SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-20473
FORT HOWARD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 39-1090992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1919 South Broadway, Green Bay, Wisconsin 54304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 414/435-8821
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 15, 1997
----- ----------------------------
Common Stock, par value $.01 76,150,854
per share
PART I. FINANCIAL INFORMATION
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
(In thousands, except per share data)
Net sales....................... $411,415 $402,397 $812,174 $788,144
Cost of sales................... 225,821 243,487 454,861 481,856
-------- -------- -------- --------
Gross income.................... 185,594 158,910 357,313 306,288
Selling, general and
administrative................ 31,910 34,211 65,392 67,386
-------- -------- -------- --------
Operating income................ 153,684 124,699 291,921 238,902
Interest expense................ 57,156 66,201 115,018 136,974
Other expense, net.............. 655 475 1,435 1,038
-------- -------- -------- --------
Income before taxes............. 95,873 58,023 175,468 100,890
Income tax expense ............. 36,984 21,646 66,832 37,573
-------- -------- -------- --------
Net income before
extraordinary item............ 58,889 36,377 108,636 63,317
Extraordinary item -- loss
on debt repurchases (net
of income taxes of $391 and
$1,258 in 1997 and $2,180
in 1996)...................... (601) (3,340) (1,928) (3,340)
-------- -------- -------- --------
Net income ..................... $ 58,288 $ 33,037 $106,708 $ 59,977
======== ======== ======== ========
Net income per share:
Net income before
extraordinary item.......... $ 0.78 $ 0.53 $ 1.45 $ 0.96
Extraordinary item............ (0.01) (0.05) (0.03) (0.05)
-------- -------- -------- --------
Net income.................... $ 0.77 $ 0.48 $ 1.42 $ 0.91
======== ======== ======== ========
Average shares outstanding...... 75,215 68,759 74,875 66,066
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 2 -
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
-------- ------------
Assets (In thousands)
Current assets:
Cash and cash equivalents................. $ 4,107 $ 759
Receivables, less allowances of $3,389 in
1997 and $3,343 in 1996................. 77,466 63,194
Inventories............................... 150,061 151,248
Deferred income taxes..................... 48,000 60,000
Income taxes receivable................... -- 10,121
---------- ----------
Total current assets.................... 279,634 285,322
Property, plant and equipment............... 2,092,311 2,057,446
Less: Accumulated depreciation........... 856,067 809,650
---------- ----------
Net property, plant and equipment....... 1,236,244 1,247,796
Other assets................................ 69,964 82,262
---------- ----------
Total assets............................ $1,585,842 $1,615,380
========== ==========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable.......................... $ 106,402 $ 131,205
Interest payable.......................... 58,015 60,443
Income taxes payable...................... 3,684 7,700
Other current liabilities................. 80,649 110,357
Current portion of long-term debt......... 7,015 11,972
---------- ----------
Total current liabilities............... 255,765 321,677
Long-term debt.............................. 2,332,196 2,451,373
Deferred and other long-term income taxes... 259,561 247,464
Other liabilities........................... 48,517 49,703
Shareholders' deficit:
Common Stock.............................. 762 744
Additional paid-in capital................ 1,148,971 1,108,976
Cumulative translation adjustment......... 2,636 4,717
Retained deficit.......................... (2,462,566) (2,569,274)
---------- ----------
Total shareholders' deficit............. (1,310,197) (1,454,837)
---------- ----------
Total liabilities and shareholders'
deficit............................... $1,585,842 $1,615,380
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 3 -
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
------------------
1997 1996
---- ----
(In thousands)
Cash provided from (used for) operations:
Net income ................................... $ 106,708 $ 59,977
Depreciation.................................. 51,569 50,231
Non-cash interest expense..................... 7,200 6,645
Deferred income tax expense................... 22,745 11,975
Pre-tax loss on debt repurchases.............. 3,186 5,519
Decrease in restricted cash................... 14,916 --
(Increase) decrease in receivables............ (14,272) 10,639
Decrease in inventories....................... 1,187 27,453
Decrease in income taxes receivable........... 10,121 --
Decrease in accounts payable.................. (24,803) (8,769)
Decrease in interest payable.................. (2,428) (3,391)
Increase (decrease) in income taxes payable... (4,016) 1,282
All other, net................................ (38,069) (8,891)
---------- ---------
Net cash provided from operations .......... 134,044 152,670
Cash used for investment activity:
Additions to property, plant and equipment.... (44,403) (24,384)
Cash provided from (used for) financing
activities:
Proceeds from long-term borrowings............ 36,300 192
Repayment of long-term borrowings............. (159,550) (332,529)
Debt issuance costs........................... -- (1,481)
Issuance of Common Stock, net of
offering costs.............................. 36,957 205,318
---------- ---------
Net cash used for financing activities...... (86,293) (128,500)
---------- ---------
Increase (decrease) in cash..................... 3,348 (214)
Cash at beginning of period..................... 759 946
---------- ---------
Cash at end of period......................... $ 4,107 $ 732
========== =========
Supplemental Cash Flow Disclosures:
Interest paid................................. $ 110,208 $ 133,678
Income taxes paid - net....................... 33,165 22,096
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 4 -
FORT HOWARD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements reflect all adjustments
(consisting only of normally recurring accruals) 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, 1996 and the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1997.
