construe
and implement the provisions of the 1995 Plan. The Compensation Committee's
decisions are binding on the Company and employees eligible to participate in
the 1995 Plan and all other persons having any interest in the 1995 Plan. It
is presently anticipated that approximately 130 individuals will initially
participate in the 1995 Plan.
A total of 3,359,662 shares of Common Stock may be subject to Awards
under the 1995 Plan, subject to adjustment in accordance with the terms of the
1995 Plan. Common Stock issued under the 1995 Plan may be either authorized
but unissued shares, treasury shares, or any combination thereof. To the
fullest extent permitted under Rule 16b-3 under the Exchange Act and Section
422 of the Code, any shares of Common Stock subject to an Award which lapses,
expires or is otherwise terminated without the issuance of such shares may
become available for new Awards. The number of dividend equivalents which may
be granted under the 1995 Plan will be determined by the Compensation
Committee in its discretion; provided, however, that in no event will such
number correspond to a greater number of shares than the maximum number of
shares available for issuance under the 1995 Plan.
Set forth below is a description of the types of Awards which may be
granted under the 1995 Plan:
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Stock Options. Options (each, an "Option") to purchase shares of Common
Stock, which may be nonqualified or incentive stock options, may be granted
under the 1995 Plan at an exercise price (the "Option Price") determined by
the Compensation Committee in its discretion, provided that the Option Price
may be no less than the fair market value of the underlying Common Stock on
the date of grant (110% of fair market value in the case of an incentive stock
option granted to a ten percent shareholder).
Options will expire not later than ten years after the date on which they
are granted (five years in the case of an incentive stock option granted to a
ten percent shareholder). Options become exercisable at such times and in
such installments as determined by the Compensation Committee, and such
exercisability will generally be based on (i) length of service or (ii) the
attainment of performance goals established by the Compensation Committee,
provided that no Option may be exercised within the first six months following
the date of grant. The Compensation Committee may also accelerate the period
for the exercise of any or all Options held by an optionee. Payment of the
Option Price must be made in full at the time of exercise in cash, certified
or bank check, note or other instrument acceptable to the Compensation
Committee. As determined by the Compensation Committee, payment in full or in
part may also be made by tendering to the Company shares of Common Stock
having a fair market value equal to the Option Price (or such portion
thereof), by a "cashless exercise" procedure to be approved by the
Compensation Committee or by withholding shares of Common Stock that would
otherwise have been received by the optionee.
Stock Appreciation Rights. A stock appreciation right ("SAR") is an
Award entitling an employee to receive an amount equal to (or subject to
certain limitations, less than, if the Compensation Committee so determines at
the time of grant) the excess of the fair market value of a share of Common
Stock on the date of exercise over the exercise price per share specified for
the SAR, multiplied by the number of shares of Common Stock with respect to
which the SAR was exercised. An SAR granted in connection with an Option will
be exercisable to the extent that the related Option is exercisable. Upon the
exercise of an SAR related to an Option, the Option related thereto will be
cancelled to the extent of the number of shares covered by such exercise, and
such shares will no longer be available for grant under the 1995 Plan. Upon
the exercise of a related Option, the SAR will be cancelled automatically to
the extent of the number of shares covered by the exercise of the Option.
SARs unrelated to an Option will contain such terms and conditions as to
exercisability, vesting and duration as the Compensation Committee may
determine, but such duration will not be greater than ten years. The
Compensation Committee may accelerate the period for the exercise of an SAR
unrelated to an Option. Payment upon exercise of an SAR will be made, at the
election of the Compensation Committee, in cash, in shares of Common Stock or
a combination thereof.
The Compensation Committee may grant limited stock appreciation rights
(an "LSAR") under the 1995 Plan. An LSAR is an SAR which becomes exercisable
only in the event of a "change in control" (as defined below). Any such LSAR
will be settled solely in cash. An LSAR must be exercised within the 30-day
period following a change in control.
Restricted Stock. An Award of restricted stock ("Restricted Stock") is
an Award of Common Stock which is subject to such restrictions as the
Compensation Committee deems appropriate, including forfeiture conditions and
restrictions against transfer for a period specified by the Compensation
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Committee. Restricted Stock Awards may be granted under the 1995 Plan for or
without consideration. Restrictions on Restricted Stock may lapse in
installments based on factors selected by the Compensation Committee. The
Compensation Committee, in its sole discretion, may waive or accelerate the
lapsing of restrictions in whole or in part. Prior to the expiration of the
restricted period, except as otherwise provided by the Compensation Committee,
a grantee who has received a Restricted Stock Award has the rights of a
shareholder of the Company, including the right to vote and to receive cash
dividends on the shares subject to the Award. Stock dividends issued with
respect to shares covered by a Restricted Stock Award will be treated as
additional shares under such Award and will be subject to the same
restrictions and other terms and conditions that apply to the shares with
respect to which such dividends are issued.
Performance Shares. A performance share Award (a "Performance Share") is
an Award of a number of units which represent the right to receive a specified
number of shares of Common Stock upon satisfaction of certain specified
performance criteria, subject to such other terms and conditions as the
Compensation Committee deems appropriate. Performance objectives will be
established before, or as soon as practicable after, the commencement of the
performance period (the "Performance Period") and may be based on net
earnings, operating earnings or income, absolute and/or relative return on
equity or assets, earnings per share, cash flow, pre-tax profits, earnings
growth, revenue growth, comparisons to peer companies, any combination of the
foregoing and/or such other measures, including individual measures of
performance, as the Compensation Committee deems appropriate. Prior to the
end of a Performance Period, the Compensation Committee, in its discretion and
only under conditions which do not affect the deductibility of compensation
attributable to Performance Shares under Section 162(m) of the Code, may
adjust the performance objectives to reflect an event which may materially
affect the performance of the Company, a subsidiary or a division, including,
but not limited to, market conditions or a significant acquisition or
disposition of assets or other property by the Company, a subsidiary or a
division. The extent to which a grantee is entitled to payment in settlement
of a Performance Share Award at the end of the Performance Period will be
determined by the Compensation Committee, in its sole discretion, based on
whether the performance criteria have been met.
