SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-6901
FORT HOWARD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 39-1090992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1919 South Broadway, Green Bay, Wisconsin 54304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 414/435-8821
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1994
----- -----------------------------
Voting Common Stock, par value $.01 5,861,780
per share
PART I. FINANCIAL INFORMATION
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------
1994 1993
---- ----
(In thousands, except
per share data)
Net sales................................. $275,330 $284,814
Cost of sales............................. 188,495 189,300
-------- --------
Gross income.............................. 86,835 95,514
Selling, general and administrative....... 26,702 25,363
Amortization of goodwill.................. -- 14,192
-------- --------
Operating income.......................... 60,133 55,959
Interest expense.......................... 84,318 86,610
Other (income) expense, net............... 588 (253)
-------- --------
Loss before taxes......................... (24,773) (30,398)
Income tax credit......................... (9,601) (4,183)
-------- --------
Loss before extraordinary item............ (15,172) (26,215)
Extraordinary item -- loss on debt
repurchases (net of income taxes)....... (28,170) (9,760)
-------- --------
Net loss.................................. $(43,342) $(35,975)
======== ========
Loss per share:
Net loss before extraordinary item...... $ (2.59) $ (4.48)
Extraordinary item...................... (4.80) (1.66)
-------- --------
Net loss................................ $ (7.39) $ (6.14)
======== ========
Average shares outstanding................ 5,863 5,863
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1994 1993
--------- ------------
(In thousands)
Assets
Current assets:
Cash and cash equivalents................. $ 783 $ 227
Receivables, less allowances.............. 112,788 105,834
Inventories............................... 121,589 118,269
Deferred income taxes..................... 14,000 14,000
Income taxes receivable................... 11,600 9,500
---------- ----------
Total current assets.................... 260,760 247,830
Property, plant and equipment............... 1,875,241 1,845,052
Less: Accumulated depreciation........... 538,924 516,938
---------- ----------
Net property, plant and equipment....... 1,336,317 1,328,114
Other assets................................ 79,256 73,843
---------- ----------
Total assets............................ $1,676,333 $1,649,787
========== ==========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable.......................... $ 99,263 $ 101,665
Interest payable.......................... 32,731 54,854
Income taxes payable...................... 255 122
Other current liabilities................. 45,603 70,138
Current portion of long-term debt......... 14,234 112,750
---------- ----------
Total current liabilities............... 192,086 339,529
Long-term debt.............................. 3,351,550 3,109,838
Deferred and other long-term income taxes... 220,430 243,437
Other liabilities........................... 24,533 26,088
Voting Common Stock with put right.......... 11,820 11,820
Shareholders' equity (deficit):
Voting Common Stock....................... 600,459 600,459
Cumulative translation adjustment......... (4,910) (5,091)
Retained earnings (deficit)............... (2,719,635) (2,676,293)
---------- ----------
Total shareholders' equity (deficit).... (2,124,086) (2,080,925)
---------- ----------
Total liabilities and shareholders'
equity (deficit)...................... $1,676,333 $1,649,787
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------
1994 1993
---- ----
(In thousands)
Cash provided from (used for) operations:
Net loss........................................ $(43,342) $(35,975)
Depreciation and amortization................... 22,098 34,290
Non-cash interest expense....................... 21,287 36,650
Deferred income tax credit...................... (21,760) (7,097)
Pre-tax loss on debt repurchases................ 42,901 15,742
Increase in receivables......................... (6,954) (15,516)
(Increase) decrease in inventories.............. (3,320) 732
Increase in income taxes receivable............. (2,100) (5,500)
Decrease in accounts payable.................... (2,402) (13,828)
Increase (decrease) in interest payable......... (22,123) 23,732
Increase in income taxes payable................ 133 248
All other, net.................................. (28,646) (11,706)
-------- --------
Net cash provided from (used for) operations.. (44,228) 21,772
Cash used for investment activity --
Additions to property, plant and equipment...... (30,411) (34,259)
Cash provided from (used for) financing
activities:
Proceeds from long-term borrowings.............. 800,600 760,550
Repayment of long-term borrowings............... (703,770) (291,001)
Funds escrowed for debt repayment............... -- (435,500)
Debt issuance costs............................. (21,635) (21,335)
-------- --------
Net cash provided from financing activities... 75,195 12,714
-------- --------
Increase in cash.................................. 556 227
Cash at beginning of period....................... 227 188
-------- --------
Cash at end of period........................... $ 783 $ 415
======== ========
Supplemental Cash Flow Disclosures:
Interest paid................................... $ 88,014 $ 28,392
Income taxes paid - net......................... 691 168
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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FORT HOWARD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements reflect all adjustments
(consisting only of normally recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Certain reclassifications have been made to conform prior
years' data to the current format. These financial statements should be read
in conjunction with the Company's annual report on Form 10-K for 1993.
