AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1996
REGISTRATION NO. 333-01929
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
FORT HOWARD CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 39-1090992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
-------------------
1919 SOUTH BROADWAY
GREEN BAY, WISCONSIN 54304
(414) 435-8821
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-------------------
JAMES W. NELLEN II
VICE PRESIDENT AND SECRETARY
FORT HOWARD CORPORATION
1919 SOUTH BROADWAY
GREEN BAY, WISCONSIN 54304
(414) 435-8821
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------------
COPIES TO:
<TABLE>
<S> <C>
FAITH D. GROSSNICKLE RICHARD J. SANDLER
SHEARMAN & STERLING DAVIS POLK & WARDWELL
599 LEXINGTON AVENUE 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017
(212) 848-4000 (212) 450-4000
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be used
in connection with a United States and Canadian offering of the registrant's
Common Stock (the "U.S. Prospectus") and one to be used in connection with a
concurrent international offering of the Common Stock (the "International
Prospectus" and, together with the U.S. Prospectus, the "Prospectuses"). The
International Prospectus will be identical to the U.S. Prospectus except that it
will have a different front cover page. The U.S. Prospectus is included herein
and is followed by the front cover page to be used in the International
Prospectus. The front cover page for the International Prospectus included
herein has been labeled "Alternate Page for International Prospectus."
If required pursuant to Rule 424(b) of the General Rules and Regulations
under the Securities Act of 1933, as amended, ten copies of each of the
Prospectuses in the forms in which they are used will be filed with the
Securities and Exchange Commission.
<PAGE>
PROSPECTUS (Subject to Completion)
Issued April 24, 1996
16,000,000 Shares
Fort Howard Corporation
COMMON STOCK
-------------------
OF THE 16,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 12,800,000 SHARES
ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 3,200,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF
THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." OF THE 16,000,000 SHARES OF COMMON STOCK BEING OFFERED
HEREBY, 10,000,000 SHARES ARE BEING OFFERED BY THE COMPANY AND
6,000,000 SHARES ARE BEING OFFERED BY THE SELLING SHAREHOLDERS. SEE
"PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES BY THE SELLING
SHAREHOLDERS. THE COMMON STOCK IS LISTED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "FORT." ON APRIL 23,
1996, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET WAS
$22 1/2 PER SHARE.
-------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 7 HEREOF FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
PRICE $ A SHARE
-------------------
<TABLE><CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total(3)................ $ $ $ $
</TABLE>
- ---------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
(2) Before deducting expenses payable by the Company estimated at $1,500,000.
(3) The Company and the Selling Shareholders have granted the U.S. Underwriters
an option, exercisable within 30 days of the date hereof, to purchase up to
an aggregate of 2,400,000 additional shares at the price to public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the U.S. Underwriters exercise such option in
full, the total price to public, underwriting discounts and commission,
proceeds to Company and proceeds to the Selling Shareholders will be
$ , $ , $ and $ , respectively. See
"Underwriters."
----------------------
The Shares of Common Stock are offered, subject to prior sale, when, as and
if accepted by the Underwriters and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about , 1996, at the office of
Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor
in immediately available funds.
-------------------
MORGAN STANLEY & CO.
Incorporated
CS FIRST BOSTON
DEAN WITTER REYNOLDS INC.
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-------------------
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR
ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR
POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION
FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO
WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO
THE OFFERING OF THE COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS.
-------------------
TABLE OF CONTENTS
<TABLE><CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 12
Price Range of Common Stock and
Dividend Policy..................... 12
Capitalization........................ 13
Selected Consolidated Financial
Data................................ 14
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations........... 16
Business.............................. 24
Management............................ 41
Principal and Selling Shareholders.... 48
<CAPTION>
PAGE
----
<S> <C>
Description of Certain Indebtedness... 50
Description of Capital Stock.......... 61
Shares Eligible for Future Sale....... 65
Certain United States Federal Tax
Considerations for Non-U.S. Holders
of Common Stock..................... 66
Underwriters.......................... 69
Legal Matters......................... 72
Experts............................... 72
Incorporation of Certain Documents by
Reference........................... 73
Additional Information................ 73
Index to Financial Statements......... F-1
</TABLE>
-------------------
In this Prospectus, references to "dollar" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction. All tons are short tons.
MARDI GRAS, SOFT'N GENTLE, SO-DRI, GREEN FOREST, ENVISION, GENERATION II,
PREFERENCE and NOUVELLE are trademarks of the Company that are registered or
otherwise protected under the laws of various jurisdictions.
The principal executive offices of the Company are located at 1919 South
Broadway, Green Bay, Wisconsin 54304, and the Company's telephone number is
(414) 435-8821. The Company was incorporated in Delaware in 1967.
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B6-A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITERS."
2
<PAGE>
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the detailed
information and financial statements found elsewhere in this Prospectus. As used
in this Prospectus, unless the context indicates otherwise: (i) the "Company" or
"Fort Howard" means Fort Howard Corporation, and where appropriate, its
subsidiaries; (ii) "Common Stock" means the Common Stock, par value $.01 per
share, of Fort Howard Corporation; (iii) "Offering" means the offering of
16,000,000 shares of Common Stock in the underwritten public offering to which
this Prospectus relates and (iv) numbers and percentages of shares outstanding
assume that the U.S. Underwriters' over-allotment option is not exercised. The
market share information and, unless otherwise indicated, the industry
statistical information presented herein reflect the Company's best estimates
based on publicly available information, and no assurance can be given regarding
the accuracy of such estimates and statistics.
THE COMPANY
Founded in 1919, Fort Howard is a leading manufacturer, converter and
marketer of sanitary tissue products in the commercial (away-from-home) and
consumer (at-home) markets in the United States and the United Kingdom. Its
principal products include paper towels, bath tissue, table napkins, wipers and
boxed facial tissue manufactured from virtually 100% recycled fibers. 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 approximately
60% of its domestic capacity on this faster growing segment of the tissue
market. The balance of the Company's domestic capacity is directed to the
consumer market, which includes private label and branded products. The Company
is a leading producer of tissue products in this market and has grown its share
from 3% in 1984 to 10.5% in 1995. Its principal consumer 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, and Green
Forest, the leading domestic line of environmentally positioned, recycled tissue
paper products.
For the past 20 years, Fort Howard has maintained annual EBITDA margins of
approximately 30%, about double those publicly reported by the Company's major
competitors. At the same time, the Company has achieved strong market share
growth on the basis of its position as a low cost producer in the markets in
which it competes.
The Company's business strategy is focused on increasing shareholder value
by enhancing its position in the United States and internationally. The
Company's strategy involves: (i) increasing new product development to drive
further market share growth and margin improvement; (ii) improving its position
as a low cost producer of tissue products in the markets in which it competes
while continuously improving product quality; (iii) developing opportunities for
further international growth; and (iv) reducing debt to improve its operating
and financial flexibility.
From 1984 to 1994, the Company doubled its production capacity by
constructing or expanding its system of world-class, integrated, regional tissue
mills. These mills use the Company's state-of-the-art wastepaper de-inking and
processing systems that allow the Company to process relatively low grades of
wastepaper to produce low cost, quality fiber for making tissue paper. The
Company operates eight of the eleven largest (270-inch) tissue paper machines in
the world, which significantly increase labor productivity.
The Company was acquired by The Morgan Stanley Leveraged Equity Fund II,
L.P. ("MSLEF II") and other investors in 1988 (the "Acquisition"). Morgan
Stanley Group Inc. ("Morgan Stanley Group"), directly and through certain
affiliated entities which it controls, including MSLEF II, currently
beneficially owns approximately 37% of the outstanding Common Stock of Fort
Howard. Upon consummation of the Offering, Morgan Stanley Group and its
affiliates will own approximately 27% of the outstanding Common Stock
(approximately 25% if the U.S. Underwriters' over-allotment option is exercised
in full). Morgan Stanley Group and MSLEF II are affiliates of both Morgan
Stanley & Co. Incorporated ("MS&Co"), a representative of the U.S. Underwriters,
and Morgan Stanley & Co. International Limited ("MS&Co International"), a
representative of the International Underwriters.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company:
U.S. Offering............................ 8,000,000 shares
International Offering................... 2,000,000 shares
Total................................ 10,000,000 shares
Common Stock offered by the Selling Shareholders:
U.S. Offering............................ 4,800,000 shares
International Offering................... 1,200,000 shares
Total................................ 6,000,000 shares
Total Offering............................. 16,000,000 shares
Common Stock outstanding after the 73,447,097 shares(a)
Offering...................................
Use of Proceeds............................ The net proceeds to the Company from the
Offering will be used to prepay a portion
of the outstanding principal of the 1995
Term Loan B under the 1995 Bank Credit
Agreement (as defined herein). See "Use of
Proceeds."
Nasdaq National Market
Symbol................................... "FORT"
</TABLE>
- ------------
(a) Excludes 4,442,508 shares of Common Stock issuable upon exercise of
outstanding options. See "Management--Compensation of Executive Officers and
Directors."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical consolidated financial
data of the Company for the years ended December 31, 1995, 1994 and 1993, that
were derived from the consolidated financial statements of the Company, which
were audited by Arthur Andersen LLP, independent public accountants, whose
report thereon appears elsewhere in this Prospectus.
The following table also sets forth historical consolidated financial data
of the Company for the three-month periods ended March 31, 1996 and 1995. The
information presented for the interim periods is unaudited but in the opinion of
management such information reflects all adjustments (which consist only of
normal recurring accruals) necessary for a fair presentation of the financial
data for the interim periods. The results for the interim periods presented are
not necessarily indicative of the results for a full year.
The following financial information should be read in conjunction with
"Capitalization," "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations" and the audited consolidated financial statements and the related
notes thereto included elsewhere in this Prospectus.
<TABLE><CAPTION>
PRO FORMA(A) HISTORICAL
------------------------------- ---------------------------------------------------
THREE MONTHS ENDED
THREE MONTHS YEAR ENDED MARCH 31, YEAR ENDED DECEMBER 31,
ENDED MARCH 31, DECEMBER 31, ------------------ -----------------------------
1996 1995 1996 1995 1995 1994 1993
--------------- ------------ ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................... $ 386 $ 1,621 $ 386 $ 367 $ 1,621 $ 1,274 $ 1,187
Cost of sales........................... 239 1,139 239 267 1,139 867 784
------- ------ ------- ------- ------- ------- -------
Gross income............................ 147 482 147 100 482 407 403
Selling, general and
administrative(b)..................... 33 122 33 29 122 110 97
Amortization of goodwill(c)............. -- -- -- -- -- -- 43
Goodwill write-off(c)................... -- -- -- -- -- -- 1,980
Environmental charge(d)................. -- -- -- -- -- 20 --
------- ------ ------- ------- ------- ------- -------
Operating income (loss)(d).............. 114 360 114 71 360 277 (1,717)
Interest expense........................ 66 271 71 87 310 338 342
Other (income) expense, net............. -- (2) -- (1) (2) -- (3)
------- ------ ------- ------- ------- ------- -------
Income (loss) before taxes(d)........... 48 91 43 (15) 52 (61) (2,056)
Income taxes (credit)................... 18 33 16 (6) 18 (19) (16)
------- ------ ------- ------- ------- ------- -------
Income (loss) before extraordinary items
and adjustment for accounting
change............................... 30 58 27 (9) 34 (42) (2,040)
Extraordinary items--losses on debt
repurchases (net of income
taxes)(e)............................ -- -- -- (19) (19) (28) (12)
------- ------ ------- ------- ------- ------- -------
Net income (loss)(d)(f)................. $ 30 $ 58 $ 27 $ (28) $ 15 $ (70) $(2,052)
------- ------ ------- ------- ------- ------- -------
------- ------ ------- ------- ------- ------- -------
Earnings (loss) per share(d)(f)(g)...... $ 0.41 $ 0.79 $ 0.43 $ (0.66) $ 0.25 $ (1.85) $(53.85)
OTHER DATA:
EBITDA(h)............................... $ 139 $ 459 $ 139 $ 95 $ 459 $ 393 $ 387
EBITDA as a percent of net sales(h)..... 36.1% 28.3% 36.1% 25.9% 28.3% 30.8% 32.6%
Depreciation of property, plant and
equipment............................. $ 25 $ 99 $ 25 $ 24 $ 99 $ 96 $ 89
Non-cash interest expense............... 3 13 3 3 13 74 101
Capital expenditures.................... 9 47 9 11 47 84 166
Weighted average number of shares of
Common Stock outstanding (in
thousands)(g)....................... 73,372 73,371 63,372 42,546 58,228 38,103 38,107
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................ $ 1,617 $ 1,622 $ 1,726 $ 1,652 $ 1,681 $ 1,650
Working capital (deficit)............... 3 1 61 (35) (98) (92)
Long-term debt (including current
portion) and Common Stock with put
right............................... 2,749 2,962 3,136 2,966 3,318 3,234
Shareholders' deficit................... (1,602) (1,812) (1,882) (1,838) (2,148) (2,081)
</TABLE>
(Footnotes on following page)
5
<PAGE>
(Footnotes for preceding page)
- ------------
<TABLE>
<C> <S>
(a) The Pro Forma data give effect to (i) the Offering (assuming a public offering price $22.50 per
share), as if the Offering occurred on March 31, 1996 for consolidated balance sheet purposes (see
"Use of Proceeds") and (ii) the Offering and the 1995 Recapitalization (as defined in
"Management's Discussion and Analysis of Consolidated Financial Condition and Results of
Operations--Financial Condition--Liquidity and Capital Resources"), as if they occurred on January
1, 1995 for consolidated statement of income purposes (see "Use of Proceeds" and "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of Operations--Financial
Condition--Liquidity and Capital Resources").
(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 9 of the
Company's audited consolidated financial statements included elsewhere in this Prospectus.
(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 3 of the Company's audited consolidated
financial statements included elsewhere in this Prospectus.
(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 $297 million, $41 million, $56
million and $1.47 per share, respectively.
(e) In 1995, 1994 and 1993, the Company incurred extraordinary losses (net of income taxes) on early
retirement of debt of $19 million, $28 million and $12 million, respectively.
(f) Net income and earnings per share before extraordinary items for the year ended December 31, 1995
were $33.5 million and $0.57, respectively. On a pro forma basis after giving effect solely to the
1995 Recapitalization as if it had occurred on January 1, 1995 for consolidated statement of
income purposes, net income and earnings per share for the year ended December 31, 1995 would have
been $43.4 million and $0.69, respectively, and for the three months ended March 31, 1995, net
loss and loss per share would have been $1.1 million and $0.02, respectively.
(g) The computation of earnings (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 1995 Bank Credit
Agreement and other instruments governing the Company's indebtedness are based on the Company's
EBITDA, subject to certain adjustments.
</TABLE>
RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
an investment in the Common Stock, including: pricing of the Company's products;
wastepaper prices; competition; deficit in shareholders' equity; the Company's
highly leveraged position and ability to service debt; the Company's sensitivity
to interest rates; covenant restrictions that may limit the Company's operating
flexibility; environmental matters; the Company's principal shareholders;
restrictions on dividends; effect on the public market of shares of Common Stock
eligible for future sale; anti-takeover effects of certain provisions of the
Restated Certificate of Incorporation and Restated By-laws of the Company and
forward looking information contained in this Prospectus, see "Risk Factors."
6
<PAGE>
RISK FACTORS
In evaluating an investment in the Common Stock, purchasers of the Common
Stock should carefully consider the following factors as well as the other
information set forth in this Prospectus.
PRICING
The Company believes that prices for commercial and consumer tissue paper
products are significantly affected by the levels of industry capacity and
operating rates, demand, general economic conditions and competitive conduct,
all of which are beyond the Company's control. Commercial and consumer market
finished product prices generally move over time in the same direction as a
result of common raw material costs and other manufacturing cost factors.
However, the timing and magnitude of price changes, and the prices themselves,
in the two markets can vary significantly in part because of their different
competitive dynamics. Higher operating rates among tissue producers in 1994 and
1995 and higher fiber costs across all segments of the paper industry supported
average domestic selling price increases for the Company's products of 5% in
1994 and 22% in 1995. Although industry capacity continues to operate at higher
levels, fiber costs have trended downward since the third quarter of 1995
resulting in modest price discounting in the domestic tissue market. Also, in
March and April 1996, certain of the Company's competitors announced price
decreases as a result of lower fiber costs. If fiber costs remain at lower
levels, there may be erosion in the prices the Company can obtain for its tissue
products. See "--Wastepaper Prices," "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations" and
"Business--Industry Overview."
WASTEPAPER PRICES
Fort Howard uses wastepaper for substantially all of its fiber requirements.
The Company believes that the price of wastepaper is affected by demand, which
is primarily dependent upon de-inking and recycling capacity levels in the paper
industry overall, and by the price of market pulp. Prices for de-inking 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 increased more than 150% from July 1994 to July 1995.
Wastepaper prices began to decline in the third quarter of 1995, declined
sharply in the fourth quarter of 1995 and have continued to decline moderately
during the first quarter of 1996. Substantial additions of de-inking and
recycling capacity in the paper industry, which are expected to come on line
during 1996 and 1997, potential increases in market pulp prices and other
factors could cause a return to higher wastepaper prices. In the event the cost
of wastepaper were to increase, 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 and the Company's earnings could be materially adversely
affected. Further, a reduction in supply of wastepaper due to increased demand
or other factors could have an adverse effect on the Company's business. See
"Business--Industry Overview."
COMPETITION
The manufacture and sale of tissue products are highly 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. 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. See "Business--Competition."
7
<PAGE>
DEFICIT IN SHAREHOLDERS' EQUITY
The Company has a substantial common shareholders' deficit. At March 31,
1996, the Company's common shareholders' deficit was approximately $1,812
million. On a pro forma basis after giving effect to the Offering, the Company's
common shareholders' deficit would have been approximately $1,602 million at
March 31, 1996. See "Capitalization."
HIGHLY LEVERAGED POSITION AND ABILITY TO SERVICE DEBT
The Company has substantial consolidated indebtedness. At March 31, 1996,
the Company's consolidated debt was approximately $2,962 million. On a pro forma
basis after giving effect to the Offering, the Company's consolidated debt would
have been approximately $2,749 million at March 31, 1996. See "Capitalization."
The ability of the Company to meet its obligations and to comply with the
financial covenants contained in the agreements relating to the Company's
indebtedness is largely dependent upon the future performance of the Company,
which is subject to financial, business and other factors affecting it. Many of
these factors, such as economic conditions, interest rate levels, job formation,
demand for and selling prices of its products, costs of its raw materials,
environmental regulation and other factors relating to its industry generally or
to specific competitors are beyond the Company's control. There can be no
assurance that the Company will generate sufficient cash flow to meet its
obligations under its indebtedness, which include estimated repayment
obligations, assuming completion of the Offering, of approximately $62 million
in 1996, $112 million in 1997, $135 million in 1998, $150 million in 1999 and
$156 million in 2000 (and increasing thereafter). If the Company is unable to
generate sufficient cash flow or otherwise obtain funds necessary to make
required payments on its indebtedness, or if the Company fails to comply with
the various covenants in such indebtedness, it would be in default under the
terms thereof, which would permit the lenders thereunder to accelerate the
maturity of such indebtedness and could cause defaults under other indebtedness
of the Company or result in a bankruptcy of the Company. See "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations--Financial Condition" and "Description of Certain Indebtedness."
SENSITIVITY TO INTEREST RATES
At March 31, 1996, the Company's indebtedness had a weighted average
interest rate of 8.85% and approximately $1,249 million of the Company's
indebtedness bore interest at a floating rate. Of this amount, $500 million is
subject to LIBOR-based interest rate cap agreements which effectively limit the
interest cost to the Company 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. Interest rates were at comparatively low levels in 1995. If
interest rates were to increase substantially, the Company may be less able to
meet its debt service obligations. See "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations--Financial Condition"
and "Description of Certain Indebtedness."
COVENANT RESTRICTIONS MAY LIMIT COMPANY'S OPERATING FLEXIBILITY
The limitations contained in the agreements relating to the Company's
indebtedness, together with the highly leveraged position of the Company, could
limit the ability of the Company to effect future debt or equity financings and
may otherwise restrict corporate activities, including the Company's ability to
avoid defaults, to respond to competitive market conditions, to provide for
capital expenditures beyond those permitted or to take advantage of business
opportunities. If the Company cannot generate sufficient cash flow from
operations to meet its obligations, then its indebtedness might have to be
refinanced. There can be no assurance that any such refinancing could be
effected successfully or on
8
<PAGE>
terms that are acceptable to the Company. In the absence of such refinancing,
the Company could be forced to dispose of assets in order to make up for any
shortfall in the payments due on its indebtedness under circumstances that might
not be favorable to realizing the best price for such assets. Further, there can
be no assurance that any assets could be sold quickly enough, or for amounts
sufficient, to enable the Company to make any such payments. See "Description of
Certain Indebtedness."
ENVIRONMENTAL MATTERS
The Company is subject to substantial regulation by various federal, state
and local authorities in the United States and national and local authorities in
the United Kingdom 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. 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 an investigation and potential clean-up of the Lower Fox River in
Wisconsin and has been named as a potentially responsible party ("PRP") 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.
The Company has approximately $20 million of accrued liabilities as of
December 31, 1995 for estimated or anticipated liabilities and legal and
consulting costs relating to environmental matters arising from past operations.
While the accrued liabilities reflect the Company's current estimate of the cost
of these environmental matters, there can be no assurance that the amount
accrued will be adequate. In addition, there can be no assurance that the
Company will not be named a PRP at other sites in the future or that the costs
associated with such future sites would not be material. 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 may increase the likelihood and cost of environmental
clean-ups or related costs, all of which are likely to increase certain
operating expenses, require continuing capital expenditures and adversely affect
the operating flexibility of the Company's manufacturing operations. While the
Company has budgeted for future capital and operating expenditures to maintain
compliance with environmental legislation and regulations, indeterminable
significant expenditures in connection with such compliance or other
environmental matters could have a material adverse effect on the Company's
financial condition and results of operations. See Note 11 of the Company's
audited consolidated financial statements included elsewhere in this Prospectus
and "Business--Environmental Matters" and "--Legal Proceedings."
PRINCIPAL SHAREHOLDERS
Upon consummation of the Offering, Morgan Stanley Group, directly and
through certain affiliated entities which it controls, including MSLEF II,
collectively will beneficially own approximately 27% of the outstanding shares
of Common Stock (approximately 25% if the U.S. Underwriters' over-allotment
option is exercised in full). Currently, two of the nine directors of the
Company are officers, and one director of the Company is an Advisory Director,
of MS&Co, a subsidiary of Morgan Stanley Group. Pursuant to the terms of the
Stockholders Agreement (as defined herein), MSLEF II and Fort Howard Equity
Investors II, L.P., a Delaware limited partnership ("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 addition, in the event of a
vacancy on the Board of
9
<PAGE>
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.
As a result of their large shareholdings, Morgan Stanley Group and its
affiliates will continue to have significant influence over the management
policies of the Company and over matters requiring shareholder approval,
including the election of all directors, the adoption of amendments to the
Company's Restated Certificate of Incorporation and the approval of mergers and
sales of all or substantially all of the Company's assets, which may deter a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of the Company, even if such events might be favorable to the Company's
shareholders. See "--Anti-Takeover Effects of Provisions of the Restated
Certificate of Incorporation and By-laws" and "Description of Capital
Stock--Stockholders Agreement."
RESTRICTIONS ON DIVIDENDS
Since the Acquisition, the Company has not declared or paid any cash
dividends on any class of its capital stock, and currently does not intend to
pay dividends on the Common Stock. The 1995 Bank Credit Agreement and the
Company's outstanding debt obligations limit, in each case with certain
exceptions, the payment of cash dividends on the Common Stock. See "Price Range
of Common Stock and Dividend Policy" and "Description of Certain Indebtedness."
EFFECT ON PUBLIC MARKET OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 73,447,097 shares of Common
Stock outstanding, of which the 16,000,000 shares sold by the Company and the
Selling Shareholders pursuant to the Offering and an additional 26,308,433
shares that were outstanding prior to the Offering will be tradeable without
restriction or further registration under the Securities Act, except for any of
such shares held by "affiliates" (as defined under the Securities Act) of the
Company. The remaining shares of Common Stock will be "restricted" securities
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), and may not be sold in the absence of registration under the Securities
Act or an exemption therefrom, including the exemptions contained in Rule 144
under the Securities Act. No prediction can be made as to the effect, if any,
that future sales of shares of Common Stock, or the availability of such shares
for future sale, will have on the market price of the Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock (including
shares issued upon the exercise of stock options) in the public market, or the
perception that such sales could occur, could adversely affect the prevailing
market price of the Common Stock or the ability of the Company to raise capital
through a public offering of its equity securities.
Pursuant to the Underwriting Agreement the Company has agreed, and pursuant
to the Stockholders Agreement certain shareholders (who, following the Offering,
will beneficially own in the aggregate 30,654,531 shares of Common Stock) of the
Company 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 the effective date of the Registration
Statement, without the prior written consent of certain of the representatives
of the U.S. Underwriters in the case of Morgan Stanley Group, MSLEF II, Fort
Howard Equity Investors, L.P., a Delaware limited partnership ("Fort Howard
Equity Investors"), and Fort Howard Equity Investors II, or of MS&Co, in the
case of the remaining shareholders. See "Shares Eligible for Future Sale" and
"Underwriters."
Pursuant to the Stockholders Agreement, Morgan Stanley Group, MSLEF II and
other shareholders of the Company have certain registration rights with respect
to the shares of Common Stock that they currently own. Subject to the 180-day
lock-up period described above, Morgan Stanley Group,
10
<PAGE>
MSLEF II, Fort Howard Equity Investors and Fort Howard Equity Investors II may
choose to dispose of the Common Stock owned by them. The timing of such sales or
other dispositions by such shareholders (which could include distributions to
MSLEF II's, Fort Howard Equity Investors' and Fort Howard Equity II's partners)
will depend on market and other conditions, but could occur relatively soon
after the 180-day lock-up period described above, including pursuant to the
exercise of their registration rights. MSLEF II, Fort Howard Equity Investors
and Fort Howard Equity Investors II are unable to predict the timing of sales by
any of their limited partners in the event of a distribution to them. Such
dispositions could be privately negotiated transactions or public sales. See
"Description of Capital Stock--Stockholders Agreement."
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION
AND BY-LAWS
Certain provisions of the Restated Certificate of Incorporation (the
"Certificate of Incorporation") and the Restated By-laws (the "By-laws") of the
Company may be deemed to have anti-takeover effects and may discourage or make
more difficult a takeover attempt that a shareholder might consider in its best
interest. Such provisions also may adversely affect prevailing market prices for
the Common Stock. These provisions, among other things: (i) classify the
Company's Board of Directors into three classes, each of which will serve for
different three-year periods; (ii) provide that only the Board of Directors or
the Chief Executive Officer of the Company may call special meetings of the
shareholders; (iii) eliminate the ability of the shareholders to take any action
without a meeting; (iv) permit the adjournment of shareholder meetings in
certain circumstances and (v) limit the ability of the shareholders to amend or
repeal the By-laws or any of the foregoing provisions of the Certificate of
Incorporation, except with the consent of holders of at least 80% of the
Company's outstanding Common Stock. In addition, the By-laws establish certain
advance notice procedures for nomination of candidates for election as directors
and for shareholder proposals to be considered at shareholders' meetings. See
"Description of Capital Stock--Anti-Takeover Effects of Provisions of the
Company's Restated Certificate of Incorporation and By-laws."
FORWARD LOOKING INFORMATION
Each paragraph of the Industry Overview and Business Strategy sections of
"Business" and the "Pricing" and "Wastepaper Prices" paragraphs of "Risk
Factors" contain one or more forward looking statements and statements based on
the Company's beliefs in which the Company attempts to measure activity in, and
to analyze the many factors affecting, the markets for its products and the
markets for the raw materials from which its products are made. There can be no
assurance that: (i) the Company has correctly measured or identified all of the
factors affecting these markets or the extent of their likely impact; (ii) the
publicly available information with respect to these factors on which the
Company's analysis is based is complete or accurate; (iii) the Company's
analysis is correct or (iv) the Company's strategy, which is based in part on
this analysis, will be successful.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
10,000,000 shares of Common Stock offered by the Company (assuming a public
offering price of $22.50 per share) are estimated to be approximately $215
million after deducting estimated underwriting discounts and commissions and
expenses of the Offering payable by the Company. The Company intends to use the
entire net proceeds of the Offering to prepay a portion of the outstanding
principal of the 1995 Term Loan B under the 1995 Bank Credit Agreement. The 1995
Term Loan B bears interest at floating rates (a weighted average rate of 8.52%
at March 31, 1996) and matures on December 31, 2002. Subject to certain
conditions, including consummation of the Offering, the interest rates on the
1995 Term Loan A, the remaining 1995 Term Loan B and the 1995 Revolving Credit
Facility will be reduced. See "Description of Certain Indebtedness."
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
During the fiscal year ended December 31, 1994, there was no market for the
Common Stock. The Common Stock began trading under the symbol "FORT" on the
Nasdaq National Market on March 10, 1995. The range of high and low sale prices
of the Common Stock during quarters in which there was an active public trading
market is as follows:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995:
First Quarter.............................................. $12 7/8 $12
Second Quarter............................................. 15 12
Third Quarter.............................................. 16 1/4 133/8
Fourth Quarter............................................. 23 1/4 143/8
1996:
First Quarter.............................................. 25 1/2 19
Second Quarter (through April 23, 1996).................... 23 1/4 201/4
</TABLE>
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 the Common
Stock in the foreseeable future. The 1995 Bank Credit Agreement 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. See "Description of Certain Indebtedness" and "Description
of Capital Stock."
12
<PAGE>
CAPITALIZATION
Set forth below is the actual consolidated capitalization of the Company at
March 31, 1996, and the pro forma consolidated capitalization of the Company as
of that date after giving effect to the Offering. The information presented
below should be read in conjunction with the Company's audited consolidated
financial statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL PRO FORMA (A)
--------- -------------
(IN MILLIONS)
<S> <C> <C>
Current portion of long-term debt................................... $ 84.1 $ 82.1
--------- -------------
Long-term debt, less current portion(b):
1995 Term Loan A.................................................. 726.0 726.0
1995 Term Loan B.................................................. 320.0 109.5
1995 Revolving Credit Facility.................................... 96.5 96.5
9 1/4% Notes...................................................... 450.0 450.0
8 1/4% Notes...................................................... 100.0 100.0
9% Notes.......................................................... 650.0 650.0
10% Notes......................................................... 300.0 300.0
Capital lease obligations......................................... 165.8 165.8
Other long-term debt.............................................. 69.4 69.4
--------- -------------
Total long-term debt, less current portion.......................... 2,877.7 2,668.2
--------- -------------
Total indebtedness................................................ 2,961.8 2,749.3
Shareholders' deficit:
Common Stock, par value $.01 per share,
100,000,000 shares authorized, 63,385,475 shares
issued and outstanding and 73,385,475 shares issued and
outstanding on a pro forma basis(c)............................. 0.6 0.7
Paid-in capital................................................... 895.9 1,110.3
Cumulative translation adjustment................................. (3.8) (3.8)
Retained deficit.................................................. (2,704.9) (2,708.8)
--------- -------------
Total shareholders' deficit..................................... (1,812.2) (1,601.6)
--------- -------------
Total capitalization............................................ $ 1,149.6 $ 1,147.7
--------- -------------
--------- -------------
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Calculated based upon estimated proceeds to the Company from the Offering. See "Use of
Proceeds."
(b) See Note 5 of the Company's audited consolidated financial statements for additional
information with respect to long-term debt.
(c) In April 1996, the Company issued and sold 61,622 shares of Common Stock to the
Company's profit sharing plan. The proceeds from such issuance were used to reduce
borrowings under the 1995 Revolving Credit Facility.
</TABLE>
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of the Company for the years ended December 31, 1995, 1994, 1993, 1992 and
1991 that were derived from the consolidated financial statements of the
Company, which were audited by Arthur Andersen LLP, independent public
accountants. The report of such accountants with respect to the years ended
December 31, 1995, 1994 and 1993 appears elsewhere in this Prospectus.
The following table also sets forth historical consolidated financial data
of the Company for the three-month periods ended March 31, 1996 and 1995. The
information presented for the interim periods is unaudited but in the opinion of
management, such information reflects all adjustments (which consist only of
normal recurring accruals) necessary for a fair presentation of the financial
data for the interim periods. The results for the interim periods presented are
not necessarily indicative of the results for a full year.
