SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) AUGUST 13, 1997
FORT JAMES CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA
(State or other jurisdiction of incorporation)
1-7911 54-0848173
(Commission File Number) (IRS Employer Identification Number)
120 TREDEGAR STREET, RICHMOND, VIRGINIA 23219
(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (804) 644-5411
JAMES RIVER CORPORATION OF VIRGINIA
(Former name, if changed since last report.)
<PAGE>
ITEM 2. ACQUISITIONS AND DISPOSITIONS OF ASSETS
On August 13, 1997, Fort James Corporation ("Fort James" or the
"Company") filed a press release announcing the completion of the merger between
James River Corporation of Virginia ("James River") and Fort Howard Corporation
("Fort Howard") pursuant to which Fort Howard became a wholly-owned subsidiary
of the Company (the "Merger"). The Company issued 104.8 million shares of its
common stock for all of the outstanding common stock of Fort Howard Corporation.
In connection with the Merger, the Company's corporate name was changed
from James River Corporation of Virginia to Fort James Corporation.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
A. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Fort Howard Corporation consolidated financial statements as of December 31,
1996, and December 31, 1995, for each of the years in the three-year period
ended December 31, 1996, and as of June 30, 1997 and 1996 and for the quarters
and six months then ended are filed herewith.
C. EXHIBITS.
23.1 Consent of Arthur Andersen LLP
99.1 Fort Howard Corporation consolidated financial statements as of
December 31, 1996, and December 31, 1995, and for each of the
years in the three-year period ended December 31, 1996.
99.2 Fort Howard Corporation condensed consolidated financial
statements as of June 30, 1997, and June 30, 1996, and for the
quarters and six months then ended.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FORT JAMES CORPORATION
By: /s/ William A. Paterson
-------------------------
William A. Paterson
Senior Vice President &
Controller
Date: August 25, 1997
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 8-K, into Fort James
Corporation's previously filed Registration Statement File Nos. 33-53413,
333-02213, 333-02217, 333-33431, 333-33435, 33-54491, 33-57153, 33-43894,
33-56657, and 2-83979 on Form S-8, serving as Post-Effective Amendment No. 5
to Registration Statement No. 2-64057, and as Post-Effective Amendment No. 2
to Registration Statement No. 2-76900.
/s/ ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
August 21, 1997.
Exhibit 99.1
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, 1996, and 1995, and the related consolidated statements of income
and cash flows for the years ended December 31, 1996, 1995 and 1994. 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, 1996, and 1995,
and the consolidated results of their operations and their cash flows for the
years ended December 31, 1996, 1995 and 1994, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 31, 1997.
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<PAGE>
FORT HOWARD CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Net sales............................ $ 1,580,771 $ 1,620,903 $ 1,274,445
Cost of sales........................ 944,257 1,139,378 867,357
----------- ----------- -----------
Gross income......................... 636,514 481,525 407,088
Selling, general and administrative.. 142,143 121,406 110,285
Environmental charge................. 18,000 -- 20,000
----------- ----------- -----------
Operating income..................... 476,371 360,119 276,803
Interest expense..................... 258,948 309,915 337,701
Other (income) expense, net.......... 2,923 (1,662) 118
----------- ----------- -----------
Income (loss) before taxes........... 214,500 51,866 (61,016)
Income taxes (credit)................ 43,767 18,401 (18,891)
----------- ----------- -----------
Income (loss) before extraordinary
items.............................. 170,733 33,465 (42,125)
Extraordinary items--losses on
debt repurchases (net of income
taxes of $5,313 in 1996, $11,986
in 1995 and $14,731 in 1994)....... (8,136) (18,748) (28,170)
----------- ----------- -----------
Net income (loss).................... $ 162,597 $ 14,717 $ (70,295)
=========== =========== ===========
Earnings (loss) per share:
Net income (loss) before
extraordinary items.............. $ 2.44 $ 0.57 $ (1.11)
Extraordinary items................ (0.12) (0.32) (0.74)
----------- ----------- -----------
Net income (loss).................. $ 2.32 $ 0.25 $ (1.85)
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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FORT HOWARD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
-------------------
1996 1995
---- ----
Assets
Current assets:
Cash and cash equivalents.................. $ 759 $ 946
Receivables, less allowances of $3,343
in 1996 and $2,883 in 1995............... 63,194 97,707
Inventories................................ 151,248 163,076