2. EARNINGS PER SHARE
Earnings per share is computed on the basis of the weighted average
number of common shares outstanding during the periods. The weighted average
number of shares outstanding for the three and six month periods ended
June 30, 1997 was 75,215,407 and 74,874,873, respectively. The average number
of shares outstanding for the three and six month periods ended June 30, 1996
was 68,759,446 and 66,065,754, respectively. The assumed exercise of all
outstanding stock options has been excluded from the computation of earnings
per share for the three and six month periods ended June 30, 1997 and 1996
because the result was not material.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). The Company will adopt SFAS No. 128 effective for the year
ending December 31, 1997. On a pro forma basis, if the Company had adopted
SFAS No. 128 for the three and six months ended June 30, 1997 and 1996, the
effect of this accounting change on reported earnings per share ("EPS") would
be:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
Earnings Per Share:
BASIC
Income before extraordinary
item as reported............ $ 0.78 $ 0.53 $ 1.45 $ 0.96
Effect of SFAS No. 128........ -- -- -- --
------ ------ ------ ------
Basic income before extra-
ordinary item as restated... $ 0.78 $ 0.53 $ 1.45 $ 0.96
====== ====== ====== ======
Net income as reported........ $ 0.77 $ 0.48 $ 1.42 $ 0.91
Effect of SFAS No. 128........ -- -- -- --
------ ------ ------ ------
Basic income as restated...... $ 0.77 $ 0.48 $ 1.42 $ 0.91
====== ====== ====== ======
- 5
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
DILUTED
Diluted income before
extraordinary item (A)...... $ 0.77 $ 0.52 $ 1.43 $ 0.95
====== ====== ====== ======
Diluted income (A)............ $ 0.76 $ 0.48 $ 1.40 $ 0.90
====== ====== ====== ======
(A) In accordance with the provisions of APB Opinion No. 15, the Company
currently does not report fully diluted EPS due to immaterial dilution.
3. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
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 8% plus
the Company's borrowing margin until June 1, 1999. At current market rates at
June 30, 1997, the fair value of the Company's interest rate cap agreements is
$300,000 compared to a carrying value of $6 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.
4. CASH AND CASH EQUIVALENTS
At December 31, 1996, the Company had $14,916,000 of cash restricted as
collateral under the terms of its 1995 Accounts Receivable Facility. At
June 30, 1997, there was no cash restricted under the terms of this Facility.
5. INVENTORIES
Inventories consist of:
June 30, December 31,
1997 1996
-------- ------------
(In thousands)
Raw materials and supplies.............. $ 69,170 $ 70,595
Finished and partly-finished products... 80,891 80,653
-------- --------
$150,061 $151,248
======== ========
- 6 -
6. PROPOSED MERGER WITH JAMES RIVER CORPORATION
On May 5, 1997, the Company and James River Corporation announced the
signing of a definitive merger agreement that will create a worldwide consumer
products company which will be named Fort James Corporation. Under the
agreement, Fort Howard shareholders will receive 1.375 shares of Fort James
common stock for each share of Fort Howard common stock.
The merger agreement has been approved by the boards of directors of both
companies. The transaction is structured to qualify as a tax-free
reorganization and will be accounted for as a pooling of interests. The
merger, which is expected to be completed at the end of the summer, is
conditioned on receiving regulatory clearances in the United States and Europe
and requires the approval of the shareholders of both companies.
On a pro forma basis, the combined operations would have had net sales of
approximately $7.7 billion for the year ended December 31, 1996.
7. CONTINGENCIES
The Company and its subsidiaries are parties to lawsuits and state and federal
administrative proceedings incidental to their businesses. Although the final
results in such suits and proceedings cannot be predicted with certainty, 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.
- 7 -
FORT HOWARD CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Second Quarter and First Six Months of 1997 Compared to 1996
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
(In thousands, except percentages)
Net sales:
Domestic tissue............... $348,404 $345,574 $685,224 $670,482
International operations...... 46,306 42,545 90,413 86,353
Harmon........................ 16,705 14,278 36,537 31,309
-------- -------- -------- --------
Consolidated.................. $411,415 $402,397 $812,174 $788,144
======== ======== ======== ========
Operating income:
Domestic tissue............... $142,328 $116,962 $272,848 $223,882
International operations...... 10,857 6,977 17,972 13,282
Harmon........................ 499 760 1,101 1,738
-------- -------- -------- --------
Consolidated.................. $153,684 $124,699 $291,921 $238,902
======== ======== ======== ========
Consolidated net income ........ $ 58,288 $ 33,037 $106,708 $ 59,977
======== ======== ======== ========
Operating income as a percent of
net sales..................... 37.4% 31.0% 35.9% 30.3%
Net Sales. Consolidated net sales for the second quarter of 1997
increased 2.2% to $411 million compared to $402 million in the second quarter
of 1996. Domestic tissue net sales for the second quarter of 1997 increased
0.8% compared to the same period in 1996 due to a 0.6% increase in net selling
prices and a 0.1% increase in sales volume. For the second quarter of 1997,
sales volume of converted products increased 1.7% from the second quarter of
1996. There were no sales of parent rolls in the second quarter of 1997. Net
selling prices increased slightly for the second quarter of 1997 compared to
the second quarter of 1996 as a result of reduced promotional spending.