The following financial information should be read in conjunction with
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations" and the audited consolidated financial statements and the
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA(A) HISTORICAL
------------------------------ ---------------------------------------------------------
THREE MONTHS
THREE MONTHS YEAR ENDED ENDED MARCH 31, YEAR ENDED DECEMBER 31,
ENDED MARCH 31, DECEMBER 31, ----------------- -------------------------------------
1996 1995 1996 1995 1995 1994 1993 1992
--------------- ------------ ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales......................... $ 386 $1,621 $ 386 $ 367 $ 1,621 $ 1,274 $ 1,187 $ 1,151
Cost of sales(b).................. 239 1,139 239 267 1,139 867 784 726
------ ----- ------- ------- ------- ------- ------- -------
Gross income...................... 147 482 147 100 482 407 403 425
Selling, general and
administrative(b)(c)............ 33 122 33 29 122 110 97 97
Amortization of goodwill(d)....... -- -- -- -- -- -- 43 57
Goodwill write-off(d)............. -- -- -- -- -- -- 1,980 --
Environmental charge(e)........... -- -- -- -- -- 20 -- --
------ ----- ------- ------- ------- ------- ------- -------
Operating income (loss)(e)........ 114 360 114 71 360 277 (1,717) 271
Interest expense.................. 66 271 71 87 310 338 342 338
Other (income) expense, net....... -- (2) -- (1) (2) -- (3) 2
------ ----- ------- ------- ------- ------- ------- -------
Income (loss) before taxes(e)..... 48 91 43 (15) 52 (61) (2,056) (69)
Income taxes (credit)............. 18 33 16 (6) 18 (19) (16) --
------ ----- ------- ------- ------- ------- ------- -------
Income (loss) before equity
earnings, extraordinary items
and adjustment for accounting
change.......................... 30 58 27 (9) 34 (42) (2,040) (69)
Equity in net loss of
unconsolidated
subsidiaries(f)................. -- -- -- -- -- -- -- --
------ ----- ------- ------- ------- ------- ------- -------
Net income (loss) before
extraordinary items and
adjustment for accounting change 30 58 27 (9) 34 (42) (2,040) (69)
Extraordinary items--losses on
debt repurchases (net of income
taxes)(g)....................... -- -- -- (19) (19) (28) (12) --
Adjustment for adoption of SFAS
No. 106 (net of income
taxes)(h)....................... -- -- -- -- -- -- -- (11)
------ ----- ------- ------- ------- ------- ------- -------
Net income (loss)(b)(e)(i)........ $ 30 $ 58 $ 27 $ (28) $ 15 $ (70) $(2,052) $ (80)
------ ----- ------- ------- ------- ------- ------- -------
------ ----- ------- ------- ------- ------- ------- -------
Earnings (loss) per
share(e)(i)(j)................... $ 0.41 $ 0.79 $ 0.43 $ (0.66) $ 0.25 $ (1.85) $(53.85) $ (2.10)
OTHER DATA:
EBITDA(k)......................... $ 139 $ 459 $ 139 $ 95 $ 459 $ 393 $ 387 $ 410
EBITDA as a percent of net
sales(k)........................ 36.1% 28.3% 36.1% 25.9% 28.3% 30.8% 32.6% 35.6%
Depreciation of property, plant
and equipment(b)................ $ 25 $ 99 $ 25 $ 24 $ 99 $ 96 $ 89 $ 81
Non-cash interest expense......... 3 13 3 3 13 74 101 140
Capital expenditures.............. 9 47 9 11 47 84 166 233
Weighted average number of shares
of Common Stock outstanding
(in thousands)(j)............... 73,372 73,371 63,372 42,546 58,228 38,103 38,107 38,107
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets...................... $ 1,617 $ 1,622 $ 1,726 $ 1,652 $ 1,681 $ 1,650 $ 3,575
Working capital (deficit)......... 3 1 61 (35) (98) (92) (124)
Long-term debt (including current
portion) and Common Stock with
put right....................... 2,749 2,962 3,136 2,966 3,318 3,234 3,104
Shareholders' equity (deficit).... (1,602) (1,812) (1,882) (1,838) (2,148) (2,081) (29)
<CAPTION>
1991
-------
<S> <C>
<S> <C>
STATEMENT OF INCOME DATA:
Net sales......................... $ 1,138
Cost of sales(b).................. 713
-------
Gross income...................... 425
Selling, general and
administrative(b)(c)............ 98
Amortization of goodwill(d)....... 57
Goodwill write-off(d)............. --
Environmental charge(e)........... --
-------
Operating income (loss)(e)........ 270
Interest expense.................. 371
Other (income) expense, net....... (3)
-------
Income (loss) before taxes(e)..... (98)
Income taxes (credit)............. (24)
-------
Income (loss) before equity
earnings, extraordinary items
and adjustment for accounting
change......................... (74)
Equity in net loss of
unconsolidated
subsidiaries(f)................. (32)
-------
Net income (loss) before
extraordinary items and
adjustment for accounting change (106)
Extraordinary items--losses on
debt repurchases (net of income
taxes)(g)....................... (5)
Adjustment for adoption of SFAS
No. 106 (net of income
taxes)(h)....................... --
-------
Net income (loss)(b)(e)(i)........ $ (111)
-------
-------
Earnings (loss) per
share(e)(i)(j).................. $ (3.17)
OTHER DATA:
EBITDA(k)......................... $ 444
EBITDA as a percent of net
sales(k)........................ 39.0%
Depreciation of property, plant
and equipment(b)................ $ 116
Non-cash interest expense......... 141
Capital expenditures.............. 144
Weighted average number of shares
of Common Stock outstanding
(in thousands)(j)............... 34,868
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets...................... $ 3,470
Working capital (deficit)......... 2
Long-term debt (including current
portion) and Common Stock with
put right....................... 2,947
Shareholders' equity (deficit).... 62
</TABLE>
(Footnotes on following page)
14
<PAGE>
(Footnotes from preceding page)
- ------------
<TABLE>
<C> <S>
(a) The Pro Forma data give effect to (i) the Offering (assuming a public offering price of $22.50
per share), as if the Offering occurred on March 31, 1996 for consolidated balance sheet purposes
(see "Use of Proceeds") and (ii) the Offering and the 1995 Recapitalization, as if they occurred
on January 1, 1995, for consolidated statement of income purposes (see "Use of Proceeds" and
"Management's Discussion and Analysis of Consolidated Financial Condition and Results of
Operations--Financial Condition--Liquidity and Capital Resources").
(b) Effective January 1, 1992, the Company prospectively changed its estimates of the depreciable
lives of certain machinery and equipment. The change had the effect of reducing depreciation
expense by approximately $38 million and net loss by $24 million in 1992.
(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 9 of the
Company's audited consolidated financial statements included elsewhere in this Prospectus.
(d) 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 3 of the Company's audited consolidated
financial statements included elsewhere in this Prospectus.
(e) 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 $297 million, $41 million, $56
million and $1.47 per share, respectively.
(f) As of December 31, 1991, the Company had sold all its international cup operations and had
discontinued recording equity in net losses of its residual interest in its former domestic cup
operations because the Company's carrying value of such residual investment was reduced to zero.
(g) In 1995, 1994 and 1993, the Company incurred extraordinary losses (net of income taxes) on early
retirement of debt of $19 million, $28 million and $12 million, respectively.
(h) 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.
(i) Net income and earnings per share before extraordinary items for the year ended December 31, 1995
were $33.5 million and $0.57, respectively. On a pro forma basis after giving effect solely to
the 1995 Recapitalization as if it occurred on January 1, 1995 for consolidated statement of
income purposes, net income and earnings per share for the year ended December 31, 1995 would
have been $43.4 million and $0.69, respectively, and for the three months ended March 31, 1995,
net loss and loss per share would have been $1.1 million and $0.02, respectively.
(j) The computation of earnings (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.
(k) 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 1995
Bank Credit Agreement and other instruments governing the Company's indebtedness are based on the
Company's EBITDA, subject to certain adjustments. See "Description of Certain Indebtedness."
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
-------------- ---------------------------
1996 1995 1995 1994 1993
----- ----- ------ ------ -------
(UNAUDITED)
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Net sales:
Domestic tissue.................................. $ 325 $ 294 $1,320 $1,060 $ 1,004
International operations......................... 44 36 164 131 143
Harmon........................................... 17 37 137 83 40
----- ----- ------ ------ -------
Consolidated..................................... $ 386 $ 367 $1,621 $1,274 $ 1,187
----- ----- ------ ------ -------
----- ----- ------ ------ -------
Operating income (loss):
Domestic tissue (a)(b)(c)........................ $ 107 $ 67 $ 337 $ 264 $(1,715)
International operations (a)..................... 6 2 18 8 (1)
Harmon (a)....................................... 1 2 5 5 (1)
----- ----- ------ ------ -------
Consolidated (a)(b)(c)........................... 114 71 360 277 (1,717)
Amortization of goodwill and goodwill write-off
(a)................................................ -- -- -- 2,023
Depreciation....................................... 25 24 99 96 89
Environmental charge (b)........................... -- -- -- 20 --
Employee stock compensation (c).................... -- -- -- -- (8)
----- ----- ------ ------ -------
EBITDA(d)........................................ $ 139 $ 95 $ 459 $ 393 $ 387
----- ----- ------ ------ -------
----- ----- ------ ------ -------
Consolidated net income (loss)..................... $ 27 $ (28) $ 15 $ (70) $(2,052)
----- ----- ------ ------ -------
----- ----- ------ ------ -------
EBITDA as a percent of net sales(d)................ 36.1% 25.9% 28.3% 30.8% 32.6%
</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 3 to the
Company's audited consolidated financial statements included elsewhere in
this Prospectus.
(b) During the fourth quarter of 1994, operating income for domestic tissue
operations was reduced by a $20 million environmental charge. See Note 11 to
the Company's audited consolidated financial statements included elsewhere
in this Prospectus.
(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 9 to the Company's audited consolidated
financial statements included elsewhere in this Prospectus.
(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
1995 Bank Credit Agreement and other instruments governing the Company's
indebtedness are based on the Company's EBITDA, subject to certain
adjustments. See "Description of Certain Indebtedness."
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
Net Sales. Consolidated net sales increased 5.0% to $386 million in the
first quarter of 1996 compared to $367 million in the first quarter of 1995.
Domestic tissue net sales increased 10.5% in the first quarter of 1996 compared
to the first quarter of 1995 due to a 17.6% increase in net selling prices
offset by a 6.0% decrease in sales volume. Although consumer volume increased
significantly during the first quarter of 1996, units sold to commercial
customers decreased from the first quarter of 1995 when volume may have been
affected by inventory buildups by the Company's distributors in anticipation of
the implementation of the Company and industry announced price increases. Net
selling prices increased significantly in both the commercial and consumer
markets for the first quarter of 1996 compared to the first quarter of 1995 in
response to rising raw material costs in late 1994 and early 1995. Accordingly,
the Company implemented price increases in both markets in 1995. From the fourth
16
<PAGE>
quarter of 1995 through the first quarter of 1996, overall domestic net selling
prices declined slightly. In the first quarter, modest price discounting
occurred in the marketplace. Also, in March and April 1996, certain of the
Company's competitors announced price decreases as a result of lower fiber
costs.
Net sales of the Company's international operations increased 21.1% in the
first quarter of 1996 compared to the first quarter of 1995 due to a significant
increase in net selling prices and a higher volume of converted products, while
parent roll volume was reduced. The 54.3% decrease in net sales of the Company's
wastepaper brokerage subsidiary, Harmon Assoc., Corp. ("Harmon"), principally
reflects lower wastepaper selling prices.
Gross Income. For the first quarter of 1996, consolidated gross income
increased 48.1% to $147 million from $100 million for the first quarter of 1995
due to higher net selling prices and lower raw material costs, partially offset
by lower sales volume. Consolidated gross margins increased to 38.2% for the
first quarter of 1996 from 27.1% for the first quarter of 1995. Domestic tissue
gross margins increased for the first quarter of 1996 compared to the first
quarter of 1995 primarily due to higher net selling prices and lower wastepaper
costs. Wastepaper prices began to decline in the third quarter of 1995, declined
sharply in the fourth quarter of 1995 and continued to decline moderately in the
first quarter of 1996. The direction of wastepaper price trends in succeeding
quarters is uncertain due to general economic factors, virgin market pulp price
trends and changes in demand for wastepaper arising from export markets and
scheduled start-ups of de-inked market pulp mills.
Gross margins of international operations increased in the first quarter of
1996 compared to the first quarter of 1995 due to higher net selling prices and
lower wastepaper costs. Consolidated gross margins were positively affected for
the first quarter of 1996 compared to the first quarter of 1995 because net
sales of Harmon (which typically has very low margins compared to either
domestic or international tissue operations) were a smaller proportion of total
net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, as a percent of net sales, increased to 8.6% for the
first quarter of 1996 compared to 7.8% in 1995 principally due to the impact of
the Company's strong earnings performance on employee compensation plans and
higher selling expenses resulting from increased sales in the Company's consumer
market segment.
Operating Income. Operating income increased 61.4% to $114 million in the
first quarter of 1996 compared to $71 million in the first quarter of 1995.
Operating income as a percent of net sales increased to 29.6% in the first
quarter of 1996 compared to 19.3% in the first quarter of 1995. Domestic tissue
operating income as a percent of net sales increased to 32.9% in the first
quarter of 1996 from 22.9% in the first quarter of 1995 due to higher net
selling prices and lower wastepaper costs. International operating income as a
percent of sales rose significantly in the first quarter of 1996 compared to the
first quarter of 1995 also due to higher net selling prices and lower wastepaper
costs. In addition, consolidated operating income increased as a percent of net
sales because net sales of Harmon (which typically has very low operating income
margins compared to either domestic or international tissue operations) were a
smaller proportion of total net sales.
Extraordinary Loss. The Company's net loss in the first quarter of 1995 was
increased by an extraordinary loss of $19 million (net of income taxes of $12
million) from debt repurchases.
Net Income (Loss). For the first quarter of 1996, net income was $27 million
compared to a net loss of $28 million for the first quarter of 1995.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Net Sales. Consolidated net sales for 1995 increased 27.2% compared to 1994.
Domestic tissue net sales for 1995 increased 24.6% compared to 1994 due to net
selling price increases of 22.4% and converted products volume increases of
4.4%, offset by reduced parent roll export volume. The significant increase in
domestic net selling prices in 1995 reflects commercial market price increase
announcements effective January 1995, April 1995, July 1995 and September 1995
and consumer
17
<PAGE>
market price increase announcements effective January 1995 and July 1995, all in
response to rising raw material costs and improving operating rates in the
tissue industry. Domestic volume of the Company's commercial products was flat
for the full year 1995 compared to 1994. Significant volume growth in the first
quarter of 1995 was offset by volume declines in succeeding quarters. The
Company believes that the first quarter volume growth may have been affected by
inventory buildups by the Company's distributors in anticipation of the
implementation of the Company's announced price increases. The Company's firm
implementation of these price increases led to the commercial volume declines
beginning in the second quarter of 1995. Domestic consumer volume was
significantly higher throughout 1995 compared to 1994 due to strong consumer
market demand for the Company's products.
Net sales of the Company's international operations increased 24.8% for 1995
compared to 1994 due to a significant increase in net selling prices, slightly
higher volume of converted products and the benefit from the change in foreign
exchange rates, while parent roll volume was reduced. Net sales of Harmon
increased 63.8% for 1995 due to higher selling prices and slightly higher
volume.
Gross Income. For 1995, consolidated gross income increased 18.3% due to
higher selling prices and, to a much lesser degree, higher domestic volume,
partially offset by higher raw material costs. Consolidated gross margins
decreased to 29.7% for 1995 from 31.9% for 1994 and 34.0% for 1993 as a result
of significant raw material cost increases that began in mid-1994 and continued
until mid-1995. However, beginning in the second quarter of 1995, as net selling
price increases began to offset raw material cost increases, consolidated gross
margins began to recover and reached 34.0% in the fourth quarter of 1995, the
same rate achieved in full year 1993. Domestic tissue gross margins in 1995
exhibited trends similar to consolidated gross margins. Beginning in July 1994,
domestic wastepaper prices rose sharply until flattening in the second and third
quarters of 1995. Average wastepaper prices in the fourth quarter of 1995 were
higher than average wastepaper prices in the fourth quarter of 1994. However,
wastepaper prices fell significantly in the fourth quarter of 1995 from the
third quarter of 1995 and by December 1995 were significantly below wastepaper
prices in December 1994. Wastepaper price trends have remained favorable for the
first quarter of 1996, however, the direction of wastepaper price trends in
succeeding quarters is uncertain due to general economic factors, virgin market
pulp price trends and expected increases in demand for wastepaper arising from
scheduled start-ups of de-inked market pulp mills and from export markets. Costs
of other raw materials also increased during 1995 compared to 1994 but to a much
lesser extent, while all other costs (on a per ton basis) were flat or declined
due to efficiencies achieved from higher volumes.
Gross margins of international operations increased in 1995 compared to 1994
in spite of significantly higher wastepaper prices due to the benefits achieved
from product rationalization in 1994 and the success of 1995 price increases.
Wastepaper price trends in the U.K. were similar to those in the U.S. in 1995.
Consolidated gross margins were negatively affected in 1995 by the increased
proportion of net sales represented by the Company's wastepaper brokerage
subsidiary which typically has very low margins compared to domestic tissue
operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, as a percent of net sales, decreased to 7.5% for 1995
compared to 8.6% for 1994. The decrease occurred principally due to the effects
of significantly higher net sales.
Operating Income. Operating income increased to $360 million in 1995
compared to $277 million in 1994. Excluding the environmental charge from 1994
results, operating income would have been $297 million in 1994. Operating income
as a percent of net sales decreased to 22.2% in 1995 compared to 23.3% in 1994,
as adjusted for the environmental charge. Domestic tissue operating income as a
percent of net sales decreased to 25.5% in 1995 from 26.9% in 1994, also as
adjusted for the environmental charge. The decreases are due to significantly
higher raw material costs in 1995 partially offset by significantly higher net
selling prices and higher domestic volume. Operating income as a
18
<PAGE>
percent of net sales began to recover beginning in the second quarter of 1995,
similar to gross margin trends, such that consolidated and domestic tissue
operating income as a percent of net sales reached 25.5% and 27.9%,
respectively, in the fourth quarter of 1995.
Extraordinary Loss. The Company's net income in 1995 was decreased by an
extraordinary loss of $19 million (net of income taxes of $12 million)
representing the redemption premiums and write-offs of deferred loan costs
associated with the 1995 Recapitalization discussed below in "--Financial
Condition--Liquidity and Capital Resources."
Net Income. The Company reported net income of $15 million for 1995 compared
to a net loss of $70 million for 1994.
FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993
Net Sales. Consolidated net sales for 1994 increased 7.3% compared to 1993
due to increases in domestic tissue net sales and a significant net sales
increase by the Company's wastepaper brokerage subsidiary. Domestic tissue net
sales increased 5.5% for fiscal year 1994 compared to 1993 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 a
volume decrease in the commercial market. 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 1994.
Net sales of the Company's international operations decreased 8.4% for 1994
compared to 1993. The decrease in international net sales in 1994 was due to
significantly lower net selling prices on flat volume. 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 compared to 1993 principally
reflects higher net selling prices.
Gross Income. For 1994, consolidated gross margins decreased to 31.9% from
34.0% in 1993, principally due to lower margins in domestic tissue operations
where unit manufacturing cost increases exceeded net selling price increases.
Such cost increases primarily resulted from higher wastepaper and other raw
material costs, lower converting volume, higher depreciation expense resulting
from the start-up of a new paper machine at the Muskogee mill late in the first
quarter of 1994 and higher maintenance costs. From July to December 1994,
wastepaper prices for the grades of wastepaper used in Fort Howard's products
more than doubled.
Gross margins of international operations declined in 1994 compared to 1993
principally due to the lower net selling prices and the effects of product
rationalization. In addition, from July to December 1994, wastepaper prices for
the grades of wastepaper used by international operations increased
approximately 65%. Consolidated gross margins also were negatively affected in
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% for 1994 compared
to 8.8% for 1993. The decrease 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 1993.
19
<PAGE>
Environmental Charge. 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 "Business--Environmental Matters" and "--Legal Proceedings" and Note 11 of
the Company's audited consolidated financial statements included elsewhere in
this Prospectus.
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.
Extraordinary Loss. 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 and the write off of deferred loan costs
associated with the repayment of long-term debt from the proceeds of the
issuance of the 8 1/4% Notes and the 9% Notes in 1994.
Net Loss. The Company reported a net loss of $70 million for 1994 as
compared to a net loss of $2,052 million in 1993. The significant net loss for
1993 resulted principally from the goodwill write-off in the third quarter of
1993.
FINANCIAL CONDITION
Three Months Ended March 31, 1996
For the first three months of 1996, cash decreased $352,000. Capital
additions of $9 million and debt repayments of $26 million were funded
principally by borrowings of $22 million and $12 million of cash from operations
provided by strong operating results, partially offset by seasonal working
capital requirements.
During the first three months of 1996, receivables decreased $14 million due
to seasonally lower domestic tissue sales in the first quarter of 1996 compared
to the fourth quarter of 1995. Inventories decreased by $5 million due to lower
raw material costs partially offset by higher quantities in anticipation of
seasonal sales requirements. Accounts payable decreased $9 million due to
falling wastepaper costs. The liability for interest payable decreased $41
million due to semi-annual interest payments made in February and March 1996.
Other current liabilities declined $26 million resulting from the payment of
obligations due on an annual basis, including employee bonuses and customer
incentive payments. As a result of all these changes, net working capital
increased to $1 million at March 31, 1996 from a deficit of $35 million at
December 31, 1995.
Year Ended December 31, 1995
During 1995, cash increased $524,000. Capital additions of $47 million, debt
repayments of $1,811 million, including the prepayment or repurchase of all of
the 1988 Term Loan, the 1988 Revolving Credit Facility, the 1993 Term Loan and
the Senior Secured Notes, repayment of the 1995 Receivables Facility and the
redemption of all the outstanding 12 5/8% Debentures and 14 1/8% Debentures,
were funded principally by cash provided from operations of $157 million
(including proceeds of $63 million from the sale of certain domestic tissue
receivables), net proceeds of $284 million from the sale of Common Stock and
borrowings of $1,418 million (net of $50 million of debt issuance costs)
pursuant to the 1995 Recapitalization discussed below in "--Liquidity and
Capital Resources."
Receivables decreased $25 million during 1995 due principally to the sale of
certain domestic tissue receivables of $63 million, which was largely offset by
the effects of an increase in net sales and significantly higher net selling
prices in all the Company's businesses. Inventories increased by $32 million
principally due to an increase in inventory quantities. The Company increased
its parent roll and
20
<PAGE>
wastepaper inventories to take advantage of lower wastepaper prices and to
maximize the flexibility of existing productive capacity. The liability for
interest payable decreased $20 million due to the early payment of interest in
connection with the 1995 Recapitalization. Principally as a result of all these
changes and the $53 million reduction in the current portion of long-term debt,
the net working capital deficit decreased to $35 million at December 31, 1995,
from a deficit of $98 million at December 31, 1994.
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.
Principally 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 and inventories.
Liquidity and Capital Resources
The Company's principal uses of cash for the next several years will be
interest and principal payments on its indebtedness and capital expenditures.
On April 15, 1995, the Company completed a recapitalization plan (the "1995
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 debt
maturities, increase shareholders' equity and enhance its access to capital
markets. The 1995 Recapitalization included the following components: (1) the
offer and sale by the Company of 25,269,555 shares of Common Stock in March and
April 1995, at $12.00 per share (the "Initial Public Offering"); (2) entering
into a bank credit agreement (the "1995 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 "1995 Term
Loans") and entering into a receivables credit agreement consisting of a $60
million term loan (the "1995 Receivables Facility"); (3) the application in
March and April 1995 of the net proceeds of the Initial Public Offering,
together with borrowings under the 1995 Bank Credit Agreement and the 1995
Receivables Facility, to prepay or redeem all the Company's indebtedness
outstanding under the 1988 Bank Credit Agreement, 1993
21
<PAGE>
Term Loan, Senior Secured Notes, 14 1/8% Debentures (at par) and 12 5/8%
Debentures (at 102.5% of the principal amount thereof); and (4) the payment of
transaction costs. Assuming completion of the Offering, the Company will have
payment obligations of $62 million in 1996, $112 million in 1997, $135 million
in 1998, $150 million in 1999 and $156 million in 2000.
In September 1995, the Company entered into receivables sales agreements
(the "1995 Receivables Sales Agreements") which segregate certain domestic
tissue receivables from the Company's other assets and liabilities for the
purpose of effecting the sales of such receivables in order to achieve a lower
cost of borrowing based on the credit quality of the receivables. As a result,
receivables were reduced by $60 million, the 1995 Receivables Facility was
repaid and the interest cost on the 1995 Receivables Facility of 2.5% over LIBOR
has been effectively replaced by financing costs equal to 0.25% to 0.65% over
LIBOR on $60 million. In connection with the 1995 Receivables Sales Agreements,
additional revolving funds of up to $25 million may be available to the Company,
resulting in further decreases in receivables and interest costs. At March 31,
1996, the Company had drawn no amounts against the additional revolving funds
under the 1995 Receivables Sales Agreements. See "Description of Certain
Indebtedness--1995 Receivables Sales Agreements."
Capital expenditures were $47 million, $84 million and $166 million in 1995,
1994 and 1993, respectively, including an aggregate of $175 million during those
periods for capacity expansions. Subject to market conditions, 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. The 1995
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 certain
conditions are met. In addition, the Company is permitted to make investments
for international expansion of up to $41.3 million through June 30, 1996 (of
which $2.1 million had been spent as of December 31, 1995), and up to $100
million in the aggregate after June 30, 1996 if certain conditions are met.
Under the 1995 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. At December 31, 1995, the capital
expenditures carryover available to the Company totaled $31 million. The Company
does not believe such limitations will impair its plans for capital
expenditures. Capital expenditures are projected to approximate $90 to $100
million annually for the next several years, plus domestic expansion capital
spending that is subject to market conditions. The portions of the above capital
expenditures which are attributable to environmental matters are described in
"Business--Environmental Matters."
The 1995 Revolving Credit Facility, which may be used for general corporate
purposes, has a final maturity of March 16, 2002. At March 31, 1996, the Company
had $203 million in available capacity under the 1995 Revolving Credit Facility.
The Company believes that cash provided from 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 to meet its debt service requirements for the foreseeable future.
In connection with its planned appeal of a U.S. Tax Court decision regarding
the disallowance of certain income tax deductions related to the period 1988
through 1995, the Company estimates that, if the decision of the U.S. Tax Court
is ultimately sustained, the potential amount of additional taxes due by the
Company would be approximately $38 million exclusive of interest. In
anticipation of its appeal, the Company has paid to the Internal Revenue Service
(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. While the Company is unable to predict the final
result of its appeal of
22
<PAGE>
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 1995 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. If payment of the tax liability and
interest charges were to become necessary, the Company anticipates that it would
borrow the amount of the payment under the 1995 Revolving Credit Facility. See
Note 4 of the Company's audited consolidated financial statements included
elsewhere in this Prospectus and "Business--Legal Proceedings."
Net Operating Loss Carryforwards
Under the Internal Revenue Code of 1986, as amended (the "Code"), the
utilization of Net Operating Loss ("NOL") carryforwards against future taxable
income is subject to limitation if a company experiences an "ownership change"
as defined in the Code. While the Company will likely experience an ownership
change in connection with the Offering, the Company believes that the resulting
limitation on NOL carryforward utilization will not have a significant effect on
the Company's financial condition or on its results of operations.
Seasonality
Historically, a slightly higher amount of the Company's revenues and
operating income have been recognized during the second and third quarters. The
Company expects to fund seasonal working capital needs from the 1995 Revolving
Credit Facility.
23
<PAGE>
BUSINESS
THE COMPANY
Founded in 1919, Fort Howard is a leading manufacturer, converter and
marketer of sanitary tissue products in the commercial (away-from-home) and
consumer (at-home) markets in the United States and the United Kingdom. Its
principal products include paper towels, bath tissue, table napkins, wipers and
boxed facial tissue manufactured from virtually 100% recycled fibers. 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 approximately
60% of its domestic capacity on this faster growing segment of the tissue
market. The balance of the Company's domestic capacity is directed to the
consumer market, which includes private label and branded products. The Company
is a leading producer of tissue products in this market and has grown its share
from 3% in 1984 to 10.5% in 1995. Its principal consumer 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 and Green
Forest, the leading domestic line of environmentally positioned, recycled tissue
paper products.
BUSINESS STRATEGY
Fort Howard's business strategy is focused on increasing shareholder value
by enhancing its position in the United States and internationally. The
Company's strategy involves:
Increasing New Product Development to Drive Market Share Growth and
Margin Improvement. The Company initiated a new product development strategy
in 1995. The Company believes that targeted new product development can
continue market share growth and create opportunities for margin enhancement
as product offerings are improved and expanded. To respond to these
opportunities, the Company assembled a multi-functional team to develop and
implement a continuing flow of new products, product line extensions and
product restages in all product quality groups, for both of the Company's
major markets. This team has developed a stepped schedule of new product
introductions based on marketplace analysis and research, competitive
product benchmarking and the integration of the Company's manufacturing
technologies. Recent new product development activities by market are
described below:
Commercial Market. Early in 1996, Fort Howard began a comprehensive
roll-out of the new Preference Ultra line of premium products, a sector
in which the Company had not previously participated. The Preference
Ultra product line includes bath tissue, facial tissue and paper towels.
The Company believes that the premium sector, which includes upscale
office buildings, corporate headquarters, top-rated hotels and
restaurants and high-end health care institutions, represents
approximately 20% of the commercial market and over $400 million in
sales. In order to increase the opportunity for gaining a substantial
share of the premium sector of the commercial market, the Company has
introduced a significantly increased level of new promotional activity.
Also, as a full-line supplier, Fort Howard believes that it has created a
competitive advantage with distributors that are consolidating sources of
supply to reduce their overall distribution costs. Concurrent with its
development of the Preference Ultra line, the Company has undertaken an
expansive effort to identify factors that drive the success of the
Company's distributor-customers. As a result of in-depth research with
1,400 distributor-customers and their senior managers, as well as input
from an advisory board of its distributor-customers, the Company plans
the introduction of further new products to create additional
opportunities for market share growth in 1996 and 1997.
Consumer Market. The Company's market share has increased from 9.4%
in 1994 to 10.5% in 1995 in the domestic consumer market of the tissue
industry primarily as a result of recent product enhancements. Creative
and colorful print designs and targeted retail pricing enabled Mardi
Gras, the number one consumer napkin brand since 1991, to increase its
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<PAGE>
grocery market share by approximately 3% during 1995. Fort Howard also
had the overall number one grocery market share in total consumer napkins
in 1995. Product quality enhancements, including a softer bath tissue and
a thicker towel, contributed to a 21% increase in 1995 sales revenues for
Green Forest products, the nation's largest selling brand in the
environmentally positioned market. From 1993, following the restage of
So-Dri towels, to 1995, the grocery market share for these towels
tripled. Later in 1996 and into 1997, the Company has planned further
product enhancements to increase the competitiveness of its product
offerings. The Company is continuing to improve product quality and is
expanding its capabilities to offer consumers larger unit sizes such as
three- and six-roll towels and 12-roll bath tissue. Fort Howard is also
accelerating the development of its distribution and information systems
to meet the requirements of servicing large mass merchandisers and
grocery and drug retailers.
Improving its Position as a Low Cost Producer while Continuously
Improving Product Quality. Fort Howard is committed to improving its
position as a low cost producer of tissue products in the markets in which
it competes. The Company believes that its use of wastepaper for
substantially all of its fiber requirements and, in particular, its
increasingly effective consumption of lower cost wastepaper grades while
improving end product quality, are key components of its low cost producer
strategy. Over the last ten years, because of continuous improvements in its
proprietary de-inking process, Fort Howard has been able to shift
significantly the mix of wastepaper to lower cost grades, thereby achieving
substantial cost savings. Due to important research and process development
over the last five years, the Company is now able to manufacture
competitive, premium quality products from its traditional low cost grades
of wastepaper, thereby permitting the launch of premium quality products in
the commercial market in early 1996. The Company believes that it has
created a competitive advantage based on the development of its proprietary
de-inking technology and know-how and the barriers created by the
substantial capital investment in new equipment and technologies required by
competitors to achieve operating income margins comparable to those of the
Company. The Company's annual capital spending program for 1996, 1997 and
1998 includes significant projects for the continued development of improved
de-inking technologies, which should in the near term produce end product
quality improvements and additional cost savings from the consumption of
greater quantities of lower cost grades of wastepaper. In addition, the
Company is focused on reducing all other costs while upgrading the quality
of its products. In 1995, the Company achieved annual cost savings of $20
million as a result of an ongoing cost reduction program.
Expanding Internationally. The Company views expansion of its
international operations as an increasingly important component of its
long-term business strategy and is focusing on the following:
Increasing Growth in United Kingdom Earnings and Market Share. Recent
consolidation among United Kingdom tissue manufacturers has created
opportunities with major retailers seeking alternate sources of supply.
The Company's Fort Sterling Limited ("Fort Sterling") operation has
stepped up new product development efforts to seek to increase its
consumer market share in light of this development. Fort Sterling also
has acquired new converting capacity to fill key gaps in its napkin and
wiper product lines in an effort to achieve full penetration of the
foodservice channel of the United Kingdom commercial market. Management
believes that its commercial market share in the United Kingdom is
underdeveloped and that its experience in building its commercial market
share in the United States can continue to be applied to improve results
in the United Kingdom.
Expanding into New International Markets. The Company also believes
that significant opportunities may exist for additional growth by
applying its low cost producer technology to international markets
outside of the United Kingdom. Fort Howard entered into a small joint
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<PAGE>
venture to convert parent rolls into finished products in the People's
Republic of China in 1995 which began operations in March 1996, and
opened direct sales operations in Mexico in 1995. The Company is
reviewing opportunities to expand its initial China project, and may
consider other ventures in China. The Company is also exploring other new
international markets in Asia and Latin America whose size, competitive
profile and end use tendencies will allow it to capitalize on its
proprietary de-inking technologies and its experience in the United
Kingdom.
Reducing Debt. The Company is committed to deleveraging to improve its
operating and financial flexibility by reducing the level and overall cost
of its debt, extending maturities of indebtedness, increasing shareholders'
equity and enhancing its access to capital markets. The 1995
Recapitalization and the Offering are key steps in the deleveraging process.