Payment in settlement of a Performance Share Award will be made as soon
as practicable following the last day of the Performance Period, or at such
other time as the Compensation Committee may determine, in shares of Common
Stock.
Stock Equivalents. A stock equivalent Award (a "Stock Equivalent") is a
grant of a number of units valued, in whole or in part by reference to, or
otherwise based on, shares of Common Stock. At the discretion of the
Compensation Committee, Stock Equivalent Awards may relate in whole or in part
to the attainment by the grantee of certain specified performance criteria.
The Compensation Committee in its discretion will determine the basis for
the value of units granted under a Stock Equivalent Award at the time of grant
of the Award. In determining unit value, the Committee may use such measures
as fair market value or appreciation in the value of a share of Common Stock
and may specify the date or dates over which the appreciation shall be
measured, in such manner as it deems appropriate.
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Payment in settlement of a Stock Equivalent Award will be made as soon as
practicable after the Award is earned, or at such other time as the
Compensation Committee may determine, in cash, in shares of Common Stock, or
some combination thereof, as determined by the Compensation Committee.
Dividend Equivalents. A dividend equivalent Award (a "Dividend
Equivalent") is an Award which entitles an employee to receive from the
Company cash payments, in the same amount that the holder of record of a share
of Common Stock on the dividend record date would be entitled to receive as
cash dividends on such share of Common Stock.
Grants of Options, SARs, Performance Share Awards and Stock Equivalent
Awards may, in the discretion of the Compensation Committee, earn Dividend
Equivalents. The Compensation Committee will establish such rules and
procedures governing the crediting of Dividend Equivalents, including any
timing and payment contingencies of such Dividend Equivalents, as it deems
appropriate or necessary.
Additional Information. Under the 1995 Plan, if there is any change in
the outstanding shares of Common Stock by reason of any stock dividend,
recapitalization, merger, consolidation, stock split, combination or exchange
of shares or other form of reorganization, or any other change involving the
Common Stock, such proportionate adjustments as may be necessary (in the form
determined by the Compensation Committee) to reflect such change will be made
to prevent dilution or enlargement of the rights with respect to the aggregate
number of shares of Common Stock for which Awards in respect thereof may be
granted under the 1995 Plan, the number of shares of Common Stock covered by
each outstanding Award, and the price per share in respect thereof.
Generally, an individual's rights under the 1995 Plan may not be assigned or
transferred (except in the event of death).
In the event of a change in control and except as the Compensation
Committee (as constituted prior to such change in control) may expressly
provide otherwise: (i) all Stock Options or SARs then outstanding will become
fully exercisable as of the date of the change in control, whether or not then
exercisable; (ii) all restrictions and conditions of all Restricted Stock
Awards then outstanding will lapse as of the date of the change in control;
(iii) all Performance Share Awards will be deemed to have been fully earned as
of the date of the change in control and (iv) all Stock Equivalent Awards will
be deemed to be free of any restrictions or conditions and fully earned as of
the date of the change in control. The above notwithstanding, any Award
granted within six (6) months of a change in control will not be afforded any
such acceleration as to exercise, vesting and payment rights or lapsing as to
conditions or restrictions. For purposes of the 1995 Plan, a "change in
control" shall have occurred when (A) any person (other than (x) the Company,
any subsidiary of the Company, any employee benefit plan of the Company or of
any subsidiary of the Company, or any person or entity organized, appointed or
established by the Company or any subsidiary of the Company for or pursuant to
the terms of any such plans, (y) Morgan Stanley Group, MSLEF II, Fort Howard
Equity Investors, Fort Howard Equity Investors II, or any of their respective
affiliates or (z) any general or limited partner of MSLEF II, Fort Howard
Equity Investors or Fort Howard Equity Investors II), alone or together with
its affiliates and associates (collectively, an "Acquiring Person")), shall
become the beneficial owner of 20% or more of the then outstanding shares of
Common Stock or the combined voting power of the Company's then outstanding
voting securities (except pursuant to an offer for all outstanding shares of
Common Stock at a price and upon such terms and conditions as a majority of
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the Continuing Directors (as defined below) determine to be in the best
interests of the Company and its shareholders (other than an Acquiring Person
on whose behalf the offer is being made)), or (B) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors and any new director (other than a director who is a
representative or nominee of an Acquiring Person) whose election by the Board
of Directors or nomination for election by the Company's shareholders was
approved by a vote of at least a majority of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved (collectively,
the "Continuing Directors"), no longer constitute a majority of the Board of
Directors.
The 1995 Plan will remain in effect until terminated by the Board of
Directors and thereafter until all Awards granted thereunder are satisfied by
the issuance of shares of Common Stock or the payment of cash or otherwise
terminated pursuant to the terms of the 1995 Plan or under any Award
agreements. Notwithstanding the foregoing, no Awards may be granted under the
1995 Plan after the tenth anniversary of the effective date of the 1995 Plan.
The Board of Directors may at any time terminate, modify or amend the 1995
Plan; provided, however, that no such amendment, modification or termination
may adversely affect an optionee's or grantee's rights under any Award
theretofore granted under the 1995 Plan, except with the consent of such
optionee or grantee, and no such amendment or modification will be effective
unless and until the same is approved by the shareholders of the Company where
such shareholder approval is required to comply with Rule 16b-3 under the
Exchange Act, or other applicable law, regulation or Nasdaq National Market or
stock exchange rule. Rule 16b-3 currently requires shareholder approval if
the amendment would, among other things, materially increase the benefits
accruing to optionees or grantees under the 1995 Plan.
MANAGEMENT EQUITY PLAN
Effective as of April 29, 1991, the Board of Directors adopted the
Fort Howard Corporation Management Equity Plan (the "Management Equity Plan").
The Management Equity Plan provides for the offer of Common Stock and the
grant of options to purchase Common Stock to executive officers and certain
other key employees of the Company.
