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, 1995 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-20473
FORT HOWARD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 39-1090992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1919 South Broadway, Green Bay, Wisconsin 54304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 414/435-8821
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 26, 1995
----- -----------------------------
Common Stock, par value $.01
per share 63,370,794
PART I. FINANCIAL INFORMATION
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------
1995 1994
---- ----
(In thousands, except
per share data)
Net sales................................. $367,376 $275,330
Cost of sales............................. 267,856 188,495
-------- --------
Gross income.............................. 99,520 86,835
Selling, general and administrative....... 28,745 26,702
-------- --------
Operating income.......................... 70,775 60,133
Interest expense.......................... 86,770 84,318
Other (income) expense, net............... (224) 588
-------- --------
Loss before taxes......................... (15,771) (24,773)
Income tax credit......................... (6,253) (9,601)
-------- --------
Loss before extraordinary item............ (9,518) (15,172)
Extraordinary item -- loss on debt
repurchases (net of income taxes
of $11,986 in 1995 and $14,731 in
in 1994)................................ (18,748) (28,170)
-------- --------
Net loss.................................. $(28,266) $(43,342)
======== ========
Loss per share:
Net loss before extraordinary item...... $ (0.22) $ (0.40)
Extraordinary item...................... (0.44) (0.74)
-------- --------
Net loss................................ $ (0.66) $ (1.14)
======== ========
Average shares outstanding................ 42,546 38,107
======== ========
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,
1995 1994
--------- ------------
(In thousands)
Assets
Current assets:
Cash and cash equivalents................. $ 210 $ 422
Receivables, less allowances of $1,675
in 1995 and $1,589 in 1994.............. 139,284 123,150
Inventories............................... 145,311 130,843
Deferred income taxes..................... 20,000 20,000
Income taxes receivable................... 8,200 5,200
---------- ----------
Total current assets.................... 313,005 279,615
Property, plant and equipment............... 1,949,068 1,932,713
Less: Accumulated depreciation........... 637,574 611,762
---------- ----------
Net property, plant and equipment....... 1,311,494 1,320,951
Other assets................................ 101,326 80,332
---------- ----------
Total assets............................ $1,725,825 $1,680,898
========== ==========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable.......................... $ 126,809 $ 100,981
Interest payable.......................... 63,192 84,273
Income taxes payable...................... 112 224
Other current liabilities................. 50,595 75,450
Current portion of long-term debt......... 11,669 116,203
---------- ----------
Total current liabilities............... 252,377 377,131
Long-term debt.............................. 3,123,994 3,189,644
Deferred and other long-term income taxes... 194,231 209,697
Other liabilities........................... 37,332 41,162
Common Stock with put right................. -- 11,711
Shareholders' deficit:
Common Stock.............................. 631 381
Additional paid-in capital................ 892,598 600,090
Cumulative translation adjustment......... (484) (2,330)
Retained deficit.......................... (2,774,854) (2,746,588)
---------- ----------
Total shareholders' deficit............. (1,882,109) (2,148,447)
---------- ----------
Total liabilities and shareholders'
deficit............................... $1,725,825 $1,680,898
========== ==========
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,
------------------
1995 1994
---- ----
(In thousands)
Cash provided from (used for) operations:
Net loss........................................ $(28,266) $(43,342)
Depreciation.................................... 24,331 22,098
Non-cash interest expense....................... 3,223 21,287
Deferred income tax credit...................... (16,191) (21,760)
Pre-tax loss on debt repurchases................ 30,734 42,901
Increase in receivables......................... (16,134) (6,954)
Increase in inventories......................... (14,468) (3,320)
Increase in income taxes receivable............. (3,000) (2,100)
Increase (decrease) in accounts payable......... 25,828 (2,402)
Decrease in interest payable.................... (21,081) (22,123)
Increase (decrease) in income taxes payable..... (112) 133
All other, net.................................. (30,281) (28,646)
-------- --------
Net cash used for operations.................. (45,417) (44,228)
Cash used for investment activity --
Additions to property, plant and equipment...... (10,845) (30,411)
Cash provided from (used for) financing
activities:
Proceeds from long-term borrowings.............. 655,800 800,600
Repayment of long-term borrowings............... (832,596) (703,770)
Debt issuance costs............................. (48,201) (21,635)
Issuance of Common Stock, net of offering costs. 281,047 --
-------- --------
Net cash provided from financing activities... 56,050 75,195
-------- --------
Increase (decrease) in cash....................... (212) 556
Cash at beginning of period....................... 422 227
-------- --------
Cash at end of period........................... $ 210 $ 783
======== ========
Supplemental Cash Flow Disclosures:
Interest paid................................... $105,660 $ 88,014
Income taxes paid - net......................... 956 691
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 the year
ended December 31, 1994.