In addition, the Company intends to apply available cash flow to debt
reduction for the near term. As a result of the 1995 Recapitalization and
the Offering, the Company believes that it will be able to better execute
its strategy and take advantage of growth opportunities.
The Company's current plans to support growth in domestic tissue shipments
include, subject to market conditions, adding one world-class (270-inch) tissue
paper machine over the next five years. Any such expansion would only be
undertaken after a careful evaluation of industry capacity conditions. The
Company believes that this rate of expansion will contribute to improved
long-term tissue industry operating conditions.
STRATEGIC POSITION
For the past 20 years, Fort Howard has maintained annual EBITDA margins of
approximately 30%, about double those publicly reported by the Company's major
competitors. At the same time, the Company has achieved strong market share
growth on the basis of its position as a low cost producer in the markets in
which it competes.
From 1984 to 1994, the Company doubled its production capacity by
constructing or expanding its system of world-class, integrated, regional tissue
mills which use the Company's proprietary de-inking technology to produce low
cost, quality tissue from a broad range of wastepaper grades. These mills: (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.
While investing in modern, efficient production capacity, the Company was
also building large distribution networks in both the commercial and consumer
markets that are important platforms for future growth. Due to its leading
market share, the Company believes it has built the largest distribution network
in the commercial market which has been responsible in part for an increase in
its commercial market share from 24% in 1984 to 26% in 1995. Over this period in
the consumer market, the Company built its branded and private label
distribution from a regional to a national basis. In 1995, Fort Howard achieved
a 10.5% consumer market share with the leading national napkin brand, Mardi
Gras, and the leading national brand for the environmentally positioned market,
Green Forest. In 1984, the Company's consumer market share of 3% was principally
achieved in the Midwest.
INDUSTRY OVERVIEW
United States
Demand
According to statistics compiled by the American Forest and Paper
Association, sanitary tissue paper converted product shipments in the United
States grew from 4.2 million tons in 1984 to 5.4
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<PAGE>
million tons in 1995 for a compound annual growth rate of 2.1%. Industry
shipments have increased in nineteen of the last twenty years.
Shipments to the commercial and consumer markets represent approximately 37%
and 63% of total shipments, respectively. The Company believes that, except in
recessionary years, commercial market shipment growth rates have generally
exceeded consumer market shipment growth rates. Population growth has a
stabilizing effect on demand in the consumer market in recessionary years. The
Company also believes that, because of the increasing number of dual income
households, more frequent travel and recreation and longer life expectancy,
which result in increased use of away-from-home facilities, the commercial
market will continue to grow faster on average than the consumer market.
Shipments tend to be stronger in the second and third quarters because of
seasonal demand.
Commercial Market. In the commercial market, domestic tissue shipments grew
from 1.5 million tons in 1984 to 2.0 million tons in 1995 for a compound annual
growth rate of 2.3%. The Company believes that shipment growth rates in the
commercial market are affected principally by demographic and socio-economic
trends, including the number of dual income households, the aging of the
population, travel and recreation demand and the strength of the economy and job
market generally.
The commercial market is comprised of a few major tissue producers that have
large market positions and a significant number of small, regional
manufacturers. While the full range of premium, value and economy products exist
in this market, the value and economy ranges of products are predominant in the
commercial market. The Company believes that advertising does not have a
significant influence on commercial demand.
Consumer Market. In the consumer market, domestic tissue shipments grew from
2.7 million tons in 1984 to 3.4 million tons in 1995, for a compound annual
growth rate of 2.1%. The Company believes that shipment growth rates in the
consumer market are principally affected by demographic trends, including the
aging of the population, and general economic conditions, including the level of
consumer confidence.
The consumer market is comprised of a few major, mostly branded premium
product manufacturers that actively advertise to stimulate consumer demand for
their products. The product range in this market covers branded premium products
(44% of market), branded value products (40%) and private label products (16%).
Discount retailers have been emphasizing the development of private label
products to achieve higher gross margins and to lower retail shelf prices to
appeal to increasingly price conscious consumers.
Capacity
The Company believes that tissue industry operating rates of approximately
92% to 93% represent balanced supply and demand in the tissue market. Tissue
industry operating rates were 91.7% in 1994 and 93.6% in 1995, years of limited
industry capacity expansion. During the period 1991 through 1993, tissue
industry operating rates fell to the 90% to 91% level due to higher than
historic capacity addition rates. For the ten years prior to 1991, tissue
industry capacity grew at a 2.2% average annual growth rate and operating rates
remained at a relatively strong average level of 93.0%.
Tissue industry operating rates in 1996 and future years will depend upon
the level of demand and industry capacity growth. For the period 1996 to 1998,
estimated industry capacity additions reported by independent public sources
average 0.4% to 1.6% per year. Such capacity addition rates are well below
historic demand growth of slightly more than 2% per year in industry shipments.
Pricing
Since 1984, pricing has correlated strongly with the levels of industry
operating rates. Following sharp wastepaper and market pulp price increases in
1994 and 1995, and supported by improved industry operating rates, the Company
believes that industry pricing rose in both 1994 and 1995. Domestically, the
Company realized average price increases of 5% in 1994 and 22% in 1995. The high
level of growth in tissue industry capacity from 1990 through 1992, coupled with
the weakening
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<PAGE>
commercial demand resulting from the recession and competitive new product
introductions in the consumer market, caused industry operating rates and
pricing to fall. As a result, the Company believes that industry pricing fell in
each of 1991 and 1992 and may have fallen in 1993.
Commercial and consumer market finished product prices generally move over
time in the same direction as a result of common raw material costs and other
manufacturing cost factors. However, the timing and magnitude of price changes,
and the prices themselves, in the two markets can vary significantly in part
because of their different competitive dynamics. The Company believes that as a
result of lower fiber costs, there has been some modest price discounting in the
domestic tissue market. In addition, in March and April 1996, certain of the
Company's competitors announced price decreases as a result of lower fiber
costs.
Raw Material Supply
Fiber, which constitutes the principal raw material for making paper, is
obtained either by processing virgin wood pulp or by de-inking and processing
wastepaper. The Company estimates that approximately one-third of all fiber for
domestic tissue production is sourced from integrated virgin wood pulp
operations while the remainder is sourced from market purchases of virgin market
pulp, de-inked market pulp or wastepaper for integrated wastepaper processing
operations.
The following table shows the price per ton for virgin market pulp, de-inked
market pulp and wastepaper for the periods indicated, based on statistics
compiled in independent industry reports. Wastepaper prices are not directly
comparable to market pulp prices because wastepaper yields are generally lower
than market pulp yields, wastepaper processing costs are generally higher than
those associated with market pulp and market pulp prices are widely reported per
metric ton while wastepaper prices are widely reported per the smaller short
ton.
<TABLE>
<CAPTION>
YEAR END
---------------------------------------------------- MARCH 31,
1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Virgin market pulp per metric
ton(a).......................... $830 $765 $500 $570 $415 $700 $935 $ 600
De-inked market pulp per metric
ton(b) NA NA NA NA $545 $745 $725 $ 575
Wastepaper per short ton(c)....... $106 $ 80 $ 67 $ 81 $ 86 $176 $114 $ 84
</TABLE>
- -------------------
<TABLE>
<C> <S>
(a) Market prices per metric ton for Northern Bleached Softwood Kraft.
(b) Market prices (f.o.b. shipping point) for de-inked wet lap pulp. Prices for de-inked
wet lap pulp peaked in September 1995 at $955 per metric ton. Prior to 1993, de-inked
market pulp capacity was limited and industry pricing was not tracked by independent
sources.
(c) Market prices per short ton for Coated Book. Coated Book prices peaked at $266 per
short ton in May 1995 and averaged $218 in 1995. The market price trends for this
wastepaper grade are representative of the percentage price changes experienced by the
Company over the period 1990 through 1995 for the grades of wastepaper used by the
Company. The market price trends for Coated Book may not be representative of future
price trends for the grades of wastepaper Fort Howard uses. In addition, the market
prices shown in this table are not necessarily indicative of Fort Howard's or any other
tissue manufacturer's actual wastepaper costs, which will depend on the particular
grades of wastepaper used.
</TABLE>
Beginning in 1994, demand for most grades of paper in the overall paper
industry rose substantially, thereby increasing the demand for fiber. At the
same time, the capacity of de-inked market pulp producers expanded substantially
as the paper industry increased its commitment to the recovery and utilization
of wastepaper. However, worldwide virgin market pulp capacity remained
relatively unchanged. Beginning in the third quarter of 1995, pricing for virgin
market pulp, de-inked market pulp and wastepaper began to fall sharply due to
slowing demand for most grades of paper in the overall paper industry, other
than tissue, and the addition of new virgin market pulp capacity in Asia and de-
inked market pulp capacity in North America.
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<PAGE>
United Kingdom
General
The tissue market in the United Kingdom is roughly one-eighth the size of
the U.S. market or approximately 691,000 tons in 1995. The commercial market
represents approximately one-third of the total market and the consumer market
represents approximately two-thirds. Fort Sterling's operations are primarily in
the consumer market. Because no definitive industry reports covering the U.K.
market are available, the following information is based in part on reports
commissioned by the Company and on the Company's estimates.
Demand
Total U.K. tissue shipments increased from 563,000 tons in 1984 to 691,000
tons in 1995 for a compound annual growth rate of 1.9%. In the consumer market,
U.K. tissue shipments grew from 372,000 tons in 1984 to 464,000 tons in 1995 for
a compound annual growth rate of 2.0%. In the commercial market, U.K. tissue
shipments increased from 191,000 tons in 1984 to 227,000 tons in 1995, for a
compound annual growth rate of 1.6%. Growth in the U.K. commercial market is
affected by the same factors that affect growth in the U.S. commercial market.
In comparison to the U.S. commercial market, the commercial market in the U.K.
has an underdeveloped distribution network and more limited product penetration,
thereby offering opportunities for improved shipment growth.
Fort Sterling is one of the three largest tissue producers in the U.K. The
U.K. tissue market is characterized by low consumption of paper towels and table
napkins as compared to the U.S. tissue market. Private label products command an
equal and growing consumer market share compared to branded products. Private
label products are more likely to be premium quality/high priced than
economy/value priced. However, beginning in late 1992, as Europe began to
experience a recession and as U.K. grocery price competition increased due to
the emergence of grocery discounters and the introduction of club warehouses to
the U.K. market, U.K. consumers began to move more heavily to economy products.
The Company believes that shipment growth rates in the consumer market are
principally affected by population growth trends, and to a lesser extent,
changing consumption habits as the acceptance and use of paper towels and table
napkins develops further.
Capacity
For the period from 1984 to 1995, U.K. tissue papermaking capacity grew at a
compound annual growth rate of 2.6% to 696,000 tons from 522,000 tons. Taking
into account waste on conversion to finished products of 6% to 9%, U.K. tissue
papermaking capacity falls significantly short of U.K. tissue consumption.
Unlike the U.S. market, there are a large number of small, partially integrated
or non-integrated tissue converters that purchase parent rolls (unconverted
rolls of finished tissue) and hold a combined U.K. market share of tissue
shipments of approximately 25%. Also, all the large U.K. tissue manufacturers,
with the exception of Fort Sterling, purchase significant quantities of virgin
market pulp or parent rolls because there is no U.K. timber harvesting to
support fully integrated, virgin wood pulp production.
Pricing
As in the U.S., consumer and commercial tissue industry pricing began to
increase in late 1994 and further increases were implemented in 1995 due to
significant fiber cost increases incurred by all U.K. tissue producers, further
supported by improved industry operating conditions. Current U.K. pricing
reflects some modest discounting due to lower fiber costs.
U.K. retailers were engaged in very competitive pricing activity in 1993 and
1994 across a broad range of consumer products, including sanitary tissue paper
products, due in part to the greater
29
<PAGE>
penetration of large discount chains, the entry of club warehouse chains from
the U.S. and the recession in the U.K. As a result, tissue prices declined
significantly in the U.K. from 1992 through late 1994.
Raw Material Supply
Market pulp and wastepaper supply and demand and cost trends in the U.K. are
substantially similar to those in the United States.
DOMESTIC TISSUE OPERATIONS
Fort Howard produces its domestic tissue products at three mills: its
original mill 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 mills 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 86% of Fort Howard's domestic production comes from tissue paper
machines capable of making 50,000 tons or more annually, whereas the Company
believes that less than 30% of competitors' production comes from machines with
a capacity of 50,000 tons or more. Approximately 50% of Fort Howard's
papermaking capacity came on-line during the last 11 years, while the Company
believes that approximately three-quarters of competitors' tissue paper machines
in the U.S. were built over 11 years ago, with more than one-third over 30 years
old. Because tissue paper machines are often operated for over 50 years, the
Company believes that its new large machines offer a long-term competitive
advantage. In addition, 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 provides further
productivity advantages.
Facilities. 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 mill, 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.
30
<PAGE>
Wastepaper. 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--more than three times as much
as any other U.S. tissue company. 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 de-inking grades
of wastepaper in the domestic tissue industry. A large portion of its wastepaper
requirements is sourced through Harmon. 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.
Energy. Each of the Company's 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
Company believes that its energy cost is significantly lower than the cost of
energy available to it from public utilities. 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.
Chemicals, Printing and Packaging. The Company operates chemical plants at
all three mills to produce some of the whitening agents used in high volumes in
processing fiber. The Muskogee mill also operates a plant to process resin into
polywrap to supply much of the Company's polywrap needs. The Company's own
artists and graphic designers create the many and varied colored print designs
for certain of Fort Howard's tissue products. In addition, all the cores and a
large percentage of the labels and boxes used in packaging tissue products are
manufactured at each mill using Company manufactured or purchased paper and
chipboard.
Distribution. The Company has geographically sited its tissue mills to serve
its largest regional markets in the Midwest, Northeast and Southeast which
permits it to ship its products at a low cost. The Company maintains a small
number of distribution points enabling it to ship full truckloads of its broad
product line at a low cost. The Company uses independent haulers to transport
most of its shipments. The Company seeks to maximize the productivity of its
haulers by applying a "round trip" transport concept for shipping finished goods
out and hauling wastepaper back. The Company's own truck fleet is used to
minimize truckload carrying costs to select markets and to handle "rush"
shipments to meet customer requirements.
Capital Expenditures. The Company has invested heavily in its manufacturing
operations. Capital expenditures in the Company's tissue business were
approximately $674 million for the five year period ended December 31, 1995,
$476 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
de-inking technologies and converting equipment are developed, the Company adds
such technology and equipment at each mill to maintain its low cost structure.
See "Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations--Financial Condition--Liquidity and Capital
Resources."
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
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<PAGE>
expansion were approximately $140 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 new tissue paper machine at the Green Bay
mill commenced production in August 1992. Total expenditures for the expansion
project were $180 million.
Research and Development. The Company maintains laboratory facilities with a
permanent staff of engineers, scientists and technicians who are responsible for
improving existing products, developing new products and processes, product
quality, process control and providing technical assistance in adhering to
regulatory standards. Continued emphasis is being placed upon designing new
products and enhancing existing products, expanding the Company's capability to
de-ink a broader range of wastepaper grades, further automating manufacturing
operations and developing improved manufacturing and environmental processes.
Engineering and Maintenance. The Company's internal engineering staff
provides the engineering expertise to assist in the designing, constructing,
upgrading and maintenance of the Company's tissue mills. The Company's
engineering staff has managed the start-up of eight of the world's largest
tissue paper machines since 1984, and has designed many vital components of the
tissue paper machines, wastepaper processing systems and converting equipment
related to these expansions. In addition, the Company's engineers have designed
key wastepaper processing and converting equipment which is manufactured in the
Company's Green Bay machine shop. The Company's maintenance program at each of
its domestic mills emphasizes preventive maintenance to minimize production
stoppages.
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. Competition in this market
is based upon attaining a competitive level of product attributes at prices
which provide a good value to customers. Another competitive factor is the
ability to provide reliable and timely service. Management believes that Fort
Howard's commitment to quality and service and its competitive pricing strategy
afforded by its low cost producer status have provided the foundation for the
continuation of its leading commercial market share of approximately 26%.
The Company constantly strives to grow in new or underdeveloped subsegments
of its commercial products business. As described in "--Business Strategy,"
early in 1996 the Company introduced its Preference Ultra line to compete in the
$400 million premium segment of the commercial market in which the Company had
previously not participated. In 1990, with the introduction of 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 met or
exceeded U.S. Environmental Protection Agency ("U.S. EPA") guidelines for
post-consumer wastepaper content of 5% to 40%. The Company believes Envision is
the market leader in the rapidly growing environmental segment of the commercial
market. In 1995, Envision sales volume grew 14%, representing 12% of the
Company's total commercial market sales.
In addition, the Company also produces parent rolls for sale to converters
in international markets, including Latin America and the Middle East.
Consumer Products. Fort Howard's consumer products 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. Management
believes that these segments will continue to grow as consumers become more
price conscious.
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
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<PAGE>
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 grocery market share to approximately 17.8% in 1995, thereby
maintaining the leading consumer napkin share since 1991.
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% to 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 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 towels are typically targeted at 25% to 30% below the premium brands.
Fort Howard is the leading tissue producer in the growing consumer private
label business with an estimated market share of approximately 40% in 1995. 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. 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. The Company believes that its ability to position branded and private
label tissue products with the same grocer or mass merchandiser is a major
competitive advantage, as no other major competitor emphasizes, to the same
extent as Fort Howard, both branded and private label tissue products.
Marketing
Commercial Market. Approximately 60% of the Company's products are sold
through paper, institutional food and janitorial distributors into the
commercial market. 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. The Company sells its commercial products under its own brand
names, which include Envision, Generation II and Preference Ultra, and under the
Fort Howard name.
Fort Howard's commercial sales force of approximately 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.
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
33
<PAGE>
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 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.
In addition, the Company's sales force includes specialized sales teams
focused on selling wiper products and its Preference Ultra premium quality
products.
Consumer Market. Approximately 40% of the Company's products are sold
through independent brokers to major food store chains and wholesale grocers or
directly to mass merchandisers for at-home use. Most consumer products are sold
under Company-owned brand names, with over 40% being sold under private labels.
Principal brand names of consumer products include Mardi Gras, Soft 'n Gentle,
So-Dri and Green Forest. Regional sales managers focus on maintaining close
relationships with brokers and retailers by emphasizing Fort Howard's historic
strengths--attractive product attributes at a good value for the consumer 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 markets directly to national accounts
and through brokers to 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
The Company's international tissue operations principally consist of its
tissue business in the United Kingdom, Fort Sterling. The Company also entered
into a small joint venture to convert parent rolls into finished products in the
People's Republic of China in 1995 which began operations in March 1996, and
opened direct sales operations in Mexico in 1995. For an analysis of net sales,
operating income (loss) and identifiable operating assets in the United States
and internationally, see Note 12 to the audited consolidated financial
statements included elsewhere in this Prospectus.
Fort Sterling
When it was acquired by Fort Howard in 1982, Fort Sterling 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 strong 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 three
largest tissue companies in the United Kingdom.
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<PAGE>
Facilities. Fort Sterling currently operates three tissue paper machines and
a de-inking and wastepaper processing plant at its Ramsbottom paper mill. The
Company cuts, folds, prints and packages paper into finished tissue products at
its Bolton and Wigan converting facilities. All of Fort Sterling's facilities
are located in Greater Manchester, England.
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 de-inking and pulp processing plants. In September 1992, Fort Sterling
acquired 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.
Fort Sterling's expansion provided an opportunity for significant market
share growth. Since 1984, Fort Sterling's sales volume has increased at a
compound annual growth rate of 7.0% per year. The additional tissue paper
machine capacity and de-inking technologies have enabled Fort Sterling to
significantly reduce its manufacturing costs.
Products. Unlike the Company's domestic tissue operations, Fort Sterling's
primary thrust has been in the larger consumer segment of the United Kingdom
tissue market, where approximately 85% of its converted product sales are
targeted. In a market where private label represents about one-half of all
tissue 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 1995 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. Overall, Fort Sterling's consumer market share approximated 16%
in 1995.
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 1995, and management intends to use its expanded capacity to increase its
position in the commercial market.
Marketing. Fort Sterling maintains a direct sales force serving large
national grocers, 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.
PATENTS, LICENSES, TRADEMARKS AND TRADE NAMES
While the Company owns or is a licensee of a number of patents, its
operations and products are not materially dependent on any patent. The Company
relies on trade secret protection for its proprietary de-inking technology which
is not covered by patent. The Company's domestic tissue products for at-home use
are sold under the principal brand names Mardi Gras, Soft 'n Gentle, So-Dri and
Green Forest. For the Company's domestic commercial tissue business, principal
brand names include Envision, Generation II and Preference. Such brand names are
trademarks of the Company that are registered or otherwise protected under law.
A portion of the Company's tissue products are sold under private labels or
brand names owned by customers.
QUALITY MANAGEMENT
In 1989, the Company commenced a program to educate and train all employees
at its three domestic mills in the principles of "Total Quality" and to adopt
total quality principles. Employees at all levels of the Company are encouraged
to understand customer and supplier requirements, measure performance, develop
systems and procedures to prevent nonconformance with requirements and produce
continuous improvement in all work processes. Since the introduction of the
program, the
35
<PAGE>
Company has reduced its lead times, improved on-time and complete order shipping
performance, delivered improved adherence to key product specifications and
fostered and implemented improvement opportunity ideas from employees that have
yielded significant annual cost savings. In May 1994, the Company's Savannah
mill became the first domestic recycled tissue mill to obtain ISO-9002
certification, an achievement recognizing the Company's commitment to Total
Quality. The Company's Green Bay mill achieved ISO-9002 certification in
December 1995 and the Muskogee mill is scheduled to be audited for ISO-9002
certification in April 1996. Fort Sterling achieved similar certification,
BS5750, in 1991 and was awarded the newer ISO-9002 certification in its annual
re-certification process in 1995.
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 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. Beginning in July 1994,
wastepaper prices for the grades of wastepaper used in Fort Howard's products
have been volatile. See "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations" and "Risk Factors--Wastepaper
Prices." The de-inking technology employed by the Company allows it to use a
broad range of wastepaper grades, which effectively increases both the number of
sources and the quantity of wastepaper available for its manufacturing process.
The Company manufactures some of the process chemicals required for the
Company's tissue production at each of its domestic mill locations. The balance
of its chemical requirements is purchased from outside sources. The Company also
purchases significant quantities of coal and petroleum coke 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.
The Company's major sources of energy for its domestic tissue mills are
coal, petroleum coke and, to a lesser extent, natural gas. These fuels are
burned to provide steam and electrical power to process wastepaper, operate
machinery and dry paper. Coal is received in Green Bay in self-unloading vessels
during the Great Lakes shipping season and at the Muskogee and Savannah mills by
rail. The petroleum coke is received in Green Bay and Savannah by rail. The
Company maintains adequate inventories of these fuels at each of its domestic
mills. The Savannah mill can also generate electrical power by burning natural
gas or fuel oil in combustion turbines. The primary sources of energy for the
Company's United Kingdom tissue facilities are purchased electrical power and
natural gas.
CUSTOMERS AND BACKLOG
The Company principally markets its products to customers in the United
States and the United Kingdom and, to a lesser extent, Mexico, Canada, the
Middle East, Europe and Asia. The business of the Company is not dependent on a
single customer.
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.
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. and The Procter & Gamble Company, as well as
regional manufacturers, including converters of tissue into finished products
who buy tissue directly
36
<PAGE>
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. Customers generally take into account price, quality, distribution and
service as factors when considering the purchase of products from the Company.
PROPERTIES
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
5 to the audited consolidated financial statements included elsewhere in this
Prospectus.
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. Converting facilities are generally operated
on a 24-hour per day, 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.
EMPLOYEES
At December 31, 1995, the Company's worldwide 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
United Kingdom 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. Such further
environmental regulation may result in an increase in operating expenses and
require continuing capital expenditures and is likely to limit the operating
flexibility of the Company's manufacturing operations. 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 the cost of such compliance could have a material
adverse effect on the Company's financial condition and results of operations at
some time in the future.
In 1995, the Company made capital expenditures of $4 million with respect to
pollution abatement and environmental compliance. The Company expects to commit
to an aggregate of approximately $9 million of capital expenditures to maintain
compliance with environmental control standards and enhance pollution control at
its mills during 1996 and 1997. Because the impact of further environmental
regulation 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.
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<PAGE>
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 U.S. EPA has not formally indicated when the components of
the Cluster Rules that deal with wastewater discharges are to be finalized. 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.
On March 8, 1996, the U.S. EPA proposed new Cluster Rule air emission
standards under Section 112(d) of the Clean Air Act (commonly referred to as the
"MACT Standards") for certain processes and emissions associated with secondary
fiber mills, including the Company's three domestic mills. The U.S. EPA intends
to finalize these new air emission standards later this year. Companies impacted
by these standards will have three years after the standards are finalized in
which to comply. The ultimate impact of the final MACT Standards on the
Company's operations may vary depending upon several factors, including, among
others: (i) the form of the final standards; (ii) delays or changes resulting
from any judicial challenges to the final standards and (iii) new developments
in control and process technology. If the final MACT Standards promulgated by
the U.S. EPA are substantially the same as those proposed, the Company believes
the impact of the standards will not be material.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") imposes liability, without regard to fault or to the legality of the
original action, on PRPs associated with a release or threat of a release of
hazardous substances 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 an 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. Other than the United States Department of Interior, Fish and Wildlife
Service ("FWS") assessment of the Fox River described in "--Legal Proceedings,"
the Company is currently named as a PRP at only one CERCLA-related site. The
Company believes its liability, if any, at such site will be de minimis.
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.
The Company has approximately $20 million of accrued liabilities as of
December 31, 1995 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 accrued liabilities reflect the Company's current estimate of the cost
of these environmental matters, there can be no assurance that the amount
accrued will be adequate.
LEGAL PROCEEDINGS
In December 1994, the Company was notified by the U.S. Department of Justice
of a civil antitrust investigation into possible agreements in restraint of
trade in connection with sales of sanitary paper products. The Company has
cooperated in the investigation and in the first and second quarters of 1995
responded to the Civil Investigative Demand served on the Company.
Since July 1992, the Company has been participating with a coalition
consisting of industry, local government, Wisconsin Department of Natural
Resources ("WDNR") and public interest members studying the nature and extent of
polychlorinated biphenyl ("PCB") 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. The
Company anticipates that any remediation of sediment contamination will begin in
an area approximately 35 miles upstream from the Company's Green Bay mill. The
Company's participation in funding studies undertaken by the coalition to date
has not involved significant cost. The Company's participation in the coalition
is not an
38
<PAGE>
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. In addition to its participation in the activities of the coalition,
the Company, together with four other companies with facilities along the Fox
River (the "Five Companies"), is engaged in discussions with the WDNR regarding
their liability in connection with the remediation and restoration of sediment
contamination caused by alleged PCB releases to the Fox River. The Company
believes the WDNR has identified additional parties, some of which may have
substantial resources, whose manufacturing practices allegedly resulted in the
release of PCBs to the Fox River.
On June 20, 1994, the FWS, a federal natural resources trustee, informed
each of the Five Companies that they had been identified as PRPs for purposes of
federal claims for natural resources damages under CERCLA, and the Federal Water
Pollution Control Act arising from alleged releases of PCBs to the Fox River and
Green Bay system. On or about February 6, 1996, the FWS notified two additional
PRPs of their potential liability in connection with the alleged release of PCBs
into the Fox River. 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 is
undertaking an assessment to determine and quantify the nature and extent of
injury to natural resources. The FWS has invited the identified PRPs to
participate in the development of the type and scope of the assessment and in
the performance of the assessment, pursuant to federal regulations. The
identified PRPs are engaged in discussions with the FWS concerning the nature of
their participation in the assessment. The Company believes that additional
parties, some of which may have substantial resources, 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. On February 8, 1996, the Company executed a consent decree 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 anticipates that the settlement
will be completed in 1996.
The Company has approximately $20 million of accrued liabilities as of
December 31, 1995 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 accrued liabilities reflect the Company's current estimate of the cost
of these environmental matters, there can be no assurance that the amount
accrued will be adequate.
In 1992, the IRS disallowed income tax deductions for the 1988 tax year
which were claimed by the Company for fees and expenses, other than interest,
related to 1988 debt financing and refinancing transactions. The Company
deducted the balance of the disallowed fees and expenses related to the 1988
debt instruments during the tax years 1989 through 1995. 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 is contesting the disallowance. 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 to enter its decision in which
it will determine the amount of the tax deficiency owed by the Company. The
Company intends to appeal the U.S. Tax Court decision as it bears on the
interpretation of Code Section 162(k) to the U.S. Court of Appeals for the
Seventh Circuit.
39
<PAGE>
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 1995 would be approximately $38 million
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 1995 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. See Note 4 of the Company's
audited consolidated financial statements included elsewhere in this Prospectus.
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.
40
<PAGE>
MANAGEMENT
DIRECTORS OF THE COMPANY
The following table provides certain information about each of the current
directors of the Company.
The Board of Directors of the Company is divided into three classes, each
class serving for a period of three years. The Board of Directors of the Company
has set the number of directors of the Company at nine. One-third of the members
of the Board of Directors are elected by the Company's stockholders annually.
The terms of office of the directors expire as follows: Ms. Hempel, Dr. Burke
and Mr. Margolis in 1996; Messrs. Riordan, Godfrey and Sica in 1997; and Messrs.
DeMeuse, Brennan and Niehaus in 1998. See "Description of Capital
Stock--Restated Certificate of Incorporation and By-laws."
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT;
NAME AND POSITION FIVE-YEAR EMPLOYMENT HISTORY AND OTHER
WITH THE COMPANY AGE DIRECTORSHIPS
----------------- --- ------------------------------------------
<S> <C> <C>
Donald H. DeMeuse......................... 60 Chairman of the Board of Directors and
Chairman of the Board Chief Executive Officer since March
1992; President and Chief Executive
Officer prior to that time. Director
since 1978. Director of Associated Bank
Green Bay.
Kathleen J. Hempel........................ 45 Vice Chairman and Chief Financial Officer
Vice Chairman since March 1992; Senior Executive Vice
President and Chief Financial Officer
prior to that time. Director since 1979.
Director of Whirlpool Corporation.
Michael T. Riordan........................ 45 President and Chief Operating Officer
Director since March 1992; Vice President prior to
that time. Director since 1992.
Donald Patrick Brennan.................... 55 Advisory Director of MS&Co since January
Director 1996. Prior to that time, head of
MS&Co's Merchant Banking Division and
Chairman of Morgan Stanley Capital
Partners III, Inc. ("MSCP III"), Morgan
Stanley Leveraged Equity Fund II, Inc.
("MSLEF II, Inc.") and Morgan Stanley
Venture Capital II, Inc. Director since
1988. Director of Jefferson Smurfit
Corporation and SITA Telecommunications
Holding N.V.
Dr. James L. Burke........................ 57 President, Chief Executive Officer and
Director member of Management Board of Southeast
Paper Manufacturing Company since 1993.
Prior to that time, President and Chief
Operating Officer of Garden State Paper
Company. Director since 1995.
Dudley J. Godfrey, Jr..................... 70 Attorney and principal in the law firm of
Director Godfrey & Kahn, S.C., which he founded
in 1956. Director since 1995. Director
of ARM Financial Group, Inc., CLARCOR
Inc. and Manpower, Inc.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT;
NAME AND POSITION FIVE-YEAR EMPLOYMENT HISTORY AND OTHER
WITH THE COMPANY AGE DIRECTORSHIPS
----------------- --- ------------------------------------------
<S> <C> <C>
David I. Margolis......................... 66 Chairman of the Board and Chief Executive
Director Officer of Coltec Industries Inc., a
manufacturer of diversified industrial
equipment, until his retirement in
February 1995. Director since 1995.
Director of Burlington Industries Inc.
and Coltec Industries Inc.
Robert H. Niehaus......................... 40 Managing Director of MS&Co since 1990.
Director Vice Chairman and Director of MSLEF II,
Inc. and MSCP III. Director since 1988.
Director of American Italian Pasta
Company, Collings Farm, Inc., 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............................. 45 Managing Director of MS&Co since 1988.
Director Vice Chairman and Director of MSLEF II,
Inc. and MSCP III. Director since 1988.
Director of ARM Financial Group, Inc.,
The Compucare Company, Consolidated
Hydro, Inc., CSG Systems International,
Inc., Highlands Gas Corporation, Ionica
L3 Limited, Kohl's Corporation, PageMart
Wireless, Inc., SITA Telecommunications
Holding N.V., Southern Pacific Rail
Corporation and Sullivan Communications,
Inc.
</TABLE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table provides certain information about each of the current
executive officers of the Company. All executive officers are elected by, and
serve at the discretion of, the Board of Directors. None of the executive
officers of the Company is related by blood, marriage or adoption to any other
executive officer or director of the Company.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT;
NAME AND POSITION FIVE-YEAR EMPLOYMENT HISTORY AND OTHER
WITH THE COMPANY AGE DIRECTORSHIPS
----------------- --- ------------------------------------------
<S> <C> <C>
Donald H. DeMeuse......................... 60 See description under "--Directors of the
Chairman of the Board and Chief Company."
Executive Officer
Kathleen J. Hempel........................ 45 See description under "--Directors of the
Vice Chairman and Chief Financial Officer Company."
Michael T. Riordan........................ 45 See description under "--Directors of the
President and Chief Operating Officer Company."