Executive officers or other key employees of the Company who hold shares
of Common Stock or options pursuant to the Management Equity Plan ("Equity
Investors") have entered into a Management Equity Plan Agreement with the
Company. Executive officers or other key employees of the Company who have
acquired shares of Common Stock pursuant to the Management Equity Plan have
agreed to become bound by the terms of the Company's Stockholders Agreement.
See "Certain Transactions--Stockholders Agreement."
Options, whether or not vested, may not be transferred, except that
vested options may be transferred in certain limited circumstances. Subject
to certain exceptions, options which have not vested at the time an Equity
Investor's employment is terminated are forfeited to the Company.
In April 1991, certain executive officers and other key employees of the
Company purchased an aggregate of 40,300 shares of Common Stock at $18.46 per
share pursuant to the Management Equity Plan. In addition, options to
purchase a total of 722,150 shares of Common Stock at an exercise price of
$18.46 per share were granted in 1991, 1992 and 1993 pursuant to the
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Management Equity Plan to certain executive officers and other key employees
of the Company. All options outstanding under the Management Equity Plan
became fully vested prior to the consummation of the Offering. Further, the
terms and conditions of options to purchase 100,750 shares of Common Stock
granted in December 1988 at an exercise price of $15.38 per share pursuant to
a predecessor plan are now governed by the Management Equity Plan. The
Company does not intend to sell or grant any additional shares of Common Stock
or options under the Management Equity Plan.
MANAGEMENT EQUITY PARTICIPATION AGREEMENT
Mr. DeMeuse, Ms. Hempel, Mr. Riordan and other current executive officers
and members of the Company's senior management (the "Management Investors")
are parties to an Amended and Restated Management Equity Participation
Agreement, as amended, with the Company, Morgan Stanley Group and MSLEF II
(the "Management Equity Participation Agreement"), pursuant to which the
Management Investors purchased 410,196 shares of Common Stock in 1988 and
31,824 shares of Common Stock in 1990 at $15.38 and $20.77 per share,
respectively. Management Investors who purchased shares of Common Stock
pursuant to the Management Equity Participation Agreement were also granted
stock options to acquire 1,807,338 and 275,990 shares of Common Stock pursuant
to the Management Equity Participation Agreement at exercise prices of $15.38
and $18.46 per share, respectively. All such options became fully vested
prior to the consummation of the Offering. Certain of the Management Investors
have also purchased shares of Common Stock and have been granted options to
acquire additional shares of Common Stock pursuant to the terms of the
Management Equity Plan. See "--Management Equity Plan."
The Management Equity Participation Agreement prohibits, except in
certain limited circumstances with respect to vested options ("Vested
Options"), the transfer of options, whether vested or not vested, held by the
Management Investors.
The Management Equity Participation Agreement also provides that the
Company will indemnify Management Investors for taxes on income which may be
recognized upon the vesting of shares of Common Stock under certain
circumstances. The indemnity is limited to the tax benefit to the Company,
and if the tax benefit has not yet been received by the Company in cash at the
time when the taxes must be paid by a Management Investor, the Company will
make a nonrecourse loan to the Management Investor (secured by Common Stock
and Vested Options) until the time the tax benefit is actually received.
The Management Equity Participation Agreement contains noncompetition
provisions applicable to each Management Investor except Mr. DeMeuse,
Ms. Hempel and Mr. Riordan, whose noncompetition agreements are contained in
their respective Employment Agreements. (Similar noncompetition provisions
are applicable to the Equity Investors under the Management Equity Plan.)
In 1988 and 1990, the Company's former chairman of the board and chief
executive officer (the "former executive") acquired shares of Common Stock and
was granted options to acquire additional shares of Common Stock pursuant to
the Management Equity Participation Agreement. Under the terms of an
agreement entered into with the Company at the time of his resignation in July
1990, as amended, he retained his entire interest in the Company's Common
Stock and all options to acquire additional shares thereof granted to him
pursuant to the Management Equity Participation Agreement were vested. In
addition, all the shares of the Company's Common Stock then owned by him
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became putable to the Company, and he retained certain other put rights
previously granted to him with respect to such options and the shares issuable
upon the exercise thereof. Such put rights are no longer exercisable,
however, the Company has extended the economic benefit of the put right with
respect to the shares of Common Stock to the ten-day period following
expiration of the 180-day lock-up agreement contained in the Stockholders
Agreement in exchange for the former executive's agreement not to exercise his
then existing put right with respect to such shares prior to consummation of
the Offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Committee currently acts as a compensation committee for
determining certain aspects of the compensation of the executive officers of
the Company. The members of the Executive Committee are Donald H. DeMeuse,
the Company's Chairman and Chief Executive Officer, and Donald Patrick
Brennan.
The Executive Committee also administers the Company's Management
Incentive Plan under which annual cash awards are paid to employees serving in
key executive, administrative, professional and technical capacities. Awards
generally are based upon the extent to which the Company's financial
performance during the year has met or exceeded certain performance goals
specified by the Executive Committee.
The members of the Compensation Committee are Donald Patrick Brennan and
Robert H. Niehaus. The compensation Committee administers the Company's 1995
Plan and selects the officers and key employees to whom Awards under the 1995
Plan will be granted.
Salaries and employment contract terms are determined by the entire Board
of Directors for the Chief Executive Officer, by the Executive Committee for
other executive officers who also serve as directors of the Company and by the
Company's Chief Executive Officer for other executive officers of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of March 17, 1995 by
holders known to the Company to have beneficial ownership of more than five
percent of the Company's Common Stock, by certain other principal holders, by
each of the Company's directors, by the Named Executive Officers, and by all
directors and all executive officers of the Company as a group. Information
with respect to holders having beneficial ownership of more than five percent
of the Company's Common Stock is based on statements filed with the Securities
and Exchange Commission pursuant to Sections 13(d) and 13(g) of the Securities
Exchange Act of 1934 as of March 27, 1995.
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Shares Beneficially Owned
-----------------------------
Number of Percentage
Name Shares of Class
---- --------- ----------
THE MORGAN STANLEY LEVERAGED 20,889,290 (a) 33.1
EQUITY FUND II, L.P.
