-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BWqvhbEk5r63xLdW3eTdLG1dC8lTYnJ0E4Ovil1y+bUQqE8/EXpq4HY6+dEz4joi CyVfdJqga4wrMerCM+fZzg== 0000038195-97-000003.txt : 19970225 0000038195-97-000003.hdr.sgml : 19970225 ACCESSION NUMBER: 0000038195-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970204 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORT HOWARD CORP CENTRAL INDEX KEY: 0000038195 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 391090992 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20473 FILM NUMBER: 97517875 BUSINESS ADDRESS: STREET 1: 1919 S BROADWAY CITY: GREEN BAY STATE: WI ZIP: 54304 BUSINESS PHONE: 4144358821 FORMER COMPANY: FORMER CONFORMED NAME: FORT HOWARD PAPER CO/DE DATE OF NAME CHANGE: 19870506 FORMER COMPANY: FORMER CONFORMED NAME: MARYLAND CUP CORP/WI DATE OF NAME CHANGE: 19840612 FORMER COMPANY: FORMER CONFORMED NAME: FORT HOWARD PAPER CO DATE OF NAME CHANGE: 19830926 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- Common Stock $.01 par value 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Common Stock held by nonaffiliates of the Registrant, based on the closing price reported by the Nasdaq National Market on January 15, 1997, was $1,666,288,665. As of January 15, 1997, 74,510,652 shares of $.01 par value Common Stock were outstanding. The sections of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 13, 1997, captioned "Election of Directors," "Committees of the Board of Directors; Meetings and Compensation of Directors," "Ownership of Common Stock by Management," "Principal Stockholders," "Certain Transactions," "Compensation and Nominating Committee Report on Executive Officer Compensation," "Performance Graph" and "Executive Compensation" are incorporated by reference into this Form 10-K at Part III, Items 10, 11, 12 and 13. PART I ITEM 1. BUSINESS THE COMPANY Founded in 1919, Fort Howard is a leading manufacturer, converter and marketer of sanitary tissue products, including specialty dry form products, in the United States and the United Kingdom. Its principal products, which are sold in the commercial (away-from-home) and consumer (at-home) markets, include paper towels, bath tissue, table napkins, wipers and facial tissue manufactured from virtually 100% recycled fibers. The Company believes that it has the leading market share of tissue products in the domestic commercial market of approximately 25% and has focused approximately 60% of its domestic capacity on this segment of the tissue market. In the domestic consumer market, where the Company has an approximate 11% market share, its principal brands include Mardi Gras printed napkins (which hold the leading domestic market position) and paper towels, Soft'n Gentle bath and facial tissue, So- Dri paper towels, and Green Forest, the leading domestic line of environmentally positioned, recycled tissue paper products. Fort Howard also manufactures and distributes its products in the United Kingdom where it currently has the third largest market share primarily in the consumer segment of the market. DOMESTIC TISSUE OPERATIONS Products Commercial Products. Fort Howard's commercial tissue products include folded and roll towels, bath and facial tissue, bulk and dispenser napkins, disposable wipers, specialty printed merchandise and dispensers. Fort Howard produces and sells its commercial products in all three quality segments: Premium, Mid-range and Economy. Competition in this market is based upon attaining a competitive level of product attributes at prices which provide a good value to customers. Another competitive factor is the ability to provide reliable and timely service. Consumer Products. Fort Howard's consumer product growth strategy has targeted the value brand and private label segments of the market. The Company's value brands such as Mardi Gras, Soft'n Gentle, So-Dri and Green Forest offer a high level of softness, absorbency and brightness at a substantial price savings versus the premium brands. The appeal of Mardi Gras napkins and paper towels is enhanced by their multi-color prints with changing patterns and special seasonal designs. Fort Howard is the leading tissue producer in the growing consumer private label business with an estimated private label market share of approximately 40% in 1996. Many national grocery chains have focused on the development of private label tissue products to support the positioning of the chain with their shoppers as well as to enhance margins. Typically offered on a limited supplier basis, private label products enable the Company to form close relationships with many of the nation's fastest growing, leading grocery chains and mass merchandisers and afford opportunities for sales of Fort Howard's branded products with these same customers. - 2 - Marketing Commercial Market. Approximately 60% of the Company's products are sold through paper, institutional food and janitorial distributors into the commercial market. These products are produced in a broad range of weights, textures, sizes, colors and package configurations providing Fort Howard with distinct advantages as a full-line manufacturer. The Company also creates and prints logos, commercial messages and artistic designs on paper napkins and place mats for commercial customers and party goods and specialty print merchandisers. The Company sells its commercial products under its own brand names which include Preference Ultra, Preference, Envision and under the Fort Howard name. Fort Howard's commercial sales force of salaried representatives combines broad geographical reach and frequency of contact with the Company's major commercial customers, including large distributors, national accounts and club warehouses. Because the commercial sales force is dedicated to the sale of the Company's commercial tissue products, the Company's sales representatives are able to devote substantial time to developing end user demand, an important selling point for the Company's distributors. In addition, the Company's sales force includes a specialized sales team focused on selling wiper products. Consumer Market. Approximately 40% of the Company's products are sold through independent brokers to major food store chains and wholesale grocers or directly to mass merchandisers for at-home use. Most consumer products are sold under Company-owned brand names, with over 40% being sold under private labels. Principal brand names of consumer products include Mardi Gras, Soft'n Gentle, So-Dri and Green Forest. Regional sales managers focus on maintaining close relationships with brokers and retailers by emphasizing Fort Howard's historic strengths--functional product attributes at a good value for the consumer and enhanced margins for retailers. The Company's national accounts sales force focuses on mass merchandisers and the drug store market. The private label sales team markets directly to national accounts and through food brokers to their customers. In contrast to tissue producers who emphasize marketing of their consumer products through advertising and promotion to the end consumer, Fort Howard incurs minimal advertising expense. Rather, the Company focuses its marketing efforts for consumer products on trade promotion and incentive programs targeted to grocery and mass merchandising retailers. INTERNATIONAL TISSUE OPERATIONS The Company's international tissue operations principally consist of its tissue business in the United Kingdom, Fort Sterling Limited ("Fort Sterling"). The Company also entered into a joint venture to convert parent rolls into finished products in the People's Republic of China in 1995 which began operations during 1996. The Company also opened direct sales operations in Mexico in 1995. For an analysis of net sales, operating income (loss) and identifiable operating assets in the United States and internationally, see Note 11 to the audited consolidated financial statements. Products Fort Sterling's primary thrust has been in the larger consumer