Andrew W. Donnelly........................ 53 Executive Vice President for more than
Executive Vice President five years.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT;
NAME AND POSITION FIVE-YEAR EMPLOYMENT HISTORY AND OTHER
WITH THE COMPANY AGE DIRECTORSHIPS
----------------- --- ------------------------------------------
<S> <C> <C>
John F. Rowley............................ 55 Executive Vice President for more than
Executive Vice President five years.
James C. Bowen, Jr........................ 51 Vice President since July 1995; Director
Vice President of Consumer Sales prior to that time.
George F. Hartmann, Jr.................... 53 Vice President for more than five years.
Vice President
R. Michael Lempke......................... 43 Vice President since September 1994;
Vice President and Treasurer Treasurer since November 1989.
James W. Nellen II........................ 48 Vice President and Secretary for more than
Vice President and Secretary five years.
Daniel J. Platkowski...................... 45 Vice President for more than five years.
Vice President
Timothy G. Reilly......................... 45 Vice President for more than five years.
Vice President
James H. Riehl, Jr........................ 43 Vice President since July 1995; Director
Vice President of Consumer Marketing prior to that time.
Donald J. Schneider....................... 59 Vice President for more than five years.
Vice President
Charles D. Wilson......................... 51 Vice President since June 1994; Director
Vice President of Government Affairs prior to that time.
David K. Wong............................. 46 Vice President since June 1993; Director
Vice President of Personnel prior to that time.
David A. Stevens.......................... 47 Assistant Vice President for more than
Assistant Vice President five years.
</TABLE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors currently has, among other committees, an
Audit Committee and a Compensation and Nominating Committee.
The Audit Committee. The Audit Committee, among other things, recommends to
the Board of Directors the selection of the independent auditors of the Company,
reviews with the independent auditors the scope and results of the Company's
audits, approves the audit fees and reviews the adequacy and effectiveness of
the Company's internal auditing, accounting and financial controls with the
independent auditors and the Company's financial and accounting staff. The Audit
Committee is composed entirely of directors who are not officers of the Company.
The members of the Audit Committee are Dr. Burke (Chairman), Mr. Godfrey and Mr.
Niehaus. The Audit Committee met twice in 1995.
The Compensation and Nominating Committee. The Compensation and Nominating
Committee reviews and approves all salary arrangements and other remuneration
for senior officers of the Company. It is also responsible for the
administration of the Fort Howard Corporation 1995 Stock Incentive Plan (the
"Stock Incentive Plan"), the Fort Howard Corporation Management Incentive Plan
(the "MIP") and the Fort Howard Corporation Supplemental Retirement Plan. The
Compensation and Nominating Committee also recommends to the Board of Directors
candidates for election to the Board of Directors. The Compensation and
Nominating Committee will consider recommendations for nominees for
directorships submitted by shareholders. The Compensation and Nominating
Committee
43
<PAGE>
is composed entirely of directors who are not officers of the Company. The
members of the Compensation and Nominating Committee are Mr. Brennan (Chairman),
Mr. Margolis and Mr. Niehaus. The Compensation and Nominating Committee met
three times in 1995.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information concerning compensation paid for
services to the Company during 1995 and the two prior fiscal years to the Chief
Executive Officer and the four other most highly compensated executive officers
of the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE><CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
------------------------------------- NUMBER OF
OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(A) OPTIONS/SARS COMPENSATION(B)
------------------ ---- -------- -------- --------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Donald H. DeMeuse........ 1995 $750,000 $973,125 $ 2,648 100,000 $70,687
Chairman and Chief 1994 750,000 307,500 7,802 0 69,366
Executive Officer 1993 653,846 55,250 4,840 0 62,742
Kathleen J. Hempel....... 1995 $480,000 $622,800 $ 289 50,000 $27,891
Vice Chairman and Chief 1994 480,000 196,800 1,036 0 27,311
Financial Officer 1993 453,077 38,381 0 0 27,388
Michael T. Riordan....... 1995 $378,846 $486,563 $ 1,641 100,000 $22,088
President and Chief 1994 375,000 153,750 4,671 0 21,400
Operating Officer 1993 302,885 25,500 0 48,750 18,437
Andrew W. Donnelly....... 1995 $330,000 $428,175 $ 880 20,000 $19,026
Executive Vice President 1994 330,000 135,300 162 0 18,603
1993 350,000 29,750 0 0 20,859
John F. Rowley........... 1995 $250,000 $324,375 $ 103 20,000 $14,688
Executive Vice President 1994 237,885 96,350 338 0 13,676
1993 255,000 21,675 0 0 15,111
</TABLE>
- ------------
(a) Consists of amounts reimbursed for the payment of taxes.
(b) Consists of Company contributions to the Company's profit sharing plan and
supplemental retirement plan.
44
<PAGE>
The following table presents information concerning grants of stock options
pursuant to the Stock Incentive Plan made during the 1995 fiscal year to each of
the Name Executive Officers. No stock appreciation rights were granted under the
Stock Incentive Plan during 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE><CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE GRANT DATE
NAME GRANTED(A) 1995 PRICE ($/SH) EXPIRATION DATE PRESENT VALUE(B)
- --------------------- ------------ ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Donald H. DeMeuse.... 100,000 13.5% $19.75 12/06/05 $656,000
Kathleen J. Hempel... 50,000 6.7 19.75 12/06/05 328,000
Michael T. Riordan... 100,000 13.5 19.75 12/06/05 656,000
Andrew W. Donnelly... 20,000 2.7 19.75 12/06/05 131,200
John F. Rowley....... 20,000 2.7 19.75 12/06/05 131,200
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) All grants consisted of nonqualified stock options with a term of 10 years granted
pursuant to the Stock Incentive Plan. Subject to certain conditions, Mr. DeMeuse's
options vest and become exercisable on the first anniversary of the date of grant.
Options granted to the other Named Executive Officers vest and become exercisable as to
20% of such options on each of the first five anniversaries of the date of grant.
Exercisability of the options is accelerated in the event of a Named Executive
Officer's death, disability, termination by the Company without "cause" (as defined for
purposes of the Stock Incentive Plan) or, unless otherwise determined by the
Compensation and Nominating Committee, upon a "change in control" (as defined below
under "1995 Stock Incentive Plan"). Notwithstanding the foregoing, no option may be
exercised within the first six months following the date of grant. The Compensation and
Nominating Committee has the discretion to accelerate the exercisability of any options
granted under the Stock Incentive Plan.
(b) The estimated grant date present value reflected in the above table is determined using
the Black-Scholes model. The material assumptions and adjustments incorporated in the
Black-Scholes model in estimating the value of the options reflected in the above table
include the following: (i) an option exercise price of $19.75, equal to the fair market
value of the underlying stock on the date of grant; (ii) an expected weighted average
option life equal to five years; (iii) an interest rate of 5.51% that represents the
interest rate on a U.S. Treasury security on the date of grant with a maturity date
corresponding to that of the expected weighted average option life; and (iv) volatility
of 24.32% calculated using daily stock prices of the companies comprising the Household
Products/Paper and Forest Products Combined Indices in the five year period preceding
1996. The ultimate values of the options will depend on the future market price of the
Company's stock, which cannot be forecasted with reasonable accuracy. The actual value,
if any, an optionee will realize upon exercise of an option will depend on the excess
of the market value of the Company's Common Stock over the exercise price on the date
the option is exercised. There is no assurance that the value realized by an optionee
will be at or near the value estimated by the Black-Scholes model or any other model
applied to value the options.
</TABLE>
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 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE><CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT DECEMBER 31, IN-THE-MONEY OPTIONS HELD
1995 AT DECEMBER 31, 1995(A)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Donald H. DeMeuse........................... 543,237 100,000 $ 3,527,507 $ 275,000
Kathleen J. Hempel.......................... 575,347 50,000 3,996,371 137,500
Michael T. Riordan.......................... 173,608 100,000 945,799 275,000
Andrew W. Donnelly.......................... 158,827 20,000 970,688 55,000
John F. Rowley.............................. 117,923 20,000 699,472 55,000
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) The value of unexercised in-the-money options represents the positive spread between
the December 31, 1995 closing price of the Common Stock of $22.50 per share as reported
on the Nasdaq National Market and the exercise price of unexercised options. The actual
amount, if any, realized upon exercise of options will depend upon the market price of
the Common Stock relative to the per share exercise price at the time the option is
exercised. There is no assurance that the values of unexercised in-the-money options
reflected in this table will be realized.
</TABLE>
45
<PAGE>
DIRECTORS' COMPENSATION
Officers of the Company who are also directors do not receive any fee or
remuneration for services as members of the Board of Directors or of any
committee of the Board of Directors. Non-management directors other than Mr.
Brennan, Mr. Niehaus and Mr. Sica, each of whom has waived compensation for his
services as a director, receive a $30,000 annual fee, $2,000 for each Board
meeting attended and $1,000 for each committee meeting attended. The Company
pays 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. In addition, the Company reimburses all of
its directors for their travel expenses in connection with their attendance at
Board and committee meetings.
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 Employment Agreements for Mr. DeMeuse, Ms. Hempel
and Mr. Riordan provide for participation in additional bonus arrangements which
may be agreed upon in good faith from time to time with the Company. In the
event of the termination of the employment of a Named Executive Officer by the
Company without "cause" (other than by reason of death or disability) or by such
Named Executive Officer for "good reason" (as such terms are defined in the
Employment Agreements), the Employment Agreements provide that such Named
Executive Officer would receive his or her full base salary for a period (in
each case, the "Severance Period") ranging from one to three years. In addition,
during the Severance Period, such Named Executive Officer would receive a
payment in each January following the date of termination in respect of the
previous calendar year, the amount of which is based on the average of the three
prior year bonuses under the MIP. During the Severance Period, such Named
Executive Officer would also continue to participate in all other compensation
and benefit plans of the Company and would be entitled to outplacement
assistance. Such Named Executive Officer is, however, required to mitigate the
amount of the severance payments provided for in the Employment Agreements by
seeking other employment. The Employment Agreements for Mr. DeMeuse, Ms. Hempel
and Mr. Riordan also include noncompetition and confidentiality provisions.
MANAGEMENT INCENTIVE PLAN
Participation in the MIP is based upon individual selection by the
Compensation and Nominating 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. Awards are
based upon the extent to which the Company's financial performance during the
year has met or exceeded certain performance goals specified by the Compensation
and Nominating Committee. The Compensation and Nominating 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
MIP) within two years following a "change in control" (as defined below under
"1995 Stock Incentive Plan"), participants would receive a pro rata bonus for
such year calculated as if the applicable performance targets have been
attained.
46
<PAGE>
1995 STOCK INCENTIVE PLAN
The Stock Incentive 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. A total of 3,359,662 shares
of Common Stock may be subject to Awards under the Stock Incentive Plan, subject
to adjustment in accordance with the terms of the Stock Incentive Plan.
The only Awards that have been granted to date under the Stock Incentive
Plan are nonqualified stock options. In the event of a change in control and
except as the Compensation and Nominating Committee (as constituted prior to
such change in control) may expressly provide otherwise, all stock options then
outstanding (except for any stock options granted within six months of the
change in control) will become fully exercisable. For purposes of the Stock
Incentive 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 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.
47
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock immediately prior to the Offering and as adjusted to
reflect the Offering with respect to (i) persons known to the Company to be the
beneficial owners of more than five percent of the Company's outstanding shares
of Common Stock, (ii) each of the Selling Shareholders, (iii) each of the
Company's directors, (iv) the Named Executive Officers and (v) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
BEFORE OFFERING SHARES AFTER OFFERING
------------------------ BEING SOLD ------------------------
NAME AND ADDRESS NUMBER PERCENT IN THE OFFERING NUMBER PERCENT
---------------- ---------- ------- --------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Morgan Stanley Group %
Inc.(a)(b)................... 23,666,174 37.3 4,015,250 19,650,924 26.8
1585 Broadway
New York, New York 10036
Mellon Bank, N.A., as
Trustee for First Plaza
Group Trust(a)(c)............ 6,715,507 10.6 1,139,366 5,576,141 7.6
1 Mellon Bank Center
Pittsburgh, Pennsylvania
15258
State of Wisconsin
Investment Board(a)(d)....... 6,000,000 9.5 -- 6,000,000 8.2
P.O. Box 7842
Madison, Wisconsin 53707
AT&T Master Pension 3,423,250
Trust(a)(e).................. 5.4 569,683 2,853,567 3.9
1 Enterprise Drive
North Quincy, Massachusetts
02171
Bankers Trust New York
Corporation(a)(f)............ 1,634,000 2.6 275,701 1,358,299 1.8
1 Bankers Trust Plaza
New York, New York 10006
Donald Patrick Brennan......... 0 -- -- 0 --
James L. Burke................. 1,377 * -- 1,377 *
Donald H. DeMeuse(g)........... 710,449 1.1 -- 710,449 1.0
Andrew W. Donnelly(g).......... 177,477 * -- 177,477 *
Dudley J. Godfrey, Jr.(h)...... 4,377 * -- 4,377 *
Kathleen J. Hempel(g).......... 607,691 * -- 607,691 *
David I. Margolis.............. 5,477 * -- 5,477 *
Robert H. Niehaus.............. 0 -- -- 0 --
Michael T. Riordan(g).......... 190,020 * -- 190,020 *
John F. Rowley(g).............. 128,973 * -- 128,973 *
Frank V. Sica.................. 0 -- -- 0 --
All directors and executive
officers as a group (22 2,543,543 3.9 -- 2,543,543 3.4
persons)(g)..................
---------------
6,000,000
---------------
---------------
</TABLE>
- ------------
<TABLE>
<C> <S>
* Less than 1%
(a) Stock ownership information is based upon information set forth in the beneficial
owner's Schedule 13G report, filed with the Securities and Exchange Commission with
respect to beneficial ownership of the Company's Common Stock as of December 31, 1995.
</TABLE>
(Footnotes continued on following page)
48
<PAGE>
(Footnotes continued from preceding page)
<TABLE>
<C> <S>
(b) Includes 2,776,884 shares held directly by Morgan Stanley Group and 18,525,000 shares
held directly by MSLEF II. MSLEF II, Inc. is the sole general partner of MSLEF II and
is a wholly owned subsidiary of Morgan Stanley Group. Also includes 1,701,290 shares
held directly by Fort Howard Equity Investors II and 663,000 shares held directly 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. Morgan Stanley Group, MSLEF II, Fort Howard Equity Investors II and Fort
Howard Equity Investors will be selling 471,132, 3,142,988, 288,644 and 112,486 shares,
respectively, in the Offering. Following the Offering, Morgan Stanley Group, MSLEF II,
Fort Howard Equity Investors II and Fort Howard Equity Investors will own 2,305,752,
15,382,012, 1,412,646 and 550,514 shares, respectively, representing, 3.1%, 20.9%, 1.9%
and less than 1%, respectively, of the outstanding shares.
(c) 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.
(d) State of Wisconsin Investment Board has sole voting and investment power with respect
to shares beneficially owned.
(e) Includes 65,500 shares of Common Stock held for the AT&T Master Pension Trust, with
respect to a portion of whose assets State Street Global Advisors acts as investment
advisor. State Street Bank and Trust Company acts as Trustee of the AT&T Master Pension
Trust, a qualified employee benefit plan of AT&T Corp. and its subsidiaries.
(f) Includes 9,000 shares for which Bankers Trust Company, a wholly owned subsidiary of
Bankers Trust New York Corporation, has shared dispositive power but as to which it
disclaims beneficial ownership.
(g) Includes the following numbers of shares which the designated director or officer has
the right to acquire within 60 days upon the exercise of stock options: Mr. DeMeuse,
543,237 shares; Mr. Donnelly, 158,827 shares; Ms. Hempel, 575,347 shares; Mr. Riordan,
173,608 shares; Mr. Rowley, 117,923 shares; and all directors and executive officers as
a group, 2,124,300 shares.
(h) Includes 2,000 shares held in a trust over which Mr. Godfrey exercises shared voting
and investment power.
</TABLE>
49
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summary of the instruments governing certain indebtedness of
the Company does not purport to be complete and is qualified in its entirety by
reference to such instruments, copies of which have been filed, or incorporated
by reference, as exhibits to the Registration Statement of which this Prospectus
is a part. Capitalized terms used but not defined herein have the meanings
ascribed to them in such instruments.
THE 1995 BANK CREDIT AGREEMENT
The Company entered into the 1995 Bank Credit Agreement dated as of March 8,
1995 with the lenders party thereto (the "Banks"), Bankers Trust Company
("Bankers Trust"), Chemical Bank and Bank of America National Trust and Savings
Association, as Arrangers, and Bankers Trust, as Administrative Agent. Set forth
below is a description of the 1995 Bank Credit Agreement.
General. The 1995 Bank Credit Agreement provides for the 1995 Term Loan A,
the 1995 Term Loan B and the 1995 Revolving Credit Facility (in an amount of
$300 million). The 1995 Term Loan A and the 1995 Revolving Credit Facility each
have a final maturity on March 15, 2002. The 1995 Term Loan B has a final
maturity of December 31, 2002.
As of March 31, 1996, the outstanding principal amount of the 1995 Term Loan
A, including the current portion, was $795 million and of the 1995 Term Loan B,
$323 million. As of March 31, 1996, $97 million was outstanding, and the Company
had $203 million in available capacity, under the 1995 Revolving Credit
Facility. After application of the estimated net proceeds of the Offering to the
outstanding principal amount of the 1995 Term Loan B, the outstanding principal
amount, including the current portion, will be approximately $111 million.
As part of the 1995 Revolving Credit Facility, the 1995 Bank Credit
Agreement provides for the issuance of letters of credit in the normal course of
business of up to $50 million. Bankers Trust provides a $25 million swing line
facility within the 1995 Revolving Credit Facility, which is available for
working capital and other general corporate purposes. As of March 31, 1996, no
letters of credit were outstanding under the 1995 Bank Credit Agreement.
Interest. Currently, the 1995 Term Loan A and the 1995 Revolving Credit
Facility bear interest, at the Company's option, at Bankers Trust's prime, plus
1.50% or, subject to certain limitations, at a reserve adjusted LIBOR, plus
2.50%; the foregoing rates are subject to adjustment downward based on the
ratings by Standard & Poor's Ratings Group ("S&P") or Moody's Investors
Services, Inc. ("Moody's") of the Company's long-term senior unsecured debt
and/or certain operating performance measures. The 1995 Term Loan B bears
interest, at the Company's option, at Bankers Trust's prime rate, plus 2.00% or,
subject to certain limitations, at a reserve adjusted LIBOR, plus 3.00%. Subject
to certain conditions, including consummation of the Offering, the 1995 Bank
Credit Agreement will be amended so that the 1995 Term Loan A and the 1995
Revolving Credit Facility will bear interest, at the Company's option, at
Bankers Trust's prime rate, plus 1.00% or, subject to certain limitations, at a
reserved adjusted LIBOR, plus 2.00% and so that the remaining portion of the
1995 Term Loan B will bear interest, at the Company's option, at Bankers Trust's
prime rate, plus 1.50% or, subject to certain limitations, at a reserve adjusted
LIBOR, plus 2.50%. Such rates would be subject to adjustment based on the
Company's ability to maintain certain financial ratios.
Repayment. The 1995 Term Loans and the 1995 Revolving Credit Facility are
subject to mandatory and optional repayments and prepayments. The Company is
required to make scheduled repayments of the 1995 Term Loans. Without giving
effect to the application of the net proceeds of the
50
<PAGE>
Offering to the prepayment of a portion of the outstanding principal of the 1995
Term Loan B, the installments on the 1995 Term Loans are payable as follows:
<TABLE>
<CAPTION>
1995 TERM 1995 TERM
INSTALLMENT DATE LOAN A LOAN B
---------------- --------- ---------
(IN MILLIONS)
<S> <C> <C>
September 15, 1996.................................... $ 27.0 $ 1.1
March 15, 1997........................................ $ 42.0 $ 1.9
September 15, 1997.................................... $ 55.0 $ 1.9
March 15, 1998........................................ $ 55.0 $ 1.9
September 15, 1998.................................... $ 67.5 $ 1.9
March 15, 1999........................................ $ 67.5 $ 1.9
September 15, 1999.................................... $ 67.5 $ 1.9
March 15, 2000........................................ $ 67.5 $ 1.9
September 15, 2000.................................... $ 80.0 $ 1.9
March 15, 2001........................................ $ 80.0 $ 1.9
September 15, 2001.................................... $ 93.0 $ 44.3
March 15, 2002........................................ $ 93.0 $ 44.3
September 15, 2002.................................... $ 0.0 $ 108.1
December 31, 2002..................................... $ 0.0 $ 108.1
</TABLE>
The Company intends to apply the net proceeds of the Offering to the 1995
Term Loan B installments ratably (on the basis of the respective principal
amounts of such installments set forth above).
The Company is also required to make mandatory prepayments of the 1995 Term
Loans on or before the last day of March of each year commencing March 31, 1996
and ending on but including March 31, 2002 in an amount equal to 50% of Excess
Cash Flow for the year ending on the immediately preceding December 31. The
Company had Excess Cash Flow for the year ended December 31, 1995 in the amount
of $42.1 million. A prepayment of the 1995 Term Loans in the amount of $22.0
million was made on March 19, 1996. "Excess Cash Flow" for any period is defined
as the Net Cash Provided From Operations during such period, reduced by the sum,
without duplication, of: (i) the scheduled principal payments of the 1995 Term
Loans paid during such period; (ii) payments with respect to the principal
portion of indebtedness constituting capital leases; (iii) with certain
exceptions, each of the following amounts paid during such period: (a) certain
mandatory prepayments of the 1995 Term Loans and the 1995 Revolving Credit
Facility, (b) certain voluntary prepayments of the 1995 Term Loans, (c)
scheduled, voluntary or mandatory payments or prepayments of the principal of
permitted indebtedness other than intercompany indebtedness, the 1995 Term Loans
and certain obligations owed for all or any part of the deferred purchase price
of property or services, (d) payments in respect of Consolidated Domestic
Capital Expenditures, (e) payments in respect of Consolidated Capital
Expenditures (other than Consolidated Domestic Capital Expenditures) but only to
the extent not financed with the proceeds of indebtedness (excluding
intercompany indebtedness) incurred by a foreign subsidiary, (f) certain
permitted payments in respect of equity and (g) certain investments made by the
Company and its subsidiaries in joint ventures and foreign subsidiaries.
"Net Cash Provided From Operations" for any period is defined as the
Adjusted Consolidated Net Income for such period, minus (plus) the increase
(decrease), if any, in Adjusted Working Capital from the first day to the last
day of such period.
"Adjusted Consolidated Net Income" for any period is defined as consolidated
net income during such period plus (minus) the sum, without duplication, of the
amount of depreciation, depletion, amortization of intangibles, deferred taxes,
accreted and zero coupon bond interest and other non-cash
51
<PAGE>
expenses (income), losses (gains) or other charges (credits) that, pursuant to
GAAP, were deducted (added) in determining such consolidated net income.
"Adjusted Working Capital" means, at any time, Consolidated Current Assets
minus Consolidated Current Liabilities at such time.
"Consolidated Current Assets" means, at any time, the consolidated current
assets (other than cash and cash equivalents) of the Company and its
subsidiaries (whether or not consolidated with the Company for financial
reporting purposes and including, without limitation, all receivables
subsidiaries) at such time.
"Consolidated Current Liabilities" means, at any time, the consolidated
current liabilities of the Company and its subsidiaries (whether or not
consolidated with the Company for financial reporting purposes and including,
without limitation, all receivables subsidiaries) at such time, but excluding
the current portion of any long-term indebtedness which would otherwise be
included therein and any indebtedness with a maturity which may, by the terms of
the instrument evidencing or governing such indebtedness, be extended, renewed
or reborrowed (whether conditionally or unconditionally) by the Company or any
of its subsidiaries to a date that is later than one year after such time.
"Consolidated Capital Expenditures" means, for any period, the sum of: (i)
the aggregate of all capital expenditures by the Company and its subsidiaries
during such period, plus (ii) to the extent not covered by clause (i) hereof,
the aggregate of all expenditures by the Company and its subsidiaries to acquire
by purchase or otherwise any business, property or fixed assets of, or stock or
other evidence of beneficial ownership of or interest in, any person, including,
without limitation, the amount of any indebtedness of any such acquired person
existing at the date of or by reason of such purchase or acquisition, whether or
not such indebtedness is assumed or guaranteed by the Company or any subsidiary
of the Company, it being understood that each item covered by this clause (ii)
shall be deemed incurred as of the date of the applicable acquisition, provided
that any indebtedness referred to in this clause (ii) of any acquired person
that is not a wholly owned subsidiary of the Company shall only be included in
an amount equal to the product of (1) the Company's direct or indirect
percentage of equity ownership in such acquired person at the time such
indebtedness is incurred or deemed incurred and (2) the amount of such
indebtedness.
"Consolidated Domestic Capital Expenditures" means, for any period, the sum
of: (i) the aggregate of all capital expenditures by the Company and its
domestic subsidiaries during such period, plus (ii) to the extent not covered by
clause (i) hereof, the aggregate of all expenditures by the Company and its
domestic subsidiaries to acquire by purchase or otherwise the business, property
or fixed assets of, or stock or other evidence of beneficial ownership of, any
person, including, without limitation, the amount of any indebtedness of any
such acquired person existing at the date of or by reason of such purchase or
acquisition, whether or not such indebtedness is assumed or guaranteed by the
Company or any subsidiary of the Company, it being understood that each item
covered by this clause (ii) shall be deemed incurred as of the date of the
applicable acquisition, provided that any indebtedness referred to in this
clause (ii) of any acquired person that is not a wholly owned subsidiary of the
Company shall only be included in an amount equal to the product of (1) the
Company's direct or indirect percentage of equity ownership in such acquired
person at the time such indebtedness is incurred or deemed incurred and (2) the
amount of such indebtedness.
Excess Cash Flow prepayments under the 1995 Bank Credit Agreement shall be
allocated pro rata between the 1995 Term Loans. The portion of any such
prepayment allocable to the 1995 Term Loan A shall be applied in the direct
order of maturity until such application results in the prepayment in whole of
all the amortization payments scheduled to become due in the 12-month period
following such date of prepayment, and then on a pro rata basis to the remaining
scheduled amortization installments. The portion of any such prepayment
allocable to the 1995 Term Loan B shall be applied pro rata to the remaining
scheduled amortization installments. In the event that any such prepayment is
due at a time
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when the 1995 Term Loans have been fully repaid, the 1995 Revolving Credit
Facility commitments shall be permanently reduced by an amount equal to the
amount of such prepayment and the Company shall (a) prepay the 1995 Revolving
Credit Facility in an amount equal to the excess, if any, of the aggregate
principal amount of the 1995 Revolving Credit Facility then outstanding over the
aggregate amount of the 1995 Revolving Credit Facility commitments (after giving
effect to such reduction) and (b) retain the remaining amount of such
prepayment.
The 1995 Term Loans also provide for mandatory prepayments from proceeds of
Asset Sales, permitted sale/leaseback transactions and permitted receivables
transactions. "Asset Sale" is defined as the sale, transfer or other disposition
after March 16, 1995 (in a single transaction or a series of related
transactions) by the Company or any of its subsidiaries to any person (other
than the Company or any of its subsidiaries) of: (i) any of the stock of any of
the Company's subsidiaries; (ii) substantially all of the assets of any
geographic or other division or line of business of the Company or any of its
subsidiaries or (iii) any real property or a portion of any real property or any
other assets (including, without limitation, any assets which do not constitute
substantially all of the assets of any geographic or other division or line of
business but excluding any assets manufactured, constructed or otherwise
produced or purchased for sale to others in the ordinary course of business) of
the Company or any of its subsidiaries having a fair value in excess of $2
million (it being understood that if the fair value thereof exceeds $2 million,
the entire amount and not just the portion in excess of $2 million shall be
subject to the mandatory prepayment provisions); provided that any asset sale
described in clause (iii) above shall not be deemed to be an "Asset Sale" unless
and until the aggregate amount of the fair value of the proceeds of all such
sales after March 16, 1995 by the Company and its subsidiaries occurring in any
fiscal year of the Company equals or exceeds $10 million (it being understood
that any such amounts less than $10 million in any fiscal year of the Company
shall not be included in the calculation of "Asset Sales" in any subsequent
fiscal year of the Company). Excluded from Asset Sales are: (A) sales of cash
and cash equivalents in the ordinary course of business; (B) sales or other
transfers of receivables pursuant to certain permitted receivables transactions;
(C) sales of assets effected pursuant to certain permitted sale/leaseback
transactions and (D) up to $30 million of dispositions of plants or facilities
of the Company, or of a subsidiary of the Company, located outside the United
States if the proceeds of such dispositions are redeployed outside the United
States within six months following each such disposition. So long as the 1995
Bank Credit Agreement remains in effect, the net cash proceeds of Asset Sales
are to be applied to prepay the indebtedness under the 1995 Bank Credit
Agreement. The net cash proceeds from Asset Sales, permitted sale/leaseback
transactions and permitted receivables transactions will be applied in the same
manner as the Excess Cash Flow prepayments.
If the utilization of the 1995 Revolving Credit Facility exceeds the
commitment thereunder, the Company will be required to prepay the 1995 Revolving
Credit Facility by an amount equal to such excess.
The 1995 Term Loans and the 1995 Revolving Credit Facility may be prepaid in
whole or in part at any time without premium or penalty (subject to
reimbursement of the lender's redeployment costs in the case of a prepayment of
Eurodollar loans other than on the last day of the relevant interest period),
and the 1995 Revolving Credit Facility commitment may be reduced by the Company
in whole or in part at any time without premium or penalty.
Security. The indebtedness under the 1995 Bank Credit Agreement is secured
by a first lien (subject to permitted liens) on the inventory, receivables
(subject to the sale thereof under the 1995 Receivables Sales Agreements,
intellectual property and real property of the Company and certain of its
subsidiaries, and the capital stock of or other evidence of the ownership
interest in certain of the Company's subsidiaries.
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Covenants; Events of Default. The 1995 Bank Credit Agreement contains two
financial covenants that require the Company to maintain certain specified
ratios at specified times. These financial covenants are as follows:
(i) A requirement that the Company maintain a ratio of (a) Consolidated
EBITDA to (b) Consolidated Interest Expense of not less than 1.25 to 1.00
for the first and second full fiscal quarters (taken as one accounting
period) following the initial borrowing under the 1995 Bank Credit
Agreement, 1.25 to 1.00 for the first, second and third full fiscal quarters
(taken as one accounting period) following March 16, 1995 and for any period
of four consecutive full fiscal quarters (in each case taken as one
accounting period) following March 16, 1995 not less than the ratio shown
below during the indicated period ending December 30:
1996-- 1.40 to 1.00
1997-- 1.50 to 1.00
1998-- 1.60 to 1.00
1999-- 1.75 to 1.00
2000-- 1.85 to 1.00
Thereafter-- 2.00 to 1.00
"Consolidated EBITDA" for any period is defined as the total of the amounts
for such period of (a) consolidated net income, plus (b) provision for taxes
based on income, plus (c) total interest expense (including that attributable to
capital leases and including, without limitation, to the extent not otherwise
included by this clause (c), all interest expense or expenses in the nature of
interest expense incurred by any receivables subsidiary), plus (d) depreciation
expense, plus (e) amortization expense, plus (f) other non-cash items reducing
or deducted in calculating consolidated net income, minus (g) other non-cash
items increasing consolidated net income, minus (h) charges against the
Company's $20,000,000 special reserve established in respect of certain
environmental matters, all as determined on a consolidated basis for the Company
and its subsidiaries for such period taken as a single accounting period
determined (other than in the case of clause (h)) in conformity with GAAP.
"Consolidated Interest Expense" for any period is defined as the sum of: (i)
total interest expense for such period (including that attributable to capital
leases) of the Company and its subsidiaries on a consolidated basis with respect
to all outstanding indebtedness of the Company and its subsidiaries, including,
without limitation, all commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financings (and
excluding capitalized interest, to the extent such capitalized interest
constituted a capital expenditure or a consolidated domestic capital
expenditure); (ii) net costs under interest rate swap, cap, collar or similar
agreements for such period and (iii) to the extent not otherwise included above,
all interest expense or expenses in the nature of interest expense incurred by
any receivables subsidiary, but excluding interest expense not payable in cash
(including amortization of discount), certain fees payable to the administrative
agent and the Banks under the 1995 Bank Credit Agreement on or prior to March
16, 1995, all as determined on a consolidated basis for the Company and its
subsidiaries in conformity with GAAP.