Consolidated net sales for the first six months of 1997 increased 3.0% to
$812 million compared to $788 million in the first six months of 1996.
Domestic tissue net sales for the first six months of 1997 increased 2.2%
compared to the same period in 1996 due to a 3.1% increase in sales volume
offset by a 0.9% decrease in net selling prices. For the first six months of
1997, sales volume of converted products increased 5.0% from the first six
months of 1996. There were no sales of parent rolls in the first six months
of 1997. Net selling prices decreased for the first six months of 1997
compared to the first six months of 1996 as a result of price decreases in the
consumer market which took effect in April and June 1996.
- 8
Net sales of the Company's international operations increased 8.8% and
4.7% for the second quarter and first six months of 1997, respectively,
compared to the same periods in 1996 due to higher volume and increased
exchange rates, offset by a decrease in net selling prices at the Company's
United Kingdom facility. Net sales of the Company's wastepaper brokerage
subsidiary, Harmon Assoc., Corp. ("Harmon"), increased for the second quarter
of 1997 compared to the second quarter of 1996 due to increased net selling
prices and increased net volume. For the first six months of 1997 compared to
the first six months of 1996, Harmon's net sales increased due to increased
net selling prices and an 11.0% increase in volume.
Gross Income. Consolidated gross income increased 16.8% and 16.7% for the
second quarter and first six months of 1997 compared to 1996, respectively,
due to higher volume and lower raw material costs. Consolidated gross margins
increased to 45.1% and 44.0% for the second quarter and first six months of
1997 compared to 39.5% and 38.9% for the second quarter and first six months
of 1996, respectively. Domestic tissue gross margins increased for the second
quarter and first six months of 1997 compared to the same periods in 1996 due
to higher volume and lower wastepaper and other fiber-based raw material
costs. Wastepaper prices began decreasing significantly in late 1995 and
continued to decrease through the first half of 1996, and have been stable
since mid-1996.
Gross margins of international operations increased in both the second
quarter and first six months of 1997 compared to 1996 due to higher volume and
lower wastepaper costs.
Selling, General and Administrative Expenses. Selling general and
administrative expenses, as a percent of net sales, decreased to 7.8% and
8.1% for the second quarter and first six months of 1997 compared to 8.5% for
the second quarter and first six months of 1996. The decrease was principally
due to the impact of higher net sales.
Operating Income. Operating income increased to $154 million and
$292 million for the second quarter and first six months of 1997 from
$125 million and $239 million for the second quarter and first six months of
1996, respectively. Operating income as a percent of net sales increased to
37.4% and 35.9% in the second quarter and first six months of 1997 compared to
31.0% and 30.3% in the second quarter and first six months of 1996,
respectively. Domestic tissue operating income as a percent of net sales
increased to 40.9% and 39.8% in the second quarter and first six months of
1997 from 33.8% and 33.4% in the second quarter and first six months of 1996,
respectively, due to higher volume as well as lower wastepaper and other raw
material costs. International operating income as a percent of sales rose for
the second quarter and first six months of 1997 compared to the same periods
in 1996 also due to higher volume and lower wastepaper costs.
Interest Expense. Interest expense decreased 13.7% and 16.0% for the
second quarter and first six months of 1997, respectively, compared to the
same periods in 1996 due to lower debt balances resulting from debt repayments
using the proceeds from sales of common stock and cash provided from
operations.
Extraordinary Loss. The Company's net income in the second quarter and
first six months of 1997 was decreased by extraordinary losses of $.6 million
and $1.9 million (net of income taxes of $.4 million and $1.3 million),
respectively, representing the write-off of deferred loan costs associated
with the prepayment of a portion of the outstanding indebtedness under the
Company's 1995 Bank Credit Agreement.
Net Income. For the second quarter and first six months of 1997, net
income was $58 million and $107 million, respectively, compared to net income
- 9 -
of $33 million and $60 million for the second quarter and first six months of
1996.
FINANCIAL CONDITION
For the first six months of 1997, cash increased $3 million. Capital
additions of $44 million and debt repayments of $160 million were funded
principally by net proceeds of $37 million from the sale of common stock
pursuant to the exercise of stock options, $36 million of borrowings and
$134 million of cash from operations.