segment of the United Kingdom tissue market where approximately 85% of its converted - 3 - product sales are targeted. In a market where private label represents about one-half of all tissue sales, the Company believes that Fort Sterling maintains a leading share of the consumer private label market. Approximately two-thirds of Fort Sterling's consumer business in 1996 was sold under private labels to large grocers and convenience stores. Fort Sterling's principal brand is its Nouvelle line of tissue paper products. Overall, Fort Sterling's consumer market share was approximately 16% in 1996. Fort Sterling has approximately a 6% market share in the commercial segment. Marketing Fort Sterling maintains a direct sales force serving large national grocers, independent grocers and mass merchandisers in the consumer market. Fort Sterling has a commercial sales force which markets the Company's products via a network of independent distributors. A separate national accounts sales team targets commercial foodservice, health care and national industrial accounts. CAPITAL EXPENDITURES The Company has invested heavily in its manufacturing operations. Capital expenditures in the Company's tissue business were approximately $603 million for the five year period ended December 31, 1996, $369 million of which was incurred for capacity expansion projects. In addition, the Company's annual capital spending program includes significant investments for the ongoing modernization of each of its mills. For example, as new deinking technologies and converting equipment are developed, the Company adds such technology and equipment at each mill to maintain its low cost structure. The Company announced plans during 1996 for a $160 million expansion project that will add a new tissue paper machine and associated facilities at one of its United States mills. Construction of this capacity expansion will commence in 1997, with an anticipated completion date in 1999. In 1994, the Company completed the installation of a fifth tissue paper machine, environmental protection equipment and associated facilities at its Muskogee tissue mill. Total expenditures for the expansion were approximately $140 million. In 1993, the Company completed an expansion of its Green Bay tissue mill, including the addition of a new tissue paper machine and related environmental protection, pulp processing, converting, and steam generation equipment. The new tissue paper machine at the Green Bay mill commenced production in August 1992. Total expenditures for the expansion project were $180 million. Also in 1993, Fort Sterling completed a $96 million expansion which doubled the capacity of its paper mill. The expansion project added a 206-inch tissue paper machine and related deinking and pulp processing plants. RAW MATERIALS AND ENERGY SOURCES The principal raw materials and supplies used to manufacture tissue products are wastepaper (which is processed to reclaim fiber), chemicals, corrugated shipping cases and packaging materials. Fort Howard uses 100% wastepaper for all but a limited number of dry form and specialty products representing approximately 2% of its volume. Currently, Fort Howard recycles over 1.4 million tons of wastepaper annually into tissue products. Wastepaper prices began to rise in late 1994, peaked in the third quarter of 1995 and - 4 - fell throughout the remainder of 1995 and the first half of 1996. Prices were stable in the second half of 1996. See "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations." The deinking technology employed by the Company allows it to use a broad range of wastepaper grades, which effectively increases both the number of sources and the quantity of wastepaper available for its manufacturing process. The Company manufactures some of the process chemicals required for the Company's tissue production at each of its domestic mill locations. The balance of its chemical requirements is purchased from outside sources. The Company also purchases significant quantities of coal and petroleum coke for generation of electrical power and steam at all three of its domestic tissue mills. The Company seeks to maintain inventories of wastepaper, other raw materials and supplies which are adequate to meet its anticipated manufacturing needs. The Company's major sources of energy for its domestic tissue mills are coal, petroleum coke and, to a lesser extent, natural gas. These fuels are burned to provide steam and electrical power to process wastepaper, operate machinery and dry paper. Coal is received in Green Bay in self-unloading vessels during the Great Lakes shipping season and at the Muskogee and Savannah mills by rail. Petroleum coke is received in Green Bay and Savannah by rail or truck. The Company maintains adequate inventories of these fuels at each of its domestic mills. The Savannah mill can also generate electrical power by burning natural gas or fuel oil in combustion turbines. The primary sources of energy for the Company's United Kingdom tissue facilities are purchased electrical power and natural gas. COMPETITION All the markets in which the Company sells its products are extremely competitive. The Company's tissue products compete directly with those of a number of large diversified paper companies, including Chesapeake Corporation, Georgia-Pacific Corporation, James River Corporation of Virginia, Kimberly-Clark Corporation, Pope & Talbot, Inc. and The Procter & Gamble Company, as well as regional manufacturers, including converters of tissue into finished products who buy tissue directly from tissue mills. Many of the Company's competitors are larger and more strongly capitalized than the Company which may enable them to better withstand periods of declining prices and adverse operating conditions in the tissue industry. Customers generally take into account price, quality, distribution and service as factors when considering the purchase of products from the Company. CUSTOMERS AND BACKLOG The Company principally markets its products to customers in the United States and the United Kingdom, and to a lesser extent, Mexico, Canada, the Middle East, Europe and Asia. The business of the Company is not dependent on a single customer. The Company's products are manufactured with relatively short production time from basic materials. Products marketed under the Company's trademarks and stock items are sold from inventory. The backlog of customer orders is not significant in relation to sales. - 5 - RESEARCH AND DEVELOPMENT The Company maintains laboratory facilities with a permanent staff of engineers, scientists and technicians who are responsible for improving existing products, developing new products and processes, product quality, process control and providing technical assistance in adhering to regulatory standards. Continued emphasis is being placed upon designing new products and enhancing existing products, expanding the Company's capability to deink a broader range of wastepaper grades, further automating manufacturing operations and developing improved manufacturing and environmental processes. PATENTS, LICENSES, TRADEMARKS AND TRADE NAMES Although the Company owns or is a licensee of a number of patents, its operations and products are not materially dependent on any patent. The Company relies on trade secret protection for its proprietary deinking technology which is not covered by patent. The Company's domestic tissue products for at-home use are sold under the principal brand names Mardi Gras, Soft'n Gentle, So-Dri and Green Forest. For the Company's domestic commercial tissue business, principal brand names include Envision, Generation II and Preference. Such brand names are trademarks of the Company that are registered or otherwise protected under law. A portion of the Company's tissue products are sold under private labels or brand names owned by customers. EMPLOYEES At December 31, 1996, the Company's worldwide employment was approximately 7,000, of which 6,000 persons