1221 Avenue of the Americas
New York, New York 10020
Mellon Bank, N.A., as Trustee for 6,715,507 (b) 10.6
FIRST PLAZA GROUP TRUST
1 Mellon Bank Center
Pittsburgh, Pennsylvania 15258
LEEWAY & CO. 3,357,750 5.3
1 Enterprise Drive
North Quincy, Massachusetts 02171
MORGAN STANLEY GROUP INC. 3,036,884 (c) 4.8
1251 Avenue of the Americas
New York, New York 10020
Donald H. DeMeuse 710,449 (d) 1.1
Kathleen J. Hempel 607,691 (e) 1.0
Michael T. Riordan 190,020 (f) *
Donald Patrick Brennan 0 --
Frank V. Sica 0 --
Robert H. Niehaus 0 --
Andrew W. Donnelly 175,077 (g) *
John F. Rowley 128,793 (h) *
Directors and Executive Officers 2,511,100 (i) 3.9
as a Group
*Less than 1%
(a) MSLEF II, Inc. is the sole general partner of MSLEF II and is a wholly
owned subsidiary of Morgan Stanley Group. Includes 1,701,290 shares held
by Fort Howard Equity Investors II and 663,000 shares held by Fort Howard
Equity Investors. Morgan Stanley Equity Investors Inc. is the sole
general partner of both of these partnerships and is a wholly owned
subsidiary of Morgan Stanley Group.
(b) Mellon Bank, N.A., acts as the trustee (the "Trustee") for First Plaza
Group Trust ("First Plaza"), a trust under and for the benefit of certain
employee benefit plans of General Motors Corporation ("GM") and its
subsidiaries. These shares may be deemed to be owned beneficially by
General Motors Investment Management Corporation ("GMIMCo"), a wholly
owned subsidiary of GM. GMIMCo's principal business is providing
investment advice and investment management services with respect to the
assets of certain employee benefit plans of GM and its subsidiaries and
with respect to the assets of certain direct and indirect subsidiaries of
GM and associated entities. GMIMCo is serving as First Plaza's investment
manager with respect to these shares and in that capacity it has the sole
power to direct the Trustee as to the voting and disposition of these
shares. Because of the Trustee's limited role, beneficial ownership of
the shares by the Trustee is disclaimed.
(c) Includes 260,000 shares for which Morgan Stanley Group exercises
exclusive voting rights but as to which it disclaims beneficial
ownership.
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(d) Beneficial ownership includes 543,237 shares which are subject to
acquisition within 60 days by exercise of employee stock options.
(e) Beneficial ownership includes 575,347 shares which are subject to
acquisition within 60 days by exercise of employee stock options.
(f) Beneficial ownership includes 173,608 shares which are subject to
acquisition within 60 days by exercise of employee stock options.
(g) Beneficial ownership includes 158,827 shares which are subject to
acquisition within 60 days by exercise of employee stock options.
(h) Beneficial ownership includes 117,923 shares which are subject to
acquisition within 60 days by exercise of employee stock options.
(i) Beneficial ownership includes 2,104,638 shares which are subject to
acquisition within 60 days by exercise of employee stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
The Company, Morgan Stanley Group, MSLEF II, certain other investors and
the Management Investors (each, a "Holder") have entered into a stockholders
agreement (the "Stockholders Agreement"), which contains certain restrictions
with respect to the transferability of Common Stock by certain parties
thereunder, certain registration rights granted by the Company with respect to
such shares and certain arrangements with respect to the nomination of
designees to the Board of Directors.
Pursuant to the terms of the Stockholders Agreement, in the event that
one or more Holders (other than the Management Investors) (each, a
"Controlling Shareholder") sell a majority of the shares of Common Stock
subject to the Stockholders Agreement to a third party, certain other Holders
have the right to elect to sell on the same terms the same percentage of such
other Holder's shares to the third party as the Controlling Shareholder is
selling of its shares of Common Stock. In addition, if a Controlling
Shareholder sells all of its shares of Common Stock to a third party, the
Controlling Shareholder has the right to require that certain remaining
Holders sell all of their shares to the third party on the same terms.
Pursuant to the terms of the Stockholders Agreement, Holders of specified
percentages of Common Stock will be entitled to certain demand registration
rights ("Demand Rights") with respect to shares of Common Stock held by them;
provided, however, that the Company (or purchasers designated by the Company)
shall have the right to purchase at fair market value the shares which are the
subject of Demand Rights in lieu of registering such shares of Common Stock.
In addition to the Demand Rights, Holders are, subject to certain limitations,
entitled to register shares of Common Stock in connection with a registration
statement prepared by the Company to register its equity securities. The
Stockholders Agreement contains customary terms and provisions with respect
to, among other things, registration procedures and certain rights to
indemnification granted by parties thereunder in connection with the
registration of Common Stock subject to such agreement.
Pursuant to the terms of the Stockholders Agreement, MSLEF II and
Fort Howard Equity Investors II each have the right to have a designee
nominated for election to the Company's Board of Directors at any annual
meeting of the Company's shareholders, so long as MSLEF II or Fort Howard
Equity Investors II, as the case may be, does not already have a designee as a
member of the Board of Directors at the time of such annual meeting. In
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addition, in the event of a vacancy on the Board of Directors created by the
resignation, removal or death of a director nominated by MSLEF II or
Fort Howard Equity Investors II, such shareholders have the right to have a
designee nominated for election to fill such vacancy.
Pursuant to the Stockholders Agreement, all Holders are subject to an
agreement, with certain limited exceptions, not to offer, pledge, sell,
contract to sell, or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock for a period beginning 7 days before and
ending 180 days after March 9, 1995 in the case of current and former officers
and other key employees of the Company (who beneficially own an aggregate of
791,358 shares of Common Stock), and ending March 9, 1996 in the case of the
remaining Holders (who beneficially own an aggregate of 37,309,881 shares of
Common Stock), without the prior written consent of certain of the
representatives of certain of the Underwriters in the case of Morgan Stanley
Group, MSLEF II, Fort Howard Equity Investors and Fort Howard Equity
Investors II, or of MS&Co, in the case of the remaining Holders.