During the first six months of 1997, receivables increased $14 million
due principally to increased sales due to seasonally higher volume in the
domestic tissue and international operations in the second quarter of 1997
compared to the fourth quarter of 1996. Accounts payable decreased
$25 million due to lower raw material costs. The liability for interest
payable decreased $2 million due to lower debt balances resulting from debt
repayments using the proceeds from the sale of common stock and cash provided
by operations. Other current liabilities declined $30 million resulting from
the payment of obligations due on an annual basis, including employee bonuses
and profit sharing and customer incentive payments. As a result of all these
changes the net working capital increased to $24 million at June 30, 1997 from
a deficit of $36 million at December 31, 1996.
The 1995 Revolving Credit Facility of the Company's 1995 Bank Credit
Agreement, which may be used for general corporate purposes, has a final
maturity of March 16, 2002. At June 30, 1997, the Company had $236 million in
available capacity under the 1995 Revolving Credit Facility.
PROPOSED MERGER WITH JAMES RIVER CORPORATION
On May 5, 1997, the Company and James River Corporation announced the
signing of a definitive merger agreement that will create a worldwide consumer
products company which will be named Fort James Corporation. Under the
agreement, Fort Howard shareholders will receive 1.375 shares of Fort James
common stock for each share of Fort Howard common stock.
The merger agreement has been approved by the boards of directors of both
companies. The transaction is structured to qualify as a tax-free
reorganization and will be accounted for as a pooling of interests. The
merger, which is expected to be completed at the end of the summer, is
conditioned on receiving regulatory clearances in the United States and Europe
and requires the approval of the shareholders of both companies.
IMPACT OF NEW ACCOUNTING STANDARD
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). The Company will adopt SFAS No. 128 effective for the year
ending December 31, 1997. The Company does not expect SFAS No. 128 to have a
significant impact on its reported earnings per share. See footnote 2 to the
Condensed Consolidated Financial Statements for a pro forma disclosure of the
impact of SFAS No. 128 for the three and six month periods ended June 30, 1997
and 1996.
- 10
PART II. OTHER INFORMATION
1. LEGAL PROCEEDINGS
As previously reported, the Company responded during the first and second
quarters of 1995 to a Civil Investigative Demand issued by the U.S. Department
of Justice concerning a civil antitrust investigation into possible agreements
in restraint of trade in connection with the sales of commercial sanitary
paper products. As previously reported, on May 20, 1996, the Company received
a subpoena from a federal grand jury in Cleveland that is investigating
possible antitrust violations in the sale of commercial sanitary paper
products. The Company believes that it has fully complied with the subpoena.
On or about May 13, 1997, the Attorney General of the State of Florida
filed a civil action in the Gainesville Division of the United States District
Court for the Northern District of Florida against the Company and nine other
manufacturers of sanitary paper products alleging violations of federal and
state antitrust and unfair competition laws. The complaint seeks a civil
penalty under Florida law of $1 million for each alleged violation against
each defendant, an unspecified amount of treble damages and injunctive relief.
Over the following weeks, additional civil class actions were filed in various
federal and state courts against the same defendants alleging violations of
federal and state antitrust statutes and seeking treble damages and injunctive
relief. The actions are the subject of a motion for transfer and
consolidation before the Joint Panel on Multidistrict Litigation. The
litigation is in its earliest stages. The Company intends to defend the
litigation vigorously.
Since 1992, the Company has been participating in an effort sponsored by
the Wisconsin Department of Natural Resources ("WDNR") to study the nature and
extent of polychlorinated biphenyl ("PCB") and other sediment contamination of
the lower Fox River in northeast Wisconsin. The objective of this effort is
to identify potential cost-effective primary restoration methods for certain
sediment deposits. On January 30, 1997, the Company and six other companies
(the "Seven Companies") entered into an agreement (the "Agreement") with WDNR
and the Wisconsin Department of Justice ("WDOJ") to investigate claims for
natural resource damages, including sediment restoration claims, asserted
against the Seven Companies relating to releases of PCBs and other hazardous
substances to the lower Fox River and to pursue a negotiated settlement of
those claims under federal and state law. The Agreement also provides that
the Seven Companies will make available to the State of Wisconsin a total of
$10 million, consisting of work and funds, to, among other purposes, initiate
demonstration projects to determine the efficacy of sediment restoration
approaches and to undertake a state directed natural resources damage
assessment. The parties have agreed to a tolling agreement and to forbear
from commencing litigation during the term of the Agreement. Based upon
available information, the Company believes there are additional parties who
may be responsible for releasing PCBs and other hazardous substances to the
Fox River.
The United States Department of Interior, Fish and Wildlife Service
("FWS"), a federal natural resource trustee, previously informed each of the
Seven Companies that they have been identified as potentially responsible
parties ("PRPs") for purposes of claims for natural resource damages under the
federal Comprehensive Environmental Response, Compensation, and Liability Act
- 11 -
("CERCLA"), commonly known as "Superfund," and the Federal Water Pollution
Control Act arising from alleged releases of PCBs to the Fox River and Green
Bay system. The FWS alleges that natural resources, including endangered
species, fish, birds and tribal lands or lands held by the United States in
trust for various tribes, have been exposed to PCBs that were released from
facilities located along the Fox River. The FWS has begun an assessment to
identify and quantify the nature and extent of injury to any affected natural
resources. On February 3, 1997, the Seven Companies were notified by FWS of
its intent to file suit to recover natural resources damages pursuant to
federal law. Based upon available information, the Company believes that
there are additional parties who may be identified as PRPs for alleged natural
resource damages.
