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 September 30, 1996 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 October 15, 1996
----- -------------------------------
Voting Common Stock, par value $.01 73,984,928
per share
PART I. FINANCIAL INFORMATION
FORT HOWARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except per share data)
Net sales........................... $408,163 $426,116 $1,196,307 $1,205,602
Cost of sales....................... 234,007 299,974 715,863 865,474
-------- -------- ---------- ----------
Gross income........................ 174,156 126,142 480,444 340,128
Selling, general and administrative. 38,857 30,773 106,243 85,893
-------- -------- ---------- ----------
Operating income ................... 135,299 95,369 374,201 254,235
Interest expense.................... 61,867 74,177 198,841 237,258
Other expense (income), net......... 2,545 (1,600) 3,583 (2,537)
-------- -------- ---------- ----------
Income before taxes................. 70,887 22,792 171,777 19,514
Income tax expense.................. 27,813 8,292 65,386 6,913
-------- -------- ---------- ----------
Net income before
extraordinary item................ 43,074 14,500 106,391 12,601
Extraordinary item -- loss on
debt repurchases (net of income
taxes of $2,180 in 1996 and
$11,986 in 1995).................. -- -- (3,340) (18,748)
-------- -------- ---------- ----------
Net income (loss)................... $ 43,074 $ 14,500 $ 103,051 $ (6,147)
======== ======== ========== ==========
Net income (loss) per share:
Net income before
extraordinary item.............. $ 0.58 $ 0.23 $ 1.55 $ 0.22
Extraordinary item................ -- -- (0.05) (0.33)
-------- -------- ---------- ----------
Net income (loss)................. $ 0.58 $ 0.23 $ 1.50 $ (0.11)
======== ======== ========== ==========
Average shares outstanding.......... 73,970 63,371 68,720 56,495
======== ======== ========== ==========
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)
September 30, December 31,
1996 1995
------------- ------------
(In thousands)
Assets
Current assets:
Cash and cash equivalents............... $ 693 $ 946
Receivables, less allowances of $3,304
in 1996 and $2,883 in 1995............ 90,157 97,707
Inventories............................. 136,696 163,076
Deferred income taxes................... 51,000 29,000
Income taxes receivable................. 400 700
---------- ----------
Total current assets.................. 278,946 291,429
Property, plant and equipment............. 2,009,804 1,971,641
Less: Accumulated depreciation......... 778,953 706,394
---------- ----------
Net property, plant and equipment..... 1,230,851 1,265,247
Other assets.............................. 77,905 95,761
---------- ----------
Total assets.......................... $1,587,702 $1,652,437
========== ==========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable........................ $ 121,179 $ 112,384
Interest payable........................ 23,481 64,375
Income taxes payable.................... 6,145 1,339
Other current liabilities............... 90,530 85,351
Current portion of long-term debt....... 69,865 62,720
---------- ----------
Total current liabilities............. 311,200 326,169
Long-term debt............................ 2,500,695 2,903,299
Deferred and other long-term income taxes. 270,227 225,043
Other liabilities......................... 34,970 36,355
Shareholders' deficit:
Common Stock............................ 740 634
Additional paid-in capital.............. 1,100,884 895,652
Cumulative translation adjustment....... (2,194) (2,844)
Retained deficit........................ (2,628,820) (2,731,871)
---------- ----------
Total shareholders' deficit........... (1,529,390) (1,838,429)
---------- ----------
Total liabilities and shareholders'
deficit............................. $1,587,702 $1,652,437
========== ==========
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)
Nine Months Ended
September 30,
------------------
1996 1995
---- ----
(In thousands)
Cash provided from (used for) operations:
Net income (loss).............................. $ 103,051 $ (6,147)
Depreciation................................... 75,727 73,751
Non-cash interest expense...................... 10,103 9,634
Deferred income tax (credit) expense........... 23,228 (3,967)
Pre-tax loss on debt repurchases............... 5,520 30,734
Decrease in receivables........................ 7,550 17,972
(Increase) decrease in inventories............. 26,380 (41,820)
Decrease in income taxes receivable............ 300 4,500
Increase in accounts payable................... 8,795 26,623
Decrease in interest payable................... (40,894) (58,538)
Increase in income taxes payable............... 4,806 429
All other, net................................. 7,435 (12,228)
---------- ---------
Net cash provided from operations............ 232,001 40,943
Cash used for investment activity:
Additions to property, plant and equipment..... (40,876) (32,150)
Cash provided from (used for) financing activities:
Proceeds from long-term borrowings............. -- 1,438,900
Repayment of long-term borrowings.............. (395,227) (1,682,623)
Debt issuance costs............................ (1,489) (49,155)
Issuance of Common Stock, net of offering
costs........................................ 205,338 284,104
---------- ---------
Net cash used for financing activities....... (191,378) (8,774)
---------- ---------
Increase (decrease) in cash...................... (253) 19
Cash at beginning of period...................... 946 422
---------- ---------
Cash at end of period.......................... $ 693 $ 441
========== =========
Supplemental Cash Flow Disclosures:
Interest paid.................................. $ 229,561 $ 286,439
Income taxes paid (refunded) - net............. 35,052 (5,705)
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 1995 and the
Company's quarterly reports on Form 10-Q for the quarters ended March 31, 1996
and June 30, 1996.