(ii) A requirement that the Company maintain at all times a ratio of (a)
Senior Secured Indebtedness as of the last day of any fiscal quarter to (b)
Consolidated EBITDA for the four fiscal
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quarters ending on such last day, of not more than the ratio shown below
during the indicated period:
December 31, 1995 to March 30, 1996 --4.00 to 1
March 31, 1996 to June 29, 1996 --3.90 to 1
June 30, 1996 to September 29, 1996 --3.80 to 1
September 30, 1996 to December 30, 1996 --3.70 to 1
December 31, 1996 to March 30, 1997 --3.45 to 1
March 31, 1997 to June 29, 1997 --3.30 to 1
June 30, 1997 to September 29, 1997 --3.20 to 1
September 30, 1997 to December 30, 1997 --3.10 to 1
December 31, 1997 to December 30, 1998 --3.00 to 1
December 31, 1998 to December 30, 1999 --2.75 to 1
December 31, 1999 to December 30, 2000 --2.50 to 1
Thereafter --2.00 to 1
"Senior Secured Indebtedness" is defined as the following obligations of the
Company and/or any of its subsidiaries: (i) the amount of any indebtedness
incurred by the Company or any subsidiary of the Company in connection with any
permitted receivables transaction; (ii) that portion of obligations with respect
to capital leases which is properly classified as a liability on a balance sheet
in conformity with GAAP; (iii) indebtedness incurred with respect to certain
permitted sale/leaseback transactions and certain permitted expansion
construction financings; (iv) indebtedness of the Company or any subsidiary of
the Company that is not Subordinated Indebtedness and is secured by any lien on
any property of the Company or any subsidiary of the Company and (v) the full
amount of the obligations of the Company or any subsidiary of the Company under
any letter of credit issued for the account of the Company or any subsidiary of
the Company that are secured by a lien on any property of the Company or any
subsidiary of the Company. In calculating the amount of Senior Secured
Indebtedness, there shall be excluded, in the case of any revolving loan
facility or letter of credit commitment issued in favor of the Company or any
subsidiary of the Company, the then unutilized portion of such facility or
commitment and, except as specified in clause (v), any contingent obligation.
"Subordinated Indebtedness" is defined as indebtedness of the Company
subordinated in right of payment to the obligations of the Company and its
subsidiaries under the 1995 Bank Credit Agreement and certain other related
documents.
The 1995 Bank Credit Agreement contains additional covenants which, among
other things, require the Company: (i) to maintain the properties of the Company
and its subsidiaries, together with insurance thereon; (ii) to enter into
interest rate agreements with respect to a certain portion of the 1995 Bank
Credit Agreement; (iii) to provide certain reports to the Banks and permit
inspections by the Banks; (iv) with certain exceptions, to cause subsidiaries
accounting for more than 10% of consolidated assets or consolidated revenues of
the Company (each a "Material Subsidiary") to provide a guarantee of the
Company's obligations under the 1995 Bank Credit Agreement and to secure the
same with a pledge of inventory and receivables and (v) with certain exceptions,
to pledge the stock of certain Material Subsidiaries.
The 1995 Bank Credit Agreement also contains covenants which, among other
things (in each case, subject to certain exceptions): (i) limit the ability of
the Company and its subsidiaries to incur additional indebtedness and contingent
obligations or grant liens or additional negative pledges in respect of their
assets; (ii) limit the investments and capital expenditures which may be made by
the Company and its subsidiaries; (iii) limit the ability of the Company and its
subsidiaries to make prepayments of subordinated debt and limit the ability of
the Company to pay dividends or make other distributions on account of any
shares of any class of its capital stock (other than dividends payable solely in
other shares of such class of capital stock and cash dividends up to certain
specified amounts);
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(iv) limit the ability of the Company and its subsidiaries to incur obligations
under leases or to enter into sale and leaseback transactions; (v) limit the
ability of the Company and its subsidiaries to enter into certain transactions
or arrangements with certain affiliates of the Company or any holder of 5% or
more of any class of its equity securities or affiliates of such holders; (vi)
restrict the ability of the Company and its subsidiaries to make fundamental
changes and to enter into new lines of business and (vii) limit the ability of
the Company or its subsidiaries to dispose of their respective assets.
The 1995 Bank Credit Agreement contains certain events of default which
permit the Banks to cease making loans and to declare all amounts outstanding
under the 1995 Term Loans and the 1995 Revolving Credit Facility to be due and
payable. These events include, among other things: (i) failure to pay any
installment of principal under the 1995 Bank Credit Agreement when due; (ii)
failure to pay for five days after the due date any interest or any other amount
due under the 1995 Bank Credit Agreement; (iii) default in or relating to other
indebtedness of the Company or any of its subsidiaries in a principal amount of
$15 million or more individually or $30 million or more in the aggregate; (iv)
breach of certain covenants contained in the 1995 Bank Credit Agreement; (v) any
representation or warranty contained in the 1995 Bank Credit Agreement or
certain other related documents proving to have been false in any material
respect when made; (vi) default in the performance of any other terms contained
in the 1995 Bank Credit Agreement or certain other related documents without
being remedied or waived within 30 days after receipt of notice from the
administrative agent or any Bank of such default; (vii) bankruptcy or
dissolution of the Company or any of its Material Subsidiaries; (viii) a
judgment or attachment involving an amount in excess of $10 million individually
or $20 million in the aggregate shall be entered or filed against the Company or
any of its Material Subsidiaries which is not discharged within a specified
period; (ix) certain ERISA defaults; (x) the invalidity of any guarantee given
by a subsidiary of the Company in connection with the 1995 Bank Credit
Agreement; (xi) failure to maintain the validity and perfection of any security
interest (to the extent required under the 1995 Bank Credit Agreement) with
respect to collateral with a fair market value or book value (whichever is
greater) of more than $20 million in the aggregate and (xii) a Change in
Control. A "Change in Control" under the 1995 Bank Credit Agreement is deemed to
have occurred if (i) any person or group other than (x) MSLEF II, Morgan Stanley
Group, Fort Howard Equity Investors, Fort Howard Equity Investors II and their
respective general or limited partners and/or affiliates or (y) any employee
benefit plan of the Company or any of its affiliates, shall become the
beneficial owner of shares representing 25% or more of any outstanding class of
capital stock having ordinary voting power in the election of directors of the
Company, or (ii) there shall occur during any period after March 16, 1995 a
change in the Board of Directors of the Company pursuant to which the
individuals who constituted the Board of Directors of the Company at the
beginning of such period (together with any other director whose election by the
Board of Directors of the Company (or whose nomination by the Board of Directors
for election by the shareholders of the Company) was approved by a vote of at
least a majority of the directors then in office who either were directors at
the beginning of such period or whose election was previously so approved or by
a duly authorized committee of the Board of Directors (which committee was
designated by at least a majority of directors then in office who either were
directors at the beginning of such period or whose election was previously so
approved)) cease to constitute 75% of the Board of Directors of the Company at
the end of such period.
Fees and Expenses. A commitment fee of 0.5% per annum, subject to adjustment
based on the ratings by S&P or Moody's of the Company's long-term senior
unsecured debt and/or certain operating performance measures, on the unused
portion of each Bank's commitment under the 1995 Revolving Credit Facility is
payable to the Banks quarterly in arrears. In addition, an annual agent's
commission of $500,000 is payable to Bankers Trust. The Company paid certain
of the Banks' expenses incurred in connection with the 1995 Bank Credit
Agreement and has provided the Banks and their respective directors, officers,
employees and affiliates with customary indemnification.
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1995 RECEIVABLES SALES AGREEMENTS
In September 1995, the Company and FHC Funding Corporation, a newly formed
special purpose company incorporated under the laws of the State of Nevada and a
wholly-owned subsidiary of the Company ("FHC"), entered into the 1995
Receivables Sales Agreements for the purpose of effecting the sale of certain
domestic tissue receivables in order to achieve a lower cost of borrowing based
on the credit quality of such receivables. The Company and FHC entered into a
Receivables Sale Agreement dated as of September 28, 1995 pursuant to which the
Company is obligated to sell to FHC, and FHC is obligated to purchase from the
Company, all of the Company's right, title and interest in, to and under (i) all
receivables then existing and thereafter arising from time to time, and all
payment and enforcement rights (but none of the obligations) with respect to the
receivables, (ii) all related property in respect of such receivables and (iii)
all collections and proceeds thereon with respect to the assets and properties
referred to in clauses (i) and (ii) and this clause (iii) (all such assets and
property being the "Receivables Property"). FHC will, in turn, transfer pursuant
to the Pooling Agreement (as defined below) all of the Receivables Property to
FHC Master Trust (the "Trust"), the master trust formed pursuant to the Pooling
Agreement dated as of September 28, 1995 (the "Pooling Agreement") among the
Company, in its capacity as servicer (the "Servicer") of the receivables, FHC
and Chemical Bank Delaware, a Delaware banking corporation, as trustee for the
Trust (the "Trustee"). The assets of the Trust are expected to change over the
life of the Trust as new receivables are generated and as existing receivables
are collected, charged off as uncollectible or otherwise adjusted.
On September 28, 1995, the Trust issued $50,000,000 Floating Rate Class A
Trade Receivables Participation Certificates, Series 1995-1 (the "Class A
Certificates") and $10,000,000 Floating Rate Class B Trade Receivables
Participation Certificates, Series 1995-1 (the "Class B Certificates", and
together with the Class A Certificates, the "Term Certificates"). The Term
Certificates represent fractional undivided interests in the assets of the
Trust.
To accommodate fluctuations in the amount of the receivables in the Trust
over and above the receivables allocated to the Term Certificates (including,
without limitation, any receivables allocated to the reserves required to be
kept in respect of the Term Certificates), on October 5, 1995, the Trust issued
a variable funding certificate (the "VFC") pursuant to a supplement to the
Pooling Agreement. The holder of the VFC has provided a five year revolving
commitment of $25 million to permit increases and decreases in the principal
amount of the VFC.
Pursuant to the Servicing Agreement dated as of September 28, 1995 (the
"Servicing Agreement") among FHC, the Servicer and the Trustee, the Company has
agreed to act as servicer of the receivables, to manage the administration and
servicing of the receivables and to provide information and direction to the
Trustee for the administration of the Trust.
The Class A Certificates bear interest at a rate equal to the sum of
One-Month LIBOR (as defined below) plus 0.25% per annum and the Class B
Certificates bear interest at a rate equal to the sum of One-Month LIBOR plus
0.65% per annum. "One-Month LIBOR" means, for any period, the rate per annum
which is the arithmetic mean (rounded to the nearest 1/100th of 1%) of the
offered rates for dollar deposits having a maturity of one month commencing on
the first day of such period that appears on the Telerate British Bankers Assoc.
Interest Settlement Rates Page at approximately 11:00 a.m., London time, on the
second full business day prior to such day.
The VFC bears interest, at the option of the Servicer or FHC on behalf of
the Trust, at a rate equal to the sum of Societe Generale's prime rate plus
0.35% or the sum of a reserve adjusted LIBOR plus 0.35%.
Neither the Company (whether in its individual capacity, its capacity as
seller of the receivables or in its capacity as the Servicer) nor FHC is
obligated to make any payments in respect of the Term Certificates, the VFC or
the Receivables, except under certain limited circumstances. Consequently, the
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holders of the Term Certificates and the VFC must rely upon payments on the
receivables for the payment of principal of and interest on the Term
Certificates.
The net proceeds from the issuance of the Term Certificates were used to
repay in full the 1995 Receivables Facility. The payments on the receivables are
used (i) to service the interest and principal payments in respect of the Term
Certificates and the VFC, (ii) to pay the expenses of FHC and (iii) to purchase
new receivables from the Company.
As of March 31, 1996, $50 million aggregate principal amount of Class A
Certificates was outstanding and $10 million aggregate principal amount of Class
B Certificates was outstanding. As of March 31, 1996, no amount of VFC was
outstanding.
PASS THROUGH CERTIFICATES, SERIES 1991
The Pass Through Certificates were issued pursuant to the Amended and
Restated Pass Through Trust Agreement dated as of December 13, 1991 between the
Company and Wilmington Trust Company, as trustee. The Pass Through Certificates
bear interest at 11% per annum and have a final distribution date of January 2,
2002.
The Pass Through Certificates represent fractional undivided interests in a
pass through trust (the "Pass Through Trust") holding the Pass Through Secured
Notes issued on a nonrecourse basis by an owner trustee (the "Owner Trustee") in
connection with leveraged lease transactions to finance or refinance not more
than 85% of the cost to the Owner Trustee of acquiring the Company's interest in
a paper manufacturing facility, power plant and certain equipment related
thereto located at the Company's Savannah mill (the "Pass Through Assets").
Simultaneously with the acquisition of the Pass Through Assets by the Owner
Trustee, it leased the Pass Through Assets back to the Company pursuant to the
Pass Through Certificate Leases. Amounts payable under the Pass Through
Certificate Leases will be at least sufficient to pay in full when due all
payments of principal and interest on the Pass Through Secured Notes. However,
neither the Pass Through Certificates nor the Pass Through Secured Notes are
direct obligations of, or guaranteed by, the Company.
Prior to December 20, 1998, the Pass Through Certificates may not be
redeemed except in connection with an event of loss to a Pass Through Asset, or
in certain cases of obsolescence of any Pass Through Asset and during the
continuance of any lease event of default with respect to a Pass Through Asset.
On or after December 20, 1998, the Pass Through Certificates may be redeemed at
any time. Unless earlier redeemed, 74.20% (or $62,041,625) of the principal
amount of the Pass Through Certificates will be distributed to the holders
thereof on the final distribution date.
The Company's obligations under the Pass Through Certificate Leases, which
are treated as capital leases, rank pari passu in right of payment with all
other general obligations of the Company and are secured by a security interest
in all of the Pass Through Assets. The Company's obligations under the 1995 Bank
Credit Agreement are secured by essentially all of the Company's assets,
including the Company's leasehold interest in the Pass Through Assets. The
holders of such indebtedness will be entitled to payment of their indebtedness
out of the proceeds of such collateral prior to the holders of any general
unsecured obligations of the Company, including the 8 1/4% Notes and the 9%
Notes.
At March 31, 1996, $82.0 million of aggregate principal amount under the
Pass Through Certificate Leases was outstanding.
8 1/4% NOTES
The 8 1/4% Notes were issued under an Indenture, dated as of February 1,
1994 (the "8 1/4% Note Indenture"), between the Company and Norwest Bank
Wisconsin, N.A. ("Norwest"), as Trustee.
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The 8 1/4% Notes are senior unsecured obligations of the Company, and rank
pari passu in right of payment with other senior indebtedness of the Company and
are senior to all existing and future subordinated indebtedness of the Company.
The 8 1/4% Notes mature on February 1, 2002, and bear interest at a rate of 8
1/4% per annum. The 8 1/4% Notes currently have a face amount outstanding of
$100 million and may not be redeemed prior to maturity.
The 1995 Bank Credit Agreement contains a provision prohibiting the optional
redemption of the 8 1/4% Notes without the consent of a specified percentage in
interest of lenders under the 1995 Bank Credit Agreement. The 8 1/4% Note
Indenture also contains a covenant limiting the optional redemption of the 9%
Notes.
The 8 1/4% Note Indenture contains certain restrictive covenants which
impose limitations on the Company and certain of its subsidiaries' ability to,
among other things: (i) incur additional indebtedness; (ii) pay dividends and
make certain other payments and distributions; (iii) create liens and (iv) merge
or consolidate or sell substantially all of the Company's assets.
At March 31, 1996, $100 million of aggregate principal amount of 8 1/4%
Notes was outstanding.
9 1/4% NOTES
The 9 1/4% Notes were issued under an Indenture, dated as of March 15, 1993
(the "9 1/4% Note Indenture"), between the Company and Norwest, as Trustee.
The 9 1/4% Notes constitute senior unsecured obligations of the Company,
limited to $450 million aggregate principal amount, and will mature on March 15,
2001. The 9 1/4% Notes bear interest at the rate of 9 1/4% per annum. The 9 1/4%
Notes are not redeemable prior to maturity. The 9 1/4% Notes rank pari passu
with the 8 1/4% Notes and constitute senior indebtedness with respect to the 9%
Notes.
The 1995 Bank Credit Agreement contains a provision prohibiting the optional
redemption of the 9 1/4% Notes without the consent of a specified percentage in
interest of lenders under the 1995 Bank Credit Agreement.
The 9 1/4% Note Indenture contains certain restrictive covenants which
impose limitations on the Company and certain of its subsidiaries' ability to,
among other things: (i) incur additional indebtedness; (ii) pay dividends and
make other distributions; (iii) create liens and (iv) merge or consolidate or
transfer substantially all of the Company's assets.
At March 31, 1996, $450 million of aggregate principal amount of 9 1/4%
Notes was outstanding.
9% NOTES
The 9% Notes were issued under an Indenture, dated as of February 1, 1994
(the "9% Note Indenture"), between the Company and the Bank of New York, as
Trustee.
The 9% Notes are unsecured senior subordinated obligations of the Company.
The 9% Notes mature on February 1, 2006, and bear interest at a rate of 9% per
annum. The 9% Notes may be redeemed at the option of the Company, in whole or in
part, at any time on or after February 1, 1999, initially at 104.5% of their
principal amount and declining to 100% of their principal amount on or after
February 1, 2001, in all cases plus accrued interest to the redemption date. In
addition, at the option of the Company at any time prior to February 1, 1997, up
to $227.5 million aggregate principal amount of 9% Notes are redeemable, at 109%
plus accrued interest, from the proceeds of a public equity offering.
The 1995 Bank Credit Agreement contains a provision prohibiting the optional
redemption of the 9% Notes without the consent of a specified percentage in
interest of lenders under the 1995 Bank Credit Agreement.
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The 9% Note Indenture contains certain restrictive covenants which impose
limitations on the Company and certain of its subsidiaries' ability to, among
other things: (i) incur additional indebtedness; (ii) pay dividends and make
certain other payments and distributions; (iii) create liens and (iv) merge or
consolidate or sell substantially all of the Company's assets.
At March 31, 1996, $650 million of aggregate principal amount of 9% Notes
was outstanding.
10% NOTES
The 10% Notes were issued under an Indenture, dated as of March 15, 1993
(the "10% Note Indenture"), between the Company and United States Trust Company
of New York, as Trustee.
The 10% Notes constitute unsecured subordinated obligations of the Company,
limited to $300 million aggregate principal amount, and will mature on March 15,
2003. The 10% Notes bear interest at the rate of 10% per annum. The 10% Notes
are redeemable at any time on or after March 15, 1998 at 105.0% of the principal
amount thereof, on or after March 15, 1999 at 103.75% of the principal amount
thereof, on or after March 15, 2000 at 102.50% of the principal amount thereof,
on or after March 15, 2001 at 101.25% of the principal amount thereof, and after
March 15, 2002, at 100% of the principal amount thereof, in each case together
with accrued and unpaid interest to the redemption date. The 10% Notes are
subordinated to the 8 1/4% Notes and the 9% Notes.
The 1995 Bank Credit Agreement contains a provision prohibiting the optional
redemption of the 10% Notes without the consent of a specified percentage in
interest of lenders under the 1995 Bank Credit Agreement. The 9 1/4% Note
Indenture also contains a covenant limiting the optional redemption of the 10%
Notes.
At March 31, 1996, $300 million of aggregate principal amount of 10% Notes
was outstanding.
OTHER DEBT OF THE COMPANY
In addition to borrowings under the 1995 Bank Credit Agreement, the 1995
Receivables Sales Agreements, the 8 1/4% Notes, the 9% Notes, the 9 1/4% Notes,
the 10% Notes and the Pass Through Certificate Leases at March 31, 1996, the
Company and its subsidiaries had outstanding approximately $165 million of other
long-term debt (including the current portion thereof).
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.01 per share and 50,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). The following summary
does not purport to be complete and is subject to the detailed provisions of,
and qualified in its entirety by reference to, the Certificate of Incorporation
and By-laws, and to the applicable provisions of the General Corporation Law of
the State of Delaware (the "DGCL").
COMMON STOCK
Upon completion of the Offering, the Company will have 73,447,097 shares of
Common Stock outstanding, assuming no exercise of any options granted by the
Company.
Voting Rights. Each share of Common Stock entitles the holder thereof to one
vote in elections of directors and all other matters submitted to a vote of
shareholders.
Dividends. Each share of Common Stock has an equal and ratable right to
receive dividends to be paid from the Company's assets legally available
therefor when, as and if declared by the Board of Directors. Since the
Acquisition, the Company has not declared or paid any cash dividends on any
class of its capital stock, and currently does not intend to pay dividends on
the Common Stock. The 1995 Bank Credit Agreement 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. Delaware law generally requires
that dividends are payable only out of a company's surplus or current net
profits in accordance with the DGCL. The Company would be permitted under
Delaware law to pay dividends out of its current net profits, despite its
shareholders' deficit. See "Dividend Policy."
Liquidation. Subject to the rights of any holders of Preferred Stock
outstanding, upon the dissolution, liquidation or winding up of the Company, the
holders of Common Stock are entitled to share equally and ratably in the assets
available for distribution after payments are made to the Company's creditors.
Other. The holders of shares of Common Stock offered hereby have no
preemptive, subscription, redemption or conversion rights and are not liable for
further call or assessment. All of the outstanding shares of Common Stock are,
and the Common Stock offered by the Company hereby will be, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors of the Company is authorized, without further
shareholder action, to divide any or all shares of authorized Preferred Stock
into one or more series and to fix and determine the designations, preferences
and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereon, of any series so
established, including voting powers, dividend rights, liquidation preferences,
redemption rights and conversion or exchange privileges. As of the date of this
Prospectus, the Board of Directors of the Company has not authorized any series
of Preferred Stock and there are no plans, agreements or understandings for the
issuance of any shares of Preferred Stock.
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
Shareholders' rights and related matters are governed by the DGCL, the
Certificate of Incorporation and By-laws. Certain provisions of the Certificate
of Incorporation and the By-laws, which are summarized below, may discourage or
make more difficult a takeover attempt that a shareholder might consider in its
best interest. Such provisions may also adversely affect prevailing market
prices for the
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Common Stock. See "Certain Risk Factors--Anti-Takeover Effects of Provisions of
the Restated Certificate of Incorporation and By-laws."
Classified Board of Directors and Related Provisions. The Certificate of
Incorporation provides that the Board of Directors of the Company be divided
into three classes of directors serving staggered three-year terms. The classes
of directors are equal in number. Accordingly, one-third of the Company's Board
of Directors will be elected each year. See "Management--Directors." The
classified board provision will prevent a party who acquires control of a
majority of the outstanding voting stock of the Company from obtaining control
of the Board of Directors until the second annual shareholders meeting following
the date such party obtains the controlling interest. The provisions of the
Certificate of Incorporation relating to the classified nature of the Company's
Board of Directors may not be amended without the affirmative vote of the
holders of at least 80% of the Company's outstanding voting stock.
The Certificate of Incorporation provides that the number of directors will
be no greater than fifteen or less than three. Currently the Board of Directors
is set at nine. The Certificate of Incorporation provides that directors may not
be removed without cause and that any vacancies on the Board of Directors may
only be filled by the remaining directors and not by the shareholders. These
provisions preclude shareholders from removing incumbent directors without cause
and filling the resulting vacancies with their own nominees.
No Shareholder Action by Written Consent; Special Meeting. The Certificate
of Incorporation prohibits shareholders from taking action by written consent in
lieu of an annual or special meeting, and thus shareholders may only take action
at an annual or special meeting called in accordance with the By-laws. The
Certificate of Incorporation and By-laws provide that special meetings of
shareholders may only be called by the Chief Executive Officer or a majority of
the Board of Directors. Special meetings may not be called by the shareholders.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The Certificate of Incorporation and By-laws establish advance
notice procedures with regard to shareholder proposals and the nomination, other
than by or at the direction of the Board of Directors or a committee thereof, of
candidates for election as directors. These procedures provide that the notice
of shareholder proposals and shareholder nominations for the election of
directors at an annual meeting must be in writing and received by the Secretary
of the Company not less than 60 days nor more than 90 days prior to the
anniversary date of the immediately preceding annual meeting of shareholders;
provided, however, that in the event that the annual meeting is called for a
date that is not within 30 days before or after such anniversary date, notice by
the shareholder in order to be timely must be received not later than the close
of business on the 10th day following the day on which such notice of the date
of the annual meeting was mailed or such public disclosure of the date of the
annual meeting was made, whichever first occurs. The notice of shareholder
nominations must set forth certain information with respect to the shareholder
giving the notice and with respect to each nominee.
Indemnification. The Certificate of Incorporation and By-laws provide that
the Company shall advance expenses to and indemnify each director and officer of
the Company to the fullest extent permitted by law.
Amendments. Shareholders may adopt, alter, amend or repeal provisions of the
By-laws only by vote of the holders of 80% or more of the outstanding Common
Stock and any other voting securities. In addition, the affirmative vote of the
holders of 80% or more of the outstanding Common Stock and any other voting
securities is required to amend certain provisions of the Certificate of
Incorporation, including the provisions referred to above relating to the
classification of the Company's Board of Directors, filling vacancies on the
Board of Directors, removal of directors only for cause, prohibiting shareholder
action by written consent, prohibiting the calling of special meetings by
shareholders and approval of amendments to the By-laws.
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STOCKHOLDERS AGREEMENT
The Company, Morgan Stanley Group, MSLEF II, certain other investors and
certain management investors (each, a "Holder") have entered into a Stockholders
Agreement dated as of March 1, 1995 (the "Stockholders Agreement"), which
contains certain restrictions with respect to the transferability of Common
Stock by certain parties thereunder and certain registration rights granted by
the Company with respect to such shares.
Pursuant to the terms of the Stockholders Agreement, MSLEF II and Fort
Howard Equity Investors II, L.P. 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, L.P., 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
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, L.P., such shareholders have the right to have a designee
nominated for election to fill such vacancy.
Pursuant to the terms of the Stockholders Agreement, in the event that one
or more Holders (other than the management investors) (each, a "Controlling
Stockholder") 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 are 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 to
parties thereunder in connection with the registration of Common Stock subject
to such agreement.
LIMITATIONS ON DIRECTORS' LIABILITY
The Certificate of Incorporation provides that no director of the Company
shall be personally liable to the Company or its shareholders for monetary
damages for any breach of fiduciary duty as a director, except for liability:
(i) for any breach of the director's duty of loyalty to the Company or its
shareholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) in respect of
certain unlawful dividend payments or stock redemptions or purchases or (iv) for
any transaction from which the director derived an improper personal benefit.
The effect of these provisions is to eliminate the rights of the Company and its
shareholders (through shareholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from grossly negligent behavior), except
in the situations described above. These provisions do not limit the liability
of directors under federal securities laws and do not affect the availability of
equitable remedies such as an injunction or rescission based upon a director's
breach of his duty of care.
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SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of DGCL prohibits certain transactions between a Delaware
corporation and an "interested shareholder," which is defined as a person who,
together with any affiliates and/or associates of such person, beneficially
owns, directly or indirectly, 15 percent or more of the outstanding voting
shares of a Delaware corporation. This provision prohibits certain business
combinations (defined broadly to include mergers, consolidations, sales or other
dispositions of assets having an aggregate value of 10 percent or more of the
consolidated assets of the corporation, and certain transactions that would
increase the interested shareholder's proportionate share ownership in the
corporation) between an interested shareholder and a corporation for a period of
three years after the date the interested shareholder acquired its stock,
unless: (i) the business combination is approved by the corporation's board of
directors prior to the date the interested shareholder acquired shares; (ii) the
interested shareholder acquired at least 85 percent of the voting stock of the
corporation in the transaction in which it became an interested shareholder or
(iii) the business combination is approved by a majority of the board of
directors and by the affirmative vote of two-thirds of the outstanding voting
stock owned by disinterested shareholders at an annual or special meeting. A
Delaware corporation, pursuant to a provision in its certificate of
incorporation or by-laws, may elect not to be governed by Section 203 of the
DGCL. The Company has not made such an election and, as a result, the Company is
subject to the provisions of Section 203 of the DGCL upon consummation of the
Offering.
REGISTER AND TRANSFER AGENT
Chemical Mellon Shareholder Services LLC is the Registrar and Transfer Agent
for the Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have 73,447,097 shares
of common stock outstanding, assuming no exercise of any options granted by the
Company. Of these shares, the 16,000,000 shares of Common Stock sold by the
Company and the Selling Shareholders in the Offering and 26,308,433 shares that
were outstanding prior to the Offering will be tradeable without restriction or
further registration under the Securities Act, except for any of such shares
held by "affiliates" (as defined under the Securities Act) of the Company. The
remaining 31,138,664 shares of common stock will be deemed "restricted"
securities within the meaning of Rule 144. Neither shares held by an affiliate
nor restricted securities may be publicly sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including the exemptions contained in Rule 144. Of such shares of common stock
which are deemed to be restricted securities as described above, approximately
11,182,787 shares may be freely tradeable under Rule 144 by the holders thereof
(subject, in certain cases, to certain transfer restrictions contained in the
Stockholders Agreement) and, if certain partnerships (including MSLEF II) which
currently own such restricted shares of common stock distribute to their
respective partners all of their current holdings, approximately up to an
additional 17,345,172 shares could become freely tradeable under Rule 144(k) by
the partners of such partnerships.
Generally, Rule 144 provides that a person who has owned restricted
securities for at least two years, or who may be deemed an "affiliate" of the
Company, is entitled to sell, within any three-month period, up to the number of
restricted securities that does not exceed the greater of (i) one percent of the
then outstanding shares of Common Stock or (ii) the average weekly trading
volume during the four calendar weeks preceding the date on which notice of sale
is filed with the Securities and Exchange Commission (the "Commission"). Sales
under Rule 144 are subject to certain restrictions relating to manner of sale,
volume of sales and the availability of current public information about the
Company. In addition, restricted securities that have been held for at least
three years by a person who has not been an "affiliate" of the Company during
the preceding three months may be sold under Rule 144(k) without regard to the
volume limitations or current public information or manner of sale requirements
of Rule 144. As defined in Rule 144, an "affiliate" of an issuer is a person
that directly, or indirectly through the use of one or more intermediaries,
controls, or is controlled by, or is under the common control with, such issuer.
Pursuant to the Underwriting Agreement the Company has agreed, and pursuant
to the Stockholders Agreement certain shareholders of the Company (who,
following the Offering, will beneficially own in the aggregate 30,654,431 shares
of Common Stock) 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 the effective date of the
Registration Statement, without the prior written consent of certain of the
representatives of the U.S. 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 shareholders. See "Underwriters."
Pursuant to the terms of the Stockholders Agreement, holders of specified
percentages of Common Stock are entitled to certain demand registration rights
with respect to shares of Common Stock held by them provided, however, that the
Company (or purchasers designated by the Company) has 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 entitled, subject to certain limitations, to register shares of
Common Stock in connection with a registration statement prepared by the Company
to register its equity securities.
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Subject to the 180-day lock-up period described above, Morgan Stanley Group,
MSLEF II, Fort Howard Equity Investors and Fort Howard Equity Investors II may
choose to dispose of the Common Stock owned by them. The timing of such sales or
other dispositions by such shareholders (which could include distributions to
MSLEF II's, Fort Howard Equity Investors' and Fort Howard Equity Investors II's
partners) will depend on market and other conditions, but could occur relatively
soon after the 180-day lock-up period, including pursuant to the exercise of
their registration rights. MSLEF II, Fort Howard Equity Investors and Fort
Howard Equity Investors II are unable to predict the timing of sales by any of
their limited partners in the event of a distribution to them. Such dispositions
could be privately negotiated transactions or public sales.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by "Non-U.S. Holders." In general, a "Non-U.S. Holder" is an individual or
entity other than: (i) a citizen or resident of the United States; (ii) a
corporation or partnership created or organized in the United States or under
the laws of the United States or of any state or (iii) an estate or trust, the
income of which is includible in gross income for United States federal income
tax purposes regardless of its source. The term "Non-U.S. Holder" does not
include individuals who were United States citizens within the ten-year period
immediately preceding the date of this Prospectus and whose loss of United
States citizenship had as one of its principal purposes the avoidance of United
States taxes. This discussion is based on current law, which is subject to
change and is for general information only. There have been a number of proposed
changes to existing law that, if ultimately enacted, could affect the taxation
of income earned by Non-U.S. Holders, and the taxation of citizens or residents
of the U.S. who abandon their U.S. citizenship or residence. It is not clear
whether these proposals will be enacted, but holders should consult with their
tax advisors concerning the possible effect of any such proposed legislation.
This discussion does not address aspects of United States federal taxation other
than income and estate taxation and does not address all aspects of income and
estate taxation, nor does it consider any specific facts or circumstances that
may apply to a particular Non-U.S. Holder. PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL
AND NON-UNITED STATES INCOME AND OTHER TAX CONSEQUENCES OF HOLDING AND DISPOSING
OF SHARES OF COMMON STOCK.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate (or a lower rate prescribed by an
applicable tax treaty) unless the dividends are either (i) effectively connected
with a trade or business carried on by the Non-U.S. Holder within the United
States or (ii) if certain income tax treaties apply, attributable to a permanent
establishment in the United States maintained by the Non-U.S. Holder. Dividends
effectively connected with such a United States trade or business or
attributable to such a United States permanent establishment generally will not
be subject to withholding tax (if the Non-U.S. Holder files certain forms,
including, currently, Internal Revenue Service ("IRS") Form 4224, with the payor
of the dividend) and generally will be subject to United States federal income
tax on a net income basis, in the same manner as if the Non-U.S. Holder were a
resident of the United States. In the case of a Non-U.S. Holder that is a
corporation, dividend income so connected or attributable may also be subject to
the branch profits tax (which is generally imposed on a foreign corporation on
the repatriation from the United States of its effectively connected earnings
and profits subject to certain adjustments) at a 30% rate (or a lower rate
prescribed by an applicable income tax treaty). For purposes of determining
whether tax is to be withheld at a 30% rate or at a lower rate as prescribed by
an applicable tax treaty, current law permits
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the Company to presume that dividends paid to an address in a foreign country
are paid to a resident of such country absent knowledge that such presumption is
not warranted. However, under proposed regulations, in the case of dividends
paid after December 31, 1997, a non-U.S. Holder generally would be subject to
United States withholding tax at a 31% rate under the backup withholding rates
described below, rather than at a 30% rate or at a reduced rate under an income
tax treaty, unless certain certification procedures (or, in the case of payments
made outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with, directly or through an
intermediary.