On June 17, 1997, the United States Environmental Protection Agency
("EPA") announced its intention to begin the action necessary to list the
lower Fox River on the National Priorities List maintained by EPA under
CERCLA. The State of Wisconsin opposes such action, in part, to facilitate a
more cooperative approach to resolving these claims. By letter dated July 3,
1997, EPA provided "special notice" under CERCLA and invited the Seven
Companies to begin discussions concerning terms under which the Seven
Companies would agree to conduct or finance a remedial investigation and
feasibility study ("RI/FS") for the site. In the event the Seven Companies
and EPA are unable to reach agreement on terms under which the Seven Companies
would conduct or finance the RI/FS, EPA has stated it may conduct a RI/FS and
seek to recover the costs incurred from the Seven Companies.
On July 11, 1997, the WDNR, the FWS, the Menominee Indian Tribe of
Wisconsin, the Oneida Tribe of Indians of Wisconsin, the National Oceanic and
Atmospheric Administration and EPA entered into a Memorandum of Agreement (the
"MOA") that provides for coordination and cooperation among those parties in
addressing the release or threat of release of hazardous substances into the
lower Fox River, Green Bay and Lake Michigan environment. The MOA sets forth
a mutual goal of remediating and/or responding to hazardous substance releases
and threats of releases, and restoring injured and potentially injured natural
resources. Language in the MOA indicates that the governments intend to focus
on sediment removal as a principal, but not exclusive, method of achieving
restoration and rehabilitation of injured natural resources and the services
those resources provide. The impact on the WDNR and FWS natural resource
damages claims of this purported focus on sediment removal is unknown.
Studies of the relative effectiveness, feasibility, environmental impacts and
costs of large-scale sediment removal activities in the lower Fox River have
not been undertaken.
The Company intends to participate in discussions with EPA regarding the
RI/FS for the site, and remains committed to the terms of the Agreement with
WDNR. There can be no assurance, however, that the Company will reach
agreement on these matters with EPA, WDNR or the other parties to the MOA.
As of June 30, 1997, the Company had $36 million of accrued liabilities
for estimated or anticipated liabilities, including legal and consulting
costs, relating to environmental matters arising from its operations. The
Company expects these costs to be expended over an extended number of years.
Although 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.
2. CHANGES IN SECURITIES
None
- 12
3. DEFAULTS UPON SENIOR SECURITIES
None
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 13, 1997.
Dudley J. Godfrey, Michael T. Riordan and Frank V. Sica were elected to the
Company's Board of Directors at the meeting to hold office for three-year
terms expiring in 2000. The terms of Dr. James L. Burke, Kathleen J. Hempel,
David I. Margolis, Donald Patrick Brennan and Robert H. Niehaus continued
after the meeting. Donald H. DeMeuse retired as a director of the Company on
April 3, 1997.
The Company's stockholders also approved a proposal to amend the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of common stock, par value $.01, to 200,000,000 shares.
Following are the voting results:
Withheld Broker
For Against or Abstained Non-Votes
--- ------- ------------ ---------
Nominees for election
of Directors:
Dudley J. Godfrey 67,169,546 --- 412,281 ---
Michael T. Riordan 67,159,172 --- 422,655 ---
Frank V. Sica 66,312,310 --- 1,269,517 ---
Amendment to
Restated Certificate
of Incorporation 65,328,141 75,063 1,977,655 200,968
5. OTHER INFORMATION
None
6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit No. Description
2 The Agreement and Plan of Merger (the "Merger
Agreement"), dated as of May 4, 1997, among the
Company, James River Delaware, Inc. and James River
Corporation of Virginia ("James River") (Incorporated
herein by reference to the Company's Current Report
on Form 8-K, dated May 4, 1997 and filed May 13, 1997).
3(i)(A) Restated Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 as
filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
- 13 -
3(i)(B) Amendment to the Restated Certificate of Incorporation
of the Company dated June 2, 1997.
10(A) Letter Agreement, dated as of May 4, 1997, among
James River, The Morgan Stanley Leveraged Equity
Fund II, L.P., Morgan Stanley Group Inc., Fort Howard
Equity Investors II, L.P., Morgan Stanley Leveraged
Equity Holdings, Inc., Morgan Stanley Equity Investors,
Inc. and Morgan Stanley Leveraged Equity Fund II, Inc.
(Incorporated herein by reference to the Company's
Current Report on Form 8-K, dated May 4, 1997 and filed
May 13, 1997).
10(B) Letter Agreement, dated as of May 4, 1997, between
James River and Leeway & Co., as Nominee for the Long-
Term Investment Trust (Incorporated herein by reference
to the Company's Current Report on Form 8-K, dated
May 4, 1997 and filed May 13, 1997).
