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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: 1-13868
- -------------------------------------------------------------------------------
CROWN VANTAGE INC.
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(Exact name of registrant as specified in its charter)
Virginia 54-1752384
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Lakeside Drive, Oakland, CA 94612-3592
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(Address of principal executive offices) (Zip Code)
(510) 874-3400
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(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 13, 1996:
9,093,135 Shares
--------------------------
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INDEX
CROWN VANTAGE INC.
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 VANTAGE INC.
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 9,518 8,832
Deferred income taxes 14,899 14,899
-------- --------
Total current assets 189,674 236,162
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 $946,337 $992,128
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 51,132 $ 57,569
Accrued liabilities 78,353 79,959
Current portion of long-term debt 7,589 11,883
-------- --------
Total current liabilities 137,074 149,411
Long-term debt 516,217 555,352
Accrued postretirement benefits
other than pensions 101,032 100,358
Accrued pension 15,898 14,235
Other long-term liabilities 16,258 15,507
Deferred income taxes 111,793 112,039
-------- --------
Total Liabilities 898,272 946,902
-------- --------
Shareholders' Equity:
Preferred Stock, no par value;
Authorized - 500,000 shares;
Issued and outstanding - None
Common Stock, no par value;
Authorized - 50,000,000 shares;
Issued and outstanding 9,093,135 and
8,917,661 shares at June 30, 1996
and December 31, 1995, respectively 46,130 44,539
Unearned ESOP shares and other (11,152) (11,152)
Cumulative foreign currency
translation adjustment (200) (1,348)
Retained earnings 13,287 13,187
-------- --------
48,065 45,226
-------- --------
Total Liabilities and Shareholders' Equity $946,337 $992,128
-------- --------
-------- --------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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CROWN VANTAGE INC.
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 (15,718) (496) (31,830) (985)
Other income, net 647 300 1,373 251
-------- -------- -------- --------
Income (loss) before
income taxes (4,918) 17,382 165 36,907
Provision (benefit) for income taxes (1,956) 6,984 65 14,763
-------- -------- -------- --------
NET INCOME (LOSS) $ (2,962) $ 10,398 $ 100 $ 22,144
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per share $ (.35) $ .01
-------- --------
-------- --------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS .
4
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CROWN VANTAGE INC.
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 $ 100 $22,144
Items not affecting cash:
Depreciation and cost of timber harvested 37,583 39,276
Amortization of goodwill and other intangibles 562 563
Interest on Pay-in-Kind Notes 6,459 -
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 (4,912) (3,931)
Other, net 4,124 (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 VANTAGE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION
Crown Vantage Inc. and subsidiaries (the "Company") 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 Company's common stock for every
ten shares of James River common stock. A total of 8,446,362 shares of the
Company'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 Company, 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 Crown Vantage Inc. (the
"Parent"), Crown Paper Co., and Crown Paper Co.'s consolidated subsidiaries
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 Vantage Inc.'s Annual Report to
Shareholders and 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 -- EARNINGS PER SHARE
The computation of earnings (loss) per share for the quarter and six
months ended June 30, 1996 is based on the weighted average number of shares
of common stock and dilutive common stock equivalents outstanding during the
period (8,562,097 and 8,543,021 for the three and six months ended June 30,
1996, respectively). The number of shares considered outstanding does not
include 308,289 unearned shares held by the Employee Stock Ownership Plan
Trust at June 30, 1996. In accordance with Statement of Position 93-6
("Employers' Accounting for Employee Stock Ownership Plans"), shares held by
the Trust are not considered outstanding for purposes of computing earnings
per share until the shares are committed for release from the Trust.
Earnings per share information is not presented for the quarter or six
months ended June 25, 1995 since the Company had no separate capital
structure until August 25, 1995. See Note 11 for pro forma earnings per
share information for the quarter and six months ended June 25, 1995.
NOTE 4 -- 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.
7
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NOTE 5 -- LONG TERM DEBT
Consolidated long-term debt consists of the following:
June 30 December 31
1996 1995
--------- -----------
(IN THOUSANDS OF DOLLARS)
CROWN PAPER CO.
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
CROWN VANTAGE INC.
11.45% Senior Pay-in-Kind Notes, due 2007
less unamortized discount 92,052 85,450
--------- ---------
523,806 567,235
Less current portion 7,589 11,883
--------- ---------
$ 516,217 $ 555,352
--------- ---------
--------- ---------
In June 1996, the Company pre-paid $40 million on Term Loan A using
proceeds obtained through the sale of certain accounts receivable (Note 8).
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 6 -- INVENTORIES
June 30, 1996 December 31, 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
-------- ----------
-------- ----------
8
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NOTE 7 -- 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.
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.
9
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NOTE 8 -- 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 9 -- NEW ACCOUNTING PRONOUNCEMENT
In July 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125 ("Transfers of Financial Assets
and Extinguishments of Liabilities"). Statement of Financial Accounting
Standards No. 125 ("SFAS No. 125") will require that both transferors and
transferees recognize the assets and liabilities (or components thereof) that
it controls and "derecognize" the assets that are surrendered or
extinguished in a transfer. 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.
NOTE 10 -- 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.