A Non-U.S. Holder that is eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the IRS.
SALE OF COMMON STOCK
In general, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain recognized upon the disposition of Common Stock unless:
(i) the gain is effectively connected with a trade or business carried on by the
Non-U.S. Holder within the United States or, alternatively, if certain tax
treaties apply, attributable to a permanent establishment in the United States
maintained by the Non-U.S. Holder (and in either such case, the branch profits
tax may also apply if the Non-U.S. Holder is a corporation); (ii) in the case of
a Non-U.S. Holder who is a nonresident alien individual and holds shares of
stock as a capital asset, such individual is present in the United States for
183 days or more in the taxable year of disposition, and either (a) such
individual has a "tax home" (as defined for United States federal income tax
purposes) in the United States, or (b) the gain is attributable to an office or
other fixed place of business maintained by such individual in the United
States; (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions
of United States tax law applicable to certain United States expatriates; or
(iv) the Company is or has been a United States real property holding
corporation (a "USRPHC") for United States federal income tax purposes (which
the Company does not believe that it is or is likely to become) at any time
within the shorter of the five-year period preceding such disposition or such
Non-U.S. Holder's holding period. If the Company were or were to become a
USRPHC, gains realized upon a disposition of Common Stock by a Non-U.S. Holder
which did not directly or indirectly own more than 5% of the Common Stock during
the shorter of the periods described above generally would not be subject to
United States federal income tax so long as the Common Stock is "regularly
traded" on an established securities market.
ESTATE TAX
Common Stock owned or treated as owned by an individual who is not a citizen
or resident (as defined for United States federal estate tax purposes) of the
United States at the time of death will be includible in the individual's gross
estate for United States federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise, and therefore may be subject to United
States federal estate tax.
BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to, and the tax withheld with respect to, each Non-U.S.
Holder. These reporting requirements apply regardless of whether withholding was
reduced or eliminated by an applicable tax treaty. Copies of this information
also may be made available under the provisions of a specific treaty or
agreement with the tax authorities in the country in which the Non-U.S. Holder
resides or is established.
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Under current rules, United States backup withholding (which generally is
imposed at the rate of 31% on certain payments to persons that fail to furnish
the information required under the United States information reporting
requirements) and information reporting generally will not apply to (i)
dividends paid on Common Stock to a Non-U.S. Holder that is subject to
withholding at the 30% rate (or that is subject to withholding at a reduced rate
under an applicable treaty) or (ii) under current law, dividends paid to a
Non-U.S. Holder at an address outside of the United States. However, under
proposed regulations, in the case of dividends paid after December 31, 1997, a
Non-U.S. Holder generally would be subject to backup withholding at a 31% rate,
unless certain certification procedures (or, in the case of payments made
outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with, directly or through an
intermediary.
The payment of proceeds from the disposition of Common Stock to or through a
United States office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of proceeds from the disposition of Common Stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject to
backup withholding and information reporting, except as noted below. In the case
of proceeds from the disposition of Common Stock effected at a non-United States
office of a broker that is: (i) a United States person; (ii) a "controlled
foreign corporation" for United States federal income tax purposes or (iii) a
foreign person 50% or more of whose gross income from certain periods is
effectively connected with a United States trade or business, (a) backup
withholding will not apply unless such broker has actual knowledge that the
owner is not a Non-U.S. Holder, and (b) information reporting will apply unless
the broker has documentary evidence in its files that the owner is a Non-U.S.
Holder (and the broker has no actual knowledge to the contrary). The IRS
recently proposed regulations addressing certain withholding, certification, and
information reporting rules (some of which have been mentioned above) which
could affect the treatment of the payment of the proceeds discussed above.
Non-U.S. Holders should consult their tax advisors regarding the application of
these rules to their particular situations, the availability of an exemption
therefrom, the procedure for obtaining such an exemption, if available, and the
possible application of the proposed regulations addressing the withholding and
the information reporting rules.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder will be refunded or
credited against the Non-U.S. Holder's United States federal income tax
liability, if any, provided that the required information is furnished to the
IRS.
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UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters
named below, for whom MS&Co, CS First Boston Corporation, Dean Witter Reynolds
Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon Brothers
Inc are serving as U.S. Representatives, have severally agreed to purchase, and
the Company and the Selling Shareholders have severally agreed to sell to them,
and the International Underwriters named below, for whom MS&Co International, CS
First Boston Limited, Dean Witter International Ltd., Merrill Lynch
International Limited and Salomon Brothers International Limited are serving as
International Representatives, have severally agreed to purchase, and the
Company and the Selling Shareholders have severally agreed to sell to them, the
respective number of shares of the Common Stock set forth opposite the names of
such Underwriters below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated........................
CS First Boston Corporation..............................
Dean Witter Reynolds Inc.................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......
Salomon Brothers Inc.....................................
----------------
Subtotal............................................. 12,800,000
----------------
International Underwriters:
Morgan Stanley & Co. International Limited...............
CS First Boston Limited..................................
Dean Witter International Ltd............................
Merrill Lynch International Limited......................
Salomon Brothers International Limited...................
----------------
Subtotal............................................. 3,200,000
----------------
Total...................................................... 16,000,000
----------------
----------------
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters," and the U.S. Representatives and the
International Representatives are collectively referred to as the
"Representatives." The Underwriting Agreement provides that the obligations of
the several Underwriters to pay for and accept delivery of the shares of Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby if any
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such shares are taken (other than those covered by the U.S. Underwriters'
over-allotment option described below).
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any U.S. Shares (as defined below) for the account of
anyone other than a United States or Canadian Person (as defined below) and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside
the United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement Between U.S. and International Underwriters,
each International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any International Shares (as defined below)
for the account of any United States or Canadian Person and (ii) it has not
offered or sold, and will not offer or sell, directly or indirectly, any
International Shares or distribute any prospectus relating to the International
Shares within the United States or Canada or to any United States or Canadian
Person. The foregoing limitations do not apply to stabilization transactions or
to certain other transactions specified in the Agreement Between U.S. and
International Underwriters. As used herein, "United States or Canadian Person"
means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person. All
shares of Common Stock to be purchased by the U.S. Underwriters and the
International Underwriters are referred to herein as the "U.S. Shares" and the
"International Shares," respectively.
Pursuant to the Agreement Between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of any
number of shares of Common Stock to be purchased pursuant to the Underwriting
Agreement as may be mutually agreed. The per share price of any shares so sold
shall be the Price to Public set forth on the cover page hereof, in United
States dollars, less an amount not greater than the per share amount of the
concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in any
province or territory of Canada in contravention of the securities laws thereof
and has represented that any offer or sale of Common Stock in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus in
the province or territory of Canada in which such offer or sale is made. Each
U.S. Underwriter has further agreed to send to any dealer who purchases from it
any shares of Common Stock a notice stating in substance that, by purchasing
such Common Stock, such dealer represents and agrees that it has not offered or
sold, and will not offer or sell, directly or indirectly, any of such Common
Stock in any province or territory of Canada or to, or for the benefit of, any
resident of any province or territory of Canada in contravention of the
securities laws thereof and that any offer or sale of Common Stock in Canada
will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer or sale is
made, and that such dealer will deliver to any other dealer to whom it sells any
of such Common Stock a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented that: (i) it has not offered or sold
and, prior to the date six months after the Closing Date (as defined in the
Underwriting Agreement), will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 (the "Regulations"); (ii) it has complied and will
comply with all applicable provisions of the
70
<PAGE>
Financial Services Act 1986 and the Regulations with respect to anything done by
it in relation to the shares of Common Stock offered hereby in, from or
otherwise involving the United Kingdom and (iii) it has only issued or passed on
and will only issue or pass on to any person in the United Kingdom any document
received by it in connection with the issue of the shares of Common Stock to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1995, or is a person to whom
such document may otherwise lawfully be issued or passed on.
The Underwriters initially propose to offer part of the Common Stock
directly to the public at the Price to Public set forth on the cover page hereof
and part to certain dealers at a price which represents a concession not in
excess of $ per share under the Price to Public. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
other Underwriters or to certain dealers. After the initial offering of the
Common Stock the offering price and other selling terms may from time to time be
varied by the Representatives.
Pursuant to the Underwriting Agreement, the Company and the Selling
Shareholders have granted to the U.S. Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 2,400,000 additional
shares of Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. Any purchase of such
additional shares by the U.S. Underwriters shall be split equally between the
Company and the Selling Shareholders and as for Selling Shareholders, pro rata
in accordance with shares being sold in the Offering. The U.S. Underwriters may
exercise such option to purchase solely for the purpose of covering
over-allotments, if any, made in connection with the Offering. To the extent
such option is exercised, each U.S. Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares of Common Stock offered by
the U.S. Underwriters hereby.
The Common Stock is listed on the Nasdaq National Market under the symbol
"FORT."
Pursuant to the Underwriting Agreement, the Company has agreed that, without
the prior written consent of the U.S. Representatives, it will not register for
sale or 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
Registration Statement, other than: (i) the shares of Common Stock offered
hereby; (ii) any shares of Common Stock issued upon the exercise of an option or
warrant or the conversion of a security outstanding on the date of the
Underwriting Agreement and (iii) any shares of Common Stock issued pursuant to
existing employee benefit plans of the Company. Pursuant to the Stockholders
Agreement, certain shareholders of the Company (who, following the Offering,
will beneficially own in the aggregate 30,654,531 shares of Common Stock) 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 the effective date of the Registration
Statement, without the prior written consent of certain of the representatives
of the U.S. 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 shareholders.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
Upon consummation of the Offering, affiliates of MS&Co will own
approximately 27% of the outstanding shares of Common Stock (approximately 25%
if the Underwriters' over-allotment option is exercised in full). See "Principal
and Selling Shareholders."
71
<PAGE>
This Offering is being made in accordance with the provisions of Schedule E
("Schedule E") to the by-laws of the NASD and the public offering price will be
no higher than that recommended by a "qualified independent underwriter." The
NASD requires that the "qualified independent underwriter" (i) be an NASD member
experienced in the securities or investment banking business; (ii) not be an
affiliate of the issuer of the securities and (iii) agree to undertake the
responsibilities and liabilities of an underwriter under the Securities Act. In
accordance with this requirement, Salomon Brothers Inc is serving in such role,
and the public offering price of the Common Stock offered hereby is not higher
than Salomon Brothers Inc's recommended public offering price. Salomon Brothers
Inc also participated in the preparation of the Registration Statement of which
this Prospectus is a part and has performed due diligence with respect thereto.
The Company has agreed to indemnify Salomon Brothers Inc against certain
liabilities, including liabilities under the Securities Act.
Pursuant to the provisions of Schedule E, NASD members may not execute
transactions in Common Stock offered hereby to any accounts over which they
exercise discretionary authority without prior written approval of the customer.
From time to time MS&Co has provided, and continues to provide, investment
banking services to the Company and its affiliates.
Pursuant to regulations promulgated by the Commission, market makers in the
Common Stock who are Underwriters or prospective underwriters ("passive market
makers") may, subject to certain limitations, make bids for or purchases of
shares of Common Stock until the earlier of the time of commencement (the
"Commencement Date") of offers or sales of the Common Stock contemplated by this
Prospectus or the time at which a stabilizing bid for such shares is made. In
general, on and after the date two days prior to the Commencement Date (1) such
market maker's net daily purchases of the Common Stock may not exceed 30% of the
average daily trading volume in such stock for the two full consecutive calendar
months immediately preceding the filing date of the registration statement of
which this Prospectus forms a part, (2) such market maker may not effect
transactions in, or display bids for, the Common Stock at a price that exceeds
the highest bid for the Common Stock by persons who are not passive market
makers and (3) bids made by passive market makers must be identified as such.
LEGAL MATTERS
The validity of the Common Stock and certain other legal matters relating to
the Offering will be passed upon for the Company by Shearman & Sterling, New
York, New York. Certain legal matters will be passed upon for the Underwriters
by Davis Polk & Wardwell, New York, New York. Shearman & Sterling regularly
represents Morgan Stanley Group and MSLEF II on a variety of legal matters.
Davis Polk & Wardwell regularly represents Morgan Stanley Group and MSLEF II on
a variety of legal matters and is currently representing the Company in
connection with the Civil Investigative Demand issued by the U.S. Department of
Justice, Antitrust Division and the Company's anticipated appeal of the U.S. Tax
Court decision discussed under "Business--Legal Proceedings." Shortly after the
Acquisition, certain partners of Davis Polk & Wardwell, acting through a general
partnership, acquired shares of Common Stock of the Company from Morgan Stanley
Group. Shares currently owned amount, in the aggregate, to less than 1% of the
outstanding shares.
EXPERTS
The consolidated financial statements and schedules of the Company included
in this Prospectus and elsewhere in the Registration Statement for the years
ended December 31, 1995, 1994 and 1993 have been audited by Arthur Andersen LLP,
independent public accountants, as indicated by their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
72
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995 and the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1996, filed with the Commission, are hereby incorporated
by reference in this Prospectus except as superseded or modified herein. All
documents filed with the Commission pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
after the initial filing of the Registration Statement and prior to the
termination of the Offering shall be deemed to be incorporated by reference into
this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this Prospectus. The Company will provide without charge to each
person, including any beneficial owner, to whom this Prospectus is delivered,
upon written or oral request of such person, a copy of any and all of the
documents that have been or may be incorporated by reference herein (other than
exhibits to such documents which are not specifically incorporated by reference
into such documents). Such requests should be made to the Company's Secretary at
the Company's principal executive offices at 1919 South Broadway, Green Bay,
Wisconsin 54304, (414) 435-8821.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall encompass any amendment thereto) on Form S-3 under the Securities
Act, with respect to the shares of Common Stock offered hereby. This Prospectus
does not contain all the information set forth in the Registration Statement and
the exhibits and schedules thereto, to which reference is hereby made.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. Reports, proxy statements and other information filed by the Company
with the Commission, may be inspected at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and are also available for inspection and copying
at prescribed rates at the regional offices of the Commission located at 500
West Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048, and at the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
73
<PAGE>
FORT HOWARD CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants........................................... F-2
Consolidated Statements of Income for the years ended December 31, 1995, 1994 and
1993............................................................................. F-3
Consolidated Balance Sheets at December 31, 1995 and 1994.......................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994
and 1993......................................................................... F-5
Notes to Consolidated Financial Statements......................................... F-6
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Statements of Income for the three months ended March 31,
1996 and 1995.................................................................... F-20
Condensed Consolidated Balance Sheets at March 31, 1996 and December 31, 1995...... F-21
Condensed Consolidated Statements of Cash Flows for the three months ended March
31, 1996 and 1995................................................................ F-22
Notes to Condensed Consolidated Financial Statements............................... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
FORT HOWARD CORPORATION:
We have audited the accompanying consolidated balance sheets of Fort Howard
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of income and cash flows for
the years ended December 31, 1995, 1994 and 1993. 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, 1995 and 1994, and
the consolidated results of their operations and their cash flows for the years
ended December 31, 1995, 1994 and 1993, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 30, 1996.
F-2
<PAGE>
FORT HOWARD CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
<S> <C> <C> <C>
1995 1994 1993
---------- ---------- -----------
Net sales............................................. $1,620,903 $1,274,445 $ 1,187,387
Cost of sales......................................... 1,139,378 867,357 784,054
---------- ---------- -----------
Gross income.......................................... 481,525 407,088 403,333
Selling, general and administrative................... 121,406 110,285 96,966
Amortization of goodwill.............................. -- -- 42,576
Goodwill write-off.................................... -- -- 1,980,427
Environmental charge.................................. -- 20,000 --
---------- ---------- -----------
Operating income (loss)............................... 360,119 276,803 (1,716,636)
Interest expense...................................... 309,915 337,701 342,792
Other (income) expense, net........................... (1,662) 118 (2,996)
---------- ---------- -----------
Income (loss) before taxes............................ 51,866 (61,016) (2,056,432)
Income taxes (credit)................................. 18,401 (18,891) (16,314)
---------- ---------- -----------
Income (loss) before extraordinary items.............. 33,465 (42,125) (2,040,118)
Extraordinary items--losses on debt repurchases (net
of income taxes of $11,986 in 1995, $14,731 in 1994
and $7,333 in 1993)................................. (18,748) (28,170) (11,964)
---------- ---------- -----------
Net income (loss)..................................... $ 14,717 $ (70,295) $(2,052,082)
---------- ---------- -----------
---------- ---------- -----------
Earnings (loss) per share:
Net income (loss) before extraordinary items........ $ 0.57 $ (1.11) $ (53.54)
Extraordinary items................................. (0.32) (0.74) (0.31)
---------- ---------- -----------
Net income (loss)................................... $ 0.25 $ (1.85) $ (53.85)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FORT HOWARD CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1995 1994
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 946 $ 422
Receivables, less allowances of $2,883 in 1995 and $1,589 in
1994.......................................................... 97,707 123,150
Inventories..................................................... 163,076 130,843
Deferred income taxes........................................... 29,000 20,000
Income taxes receivable......................................... 700 5,200
----------- -----------
Total current assets........................................ 291,429 279,615
Property, plant and equipment..................................... 1,971,641 1,932,713
Less: Accumulated depreciation.................................. 706,394 611,762
----------- -----------
Net property, plant and equipment........................... 1,265,247 1,320,951
Other assets...................................................... 95,761 80,332
----------- -----------
Total assets................................................ $ 1,652,437 $ 1,680,898
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................ $ 112,384 $ 100,981
Interest payable................................................ 64,375 84,273
Income taxes payable............................................ 1,339 224
Other current liabilities....................................... 85,351 75,450
Current portion of long-term debt............................... 62,720 116,203
----------- -----------
Total current liabilities................................... 326,169 377,131
Long-term debt.................................................... 2,903,299 3,189,644
Deferred and other long-term income taxes......................... 225,043 209,697
Other liabilities................................................. 36,355 41,162
Common Stock with put right....................................... -- 11,711
Shareholders' deficit:
Common Stock.................................................... 634 381
Additional paid-in capital...................................... 895,652 600,090
Cumulative translation adjustment............................... (2,844) (2,330)
Retained deficit................................................ (2,731,871) (2,746,588)
----------- -----------
Total shareholders' deficit................................. (1,838,429) (2,148,447)
----------- -----------
Total liabilities and shareholders' deficit................. $ 1,652,437 $ 1,680,898
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FORT HOWARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
<S> <C> <C> <C>
1995 1994 1993
----------- ----------- -----------
Cash provided from (used for) operations:
Net income (loss)................................. $ 14,717 $ (70,295) $(2,052,082)
Depreciation and amortization..................... 98,882 95,727 130,671
Goodwill write-off................................ -- -- 1,980,427
Non-cash interest expense......................... 12,925 74,238 100,844
Deferred income taxes (credit).................... 4,418 (33,832) (17,874)
Environmental charge.............................. -- 20,000 --
Employee stock compensation....................... -- -- (7,832)
Pre-tax loss on debt repurchases.................. 30,734 42,901 19,297
(Increase) decrease in receivables................ 25,443 (17,316) (2,343)
Increase in inventories........................... (32,233) (12,574) (17,294)
(Increase) decrease in income taxes receivable.... 4,500 4,300 (7,000)
Increase (decrease) in accounts payable........... 11,403 (684) (2,740)
Increase (decrease) in interest payable........... (19,898) 29,419 21,797
Increase (decrease) in income taxes payable....... 1,115 102 (1,670)
All other, net.................................... 4,930 (6,799) 6,854
----------- ----------- -----------
Net cash provided from operations............. 156,936 125,187 151,055
Cash used for investment activities:
Additions to property, plant and equipment........ (47,296) (83,559) (165,539)
Cash provided from (used for) financing activities:
Proceeds from long-term borrowings................ 1,467,800 750,000 887,088
Repayment of long-term borrowings................. (1,810,966) (759,202) (841,399)
Debt issuance costs............................... (50,054) (32,134) (31,160)
Issuance (repurchase) of Common Stock, net of
offering costs.................................. 284,104 (97) (6)
----------- ----------- -----------
Net cash provided from (used for) financing
activities.................................... (109,116) (41,433) 14,523
----------- ----------- -----------
Increase (decrease) in cash......................... 524 195 39
Cash, beginning of year............................. 422 227 188
----------- ----------- -----------
Cash, end of year............................. $ 946 $ 422 $ 227
----------- ----------- -----------
----------- ----------- -----------
Supplemental Cash Flow Disclosures:
Interest paid..................................... $ 317,866 $ 237,650 $ 228,360
Income taxes paid (refunded), net................. $ (5,728) $ 2,483 $ 4,432
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
(A) Operations--The Company operates in one industry segment as a
manufacturer, converter and marketer of a diversified line of single-use tissue
products for the commercial and consumer markets, primarily in the United States
and United Kingdom.
(B) Principles of Consolidation--The consolidated financial statements
include the accounts of Fort Howard Corporation and all domestic and foreign
subsidiaries and are prepared in conformity with U.S. generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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.
(C) 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.
(D) Inventories--Inventories are carried at the lower of cost or market.
Cost is principally determined on a first-in, first-out basis, with a lesser
portion determined on an average cost by specific lot method.
(E) Property, Plant and Equipment--Effective with the Acquisition (as
defined below), property, plant and equipment 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. In 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). The Company's adoption of
SFAS No. 121 effective January 1, 1995 had no effect on the 1995 consolidated
financial statements.
Assets under capital leases principally arose in connection with sale and
leaseback transactions as described in Note 6 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
1995, 1994 and 1993 were $2,096,000, $4,230,000 and $8,369,000, respectively.
(F) Revenue Recognition--Sales of the Company's tissue products are recorded
upon shipment of the products.
F-6
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(G) 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.
(H) 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 3).
(I) Employee Benefit Plans--A substantial majority of the Company's
employees are covered under defined contribution plans. The Company makes annual
discretionary contributions under the plans. Participants may also contribute a
certain percentage of their wages to the plans. Costs charged to operations for
defined contribution plans were approximately $13,231,000, $12,716,000 and
$12,725,000 for 1995, 1994 and 1993, respectively.
The Company follows SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" which requires that the expected cost of
postretirement health care benefits be charged to expense during the years that
employees render service (see Note 7). 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 and meet certain age and years of service requirements 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. Employees of the Company's U.K. tissue operations are not entitled to
Company-provided postretirement benefit coverage.
(J) Interest Rate Cap Agreements--The costs of interest rate cap agreements
are amortized over the respective lives of the agreements.
(K) 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.
(L) Earnings (Loss) Per Share--Earnings (loss) per share has been computed
on the basis of the average number of common shares outstanding during the
years, after giving retroactive effect to a 6.5-for-one stock split on January
31, 1995. The average number of shares used in the computation was
F-7
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
58,227,712, 38,103,215 and 38,107,154 for 1995, 1994 and 1993, respectively. The
assumed exercise of all outstanding stock options has been excluded from the
computation of earnings (loss) per share in 1995, 1994 and 1993 because the
result was not material or was antidilutive.
2. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
INVENTORIES
Raw materials and supplies........................ $ 80,134 $ 63,721
Finished and partly-finished products............. 82,942 67,122
---------- ----------
$ 163,076 $ 130,843
---------- ----------
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land.............................................. $ 45,523 $ 44,422
Buildings......................................... 326,207 325,395
Machinery and equipment........................... 1,586,627 1,527,865
Construction in progress.......................... 13,284 35,031
---------- ----------
$1,971,641 $1,932,713
---------- ----------
---------- ----------
CAPITAL LEASE ASSETS (INCLUDED IN PROPERTY, PLANT
AND EQUIPMENT TOTALS ABOVE)
Buildings......................................... $ 4,008 $ 4,012
Machinery and equipment........................... 187,007 186,281
---------- ----------
Total assets under capital leases............. $ 191,015 $ 190,293
---------- ----------
---------- ----------
OTHER ASSETS
Deferred loan costs, net of accumulated
amortization.................................... $ 89,180 $ 76,640
Prepayments and other............................. 6,581 3,692
---------- ----------
$ 95,761 $ 80,332
---------- ----------
---------- ----------
OTHER CURRENT LIABILITIES
Salaries and wages................................ $ 51,797 $ 41,959
Contributions to employee benefit plans........... 13,226 12,816
Taxes other than income taxes..................... 6,442 5,615
Other accrued expenses............................ 13,886 15,060
---------- ----------
$ 85,351 $ 75,450
---------- ----------
---------- ----------
</TABLE>
3. GOODWILL
Low industry operating rates and aggressive competitive activity among
tissue producers resulting from a 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. The Company
F-8
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
3. GOODWILL--(CONTINUED)
determined that its projected results would not support the future amortization
of the Company's remaining goodwill balance at September 30, 1993. Accordingly,
the Company wrote off its remaining goodwill balance of $1.98 billion in the
third quarter of 1993.
4. INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME TAX PROVISION
Current
Federal.............................. $ (304) $ 1,800 $ (6,012)
State................................ 768 509 465
Foreign.............................. 1,533 (2,099) (225)
-------- -------- -----------
Total current.................... 1,997 210 (5,772)
Deferred
Federal.............................. 17,227 (18,826) (7,731)
State................................ (2,739) (2,793) (2,956)
Foreign.............................. 1,916 2,518 145
-------- -------- -----------
Total deferred................... 16,404 (19,101) (10,542)
-------- -------- -----------
$ 18,401 $(18,891) $ (16,314)
-------- -------- -----------
-------- -------- -----------
<CAPTION>
EFFECTIVE TAX RATE RECONCILIATION
<S> <C> <C> <C>
U.S. federal tax rate.................. 35.0% (34.0)% (34.0)%
Amortization of intangibles............ -- -- 33.4
State income taxes, net................ 2.1 (4.1) (0.1)
Interest on long-term income taxes..... -- 3.3 --
Permanent differences related to
accruals............................... -- 3.3 --
Other, net............................. (1.6) 0.5 (0.1)
-------- -------- -----------
Effective tax rate..................... 35.5% (31.0)% (0.8)%
-------- -------- -----------
-------- -------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
Domestic............................... $ 39,067 $(62,711) $(2,048,746)
Foreign................................ 12,799 1,695 (7,686)
-------- -------- -----------
$ 51,866 $(61,016) $(2,056,432)
-------- -------- -----------
-------- -------- -----------
</TABLE>
The net deferred income tax liability at December 31, 1995 includes $242
million related to property, plant and equipment offset by the recognition of
federal and state loss and tax credit carryforwards totaling $71 million. 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") disallowed income tax
deductions for the 1988 tax year which were claimed by the Company for fees and
expenses, other than interest, related to 1988 debt financing and refinancing
transactions. The Company deducted the balance of the disallowed fees and
expenses related to the 1988 debt instruments during the tax years 1989 through
1995. 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 is
F-9
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
4. INCOME TAXES--(CONTINUED)
contesting the disallowance. 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 to enter its decision in which
it will determine the amount of the tax deficiency owed by the Company. The
Company intends to appeal the U.S. Tax Court decision as it bears on the
interpretation of Code Section 162(k) 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 1995 would be approximately $38 million
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 1995 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, and could result in a
reversal of previously provided income taxes in the event of a resolution of the
matter in the favor of the Company. It is possible that certain legislative
activities could bring resolution to this matter in 1996. Should the matter
proceed to the U.S. Court of Appeals, it is likely that it will not be resolved
until 1997 or later.
Assuming a favorable resolution of the U.S. Tax Court decision, the Company
will have approximately $137 million of net operating loss carryforwards as of
December 31, 1995 for federal income tax purposes which expire as follows: $8
million in 2007, $47 million in 2008, $69 million in 2009 and $13 million in
2010. The aggregate amount of net operating loss carryforwards available to the
Company as of December 31, 1995 could be reduced to approximately $66 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.
F-10
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
5. LONG-TERM DEBT
Long-term debt and capital lease obligations, including amounts payable
within one year, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
1995 Term Loan A, due in varying semi-annual repayments with a
final maturity of March 16, 2002(a).............................. $ 810,000 --
1995 Term Loan B, due in varying semi-annual repayments with a
final maturity of December 31, 2002(b)........................... 330,000 --
1995 Revolving Credit Facility, due March 16, 2002(a).............. 79,400 --
Senior Unsecured Notes, 9 1/4%, due March 15, 2001................. 450,000 $ 450,000
Senior Unsecured Notes, 8 1/4%, due February 1, 2002............... 100,000 100,000
Senior Subordinated Notes, 9%, due February 1, 2006................ 650,000 650,000
Subordinated Notes, 10%, due March 15, 2003........................ 300,000 300,000
Capital lease obligations, at interest rates approximating 10.9%... 175,161 182,936
Pollution Control Revenue Refunding Bonds, 7.90%, due October 1,
2005............................................................. 42,000 42,000
Debt of foreign subsidiaries, at rates ranging from 7.60% to 8.66%,
due in varying annual installments through March 2001............ 29,458 47,193
1988 Term Loan, repaid in 1995..................................... -- 224,534
1988 Revolving Credit Facility, repaid in 1995..................... -- 196,500
1993 Term Loan, repaid in 1995..................................... -- 100,000
Senior Secured Notes, repaid in 1995............................... -- 300,000
Subordinated Debentures, 12 5/8%, redeemed in 1995................. -- 145,815
Junior Subordinated Discount Debentures, interest payable in kind
at 14 1/8%, redeemed in 1995..................................... -- 566,869
---------- ----------
2,966,019 3,305,847
Less: Current portion of long-term debt............................ 62,720 116,203
---------- ----------
$2,903,299 $3,189,644
---------- ----------
---------- ----------
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Interest on the 1995 Term Loan A and the 1995 Revolving Credit Facility is payable at
prime plus 1.5% or, subject to certain limitations, at a reserve adjusted LIBOR rate
plus 2.5% subject to downward adjustment if certain financial criteria are met (at a
weighted average rate of 8.26% at December 31, 1995).
</TABLE>
<TABLE>
<C> <S>
(b) Interest on the 1995 Term Loan B is payable at prime plus 2.0% or at a reserve adjusted
LIBOR rate plus 3.0% (at a weighted average rate of 8.74% at December 31, 1995).
</TABLE>
As a part of the Recapitalization and Offering (see Note 8), the Company
entered into a bank credit agreement (the "1995 Bank Credit Agreement")
consisting of a $300 million revolving credit facility and $1,140 million of
term loans; and entered into a receivables credit agreement consisting of a $60
million term loan (the "1995 Receivables Facility"). The net proceeds of the
Offering, together with borrowings of $1,414 million under the 1995 Bank Credit
Agreement and 1995 Receivables Facility, were used to prepay or repurchase all
the outstanding indebtedness under the 1988 Bank Credit Agreement, the 1993 Term
Loan and the Senior Secured Notes, to redeem all outstanding 14 1/8%
F-11
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
5. LONG-TERM DEBT--(CONTINUED)
Debentures (at par) and 12 5/8% Debentures (at 102.5% of the principal
amount thereof) and to pay transaction costs.
The Company incurred extraordinary losses of $19 million, $28 million and
$12 million, net of income taxes of $12 million, $15 million and $7 million, in
the first quarters of 1995, 1994 and 1993, respectively, representing redemption
premiums and write-offs of deferred loan costs associated with refinancing
transactions in each of those years.
Among other restrictions, the 1995 Bank Credit 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 certain financial ratios 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 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.
The Company is charged a 0.5% fee with respect to any unused balance
available under its $300 million 1995 Revolving Credit Facility, and a 2.75% fee
with respect to any letters of credit issued under the 1995 Revolving Credit
Facility. At December 31, 1995, $79 million of borrowings reduced available
capacity under the 1995 Revolving Credit Facility to $221 million.
The aggregate annual maturities of long-term debt and capital lease
obligations for the five years succeeding December 31, 1995, are as follows:
1996-$62,720,000; 1997-$114,353,000; 1998-$137,687,000; 1999-$152,342,000 and
2000-$158,371,000.
In September 1995, the Company entered into agreements expiring in July 2000
(the "1995 Receivables Sales Agreements") whereby substantially all the
Company's domestic tissue receivables are sold. The Company has retained
substantially the same credit risk as if the receivables had not been sold. The
Company received $60 million from such initial sales which was applied to the
repayment of the 1995 Receivables Facility and may receive up to $25 million of
additional proceeds on a revolving basis. The Company retains a residual
interest in the receivables sold, thus receivables in the accompanying
consolidated balance sheet are only reduced by the net proceeds from the sales
which totaled $63 million as of December 31, 1995. Under the terms of the 1995
Receivables Sales Agreements, the ongoing costs to the Company from this program
are based on LIBOR, plus 0.25% to 0.65%, on the net proceeds received.
At December 31, 1995, receivables totaling $94 million, inventories totaling
$163 million and property, plant and equipment with a net book value of $1,258
million were pledged as collateral or held in trust under the terms of the 1995
Bank Credit Agreement, the 1995 Receivables Sales Agreements, the debt of
foreign subsidiaries and under the indentures for sale and leaseback
transactions.
FAIR MARKET VALUE DISCLOSURES
The aggregate fair values of the Company's long-term debt and capital lease
obligations approximated $2,975 million and $3,152 million compared to aggregate
carrying values of $2,966 million and
F-12
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
5. LONG-TERM DEBT--(CONTINUED)
$3,306 million at December 31, 1995 and 1994, respectively. The fair values of
the long-term debt and capital lease obligations have been determined
principally based on secondary market transactions or trading activity in the
securities.
Obligations under the 1995 Bank Credit Agreement and debt of foreign
subsidiaries bear interest at floating rates. The Company's policy is to enter
into interest rate cap 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, 1995, the fair value of the Company's interest rate cap agreements is $2
million compared to a carrying value of $11 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.