10(C) Letter Agreement, dated as of May 4, 1997, between
James River and Mellon Bank, N.A., solely in its
capacity as Trustee for FIRST PLAZA GROUP TRUST (as
directed by General Motors Investment Management
Corporation), and not in its individual capacity
(Incorporated herein by reference to the Company's
Current Report on Form 8-K, dated May 4, 1997 and
filed May 13, 1997).
27 Financial Data Schedule for the six months ended
June 30, 1997.
99 News release containing financial results for the
quarter ended June 30, 1997.
b) During the quarter ended June 30, 1997 and subsequent thereto, the
Company filed the following Current Reports on Form 8-K:
1) The Company filed a Form 8-K on May 5, 1997, reporting
under Item 5 the signing of the Merger Agreement.
2) The Company filed a Form 8-K on May 6, 1997, publishing
a press release announcing the distribution by The
Morgan Stanley Leveraged Equity Fund II, L.P. and two
related limited partnerships of such partnerships'
entire investments in the Company.
3) The Company filed a Form 8-K on May 13, 1997, reporting
under Item 5 and attaching as exhibits the Merger
Agreement and various agreements with certain
stockholders of the Company entered into in connection
with the Merger Agreement.
- 14 -
FORT HOWARD CORPORATION
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORT HOWARD CORPORATION
Registrant
August 5, 1997 /s/ Kathleen J. Hempel
----------------------------------------
Kathleen J. Hempel, Vice Chairman and
Chief Financial Officer and Principal
Accounting Officer
August 5, 1997 /s/ James W. Nellen II
----------------------------------------
James W. Nellen II, Vice President
and Secretary
- 15 -
INDEX TO EXHIBITS
Exhibit No. Description
2 The Agreement and Plan of Merger (the "Merger
Agreement"), dated as of May 4, 1997, among the
Company, James River Delaware, Inc. and James River
Corporation of Virginia ("James River") (Incorporated
herein by reference to the Company's Current Report
on Form 8-K, dated May 4, 1997 and filed May 13, 1997).
3(i)(A) Restated Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 as
filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
3(i)(B) Amendment to the Restated Certificate of Incorporation
of the Company dated June 2, 1997.
10(A) Letter Agreement, dated as of May 4, 1997, among
James River, The Morgan Stanley Leveraged Equity
Fund II, L.P., Morgan Stanley Group Inc., Fort Howard
Equity Investors II, L.P., Morgan Stanley Leveraged
Equity Holdings, Inc., Morgan Stanley Equity Investors,
Inc. and Morgan Stanley Leveraged Equity Fund II,
Inc. (Incorporated herein by reference to the Company's
Current Report on Form 8-K, dated May 4, 1997 and filed
May 13, 1997).
10(B) Letter Agreement, dated as of May 4, 1997, between
James River and Leeway & Co., as Nominee for the Long-
Term Investment Trust (Incorporated herein by reference
to the Company's Current Report on Form 8-K, dated
May 4, 1997 and filed May 13, 1997).
10(C) Letter Agreement, dated as of May 4, 1997, between
James River and Mellon Bank, N.A., solely in its
capacity as Trustee for FIRST PLAZA GROUP TRUST (as
directed by General Motors Investment Management
Corporation), and not in its individual capacity
(Incorporated herein by reference to the Company's
Current Report on Form 8-K, dated May 4, 1997 and
filed May 13, 1997).
27 Financial Data Schedule for the six months ended
June 30, 1997
99 News release containing financial results for the
quarter ended June 30, 1997
- 16 -
Exhibit 3(i)(B)
---------------
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
FORT HOWARD CORPORATION
* * * * *
Fort Howard Corporation, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
1. The name of the Corporation is Fort Howard Corporation (the
"Corporation"). The date of filing of its Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware was
March 15, 1995.
2. The Board of Directors of the Corporation adopted a resolution proposing
and declaring advisable the following amendment to Article IV of the Restated
Certificate of Incorporation of the Corporation:
"SECTION 4.1. AUTHORIZED CAPITAL. SHARES. The total number of
shares of all classes of capital stock that the Corporation shall
have authority to issue is 250,000,000 shares, of which (i)
200,000,000 shares shall be common stock, par value $.01 per share
("Common Stock") and (ii) 50,000,000 shares shall be preferred
stock, par value $.01 per share ("Preferred Stock")."
3. The aforesaid amendment was duly adopted in accordance with the
applicable provisions of Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, Fort Howard Corporation has caused this certificate
to be signed by James W. Nellen II, its Vice President and Secretary, this
28th day of May, 1997.