Deferred income taxes...................... 60,000 29,000
Income taxes receivable.................... 10,121 700
----------- -----------
Total current assets..................... 285,322 291,429
Property, plant and equipment................ 2,057,446 1,971,641
Less: Accumulated depreciation............. 809,650 706,394
----------- -----------
Net property, plant and equipment........ 1,247,796 1,265,247
Other assets................................. 82,262 95,761
----------- -----------
Total assets........................... $ 1,615,380 $ 1,652,437
=========== ===========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable........................... $ 131,205 $ 112,384
Interest payable........................... 60,443 64,375
Income taxes payable....................... 7,700 1,339
Other current liabilities.................. 110,357 85,351
Current portion of long-term debt.......... 11,972 62,720
----------- -----------
Total current liabilities................ 321,677 326,169
Long-term debt............................... 2,451,373 2,903,299
Deferred and other long-term income taxes.... 247,464 225,043
Other liabilities............................ 49,703 36,355
Shareholders' deficit:
Common Stock............................... 744 634
Additional paid-in capital................. 1,108,976 895,652
Cumulative translation adjustment.......... 4,717 (2,844)
Retained deficit........................... (2,569,274) (2,731,871)
----------- -----------
Total shareholders' deficit.............. (1,454,837) (1,838,429)
----------- -----------
Total liabilities and shareholders'
deficit.............................. $ 1,615,380 $ 1,652,437
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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FORT HOWARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Year Ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
Cash provided from (used for) operations:
Net income (loss)....................... $ 162,597 $ 14,717 $ (70,295)
Depreciation............................ 101,647 98,882 95,727
Non-cash interest expense............... 13,909 12,925 74,238
Deferred income taxes (credit).......... 27,402 4,418 (33,832)
Environmental charge.................... 18,000 -- 20,000
Pre-tax loss on debt repurchases........ 13,448 30,734 42,901
Restricted cash......................... (14,916) -- --
(Increase) decrease in receivables...... 34,513 25,443 (17,316)
(Increase) decrease in inventories...... 11,828 (32,233) (12,574)
(Increase) decrease in income taxes
receivable............................ (9,421) 4,500 4,300
Increase (decrease) in accounts payable. 18,821 11,403 (684)
Increase (decrease) in interest payable. (3,932) (19,898) 29,419
Increase in income taxes payable........ 6,361 1,115 102
All other, net.......................... (14,928) 4,930 (6,799)
---------- ---------- ----------
Net cash provided from operations... 365,329 156,936 125,187
Cash used for investment activities:
Additions to property, plant and
equipment............................. (73,436) (47,296) (83,559)
Cash provided from (used for)
financing activities:
Proceeds from long-term borrowings...... -- 1,467,800 750,000
Repayment of long-term borrowings....... (504,025) (1,810,966) (759,202)
Debt issuance costs..................... (1,489) (50,054) (32,134)
Issuance (repurchase) of Common
Stock, net of offering costs.......... 213,434 284,104 (97)
---------- ---------- ----------
Net cash used for financing
activities........................ (292,080) (109,116) (41,433)
---------- ---------- ----------
Increase (decrease) in cash............... (187) 524 195
Cash, beginning of year................... 946 422 227
---------- ---------- ----------
Cash, end of year................... $ 759 $ 946 $ 422
========== ========== ==========
Supplemental Cash Flow Disclosures:
Interest paid........................... $ 248,919 $ 317,866 $ 237,650
Income taxes paid (refunded), net....... 49,555 (5,728) 2,483
The accompanying notes are an integral part of these consolidated financial
statements.
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FORT HOWARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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
currently 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.
(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.
At December 31, 1996, the Company had $14,916,000 of cash restricted as
collateral under the terms of its 1995 Accounts Receivable Facility. This
restricted cash is recorded under "Other Assets" in the consolidated balance
sheet.
(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. The
elements of costs include materials, labor and overhead.
(E) PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment 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 5 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.
- 5 -
<PAGE>
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 1996, 1995 and 1994 were $1,487,000, $2,096,000 and $4,230,000,
respectively.
