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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 1996 Commission File Number: 33-93494
CROWN PAPER CO.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1752385
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Lakeside Drive, Oakland, CA 94612-3592
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(510) 874-3400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
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 _____
Number of shares of no par value common stock outstanding as of the close of
business on August 9, 1996:
One (1) share which is owned by Crown Vantage Inc.
----------------------------------------------------
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INDEX
CROWN PAPER CO.
PART I: Financial Information
Item 1. Financial Statements
- Condensed Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995.
- Condensed Consolidated Statements of Operations - Three months
and six months ended June 30, 1996 and June 25, 1995.
- Condensed Consolidated Statements of Cash Flows - Six months
ended June 30, 1996 and June 25, 1995.
- Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II: Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
CROWN PAPER CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
ASSETS June 30, 1996 December 31, 1995
------------- -----------------
(UNAUDITED)
Current Assets:
Cash and cash equivalents $ 12,704 $ 5,335
Accounts receivable, net 53,191 106,674
Inventories 99,362 100,422
Prepaid expenses and other current
assets 6,256 8,832
Deferred income taxes 14,899 14,899
-------- --------
Total current assets 186,412 236,162
Property, plant and equipment, net 668,056 668,340
Other assets 42,031 39,952
Unamortized debt issue costs 15,912 16,448
Intangibles, net 30,664 31,226
-------- --------
Total Assets $943,075 $992,128
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 51,132 $ 57,569
Accrued liabilities 79,493 81,616
Current portion of long-term debt 7,589 11,883
-------- --------
Total current liabilities 138,214 151,068
Long-term debt 424,165 469,901
Accrued postretirement benefits other than
pensions 101,032 100,358
Accrued pension 15,898 14,235
Other long-term liabilities 12,235 11,341
Deferred income taxes 106,133 106,379
-------- --------
Total Liabilities 797,677 853,282
-------- --------
Shareholder's Equity:
Preferred Stock, no par value;
Authorized - 5,000 shares;
Issued and outstanding - None
Common Stock, no par value;
Authorized - 5,000 shares;
Issued and outstanding - one (1)
share at June 30, 1996
and December 31, 1995. 126,949 125,537
Minimum pension liability (1,311) (1,311)
Cumulative foreign currency translation
adjustment (200) (1,348)
Retained earnings 19,960 15,968
-------- --------
145,398 138,846
-------- --------
Total Liabilities and Shareholder's Equity $943,075 $992,128
======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CROWN PAPER CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Second Quarter (13 weeks) and Six Months (26 weeks)
Ended June 30, 1996 and June 25, 1995
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE)
Second Quarter Six Months
----------------------- --------------------
1996 1995 1996 1995
-------- ------- -------- --------
(UNAUDITED) (UNAUDITED)
Net sales $230,564 $272,253 $483,417 $533,930
Cost of goods sold 208,019 239,536 428,455 468,191
-------- -------- -------- --------
Gross margin 22,545 32,717 54,962 65,739
Selling and administrative
expenses 12,392 15,139 24,340 28,098
-------- -------- -------- --------
Operating Income 10,153 17,578 30,622 37,641
Interest expense (12,487) (496) (25,371) (985)
Other income, net 647 300 1,373 251
-------- -------- -------- --------
Income (loss) before income
taxes (1,687) 17,382 6,624 36,907
Provision (benefit) for income
taxes (672) 6,984 2,632 14,763
-------- -------- -------- --------
NET INCOME (LOSS) $ (1,015) $ 10,398 $ 3,992 $ 22,144
======== ======== ======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS .
4
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CROWN PAPER CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months (26 weeks)
Ended June 30 1996 and June 25 1995
(IN THOUSANDS OF DOLLARS)
Six Months
-------------------
1996 1995
-------- -------
(UNAUDITED)
Cash Provided by (Used for) Operating Activities:
Net income $ 3,992 $22,144
Items not affecting cash:
Depreciation and cost of timber harvested 37,583 39,276
Amortization of goodwill and other intangibles 562 563
Other, net 3,130 1,811
Changes in current assets and liabilities:
Accounts receivable (includes $40,000 sold in
1996) 53,483 116
Inventories 1,061 (6,872)
Other current assets (437) (332)
Accounts payable (6,438) 5,041
Other current liabilities (2,600) (3,931)
Other, net 4,379 (535)
------- -------
Cash Provided by Operating Activities 94,715 57,281
------- -------
Cash Provided by (Used for) Investing Activities:
Expenditures for property, plant and equipment (37,652) (22,321)
Other, net 353 694
Cash Used for Investing Activities (37,299) (21,627)
-------- ---------
Cash Provided by (Used for) Financing Activities:
Proceeds from draw down of Revolving Credit 106,000 --
Repayments of Revolving Credit (109,000) --
Repayments of Term Loans and other long-term debt (47,047) (644)
James River capital (withdrawal) infusion -- (45,150)
------- ---------
Cash Used for Financing Activities (50,047) (45,794)
------- ---------
Increase (decrease) in cash and cash equivalents 7,369 (10,140)
Cash and cash equivalents at beginning of period 5,335 12,435
------- --------
Cash and cash equivalents at end of period $12,704 $ 2,295
======= ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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CROWN PAPER CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION
Crown Paper Co. and subsidiaries (the "Company") is a wholly owned
subsidiary of Crown Vantage Inc. Crown Vantage Inc. (the "Parent") became an
independent company after the Board of Directors of James River Corporation of
Virginia ("James River") approved the spin-off of assets, liabilities and
operations which comprised a substantial part of James River's Communication
Papers Business and the paper-based part of its Food and Consumer Packaging
Business ("Predecessor Business"). At the close of business on August 25, 1995,
James River distributed to its common shareholders all of the outstanding shares
of the Company (the "Distribution"). The Distribution was made in the form of a
tax-free dividend on the basis of one share of the Parent's common stock for
every ten shares of James River common stock. A total of 8,446,362 shares of
the Parent's common stock were issued and began trading on NASDAQ on August 28,
1995.
James River transferred to the Company certain assets of the Predecessor
Business and the Company assumed certain related liabilities from James River.
In addition, the Company received $250 million in cash through a public offering
of Senior Subordinated Notes and $253 million from initial borrowings under
credit facilities with certain banks (collectively, the "Financing"). The
proceeds from the Financing after payment of expenses and retention of $1.2
million cash ($485 million) were paid to James River together with $100 million
Senior Pay-in-Kind Notes issued by the Parent, as a return of James River's
capital investment. The Distribution, transfer of assets and liabilities,
Financing and return of capital are collectively referred to as the "Spin-Off."
Also in connection with the Spin-Off, the Company entered into a
Contribution Agreement and certain transition agreements with James River. The
Company will rely on such agreements for certain services, and the supply of a
portion of the products used in the Company's manufacturing business, generally
over terms of one to three years, at agreed to prices consistent with market
terms.
NOTE 2 -- BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements include the
consolidated operations, assets and liabilities of the Company for the three
months and six months ended June 30, 1996 and the combined historical
operations, assets and liabilities of the Predecessor Business while a part of
James River for the three months and six months ended June 25, 1995. For
simplicity of presentation, these financial statements are referred to as
consolidated financial statements herein.
The condensed consolidated financial statements for the quarter and six
months ended June 25, 1995 have been prepared as if the Company had operated as
an independent stand-alone entity, except the Company generally did not have
significant borrowings, and there was no allocation of James River's
consolidated borrowings, and related interest expense, except for interest
capitalized as a component of properties. During the period ended June 25,
1995, the Company engaged in various transactions with James River and its
affiliates that are characteristic of a group of companies under common control.
Throughout this period, the Company participated in James River's centralized
cash management system and, as such, its cash funding requirements were met by
James River. The Company was charged by James River for direct costs and
expenses associated with its operations which have been included in cost of
goods sold or selling and administrative expenses, as appropriate. James
River's administrative costs not directly attributable to the
6
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Company, which historically had not been allocated, have been allocated to the
Company for the quarter and six months ended June 25, 1995 based on net sales
and are included in selling and administrative expense.
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. The condensed consolidated balance sheet as of December
31, 1995 was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months and six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 29, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in Crown Paper Co.'s Form 10-K for
the year ended December 31, 1995.
The Company adopted Statement of Financial Accounting Standards No. 121
("Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of") in the first quarter of 1996. Adoption of Statement of
Financial Accounting Standards No. 121 did not have a material effect on the
Company's financial position or results of operations.
NOTE 3 -- INCOME TAX
Historically the Company has been included in the consolidated federal and
combined/unitary state income tax returns of James River. Income taxes in the
consolidated financial statements for the quarter and six months ended June 25,
1995 represent the Company's share of James River's income tax provision which
is intended to approximate the amount which would have been recognized had the
Company filed separate income tax returns. Income taxes for the quarter and six
months ended June 30, 1996 have been provided at the Company's estimated
effective rate (approximately 39.75%) for the year ending December 29, 1996.