The Stockholders Agreement also provides that, in connection with any
future underwritten offering of Common Stock by the Company, the Holders will
not, subject to certain limited exceptions, offer, pledge, sell, contract to
sell or otherwise transfer or dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period beginning 7 days before and ending
180 days after the effective date of the related registration statement
without the prior written consent of certain of the representatives of the
underwriters thereof, in the case of Morgan Stanley Group, MSLEF II,
Fort Howard Equity Investors and Fort Howard Equity Investors II, or of MS&Co,
in the case of the remaining Holders.
THE CUP TRANSFER AND CUP SALES
On November 14, 1989, the Company transferred all the capital stock of
Fort Howard Cup to Sweetheart, a new company organized on behalf of MSLEF II,
the Company and certain executive officers of Sweetheart and other investors
in the Cup Transfer. The business transferred to Sweetheart constituted all
the Company's U.S. and Canadian disposable foodservice operations.
As a result of the Cup Transfer, the Company received: (i)
$532.25 million in cash; (ii) 430,172 shares of Sweetheart Class B Common
Stock representing 49.9% of the Sweetheart Common Stock then outstanding, with
a fair value of $87.4 million and (iii) certain other adjustments. The total
value of the cash and other assets received by the Company as a result of the
Cup Transfer was approximately $620 million. The Company has not undertaken
any guarantees of Sweetheart's indebtedness as a result of the Cup Transfer.
On the date of the Cup Transfer, the Sweetheart Class B Common Stock
owned by the Company constituted 49.9% of the shares of Sweetheart Common
Stock then outstanding, and the Sweetheart Class A Common Stock owned by MSLEF
II, Morgan Stanley Group and certain executive officers and key employees of
Sweetheart and other investors constituted 22.4%, 14% and 13.7%, respectively,
of the shares of Sweetheart Common Stock then outstanding.
On December 29, 1989, the Company sold its Pacific Basin cup business for
approximately $10.7 million in cash as part of a program to divest its
remaining international cup operations. The Company sold its European
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disposable foodservice operations for a net selling price of approximately
$49 million on December 30, 1991. On August 30, 1993, the Company sold all of
its Sweetheart Class B Common Stock for $5.1 million.
As a result of the completion of the Cup Transfer and the sales of its
remaining international cup operations, the Company has divested all of its
operating interests in those businesses.
OTHER TRANSACTIONS
The Company has entered into an agreement with MS&Co for financial
advisory services in consideration for which the Company pays MS&Co an annual
fee of $1 million. MS&Co is also entitled to reimbursement for all reasonable
expenses incurred in performance of the foregoing services. The Company paid
MS&Co approximately $1.0 million, $1.0 million and $1.1 million for these and
other miscellaneous services in 1994, 1993 and 1992, respectively. This
agreement was terminated on December 31, 1994.
In connection with the sale of the 8 1/4% Notes and the 9% Notes in 1994,
MS&Co received approximately $20.4 million in underwriting fees. In
connection with the sale of the 9 1/4% Notes and the 10% Notes in 1993, MS&Co
received approximately $19.5 million in underwriting fees. In 1992, MS&Co
received approximately $0.7 million in connection with the underwriting of the
reissuance of the Company's Development Authority of Effingham County
Pollution Control Revenue Refunding Bonds, Series 1988.
Based on transactions of similar size and nature, the Company believes
the foregoing fees received by MS&Co are no less favorable to the Company than
would be available from unaffiliated third parties.
MS&Co served as lead underwriter for the initial public offering of the
9 1/4% Notes, the 10% Notes, the 8 1/4% Notes, the 9% Notes, the 12 3/8%
Notes, the 12 5/8% Debentures, the 14 1/8% Debentures and the Pass Through
Certificates and is a market-maker with respect to such securities. In
addition, MS&Co served as the lead underwriter for the initial public offering
of the Company's Common Stock. In connection with the repurchases of certain
of the Company's securities as described in Note 8 to the audited consolidated
financial statements, $52.8 million aggregate principal amount at maturity of
the 14 5/8% Debentures and $132.7 million aggregate principal amount at
maturity of the 14 1/8% Debentures were purchased through MS&Co. In addition,
$46.5 million and $77.5 million aggregate principal amount at maturity of the
14 1/8% Debentures were purchased from Leeway & Co. and First Plaza Group
Trust, respectively, shareholders of the Company. The purchases were made in
negotiated transactions at market prices.
The Company is a party to an interest rate cap agreement with MS&Co that
was purchased in 1994 for $2.1 million.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. 1. Financial Statements of Fort Howard Corporation
Included in Part II, Item 8:
Report of Independent Public Accountants.
Consolidated Statements of Income for the years ended December 31, 1994,
1993 and 1992.
Consolidated Balance Sheets as of December 31, 1994 and 1993.
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992.
Notes to Consolidated Financial Statements.
Separate financial statements and supplemental schedules of the Company
and its consolidated subsidiaries are omitted since the Company is
primarily an operating corporation and its consolidated subsidiaries
included in the consolidated financial statements being filed do not
have a minority equity interest or indebtedness to any other person or
to the Company in an amount which exceeds five percent of the total
assets as shown by the consolidated financial statements as filed
herein.
a. 2. Financial Statement Schedules
Report of Indendent Public Accountants
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the audited
consolidated financial statements or notes thereto.
a. 3. Exhibits
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated By-Laws of the Company.
4.0 Credit Agreement dated as of March 8, 1995 among the
Company, the lenders named therein, and Bankers' Trust Company,
Bank of America National Trust and Savings Association and
Chemical Bank as arrangeers, and Bankers' Trust Company as
administrative agent.
4.1 Receivables Credit Agreement dated as of March 8, 1995 among the
Company, the lenders named therein, and Bankers' Trust Company,
as administrative agent.
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4.2 Form of 12 5/8% Subordinated Debenture Indenture dated as of
November 1, 1988 between the Company and United States Trust
Company, Trustee. (Incorporated by reference to Exhibit 4.2 as
filed with the Company's Amendment No. 2 to Form S-1 on
October 25, 1988.)