2. EARNINGS (LOSS) PER SHARE
Earnings (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 and nine month
periods ended September 30, 1996 were 73,969,946 and 68,719,716, respectively.
The weighted average number of common shares outstanding for the three and
nine month periods ended September 30, 1995 were 63,370,794 and 56,494,512,
respectively. The assumed exercise of all outstanding stock options has been
excluded from the computation of earnings (loss) per share for the three and
nine month periods ended September 30, 1996 and 1995 because the result was
not material or was antidilutive.
3. INVENTORIES
Inventories consist of:
September 30, December 31,
1996 1995
------------ ------------
(In thousands)
Raw materials and supplies $ 67,110 $ 80,134
Finished and partly-finished products 69,586 82,942
-------- --------
$136,696 $163,076
======== ========
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4. COMMON STOCK OFFERING
On May 15, 1996, the Company issued 10 million shares of Common Stock at
$20.25 per share in a public offering (the "Offering"). Proceeds from the
Offering, net of underwriting commissions and other related expenses totaling
$9 million, were $194 million. On June 4, 1996, an additional 520,000 shares
of Common Stock were issued at $20.25 per share upon the exercise of a portion
of the underwriters' over-allotment option granted in connection with the
Offering, resulting in additional net proceeds of $10 million after deducting
underwriting commissions.
5. LONG-TERM DEBT
The Company used the net proceeds of its Common Stock Offering of $204
million to prepay a portion of the outstanding indebtedness under the 1995
Bank Credit Agreement.
At September 30, 1996, the available capacity under the 1995 Revolving
Credit Facility under the Company's 1995 Bank Credit Agreement was
$297 million.
6. INCOME TAXES
In 1992, the Internal Revenue Service (the "IRS") disallowed income tax
deductions for the 1988 tax year which were claimed by the Company for fees
and expenses, other than interest, related to 1988 debt financing and
refinancing transactions. The Company deducted the balance of the disallowed
fees and expenses related to the 1988 debt instruments during the tax years
1989 through 1995. In disallowing these deductions, the IRS relied on
Internal Revenue Code of 1986, as amended (the "Code"), Section 162(k) (which
denies deductions for otherwise deductible amounts paid or incurred in
connection with stock redemptions). The Company is contesting the
disallowance. In August 1994, the U.S. Tax Court issued its opinion in which
it essentially adopted the interpretation of Code Section 162(k) advanced by
the IRS and disallowed the deductions claimed by the Company.
Prior to the entry of a decision in the U.S. Tax Court, Code
Section 162(k) was amended in August 1996 to provide that, retroactive to
1986, such Code Section was not applicable to deductions for amounts properly
allocable to indebtedness and amortized over the term of such indebtedness.