NOTE 4 -- LONG TERM DEBT
Consolidated long-term debt consists of the following:
June 30 December 31
1996 1995
---------- -------------
(IN THOUSANDS OF DOLLARS)
Bank Credit Facility:
Revolving credit, due 2002 $ 7,000 $ 10,000
Term Loan A, due 2002 53,553 97,500
Term Loan B, due 2003 99,250 99,750
---------- -------------
159,803 207,250
11% Senior Subordinated Notes, due 2005 250,000 250,000
Industrial Revenue Bonds, payable to 2022 21,951 24,182
10% Note, payable in 1996 -- 353
---------- -------------
431,754 481,785
Less current portion 7,589 11,883
---------- -------------
$424,165 $469,901
========== =============
In June 1996, the Company pre-paid $40 million on Term Loan A using proceeds
obtained through the sale of certain accounts receivable (Note 7).
7
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Maturities of long-term debt (after giving effect to the prepayment of Term Loan
A) for the next five fiscal year ends are: 1997 - $7.5 million; 1998 - $9.7
million; 1999 - $9.7 million; 2000 - $10.1 million; and 2001 - $23.1 million.
NOTE 5 -- INVENTORIES
June 30, December 31,
1996 1995
---------- -------------
(IN THOUSANDS OF DOLLARS)
Raw material $ 26,562 $ 37,238
Work in process 4,266 5,856
Finished goods 46,639 40,745
Stores and supplies 34,373 35,141
---------- -------------
111,840 118,980
Reduction to state inventories at last-in,
first-out cost (12,478) (18,558)
---------- -------------
$ 99,362 $100,422
========== =============
NOTE 6 -- LITIGATION AND ENVIRONMENTAL MATTERS
The Company is a party to various legal proceedings generally incidental to
its business and is subject to a variety of environmental protection statutes
and regulations. As is the case with other companies in similar industries, the
Company faces exposure from actual or potential claims and legal proceedings
involving environmental matters. Although the ultimate disposition of legal
proceedings cannot be predicted with certainty, it is the present opinion of the
Company's management that the outcome of any claim which is pending or
threatened, either individually or on a combined basis, will not have a
materially adverse effect on the consolidated financial position of the Company
but could materially affect consolidated results of operations in a given
period.
In addition, the Company has been identified as a potentially responsible
party, along with others, under the Comprehensive Environmental Response,
Compensation and Liability Act or similar federal and state laws regarding the
past disposal of wastes at approximately 20 sites in the United States. It is
the Company's policy to accrue remediation costs when it is probable that such
costs will be incurred and when they can be reasonably estimated. Estimates of
future response costs are necessarily imprecise due to, among other things, the
possible identification of presently unknown sites and the allocation of costs
among potentially responsible parties with respect to any such sites. However,
based upon its previous experience with respect to the cleanup of hazardous
substances as well as the regular detailed review of its known hazardous waste
sites and estimated costs to remediate certain sites, the Company has accrued
$11.6 million and $11.0 million at June 30, 1996 and December 31, 1995
respectively. The liabilities can change substantially due to such factors as
the solvency of other potentially responsible parties, additional information on
the nature or extent of contamination, methods of remediation required, and
other actions by governmental agencies or private parties. Although the Company
has accrued cleanup and remediation liabilities currently, expenditures
generally are paid over an extended period of time, in some cases as long as 30
years. While it is not feasible to predict the outcome of all environmental
liabilities, based on the most recent review by management of these matters,
management is of the opinion that its share of the costs of investigation and
remediation of the sites of which it is currently aware will not have a material
adverse effect upon the consolidated financial position of the Company.
8
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However, because of uncertainties associated with remediation activities,
regulations, technologies, and the allocation of costs among various other
parties, actual costs to be incurred at identified sites may vary from
estimates. Therefore, management is unable to determine if the ultimate
disposition of all known environmental liabilities will have a material adverse
effect on the Company's consolidated results of operations in a given year. The
accruals recorded by the Company are periodically reviewed for their adequacy,
and the Company will continue to review the status of all significant existing
or potential environmental issues and adjust its accruals as necessary. The
accruals do not reflect any possible future insurance recoveries. In addition,
as is the case with most manufacturing and many other entities, there can be no
assurance that the Company will not be named as a potentially responsible party
at additional sites in the future or that the costs associated with such
additional sites would not be material.