4.3 Form of 14 1/8% Junior Discount Debenture Indenture dated as of
November 1, 1988 between the Company and Ameritrust Company
National Association, Trustee. (Incorporated by reference to
Exhibit 4.3 as filed with the Company's Amendment No. 2 to
Form S-1 on October 25, 1988.)
4.4 Amended and Restated Credit Agreement dated as of October 24,
1988. (Incorporated by reference to Exhibit 4.5 as filed with
the Company's Amendment No. 2 to Form S-1 on October 25, 1988.)
4.4(A) Amendment No. 1 dated as of February 21, 1989 to the Amended
and Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.E 1 as filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989.)
4.4(B) Amendment No. 2 dated as of October 20, 1989 to the Amended and
Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.E 2 as filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989.)
4.4(C) Amendment No. 3 dated as of November 14, 1989 to the Amended
and Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.E 3 as filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989.)
4.4(D) Instrument of Designation, Appointment and Acceptance dated as
of June 22, 1988 among the Company, Bankers Trust Company and
Security Pacific National Bank. (Incorporated by reference to
Exhibit 4.7 as filed with the Company's Post-Effective Amendment
No. 2 to Form S-1 on February 8, 1990.)
4.4(E) Amendment No. 4 dated as of November 9, 1990 to Amended and
Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.J as filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990.)
4.4(F) Amendment No. 5 dated as of December 19, 1990 to Amended and
Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.K as filed with the
Company's Form 10-K for the year ended December 31, 1990.)
4.4(G) Amendment No. 6 dated as of September 11, 1991 to Amended and
Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4.A as filed with the
Company's report on Form 8-K on September 13, 1991.)
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4.4(H) Amendment No. 7 dated as of December 2, 1991 to Amended and
Restated Credit Agreement dated as of October 14, 1988, and
Amendment No. 1 dated as of December 2, 1991, to the Note
Purchase Agreement dated as of September 11, 1991.
(Incorporated by reference to Exhibit 4.N as filed with the
Company's Form 10-K for the year ended December 31, 1991.)
4.4(I) Amendment No. 8 dated as of October 7, 1992 to Amended and
Restated Credit Agreement dated as of October 24, 1988, and
Amendment No. 2 dated as of October 7, 1992 to the Note
Purchase Agreement dated as of September 11, 1991.
(Incorporated by reference to Exhibit 4.O as filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992.)
4.4(J) Amended and Restated Amendment No. 8 dated as of November 12,
1992 to Amended and Restated Credit Agreement dated as of
October 24, 1988, and Amended and Restated Amendment No. 2 dated
as of November 12, 1992 to the Note Purchase Agreement dated as
of September 11, 1991. (Incorporated by reference to Exhibit
4.P as filed with the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1992.)
4.4(K) Form of Second Amended and Restated Amendment No. 8 dated as of
March 4, 1993 to Amended and Restated Credit Agreement dated as
of October 24, 1988, and Second Amended and Restated Amendment
No. 2 dated as of March 4, 1993 to Note Purchase Agreement dated
as of September 11, 1991. (Incorporated by reference to
Exhibit 4.3(J) as filed with the Company's Amendment No. 2 to
Form S-2 on March 4, 1993.)
4.4(L) Amendment No. 9 dated as of December 31, 1993 to Amended and
Restated Credit Agreement dated as of October 24, 1988, and
Amendment No. 3 dated as of December 31, 1993 to Note Purchase
Agreement dated as of September 11, 1991. (Incorporated by
reference to Exhibit 4.4(L) as filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.)
4.4(M) Amendment No. 10 dated as of October 14, 1994 to Amended and
Restated Credit Agreement dated as of October 24, 1988.
(Incorporated by reference to Exhibit 4 as filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.)
4.5 Form of Senior Secured Floating Rate Note Purchase Agreement
dated as of September 11, 1991. (Incorporated by reference to
Exhibit 4.B as filed with the Company's report on Form 8-K on
September 13, 1991.)
4.6 Form of 9 1/4% Senior Note Indenture dated as of March 15, 1993
between the Company and Norwest Bank Wisconsin, N.A., Trustee.
(Incorporated by reference to Exhibit 4.1 as filed with the
Company's Amendment No. 2 to Form S-2 on March 4, 1993.)
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4.7 Form of 10% Subordinated Note Indenture dated as of March 15,
1993 between the Company and the United States Trust Company of
New York, Trustee. (Incorporated by reference to Exhibit 4.2 as
filed with the Company's Amendment No. 2 to Form S-2 on March 4,
1993.)
4.8 Form of 9% Senior Subordinated Note Indenture dated as of
February 1, 1994 between the Company and The Bank of New York,
Trustee. (Incorporated by reference to Exhibit 4.2 as filed
with the Company's Form S-2 on December 17, 1993.)
Registrant agrees to provide copies of instruments defining the
rights of security holders, including indentures, upon request
of the Commission.
10.1 Employment Agreements dated October 15, 1993 with the Company's
Chief Executive Officer, Chief Operating Officer and Chief
Financial Officer. (Incorporated by reference to Exhibit No. 10
as filed with the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.)
10.1(A) Amendments dated January 1, 1995 to Employment Agreements dated
October 15, 1993, with the Company's Chief Executive Officer,
Chief Operating Officer and Chief Financial Officer.
(Incorporated by reference to Exhibit No. 10.6(A) as filed with
the Company's Amendment No. 1 to Form S-1 on February 8, 1995.)
10.2 Employment Agreements dated December 10, 1993 with certain
executive officers of the Company. (Incorporated by reference
to Exhibit 10.13 as filed with the Company's Form S-2 on
December 17, 1993.)
10.2(A) Amendments to Employment Agreements with certain executive
officers of the Company. (Incorporated by reference to Exhibit
No. 10.13(A) as filed with the Company's Amendment No. 1 to
Form S-1 on February 8, 1995.)
10.3 Stockholders Agreement dated as of December 7, 1990.
(Incorporated by reference to Exhibit 10.C as filed with the
Company's Form 10-K for the year ended December 31, 1990.)