(F) REVENUE RECOGNITION -- Sales of the Company's tissue products are
recorded upon shipment of the products.
(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 or restoration 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. The Company's accounting policies
related to environmental expenditures are in accordance with AICPA Statement
of Position 96-1.
(H) 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 contributions plans were approximately $16,307,000,
$13,231,000 and $12,716,000 for 1996, 1995 and 1994, respectively.
Employees retiring prior to February 1, 1990, from the Company's U.S.
tissue operations who had met certain eligibility requirements are entitled to
postretirement health care benefit coverage (see Note 6). 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.
(I) INTEREST RATE CAP AGREEMENTS -- The costs of interest rate cap
agreements are amortized over the respective lives of the agreements.
(J) INCOME TAXES -- Deferred income taxes are provided to recognize
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities using enacted tax rates in effect in
the years in which the differences are expected to reverse. The principal
difference relates to depreciation expense. Deferred income tax expense
represents the change in the deferred income tax asset and liability balances,
excluding the deferred tax benefit related to extraordinary losses.
(K) 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
70,088,196, 58,227,712 and 38,103,215 for 1996, 1995 and 1994, respectively.
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<PAGE>
The assumed exercise of all outstanding stock options has been excluded from
the computation of earnings (loss) per share in 1996, 1995 and 1994 because
the result was not material or was antidilutive.
2. BALANCE SHEET INFORMATION
December 31,
------------------
1996 1995
---- ----
(In thousands)
Inventories
Raw materials and supplies........................ $ 70,595 $ 80,134
Finished and partly-finished products............. 80,653 82,942
---------- ----------
$ 151,248 $ 163,076
========== ==========
Property, Plant and Equipment
Land.............................................. $ 45,736 $ 45,523
Buildings......................................... 329,923 326,207
Machinery and equipment........................... 1,637,892 1,586,627
Construction in progress.......................... 43,895 13,284
---------- ----------
$2,057,446 $1,971,641
========== ==========
Capital Lease Assets (Included in Property, Plant
and Equipment Totals Above)
Buildings......................................... $ 4,448 $ 4,008
Machinery and equipment........................... 187,733 187,007
---------- ----------
Total assets under capital leases............. $ 192,181 $ 191,015
========== ==========
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<PAGE>
December 31,
-------------------
1996 1995
---- ----
(In thousands)
Other Assets
Deferred loan costs, net of accumulated amortization.. $ 62,787 $ 89,180
Prepayments and other................................. 4,559 6,581
Restricted cash....................................... 14,916 --
-------- --------
$ 82,262 $ 95,761
======== ========
Other Current Liabilities
Salaries and wages.................................... $ 61,657 $ 51,797
Contributions to employee benefit plans............... 16,938 13,226
Taxes other than income taxes......................... 6,769 6,442
Other accrued expenses................................ 24,993 13,886
-------- --------
$110,357 $ 85,351
======== ========
3. INCOME TAXES
Year Ended December 31,
----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Income Tax Provision
Current
Federal.................................. $ 2,632 $ (304) $ 1,800
State.................................... 2,761 768 509
Foreign.................................. 5,659 1,533 (2,099)
-------- -------- --------
Total current........................ 11,052 1,997 210
Deferred
Federal.................................. 27,954 17,227 (18,826)
State.................................... 3,281 (2,739) (2,793)
Foreign.................................. 1,480 1,916 2,518
-------- -------- --------
Total deferred....................... 32,715 16,404 (19,101)
-------- -------- --------
$ 43,767 $ 18,401 $(18,891)
======== ======== ========
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<PAGE>
Year Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Effective Tax Rate Reconciliation
U.S. federal tax rate...................... 35.0% 35.0% (34.0)%
State income taxes, net.................... 2.7 2.1 (4.1)
Long-term income taxes and interest........ (17.0) -- 3.3
Permanent differences related to accruals.. -- -- 3.3
Other, net................................. (0.3) (1.6) 0.5
--------- -------- --------
Effective tax rate......................... 20.4% 35.5% (31.0)%
========= ======== ========
Income (Loss) Before Income Taxes
Domestic................................... $ 195,284 $ 39,067 $(62,711)
Foreign.................................... 19,216 12,799 1,695
--------- -------- --------
$ 214,500 $ 51,866 $(61,016)
========= ======== ========
The net deferred income tax liability at December 31, 1996, includes
$252 million related to property, plant and equipment offset by federal and
state loss and tax credit carryforwards totaling $30 million and the tax
benefit of accruals which do not meet economic performance requirements for
income tax purposes totaling $35 million. 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 contested the
disallowance. In August 1994, the United States 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. The
decision in this case was not entered while the Company and the IRS completed
the administrative settlement of other adjustments that were not tried before
the United States Tax Court. During that period, Code Section 162(k) was
amended in August 1996 to provide that, retroactive to 1986, such Code Section
was not applicable to deductions for amounts properly allocable to
indebtedness and amortized over the term of such indebtedness.