In December 1993, the EPA published draft rules which contain proposed
regulations affecting pulp and paper industry discharges of wastewater and
gaseous emissions ("Cluster Rules"). The final Cluster Rules were scheduled to
be issued in late 1995; however, their issuance is now anticipated to occur no
earlier than the fourth quarter of 1996 with compliance required three years
later. These Cluster Rules may require significant changes in the pulping,
bleaching and/or wastewater treatment processes presently used in some U.S. pulp
and paper mills, including some of the Company's mills. Although it is
reasonably possible that the implementation of the Cluster Rules could
materially impact the Company's expenditures between 1997 and 2000, it is not
currently possible to estimate such amounts.
NOTE 7 -- SALE OF ACCOUNTS RECEIVABLE
In June 1996, the Company entered into a five year agreement which provides
for the sale of an undivided interest in a $40 million revolving pool of trade
accounts receivable. As collections reduce accounts receivable included in the
pool, the Company sells undivided interests in new receivables in order to bring
the amount sold up to $40 million. The agreement provides for a maximum
allowable amount of accounts receivable that can be sold of $60 million.
Proceeds from the sale, which are reported as operating cash flows in the
condensed consolidated statement of cash flows, were used to prepay $40 million
of long-term debt. The proceeds from the initial and subsequent sales are less
than the face amount of the undivided interests in accounts receivable sold.
The discount from the face amount, which totaled $270,000 in June 1996, is
included in other income, net in the condensed consolidated statement of
operations.
NOTE 8 -- NEW ACCOUNTING PRONOUNCEMENT
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125 ("Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities").
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125") provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. SFAS No. 125 would be effective
for transactions occurring after December 31, 1996. The Company does not
believe that adoption of SFAS No. 125 will have a material adverse effect on
its financial position or results of operations.
9
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NOTE 9 -- SUBSEQUENT EVENT
In July 1996, the Company completed an $18 million refinancing of certain
industrial revenue bonds issued by the Business Finance Authority of the State
of New Hampshire (the "Refunding Bonds"). The Refunding Bonds were issued to
refinance certain of the Company's pollution control and solid waste disposal
facilities located in the State of New Hampshire. The bonds are due January 1,
2022 and bear interest at 7.75%.
Also in July 1996, the Company finalized an agreement with the Business
Finance Authority of the State of New Hampshire whereby a total of $12.3 million
of bonds were sold (the "Project Bonds") to finance certain sewage and solid
waste disposal facilities to be used by the Company. Upon sale of the Project
Bonds, $2.6 million of proceeds were used to pre-pay Term Loan A and the
remaining net proceeds were deposited with a trustee to be used by the Company
as needed to finance eligible project costs. The Project Bonds bear interest at
7.875% and are due July 1, 2026.
NOTE 10 -- SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED STATEMENT
OF OPERATIONS
The following supplemental unaudited pro forma condensed statements of
operations are presented for informational purposes to present the results of
operations assuming that the Spin-Off of the Predecessor Business had occurred
as of December 26, 1994 and that the issuance of debt discussed in Note 1 had
occurred as of December 26, 1994. This information may not necessarily be
indicative of the future results of operations of the Company or what the
results of operations would have been had the Company operated as a separate
independent Company during the entire periods presented.
Six Months Ended
June 25, 1995
------------------------------------------
Pro forma
Historical Adjustments Pro forma
------------ -------------- ------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE)
Net sales $533,930 $ (500)(a) $533,430
Less:
Cost of goods sold 468,191 929(b) 469,120
------------ -------------- ------------
Gross margin 65,739 (1,429) 64,310
Selling and administrative
expenses 28,098 -- 28,098
------------ -------------- ------------
Operating Income 37,641 (1,429) 36,212
Interest expense (985) (24,496)(c) (25,481)
Other income 251 -- 251
------------ -------------- ------------
Income before income taxes 36,907 (25,925) 10,982
Provision for income taxes 14,763 (10,085)(d) 4,678
------------ -------------- ------------
NET INCOME $22,144 $(15,840) $6,304
============ ============== ============
10
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Three Months Ended
June 25, 1995
------------------------------------------
Pro forma
Historical Adjustments Pro forma
------------ -------------- ------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE)
Net sales $272,253 $ (250)(a) $272,003
Less:
Cost of goods sold 239,536 487(b) 240,023
------------ -------------- ------------
Gross margin 32,717 (737) 31,980
Selling and administrative
expenses 15,139 15,139
------------ -------------- ------------
Operating Income 17,578 (737) 16,841
Interest expense (496) (12,001)(c) (12,497)
Other income 300 -- 300
------------ -------------- ------------
Income before income taxes 17,382 (12,738) 4,644
Provision for income taxes 6,984 (4,955)(d) 2,029
------------ -------------- ------------
NET INCOME $ 10,398 $(7,783) $ 2,615
============ ============== ============
(a) Historically, the Company has produced approximately 38,000 tons of creped
paper for converting to toweling for sale to James River's Consumer
Products Business at the Company's cost to produce. In connection with the
Spin-Off, the Company has entered into a product supply agreement whereby
the Company will supply to James River creped paper for converting to
toweling amounting to up to 20,000 tons annually at an agreed upon price.
