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, 1997 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: 920/435-8821
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 31, 1997
----- -------------------------------
Common Stock, par value $.01 100
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,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
(In millions)
Net sales........................... $445.3 $447.1 $1,323.1 $1,317.1
Cost of sales....................... 270.1 266.8 786.0 806.5
------ ------ -------- --------
Gross income........................ 175.2 180.3 537.1 510.6
Selling, general and administrative. 34.4 46.6 104.4 138.0
Unusual and non-recurring items..... 20.1 -- 20.1 --
------ ------ -------- --------
Operating income ................... 120.7 133.7 412.6 372.6
Interest expense.................... 51.9 61.8 166.9 198.8
Other income (expense), net......... 1.0 (1.0) (0.5) (2.0)
------ ------ -------- --------
Income before taxes................. 69.8 70.9 245.2 171.8
Income tax expense.................. 35.3 27.8 102.1 65.4
------ ------ -------- --------
Net income before
extraordinary item................ 34.5 43.1 143.1 106.4
Extraordinary item -- loss on
debt repurchases (net of income
taxes of $11.1 and $12.4 in 1997
and $2.2 in 1996)................. (15.6) -- (17.5) (3.3)
------ ------ -------- --------
Net income ......................... $ 18.9 $ 43.1 $ 125.6 $ 103.1
====== ====== ======== ========
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,
1997 1996
------------- ------------
(In millions)
Assets
Current assets:
Cash and cash equivalents............... $ 5.0 $ 0.8
Receivables, less allowances of $2.8
in 1997 and $3.3 in 1996.............. 150.9 63.3
Inventories............................. 151.1 151.3
Prepaid expenses and other current
assets................................ 2.9 13.5
Deferred income taxes................... 27.2 60.0
--------- ---------
Total current assets.................. 337.1 288.9
Property, plant and equipment............. 2,121.2 2,057.4
Less: Accumulated depreciation......... 874.0 809.6
--------- ---------
Net property, plant and equipment..... 1,247.2 1,247.8
Other assets.............................. 31.2 78.7
--------- ---------
Total assets.......................... $ 1,615.5 $ 1,615.4
========= =========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable........................ $ 108.4 $ 99.5
Interest payable........................ 20.2 60.4
Due to Fort James Corporation........... 58.2 --
Accrued liabilities..................... 117.8 149.8
Current portion of long-term debt....... 6.1 12.0
--------- ---------
Total current liabilities............. 310.7 321.7
Long-term debt............................ 2,305.0 2,451.4
Accrued postretirement benefits other
than pensions........................... 17.3 17.9
Deferred and other long-term income taxes. 236.7 247.5
Other liabilities......................... 30.7 31.8
Shareholder's deficit:
Common shareholder's equity............. 1,159.0 1,109.7
Cumulative translation adjustment....... (0.2) 4.7
Retained deficit........................ (2,443.7) (2,569.3)
--------- ---------
Total shareholder's deficit........... (1,284.9) (1,454.9)
--------- ---------
Total liabilities and shareholder's
deficit............................. $ 1,615.5 $ 1,615.4
========= =========
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,
------------------
1997 1996
---- ----
(In millions)
Cash provided from (used for) operations:
Net income .................................... $ 125.6 $ 103.1
Depreciation................................... 77.6 75.7
Non-cash interest expense...................... 9.8 10.1
Deferred income tax expense.................... 21.2 25.4
Loss on debt repurchases, net of taxes......... 17.5 3.3
Unusual and non-recurring items................ 20.1 --
Decrease in restricted cash.................... 14.9 --
(Increase) decrease in receivables............. (87.6) 7.6
Decrease in inventories........................ 0.2 26.4
Decrease in prepaid expenses and other
current assets............................... 10.6 1.3
Increase in accounts payable................... 8.9 4.7
Decrease in interest payable................... (40.2) (40.9)
Due to parent company, net..................... 58.2 --