On December 30, 1996, the United States Tax Court entered its decision
allowing the deductions claimed by the Company. As a result of that decision,
the Company has reversed in the fourth quarter of 1996 $36 million of income
taxes previously accrued for the tax years 1988 through 1995, thereby reducing
its income tax expense by $36 million for 1996. Of the $36 million, a
receivable of $10 million, including interest, has been recorded for amounts
previously paid with respect to this matter.
The Company will have approximately $27 million of net operating loss
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carryforwards as of December 31, 1996, for federal income tax purposes which
expire as follows: $18 million in 2010 and $9 million in 2011.
4. LONG-TERM DEBT
Long-term debt and capital lease obligations, including amounts payable
within one year, are summarized as follows:
December 31,
----------------
1996 1995
---- ----
(In thousands)
1995 Term Loan A, due in varying semi-annual
repayments with a final maturity of
March 16, 2002 (a).................................. $ 624,000 $ 810,000
1995 Term Loan B, due in varying semi-annual
repayments with a final maturity of
December 31, 2002 (b)............................... 119,000 330,000
1995 Revolving Credit Facility, due
March 16, 2002 (a).................................. 27,300 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... 618,097 650,000
Subordinated Notes, 10%, due March 15, 2003........... 298,500 300,000
Capital lease obligations, at interest rates
approximating 10.90%................................ 170,606 175,161
Pollution Control Revenue Refunding Bonds, 7.90%,
due October 1, 2005................................. 42,000 42,000
Debt of foreign subsidiaries, at rates ranging from
7.25% to 7.84%, due in varying annual installments
through March 2001.................................. 13,842 29,458
---------- ----------
2,463,345 2,966,019
Less: Current portion of long-term debt............... 11,972 62,720
---------- ----------
$2,451,373 $2,903,299
========== ==========
_____________________
(a) Interest on the 1995 Term Loan A and the 1995 Revolving Credit Facility
is payable at prime plus 0.75% or, subject to certain limitations, at a
reserve adjusted LIBOR rate plus 1.75% subject to downward adjustment if
certain financial criteria are met (at a weighted average rate of 7.55% at
December 31, 1996).
(b) Interest on the 1995 Term Loan B is payable at prime plus 1.50% or at a
reserve adjusted LIBOR rate plus 2.50% (at a weighted average rate of 8.08% at
December 31, 1996).
The Company incurred extraordinary losses of $8 million, $19 million, and
$28 million, net of income taxes of $5 million, $12 million and $15 million,
in 1996, 1995 and 1994, respectively, representing redemption premiums and
write-offs of deferred loan costs associated with refinancing transactions or
early repayment of debt 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
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<PAGE>
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 2.00%
fee with respect to any letters of credit issued under the 1995 Revolving
Credit Facility. At December 31, 1996, $27 million of borrowings reduced
available capacity under the 1995 Revolving Credit Facility to $273 million.
The aggregate annual maturities of long-term debt and capital lease
obligations for the five years succeeding December 31, 1996, are as follows:
1997-$11,972,000; 1998-$121,726,000; 1999-$133,724,000; 2000-$150,433,000 and
2001-$637,325,000.