The financial effect of this agreement would have decreased each of net
sales and income before income taxes by approximately $500,000 for the six
months of 1995 and $250,000 for the three months of 1995. The Company
will utilize the remaining 18,000 tons of capacity as it deems appropriate.
No adjustment has been made in the pro forma statements with respect to the
Company's utilization of this remaining capacity.
(b) Historically, when the Company has purchased pulp from facilities within
James River, the purchase price of the pulp was reflected at existing
published prices less a discount ranging from 0% to 9% based upon a
combination of prevailing market prices and volumes purchased. Beginning
August 28, 1995, based upon a three year Pulp Purchase Agreement entered
into by the Company and James River, the price of such pulp purchases will
be at existing published prices less a discount ranging from 0% to 6%
based upon a combination of prevailing market prices and volumes purchased.
The effect of this agreement, if it was consummated at the beginning of the
period presented, would have increased cost of goods sold by approximately
$929,000 for the six months of 1995 and $487,000 for the three months of
1995.
(c) Reflects pro forma increases in the Company's interest expense assuming
that amounts outstanding in 1996 with respect to the Senior Subordinated
Notes and borrowings under the Bank Credit Facility were outstanding during
the corresponding period in 1995. Pro forma interest expense also includes
line of credit fees, guaranty fees for IRB's and commitment fees on the
unused portion of the Revolver for the periods presented. Included in pro
forma interest expense is the amortization of the pro rata portion of debt
issue costs related to the Financings which will be amortized over the
lives of the related indebtedness. Variable rate debt of the Company is
subject to ongoing interest rate fluctuations. The effect of a 1% increase
in the interest rate on these borrowings would have the impact of
increasing interest expense by approximately $1.3 million for the six
months of 1995 and $0.6 million for the three months of 1995.
(d) Reflects the effects of the pro forma adjustments on income tax expense
using an estimated marginal tax rate of 38.9% for the periods presented.
11
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Crown Paper Co. and subsidiaries (the "Company") together with its Parent,
Crown Vantage Inc., were organized to effect the Spin-off of certain assets of
James River Corporation of Virginia ("James River") to its shareholders. Prior
to the Spin-off, the Company and its Parent had never operated as separate,
stand-alone companies.
The following management's discussion and analysis of certain significant
factors affecting the Company's results of operations during the periods
included in the accompanying condensed consolidated statements of operations and
changes in the Company's financial condition since December 31, 1995 is made on
a historical basis. Historical results of Crown Paper Co. include the actual
operations of the Company for the three months and six months ended June 30,
1996, and the combined historical operations of the Predecessor Business while a
part of James River for the three months and six months ended June 25, 1995.
James River provided certain corporate general and administrative services to
the Company prior to the Spin-Off. These overhead costs for the quarter and six
months ended June 25, 1995 have been allocated to the Company based upon net
sales and are included in selling and administrative expenses.
The Company is a major producer of value-added paper products for a diverse
array of end-uses. The Company's two business sectors and corresponding
principal product categories are (i) printing and publishing papers, for
applications such as special interest magazines, books, custom business forms
and corporate communications and promotions (e.g., annual reports and
stationery); and (ii) specialty papers, principally for food and retail
packaging applications and conversion into such items as coffee filters, cups
and plates.
The Company operates 11 facilities using 33 diverse paper machines. The
Company's two largest facilities are integrated operations located in St.