10.3(A) Amended and Restated Stockholders Agreement dated as of
March 1, 1995, among the Company, Morgan Stanley Group,
MSLEF II, certain institutional investors and the Management
Investors which amends and restates the Stockholders Agreement
dated as of December 7, 1990, as amended.
10.4 Management Incentive Plan as amended and restated December 10,
1992. (Incorporated by reference to Exhibit 10.C as filed with
the Company's Form 10-K for the year ended December 31, 1992.)
10.4(A) Management Incentive Plan as amended and restated as of
December 19, 1994. (Incorporated by reference to Exhibit
No. 10.2 as filed with the Company's Amendment No. 1 to
Form S-1 on February 8, 1995.)
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10.5 Supplemental Retirement Plan. (Incorporated by reference to
Exhibit No. 10.7 as filed with Amendment No. 2 to the Company's
Form S-1 on October 25, 1988.)
10.5(A) Amendment No. 1 to the Supplemental Retirement Plan.
(Incorporated by reference to Exhibit 10.P as filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1988.)
10.6 Form of Supplemental Retirement Agreement for the Company's
Chief Executive Officer as Amended. (Incorporated by reference
to Exhibit 10.M as filed with the Company's Annual Report on
Form 10-K for the year ended December 31, 1988.)
10.7 Supplemental Retirement Agreements for certain directors and
officers. (Incorporated by reference to Exhibit 10.T as filed
with the Company's Annual Report on Form 10-K for the year ended
December 31, 1989.)
10.7(A) Form of Amendment No. 1 to Supplemental Retirement Agreements
for certain directors and officers. (Incorporated by reference
to Exhibit 10.U as filed with the Company's Form 10-K for the
year ended December 31, 1990.)
10.8 Amended and Restated Management Equity Participation Agreement
dated as of August 1, 1988. (Incorporated by reference to
Exhibit No. 10.9 as filed with the Company's Amendment No. 2 to
Form S-1 on October 25, 1988.)
10.8(A) Letter Agreement dated June 27, 1990, which modifies Amended and
Restated Management Equity Participation Agreement.
(Incorporated by reference to Exhibit 10.V as filed with the
Company's Form 10-K for the year ended December 31, 1990.)
10.8(B) Letter Agreement dated July 31, 1990, among the Company and the
Principal Management Investors which amends Amended and Restated
Management Equity Participation Agreement. (Incorporated by
reference to Exhibit 10.W as filed with the Company's Form 10-K
for the year ended December 31, 1990.)
10.8(C) Letter Agreement dated July 31, 1990, between the Company and
the Management Investor Committee which amends Amended and
Restated Management Equity Participation Agreement.
(Incorporated by reference to Exhibit 10.X as filed with the
Company's Form 10-K for the year ended December 31, 1990.)
10.8(D) Letter Agreement dated February 7, 1991, between the Company and
the Management Investors Committee which amends the Amended and
Restated Management Equity Participation Agreement.
(Incorporated by reference to Exhibit 10.GG as filed with the
Company's Form 10-K for the year ended December 31, 1990.)
10.8(E) Form of Letter Agreement dated February 7, 1991, among the
Company, the Management Investors Committee and Management
Investors which cancels certain stock options, grants new stock
options and amends the Amended and Restated Management Equity
Participation Agreement. (Incorporated by reference to Exhibit
- 77 -
10.HH as filed with the Company's Form 10-K for the year ended
December 31, 1990.)
10.8(F) Letter Agreement dated March 1, 1995, between the
Company and the Management Investors Committee which amends the
Amended and Restated Management Equity Participation Agreement.
10.9 Management Equity Plan. (Incorporated by reference to
Exhibit 10.H as filed with the Company's Form 10-K for the year
ended December 31, 1991.)
10.9(A) Amendment dated December 28, 1993 to Management Equity Plan.
(Incorporated by reference to Exhibit 10.9(A) as filed with
the Company's Form 10-K for the year ended December 31, 1993.)
10.9(B) Amendment dated March 1, 1995 to the Management Equity Plan.
10.10 Form of Management Equity Plan Agreement. (Incorporated by
reference to Exhibit 10.I as filed with the Company's Form 10-K
for the year ended December 31, 1991.)
10.11 Agreement dated as of July 31, 1990, between the Company and its
former Chief Executive Officer. (Incorporated by reference to
Exhibit 10.Y as filed with the Company's Form 10-K for the year
ended December 31, 1990.)
10.11(A) Modification to Agreement dated December 11, 1990, to
Agreement dated as of July 31, 1990, between the Company
and its former Chief Executive Officer. (Incorporated
by reference to Exhibit 10.Z as filed with the Company's
Form 10-K for the year ended December 31, 1990.)
10.11(B) Letter Agreement dated February 7, 1991, between the Company and
its former Chief Executive Officer which cancels stock options,
grants new stock options and amends the Agreement dated as of
July 31, 1990 among the Company and its former Chief Executive
Officer. (Incorporated by reference to Exhibit 10.II as filed
with the Company's Form 10-K for the year ended December 31,
1990.)
10.11(C) Letter Agreement dated March 9, 1995, among the Company, its
former Chief Executive Officer, his spouse and certain trustees,
as permitted transferees.
10.12 Financial Advisory Agreement dated as of October 25, 1988,
between MS&Co. and the Company. (Incorporated by reference to
Exhibit 10.13 as filed with the Company's Post-Effective
Amendment No. 1 to Form S-1 on April 6, 1989.)
10.13 Participation Agreement dated as of October 20, 1989, among the
Company, Philip Morris Credit Corporation, the Loan Participants
listed therein, the Connecticut National Bank, Owner Trustee,
and Wilmington Trust Company, Indenture Trustee. (Incorporated
by reference to Exhibit 10.15 as filed with the Company's
Post-Effective Amendment No. 2 to Form S-1 on February 8, 1990.)
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10.14 Facility Lease Agreement dated as of October 20, 1989, between
the Connecticut National Bank in its capacity as Owner Trustee,
the Lessor and the Company as Lessee. (Incorporated by
reference to Exhibit 10.16 as filed with the Company's
Post-Effective Amendment No. 2 to Form S-1 on February 8, 1990.)