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 $60 million and $63 million as of December 31,
1996 and 1995, respectively. 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, 1996, receivables totaling $57 million, inventories
totaling $151 million and property, plant and equipment with a net book value
of $1,238 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 $2,521 million and $2,975 million at
December 31, 1996, and 1995, respectively, compared to aggregate carrying
values of $2,463 million and $2,966 million at December 31, 1996 and 1995,
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 8% plus
the Company's borrowing margin until June 1, 1999. At current market rates at
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<PAGE>
December 31, 1996, the fair value of the Company's interest rate cap
agreements is $1 million compared to a carrying value of $8 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.
5. 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, 1996, are
as follows:
Year Ending December 31, Amount
------------------------ ------
(In thousands)
1997................................... $ 23,648
1998................................... 23,438
1999................................... 23,279
2000................................... 22,765
2001................................... 22,636
2002 and thereafter.................... 310,440
--------
Total payments......................... 426,206
Less imputed interest at
rates approximating 10.9%............ 255,600
--------
Present value of capital
lease obligations.................... $170,606
========
6. 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.
- 12 -
<PAGE>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(In thousands)
Net Periodic Postretirement Benefit Cost
Service cost...................................... $ 83 $ 82 $1,138
Interest cost..................................... 823 871 1,719
Curtailment gain recognized....................... -- (3,389) --
Amortization of prior service cost (benefit)...... (671) (671) 85
------ ------- ------
Net periodic postretirement benefit cost (gain). $ 235 $(3,107) $2,942
====== ======= ======
December 31,
----------------
1996 1995
---- ----
(In thousands)
Unfunded Accumulated Postretirement Benefit Obligation
Accumulated postretirement benefit obligation:
Retirees............................................ $ 7,906 $ 8,127
Fully eligible active plan participants............. 1,302 1,305
Other active plan participants...................... 1,733 1,980
------- -------
10,941 11,412
Unrecognized prior service benefit.................... 6,713 7,385
Unrecognized actuarial losses......................... (4) (435)
------- -------
Accrued postretirement benefit cost................... $17,650 $18,362
======= =======
The medical trend rate assumed in the determination of the accumulated
postretirement benefit obligation at December 31, 1996, begins at 9.5% in
1997, decreases 1% per year to 6.5% in 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, 1996, or net periodic
postretirement benefit cost.
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.5% compounded annually with respect to the 1996 and
1995 valuations.
7. SHAREHOLDERS' DEFICIT
The Company is authorized to issue up to 100,000,000 shares of $.01 par
value Common Stock. At December 31, 1996, 74,386,222 shares were issued and
74,380,921 shares were outstanding. At December 31, 1995, 63,377,326 shares
were issued and 63,370,794 shares were outstanding. 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, 1996 or December 31, 1995.
On May 15, 1996, the Company issued 10 million shares of Common Stock at
$20.25 per share (the "1996 Offering"). Proceeds from the 1996 Offering, net
- 13 -
<PAGE>
of underwriting commissions and other related expenses totaling $9 million,
were $194 million. On June 4, 1996, an additional 520,000 shares of Common
Stock were issued at $20.25 per share upon the exercise of a portion of the
underwriters' over-allotment option granted in connection with the 1996
Offering, resulting in additional new proceeds of $10 million after deducting
underwriting commissions. The proceeds of the sale of Common Stock was used
to prepay a portion of its indebtedness under the 1995 Bank Credit Agreement.
During 1996 the Company issued 419,074 shares of Common Stock at a
weighted average price of $15.42 per share as a result of stock option
exercises under the Company's employee stock option plans. The net proceeds
to the Company of $6 million from these stock option exercises were used to
prepay a portion of its indebtedness under the 1995 Bank Credit Agreement.
In March and April of 1995, the Company issued 25,269,555 shares of
Common Stock at $12.00 per share in the 1995 Offering. Proceeds from the 1995
Offering, net of underwriting commissions and other related expenses totaling
$19 million, were $284 million. The 1995 Offering was part of a
recapitalization plan 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.