FORT HOWARD CORPORATION
By: /s/ James W. Nellen II
-------------------------
James W. Nellen II
Vice President and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORT HOWARD CORPORATION'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000038195
<NAME> FORT HOWARD CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 4,107
<SECURITIES> 0
<RECEIVABLES> 80,855
<ALLOWANCES> 3,389
<INVENTORY> 150,061
<CURRENT-ASSETS> 279,634
<PP&E> 2,092,311
<DEPRECIATION> 856,067
<TOTAL-ASSETS> 1,585,842
<CURRENT-LIABILITIES> 255,764
<BONDS> 2,332,196
<COMMON> 762
0
0
<OTHER-SE> (1,310,959)
<TOTAL-LIABILITY-AND-EQUITY> 1,585,842
<SALES> 812,174
<TOTAL-REVENUES> 812,174
<CGS> 454,861
<TOTAL-COSTS> 454,861
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,018
<INCOME-PRETAX> 175,468
<INCOME-TAX> 66,832
<INCOME-CONTINUING> 108,636
<DISCONTINUED> 0
<EXTRAORDINARY> (1,928)
<CHANGES> 0
<NET-INCOME> 106,708
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.42
</TABLE>
Exhibit 99
----------
NEWS
For further information contact:
Media:
Cliff Bowers, Ext. 4087
(FORT HOWARD LOGO here)
P. O. Box 19130 Financial:
Green Bay, WI 54307-9130 Mike Lempke, Ext. 2492
414/435-8821
FOR RELEASE: IMMEDIATELY
FORT HOWARD EPS SURGES 60% IN SECOND QUARTER
GREEN BAY, WI - July 23, 1997 - Fort Howard Corporation today reported
that net income per share reached $0.77 for the second quarter ending June 30,
1997. That is an increase of 60% compared to $0.48 in the same period of
1996.
Net sales, operating income, operating margin and earnings per share all
increased in the second quarter of 1997 compared to the same period of 1996.
Quarterly operating income increased year-on-year for the tenth consecutive
quarter.
"We continue to perform at a very high level due to successful
strategies, significant cost and efficiency advantages, as well as a positive
economic environment," said Fort Howard Chairman, President and CEO,
Michael T. Riordan. "Fort Howard is delighted to bring this exceptional
business momentum to our pending merger with James River Corporation."
-- More --
-- Ad One --
Operating Income Increases
Operating income increased 23% to $153,684,000 for the second quarter
compared to $124,699,000 for the second quarter of 1996. Operating income
increased 22% to $291,921,000 for the first six months of 1997 compared to
$238,902,000 for the first six months of 1996. The increase was due to higher
sales volume and lower wastepaper costs in both the company's domestic and
international operations. Fort Howard's operating income margin for the
second quarter of 1997 was 37.4% compared to 31.0% for the second quarter of
1996 and 34.5% in the first quarter of 1997. Fort Howard's operating income
margin for the first six months was 35.9% compared to 30.3% for the first six
months of 1996.
Net Income
For the second quarter of 1997, net income before an extraordinary item
was $58,889,000 an increase of 62% compared to second quarter 1996 net income
before an extraordinary item of $36,377,000. For the first six months of
1997, net income before an extraordinary item was $108,636,000, an increase
of 72% compared to the first six months of 1996 net income before an
extraordinary item of $63,317,000.
The net income after an extraordinary item was $0.77 per share in the
second quarter of 1997, compared to $0.48 per share in the second quarter of
1996. The net income after extraordinary item was $1.42 per share for the
first six months of 1997, compared to $0.91 per share in the first six months
of the previous year.
During the second quarter of 1996, Fort Howard completed a common stock
offering resulting in a higher level of outstanding shares in the three- and
six-month periods ended June 30, 1997, as compared to l996.
-- More --
-- Ad Two --
Extraordinary losses related to debt prepayments in 1997 and 1996 (see
Note to Financial Information) impacted the company's financial performance in
the first six months and the second quarters of 1997 and 1996.
Net Sales Performance
For the second quarter, Fort Howard's net sales increased 2.2% to
$411,415,000 compared to second quarter 1996 net sales of $402,397,000. Net
sales for each of the company's domestic, international and wastepaper
brokerage operations increased for the second quarter of 1997 compared to
second quarter 1996.
For the first six months of 1997, Fort Howard's net sales increased 3.0%
to $812,174,000 compared to the first six months of 1996 net sales of
$788,144,000. Net sales for each of the company's domestic, international,
and wastepaper brokerage operations increased for the first six months of 1997
compared to the first six months of 1996.
Fort Howard is a leading manufacturer and marketer of consumer tissue
products for both the away-from-home and at-home markets in the United States
and United Kingdom.
In the domestic at-home market, its principal brands include Mardi Gras
printed napkins (which holds 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. Prominent away-from-home market brands include the
Preference Ultra line of premium products, Preference near-premium products,
and the Envision line of environmentally positioned products.
(Financial information and note follow on separate pages. The note is an
integral part of these statements.)