2. LOSS PER SHARE
Loss per share is computed on the basis of the average number of common
shares outstanding during the periods. The average number of shares
outstanding for the three-month periods ended March 31, 1994 and 1993 were
5,862,635 and 5,862,652, respectively.
3. INVENTORIES
Inventories consist of:
March 31, December 31,
1994 1993
--------- ------------
(In thousands)
Raw materials and supplies.............. $ 56,328 $ 61,285
Finished and partly-finished products... 65,261 56,984
-------- --------
$121,589 $118,269
======== ========
4. GOODWILL WRITE-OFF
Low industry operating rates and aggressive competitive pricing among
tissue producers resulting from the 1991-1992 recession, additions to industry
capacity and other factors adversely affected tissue industry operating
conditions and the Company's operating results beginning in 1991 and through
the third quarter of 1993.
As a result of these conditions, during the second quarter of 1993 the
Company commenced an evaluation of the carrying value of its goodwill for
possible impairment. The Company revised its projections and concluded its
evaluation in the third quarter of 1993 determining that its forecasted
cumulative net income before goodwill amortization was inadequate to recover
the future amortization of the Company's goodwill balance over the remaining
amortization period of the goodwill. Accordingly, the Company wrote off its
remaining goodwill balance of $1.98 billion in the third quarter of 1993.
- 5 -
5. LONG-TERM DEBT
On February 9, 1994, the Company sold $100 million principal amount of
8 1/4% Senior Unsecured Notes due 2002 (the "8 1/4% Notes") and $650 million
principal amount of 9% Senior Subordinated Notes due 2006 (the "9% Notes") in
a registered public offering (collectively, the "1994 Notes"). Proceeds from
the sale of the 1994 Notes have been applied to the repurchase of all the
remaining 12 3/8% Notes at the redemption price of 105% of the principal
amount thereof, to the repurchase of $238 million of 12 5/8% Debentures at the
redemption price of 105% of the principal amount thereof, to the prepayment of
$100 million of the Term Loan, to the repayment of a portion of the Company's
indebtedness under the Revolving Credit Facility and to the payment of fees
and expenses.
The 8 1/4% Notes are senior unsecured obligations of the Company, rank
equally in right of payment with the other senior indebtedness of the Company
and are senior to all existing and future subordinated indebtedness of the
Company. The 9% Notes are subordinated in right of payment to all existing
and future senior indebtedness of the Company, and constitute senior
indebtedness with respect to the 10% Notes, the 12 5/8% Debentures and the
14 1/8% Debentures.
In connection with the sale of the 1994 Notes, the Company amended the
Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured
Note Agreement. Among other changes, the amendments reduced the required
ratio of earnings before non-cash charges, interest and taxes to cash interest
for the four fiscal quarters ending March 31, 1994, from 1.50 to 1.00 to 1.40
to 1.00.
The Company incurred an extraordinary loss of $28 million (net of income
taxes of $15 million) in the first quarter of 1994 representing the redemption
premiums on the repurchases of the 12 3/8% Notes and the 12 5/8% Debentures,
and the write-off of deferred loan costs associated with the repayment of the
$100 million of the Term Loan and the repurchases of the 12 3/8% Notes and the
12 5/8% Debentures.
At March 31, 1994 the available capacity under the Company's Revolving
Credit Facility was $56 million.
6. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to lawsuits and state and
federal administrative proceedings incidental to their businesses. Although
the final results in such suits and proceedings cannot be predicted with
certainty, it is the present opinion of management that they will not have a
material adverse effect on the Company's financial condition.
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FORT HOWARD CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Quarter 1994 Compared to 1993
Three Months Ended
March 31,
--------------------
1994 1993
---- ----
(In thousands,
except percentages)
Net sales:
Domestic tissue......................... $229,472 $241,190
International operations................ 32,500 34,285
Eliminations and other.................. 13,358 9,339
-------- --------
Consolidated............................ $275,330 $284,814
======== ========
Operating income:
Domestic tissue......................... $ 59,124 $ 53,239
International operations................ 494 2,494
Eliminations and other.................. 515 226
-------- --------
Consolidated............................ 60,133 55,959
Amortization of purchase accounting(1).. 2,901 17,181
Employee stock compensation............. -- 294
-------- --------
Adjusted operating income............. 63,034 73,434
Other depreciation........................ 19,197 17,109
-------- --------
EBDIAT................................ $ 82,231 $ 90,543
======== ========
Consolidated net loss..................... $(43,342) $(35,975)
======== ========
EBDIAT as a percent of net sales.......... 29.9% 31.8%
(1) In 1988, the Company was acquired in a transaction referred to as the
"Acquisition." The Acquisition was accounted for using the purchase method of
accounting resulting, among other things, in an increase of property, plant
and equipment to fair value and the allocation of $2.3 billion of purchase
cost to goodwill. Such increase in property, plant and equipment is amortized
over the lives of the respective assets. The increase in goodwill was
amortized over 40 years until the third quarter of 1993 when the Company wrote
off its remaining goodwill balance of $1.98 billion. See Note 4 to the
unaudited condensed consolidated financial statements.