Accordingly, the Company and the IRS filed a joint motion for reconsideration
of the Court's opinion requesting a determination that the Company may deduct
all disallowed fees and expenses related to the 1988 debt instruments. On
October 22nd the Court granted the joint motion and issued its supplemental
opinion that the Company may deduct the fees and expenses previously
disallowed. The Company anticipates the Court's final decision on this matter
in the fourth quarter of 1996.
The Company has paid to the IRS tax of approximately $5 million for its
1988 tax year pursuant to the U.S. Tax Court opinion along with $4 million for
the interest accrued on such tax. If the opinion of the U.S. Tax Court, which
the Company had been planning to appeal, was ultimately sustained, the
potential amount of additional taxes due on account of such disallowance for
the period 1989 through 1995 would be approximately $38 million exclusive of
interest, which amount the Company has fully reserved.
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7. CONTINGENCIES
The Company and its subsidiaries are parties to lawsuits and state and
federal administrative proceedings incidental to their businesses. Although
the final results in such suits and proceedings cannot be predicted with
certainty, the Company currently believes that the ultimate resolution of all
such lawsuits and proceedings, after taking into account the liabilities
accrued with respect to such matters, will not have a material adverse effect
on the Company's financial condition or on its results of operations.
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FORT HOWARD CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third Quarter and First Nine Months of 1996 Compared to 1995
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except percentages)
Net sales:
Domestic tissue............ $346,752 $348,058 $1,017,234 $ 965,551
International operations... 44,825 43,041 131,178 120,394
Harmon..................... 16,586 35,017 47,895 119,657
-------- -------- ---------- ----------
Consolidated............... $408,163 $426,116 $1,196,307 $1,205,602
======== ======== ========== ==========
Operating income:
Domestic tissue............ $127,679 $ 88,982 $ 351,561 $ 238,457
International operations... 6,744 4,995 20,026 11,354
Harmon..................... 876 1,392 2,614 4,424
-------- -------- ---------- ----------
Consolidated............... $135,299 $ 95,369 $ 374,201 $ 254,235
======== ======== ========== ==========
Consolidated net income
(loss)..................... $ 43,074 $ 14,500 $ 103,051 $ (6,147)
======== ======== ========== ==========
Operating income as a
percent of net sales....... 33.1% 22.4% 31.3% 21.1%
Net sales. Net sales in the Company's domestic tissue operations
increased 5.4% for the first nine months of 1996 compared to the first nine
months of 1995. The increase was due to a 2.1% increase in converted products
volume and a 3.2% increase in net selling prices for the first nine months of
1996 compared to the first nine months of 1995. Domestic tissue operations'
net sales for the third quarter of 1996 decreased 0.4% compared to the third
quarter of 1995. The decrease was due to lower net selling prices offset by
volume increases. Because of significantly lower selling prices in the
Company's wastepaper brokerage subsidiary, consolidated net sales decreased
4.2% for the third quarter of 1996 and 0.8% for the first nine months of 1996
compared to the respective periods in 1995.
From the second quarter of 1996 to the third quarter of 1996, overall
domestic tissue net selling prices decreased 1.5% as a result of price
decreases in the consumer market which took effect in April and June 1996 on
certain product lines. Commercial pricing was unchanged from the second
quarter of 1996 to the third quarter of 1996.
For the third quarter and first nine months of 1996 compared to the
respective periods in 1995, domestic volume was stronger in the consumer
market than in the commercial market.
- 8 -
Net sales of the Company's international operations increased 4.1% and
9.0% for the third quarter and first nine months of 1996 compared to 1995,
respectively. For the third quarter of 1996 compared to the third quarter of
1995, the Company's U.K. facilities experienced volume increases partially
offset by lower net selling prices. For the first nine months of 1996
compared to 1995, the Company's U.K. facilities experienced both increased
volume and increased net selling prices. Net sales of the Company's
wastepaper brokerage subsidiary, Harmon Assoc. Corp. ("Harmon"), decreased
52.6% and 60.0% for the third quarter and first nine months of 1996 compared
to 1995, respectively, due to significantly lower selling prices on slightly
higher volume.