were employed in the United States and 1,000 persons were employed in the United Kingdom. There is no union representation at any of the Company's domestic facilities. The Company's employees at its facilities in the United Kingdom are unionized and the union contracts generally require annual renegotiation of employee wage awards. The Company considers its relationship with its employees to be good. ENVIRONMENTAL MATTERS The Company is subject to a wide range of laws in the United States and other countries that focus on the impact of the environment on human health, the limitation and control of emissions and discharges to the air and waters, the quality of ambient air and bodies of water and the handling, use and disposal of specified substances and solid waste at, among other locations, the Company's process waste landfills. Compliance with existing laws and regulations presently requires the Company to incur substantial capital expenditures and operating costs. In addition, environmental legislation and regulations and the interpretation and enforcement thereof are expected to become increasingly stringent. Such further environmental regulation is likely to limit the operating flexibility of the Company's manufacturing operations. Because other paper manufacturers are generally subject to similar environmental restrictions, the Company believes that compliance with environmental laws and regulations is not likely to have a material adverse effect on its competitive position. - 6 - In 1996, the Company made capital expenditures of $3.1 million with respect to pollution abatement and environmental compliance. The Company expects to commit approximately $8.6 million of capital expenditures to maintain compliance with environmental control standards and enhance pollution control at its mills during 1997 and 1998. Because the impact of further environmental regulation cannot be determined with certainty at this time, it is possible that there will be additional capital expenditures during these years, including but not limited to those described below. The United States Environmental Protection Agency (the "U.S. EPA") has proposed new air emission and revised wastewater discharge standards for the pulp and paper industry which are commonly known as the "Cluster Rules." Although the U.S. EPA had indicated that the components of the Cluster Rules dealing with wastewater discharges were to be finalized in 1996, this did not occur. If the final rules on wastewater discharges are substantially the same as the proposed rules, the Company estimates that it will incur additional aggregate capital expenditures that are not material. On March 8, 1996, U.S. EPA proposed components of the Cluster Rules that address air emissions from deinking paper mills, such as the Company's mills. U.S. EPA has not formally indicated when these emissions standards will be finalized. If the final air emission standards applicable to deinking mills are substantially the same as the proposed standards, the Company believes the cost of complying with such final standards will not be material. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") imposes liability, without regard to fault or to the legality of the original action, on certain classes of persons (referred to as potentially responsible parties or "PRPs") associated with a release or threat of a release of hazardous substances into the environment. Financial responsibility for the clean-up or other remediation of contaminated property or for natural resource damages can extend to previously owned or used properties, waterways and properties owned by third parties, as well as to properties currently owned and used by the Company even if contamination is attributable entirely to prior owners. The Company is involved in an investigation and potential clean-up of the Lower Fox River and has been named a PRP for alleged natural resource damages to the Fox River, both of which are discussed in "Legal Proceedings" below. Other than the United States Department of Interior, Fish and Wildlife Service ("FWS") assessment of the Fox River described in "Legal Proceedings," the Company is currently named as a PRP at only one CERCLA-related site. The Company believes its liability, if any, at such site is de minimis. However, there can be no certainty that the Company will not be named as a PRP at any other sites in the future or that the costs associated with additional sites would not be material to the Company's financial condition or results of operations. The Company has $37 million of accrued liabilities as of December 31, 1996, for estimated or anticipated liabilities, including legal and consulting costs, relating to environmental matters arising from its operations. The Company expects these costs to be expended over an extended number of years. Although the accrued liabilities reflect the Company's current estimate of the cost of these environmental matters, there can be no assurance that the amount accrued will be adequate. ITEM 2. PROPERTIES Fort Howard produces its domestic tissue products at three mills: its original mill in Green Bay, Wisconsin; its Muskogee, Oklahoma mill constructed - 7 - as a greenfield site which commenced papermaking production in 1978; and its greenfield mill near Savannah, Georgia, which commenced production in 1987. Each of these mills is a world-class, fully integrated tissue mill that can deink and process fiber from low cost wastepaper to provide virtually all of the mill's tissue fiber. Each mill is geographically located to minimize distribution costs to its regional markets. In Green Bay, Wisconsin, the Company operates nine tissue paper machines, including two world-class 270-inch tissue paper machines completed in 1984 and 1992. In addition, the Green Bay mill contains two dry form machines which commenced operation in 1978 and 1989. Although the Green Bay mill is the Company's original mill, having commenced production in 1920, it is well maintained, includes virtually all of Fort Howard's latest technologies and equipment and is cost competitive with the Company's newer mills. The Company's Muskogee, Oklahoma mill contains a 270-inch tissue paper machine which was added during the first quarter of 1994, and another 270-inch and three 200-inch tissue paper machines which were installed between 1978 and 1985. Fort Howard's greenfield mill located near Savannah, Georgia contains four 270-inch tissue paper machines that commenced production in 1987, 1988, 1989 and 1991. Each of the Company's domestic mills also includes a coal-fired cogeneration power plant capable of producing substantially all of the mill's steam and electricity, a modern deinking and pulp processing plant that processes virtually all of the mill's fiber requirements from wastepaper, a chemical plant that produces high volume chemicals used in whitening fibers, high speed converting equipment for cutting, folding, printing and packaging paper into the Company's finished products and related facilities and warehousing. The Muskogee mill also includes a polywrap manufacturing plant that processes approximately one-half of the polywrap required by the Company's domestic mills and the Green Bay mill includes a large machine shop that services all of the Company's domestic mills. Fort Sterling currently operates three tissue paper machines and a deinking and wastepaper processing plant at its Ramsbottom paper mill. The Company cuts, folds, prints and packages paper into finished tissue products at its Bolton and Wigan converting facilities. All of Fort Sterling's locations are in Greater Manchester, England. Except for certain facilities and equipment constructed or acquired in connection with sale and leaseback transactions pursuant to which the Company continues to possess and operate such facilities and equipment, substantially all of the Company's manufacturing facilities and equipment are owned in fee. The Company's domestic and United Kingdom tissue manufacturing facilities are pledged as collateral under the terms of the Company's debt agreements. See Note 4 to the audited consolidated financial statements. The Green Bay, Muskogee, Savannah, and United Kingdom facilities generally operate tissue paper machines at full capacity seven days per week, except for downtime for routine maintenance. Converting facilities are generally operated on a 24-hour per day, 5-day per week basis or a 7-day per week schedule. Converting capacity could be expanded by adding converting equipment. ITEM 3. LEGAL PROCEEDINGS In December 1994, the Company was notified by the United States Department of Justice ("U.S. DOJ") of a civil antitrust investigation into - 8 - possible agreements in restraint of trade in connection with sales of commercial sanitary paper products. The Company responded during the first and second quarters of 1995 to a Civil Investigative Demand issued by the U.S. DOJ. 