# # # # #
FORT HOWARD CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
(In thousands, except per share amounts)
Net sales....................... $411,415 $402,397 $812,174 $788,144
Cost of sales................... 225,821 243,487 454,861 481,856
-------- -------- -------- --------
Gross income.................... 185,594 158,910 357,313 306,288
Selling, general and
administrative................ 31,910 34,211 65,392 67,386
-------- -------- -------- --------
Operating income................ 153,684 124,699 291,921 238,902
Interest expense................ 57,156 66,201 115,018 136,974
Other expense (income), net..... 655 475 1,435 1,038
-------- -------- -------- --------
Income before taxes............. 95,873 58,023 175,468 100,890
Income tax expense ............. 36,984 21,646 66,832 37,573
-------- -------- -------- --------
Net income before
extraordinary item............ 58,889 36,377 108,636 63,317
Extraordinary item -- loss
on debt repurchases, net...... (601) (3,340) (1,928) (3,340)
-------- -------- -------- --------
Net income ..................... $ 58,288 $ 33,037 $106,708 $ 59,977
======== ======== ======== ========
Net income per share:
Before extraordinary item..... $ 0.78 $ 0.53 $ 1.45 $ 0.96
Extraordinary item............ (0.01) (0.05) (0.03) (0.05)
-------- -------- -------- --------
Net income.................... $ 0.77 $ 0.48 $ 1.42 $ 0.91
======== ======== ======== ========
Average shares outstanding...... 75,215 68,759 74,875 66,066
======== ======== ======== ========
FORT HOWARD CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
-------- ------------
Assets (In thousands)
Current assets:
Cash and cash equivalents................. $ 4,107 $ 759
Receivables, less allowances of $3,389 in
1997 and $3,343 in 1996................. 77,466 63,194
Inventories............................... 150,061 151,248
Deferred income taxes..................... 48,000 60,000
Income taxes receivable................... -- 10,121
---------- ----------
Total current assets.................... 279,634 285,322
Property, plant and equipment............... 2,092,311 2,057,446
Less: Accumulated depreciation........... 856,067 809,650
---------- ----------
Net property, plant and equipment....... 1,236,244 1,247,796
Other assets................................ 69,964 82,262
---------- ----------
Total assets............................ $1,585,842 $1,615,380
========== ==========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable.......................... $ 106,402 $ 131,205
Interest payable.......................... 58,015 60,443
Income taxes payable...................... 3,684 7,700
Other current liabilities................. 80,649 110,357
Current portion of long-term debt......... 7,015 11,972
---------- ----------
Total current liabilities............... 255,765 321,677
Long-term debt.............................. 2,332,196 2,451,373
Deferred and other long-term income taxes... 259,561 247,464
Other liabilities........................... 48,517 49,703
Shareholders' deficit:
Common Stock.............................. 762 744
Additional paid-in capital................ 1,148,971 1,108,976
Cumulative translation adjustment......... 2,636 4,717
Retained deficit.......................... (2,462,566) (2,569,274)
---------- ----------
Total shareholders' deficit............. (1,310,197) (1,454,837)
---------- ----------
Total liabilities and shareholders'
deficit............................... $1,585,842 $1,615,380
========== ==========
FORT HOWARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
------------------
1997 1996
---- ----
(In thousands)
Cash provided from (used for) operations:
Net income ................................... $ 106,708 $ 59,977
Depreciation.................................. 51,569 50,231
Non-cash interest expense..................... 7,200 6,645
Deferred income tax expense................... 22,745 11,975
Pre-tax loss on debt repurchases.............. 3,186 5,519
Decrease in restricted cash................... 14,916 --
(Increase) decrease in receivables............ (14,272) 10,639
Decrease in inventories....................... 1,187 27,453
Decrease in income taxes receivable........... 10,121 --
Decrease in accounts payable.................. (24,803) (8,769)
Decrease in interest payable.................. (2,428) (3,391)
Increase (decrease) in income taxes payable... (4,016) 1,282
All other, net................................ (38,069) (8,891)
---------- ---------
Net cash provided from operations .......... 134,044 152,670
Cash used for investment activity:
Additions to property, plant and equipment.... (44,403) (24,384)
Cash provided from (used for) financing
activities:
Proceeds from long-term borrowings............ 36,300 192
Repayment of long-term borrowings............. (159,550) (332,529)
Debt issuance costs........................... -- (1,481)
Issuance of Common Stock, net of
offering costs.............................. 36,957 205,318
---------- ---------
Net cash used for financing activities...... (86,293) (128,500)
---------- ---------
Increase (decrease) in cash..................... 3,348 (214)
Cash at beginning of period..................... 759 946
---------- ---------
Cash at end of period......................... $ 4,107 $ 732
========== =========
FORT HOWARD CORPORATION
NOTE TO FINANCIAL INFORMATION
(Unaudited)
1. The Company's net income in the first six months and second quarter of
1997 was decreased by an extraordinary loss of $1.9 million and $0.6
million (net of income taxes of $1.3 million and $0.4 million),
respectively, representing the write-off of deferred loan costs
associated with the prepayment of a portion of the outstanding
indebtedness under the 1995 Bank Credit Agreement. The Company's net
income in the first six months and the second quarter of 1996 was
decreased by an extraordinary loss of $3.3 million (net of income taxes
of $2.2 million) representing the write-off of deferred loan costs
associated with the prepayment of a portion of the outstanding
indebtedness under the 1995 Bank Credit Agreement.
# # # # #