Gross Income. Consolidated gross income for the third quarter of 1996
increased 38.1% over the third quarter of 1995 due to significantly lower raw
material costs and sales volume increases in the consumer business offset by
lower consumer selling prices. For the first nine months of 1996 compared to
the same period in 1995, consolidated gross income increased 41.3% due to
lower raw material costs, selling price increases and increases in consumer
volume. Consolidated gross margins increased to 42.7% and 40.2% for the third
quarter and first nine months of 1996 from 29.6% and 28.2% for the third
quarter and first nine months of 1995, respectively. Domestic tissue gross
margins increased for the third quarter and first nine months of 1996 compared
to the third quarter and first nine months of 1995 primarily due to
significantly lower wastepaper prices. Gross margins of international
operations increased in both the third quarter and first nine months of 1996
compared to 1995. In addition, consolidated gross margins were positively
affected for both the third quarter and first nine months of 1996 compared to
1995 because net sales by Harmon (which typically has very low margins
compared to either domestic or international tissue operations) were a smaller
proportion of total net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, as a percent of net sales, increased to 9.5% and 8.9%
for the third quarter and first nine months of 1996, compared to 7.2% and 7.1%
for the third quarter and first nine months of 1995, respectively. The
increase was principally due to the impact of the Company's strong earnings
performance on employee compensation plans, higher selling expenses resulting
from greater consumer product sales and lower net sales by Harmon.
Operating Income. Operating income increased to $135 million and
$374 million for the third quarter and first nine months of 1996 from
$95 million and $254 million for the third quarter and first nine months of
1995, respectively. Operating income as a percent of net sales increased to
33.1% and 31.3% in the third quarter and first nine months of 1996 compared to
22.4% and 21.1% in the third quarter and first nine months of 1995,
respectively. Domestic tissue operating income as a percent of net sales
increased to 36.8% and 34.6% in the third quarter and first nine months of
1996 from 25.6% and 24.7% in the third quarter and first nine months of 1995,
respectively. In addition, consolidated operating income increased as a
percent of net sales because net sales by Harmon (which typically has very low
operating income margins compared to either domestic or international tissue
operations) were a smaller proportion of total net sales.
- 9 -
Extraordinary Loss. The Company's net income in the first nine months of
1996 was decreased by an extraordinary loss of $3 million (net of income taxes
of $2 million) representing the write-offs of deferred loan costs associated
with the prepayment of a portion of the outstanding indebtedness under the
1995 Bank Credit Agreement. The Company's net loss in the first nine months
of 1995 was increased by an extraordinary loss of $19 million (net of income
taxes of $12 million) from debt repurchases.
Net Income (Loss). For the third quarter of 1996, net income was
$43 million compared to net income of $15 million for the third quarter of
1995. For the first nine months of 1996, net income was $103 million compared
to a net loss of $6 million for the first nine months of 1995.
FINANCIAL CONDITION
For the first nine months of 1996, cash decreased $253,000. Capital
additions of $41 million and debt repayments of $395 million were funded
principally by net proceeds of $205 million from the sale of Common Stock and
$232 million of cash from operations provided by strong operating results.
During the first nine months of 1996, receivables decreased $7.6 million
due principally to lower net selling prices in the domestic tissue and
international operations in the third quarter of 1996 compared to the fourth
quarter of 1995. Inventories decreased by $26.4 million principally due to
lower raw material costs. Accounts payable increased $8.8 million due to
higher selling expenses and the timing of payments to vendors. The liability
for interest payable decreased $40.9 million due to lower debt balances as a
result of the Offering and cash provided from operations and also as a result
of the timing of the quarter end relative to semi-annual interest payment
dates. Other current liabilities increased $5.2 million primarily resulting
from the timing of compensation payments. As a result of all these changes
and the prepayment of a portion of the indebtedness due within one year under
the 1995 Bank Credit Agreement from the net proceeds of the Offering, net
working capital deficit decreased to $32 million at September 30, 1996, from a
deficit of $35 million at December 31, 1995.
In September 1996, the Company's Board of Directors authorized the
installation of a new tissue paper machine and associated facilities at one of
its U.S. mills. The expansion is planned for completion in 1999 at an
estimated cost of $160 million.