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. Since 1992, the Company has been participating in an effort sponsored by the Wisconsin Department of Natural Resources ("WDNR") to study the nature and extent of polychlorinated biphenyl ("PCB") and other sediment contamination of the lower Fox River in northeast Wisconsin. The objective of this effort is to identify cost effective primary restoration of certain sediment deposits. On January 30, 1997, the Company and six other companies (the "Seven Companies") entered into an agreement with WDNR and the Wisconsin Department of Justice ("WDOJ") to investigate claims for natural resources damages, including sediment restoration claims, asserted against the Seven Companies relating to releases of PCBs and other hazardous substances to the lower Fox River ("Agreement") and to pursue a negotiated settlement of those claims under federal and state law. The Agreement also provides that the Seven Companies will make available to the State of Wisconsin a total of $10 million, consisting of work and funds, to, among other purposes, initiate demonstration projects to determine the efficacy of sediment restoration approaches and to underwrite a state directed natural resources damage assessment. The parties have agreed to a tolling agreement and to forbear from commencing litigation during the term of the Agreement. Based upon available information, the Company believes there are additional parties who may be responsible for releasing PCBs to the Fox River. The United States Department of Interior, Fish and Wildlife Service ("FWS"), a federal natural resource trustee, previously informed each of the Seven Companies that they have been identified as potentially responsible parties for purposes of claims for natural resources damages under CERCLA, commonly known as the "Superfund Act," and the Federal Water Pollution Control Act arising from alleged releases of PCBs to the Fox River and Green Bay system. The FWS alleges that natural resources including endangered species, fish, birds and tribal lands or lands held by the United States in trust for various tribes have been exposed to PCBs that were released from facilities located along the Fox River. The FWS has begun an assessment to determine and quantify the nature and extent of injury to any affected natural resources. On February 3, 1997, the Seven Companies were notified by FWS of its intent to file suit to recover natural resources damages pursuant to Federal law. Based upon available information, the Company believes that there are additional parties who may be identified as PRPs for alleged natural resource damages. The Company has $37 million of accrued liabilities as of December 31, 1996, for estimated or anticipated liabilities, including legal and consulting costs, relating to environmental matters arising from its operations. The Company expects these costs to be expended over an extended number of years. Although the accrued liabilities reflect the Company's current estimate of the cost of these environmental matters, there can be no assurance that the amount accrued will be adequate. 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 - 9 - deductions, the IRS relied on Internal Revenue Code ("Code") Section 162(k) (which denies deductions for otherwise deductible amounts paid or incurred in connection with stock redemptions). The Company contested the disallowance. In August 1994, the United States 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. The decision in this case was not entered while the Company and the IRS completed the administrative settlement of other adjustments that were not tried before the U.S. Tax Court. During that period, 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. On December 30, 1996, the U.S. Tax Court entered its decision allowing the deductions claimed by the Company. As a result of that decision, the Company has reversed in the fourth quarter of 1996 $36 million of income tax expense previously accrued for the tax years 1988 through 1995, thereby reducing its income tax expense by $36 million for 1996. Of the $36 million, a receivable of $10 million, including interest, has been recorded for amounts previously paid with respect to this matter. The Company and its subsidiaries are parties to other lawsuits and state and federal administrative proceedings in connection with their businesses. Although the final results in all suits and proceedings cannot be predicted with certainty, the Company presently 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 results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders during the fourth quarter of 1996. - 10 - ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT The following table provides certain information about each of the current executive officers of the Company. All executive officers are elected by, and serve at the discretion of, the Board of Directors. None of the executive officers of the Company are related by blood, marriage or adoption to any other executive officer or director of the Company. Present Principal Occupation or Name and Position Employment; Five-Year Employment With the Company Age History and other Directorships ----------------- --- -------------------------------- Donald H. DeMeuse .............. 60 Chairman of the Board of Directors Chairman of the Board since March 1992; Chief Executive Officer from July 1990 to September 1996; President from July 1990 to March 1992. Director of Associated Bank Green Bay. Michael T. Riordan ............. 46 Chief Executive Officer since October President and Chief Executive 1996; President since March 1992; Officer Chief Operating Officer from March 1992 to September 1996; Vice President prior to that time. Director of The Dial Corporation. Kathleen J. Hempel ............. 46 Vice Chairman and Chief Financial Vice Chairman and Officer since March 1992; Senior Chief Financial Officer Executive Vice President and Chief Financial Officer prior to that time. Director of Whirlpool Corporation. John F. Rowley ................. 56 Executive Vice President for more than Executive Vice President five years. Daniel J. Platkowski ........... 45 Senior Vice President since December Senior Vice President 1996; Vice President prior to that time. Timothy G. Reilly .............. 46 Senior Vice President since October Senior Vice President 1996; Vice President prior to that time. James W. Nellen II ............. 