10
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NOTE 11 -- 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) (30,955)(c) (31,940)
Other income 251 -- 251
-------- -------- --------
Income before income taxes 36,907 (32,384) 4,523
Provision for income taxes 14,763 (12,597)(d) 2,166
-------- -------- --------
NET INCOME $22,144 $(19,787) $2,357
-------- -------- --------
-------- -------- --------
Pro forma earnings per share (e) $ .28
--------
--------
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) (15,315)(c) (15,811)
Other income 300 -- 300
-------- --------- --------
Income before income taxes 17,382 (16,052) 1,330
Provision for income taxes 6,984 (6,244)(d) 740
-------- --------- --------
NET INCOME $10,398 $ (9,808) $ 590
-------- --------- --------
-------- --------- --------
Pro forma earnings per share(e) $ .07
--------
--------
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(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
periods 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, Senior Pay-in-Kind 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.
(e) Pro forma earnings per share is computed based upon 8,562,097 and
8,543,021 assumed weighted average shares outstanding for the three month
and six month periods, respectively. The number of shares considered
outstanding does not include 308,289 shares held be the Employee Stock
Ownership Plan Trust. In accordance with generally accepted accounting
principles, shares held by the Trust are not considered outstanding for
earnings per share calculations until the shares are committed for release
from the Trust.
12
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Crown Vantage Inc. and subsidiaries (the "Company") 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 Company's common stock for every
ten shares of James River common stock. A total of 8,446,362 shares of the
Company's common stock were issued and began trading on NASDAQ on August 28,
1995.
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 Vantage
Inc. 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.
13
<PAGE>
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
------ ------ ------ ------
------ ------ ------ ------
14
<PAGE>
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 12,100 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 $1,012 in the second quarter of 1995.
15
<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
<TABLE>
<CAPTION>
Operating Income by Sector Operating Income by Sector
for the Quarter Ended for the Six Months Ended
(Millions) (Millions)
----------------------------- ------------------------------
June 30, 1996 June 25, 1995 June 30, 1996 June 25, 1995
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
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
------ ------- ------- ------
------ ------- ------- ------
</TABLE>
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.
16
<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 $30.8 million and $15.2 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 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
8). 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.
17
<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.
18
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Ex. 3(i) Articles of Amendment to Articles of Incorporation
Ex. 11 Statement re: Computation of Per Share Earnings
Ex. 27 Financial Data Schedule
(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)
19
<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 VANTAGE INC.
(Registrant)
/s/ Charles H. Shreve
- -----------------------------------
Charles H. Shreve
Senior Vice President,
Chief Accounting Officer
(Duly Authorized Officer and
Chief Accounting Officer)
August 13, 1996
20
<PAGE>
CROWN VANTAGE INC.
ARTICLES OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
1. NAME. The name of the Corporation is Crown Vantage Inc.
2. THE AMENDMENT. This Amendment (the "Amendment") deletes the words
"15,000 shares" as it appears with respect to shares of Preferred Stock in the
first sentence of the first paragraph of Article VIII of the Articles of
Incorporation (the "Articles") and substitutes in lieu thereof, the words
"50,000 shares", thereby increasing the number of designated shares of Preferred
Stock to be issued under Article VIII.
3. BOARD ACTION. The Board of Directors at its meeting on July 31,
1996, at which a quorum was present and acting throughout, found the Amendment
to be in the best interest of the Corporation. The Board of Directors is
authorized by Article IV of the Articles to adopt Articles of Amendment to
provide for the designation of one or more series of Preferred Stock, and
accordingly, shareholder approval is not required.
Dated: July 31, 1996
CROWN VANTAGE INC.
By: /s/ Ernest S. Leopold
----------------------------
Chairman, President and Chief
Executive Officer
21
<PAGE>
EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share earnings)
Six Months Ended June 30, 1996
------------------------------
Primary Fully Diluted
------------- -------------
Average shares outstanding 8,539 8,541
Effect of dilutive stock options - based on
the treasury stock method using average
market price, which is greater than
period end market price 4 4
------------- -------------
Totals 8,543 8,545
============= =============
Net income $ 100 $ 100
============= =============
Earnings per share $ .01 $ .01
============= =============
Three Months Ended June 30, 1996
------------------------------
Primary Fully Diluted
------------- -------------
Average shares outstanding 8,562 8,563
Effect of dilutive stock options - because of
the Company's net loss, assumed conversion
of stock options would be anti-dilutive 0 0
------------- -------------
Totals 8,562 8,563
============= =============
Net loss $(2,962) $(2,962)
============= =============
Loss per share $ (.35) $ (.35)
============= =============
No earnings per share amounts are presented for the quarter or six months
ended June 25, 1995 since the Company had no separate capital structure until
August 25, 1995.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<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
<ALLOWANCES> 539
<INVENTORY> 99,362
<CURRENT-ASSETS> 189,674
<PP&E> 1,194,137
<DEPRECIATION> 526,081
<TOTAL-ASSETS> 946,337
<CURRENT-LIABILITIES> 137,074
<BONDS> 0
0
0
<COMMON> 46,130
<OTHER-SE> 1,935
<TOTAL-LIABILITY-AND-EQUITY> 946,337
<SALES> 483,417
<TOTAL-REVENUES> 483,417
<CGS> 428,455
<TOTAL-COSTS> 428,455
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 533
<INTEREST-EXPENSE> 31,830
<INCOME-PRETAX> 165
<INCOME-TAX> 65
<INCOME-CONTINUING> 100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