Decrease in accrued liabilities................ (32.0) 14.0
All other, net................................. (10.7) 1.3
---------- ----------
Net cash provided from operations............ 194.1 232.0
Cash provided from (used for) investment activity:
Additions to property, plant and equipment..... (88.1) (40.9)
Proceeds on sale of property, plant
and equipment................................ 3.4 --
---------- ----------
Net cash used for investment activity........ (84.7) (40.9)
Cash provided from (used for) financing activities:
Proceeds from long-term borrowings............. 601.6 --
Repayment of long-term borrowings.............. (752.9) (395.2)
Issuance of Common Stock, net of offering
costs........................................ -- 205.1
Issuance of Common Stock in exercise of
stock options................................ 46.1 0.2
Debt issuance costs............................ -- (1.5)
---------- ----------
Net cash used for financing activities....... (105.2) (191.4)
---------- ----------
Increase (decrease) in cash...................... 4.2 (0.3)
Cash at beginning of period...................... 0.8 0.9
---------- ----------
Cash at end of period.......................... $ 5.0 $ 0.6
========== ==========
Supplemental Cash Flow Disclosures:
Interest paid.................................. $ 193.8 $ 229.6
Income taxes paid (refunded) - net............. 38.4 35.1
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 and necessary 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 1996 and the Company's quarterly reports on Form 10-Q for the
quarters ended March 31, 1997 and June 30, 1997.
2. MERGER WITH JAMES RIVER CORPORATION
On August 13, 1997, Fort James Corporation ("Fort James") announced the
completion of the merger between James River Delaware, Inc. ("James River")
and Fort Howard Corporation ("Fort Howard" or the "Company") pursuant to which
Fort Howard became a wholly-owned subsidiary of Fort James (the "Merger").
The Merger qualified as a tax-free reorganization and has been accounted for
as a pooling of interests. Fort James issued 104.8 million shares of its
common stock for all of the outstanding common stock of Fort Howard
Corporation.
3. UNUSUAL AND NON-RECURRING ITEMS
In September 1997, Fort Howard recorded $20.1 million in transaction
costs related to the Merger.
4. EARNINGS PER SHARE
Earnings per share is not presented herein because Fort Howard is a
wholly owned subsidiary of Fort James.
5. RELATED PARTY TRANSACTIONS
Fort Howard engages in various transactions with Fort James and its
affiliates that are characteristic of companies under common control.
6. CASH AND CASH EQUIVALENTS
At December 31, 1996, the Company had $14,916,000 of cash restricted as
collateral under the terms of its 1995 Accounts Receivable Facility. At
September 30, 1997, the 1995 Accounts Receivable Facility had been refinanced
as part of the Fort James Debt Refinancing Plan (see footnote 8).
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7. INVENTORIES
Inventories consist of:
September 30, December 31,
1997 1996
------------ ------------
(In millions)
Raw materials and supplies $ 70.2 $ 70.6
Finished and partly-finished products 80.9 80.7
------ ------
$151.1 $151.3
====== ======
8. LONG-TERM DEBT
In connection with the Merger, Fort James undertook a plan (the "Debt
Refinancing Plan") designed to refinance an aggregate of approximately
$2 billion principal amount of debt of Fort James and Fort Howard. The Debt
Refinancing Plan is expected to result in a reduction of interest expense of
approximately $50 million annually. In connection with the Debt Refinancing
Plan, the Company incurred a $17.5 million, net of taxes, extraordinary loss
for prepayment penalties. An additional extraordinary charge of approximately
$80 million, net of taxes, is anticipated to be recorded in the fourth
quarter.
At the time of the Merger, as the first step in the Debt Refinancing
Plan, Fort James and Fort Howard entered into a new $2.5 billion bank credit
facility (the "New Credit Facility") and borrowed $666 million thereunder to
replace certain of the pre-merger bank credit facilities. As the second step
in the Debt Refinancing Plan, on September 8, 1997, Fort Howard commenced cash
tender offers for approximately $1.47 billion of its outstanding public debt
securities.