6. SALE AND LEASEBACK TRANSACTIONS
Certain buildings and machinery and equipment at the Company's tissue mills
were sold and leased back from various financial institutions. These leases are
treated as capital leases in the accompanying consolidated financial statements.
Future minimum lease payments at December 31, 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ ------
<S> <C>
(IN THOUSANDS)
1996.......................................................... $ 22,540
1997.......................................................... 23,649
1998.......................................................... 23,649
1999.......................................................... 23,272
2000.......................................................... 22,980
2001 and thereafter........................................... 333,467
--------------
Total payments................................................ 449,557
Less imputed interest at rates approximating 10.9%............ 274,396
--------------
Present value of capital lease obligations.................... $175,161
--------------
--------------
</TABLE>
7. EMPLOYEE POSTRETIREMENT BENEFIT PLANS
Effective January 1, 1995, the Company revised the eligibility requirements
for postretirement medical benefits resulting in a reduction in the number of
active employees eligible to receive these benefits. An additional change was
made to freeze the amount of the monthly postretirement medical benefit at the
1995 amount. As a result of these changes, the accumulated postretirement
benefit obligation as of December 31, 1995 was reduced by $10.6 million and the
Company recognized a curtailment gain of $3.4 million in 1995. The decrease in
the obligation is being amortized over 12 years, the average remaining service
period of active employees.
F-13
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
7. EMPLOYEE POSTRETIREMENT BENEFIT PLANS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
(IN THOUSANDS)
NET PERIODIC POSTRETIREMENT BENEFIT COST
Service cost...................................................... $ 82 $1,138 $1,140
Interest cost..................................................... 871 1,719 1,800
Curtailment gain recognized....................................... (3,389) -- --
Amortization of prior service cost (benefit)...................... (671) 85 99
------- ------ ------
Net periodic postretirement benefit cost (gain)............. $(3,107) $2,942 $3,039
------- ------ ------
------- ------ ------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
<S> <C> <C>
(IN THOUSANDS)
UNFUNDED ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
Accumulated postretirement benefit obligation:
Retirees............................................................... $ 8,127 $ 7,068
Fully eligible active plan participants................................ 1,305 3,411
Other active plan participants......................................... 1,980 11,505
------- -------
11,412 21,984
Unrecognized prior service benefit....................................... 7,385 --
Unrecognized actuarial gains (losses).................................... (435) 457
------- -------
Accrued postretirement benefit cost...................................... $18,362 $22,441
------- -------
------- -------
</TABLE>
The medical trend rate assumed in the determination of the accumulated
postretirement benefit obligation at December 31, 1995 begins at 10.5% in 1996,
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 have no material effect on the accumulated postretirement benefit
obligation as of December 31, 1995 or net periodic postretirement benefit cost.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% and 8% compounded annually with respect to the 1995 and 1994
valuations, respectively.
8. SHAREHOLDERS' DEFICIT
In March 1995, the Certificate of Incorporation was restated to create two
classes of stock and eliminate the formerly authorized nonvoting Common Stock.
The Company is authorized to issue up to 100,000,000 shares of $.01 par
value Common Stock. At December 31, 1995, 63,377,326 shares were issued and
63,370,794 shares were outstanding. At December 31, 1994, 38,107,778 shares were
issued and 38,101,239 shares were outstanding (after giving retroactive effect
to a 6.5-for-one stock split on January 31, 1995). The Company is authorized to
issue up to 50,000,000 shares of $.01 par value Preferred Stock none of which
were issued or outstanding at December 31, 1995. At December 31, 1994, 600,000
shares of $.01 par value nonvoting Common Stock had been authorized, of which
none were issued or outstanding.
F-14
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
8. SHAREHOLDERS' DEFICIT--(CONTINUED)
In March and April of 1995, the Company issued 25,269,555 shares of Common
Stock at $12.00 per share in a public offering (the "Offering"). Proceeds from
the Offering, net of underwriting commissions and other related expenses
totaling $19 million, were $284 million. The Offering was part of a
recapitalization plan (the "Recapitalization") implemented by the Company to
prepay or redeem a substantial portion of its indebtedness in order to reduce
the level and overall cost of its debt, extend certain debt maturities, increase
shareholders' equity and enhance its access to capital markets (see Note 5).
The balance of Common Stock with put right outstanding at the date of the
Offering of approximately $12 million was reclassified to Common Stock and
Additional Paid-In Capital in the accompanying consolidated financial statements
because the put right terminated effective with the consummation of the
Offering.
CHANGES IN SHAREHOLDERS' DEFICIT ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION RETAINED
STOCK CAPITAL ADJUSTMENT DEFICIT
------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Balance, December 31, 1992.......................... $0.4 $600.1 $(3.9) $ (625.6)
Net loss............................................ -- -- -- (2,052.1)
Decrease in fair market value of Common Stock with
put right......................................... -- -- -- 1.4
Foreign currency translation adjustment............. -- -- (1.2) --
------ ---------- ----- ---------
Balance, December 31, 1993.......................... 0.4 600.1 (5.1) (2,676.3)
Net loss............................................ -- -- -- (70.3)
Foreign currency translation adjustment............. -- -- 2.8 --
------ ---------- ----- ---------
Balance, December 31, 1994.......................... 0.4 600.1 (2.3) (2,746.6)
Net income.......................................... -- -- -- 14.7
Common Stock offering............................... 0.2 283.9 -- --
Reclass of Common Stock with put right.............. 0.0 11.7 -- --
Foreign currency translation adjustment............. -- -- (0.5) --
------ ---------- ----- ---------
Balance, December 31, 1995.......................... $0.6 $895.7 $(2.8) $(2,731.9)
------ ---------- ----- ---------
------ ---------- ----- ---------
</TABLE>
9. STOCK OPTIONS
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 1995 Stock Plan for Non-Employee Directors
under which a total of 80,000 shares of Common Stock are reserved for grant to
non-employee directors. In addition, 3,740,158 stock options were granted and
remain outstanding at December 31, 1995 under predecessor stock plans. All
options issued or 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
F-15
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
9. STOCK OPTIONS--(CONTINUED)
exercisability of stock options under the 1995 Stock Incentive Plan will be
determined by the compensation and nominating committee of the Board of
Directors. In December 1995, 1,231 shares were granted pursuant to the 1995
Stock Plan for Non-Employee Directors.
Prior to the Offering, the Company amortized 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 vested. Subsequent to the Offering, no amortization
is required because the options are not putable to the Company. There was no
employee stock compensation expense in 1995 or 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 $8
million for 1993.
CHANGES IN STOCK OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE
OPTIONS PER OPTION
--------- ---------------
<S> <C> <C>
Balance December 31, 1992....................................... 3,737,506 $15.38 to 18.46
Options Granted............................................... 98,800 18.46
Options Cancelled............................................. (10,660) 15.38 to 18.46
--------- ---------------
Balance, December 31, 1993...................................... 3,825,646 15.38 to 18.46
Options Cancelled............................................. (82,888) 15.38 to 18.46
--------- ---------------
Balance, December 31, 1994...................................... 3,742,758 15.38 to 18.46
Options Granted............................................... 743,000 19.75
Options Cancelled............................................. (2,600) 18.46
--------- ---------------
Balance, December 31, 1995...................................... 4,483,158 $15.38 to 19.75
--------- ---------------
--------- ---------------
Exercisable at December 31, 1995................................ 3,740,158 $15.38 to 18.46
--------- ---------------
--------- ---------------
Shares available for future grant at December 31, 1995.......... 2,616,662
---------
---------
</TABLE>
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was
issued. Beginning in 1996, the Company will begin to make pro forma disclosures
of stock-based compensation cost utilizing the fair value based method of
accounting pursuant to SFAS No. 123, but currently intends to continue to report
stock-based compensation expense in its consolidated financial statements for
years following 1995 under the intrinsic value based method permitted under
Accounting Principles Board Opinion No. 25 and SFAS No. 123.
F-16
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
10. 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, 1995, Morgan Stanley Group and certain of its affiliates
controlled 37.8% of the Company's Common Stock.
Morgan Stanley & Co. Incorporated ("MS&Co") has served as lead underwriter
with respect to the Offering and periodic public debt offerings and has received
underwriting fees of $7 million in 1995, $20 million in 1994 and $20 million in
1993 in connection with such public offerings. Since the Acquisition, MS&Co has
also been a market maker with respect to the Company's public debt securities.
Pursuant to an agreement terminated effective December 31, 1994, MS&Co provided
financial advisory services to the Company for which the Company paid MS&Co $1
million in each of 1994 and 1993. The Company is a party to several interest
rate cap agreements (see Note 5) including one such agreement with MS&Co which
was purchased in 1994 for $2 million.
11. COMMITMENTS AND CONTINGENCIES
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.
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 and as of December 31,
1995 continues to have accrued liabilities for environmental matters of
approximately $20 million. The ultimate cost to the Company for environmental
matters cannot be determined with certainty due to the often unknown magnitude
of the contamination to be addressed, the varying cost of remediation methods
that could be employed, the evolving nature of remediation technologies and
government regulations and the inability to determine the Company's share of
multiparty obligations or the extent to which contributions will be available
from other parties. While the accrued liabilities reflect the Company's current
estimate of the cost of these environmental matters, there can be no assurance
that the amount accrued will be adequate.
The Company and its subsidiaries are parties to other lawsuits and state and
federal administrative proceedings in connection with their businesses. Although
the final results in all such suits and proceedings cannot be predicted with
certainty, the Company currently believes that the ultimate resolution of all of
such lawsuits and proceedings, after taking into account the liabilities accrued
with respect to such matters, will not have a material adverse effect on the
Company's financial condition or on its result of operations.
F-17
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
12. GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM CONSOLIDATED
----------- -------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
1995
Net sales........................................... $ 1,457,136 $163,767 $ 1,620,903
Operating income.................................... 342,534 17,585 360,119
Identifiable operating assets....................... 1,490,426 162,011 1,652,437
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
</TABLE>
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.
F-18
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE DATA)
1995
Net sales...................................... $ 367 $ 412 $ 426 $ 416 $ 1,621
Gross income................................... 100 115 126 141 482
Operating income............................... 71 88 95 106 360
Net income (loss) before extraordinary item.... (9) 7 15 21 34
Extraordinary item-loss on debt repurchases.... (19) -- -- -- (19)
Net income (loss).............................. (28) 7 15 21 15
Earnings (loss) per share:
Net income (loss) before extraordinary
item......................................... (0.22) 0.12 0.23 0.33 0.57
Extraordinary item-loss on debt
repurchases.................................. (0.44) -- -- -- (0.32)
Net income (loss) per share.................. (0.66) 0.12 0.23 0.33 0.25
Dividends per share............................ -- -- -- -- --
1994
Net sales...................................... $ 275 $ 315 $ 340 $ 344 $ 1,274
Gross income................................... 87 107 113 100 407
Operating income............................... 60 79 85 53 277
Net loss before extraordinary item............. (15) (2) -- (25) (42)
Extraordinary item-loss on debt repurchases.... (28) -- -- -- (28)
Net 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............................ -- -- -- -- --
</TABLE>
F-19
<PAGE>
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1996 1995
-------- --------
Net sales.............................................................. $385,747 $367,376
Cost of sales.......................................................... 238,369 267,856
-------- --------
Gross income........................................................... 147,378 99,520
Selling, general and administrative.................................... 33,175 28,745
-------- --------
Operating income....................................................... 114,203 70,775
Interest expense....................................................... 70,773 86,770
Other (income) expense, net............................................ 563 (224)
-------- --------
Income (loss) before taxes............................................. 42,867 (15,771)
Income taxes (credit).................................................. 15,927 (6,253)
-------- --------
Income (loss) before extraordinary item................................ 26,940 (9,518)
Extraordinary item--loss on debt repurchases (net of income taxes of
$11,986 in 1995)..................................................... -- (18,748)
-------- --------
Net income (loss)...................................................... $ 26,940 $(28,266)
-------- --------
-------- --------
Earnings (loss) per share:
Net income (loss) before extraordinary item.......................... $ 0.43 $ (0.22)
Extraordinary item................................................... -- (0.44)
-------- --------
Net income (loss).................................................... $ 0.43 $ (0.66)
-------- --------
-------- --------
Average shares outstanding............................................. 63,372 42,546
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-20
<PAGE>
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 594 $ 946
Receivables, less allowances of $2,994 in 1996 and $2,883 in
1995........................................................... 83,488 97,707
Inventories.................................................... 158,347 163,076
Deferred income taxes.......................................... 38,000 29,000
Income taxes receivable........................................ 700 700
----------- -------------
Total current assets....................................... 281,129 291,429
Property, plant and equipment.................................... 1,976,841 1,971,641
Less: Accumulated depreciation................................. 729,804 706,394
----------- -------------
Net property, plant and equipment.......................... 1,247,037 1,265,247
Other assets..................................................... 93,608 95,761
----------- -------------
Total assets............................................... $ 1,621,774 $ 1,652,437
----------- -------------
----------- -------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................... $ 103,685 $ 112,384
Interest payable............................................... 23,731 64,375
Income taxes payable........................................... 9,470 1,339
Other current liabilities...................................... 59,099 85,351
Current portion of long-term debt.............................. 84,109 62,720
----------- -------------
Total current liabilities.................................. 280,094 326,169
Long-term debt................................................... 2,877,638 2,903,299
Deferred and other long-term income taxes........................ 240,322 225,043
Other liabilities................................................ 35,976 36,355
Shareholders' deficit:
Common Stock................................................... 634 634
Additional paid-in capital..................................... 895,860 895,652
Cumulative translation adjustment.............................. (3,819) (2,844)
Retained deficit............................................... (2,704,931) (2,731,871)
----------- -------------
Total shareholders' deficit................................ (1,812,256) (1,838,429)
----------- -------------
Total liabilities and shareholders' deficit................ $ 1,621,774 $ 1,652,437
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-21
<PAGE>
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
<S> <C> <C>
1996 1995
--------- ---------
Cash provided from (used for) operations:
Net income (loss).................................................. $ 26,940 $ (28,266)
Depreciation....................................................... 25,112 24,331
Non-cash interest expense.......................................... 3,294 3,223
Deferred income taxes (credit)..................................... 6,295 (16,191)
Pre-tax loss on debt repurchases................................... -- 30,734
(Increase) decrease in receivables................................. 14,219 (16,134)
(Increase) decrease in inventories................................. 4,729 (14,468)
Increase in income taxes receivable................................ -- (3,000)
Increase (decrease) in accounts payable............................ (8,699) 25,828
Decrease in interest payable....................................... (40,644) (21,081)
Increase (decrease) in income taxes payable........................ 8,131 (112)
All other, net..................................................... (27,277) (30,281)
--------- ---------
Net cash provided from (used for) operations................... 12,100 (45,417)
Cash used for investment activity:
Additions to property, plant and equipment......................... (8,873) (10,845)
Cash provided from (used for) financing activities:
Proceeds from long-term borrowings................................. 22,324 655,800
Repayment of long-term borrowings.................................. (26,111) (832,596)
Debt issuance costs................................................ -- (48,201)
Issuance of Common Stock, net of offering costs.................... 208 281,047
--------- ---------
Net cash provided from (used for) financing activities......... (3,579) 56,050
--------- ---------
Decrease in cash..................................................... (352) (212)
Cash at beginning of period.......................................... 946 422
--------- ---------
Cash at end of period.......................................... $ 594 $ 210
--------- ---------
--------- ---------
Supplemental Cash Flow Disclosures:
Interest paid...................................................... $ 108,082 $ 104,755
Income taxes paid--net............................................. 1,182 956
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-22
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
1. BASIS OF PRESENTATION
The condensed consolidated financial statements reflect all adjustments
(consisting only of normally recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Certain reclassifications have been made to conform prior
years' data to the current format. These financial statements should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1995.
2. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed on the basis of the weighted average
number of common shares outstanding during the periods. The weighted average
number of common shares outstanding for the three month periods ended March 31,
1996 and 1995 were 63,372,063 and 42,545,683, respectively. The assumed exercise
of all outstanding stock options has been excluded from the computation of
earnings (loss) per share for the three month periods ended March 31, 1996 and
1995 because the result was not material or was antidilutive.
3. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
(IN THOUSANDS)
Raw materials and supplies.......................... $ 72,453 $ 80,134
Finished and partly-finished products............... 85,894 82,942
--------- ------------
$ 158,347 $163,076
--------- ------------
--------- ------------
</TABLE>
4. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to lawsuits and state and
federal administrative proceedings in connection with their businesses. Although
the final results in such suits and proceedings cannot be predicted with
certainty, the Company currently 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 on its results of operations.
F-23
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (Subject to Completion)
Issued April 24, 1996
16,000,000 Shares
Fort Howard Corporation
COMMON STOCK
-------------------
OF THE 16,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 3,200,000 SHARES
ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 12,800,000 SHARES ARE BEING OFFERED
INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. OF
THE 16,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 10,000,000
SHARES ARE BEING OFFERED BY THE COMPANY AND 6,000,000 SHARES ARE BEING
OFFERED BY THE SELLING SHAREHOLDERS. SEE "PRINCIPAL AND SELLING
SHAREHOLDERS." THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE
SALE OF SHARES BY THE SELLING SHAREHOLDERS. THE COMMON STOCK
IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"FORT." ON APRIL 23, 1996, THE REPORTED LAST SALE
PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET WAS $22 1/2 PER SHARE.
-------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 7 HEREOF FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total(3)................ $ $ $ $
</TABLE>
- ---------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
(2) Before deducting expenses payable by the Company estimated at $1,500,000.
(3) The Company and the Selling Shareholders have granted the U.S. Underwriters
an option, exercisable within 30 days of the date hereof, to purchase up to
an aggregate of 2,400,000 additional shares at the price to public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the U.S. Underwriters exercise such option in
full, the total price to public, underwriting discounts and commissions,
proceeds to Company and proceeds to the Selling Shareholders will be
$ , $ , $ and $ , respectively. See
"Underwriters."
----------------------
The Shares of Common Stock are offered, subject to prior sale, when, as and
if accepted by the Underwriters and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about , 1996, at the office of
Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor
in immediately available funds.
-------------------
MORGAN STANLEY & CO.
International
CS FIRST BOSTON
DEAN WITTER INTERNATIONAL LTD.
MERRILL LYNCH INTERNATIONAL LIMITED
SALOMON BROTHERS INTERNATIONAL LIMITED
, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate (except for the Commission registration fee,
the Nasdaq National Market listing fee and the NASD filing fee) of the fees and
expenses payable by the Company in connection with the distribution of the
Common Stock:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 154,656
Nasdaq National Market listing fee............................. 17,500
NASD filing fee................................................ 30,500
Printing and engraving costs................................... 250,000
Legal fees..................................................... 400,000
Accountants' fees.............................................. 50,000
Blue Sky qualification fees and expenses....................... 20,000
Transfer Agent and Registrar fees.............................. 5,000
Miscellaneous.................................................. 572,344
----------
Total.................................................... $1,500,000
----------
----------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides, in summary,
that directors and officers of Delaware corporations are entitled, under certain
circumstances, to be indemnified against all expenses and liabilities (including
attorney's fees) incurred by them as a result of suits brought against them in
their capacity as a director or officer, if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the Company,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Any such indemnification may be made by the Company only as authorized
in each specific case upon a determination by the shareholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct. The Certificate of Incorporation and By-laws of
the Company provide for indemnification of its directors and officers to the
fullest extent permitted by Delaware law, as the same may be amended from time
to time.
Reference is made to Article VII of the Underwriting Agreement contained in
Exhibit 1.1 hereto, which provides certain indemnification rights to the
directors and officers of the Company.
The Company has entered into indemnification agreements ("Agreement") with
certain of its directors and officers (the "Indemnitee"). Each Agreement
provides that the Company will hold harmless and indemnify the Indemnitee
against all liabilities and will advance all expenses (as defined) incurred by
reason of the fact that the Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or is or was serving at the request of the
Company or for its benefit as a director, officer, employee or agent of another
enterprise, but only if the Indemnitee acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
Company and, in the case of a criminal proceeding, had no reasonable cause to
believe that his or her conduct was unlawful.
The right of indemnification and to receive advancement of expenses pursuant
to each Agreement is not exclusive of any other rights to which the Indemnitee
may at any time be entitled to under applicable law, the Company's Certificate
of Incorporation or By-Laws, any agreement, a vote of
II-1
<PAGE>
shareholders, a resolution of the Company's Board of Directors or otherwise.
Each Agreement further provides that, to the extent that the Company maintains a
policy or policies providing directors' and officers' liability insurance, the
Indemnitee shall be covered by such policy or policies in accordance with its or
their terms to the maximum extent of the coverage available. The Company is not
liable to pay any amounts otherwise indemnifiable under an Agreement to the
extent that the Indemnitee has actually received payment under any insurance
policy, contract, agreement or otherwise; and, except as provided in the
Agreement, an Indemnitee is not entitled to indemnification or advancement of
expenses with respect to any proceeding or claim brought or made by such
Indemnitee against the Company.
Each Agreement terminates upon the later to occur of: (i) ten years after
the date that the Indemnitee ceases to serve as a director, officer, employee,
agent or fiduciary of the Company or of any other enterprise which the
Indemnitee served at the request or for the benefit of the Company and (ii) the
final termination of all pending proceedings in which the Indemnitee is granted
rights of indemnification under such Agreement.
In addition, the Company maintains directors' and officers' liability
insurance.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1.1 --Form of Underwriting Agreement.
4.1 --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 arrangers, and Bankers Trust
Company, as administrative agent. (Incorporated by reference to Exhibit 4.0 as
filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.)
4.2 --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, File No. 33-51876.)
4.3 --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, File No. 33-51876.)
4.4 --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, File No. 33-51557.)
*5.1 --Opinion of Shearman & Sterling.
*23.1 --Consent of Arthur Andersen LLP.
*23.2 --Consent of Shearman & Sterling (included in its opinion delivered under
Exhibit No. 5.1).
**24 --Powers of Attorney (included as part of signature page).
</TABLE>
- ------------
<TABLE>
<C> <S>
* Filed herewith.
** Previously filed.
</TABLE>
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended (the
"Securities Act"), each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), (and, where applicable, each filing of an employee
benefit plan's
II-2
<PAGE>
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b) The undersigned Registrant hereby further undertakes that:
1. For the purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 above or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to the
Registration Statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Green Bay, State of
Wisconsin on the 24th day of April, 1996.
FORT HOWARD CORPORATION
By /s/ JAMES W. NELLEN II
...................................
James W. Nellen II
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of Directors April 24, 1996
.................................. and Chief Executive Officer
Donald H. DeMeuse (principal executive officer)
* Director, Vice Chairman and Chief April 24, 1996
.................................. Financial Officer (principal
Kathleen J. Hempel financial and accounting officer)
* Director, President and Chief April 24, 1996
.................................. Operating Officer
Michael T. Riordan
* Director April 24, 1996
..................................
Donald Patrick Brennan
* Director April 24, 1996
..................................
James L. Burke
* Director April 24, 1996
..................................
Dudley J. Godfrey
* Director April 24, 1996
..................................
David I. Margolis
* Director April 24, 1996
..................................
Robert H. Niehaus
* Director April 24, 1996
..................................
Frank V. Sica
</TABLE>
By /s/ JAMES W. NELLEN II
...................................
James W. Nellen II
Attorney-in-Fact
II-4
<PAGE>
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 Registration Statement and have issued our report thereon dated January 30,
1996. 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 30, 1996.
S-1
<PAGE>
SCHEDULE II
FORT HOWARD CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
<S> <C> <C> <C>
1995 1994 1993
------ ------ ------
Allowance for Doubtful Accounts:
Balance at beginning of year.................................... $1,589 $2,366 $1,376
Charges (credits) to earnings................................... 1,209 (92) 1,633
Charges for purpose for which reserve was created............... 85 (685) (643)
------ ------ ------
Balance at end of year.......................................... $2,883 $1,589 $2,366
------ ------ ------
------ ------ ------
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
------- -----------
<C> <S> <C>
*1.1 --Form of Underwriting Agreement.
4.1 --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
arrangers, and Bankers Trust Company, as administrative agent.
(Incorporated by reference to Exhibit 4.0 as filed with the
Company's Annual Report on Form 10-K for the year ended December
31, 1994.)
4.2 --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, File No.
33-51876.)
4.3 --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, File No. 33-51876.)
4.4 --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, File No. 33-51557.)
*5.1 --Opinion of Shearman & Sterling.
*23.1 --Consent of Arthur Andersen LLP.
*23.2 --Consent of Shearman & Sterling (included in its opinion delivered
under Exhibit No. 5.1).
**24 --Powers of Attorney (included as part of signature page).
</TABLE>
- ------------
<TABLE>
<C> <S>
* Filed herewith.
** Previously filed.
</TABLE>
Exhibit 1.1
16,000,000 Shares
FORT HOWARD CORPORATION
COMMON STOCK, PAR VALUE $.01 PER SHARE
UNDERWRITING AGREEMENT
_________________, 1996
<PAGE>
_____________, 1996
Morgan Stanley & Co. Incorporated
CS First Boston Corporation
Dean Witter Reynolds, Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Salomon Brothers Inc
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
CS First Boston Limited
Salomon Brothers International Limited
Dean Witter Reynolds, Inc.
Merrill Lynch International Limited
c/o Morgan Stanley & Co. International Limited
25 Cabot Street
Canary Wharf
London E14 4QA
England
Dear Sirs:
FORT HOWARD CORPORATION, a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters (as defined below), and
certain shareholders of the Company (the "Selling Shareholders") named in
Schedule I hereto severally propose to sell to the several Underwriters, an
aggregate of 16,000,000 shares of Common Stock, par value $.01 per share (the
"Firm Shares"), of which 10,000,000 shares are to be issued and sold by the
Company and 6,000,000 shares are to be sold by the Selling Shareholders, each
Selling Shareholder selling the amount set forth opposite such Selling
Shareholder's name in Schedule I hereto.
It is understood that, subject to the conditions hereinafter stated,
12,800,000 Firm Shares (the "U.S. Firm Shares") will be sold to the several U.S.
Underwriters named in Schedule II hereto (the "U.S. Underwriters") in connection
with the offering and sale of such U.S. Firm Shares in the United States and
Canada to United States and Canadian Persons (as such terms are defined in the
Agreement Between U.S. and International Underwriters of even date herewith),
and 3,200,000 Firm Shares (the "International Shares") will be sold to the
several International Underwriters named in Schedule III hereto (the
"International Underwriters") in connection with the offering and sale of such
International Shares outside the
<PAGE>
United States and Canada to persons other than United States and Canadian
Persons. Morgan Stanley & Co. Incorporated, CS First Boston Corporation, Dean
Witter Reynolds, Inc., Merrill Lynch, Pierce, Fenner & Smith Inc. and Salomon
Brothers Inc shall act as representatives (the "U.S. Representatives") of the
several U.S. Underwriters, and Morgan Stanley & Co. International Limited, CS
First Boston Limited, Salomon Brothers International Limited, Dean Witter
Reynolds, Inc., and Merrill Lynch International Limited shall act as
representatives (the "International Representatives") of the several
International Underwriters. The U.S. Underwriters and the International
Underwriters are hereinafter collectively referred to as the Underwriters.
The Company and the Selling Shareholders also propose to issue and sell
to the several U.S. Underwriters not more than an additional 2,400,000 shares of
its Common Stock, par value $.01 per share (the "Additional Shares") if and to
the extent that the U.S. Representatives shall have determined to exercise, on
behalf of the U.S. Underwriters, the right to purchase such shares of common
stock granted to the U.S. Underwriters in Article II hereof. Any purchase of
Additional Shares by the Underwriters shall be split equally between the Company
and the Selling Shareholders and as for Selling Shareholders, pro rata in
accordance with Shares sold. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the Shares. The shares of Common Stock,
par value $.01 per share, of the Company to be outstanding after giving effect
to the sales contemplated hereby are hereinafter referred to as the Common
Stock. The Company and the Selling Shareholders are hereinafter sometimes
collectively referred to as the "Sellers."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (File No. 333-01929) relating
to the Shares. The registration statement contains two prospectuses to be used
in connection with the offering and sale of the Shares: the U.S. prospectus, to
be used in connection with the offering and sale of Shares in the United States
and Canada to United States and Canadian Persons, and the international
prospectus, to be used in connection with the offering and sale of Shares
outside the United States and Canada to persons other than United States and
Canadian Persons. The international prospectus is identical to the U.S.
prospectus except for the outside front cover page. The registration statement
as amended at the time it becomes effective, including the information (if any)
deemed to be part of the registration statement at the time of effectiveness
pursuant to Rule 430A under the Securities Act of 1933, as amended (the
"Securities Act"), is hereinafter referred to as the Registration Statement;
2
<PAGE>
the U.S. prospectus and the international prospectus (including in the case of
all references to the Registration Statement and the Prospectus, documents
incorporated therein by reference) in the respective forms first used to confirm
sales of Shares are hereinafter collectively referred to as the Prospectus
(including, in the case of all references to the Registration Statement and the
Prospectus, documents incorporated therein by reference). If the Company has
filed an abbreviated registration statement to register additional Shares
pursuant to Rule 462(b) under the Securities Act (the "Rule 462 Registration
Statement"), then any reference herein to the term "Registration Statement"
shall be deemed to include such Rule 462 Registration Statement. The terms
"supplement" and "amendment" or "amend" as used in this Agreement shall include
all documents subsequently filed by the Company with the Commission pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are
deemed to be incorporated by reference in the Prospectus.
I.
The Company represents and warrants to each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and
no proceedings for such purpose are pending before or, to the knowledge of
the Company, threatened by the Commission.
(b) (i) Each document, if any, filed or to be filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus complied or will
comply when so filed in all material respects with the Exchange Act and the
applicable rules and regulations of the Commission thereunder, and (ii) when
the Registration Statement became effective and at all times subsequent
thereto up to and including the Closing Date referred to below, the
Registration Statement and Prospectus, and any amendments or supplements
thereto, will in all material respects conform to the requirements of the
Securities Act and the rules and regulations of the Commission thereunder
(the "Rules and Regulations"), and the Registration Statement and any
amendment or supplement thereto at their respective effective dates will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading
3
<PAGE>
and the Prospectus at the time the Registration Statement became effective or
the Prospectus together with any supplement thereto at their respective issue
dates and at the Closing Date referred to below, will not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, except that this representation and
warranty does not apply to statements or omissions made in reliance upon and
in conformity with information relating to any Underwriter furnished in
writing by such Underwriter through you expressly for use in connection with
the Registration Statement or Prospectus or any amendment or supplement
thereto.
(c) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has the
corporate power and authority to carry on its business as presently
conducted, as described in the Prospectus. The Company has not failed to
qualify to do business in any jurisdiction where failure so to qualify could
reasonably be expected to materially adversely affect its financial
condition, business, operations, or its ability to perform any of its
obligations under this Agreement.
(d) Each of Fort Sterling Limited ("Fort Sterling") and Harmon Assoc.,
Corp. ("Harmon") is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
the corporate power and authority to carry on its business as presently
conducted, as described in the Prospectus. Fort Sterling and Harmon have not
failed to qualify to do business in any jurisdiction where failure so to
qualify could reasonably be expected to materially adversely affect each of
their respective financial condition, business or operations.
(e) The authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof contained in
the Prospectus.
(f) The shares of Common Stock (including the Shares to be sold by the
Selling Shareholders) outstanding prior to the issuance of the Shares to be
sold by the Company have been duly authorized and are validly issued, fully
paid and non-assessable.
(g) The Shares to be sold by the Company have been duly authorized and,
when issued and delivered in
4
<PAGE>
accordance with the terms of this Agreement, will be validly issued, fully
paid and non-assessable, and the issuance of such Shares will not be subject
to any preemptive or similar rights.
(h) This Agreement has been duly authorized, executed and delivered by
the Company.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not (i)
contravene any provision of applicable law, (ii) violate or be inconsistent
with the certificate of incorporation or by-laws of the Company, (iii)
contravene any provision of, or constitute a default under, any indenture,
mortgage, contract or other instrument to which the Company is a party or by
which it or any of its property is bound except for such contraventions or
defaults which would not materially adversely affect the business,
properties, prospects, assets, liabilities, operations or conditions
(financial or otherwise) of the Company and its subsidiaries taken as a whole
(a "Material Adverse Effect"), (iv) contravene any judgment, order or decree
applicable to the Company or any of its subsidiaries of any governmental
body, agency or court having jurisdiction over the Company or any subsidiary
noncompliance with which would have a Material Adverse Effect, and (v) no
consent, approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company of
its obligations under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states in connection with the
offer and sale of the Shares.
(j) Each of the Company and its subsidiaries has all necessary consents,
authorizations, approvals, orders, certificates and permits of and from, and
has made all declarations and filings with, all Federal, state, local and
other governmental authorities, all self-regulatory organizations and all
courts and other tribunals, to carry on its business as presently conducted,
as described in the Prospectus (except for those which, if not obtained or
made, would not have a Material Adverse Effect).
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or operations
of the Company and its subsidiaries, taken as a whole, from that set forth in
the Prospectus.
5
<PAGE>
(l) There are no legal or governmental proceedings pending or, to the
best knowledge of the Company, threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries are (i) in compliance with any and
all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received or applied for all permits,
licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (iii) are in compliance with
all terms and conditions of any such permit, license or approval, except
where such noncompliance with Environmental Laws, failure to receive or apply
for required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a Material Adverse Effect.