Net Sales. Consolidated net sales decreased 3.3% to $275 million in the
first quarter of 1994 compared to $285 million in the first quarter of 1993.
Domestic tissue net sales decreased 4.9% in the first quarter of 1994 compared
to the first quarter of 1993 due to volume decreases that were partially
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offset by higher net selling prices. Business conditions remain extremely
competitive. During the first quarter of 1994, a period of seasonally lower
volume, the Company maintained its domestic price increases achieved through
year-end 1993, adversely affecting domestic sales volume for the first quarter
of 1994. Severe weather conditions also adversely affected domestic sales
volume during the first quarter of 1994. Net sales of the Company's
international operations decreased 5.2% in the first quarter of 1994 compared
to the first quarter of 1993 primarily due to significantly lower net selling
prices, partially offset by slightly higher volume.
Gross Income. For the first quarter of 1994, consolidated gross margins
decreased to 31.5% from 33.5% for the first quarter of 1993. Domestic tissue
gross margins decreased for the first quarter of 1994 compared to the first
quarter of 1993 primarily due to higher unit manufacturing costs attributable
to the underabsorption of fixed costs resulting from lower converting volume.
Gross margins of international operations also declined in the first quarter
of 1994 compared to the first quarter of 1993 principally due to the lower net
selling prices.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, as a percent of net sales, increased to 9.7% for the
first quarter of 1994 compared to 8.9% in 1993 principally due to the effects
of lower sales volume.
Goodwill Write-Off. Low industry operating rates and aggressive
competitive pricing among tissue producers resulting from the 1991-1992
recession, additions to industry capacity and other factors adversely affected
tissue industry operating conditions and the Company's operating results
beginning in 1991 and through the third quarter of 1993.
As a result of these conditions, during the second quarter of 1993 the
Company commenced an evaluation of the carrying value of its goodwill for
possible impairment. The Company revised its projections and concluded its
evaluation in the third quarter of 1993 determining that its forecasted
cumulative net income before goodwill amortization was inadequate to recover
the future amortization of the Company's goodwill balance over the remaining
amortization period of the goodwill. Accordingly, the Company wrote off its
remaining goodwill balance of $1.98 billion in the third quarter of 1993.
For a more detailed discussion of the methodology and assumptions
employed to assess the recoverability of the Company's goodwill, refer to Note
4 of the Company's 1993 audited consolidated financial statements.
Operating Income. Operating income increased to $60 million in the first
quarter of 1994 compared to $56 million in the first quarter of 1993. The
depreciation of asset write-ups to fair market value in purchase accounting is
charged against the Company's cost of sales and selling, general and
administrative expenses. Excluding this purchase accounting depreciation and
amortization of goodwill, adjusted operating income (as reported in the
preceding table) was $63 million and $73 million or 22.9% and 25.8% as a
percent of net sales in the first quarters of 1994 and 1993, respectively.
Adjusted operating income as a percent of net sales decreased in the first
quarter of 1994 compared to the first quarter of 1993 principally due to lower
domestic sales volume.
- 8-
EBDIAT. Earnings before depreciation, interest, amortization and taxes
("EBDIAT") decreased 9.2% to $82 million in the first quarter of 1994 from
$91 million in the first quarter of 1993. EBDIAT is reported by the Company,
not as a measure of operating results, but rather as a measure of the
Company's debt service ability. Certain financial and other restrictive
covenants in the Company's Bank Credit Agreement, Senior Secured Note
Agreement and other instruments governing the Company's indebtedness are based
on the Company's EBDIAT, subject to certain adjustments.
Income Taxes. The income tax credits for the first quarters of 1994 and
1993 principally reflect the reversal of previously provided deferred income
taxes.