Francisville, Louisiana and Berlin and Gorham, New Hampshire. St. Francisville
produces coated groundwood papers for magazines and catalogs and uncoated
specialty converting papers. Berlin-Gorham primarily produces uncoated printing
and publishing papers as well as market pulp. The Company also produces
uncoated printing and publishing papers at its non-integrated facilities in
Adams, Massachusetts; Newark, Delaware; Ypsilanti, Michigan; and Dalmore and
Guardbridge, Scotland. The Company's food and retail packaging papers are
produced primarily at non-integrated facilities in Port Huron and Parchment,
Michigan and Milford, New Jersey. In addition to its primary paper-making
operations, the Company operates a cast-coating facility in Richmond, Virginia.
12
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RESULTS OF OPERATIONS
The Company's net sales for each business sector as well as pulp and
miscellaneous, are as follows:
Net Sales and Tonnage by Sector
for the Six Months Ended
June 30, 1996 June 25, 1995
---------------------- ----------------------
Tons Sales Tons Sales
----------- ---------- ----------- ----------
(thousands) (millions) (thousands) (millions)
Printing and Publishing Papers
Coated groundwood 124.0 $117.4 139.0 $117.5
Uncoated 121.8 124.5 122.3 136.3
Specialty Papers
Food and retail packaging 119.2 160.0 131.3 180.5
Converting 80.2 75.1 86.1 79.4
Pulp and Miscellaneous 17.1 6.4 22.7 20.2
----------- ---------- ----------- ----------
462.3 $483.4 501.4 $533.9
=========== ========== =========== ==========
Net Sales and Tonnage by Sector
for the Quarter Ended
June 30, 1996 June 25, 1995
---------------------- ----------------------
Tons Sales Tons Sales
----------- ---------- ----------- ----------
(thousands) (millions) (thousands) (millions)
Printing and Publishing Papers
Coated groundwood 60.4 $ 53.6 68.6 $ 61.3
Uncoated 60.3 58.8 58.6 68.4
Specialty Papers
Food and retail packaging 59.3 75.3 65.3 91.8
Converting 43.2 38.7 41.5 42.0
Pulp and Miscellaneous 13.9 4.2 11.5 8.8
----------- ---------- ----------- ----------
237.1 $230.6 245.5 $272.3
=========== ========== =========== ==========
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NET SALES
The Company's net sales decreased 9.5% to $483.4 million for the six
months ended June 30, 1996 as compared to $533.9 million for the same period in
1995. Net sales decreased 15.3% to $230.6 million for the three months ended
June 30,1996 as compared to $ 272.3 million for the same period in 1995. The
decrease for the six month period of 1996 resulted primarily from a 7.8% decline
in volume as compared to the same period in 1995. Average selling price per ton
for the six months in 1996 declined 1.8% to $1,046 as compared to $1,065 in
1995. The decrease in sales for the quarter ended June 30, 1996 as compared to
the quarter ended June 25, 1995 was principally due to a 12.3% decline in
average selling price per ton, coupled with a 3.4% decrease in sales volume.
Net sales of coated groundwood paper (which is used principally in the
production of magazines and catalogs) for the six month period ended June 30,
1996 were $117.4, virtually unchanged as compared to the same period in 1995.
Sales volume decreased 15,000 tons for the first six months of 1996 compared to
1995. Volume declines were offset by a 12.0% increase in average selling price
per ton for the first six months of 1996 over 1995. Net sales of coated
groundwood papers decreased $7.7 million in the second quarter of 1996 as
compared to the second quarter of 1995, a 12.6% decline. This decrease in sales
is due to the combined effect of a 12.0% decrease in volume and a 1% decrease
in average selling price.
Net sales of uncoated printing and publishing papers decreased from $136.3
million for the first six months of 1995 to $124.5 million for the first six
months of 1996, a 8.7% decline. Average selling price per ton for the first six
months of 1996 declined by $92 (or 8.3%) as compared to the same period in 1995,
while 1996 sales volume was consistent with 1995. Net sales of uncoated
printing and publishing papers in the second quarter of 1996 were $58.8 million,
down $9.6 million from the second quarter of 1995. The decrease in net sales is
primarily due to a 16.5% decline in average selling price per ton in the second
quarter of 1996 as compared to the second quarter of 1995.
Food and retail packaging paper net sales totaled $160.0 million during the
first six months of 1996, a $20.5 million decline from the same period in 1995.