49 Vice President and Secretary for more Vice President and Secretary than five years. ITEM 4b. STATEMENT REGARDING FORWARD LOOKING DISCLOSURE Except for the historical information contained in this Annual Report on Form 10-K, certain matters discussed herein, including (without limitation) in particular under Part I, Item 1, "Business -- Environmental Matters," Item 3, "Legal Proceedings" and under Part II, Item 7, "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations," are forward looking statements that involve risks and uncertainties, including (without limitation) the effect of economic and market conditions, such as demand, industry operating capacity, product pricing and wastepaper supply and pricing, costs related to environmental matters, and the impact of current or - 11 - pending legislation and regulation. The forward looking statements and statements based on the Company's beliefs contained in "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" represent the Company's attempt to measure activity in, and to analyze the many factors affecting, the markets for its products and the markets for the raw materials from which its products are made. There can be no assurance that: (i) the Company has correctly measured or identified all of the factors affecting these markets or the extent of their likely impact; (ii) the publicly available information with respect to these factors on which the Company's analysis is based is complete or accurate or (iii) the Company's analysis is correct. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's Common Stock began trading under the symbol FORT on the Nasdaq National Market on March 10, 1995. Prior to that, there was no market for the Company's Common Stock. The range of high and low trade prices of the Company's Common Stock during each quarter for the two most recent fiscal years is as follows: Common Stock Trade Prices ------------------------- High Low Close ---- --- ----- Quarter Ended ------------- March 31, 1995.................... $12.875 $12.00 $12.625 June 30, 1995..................... 15.00 12.00 14.125 September 30, 1995................ 16.25 13.375 15.375 December 31, 1995................. 23.25 14.375 22.50 March 31, 1996.................... 25.50 19.00 22.50 June 30, 1996..................... 23.25 19.50 19.875 September 30, 1996................ 26.00 19.25 24.375 December 31, 1996................. 29.50 23.50 27.6875 The number of holders of record of the Company's Common Stock at December 31, 1996, was approximately 935. The Company anticipates that all its earnings in the near future will be used for the repayment of indebtedness and for the development and expansion of its business and, therefore, does not anticipate paying dividends on its Common Stock in the foreseeable future. The Company's 1995 Bank Credit Agreement and the Company's outstanding debt obligations limit, in each case with certain exceptions, the ability of the Company to pay dividends on its Common Stock. Subject to such restrictions, any determination to pay cash dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant at the time by the Board of Directors. - 12 - ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA Year Ended December 31, ------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In millions, except ratios and per share amounts) STATEMENT OF INCOME DATA: Net sales ............................... $ 1,581 $ 1,621 $ 1,274 $ 1,187 $ 1,151 Cost of sales ........................... 945 1,139 867 784 726 ------- ------- ------- ------- ------- Gross income............................. 636 482 407 403 425 Selling, general, and administrative (a)..................... 142 122 110 97 97 Amortization of goodwill (b). ........... -- -- -- 43 57 Goodwill write-off (b)................... -- -- -- 1,980 -- Environmental charge (c)................. 18 -- 20 -- -- ------- ------- ------- ------- ------- Operating income (loss) (c).............. 476 360 277 (1,717) 271 Interest expense......................... 259 310 338 342 338 Other (income) expense, net ............. 2 (2) -- (3) 2 ------- ------- ------- ------- ------- Income (loss) before taxes (c)........... 215 52 (61) (2,056) (69) Income taxes (credit) (d)................ 44 18 (19) (16) -- ------- ------- ------- ------- ------- Net income (loss) before extraordinary items and adjustment for accounting change (e)............................. 171 34 (42) (2,040) (69) Extraordinary items - losses on debt repurchases (net of income taxes)...... (8) (19) (28) (12) -- Adjustment for adoption of SFAS No. 106 (net of income taxes) (f).............. -- -- -- -- (11) ------- ------- ------- ------- ------- Net income (loss) (g).................... $ 163 $ 15 $ (70) $(2,052) $ (80) ======= ======= ======= ======= ======= Earnings (loss) per share before extraordinary items (e)................ $ 2.44 $ 0.57 $ (1.11) $(53.54) $ (1.82) Earnings (loss) per share (g)............ $ 2.32 $ 0.25 $ (1.85) $(53.85) $ (2.10) OTHER DATA: EBITDA (h)............................... $ 596 $ 459 $ 393 $ 387 $ 410 EBITDA as a percent of net sales (h)..... 37.7% 28.3% 30.8% 32.6% 35.6% Depreciation of property, plant and equipment ......................... $ 102 $ 99 $ 96 $ 88 $ 81 Non-cash interest expense................ 14 13 74 101 140 Capital expenditures..................... 73 47 84 166 233 Weighted average number of shares of Common Stock outstanding (in thousands) (g)..................... 70,088 58,228 38,103 38,107 38,107 BALANCE SHEET DATA (at end of period): Total assets............................. $ 1,615 $ 1,652 $ 1,681 $ 1,650 $ 3,575 Working capital (deficit)................ (36) (35) (98) (92) (124) Long-term debt (including current portion) and Common Stock with put right.............................. 2,463 2,966 3,318 3,234 3,104 Shareholders' deficit.................... (1,455) (1,838) (2,148) (2,081) (29)
- 13 - (a) Selling, general and administrative expense in 1993 reflects an $8 million reduction for the reversal of all employee stock compensation expense accrued prior to 1993. (b) During the third quarter of 1993, the Company wrote off the remaining unamortized balance of its goodwill of $1.98 billion and, accordingly, there is no amortization of goodwill for periods subsequent to September 30, 1993. (c) During the fourth quarters of 1996 and 1994, the Company recorded environmental charges totaling $18 million and $20 million, respectively. Excluding the effects of the environmental charge, the Company's operating income, and income (loss) before taxes in 1996 would have been $494 million and $233 million, respectively, and in 1994 would have been $297 million and ($41) million, respectively. (d) During the fourth quarter of 1996, the Company recorded a credit of $36 million to income tax expense reversing income taxes previously accrued for the tax years 1988 through 1995 for previously disallowed income tax deductions for fees and expenses related to 1988 debt financing and refinancing transactions. (e) Excluding the environmental charges described in (c) above and the income tax credit described in (d) above, net income (loss) before extraordinary items and net income (loss) per share before extraordinary items in 1996 would have been $145 million and $2.07 per share, respectively, and in 1994 would have been ($28) million and ($0.73) per share, respectively. (f) Reflects the cumulative effect on years prior to 1992 of adopting SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This change in accounting principle, excluding the cumulative effect, decreased operating income for 1992 by $1 million. (g) The computation of earnings (loss) per share is based on the weighted average number of shares of Common Stock outstanding during the period plus (in periods in which they have a material dilutive effect) the effect of shares of Common Stock contingently issuable upon the exercise of stock options. (h) EBITDA represents operating income plus depreciation of property, plant and equipment, amortization of goodwill, the goodwill write-off, the 1996 and 1994 environmental charges and the effects of 1993 employee stock compensation (credits). EBITDA is presented here as a measure of the Company's debt service ability. Certain financial and other restrictive covenants in the 1995 Bank Credit Agreement and other instruments governing the Company's indebtedness are based on the Company's EBITDA, subject to certain adjustments. - 14 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Year Ended December 31, ---------------------------- 1996 1995 1994 ---- ---- ---- (In millions, except percentages) Net sales: Domestic tissue......................... $ 1,338 $ 1,320 $ 1,060 International operations................ 