The Company's 1995 Revolving Credit Facility, which may be used for
general corporate purposes, has a final maturity of March 16, 2002. At
September 30, 1996, the Company had $297 million in available capacity under
the 1995 Revolving Credit Facility.
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PART II. OTHER INFORMATION
1. LEGAL PROCEEDINGS
In July 1992, the United States Environmental Protection Agency issued a
Finding of Violation to the Company concerning the No. 8 boiler at its Green
Bay mill. The Finding alleged violation of regulations issued by the U.S. EPA
under the Clean Air Act relating to New Source Performance Standards for
Fossil Fuel Steam Generators. In June of 1996, the Company paid $350,000 and
entered into a consent decree to settle this matter without admitting any
wrongdoing. During September 1996, the Company completed certain
modifications to its No. 8 boiler provided for in the consent decree which do
not affect its utility.
In 1992, the IRS disallowed income tax deductions for the 1988 tax year
which were claimed by the Company for fees and expenses, other than interest,
related to 1988 debt financing and refinancing transactions. The Company
deducted the balance of the disallowed fees and expenses related to the 1988
debt instruments during the tax years 1989 through 1995. In disallowing these
deductions, the IRS relied on Code Section 162(k) (which denies deductions for
otherwise deductible amounts paid or incurred in connection with stock
redemptions). The Company is contesting the disallowance. In August 1994,
the U.S. Tax Court issued its opinion in which it essentially adopted the
interpretation of Code Section 162(k) advanced by the IRS and disallowed the
deductions claimed by the Company.
Prior to the entry of a decision in the U.S. Tax Court, Code
Section 162(k) was amended in August 1996 to provide that, retroactive to
1986, such Code Section was not applicable to deductions for amounts properly
allocable to indebtedness and amortized over the term of such indebtedness.
Accordingly, the Company and the IRS filed a joint motion for reconsideration
of the Court's opinion requesting a determination that the Company may deduct
all disallowed fees and expenses related to the 1988 debt instruments. On
October 22nd the Court granted the joint motion and issued its supplemental
opinion that the Company may deduct the fees and expenses previously
disallowed. The Company anticipates the Court's final decision on this matter
in the fourth quarter of 1996.
The Company has paid to the IRS tax of approximately $5 million for its
1988 tax year pursuant to the U.S. Tax Court opinion along with $4 million for
the interest accrued on such tax. If the opinion of the U.S. Tax Court, which
the Company had been planning to appeal, was ultimately sustained, the
potential amount of additional taxes due on account of such disallowance for
the period 1989 through 1995 would be approximately $38 million exclusive of
interest, which amount the Company has fully reserved.
As previously reported, the Company responded during the first and second
quarters of 1995 to a Civil Investigative Demand issued by the U.S. Department
of Justice concerning a civil antitrust investigation into possible agreements
in restraint of trade in connection with the sales of commercial sanitary
paper products. On May 20, 1996, the Company received a subpoena to provide
certain documents to a federal grand jury in Cleveland that is investigating
possible antitrust violations in the sale of commercial sanitary paper
products. The Company has responded to the subpoena and is continuing to
cooperate in the investigation.
- 11 -
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:
Exhibit No. Description
3 Amended and Restated By-Laws
10 Stock Award Agreement dated September 10, 1996
27 Financial Data Schedule for the nine months ended
September 30, 1996.
99 News release containing financial results for the
quarter ended September 30, 1996.
b) No reports on Form 8-K were filed by the Company for the quarter
for which this report is filed.
- 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
October 23, 1996 /s/ Kathleen J. Hempel
---------------------------------------
Kathleen J. Hempel, Vice Chairman and
Chief Financial Officer and Principal
Accounting Officer
October 23, 1996 /s/ James W. Nellen II
---------------------------------------
James W. Nellen II, Vice President
and Secretary
- 13 -
INDEX TO EXHIBITS
Exhibit No. Description
3 Amended and Restated By-Laws
10 Stock Award Agreement dated September 10, 1996
27 Financial Data Schedule for the nine months ended
September 30, 1996.
99 News release containing financial results for the
quarter ended September 30, 1996.
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