Extraordinary Loss. The Company's net loss in the first quarter of 1994
was increased by an extraordinary loss of $28 million (net of income taxes of
$15 million) representing the redemption premiums on the repurchases of all
the Company's remaining 12 3/8% Notes at the redemption price of 105% of the
principal amount thereof and of $238 million of 12 5/8% Debentures at the
redemption price of 105% of the principal amount thereof on March 11, 1994,
and the write off of deferred loan costs associated with the repayment of
$100 million of the Term Loan on February 10, 1994, and the repurchases of the
12 3/8% Notes and the 12 5/8% Debentures. The Company's net loss in the
first quarter of 1993 was increased by an extraordinary loss of $10 million
(net of income taxes of $6 million) representing the write off of deferred
loan costs associated with the repayment of $250 million of the Term Loan on
March 23, 1993 and the repurchase of all the Company's 14 5/8% Debentures on
April 21, 1993.
Net Loss. For the first quarter of 1994, the Company's net loss
increased 20.5% to $43 million from $36 million in the first quarter of 1993.
FINANCIAL CONDITION
For the first three months of 1994, cash increased $556,000. Capital
additions of $30 million, debt repayments of $704 million, including the
repayment of $100 million of the Term Loan and the repurchases of all the
12 3/8% Notes and of $238 million of 12 5/8% Debentures, and cash used for
operations of $44 million, were funded by net proceeds of the sale of 8 1/4%
Senior Notes and 9% Senior Subordinated Notes of $728 million and net
Revolving Credit Facility borrowings of $51 million.
On February 9, 1994 the Company sold $100 million principal amount of
8 1/4% Senior Unsecured Notes due 2002 (the "8 1/4% Notes") and $650 million
principal amount of 9% Senior Subordinated Notes due 2006 (the "9% Notes") in
a registered public offering (collectively, the "1994 Notes"). Proceeds from
the sale of the 1994 Notes have been applied to the repurchase of all the
remaining 12 3/8% Notes at the redemption price of 105% of the principal
amount thereof, to the repurchase of $238 million of 12 5/8% Debentures at the
redemption price of 105% of the principal amount thereof, to the prepayment of
$100 million of the Term Loan, to the repayment of a portion of the Company's
indebtedness under the Revolving Credit Facility and to the payment of fees
and expenses.
- 9 -
The 8 1/4% Notes are senior unsecured obligations of the Company, rank
equally in right of payment with the other senior indebtedness of the Company
and are senior to all existing and future subordinated indebtedness of the
Company. The 9% Notes are subordinated in right of payment to all existing
and future senior indebtedness of the Company, and constitute senior
indebtedness with respect to the 10% Notes, the 12 5/8% Debentures and the
14 1/8% Debentures.
In connection with the sale of the 1994 Notes, the Company amended the
Bank Credit Agreement, the 1993 Term Loan Agreement and the Senior Secured
Note Agreement. Among other changes, the amendments reduced the required
ratio of earnings before non-cash charges, interest and taxes to cash interest
for the four fiscal quarters ending March 31, 1994, from 1.50 to 1.00 to 1.40
to 1.00.
The Company believes that cash provided by operations and access to debt
financing in the public and private markets will be sufficient to enable it to
fund maintenance and modernization capital expenditures and meet its debt
service requirements for the foreseeable future. However, in the absence of
improved financial results, the Company may be required to seek a waiver of
the cash interest coverage covenant under the Bank Credit Agreement, the 1993
Term Loan Agreement and the Senior Secured Note Agreement as early as the
fourth quarter of 1994, because the Company's 14 1/8% Debentures will accrue
interest in cash commencing on November 1, 1994 and will require payments of
interest in cash on May 1, 1995. Although the Company believes that it will
be able to obtain appropriate waivers from its lenders, there can be no
assurance that this will be the case.
The Company has a Revolving Credit Facility under the Company's Bank
Credit Agreement with a final maturity of December 31, 1996, which may be used
for general corporate purposes. At March 31, 1994, the Company had
$56 million in available capacity under the Revolving Credit Facility.
- 10 -
PART II. OTHER INFORMATION
1. LEGAL PROCEEDINGS
None
2. CHANGES IN SECURITIES
None
3. DEFAULTS UPON SENIOR SECURITIES
None
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
5. OTHER INFORMATION
None
6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits: None.
b) No reports on Form 8-K were filed by the Company during the
quarter for which this report is filed.
- 11 -
FORT HOWARD CORPORATION
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORT HOWARD CORPORATION
Registrant
May 12, 1994 /s/ Kathleen J. Hempel
Kathleen J. Hempel, Vice Chairman and
Chief Financial Officer
May 12, 1994 /s/ James W. Nellen II
James W. Nellen II, Vice President
and Secretary
May 12, 1994 /s/ Charles L. Szews
Charles L. Szews
Controller (Principal
Accounting Officer)
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