177 164 131 Harmon.................................. 66 137 83 ------- ------- ------- Consolidated............................ $ 1,581 $ 1,621 $ 1,274 ======= ======= ======= Operating income: Domestic tissue (a)..................... $ 448 $ 337 $ 264 International operations ............... 25 18 8 Harmon ................................. 3 5 5 ------- ------- ------- Consolidated (a)........................ $ 476 $ 360 $ 277 ======= ======= ======= Consolidated net income (loss)............ $ 163 $ 15 $ (70) ======= ======= ======= Operating income as a percent of net sales 30.1% 22.2% 21.7% _____________________ (a) During the fourth quarter of 1996 and 1994, operating income for domestic tissue operations was reduced by environmental charges of $18 million and $20 million, respectively. See Note 10 to the Company's audited consolidated financial statements. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 Net Sales. Net sales in the Company's domestic tissue operations increased 1.4% for 1996 compared to 1995. The increase was due to a 1.4% increase in converted products volume. Domestic sales volume in 1996 was stronger in the consumer market than in the commercial market. Sales volume of unconverted parent rolls decreased in 1996 compared to 1995 as the Company focused on higher profit converted products. Domestic net selling prices were slightly higher in 1996 compared to 1995. However, selling prices declined in 1996 from price levels at the beginning of the year principally as a result of price decreases in the consumer market which took effect in April and June 1996. Net selling prices were stable during the second half of 1996. Net sales of the Company's international operations increased 8.2% for 1996 compared to 1995 due to an increase in net selling prices and higher volume of converted products at the Company's United Kingdom facilities. Consolidated net sales for 1996 decreased 2.5% compared to 1995 because of significantly lower selling prices in the Company's wastepaper brokerage subsidiary, Harmon Assoc. Corp. ("Harmon"), where sales decreased 52.4% in 1996 compared to 1995. - 15 - Gross Income. For 1996, consolidated gross income increased 32.2% principally due to lower raw material costs and, to a much lesser degree, higher volume and selling prices for both domestic tissue and international operations. Consolidated gross margins increased to 40.3% for 1996 from 29.7% for 1995 as a result of significant raw material cost decreases that began in late 1995 and continued through the first half of 1996. Raw material costs stabilized in the second half of 1996. Wastepaper prices both domestically and in the United Kingdom are expected to remain stable for the first quarter of 1997; however, the direction of wastepaper price trends in succeeding quarters is uncertain due to general economic factors, virgin market pulp price trends and changes in demand for wastepaper by deinked market pulp mills and in export markets that are difficult to estimate. Consolidated gross margins were positively affected in 1996 by the decreased 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, increased to 9.0% for 1996 compared to 7.5% for 1995. 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. Environmental Charge. Based upon currently available information and analysis, the Company recorded an $18 million charge in the fourth quarter of 1996 for estimated or anticipated liabilities, including legal and consulting costs, relating to environmental matters arising from its operations. The Company expects these costs to be incurred over an extended number of years. See "Environmental Matters" and "Legal Proceedings" and Note 10 to the Company's audited consolidated financial statements. Operating Income. Operating income increased to $476 million in 1996 compared to $360 million in 1995. Operating income as a percent of net sales increased to 30.1% in 1996 compared to 22.2% in 1995. (Excluding the environmental charge from 1996 results, operating income would have increased to $494 million in 1996 resulting in operating income as a percent of net sales of 31.3%.) Domestic tissue operating income as a percent of net sales increased to 33.5% in 1996 from 25.5% in 1995. The increases are due to significantly lower raw material costs in 1996 and slightly higher net selling prices and volume in both domestic tissue and international operations. Income Taxes. The Company's 1996 income tax expense was reduced by $36 million as a result of a fourth quarter 1996 decision by the United States Tax Court allowing the Company to deduct certain fees and expenses related to 1988 debt financing and refinancing transactions which were claimed by the Company for its tax years 1988 through 1995 and which had been previously disallowed by the Internal Revenue Service. See "Legal Proceedings" and Note 3 to the Company's audited consolidated financial statements. Extraordinary Loss. The Company's net income in 1996 was decreased by an extraordinary loss of $8 million (net of income taxes of $5 million) representing the write-off of deferred loan costs associated with the prepayment of a portion of the outstanding indebtedness under the 1995 Bank Credit Agreement. - 16 - Net Income. The Company reported net income of $163 million for 1996 compared to net income of $15 million for 1995. FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 Net Sales. Consolidated net sales for 1995 increased 27.2% compared to 1994. Domestic tissue net sales for 1995 increased 24.6% compared to 1994 due to net selling price increases of 22.4%, converted products volume increases of 4.4% and reduced parent roll export volume. The significant increase in domestic net selling prices in 1995 reflects commercial market price increase announcements effective January 1995, April 1995, July 1995 and September 1995 and consumer market price increase announcements effective January 1995 and July 1995, all in response to rising raw material costs and improving operating rates in the tissue industry. Domestic volume of the Company's commercial products was flat for the full year 1995 compared to 1994. Significant volume growth in the first quarter of 1995 was offset by volume declines in succeeding quarters. The Company's firm implementation of price increases led to the commercial volume declines beginning in the second quarter of 1995. Domestic consumer volume was significantly higher throughout 1995 compared to 1994 due to strong consumer market demand for the Company's products. Net sales of the Company's international operations increased 24.8% for 1995 compared to 1994 due to a significant increase in net selling prices, slightly higher volume of converted products and the benefit from the change in foreign exchange rates, while parent roll volume was reduced. Net sales of the Company's wastepaper brokerage subsidiary, Harmon, increased 63.8% for 1995 due to higher selling prices and slightly higher volume. Gross income. For 1995, consolidated gross income increased 18.3% due to higher selling prices and to a much lesser degree, higher domestic volume, partially offset by higher raw material costs. Consolidated gross margins decreased to 29.7% for 1995 from 31.9% for 1994 and 34.0% for 1993 as a result of significant raw material cost increases that began in mid-1994 and continued until mid-1995. However, beginning in the second quarter of 1995, as net selling price increases began to offset raw material cost increases, consolidated gross margins began to recover and reached 34.0% in the fourth quarter of 1995, the same rate achieved in full year 1993. Domestic tissue gross margins in 1995 exhibited trends similar to consolidated gross margins. Beginning in July 1994, domestic wastepaper prices rose sharply until flattening in the second and third quarters of 1995. Average wastepaper prices