10.15 Power Installation Lease Agreement dated as of October 20, 1989,
between The Connecticut National Bank, not in its individual
capacity but solely as Owner Trustee, and the Company.
(Incorporated by reference to Exhibit 10.HH as filed with the
Company's Form 10-K for the year ended December 31, 1991.)
10.16 Equipment Lease Agreement dated as of October 20, 1989, between
The Connecticut National Bank, not in its individual capacity
but solely as Owner Trustee, and the Company. (Incorporated by
reference to Exhibit 10.II as filed with the Company's Form 10-K
for the year ended December 31, 1991.)
10.17 Participation Agreement dated as of December 23, 1990, among the
Company, Bell Atlantic Tricon Leasing Corporation, Bankers Trust
Company, The Connecticut National Bank, Owner Trustee, and
Wilmington Trust Company, Indenture Trustee. (Incorporated by
reference to Exhibit 10.BB as filed with the Company's Form 10-K
for the year ended December 31, 1990.)
10.18 Amended and Restated Equipment Lease Agreement [1990] dated as
of December 19, 1991, between The Connecticut National Bank, not
in its individual capacity but solely as Owner Trustee under the
Trust Agreement, as Lessor, and the Company, as Lessee.
(Incorporated by reference to Exhibit 10.W as filed with the
Company's Form 10-K for the year ended December 31, 1991.)
10.19 Facility Lease Agreement dated as of December 19, 1991, between
The Connecticut National Bank, not in its individual capacity
but solely as Owner Trustee, and the Company. (Incorporated by
reference to Exhibit 10.EE as filed with the Company's Form 10-K
for the year ended December 31, 1991.)
10.20 Equipment Lease Agreement [1991] dated as of December 19, 1991,
between The Connecticut National Bank, not in its individual
capacity but solely as Owner Trustee, and the Company.
(Incorporated by reference to Exhibit 10.FF as filed with the
Company's Form 10-K for the year ended December 31, 1991.)
10.21 Power Plant Lease Agreement dated as of December 19, 1991,
between The Connecticut National Bank, not in its individual
capacity but solely as Owner Trustee, and the Company.
(Incorporated by reference to Exhibit 10.GG as filed with the
Company's Form 10-K for the year ended December 31, 1991.)
10.22 Amended and Restated Participation Agreement dated as of
October 21, 1991, among the Company, Bell Atlantic Tricon
Leasing Corporation, Bankers Trust Company, The Connecticut
National Bank, Owner Trustee, and Wilmington Trust Company,
Indenture Trustee and the Form of the First Amendment thereto
dated as of December 13, 1991. (Incorporated by reference to
Exhibit 4.3 as filed with the Company's Amendment No. 3 to
Form S-3 on December 13, 1991).
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10.23 Deferred Compensation Plan for Non-Employee Directors.
(Incorporated by reference to Exhibit No. 10.14 as filed with
the Company's Amendment No. 1 to Form S-1 on February 8, 1995).
10.24 1995 Stock Incentive Plan. (Incorporated by reference to
Exhibit No. 10.15 as filed with the Company's Amendment No. 1 to
Form S-1 on February 8, 1995).
10.25 1995 Stock Plan for Non-Employee Directors. (Incorporated by
reference to Exhibit No. 10.16 as filed with the Company's
Amendment No. 1 to Form S-1 on February 8, 1995).
12 Statement of Deficiency of Earnings Available to Cover Fixed
Charges.
21 Subsidiaries of Fort Howard Corporation.
25 Powers of Attorney (included as part of signature page).
b. Reports on Form 8-K
The Company filed a Form 8-K on November 28, 1994, reporting under item
five a proposed offering of Common Stock. The Company filed a Form 8-K
on December 23, 1994, reporting under item five the receipt of a civil
investigative demand from the U.S. Department of Justice, Antitrust
Division.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FORT HOWARD CORPORATION
Green Bay, Wisconsin
March 28, 1995 By /s/ Donald H. DeMeuse
----------------------------------
Donald H. DeMeuse, Chairman of the
Board and Chief Executive Officer
POWER OF ATTORNEY
The undersigned directors and officer of Fort Howard Corporation hereby
constitute and appoint Donald H. DeMeuse, Kathleen J. Hempel and James W.
Nellen II and each of them, with full power to act without the other and with
full power of substitution and resubstitution, our true and lawful attorneys-
in-fact with full power to execute in our name and behalf in the capacities
indicated below any and all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission and hereby ratify and
confirm all that such attorneys-in-fact, or any of them, or their substitutes
shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on behalf of the registrant and in the
capacities on the dates indicated:
/s/ Donald H. DeMeuse Chairman of the Board, March 28, 1995
Donald H. DeMeuse Chief Executive Officer
and Director
/s/ Kathleen J. Hempel Vice Chairman, Chief March 28, 1995
Kathleen J. Hempel Financial Officer and
Director
/s/ Michael T. Riordan President, Chief March 28, 1995
Michael T. Riordan Operating Officer and
Director
/s/ Donald Patrick Brennan Director March 28, 1995
Donald P. Brennan
/s/ Frank V. Sica Director March 28, 1995
Frank V. Sica
/s/ Robert H. Niehaus Director March 28, 1995
Robert H. Niehaus
/s/ Charles L. Szews Vice President and March 28, 1995
Charles L. Szews Controller and Principal
Accounting Officer
- 81 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Fort Howard Corporation included in this
Form 10-K and have issued our report thereon dated January 31, 1995. Our
audits were made for the purpose of forming an opinion on those statements
taken as a whole. Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 31, 1995
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Schedule II
FORT HOWARD CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
For the Years Ended
December 31,
---------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS: 1994 1993 1992
---- ---- ----
Balance at beginning of year.......... $2,366 $1,376 $1,379
Additions charged to earnings......... (92) 1,633 792
Charges for purpose for which
reserve was created............... (685) (643) (795)
------ ------ ------
Balance at end of year................ $1,589 $2,366 $1,376
====== ====== ======
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