2. COMMON STOCK SPLIT
On January 31, 1995, the Company's shareholders approved an increase in
the number of authorized shares of voting Common Stock to 99,400,000 shares
and approved a 6.5-for-one stock split of the Common Stock, effective
January 31, 1995. All share and per share amounts included in the condensed
consolidated financial statements and notes thereto have been restated to give
effect to the increase in authorized shares and the stock split.
3. LOSS PER SHARE
Loss per share is computed on the basis of the weighted average number of
common shares outstanding during the periods. The weighted average number of
common shares outstanding for the three month periods ended March 31, 1995 and
1994 were 42,545,683 and 38,107,128, respectively. The assumed exercise of
all outstanding stock options has been excluded from the computation of loss
per share for the three month periods ended March 31, 1995 and 1994 because
the results were antidilutive.
4. INVENTORIES
Inventories consist of:
March 31, December 31,
1995 1994
--------- ------------
(In thousands)
Raw materials and supplies.............. $ 65,330 $ 63,721
Finished and partly-finished products... 79,981 67,122
-------- --------
$145,311 $130,843
======== ========
5. COMMON STOCK OFFERING
On March 16, 1995, the Company issued 25 million shares of Common Stock
at $12.00 per share in a public offering (the "Offering"). Proceeds from the
Offering, net of underwriting commissions and other related expenses totaling
$19 million, were $281 million. On April 12, 1995, an additional 269,555
shares of Common Stock were issued at $12.00 per share upon the exercise of a
portion of the underwriters' over-allotment option granted in connection with
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the Offering, resulting in additional net proceeds of $3 million after
deducting underwriting commissions. The Offering was part of a
recapitalization plan (the "Recapitalization") implemented by the Company to
prepay or redeem a substantial portion of its indebtedness in order to reduce
the level and overall cost of its debt, extend certain debt maturities,
increase shareholders' equity and enhance its access to capital markets (see
Note 6).
The balance of Common Stock with put right of approximately $12 million
was reclassified to Common Stock and Additional Paid-In Capital in the
accompanying condensed consolidated financial statements because the put right
terminated effective with the consummation of the Offering.
6. LONG-TERM DEBT
As a part of the Recapitalization (see Note 5), the Company entered into
a bank credit agreement (the "New Bank Credit Agreement") consisting of a
$300 million revolving credit facility (the "1995 Revolving Credit Facility"),
an $810 million term loan (the "1995 Term Loan A") and a $330 million term
loan (the "1995 Term Loan B" and together with the 1995 Term Loan A, the "New
Term Loans"); and entered into a receivables credit agreement consisting of a
$60 million term loan (the "1995 Receivables Facility"). On March 16, 1995,
the net proceeds of the Offering, together with borrowings of $652 million
under the New Bank Credit Agreement, were used to prepay or repurchase all the
outstanding indebtedness under the 1988 Bank Credit Agreement, the 1993 Term
Loan and the Senior Secured Notes. On April 14, 1995, further borrowings of
$762 million under the New Bank Credit Agreement and 1995 Receivables Facility
were used to redeem on April 15, 1995 all outstanding 14 1/8% Debentures (at
par) and 12 5/8% Debentures (at 102.5% of the principal amount thereof).
The Company incurred an extraordinary loss of $19 million (net of income
taxes of $12 million) in the first quarter of 1995 representing the redemption
premiums on the repurchases of all the Company's outstanding 12 5/8%
Debentures at the redemption price of 102.5% of the principal amount thereof
and write-offs of deferred loan costs associated with the prepayment or
repurchases of all indebtedness outstanding under the Company's 1988 Bank
Credit Agreement, the 1993 Bank Term Loan and the Senior Secured Notes on
March 16, 1995, and the redemption of all outstanding 12 5/8% Debentures and
14 1/8% Debentures on April 15, 1995.