Changes in Shareholders' Deficit Accounts
Additional Cumulative
Common Paid-in Translation Retained
Stock Capital Adjustment Deficit
------ ---------- ----------- --------
(In millions)
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)
Net income..................... -- -- -- 162.6
Common Stock offering.......... 0.1 203.6 -- --
Exercise of stock options...... 0.0 6.4 -- --
Tax benefits from exercise
of stock options............. -- 1.9 -- --
Other transactions............. 0.0 1.4 -- --
Foreign currency translation
adjustment................... -- -- 7.5 --
---- -------- ----- ---------
Balance, December 31, 1996....... $0.7 $1,109.0 $ 4.7 $(2,569.3)
==== ======== ===== =========
- 14 -
<PAGE>
8. STOCK OPTIONS
The Company has two stock option plans, 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 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, of which 2,854 shares have been granted at December 31, 1996. In
addition, stock options to purchase 3,317,834 shares were granted and remain
outstanding at December 31, 1996, under predecessor stock plans. The Company
accounts for these plans using the intrinsic value based method pursuant to
APB Opinion No. 25 and Statement of Financial Accounting Standards No. 123
("SFAS No. 123") under which compensation expense of $52,000 was recognized in
1996 and no compensation expense was recognized in 1995 and 1994. Had
compensation cost for these plans been determined pursuant to the fair value
method under SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts (in thousands,
except per share amounts):
1996 1995
----------------------- -----------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net Income................. $ 162,597 $ 161,260 $ 14,717 $ 14,127
Earnings Per Share......... $ 2.32 $ 2.30 $ 0.25 $ 0.24
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, and additional awards in future
years are anticipated, the effects of applying SFAS No. 123 in this pro forma
disclosure are not indicative of future amounts.
The fair value of the 1995 and 1996 option grants used to compute the
pro forma amounts above was estimated on the grant date using the Black-
Scholes option pricing model with the following assumptions used for grants in
1996 and 1995 respectively: risk free interest rates of 6.07% and 5.51%;
expected lives of 5 years and 5 years; and expected volatility of 19.26% and
24.32%. The dividend yield was assumed to be zero since the Company does not
anticipate paying dividends in the near term.
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 exercisability of stock options under the
1995 Stock Incentive Plan will be determined by the Compensation and
Nominating Committee of the Board of Directors. Pursuant to the 1995 Stock
Incentive Plan, 12,000 shares were granted as a Restricted Stock Award and
8,000 shares were granted as a Stock Equivalent Award in September 1996. In
December 1996, stock options to purchase 750,000 shares were also granted
pursuant to the 1995 Stock Incentive Plan.
- 15 -
<PAGE>
Changes in Stock Options Outstanding
Weighted Average
Exercise
Number Of Price
Options Per Option
--------- ----------------
Balance, December 31, 1993..................... 3,825,646 $16.22
Options Cancelled............................ (82,888) $16.06
--------- ------
Balance, December 31, 1994..................... 3,742,758 $16.22
Options Granted.............................. 743,000 $19.75
Options Cancelled............................ (2,600) $18.46
--------- ------
Balance, December 31, 1995..................... 4,483,158 $16.81
Options Granted.............................. 750,000 $27.75
Options Exercised............................ (419,074) $15.42
Options Cancelled............................ (29,750) $19.61
--------- ------
Balance, December 31, 1996..................... 4,784,334 $18.63
========= ======
Exercisable at December 31, 1996............... 3,557,134 $16.55
========= ======
Shares available for future grant at
December 31, 1996............................ 1,873,162
=========
3,317,834 of the 4,784,334 options outstanding at December 31, 1996 have
exercise prices of $15.38 or $18.46 with a weighted average exercise price of
$16.32 and a weighted average remaining contractual life of 2.6 years. All of
these options are exercisable. The remaining 1,466,500 options have exercise
prices of $19.75 or $27.75 with a weighted average exercise price of $23.84
and a weighted average remaining contractual life of 9.5 years. 239,300 of
these options are exercisable; their weighted average exercise price is
$19.75.
9. RELATED PARTY TRANSACTIONS
At December 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley Group")
and certain of its affiliates controlled 26% of the Company's Common Stock.
Morgan Stanley & Co. Incorporated ("MS&Co") has served as lead
underwriter with respect to the 1996 Offering, the 1995 Offering and periodic
public debt offerings and has received underwriting fees of $3 million in
1996, $7 million in 1995 and $20 million in 1994 in connection with such
public offerings. MS&Co is also a market maker with respect to the Company's
public debt securities. MS&Co also periodically provides financial advisory
services for the Company for which it receives customary fees. 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 1994. The Company is a party to several interest rate cap agreements (see
Note 4) including one such agreement with MS&Co which was purchased in 1994
for $2 million.