The 11.4% decrease in net sales is the result of a l2,100 ton decrease in sales
volume. Average selling price per ton declined by 2.4% during the six month
period ended June 30, 1996 compared to the same period in 1995. For the second
quarter of 1996, net sales were $75.3 million, down $16.5 million from second
quarter 1995. Average selling price per ton in the second quarter of 1996 was
$1,270, down 9.7% from the average selling price of $1,406 in the second quarter
of 1995. Tons sold in the second quarter of 1996 were down 6,000 from the same
period in 1995.
Net sales of specialty converting papers during the first six months of
1996 were $75.1 million, a 5.4% decrease compared to the first six months of
1995. The decrease is the result of a 6.9% decrease in tons sold in 1996
compared to 1995 partially offset by a 1.5% increase in average selling price
per ton. Net sales of specialty converting papers in the second quarter of
1996 totaled $38.7 million, a 7.9% decrease from second quarter 1995 net sales
of $42.0 million. Tons sold in the second quarter of 1996 were 43,200, a 4.1%
increase over the same period in 1995. However, average selling price per ton
in the second quarter of 1996 declined $116 to $896 as compared to $1,0l2 in
the second quarter of 1995.
14
<PAGE>
Net sales of pulp and miscellaneous products decreased to $6.4 million for
the six months ended June 30, 1996 as compared to $20.2 million in the same
period in 1995. Tons sold in the six month period of 1996 decreased to 17,100
tons compared to 22,700 tons in the same period of 1995. This decrease was due
primarily to the increased internal use of pulp produced by the Company. In the
second quarter, net sales of pulp and miscellaneous products decreased from $8.8
million in 1995 to $4.2 million million in 1996. Tons sold increased to 13,900
in the second quarter of 1996 from 11,500 in the second quarter of 1995.
OPERATING INCOME
Operating Income by Operating Income by
Sector for the Sector for the
Quarter Ended Six Months Ended
(Millions) (Millions)
---------------------- ----------------------
June 30, June 25, June 30, June 25,
1996 1995 1996 1995
----------- ---------- ----------- ----------
Printing and Publishing Papers $ 8.2 $12.9 $22.1 $26.1
Food and retail packaging 3.7 (1.7) 5.2 (2.8)
Converting 3.5 3.6 9.5 8.7
Pulp and Miscellaneous (5.2) 2.8 (6.2) 5.6
----------- ---------- ----------- ----------
$10.2 $17.6 $30.6 $37.6
=========== ========== =========== ==========
The Company had operating income of $30.6 million for the six month period
in 1996 compared to operating income of $37.6 million for the same period in
1995. In the second quarter of 1996, operating income was $10.2 million, a $7.4
million decline from the second quarter of 1995.
Operating income for printing and publishing papers decreased to $22.1
million in the six months of 1996 compared to $26.1 million for 1995. The
decrease in operating income resulted primarily from the decrease in uncoated
paper prices discussed above as well as increased costs of energy and labor due
to adverse weather conditions in 1996. Operating income of $8.2 million in the
second quarter of 1996 declined by $4.7 million from the second quarter of 1995
primarily because of the 8.3% decline in average selling price discussed above.
Food and retail packaging operating income increased from a loss of $2.8
million for the first six months of 1995 to a profit of $ 5.2 million in the
first six months of 1996. The increase in operating profits is attributable to a
23% decrease in pulp costs and cost reduction initiatives implemented in 1996.
The Company's packaging mills are non-integrated and, as a result, operating
results generally improve during periods of declining pulp costs. Operating
results improved from a loss of $1.7 million in the second quarter of 1995 to
income of $3.7 million in the second quarter of 1996. Second quarter 1996
operating results improved as a result of the lower pulp costs and cost
reduction initiatives discussed above.
Operating income for converting papers increased to $9.5 million in the six
months of 1996 as compared to $8.7 million in the first six months of 1995. The
increase in operating profits is attributable to an increase in tons sold at the
Company's cast coating facility which generally produces higher margin products.
Operating profits for the second quarter of 1996 were $3.5 million, virtually
unchanged from operating profits of $3.6 million in the second quarter of 1995.
15
<PAGE>
Selling and administrative expenses decreased $3.8 million for the six
month period of 1996, compared to the same period in 1995 as a result of cost
savings as a stand-alone company. For the second quarter, selling and
administrative expenses were down $2.7 million in 1996 compared to 1995.