The New Bank Credit Agreement and the 1995 Receivables Facility include
restrictions on the Company's operating activities and require the maintenance
of certain financial ratios at prescribed levels. The Company believes that
such limitations should not impair its plans for continued maintenance and
modernization of facilities or other operating activities.
At March 31, 1995, the available capacity under the Company's 1995
Revolving Credit Facility was $271 million. On April 15, 1995, following the
redemption of the 14 1/8% Debentures and 12 5/8% Debentures, the available
capacity under the Company's 1995 Revolving Credit Facility had declined to
$91 million.
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7. 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, the Company currently believes that the ultimate resolution of all
such lawsuits and proceedings, after taking into account the liabilities
accrued with respect to such matters, will not have a material adverse effect
on the Company's financial condition or on its results of operations.
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FORT HOWARD CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Quarter 1995 Compared to 1994
Three Months Ended
March 31,
--------------------
1995 1994
---- ----
(In thousands,
except percentages)
Net sales:
Domestic tissue......................... $293,928 $229,370
International operations................ 36,187 32,500
Harmon.................................. 37,261 13,460
-------- --------
Consolidated............................ $367,376 $275,330
======== ========
Operating income:
Domestic tissue......................... $ 67,364 $ 59,288
International operations................ 1,972 495
Harmon.................................. 1,439 350
-------- --------
Consolidated............................ 70,775 60,133
Depreciation.............................. 24,331 22,098
-------- --------
EBITDA(a)............................. $ 95,106 $ 82,231
======== ========
Consolidated net loss..................... $(28,266) $(43,342)
======== ========
EBITDA as a percent of net sales(a)....... 25.9% 29.9%
- ---------------------
(a) EBITDA 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 New Bank
Credit Agreement and other instruments governing the Company's
indebtedness are based on the Company's EBITDA, subject to certain
adjustments.
Net Sales. Consolidated net sales increased 33.4% to $367 million in the
first quarter of 1995 compared to $275 million in the first quarter of 1994.
Domestic tissue net sales increased 28.1% in the first quarter of 1995
compared to the first quarter of 1994 due to a 17.5% increase in sales volume
and a 9.0% increase in net selling prices. Sales volume growth for the first
quarter of 1995 was significant in both the commercial and consumer markets
but stronger in the commercial market where shipments had fallen significantly
during the first quarter of 1994 compared to the first quarter of 1993. Net
selling prices increased to a greater extent in the commercial market than in
the consumer market for the first quarter of 1995 compared to the first
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quarter of 1994. From the fourth quarter of 1994 to the first quarter of
1995, overall domestic net selling prices increased 8.7% as a result of price
increase announcements for the commercial market effective mid-October 1994
and January 1995 and for the consumer market effective January 1995. Price
improvement occurred at a slightly higher pace from the fourth quarter of 1994
to the first quarter of 1995 in the commercial market compared to the consumer
market. The Company has announced further domestic price increases for the
commercial market effective April 1995 and for the consumer market effective
mid-May 1995. Because historically a substantial portion of the Company's
commercial sales were pursuant to contracts which specified pricing over
periods up to one year, there is a time lag before the Company realizes the
full benefit of commercial market price increases. In recent months as
commercial contracts have been renewed, the Company has reduced the periods of
its price guarantees of those contracts to a maximum of three months.
Net sales of the Company's international operations increased 11.3% in
the first quarter of 1995 compared to the first quarter of 1994 due to a 6.9%
increase in net selling prices on flat volume plus the benefit from the change
in foreign exchange rates. The 176.8% increase in net sales of the Company's
wastepaper brokerage subsidiary, Harmon Associates Corp. ("Harmon"),
principally reflects higher selling prices and, to a much lesser degree,
higher sales volume.
Gross Income. For the first quarter of 1995, consolidated gross income
increased 14.6% to $100 million from $87 million for the first quarter of 1994
due to the higher selling prices and sales volumes, partially offset by higher
raw material costs. Consolidated gross margins decreased to 27.1% for the
first quarter of 1995 from 31.5% for the first quarter of 1994. Domestic
tissue gross margins decreased for the first quarter of 1995 compared to the
first quarter of 1994 primarily due to rapidly escalating wastepaper prices
experienced in the second half of 1994 and continuing into 1995. From July
1994 to March 1995, wastepaper prices for the grades of wastepaper used in
Fort Howard's domestic products increased approximately 150% and such
wastepaper prices may increase further due to increased demand for those
wastepaper grades used by the Company. From the fourth quarter of 1994 to the
first quarter of 1995, Fort Howard's domestic wastepaper prices increased 38%.