in the fourth quarter of 1995 were higher than average wastepaper prices in the fourth quarter of 1994. However, wastepaper prices fell significantly in the fourth quarter of 1995 from the third quarter of 1995 and by December 1995 were significantly below wastepaper prices in December 1994. Wastepaper price trends are expected to remain positive for the first quarter of 1996, however, the direction of wastepaper price trends in succeeding quarters is uncertain due to general economic factors, virgin market pulp price trends and expected increases in demand for wastepaper arising from scheduled start-ups of deinked market pulp mills and from export markets. Costs of other raw materials also increased during 1995 compared to 1994 but to a much lesser extent, while all other costs were flat or declined due to efficiencies achieved from higher volumes. Gross margins of international operations increased in 1995 compared to 1994 in spite of significantly higher wastepaper prices due to the benefits - 17 - achieved from product rationalization in 1994 and the success of 1995 price increases. Wastepaper price trends in the United Kingdom were similar to those in the United States in 1995. Consolidated gross margins were negatively affected in 1995 by the 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 7.5% for 1995 compared to 8.6% for 1994. The decrease occurred principally due to the effects of significantly higher net sales. Operating Income. Operating income increased to $360 million in 1995 compared to $277 million in 1994. Excluding the environmental charge from 1994 results, operating income would have been $297 million in 1994. Operating income as a percent of net sales decreased to 22.2% in 1995 compared to 23.3% in 1994, as adjusted for the environmental charge. Domestic tissue operating income as a percent of net sales decreased to 25.5% in 1995 from 26.9% in 1994, also as adjusted for the environmental charge. The decreases are due to significantly higher raw material costs in 1995 partially offset by significantly higher net selling prices and higher domestic volume. Operating income as a percent of net sales began to recover beginning in the second quarter of 1995, similar to gross margin trends, such that consolidated and domestic tissue operating income as a percent of net sales reached 25.5% and 27.9%, respectively, in the fourth quarter of 1995. Extraordinary Loss. The Company's net income in 1995 was decreased by an extraordinary loss of $19 million (net of income taxes of $12 million) representing the redemption premiums and write-offs of deferred loan costs associated with the prepayment or redemption of all the Company's indebtedness outstanding under the 1988 Bank Credit Agreement, 1993 Term Loan, Senior Secured Notes, 14 1/8% Debentures (at par) and 12 5/8% Debentures (at 102.5% of the principal amount thereof). Net Income. The Company reported net income of $15 million for 1995 compared to a net loss of $70 million for 1994. FINANCIAL CONDITION Year Ended December 31, 1996 During 1996, cash decreased $187,000. Capital additions of $73 million and debt repayments of $504 million were funded principally by net proceeds of $213 million from the sale of Common Stock and $365 million of cash from operations provided by strong operating results. Receivables decreased $35 million during 1996 due principally to lower net selling prices in the domestic tissue and international operations in the fourth quarter of 1996 compared to the fourth quarter of 1995. Inventories decreased by $12 million principally due to decreased raw material costs in the fourth quarter of 1996 compared to the fourth quarter of 1995. Accounts payable increased $19 million principally due to increased liabilities resulting from higher selling expenses due to the growth of the consumer business and the introduction of premium products in the commercial market and - 18 - from higher capital spending in the fourth quarter of 1996. Other current liabilities increased $25 million due to higher amounts to be paid under employee compensation plans as a result of strong earnings results and higher current expenses for legal and consulting costs associated with the fourth quarter environmental charge. The liability for interest payable decreased $4 million due to lower debt balances as a result of the 1996 public stock offering (the "1996 Offering") and cash provided from operations. Principally 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 1996 Offering and cash from operations, the net working capital deficit was $36 million at December 31, 1996, as compared to a deficit of $35 million at December 31, 1995. Year Ended December 31, 1995 During 1995, cash increased $524,000. Capital additions of $47 million, debt repayments of $1,811 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, repayment of the 1995 Receivables Facility and the redemption of all the outstanding 12 5/8% Debentures and 14 1/8% Debentures, were funded principally by cash provided from operations of $157 million (including proceeds of $63 million from the sale of certain domestic tissue receivables), net proceeds of $284 million from the sale of Common Stock and borrowings of $1,418 million (net of $50 million of debt issuance costs) pursuant to the 1995 public stock offering (the "1995 Offering"). Receivables decreased $25 million during 1995 due principally to the sale of certain domestic tissue receivables of $63 million, which was largely offset by the effects of an increase in net sales and significantly higher net selling prices in all the Company's businesses. Inventories increased by $32 million principally due to an increase in inventory quantities. Parent roll and wastepaper inventories were increased to reflect currently lower priced wastepaper and to maximize the flexibility of existing productive capacity. The liability for interest payable decreased $20 million due to the early payment of interest in connection with the prepayment or redemption of a substantial portion of the Company's indebtedness. Principally as a result of all these changes and the $53 million reduction in the current portion of long-term debt, the net working capital deficit decreased to $35 million at December 31, 1995, from a deficit of $98 million at December 31, 1994. Liquidity and Capital Resources The Company's principal uses of cash generated from operations for the next several years will be interest and principal payments on its indebtedness and capital expenditures. On May 15, 1996, the Company issued 10 million shares of Common Stock at $20.25 per share in the 1996 Offering. Proceeds from the 1996 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 1996 Offering, resulting in additional new proceeds of $10 million after deducting underwriting commissions. During 1996 the Company issued 419,074 shares of Common Stock at a weighted average price of $15.42 per share as a result of stock option exercises under the Company's employee stock option plans resulting in net proceeds to the Company of $6 million. - 19 - Capital expenditures were $73 million, $47 million and $84 million in 1996, 1995 and 1994, respectively, including an aggregate of $59 million during those periods for capacity expansions. 