INTEREST EXPENSE
Interest expense increased $24.4 million and $12.0 million for the six
month and three month periods of 1996, compared to the same periods in 1995 as a
result of the borrowings incurred in connection with the Spin-Off (see
Liquidity and Sources of Capital).
LIQUIDITY AND SOURCES OF CAPITAL
Prior to the Spin-Off, the assets of the Company comprised a substantial
part of the Communications Paper Business and the paper-based part of the Food
and Consumer Packaging Business of James River. For the period presented for
1995, the Company participated in James River's centralized cash management
system and, as such, its cash funding requirements, if any, were met by James
River. Since consummation of the Spin-Off, the Company no longer has any such
financial arrangements with James River and now relies on internally generated
funds and its ability to access funds from the equity and debt markets.
In connection with the Spin-Off, the Company obtained $250 million in
financing through a public offering of Senior Subordinated Notes and $253
million initial borrowing under a $350 million credit facility from a group of
banks (collectively, the "Financing"). The net proceeds from the Financing were
paid to James River together with $100 million Senior Pay-in-Kind Notes, issued
by the Company's Parent, as a return of James River's capital investment.
Under the bank credit facility the revolving credit available is in the
aggregate amount of $150 million with a $75 million sublimit for letters of
credit (of which $40 million has been issued at June 30, 1996) and can be used
for general corporate purposes, working capital needs, letters of credit and
permitted investments. At June 30, 1996, $7.0 million of the revolving credit
was outstanding.
Principal amounts on the Term Loan A and Term Loan B are due in quarterly
installments together with accrued interest. In addition to scheduled
repayments, the Company is obligated to make prepayments upon the occurrence of
certain events. During June 1996, the Company prepaid $40 million on Term Loan A
using proceeds from the sale of certain trade accounts receivable (see below).
The Company anticipates that cash flows provided by operating activities will be
sufficient to pay its operating expenses and satisfy its debt repayments for the
remainder of 1996.
Cash flows provided by operating activities were $94.7 million for the six
months ended June 30, 1996 compared to $57.3 million in the first six months of
1995. The significant increase in operating cash flows is due to the sale of
$40 million of trade accounts receivable in June 1996 (see Note 7). Earnings
before interest, taxes, depreciation and amortization (EBITDA) were $70.1
million for the first six months of 1996, as compared to $77.7 million in 1995.
16
<PAGE>
The Company's capital expenditures for the six months ended June 30, 1996
were $37.7 million compared to $22.3 million in the same period in 1995. A
fully-integrated pulp and paper mill generally consists of an extensive network
of buildings, machines and equipment, which require continual upgrade,
replacement, modernization and improvement to remain competitive and meet
changing customer preferences and regulatory requirements. The Company's
strategic capital plans involve aggregate capital expenditure for the remainder
of 1996 of approximately $45 million. These capital expenditures will be
financed primarily by cash flows from operations.
In July 1996, the Company completed an $18 million refinancing of certain
industrial revenue bonds issued by the Business Finance Authority of the State
of New Hampshire (the "Refunding Bonds"). The Refunding Bonds were issued to
refinance certain of the Company's pollution control and solid waste disposal
facilities located in the State of New Hampshire. The bonds are due January 1,
2022 and bear interest at 7.75%.
Also in July 1996, the Company finalized an agreement with the Business
Finance Authority of the State of New Hampshire whereby a total of $12.3 million
of bonds were sold (the "Project Bonds") to finance certain sewage and solid
waste disposal facilities to be used by the Company. Upon sale of the Project
Bonds, $2.6 million of proceeds were used to pre-pay Term Loan A and the
remaining proceeds were deposited with a trustee to be used by the Company as
needed to finance eligible project costs. The Project Bonds bear interest at
7.875% and are due July 1, 2026.
17
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Ex. 27 Financial Data Schedules
(b) Reports on Form 8-K --
Forms 8-K and 8-K/A dated June 25, 1996 and June 28, 1996, respectively,
pursuant to Item 4 of such forms (Change in Registrants Certifying
Accountant)
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN PAPER CO.
(Registrant)
/s/ Charles H. Shreve
- -------------------------------------
Charles H. Shreve
Senior Vice President,
Chief Accounting Officer
(Duly Authorized Officer and
Chief Accounting Officer)
August 13, 1996
19
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 12,704
<SECURITIES> 0
<RECEIVABLES> 53,730
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<INVENTORY> 99,362
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<CURRENT-LIABILITIES> 138,214
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0
<COMMON> 126,949
<OTHER-SE> 18,449
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