9. 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.
10. SUBSEQUENT EVENTS
Upon expiration of the tender offers in the fourth quarter, Fort Howard
purchased certain public debt securities as follows: (i) $89.9 million of
8-1/4% Senior Notes due 2002, (ii) $395.0 million 9-1/4% Senior Notes due
2001, (iii) $559.3 million of 9% Senior Subordinated Notes due 2006 and
(iv) $234.2 million of 10% Subordinated Notes due 2003. The tender offers
were funded through intercompany borrowings with Fort James.
On October 31, 1997, an amendment to the Fort James 1997 Revolving Credit
Facility was completed which discontinued Fort Howard Corporation as a
borrowing subsidiary on this facility.
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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 1997 Compared to 1996
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
(In millions, except percentages)
Net sales:
Domestic tissue............ $375.6 $383.9 $1,122.7 $1,132.7
International operations... 46.3 46.7 140.6 136.5
Harmon..................... 23.4 16.5 59.8 47.9
------ ------ -------- --------
Consolidated............... $445.3 $447.1 $1,323.1 $1,317.1
====== ====== ======== ========
Operating income:
Domestic tissue............ $112.1 $126.1 $ 384.9 $ 350.1
International operations... 8.1 6.7 26.1 19.9
Harmon..................... 0.5 0.9 1.6 2.6
------ ------ -------- --------
Consolidated............... $120.7 $133.7 $ 412.6 $ 372.6
====== ====== ======== ========
Consolidated net income....... $ 18.9 $ 43.1 $ 125.6 $ 103.1
====== ====== ======== ========
Operating income as a
percent of net sales....... 27.1% 29.9% 31.2% 28.3%
Net sales. Net sales in the Company's domestic tissue operations
decreased 0.9% for the first nine months of 1997 compared to the first nine
months of 1996. The decrease was due to a 2.0% decrease in net selling prices
offset by a 2.5% increase in converted products volume for the first nine
months of 1997 compared to the first nine months of 1996. There were no sales
of parent rolls in the first nine months of 1997. Domestic tissue operations'
net sales for the third quarter of 1997 decreased 2.2% compared to the third
quarter of 1996. The decrease was due to lower volume offset by net selling
price increases. There were no sales of parent rolls in the third quarter of
1997.
Net sales of the Company's international operations increased 3.0% for
the first nine months of 1997 compared to 1996, respectively. For the first
nine months of 1997 compared to 1996, the Company's U.K. facilities
experienced increased volume offset by slightly decreased net selling prices.
Net sales of the Company's international operations decreased 0.9% for the
third quarter of 1997 compared to the third quarter of 1996 primarily due to
decreased sales volume at the Company's U. K. facilities offset by slightly
increased net selling prices. Net sales of the Company's wastepaper brokerage
subsidiary, Harmon Assoc. Corp. ("Harmon"), increased 24.8% and 41.8% for the
first nine months and third quarter of 1997 compared to 1996, respectively,
due to increased sales volumes and net selling prices.
- 7 -
Gross Income. For the first nine months of 1997 compared to the same
period in 1996, consolidated gross income increased 5.2% due to lower raw
material costs and sales volume increases in the commercial business offset by
lower selling prices. Consolidated gross income for the third quarter of 1997
decreased 2.8% from the third quarter of 1996 due to increased raw material
costs and sales volume decreases offset by increased selling prices.
Consolidated gross margins increased to 40.6% from 38.8% for the first nine
months of 1997 and 1996, respectively. Consolidated gross margins decreased
to 39.3% from 40.3% for the third quarter of 1997 and 1996, respectively.