Costs of other raw materials also increased during the first quarter of 1995
compared to the first quarter of 1994 but by a much lower percentage while all
other costs held flat or declined due to efficiencies achieved from higher
volumes.
Gross margins of international operations increased in the first quarter
of 1995 compared to the first quarter of 1994 in spite of higher wastepaper
prices due to the effects of product rationalization on first quarter of 1994
earnings. From July 1994 to March 1995, wastepaper prices doubled for the
grades of wastepaper used by international operations and wastepaper prices
are expected to increase further for such operations due to increased demand
for those wastepaper grades used by the Company. In addition, consolidated
gross margins were negatively affected for the first quarter of 1995 compared
to the first quarter of 1994 by the significant increased proportion of net
sales represented by the Company's wastepaper brokerage subsidiary which
typically has very low margins compared to domestic tissue operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, as a percent of net sales, decreased to 7.8% for the
first quarter of 1995 compared to 9.7% in 1994 principally due to the impact
of the higher net sales.
- 9 -
Operating Income. Operating income increased 17.7% to $71 million in the
first quarter of 1995 compared to $60 million in the first quarter of 1994.
Operating income as a percent of net sales decreased to 19.3% in the first
quarter of 1995 compared to 21.8% in the first quarter of 1994. Domestic
tissue operating income as a percent of net sales decreased to 22.9% in the
first quarter of 1995 from 25.8% in the first quarter of 1994 principally
because the rate of increase in wastepaper costs exceeded the rate of increase
in net selling prices. In addition, consolidated operating income declined as
a percent of net sales due to the significant increased proportion of net
sales represented by the Company's wastepaper brokerage subsidiary which
typically has very low operating income margins compared to either domestic
tissue or international operations.
Income Taxes. The income tax credits for the first quarters of 1995 and
1994 principally reflect the reversal of previously provided deferred income
taxes.
Extraordinary Loss. The Company's net loss in the first quarter of 1995
was increased by an extraordinary loss of $19 million (net of income taxes of
$12 million) representing the redemption premiums on the repurchases of all
the Company's outstanding 12 5/8% Debentures at the redemption price of 102.5%
of the principal amount thereof, and write-offs of deferred loan costs
associated with the prepayment or repurchases of all indebtedness outstanding
under the Company's 1988 Bank Credit Agreement, the 1993 Bank Term Loan and
the Senior Secured Notes on March 16, 1995, and the redemption of all
outstanding 12 5/8% Debentures and 14 1/8% Debentures on April 15, 1995. 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 prepayment of $100 million of
the 1988 Term Loan on February 10, 1994, and the repurchases of the 12 3/8%
Notes and the 12 5/8% Debentures.
Net Loss. For the first quarter of 1995, the Company's net loss
decreased 34.8% to $28 million from $43 million in the first quarter of 1994.
FINANCIAL CONDITION
For the first three months of 1995, cash decreased $212,000. Capital
additions of $11 million, debt repayments of $833 million, including the
prepayment or repurchase of all of the 1988 Term Loan, the 1988 Revolving
Credit Facility, the 1993 Term Loan and the Senior Secured Notes, and cash
used for operations of $45 million, were funded principally by net proceeds of
$281 million from the sale of Common Stock and borrowings of $608 million (net
of $48 million of debt issuance costs) pursuant to the Recapitalization (see
below).
During the first three months of 1995, receivables increased $16 million
due principally to higher net selling prices in the domestic tissue and
wastepaper brokerage operations and inventories increased by $14 million
principally for seasonal sales requirements. Accounts payable increased
$26 million due to rising wastepaper costs and the seasonal inventory build.
The liability for interest payable decreased $21 million due to the early
payment of interest in connection with the Recapitalization. Other current
- 10 -
liabilities declined $25 million resulting from the payment of obligations due
on an annual basis, including employee bonuses and customer incentive
payments. As a result of all these changes and the prepayment of the
remaining $107 million outstanding under the 1988 Term Loan from the net
proceeds of the Recapitalization, net working capital increased to $61 million
at March 31, 1995 from a deficit of $98 million at December 31, 1994.