(o) In the ordinary course of its business, the Company conducts a
periodic review of the effect of Environmental Laws on the business and
operations of the Company and its subsidiaries, as a result of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up,
closure of properties or compliance with Environmental Laws or any permit,
license or approval, any related constraints on operating activities and any
potential liabilities to regulatory authorities). On the basis of such
review, the Company has reasonably concluded that such associated costs and
liabilities would not, singly or in the aggregate, have a Material Adverse
6
<PAGE>
Effect other than associated costs and liabilities disclosed in the
Prospectus.
(p) The provisions of Section 4.3(c) of the Stockholders Agreement
dated as of March 1, 1995 (the "Stockholders Agreement) which prohibit the
sale of shares of Common Stock of the Company or of securities convertible
into or exercisable or exchangeable for such Common Stock by any of the
parties to the Stockholders Agreement (other than the Company) for a period
beginning seven days before and ending 180 days after the effective date of
the Registration Statement (the "Lock Up Period") are in full force and
effect and are binding on each of the parties to the Stockholders Agreement
(other than the Company), provided, however, that the Underwriters hereby
-------- -------
give their prior written consent to any sales of shares of Common Stock of
the Company or of securities convertible into or exercisable for such Common
Stock by any Management Investors (as defined in the Stockholders Agreement)
during the Lock Up Period.
(q) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the rules and regulations of
the Commission thereunder.
(r) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida) related to doing business
with the Government of Cuba or with any person or affiliate located in Cuba.
II.
Each of the Selling Shareholders, severally and not jointly with the
other Selling Shareholders, represents and warrants to and agrees with each of
the Underwriters that:
(a) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Shareholder.
(b) The execution and delivery by such Selling Shareholder of, and the
performance by such Selling Shareholder of its obligations under, this
Agreement,
7
<PAGE>
the Custody Agreement signed by such Selling Shareholder and ____________, as
Custodian, relating to the deposit of the Shares to be sold by such Selling
Shareholder (the "Custody Agreement") and the Power of Attorney appointing
certain individuals as such Selling Shareholder's attorneys-in-fact to the
extent set forth therein, relating to the transactions contemplated hereby
and by the Registration Statement (the "Power of Attorney") will not
contravene any provision of applicable law, or the certificate of
incorporation or by-laws of such Selling Shareholder (if such Selling
Shareholder is a corporation), or any agreement or other instrument binding
upon such Selling Shareholder or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over such Selling
Shareholder, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by such Selling Shareholder of its obligations under this
Agreement or the Custody Agreement or Power of Attorney of such Selling
Shareholder, except such as may be required by the securities or Blue Sky
laws of the various states in connection with the offer and sale of the
Shares.
(c) Such Selling Shareholder has, and on the Closing Date will have,
valid title to the Shares to be sold by such Selling Shareholder and the
legal right and power, and all authorization and approval required by law, to
enter into this Agreement, the Custody Agreement and the Power of Attorney
and to sell, transfer and deliver the Shares to be sold by such Selling
Shareholder.
(d) The Shares to be sold by such Selling Shareholder pursuant to this
Agreement have been duly authorized and are validly issued, fully paid and
non-assessable.
(e) The Custody Agreement and the Power of Attorney have been duly
authorized, executed and delivered by such Selling Shareholder and are valid
and binding agreements of such Selling Shareholder.
(f) Delivery of the Shares to be sold by such Selling Shareholder
pursuant to this Agreement will pass title to such Shares free and clear of
any security interests, claims, liens, equities and other encumbrances.
III.
8
<PAGE>
Each Seller, severally and not jointly, hereby agrees to sell to the
several Underwriters, and the Underwriters, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agree, severally and not jointly, to purchase from such
Seller at $______ a share (the "Purchase Price") the number of Firm Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the number of Firm Shares to be
sold by such Seller as the number of Firm Shares set forth in Schedule II and
III opposite the name of such Underwriter bears to the total number of Firm
Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees and the
Selling Shareholders agree, severally and not jointly, to sell to the U.S.
Underwriters the Additional Shares, and the U.S. Underwriters shall have a
one-time right to purchase, severally and not jointly, up to 2,400,000
Additional Shares at the purchase price. Additional Shares may be purchased as
provided in Article V hereof solely for the purpose of covering over-allotments
made in connection with the offering of the Firm Shares. If any Additional
Shares are to be purchased, each U.S. Underwriter agrees, severally and not
jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule
II hereto opposite the name of such U.S. Underwriter bears to the total number
of U.S. Firm Shares. The Additional Shares to be purchased by the U.S.
Underwriters hereunder and the U.S. Firm Shares are hereinafter collectively
referred to as the U.S. Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period beginning seven days before and ending 180 days after the date
of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, 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 (whether such shares or any such
securities are now owned or are hereafter acquired), or (ii) enter into any swap
or other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by
9
<PAGE>
delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Shares to be sold hereunder, (B)
any shares of Common Stock issued by the Company upon the exercise of an option
or warrant or the conversion of a security outstanding on the date hereof, (C)
any shares of Common Stock issued or options to purchase Common Stock granted
pursuant to existing employee benefit plans of the Company, including, without
limitation, the Company's 1995 Stock Incentive Plan or (D) any shares of Common
Stock issued pursuant to the Company's Non-Employee Director Stock Plan.
IV.
The Sellers are advised by you that the Underwriters propose to make a
public offering of their respective portions of the Shares as soon after the
Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Sellers are further advised by you that the Shares
are to be offered to the public initially at U.S. $_____ a share (the "public
offering price") and to certain dealers selected by you at a price that
represents a concession not in excess of U.S.$___ a share under the public
offering price, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in excess of U.S.$___ a share, to any Underwriter or
to certain other dealers.
Each U.S. Underwriter hereby makes to and with the Sellers the
representations and agreements of such U.S. Underwriter contained in the fifth
paragraph of Article III of the Agreement Between U.S. and International
Underwriters of even date herewith. Each International Underwriter hereby
makes to and with the Sellers the representations and agreements of such
International Underwriter contained in the seventh, eighth and ninth paragraphs
of Article III of such Agreement.
V.
Payment for the Firm Shares to be sold by each Seller shall be made to
such Seller in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on ___________, 1996, or at such
other time on the same or such other date, not later than __________, 1996, as
shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the Closing Date. Payment to the Company shall be
made to an account designated by the Company and payment to the Selling
10
<PAGE>
Shareholders shall be made to an account designated by the Custodian.
Payment for any Additional Shares shall be made to the Sellers in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on such date (which may be the
same as the Closing Date but shall in no event be earlier than the Closing Date
nor later than ten business days after the giving of the notice hereinafter
referred to) as shall be designated in a written notice from the U.S.
Representatives to the Sellers of their determination, on behalf of the U.S.
Underwriters, to purchase a number, specified in said notice, of Additional
Shares, or on such other date, in any event not later than ___________, 1996, as
shall be designated in writing by the U.S. Representatives. The time and date
of such payment are hereinafter referred to as the Option Closing Date. The
notice of the determination to exercise the option to purchase Additional Shares
and of the Option Closing Date may be given at any time within 30 days after the
date of this Agreement.
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the purchase price therefor.
VI.
The obligations of the Sellers and the several obligations of the
Underwriters hereunder are subject to the condition that the Registration
Statement shall have become effective not later than the date hereof.
The several obligations of the Underwriters hereunder are subject to the
following further conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued under the Securities Act and no proceedings
therefor shall have been instituted or threatened by the Commission.
11
<PAGE>
(b) There shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or otherwise, or
in the earnings, business or operations, of the Company and its subsidiaries,
taken as a whole, from that set forth in the Prospectus, that, in your
judgment, is material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(c) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed on behalf of the Company by an
authorized officer of the Company, to the effect set forth in clauses (a),
(j), and (k) of this Article VI, and to the effect that: (x) to the best
knowledge of such officer, after due inquiry, the representations and
warranties of the Company contained herein are true and correct in all
respects as of the Closing Date, (y) the Company has performed in all
material respects all of the obligations to be performed hereunder on or
before the Closing Date and (z) there has not occurred any change, or any
development that could reasonably be expected to involve a prospective
change, in the condition, financial or otherwise, or in the earnings,
business or operations, of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus.
(d) You shall have received on the Closing Date an opinion of James W.
Nellen II, Esq., General Counsel for the Company, in form and substance
satisfactory to you and your counsel, dated the Closing Date, to the effect
that:
(i) the Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware,
is in good standing under the laws of the States of Georgia, Oklahoma
and Wisconsin and has the corporate power and authority to carry on
its business as described in the Prospectus, to own or hold under
lease its properties, and to enter into and perform its obligations
under this Agreement;
(ii) the execution, delivery and performance by the Company of
this Agreement and the issuance of the Shares has been duly authorized
by all necessary corporate action on the part of the Company and do
not and will not require the consent or approval of
12
<PAGE>
any shareholder of the Company or any trustee or holder of any
indebtedness or other obligation of the Company, except for such as
have been obtained on or prior to the date hereof;
(iii) this Agreement has been duly executed and delivered by the
Company;
(iv) neither the execution and delivery by the Company, nor the
fulfillment of or compliance by the Company with the provisions of
this Agreement or the Shares, nor the consummation of the transactions
contemplated in the Prospectus conflicts with, or results in a breach
of the terms, conditions or provisions of, or constitutes a default
under, or results in a violation of, its certificate of incorporation
or by-laws, any statute, law, rule, code, ordinance or regulation or,
to such counsel's knowledge after due inquiry, any judgment, order or
decree, in each case applicable to it or its properties which is
material to the issuance and sale of the Shares, this Agreement or any
indenture, mortgage, contract or other instrument to which the Company
is a party or by which it or any of its property is bound (except for
such breaches, defaults, and violations which would not have a
Material Adverse Effect) or result in the creation or the imposition
of any material lien, charge or encumbrance upon any property or
assets of the Company;
(v) no consent, approval, authorization or order of, or
qualification with, any Wisconsin governmental body or agency is
required for the valid authorization, execution, delivery and
performance by the Company of this Agreement, or for the valid
authorization, issuance, sale and delivery of the Shares, or this
Agreement, except (x) for those which if not obtained would not have a
Material Adverse Effect and (y) such as may be required by the
securities or blue sky laws of Wisconsin in connection with the offer
and sale of the Shares;
(vi) each of the Company and its subsidiaries has all necessary
consents, authorizations, approvals, orders, certificates and permits
of and from, and has
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<PAGE>
made all declarations and filings with, all Federal, state, local and
other governmental authorities, all self-regulatory organizations and
all courts and other tribunals, to own, lease, license and use its
properties and assets and to conduct its business in the manner
described in the Prospectus (except for those which, if not obtained
or made, would not have a Material Adverse Effect); and
(vii) except as disclosed in the Prospectus, there is no action,
suit or proceeding pending or, to the best of such counsel's knowledge
after due inquiry, threatened against the Company or its properties
before any governmental body or agency which, individually or in the
aggregate (so far as the Company now can reasonably foresee), is
reasonably likely materially and adversely to affect the ability of
the Company to consummate any of the transactions contemplated by the
Prospectus or this Agreement.
Such opinion shall also state that such counsel has participated in the
preparation of the Registration Statement and the Prospectus and no facts
have come to the attention of such counsel which have led such counsel to
believe (A) that the Registration Statement (except for the financial
statements and other financial or statistical data included or incorporated
by reference therein or omitted therefrom as to which such counsel need
express no opinion), at the time the Registration Statement became effective,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (B) that the Prospectus (except for the
financial statements and other financial or statistical data included or
incorporated by reference therein or omitted therefrom, as to which such
counsel need express no opinion), at the time the Prospectus was issued or at
the Closing Date, contained or contains any untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Such opinion shall cover the matters referred to in
subparagraphs (i) through (vii) above with respect to the General Corporation
Law of the State of Delaware (with respect to the due organization,
authorization, execution and delivery, valid existence and good standing of
the
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<PAGE>
Company), federal law and solely with respect to paragraphs (iv), (v) and
(vi), Wisconsin law.
(e) You shall have received on the Closing Date an opinion of Shearman
& Sterling, counsel for the Company, dated the Closing Date, to the effect
that
(i) the Company is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware and has the
corporate power and authority to carry on its business and to own or
hold under lease its properties as described in the Prospectus;
(ii) Harmon is a corporation duly incorporated and in good standing
under the laws of the State of New York and has the corporate power and
authority to carry on its business as presently conducted as described
in the Prospectus.
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(iv) the shares of Common Stock (including the Shares to be sold by
the Selling Shareholders) outstanding prior to the issuance of the
Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable;
(v) the Shares to be sold by the Company have been duly authorized
and, when issued and delivered in accordance with the terms of this
Agreement, will be validly issued, fully paid and non-assessable, and
the issuance of such Shares will not be subject to any preemptive or
similar rights;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of the laws of the State of New York, the
General Corporation Law of the State of Delaware or the Federal laws of
the United States or the certificate of incorporation or by-laws of the
Company or, to the best of such counsel's knowledge, any material
agreement or other material instrument binding upon the Company
15
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or any of its properties, or, to the best of such counsel's knowledge,
any judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of or qualification with any
governmental body or agency or court of the State of New York or United
States is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the securities
or Blue Sky laws of the various states in connection with the offer and
sale of the Shares by the U.S. Underwriters;
(viii) the statements (1) in the Prospectus under the captions
"Management -- Employment Agreements," "-- Management Incentive Plan,"
"-- Supplemental Retirement Plan," "-- 1995 Stock Incentive Plan,"
"-- Management Equity Plan," and "-- Management Equity Participation
Agreement," "Certain Transactions -- Stockholders Agreement,"
"Description of Certain Indebtedness," "Description of Capital Stock"
and "Underwriters" and (2) in the Registration Statement in Item 15, in
each case insofar as such statements constitute summaries of the legal
matters, documents or proceedings referred to therein, fairly present in
all material respects the information called for with respect to such
legal matters, documents and proceedings and fairly summarize in all
material respects the matters referred to therein;
(ix) after due inquiry, such counsel does not know of any statutes,
regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement that are not described or
filed as required;
(x) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended;
(xi) the Registration Statement and Prospectus (except for
financial statements and other financial and statistical data included
or incorporated by reference therein as to which such counsel need not
express any opinion) comply as to
16
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form in all material respects with the Securities Act and the Rules and
Regulations; and
(xii) each document filed under the Exchange Act and incorporated
by reference into the Prospectus (except for financial statements or
other financial and statistical data included or incorporated by
reference therein as to which such counsel need not express any opinion)
complied when so filed as to form in all material respects with the
Exchange Act and the rules and regulations of the Commission thereunder.
Such opinion shall also state that such counsel has participated in the
preparation of the Registration Statement and the Prospectus and no facts have
come to the attention of such counsel which have led such counsel to believe (A)
that the Registration Statement, (except for the financial statements and other
financial or statistical data included therein or incorporated therein, as to
which such counsel need express no opinion) at the time the Registration
Statement became effective, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (B) that the Prospectus (except
for the financial statements and other financial or statistical data included
therein or incorporated therein, as to which such counsel need express no
opinion), at the time the Prospectus was issued or at the Closing Date,
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(f) You shall have received on the Closing Date an opinion of Pannone &
Partners, United Kingdom counsel to the Company, dated the Closing Date, to
the effect that Fort Sterling is a private limited company duly incorporated
in England under Registered number 446297 which has been in continuous
existence since the date of its incorporation, and no action is currently
being taken by the Registrar of Companies for striking Fort Sterling off the
Register or dissolving it as defunct, and it is not in liquidation or subject
to an administration order, and no receiver or manager of its property has
been appointed and that Fort Sterling has the corporate power and authority
to carry on its business as presently conducted.
(g) You shall have received on the Closing Date an opinion of
_________________, counsel for [certain
17
<PAGE>
of] the Selling Shareholders, dated the Closing Date, to the effect that:
(i) this Agreement has been duly authorized, executed and
delivered by or on behalf of [each of] the Selling Shareholders;
(ii) the execution and delivery by [each] Selling Shareholder of,
and the performance by such Selling Shareholder of its obligations
under, this Agreement and the Custody Agreement and Powers of Attorney
of such Selling Shareholder will not contravene any provision of
applicable law, or the certificates of incorporation or by-laws of such
Selling Shareholder (if such Selling Shareholder is a corporation), or,
to the best of such counsel's knowledge, any agreement or other
instrument binding upon such Selling Shareholder or, to the best of such
counsel's knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over such Selling Shareholder,
and no consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the performance by
such Selling Shareholder of its obligations under this Agreement or the
Custody Agreement or Power of Attorney of such Selling Shareholder,
except such as may be required by the securities or Blue Sky laws of the
various states in connection with offer and sale of the Shares;
(iii) [each of] the Selling Shareholders has valid title to the
Shares to be sold by such Selling Shareholder and has the legal right
and power, and all authorization and approval required by law, to enter
into this Agreement and the Custody Agreement and Power of Attorney of
such Selling Shareholder and to sell, transfer and deliver the Shares to
be sold by such Selling Shareholder;
(iv) the Custody Agreement of [each] Selling Shareholder has been
duly authorized, executed and delivered by such Selling Shareholder and
is a valid and binding agreement of such Selling Shareholder; and
(v) delivery of the Shares to be sold by [each] Selling
Shareholder pursuant to this Agreement will pass title to such Shares
free and clear of any security interests, claims, liens, equities and
other encumbrances.
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<PAGE>
(h) You shall have received on the Closing Date an opinion of Davis Polk &
Wardwell, special counsel for the Underwriters, dated the Closing Date, covering
the matters referred to in subparagraphs (v), (vi), (viii) (but only as to the
statements in the Prospectus under "Description of Capital Stock" and
"Underwriters"), (xi) and the paragraph following subparagraph (xii) of
paragraph (e) above.
With respect to the last paragraph of paragraph (e) above, Davis Polk &
Wardwell may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
The opinions of Shearman & Sterling, [Pannone & Partners] and
____________ described in paragraphs (e), (f), and (g) above shall be rendered
to you at the request of the Company or one or more of the Selling shareholders,
as the case may be, and shall so state therein.
(i) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be,
in form and substance satisfactory to you, from Arthur Andersen LLP,
independent public accountants, containing statements and information of the
type ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial information
contained in or incorporated by reference into the Registration Statement and
the Prospectus.
(j) The provisions of the Stockholders Agreement which prohibit the
sale of shares of Common Stock of the Company or of securities convertible
into or exercisable or exchangeable for such Common Stock by any of the
parties to the Stockholders Agreement for a period beginning seven days
before and ending 180 days after the effective date of the Registration
Statement hereof are in full force and effect on the Closing Date, provided,
--------
however, that the Underwriters hereby give their prior written consent to any
-------
sales of shares of Common Stock of the Company or of securities convertible
into or exercisable for such Common Stock by any Management Investors (as
defined in the Stockholders Agreement) during the Lock Up Period..
(k) The Shares have been approved for quotation on the Nasdaq National
Market, subject only to official notice of issuance.
19
<PAGE>
The several obligations of the U.S. Underwriters to purchase Additional
Shares hereunder are subject to the delivery to the U.S. Representatives on the
Option Closing Date of such documents as they may reasonably request with
respect to the good standing of the Company, the due authorization and issuance
of the Additional Shares and other matters set forth in this Article VI related
to the issuance of the Additional Shares.
VII.
In further consideration of the agreements of the Underwriters herein
contained, the Company covenants as follows:
(a) To furnish to you, without charge, six signed copies of the
Registration Statement (including exhibits thereto and documents incorporated
therein by reference) and to each other Underwriter a copy of the
Registration Statement (without exhibits thereto but including documents
incorporated therein by reference) and, during the period mentioned in
paragraph (c) below, as many copies of the Prospectus, any documents
incorporated therein by reference, and any supplements and amendments thereto
as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and to file no such proposed amendment or supplement to which you
reasonably object.
(c) If, during such period after the first date of the public offering
of the Shares as in the opinion of your counsel the Prospectus is required by
law to be delivered in connection with sales by an Underwriter or dealer, any
event shall occur or condition exist as a result of which it is necessary to
amend or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of your counsel, it is
necessary to amend or supplement the Prospectus to comply with law, forthwith
to prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish
to the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as so
amended or supplemented will not, in
20
<PAGE>
the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request and to pay all expenses (including fees and disbursements of counsel)
in connection with such qualification and in connection with any review of
the offering of the Shares by the National Association of Securities Dealers,
Inc. (the "NASD"), including, without limitation, expenses (including fees
and disbursements of counsel) incurred by Salomon Brothers Inc ("Salomon
Brothers") in its capacity as a "qualified independent underwriter" within
the meaning of Section 1 of Article III of the Rules of Fair Practice of the
NASD; provided that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not now so qualified or to take
any action which would subject it to general service of process in any
jurisdiction where it is now so subject.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-month
period ending _______, 1997 that satisfies the provisions of Section 11(a) of
the Securities Act and the rules and regulations of the Commission
thereunder.
(f) To pay all expenses incident to the performance of its obligations
under this Agreement, including (i) the preparation and filing of the
Registration Statement and the Prospectus and all amendments and supplements
thereto, (ii) the preparation, issuance and delivery of the Shares, including
any transfer taxes payable in connection with the transfer of the Shares to
be issued by the Company to the Underwriters, (iii) the fees and
disbursements of the Company's counsel and accountants, (iv) the fees and
disbursements of ________, counsel to the Selling Shareholders, (v) the
qualification of the Shares under state securities or Blue Sky laws in
accordance with the provisions of paragraph (d) of Article VII, including
filing fees and the reasonable fees and disbursements of U.S. counsel for the
Underwriters in connection therewith and in connection with the preparation
of any Blue Sky Memoranda, (vi) the filing of trade reports in the provinces
of Canada, if any, including filing fees and fees and disbursements of
Canadian counsel to the Underwriters in connection therewith, (vii) the
printing and delivery to the
21
<PAGE>
Underwriters, in quantities as hereinabove stated, of copies of the
Registration Statement and all amendments thereto and of each preliminary
prospectus and the Prospectus and any amendments or supplements thereto,
(viii) the printing and delivery to the Underwriters of copies of any Blue
Sky Memoranda, (ix) the filing fees and expenses if any, incurred with
respect to any filing with the NASD, made in connection with the offering of
the Shares, (x) any transportation, accommodation and meal expenses incurred
by the Company in connection with a "road show" presentation to potential
investors, and (xi) the approval for quotation of the Common Stock on the
Nasdaq National Market.
(g) The Company will apply the net proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
VIII.
Each Selling Shareholder, severally and not jointly, agrees to pay or
cause to be paid (i) all taxes, if any, on the transfer and sale of the Shares
being sold by such Selling Shareholder, (ii) all out-of-pocket expenses, if any,
of the Selling Shareholder or any agent of the Selling Shareholder and (iii) all
fees for counsel to the Selling Shareholders other than the reasonable fees and
expenses of one counsel for the Selling Shareholders which counsel shall be
reasonably acceptable to the Company and to the U.S. Underwriters.
IX.
The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred by any Underwriter
or any such controlling person in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such
22
<PAGE>
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein; provided, however, that the
-------- -------
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities.
Each Selling Shareholder agrees, severally and not jointly, to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred by any Underwriter or any such controlling person
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but only
with reference to information relating to such Selling Stockholder furnished in
writing by or on behalf of such Selling Stockholder expressly for use in the
Registration Statement.
The Company and each Selling Shareholder, jointly and severally, also
agree to indemnify and hold harmless Salomon Brothers and each person, if any,
who controls Salomon Brothers within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages, liabilities and judgments incurred as a result of
Salomon Brothers's participation as a "qualified independent underwriter" within
the meaning of Section 1 of Article III of the Rules of Fair Practice of the
NASD in connection with the offering of the Shares, except for any losses,
claims, damages, liabilities and judgments resulting from Salomon Brothers's,
23
<PAGE>
or its controlling person's, gross negligence or willful misconduct.
Each Selling Shareholder agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only with reference to information relating to such Selling Shareholder
furnished in writing by or on behalf of such Selling Shareholder expressly for
use in the Registration Statement, any preliminary prospectus, the Prospectus or
any amendments or supplements thereto.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, the Selling Shareholders, the directors of the
Company, the officers of the Company who sign the Registration Statement and
each person, if any, who controls the Company or any Selling Shareholder within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only with reference to information relating to such Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
24
<PAGE>
In case any proceeding (including any governmental investigation) shall
be instituted involving any person in respect of which indemnity may be sought
pursuant to any of the three preceding paragraphs, such person (the "indemnified
party") shall promptly notify the person against whom such indemnity may be
sought (the "indemnifying party") in writing and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably satisfactory
to the indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the reasonable
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (a) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Underwriters and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, (b) the fees and expenses of
more than one separate firm (in addition to any local counsel) for the Company,
its directors, its officers who sign the Registration Statement and each person,
if any, who controls the Company within the meaning of either such Section, (c)
the fees and expenses of more than one separate firm (in addition to any local
counsel) for all Selling Shareholders (other than MSLEF) and all persons, if
any, who control any Selling Shareholder (other than MSLEF) within the meaning
of either such Section and (d) the fees and expenses of more than one separate
firm (in addition to any local counsel) for MSLEF and all persons, if any, who
control MSLEF within the meaning of either such Section, and that all such fees
and expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters and such control persons of Underwriters,
such firm shall be designated in writing by Morgan Stanley & Co. Incorporated.
In the case of any such separate firm for the Company, and such directors,
officers and control persons of the Company, such firm shall be designated in
writing by the Company. In the case of any such separate firm for the Selling
Shareholders (other than MSLEF) and such controlling persons of Selling
Shareholders (other than MSLEF), such
25
<PAGE>
firm shall be designated in writing by the persons named as attorneys-in-fact
for the Selling Shareholders (other than MSLEF) under the Powers of Attorney.
In the case of any such separate firm for MSLEF and any controlling person of
MSLEF, such firm shall be designated in writing by MSLEF. Notwithstanding
anything contained herein to the contrary, if indemnity may be sought pursuant
to the second paragraph of this Article IX in respect of such action or
proceeding, then in addition to such separate firm for the indemnified parties
the indemnifying party shall be liable for the reasonable fees and expenses of
not more than one separate firm for Salomon Brothers in its capacity as a
"qualified independent underwriter" and all persons, if any, who control Salomon
Brothers within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act if representation of Salomon Brothers in such
capacity and the other indemnified parties by the same counsel would be
inappropriate due to actual or potential differing interests between them.
The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of the preceding
paragraph, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
If the indemnification provided for in the first or second paragraph of
this Article IX is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each indemnifying party under such paragraph, in lieu of
26
<PAGE>
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party or parties on the one hand
and the indemnified party or parties on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the indemnifying party or parties on the one hand and of the indemnified party
or parties on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Selling Shareholders on the one hand and the Underwriters on the
other hand in connection with the offering of the Shares shall be deemed to be
in the same respective proportions as the net proceeds from the offering of the
Shares (before deducting expenses) received by each Seller and the total
underwriting discounts and commissions received by the Underwriters, as set
forth in the table on the cover of the Prospectus, bear to the aggregate public
offering price of the Shares. The relative fault of the Sellers on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Sellers or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations
to contribute pursuant to this Article IX are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
The Sellers and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Article IX were determined by pro
---
rata allocation (even if the Underwriters were treated as one entity for such
- ----
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Article IX, no Underwriter shall be
required to contribute
27
<PAGE>
any amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Article IX are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
The indemnity and contribution provisions contained in this Article IX
and the representations and warranties of the Company and the Selling
Shareholders contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter, any Selling Shareholder
or any person controlling any Selling Shareholder or by or on behalf of the
Company, its officers or directors or any person controlling the Company and
(iii) acceptance of and payment for any of the Shares.
X.
This Agreement shall be subject to termination in your absolute
discretion by notice given by you to the Company, if (a) after the execution and
delivery of this Agreement and prior to the Closing Date (i) trading generally
shall have been suspended or materially limited on or by, as the case may be,
any of the New York Stock Exchange, the American Stock Exchange, the National
Association of Securities Dealers, Inc., the Chicago Board of Options Exchange,
the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of
any securities of the Company shall have been suspended on any exchange or in
any over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such event singly or
together with any other such event makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
28
<PAGE>
XI.
This Agreement shall become effective upon the later of (x) execution
and delivery hereof by the parties hereto and (y) release of notification of the
effectiveness of the Registration Statement by the Commission.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule II or Schedule III bears to the
aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
--------
number of Shares that any Underwriter has agreed to purchase pursuant to Article
III be increased pursuant to this Article XI by an amount in excess of one-ninth
of such number of Shares without the written consent of such Underwriter. If,
on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter or Underwriters shall fail or refuse to purchase Shares and the
aggregate number of Shares with respect to which such default occurs is more
than one-tenth of the aggregate number of Shares to be purchased on such date,
and arrangements satisfactory to you, the Company and the Selling Shareholders
for the purchase of such Shares are not made within 36 hours after such default,
this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Shareholders. In any
such case either you or the relevant Sellers shall have the right to postpone
the Closing Date or the Option Closing Date, as the case may be, but in no event
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of any Seller to comply with
the terms or to fulfill any of the conditions of this Agreement, or if
29
<PAGE>
for any reason not attributable to your actions or your failure to take actions
reasonably contemplated by this Agreement, any Seller shall be unable to perform
its obligations under this Agreement, the Sellers will reimburse the
Underwriters or such Underwriters as have so terminated this Agreement with
respect to themselves, severally, for all out-of-pocket expenses (including the
fees and disbursements of their counsel) reasonably incurred by such
Underwriters in connection with this Agreement or the offering contemplated
hereunder.
This Agreement may be signed in two or more counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
30
<PAGE>
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of New York.
Very truly yours,
FORT HOWARD CORPORATION
By
---------------------
Accepted, ______________, 1996
MORGAN STANLEY & CO.
INCORPORATED
CS FIRST BOSTON CORPORATION
DEAN WITTER REYNOLDS, INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SALOMON BROTHERS INC
Acting severally on behalf of themselves
and the several U.S. Underwriters
named in Schedule II hereto.
By Morgan Stanley & Co.
Incorporated
By
--------------------
31
<PAGE>
MORGAN STANLEY & CO.
INTERNATIONAL LIMITED
CS FIRST BOSTON LIMITED
SALOMON BROTHERS INTERNATIONAL LIMITED
DEAN WITTER REYNOLDS, INC.
MERRILL LYNCH INTERNATIONAL LIMITED
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule III hereto.
By Morgan Stanley & Co.
International Limited
By
--------------------
Acting severally on behalf of themselves and the Selling Shareholders named in
Schedule I hereto.
By
By ____________________________
32
<PAGE>
Schedule I
Selling Shareholders
--------------------
Number of
Firm Shares
Selling Shareholder To Be Sold
------------------- ----------
__________
Total ......
33
<PAGE>
Schedule II
U.S. Underwriters
-----------------
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
Morgan Stanley & Co. Incorporated
CS First Boston Corporation
Dean Witter Reynolds, Inc.
Merrill Lynch, Pierce, Fenner
& Smith Incorporated
Salomon Brothers Inc
__________
Total U.S. Firm Shares .............. 12,800,000
34
<PAGE>
Schedule III
International Underwriters
--------------------------
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
Morgan Stanley & Co. International Limited
CS First Boston Limited
Dean Witter International Ltd.
Merrill Lynch International Limited
Salomon Brothers International Limited
__________
Total International Firm Shares ...... 3,200,000
35
[SHERMAN & STERLING LETTERHEAD]
April 24, 1996
Fort Howard Corporation
1919 South Broadway
Green Bay, Wisconsin 54304
Ladies and Gentlemen:
We are acting as counsel for Fort Howard Corporation, a Delaware
corporation (the "Company"), in connection with the filing by the Company
with the Securities and Exchange Commission of a Registration Statement on
Form S-3 (No. 333-01929), as amended (the "Registration Statement"), and the
prospectus contained in the Registration Statement (the "Prospectus"),
covering the registration under the Securities Act of 1933, as amended (the
"Act"), of 10,000,000 shares of the Company's common stock, par value $.01
per share, to be issued and sold by the Company and 6,000,000 shares of
common stock to be sold by the Selling Shareholders referred to in the
Registration Statement, plus up to an additional 2,400,000 shares of common
stock to cover over-allotments (collectively, the "Shares ").
In connection with the foregoing, we have examined originals, or
copies certified or otherwise identified to our satisfaction, of such documents
and corporate and public records as we have deemed necessary as a basis for
the opinions hereinafter expressed. In our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents presented
to us as originals and the conformity to the originals of all documents
presented to us as copies. In rendering our opinions, we have relied as to
factual matters upon certificates and representations of officers of the
Company and certificates of public officials.
Based upon the foregoing and having regard for such legal
considerations as we deem relevant, we are of the opinion that:
(i) the Shares have been duly authorized by the Company;
<PAGE>
2
(ii) the Shares to be issued and sold by the Company, when issued
and paid for in the manner and at the price set forth in the
Prospectus, will be validly issued, fully paid and non-assessable; and
(iii) the Shares to be sold by the Selling Shareholders are (or,
in the case of Shares that may be sold by Selling Shareholders
following the exercise of options, such Shares, upon their issuance in
accordance with the provisions of such options, will be) validly
issued, fully paid and non-assessable.
We are members of the Bar of the State of New York and we do not
express any opinion herein concerning any law other than the Delaware
General Corporation Law.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" contained in the Prospectus. In giving this consent, we do not
thereby concede that we come within the category of persons whose consent
is required by the Act or the General Rules and Regulations promulgated
thereunder.
Very truly yours,
/s/ Shearman & Sterling
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
April 22, 1996.