Domestic tissue gross margins increased to 43.9% from 41.8% for the first nine
months of 1997 and 1996, respectively. Domestic tissue gross margins
decreased to 42.8% from 43.5% for the third quarter of 1997 and 1996,
respectively. Gross margins of international operations increased in both the
first nine months and third quarter of 1997 compared to 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, as a percent of net sales, decreased to 7.9% and 7.7%
for the first nine months and third quarter of 1997, compared to 10.5% and
10.4% for the first nine months and third quarter of 1996, respectively. The
decrease was principally due to the impact of the Company's strong 1996
earnings performance on employee compensation plans, higher selling expenses
resulting from greater consumer product sales and lower net sales by Harmon.
Operating Income. Consolidated operating income increased to
$412.6 million from $372.6 million for the first nine months of 1997 and 1996,
respectively, increasing consolidated operating income as a percent of net
sales to 31.2% from 28.3% for the same periods. Excluding the Unusual and
non-recurring items, consolidated operating income as a percent of net sales
would have been 32.7% for the first nine months of 1997. Domestic tissue
operating income as a percent of net sales increased to 34.3% from 30.9% for
the first nine months of 1997 and 1996, respectively. Excluding the Unusual
and non-recurring items, domestic tissue operating income as a percent of net
sales would have been 36.1% for the first nine months of 1997. Operating
income as a percent of net sales for the Company's International facilities
increased to 18.6% from 14.6% for the first nine months of 1997 and 1996,
respectively.
Consolidated operating income decreased to $120.7 million from
$133.7 million for the third quarter of 1997 and 1996, respectively,
decreasing consolidated operating income as a percent of net sales to 27.1%
from 29.9% for the same periods. Excluding the Unusual and non-recurring
items, consolidated operating income as a percent of net sales would have been
31.6% for the third quarter of 1997. Domestic tissue operating income as a
percent of net sales decreased to 29.8% from 32.8% for the third quarter of
1997 and 1996, respectively. Excluding the Unusual and non-recurring items,
domestic tissue operating income as a percent of net sales would have been
35.2% for the third quarter of 1997. Operating income as a percent of net
sales for the Company's International facilities increased to 17.5% from 14.4%
for the third quarter of 1997 and 1996, respectively.
Extraordinary Loss. The Company's net income in the first nine months
and the third quarter of 1997 was decreased by extraordinary losses of
$17.5 million and $15.6 million, respectively (net of income taxes of
$12.4 million and $11.1 million, respectively) representing the write-offs of
deferred loan costs associated with the prepayment of indebtedness under the
- 8 -
1995 Bank Credit Agreement. The Company's net income in the first nine months
of 1996 was decreased by an extraordinary loss of $3.3 million (net of income
taxes of $2.2 million) from debt repurchases.
Net Income. For the first nine months of 1997, net income was
$125.6 million compared to net income of $103.1 million for the first nine
months of 1996. For the third quarter of 1997, net income was $18.9 million
compared to net income of $43.1 million for the third quarter of 1996.
FINANCIAL CONDITION
For the first nine months of 1997, cash increased $4.2 million. Capital
additions of $88.1 million and debt repayments of $752.9 million were funded
principally by net proceeds of $601.6 million from debt borrowings and
$194.1 million of cash from operations provided by strong operating results.
During the first nine months of 1997, receivables increased $87.6 million
due principally to the elimination of an off-balance sheet financing agreement
resulting in $60 million of receivables being added back to the balance sheet.
Inventories decreased by $0.2 million principally due to lower raw material
costs. Accounts payable increased $8.9 million due to Merger transaction fee
liabilities. Accrued liabilities decreased $32.0 million due to the impact of
lower earnings on incentive compensation accruals. As a result of all these
changes, net working capital increased to $26.4 million at September 30, 1997,
from a deficit of $32.8 million at December 31, 1996.
Fort Howard anticipates satisfying all of its working capital
requirements through cash provided from operations and intercompany borrowings
with Fort James.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130") which is effective for periods beginning after December 15, 1997.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components. Adoption of the new standard will have no effect
on the Company's consolidated statement of income.