- 16 -
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
The Company is subject to a wide range of laws in the United States and
other countries that focus on 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. 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.
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 cost effective primary restoration of certain sediment deposits.
On January 30, 1997, the Company and six other companies (the "Seven
Companies") entered into an agreement with WDNR and the Wisconsin Department
of Justice ("WDOJ") to investigate claims for natural resources damages,
including sediment restoration claims, asserted against the Seven Companies
relating to releases of PCBs and other hazardous substances to the lower Fox
River ("Agreement") 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 underwrite a state led natural resources damage assessment.
The parties have agreed to toll certain statute of limitations and 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 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 for purposes of claims for natural resources damages under CERCLA,
commonly known as the "Superfund Act," and the Federal Water Pollution Control
Act arising from alleged releases of PCBs to the Fox River and Green Bay
system. The FWS alleges that natural resources including endangered species,
fish, birds and tribal lands or lands held by the United States in trust for
various tribes have been exposed to PCBs that were released from facilities
located along the Fox River. The FWS has begun an assessment to determine 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.
The Company recorded an additional environmental charge of $18 million in
the fourth quarter of 1996 reflecting revised estimates of costs for
environmental matters related to its operations, including legal and
consulting costs. The amounts accrued represent estimated gross undiscounted
amounts that are based on both internal and external estimates of restoration
as well as assumptions as to participation by other companies. The Company
expects these costs to be expended over an extended number of years and as of
December 31, 1996, has accrued liabilities for environmental matters of
approximately $37 million. The ultimate cost to the Company for environmental
- 17 -
<PAGE>
matters cannot be determined with certainty due to the unknown magnitude of
the contamination to be addressed, the varying cost of restoration methods
that could be employed, the evolving nature of restoration 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. 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 not increase or decrease. It is
reasonably possible that the Company's recorded estimate of these liabilities
may change.
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 results of
operations.
11. GEOGRAPHIC INFORMATION
United United
States Kingdom Consolidated
------ ------- ------------
(In thousands)
1996
Net sales........................ $ 1,404,935 $175,836 $ 1,580,771
Operating income................. 452,165 24,206 476,371
Identifiable operating assets.... 1,446,363 169,017 1,615,380
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
Intercompany sales and charges between geographic areas and export sales
are not material.
- 18 -
<PAGE>
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -----
(In millions, except per share data)
1996
Net sales................ $ 386 $ 402 $ 408 $ 385 $1,581
Gross income............. 147 159 174 156 636
Operating income (a)..... 114 125 135 102 476
Net income before
extraordinary item (a). 27 36 43 65 171
Extraordinary item-loss
on debt repurchases.... -- (3) -- (5) (8)
Net income............... 27 33 43 60 163
Earnings per share:
Net income before
extraordinary item (a) $ 0.43 $ 0.53 $ 0.58 $ 0.87 $ 2.44
Extraordinary item-loss
on debt repurchases.. -- (0.05) -- (0.06) (0.12)
Net income per share... $ 0.43 $ 0.48 $ 0.58 $ 0.81 $ 2.32
Dividends per share...... -- -- -- -- --
_____________________
(a) During the fourth quarter of 1996, the Company recorded an environmental
charge totaling $18 million and a credit of $36 million to income tax expense
reversing income taxes previously accrued for the tax years 1988 through 1995
for previously disallowed income tax deductions for fees and expenses related
to 1988 debt financing and refinancing transactions. Excluding the effects of
the environmental charge and the income tax expense reversal, the Company's
operating income, net income before extraordinary item and net income before
extraordinary item per share would have been $120 million, $39 million and
$0.52, respectively, for the fourth quarter and $494 million, $145 million and
$2.07, respectively, for the year 1996.
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -----
(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...... -- -- -- -- --
- 19 -
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.
- 1 -
<PAGE>
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.
- 2 -
<PAGE>
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.
- 3 -
<PAGE>
FORT HOWARD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements reflect all adjustments
(consisting only of normally recurring accruals) 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
====== ====== ====== ======
- 4 -
<PAGE>
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
======== ========
- 5 -
<PAGE>
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.
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