For the first quarter of 1995, cash was used for operations due to
seasonal working capital requirements.
On April 15, 1995, the Company completed a recapitalization plan (the
"Recapitalization") to prepay or redeem a substantial portion of its
indebtedness in order to reduce the level and overall cost of its debt, extend
certain debt maturities, increase shareholders' equity and enhance its access
to capital markets.
The Recapitalization included the following components:
(1) The offer and sale by the Company of 25,000,000 shares of Common
Stock on March 16, 1995 and 269,555 additional shares of Common Stock on
April 12, 1995 pursuant to the exercise of a portion of the underwriters'
over-allotment option, at $12.00 per share (the "Offering");
(2) Entering into a bank credit agreement (the "New Bank Credit
Agreement") consisting of a $300 million revolving credit facility (the "1995
Revolving Credit Facility"), an $810 million term loan (the "1995 Term Loan
A") and a $330 million term loan (the "1995 Term Loan B" and, together with
the 1995 Term Loan A, the "New Term Loans"); and entering into a receivables
credit agreement consisting of a $60 million term loan (the "1995 Receivables
Facility");
(3) The application on March 16, 1995 of the net proceeds of the sale of
25,000,000 shares of Common Stock pursuant to the Offering, together with
borrowings under the New Term Loans, to prepay or redeem all the Company's
indebtedness outstanding under the 1988 Bank Credit Agreement, 1993 Term Loan
and Senior Secured Notes.
(4) The application on April 15, 1995 of borrowings under the New Term
Loans, the 1995 Receivables Facility and the 1995 Revolving Credit Facility to
redeem all outstanding 14 1/8% Debentures (at par) and 12 5/8% Debentures (at
102.5% of the principal amount thereof).
The Company's 1995 Revolving Credit Facility, which may be used for
general corporate purposes, has a final maturity of March 16, 2002. At
March 31, 1995, the Company had $271 million in available capacity under the
1995 Revolving Credit Facility. On April 15, 1995, following the redemption
of the 14 1/8% Debentures and 12 5/8% Debentures, the available capacity under
the 1995 Revolving Credit Facility had declined to $91 million.
- 11 -
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
Effective as of January 31, 1995, shareholders of the Company representing
23,865,731 shares or 63% of the Company's then outstanding common stock (i)
approved a 6.5-for-one stock split of the Company's Common Stock, (ii)
approved the amendment of the Company's Restated Certificate of Incorporation
to increase the number of authorized shares of Common Stock, (iii) approved
the further amendment and restatement of the Company's Restated Certificate of
Incorporation, (iv) elected Donald H. DeMeuse, Kathleen J. Hempel,
Michael T. Riordan, Donald Patrick Brennan, Frank V. Sica, Robert H. Niehaus
and James S. Hoch (who has since resigned) as directors of the Company, (v)
approved the Fort Howard Corporation 1995 Stock Incentive Plan and (vi)
approved the Fort Howard Corporation 1995 Stock Plan for Non-Employee
Directors.
5. OTHER INFORMATION
None
6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit No. Description
27 Financial Data Schedule for the three months ended
March 31, 1995.
99 News release containing financial results for the
quarter ended March 31, 1995.
b) The Company filed a Form 8-K dated February 8, 1995, reporting
under Item 5 the Company's audited consolidated financial statements for the
year ended December 31, 1994. The Company filed a Form 8-K dated March 9,
1995, reporting under Item 5 the effectiveness of its registration statement
for the initial public offering of Common Stock.
- 12 -
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
April 26, 1995 /s/ Kathleen J. Hempel
---------------------------------------
Kathleen J. Hempel, Vice Chairman and
Chief Financial Officer
April 26, 1995 /s/ James W. Nellen II
--------------------------------------
James W. Nellen II, Vice President
and Secretary
April 26, 1995 /s/ Charles L. Szews
--------------------------------------
Charles L. Szews
Controller (Principal
Accounting Officer)
- 13 -
INDEX TO EXHIBITS
Exhibit No. Description
27 Financial Data Schedule for the three months ended
March 31, 1995.
99 News release containing financial results for the
quarter ended March 31, 1995.
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