In June 1997, the Financial Accounting Standards Board also issued
Statement of Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") which is effective for
periods beginning after December 15, 1997, including interim periods after the
year of initial adoption. SFAS 131 establishes standards for the way public
companies report information about operating segments in both interim and
annual financial statements, including related disclosures about products and
services, geographic areas, and major customers. The Company has not
determined what, if any, impact SFAS 131 will have on the operating segments
reported nor the impact SFAS 131 will have on the related disclosures.
- 9 -
PART II. OTHER INFORMATION
1. LEGAL PROCEEDINGS
In May 1997, the Attorney General of the State of Florida filed a civil
action in the Gainesville Division of the United States District Court for the
Northern District of Florida against the Company and eight other manufacturers
of sanitary paper products alleging violations of federal and state antitrust
and unfair competition laws. The complaint seeks civil penalty under Florida
law of $1 million for each alleged violation against each defendant, an
unspecified amount of treble damages and injunctive relief. Additional civil
class actions have been filed in various federal and state courts against the
same defendants alleging violations of federal and state antitrust statutes
and seeking treble damages and injunctive relief. The Judicial Panel for
Multidistrict Litigation has ordered the cases consolidated in the United
States District Court at Gainesville, Florida. State court actions in
California and Tennessee with similar allegations may proceed separately. The
litigation is in its earliest stages. The Company intends to defend the
litigation vigorously.
2. CHANGES IN SECURITIES
On August 13, 1997, James River Delaware, Inc., a wholly owned subsidiary
of Fort James Corporation, a Virginia corporation ("Fort James"), merged with
and into the Company. As a consequence of the Merger, the Company became a
wholly owned subsidiary of Fort James. Each outstanding share of Company
common stock, par value $.01 per share, was converted into the right to
receive 1.375 shares of common stock, par value $.10 per share, of Fort James.
3. DEFAULTS UPON SENIOR SECURITIES
None
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders was held on August 12, 1997.
Stockholders of record of the Company's common stock at the close of business
on June 30, 1997, were entitled to vote at the meeting.
The stockholders approved the adoption of the Agreement and Plan of
Merger pursuant to which the Company became a wholly-owned subsidiary of
Fort James Corporation. Votes were cast as follows: 58,649,810 shares for;
261,278 shares against; and 258,976 shares withheld. There were no broker
non-votes.
5. OTHER INFORMATION
None
- 10 -
6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit No. Description
3(a) By-Laws of August 13, 1997
3(b) Amended and Restated Certificate of Incorporation
4(a) First Supplemental Indenture to 9-1/4% Senior Notes
4(b) First Supplemental Indenture to 10% Subordinated Notes
4(c) First Supplemental Indenture to 9% Senior Subordinated
Notes
10 Fort James Corporation $2,500,000,000 Credit Agreement
dated August 13, 1997, amended and restated as of
October 31, 1997.
27 Financial Data Schedule for the nine months ended
September 30, 1997
b) The Company filed a Form 8-K on September 15, 1997. The filing
reported a correction to the Offer to Purchase and Consent
Solicitation Statement dated September 8, 1997.
- 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
November 13, 1997 /s/ R. Michael Lempke
---------------------------------------
R. Michael Lempke
Vice President and Treasurer
November 13, 1997 /s/ Ernst A. Haberli
---------------------------------------
Ernst A. Haberli
Vice President
(Principal Financial Officer)
- 12 -
INDEX TO EXHIBITS
Exhibit No. Description
3(a) By-Laws of August 13, 1997
3(b) Amended and Restated Certificate of Incorporation
4(a) First Supplemental Indenture to 9-1/4% Senior Notes
4(b) First Supplemental Indenture to 10% Subordinated Notes
4(c) First Supplemental Indenture to 9% Senior Subordinated
Notes
10 Fort James Corporation $2,500,000,000 Credit Agreement
dated August 13, 1997, amended and restated as of
October 31, 1997.
27 Financial Data Schedule for the nine months ended
September 30, 1997
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