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 United States mills. The expansion is planned for completion in 1999 at an estimated cost of $160 million. The 1995 Bank Credit Agreement imposes limits for domestic capital expenditures, with certain exceptions, of $75 million per year. The Company is also permitted to spend up to $250 million for domestic expansion projects including, without restriction, an additional tissue paper machine at one of its existing domestic mills. Other domestic expansion projects are restricted unless certain conditions are met. In addition, the Company is permitted to make capital expenditures for international expansion of up to $100 million in the aggregate if certain conditions are met. Under the 1995 Bank Credit Agreement, the Company may carry over to one or more years (thereby increasing the scheduled permitted limit for capital expenditures in respect of such year) the amount by which the scheduled permitted limit for each year (beginning with fiscal year 1995) exceeded the capital expenditures actually made in respect of such prior year. At December 31, 1996, the capital expenditures carryover available to the Company totaled $38 million. The Company does not believe such limitations will impair its plans for capital expenditures. Capital expenditures are projected to approximate $90 to $110 million annually for the next several years, plus the domestic expansion capital spending that is expected to be completed in 1999. The portions of the above capital expenditures which are attributable to environmental matters are described in "Environmental Matters." The Company's 1995 Revolving Credit Facility, which may be used for general corporate purposes, has a final maturity of March 16, 2002. At December 31, 1996, the Company had $273 million in available capacity under the 1995 Revolving Credit Facility. The Company believes that cash provided from operations, unused borrowing capacity under the 1995 Revolving Credit Facility and access to financing in public and private markets will be sufficient to enable it to fund capital expenditures (including planned capital expenditures for environmental matters) and to meet its debt service requirements for the foreseeable future. Refer to Note 3 to the audited consolidated financial statements for a description of certain matters related to income taxes. Also see "Legal Proceedings." Seasonality Historically, a slightly higher amount of the Company's revenues and operating income have been recognized during the second and third quarters. The Company expects to fund seasonal working capital needs from the 1995 Revolving Credit Facility. - 20 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Fort Howard Corporation is responsible for the preparation, integrity and fair presentation of the following financial statements. These financial statements have been prepared by management in accordance with generally accepted accounting principles and where necessary include amounts based on management's judgments and estimates. Management also prepared the other information in this annual report and is responsible for its integrity and consistency with the financial statements. Fort Howard Corporation is committed to conducting its business with integrity and in accordance with all applicable laws, rules and regulations. This commitment is reflected in the Company's Code of Conduct. The Code of Conduct is annually communicated to employees and compliance is monitored regularly to provide reasonable assurance that the Company's business is being conducted in accordance with the Code of Conduct. The Company maintains a system of internal accounting controls designed to provide reasonable assurance that the Company's assets are safeguarded and that transactions are executed and recorded according to management's authorizations in order to create financial records reliable for the preparation of financial statements. Management continuously evaluates its system of internal accounting controls in response to changes in business conditions and operations, staff turnover and development of new technologies and, as a result, enhances existing controls with the objective of maintaining a strong internal control environment. In addition, the Company's internal audit staff monitors the effectiveness of internal controls through operational audits of this system, reporting their findings and recommendations for improvement to management. The financial statements of the Company have been audited by Arthur Andersen LLP. The independent accountants were provided with unrestricted access to all financial records and related data in order to perform their tests and other procedures. Their opinion on the fairness of the Company's financial statements appears on the next page. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the Company's management, internal auditors and independent accountants to review the adequacy of significant internal control systems, the nature, extent and results of internal and external audits and reported financial results. The Audit Committee maintains direct and independent access with the independent accountants. In conclusion, management believes that as of December 31, 1996, the Company's internal control systems over financial reporting are adequate and operating effectively in all material respects. /s/ Michael T. Riordan /s/ Kathleen J. Hempel Michael T. Riordan, President and Kathleen J. Hempel, Vice Chairman Chief Executive Officer and Chief Financial Officer - 21 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of FORT HOWARD CORPORATION: We have audited the accompanying consolidated balance sheets of Fort Howard Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996, and 1995, and the related consolidated statements of income and cash flows for the years ended December 31, 1996, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fort Howard Corporation and subsidiaries as of December 31, 1996, and 1995, and the consolidated results of their operations and their cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, January 31, 1997. - 22 - FORT HOWARD CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) For the Years Ended December 31, -------------------------------- 1996 1995 1994 ---- ---- ---- Net sales............................ $ 1,580,771 $ 1,620,903 $ 1,274,445 Cost of sales........................ 944,257 1,139,378 867,357 ----------- ----------- ----------- Gross income......................... 636,514 481,525 407,088 Selling, general and administrative.. 142,143 121,406 110,285 Environmental charge................. 18,000 -- 20,000 ----------- ----------- ----------- Operating income..................... 476,371 360,119 276,803 Interest expense..................... 258,948 309,915 337,701 Other (income) expense, net.......... 2,923 (1,662) 118 ----------- ----------- ----------- Income (loss) before taxes........... 214,500 51,866 (61,016) Income taxes (credit)................ 43,767 18,401 (18,891) ----------- ----------- ----------- Income (loss) before extraordinary items.............................. 170,733 33,465 (42,125) Extraordinary items--losses on debt repurchases (net of income taxes of $5,313 in 1996, $11,986 in 1995 and $14,731 in 1994)....... (8,136) (18,748) (28,170) ----------- ----------- ----------- Net income (loss).................... $ 162,597 $ 14,717 $ (70,295) =========== =========== =========== Earnings (loss) per share: Net income (loss) before extraordinary items.............. $ 2.44 $ 0.57 $ (1.11) Extraordinary items................ (0.12) (0.32) (0.74) ----------- ----------- ----------- Net income (loss).................. $ 2.32 $ 0.25 $ (1.85) =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. - 23 - FORT HOWARD CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) December 31, ------------------- 1996 1995 ---- ---- Assets Current assets: Cash and cash equivalents.................. $ 759 $ 946 Receivables, less allowances of $3,343 in 1996 and $2,883 in 1995............... 63,194 97,707 Inventories................................ 151,248 163,076 Deferred income taxes...................... 60,000 29,000 Income taxes receivable.................... 10,121 700 ----------- ----------- Total current assets..................... 285,322 291,429 Property, plant and equipment................ 2,057,446 1,971,641 Less: Accumulated depreciation............. 809,650 706,394 ----------- ----------- Net property, plant and equipment........ 1,247,796 1,265,247 Other assets................................. 82,262 95,761 ----------- ----------- Total assets........................... $ 1,615,380 $ 1,652,437 =========== =========== Liabilities and Shareholders' Deficit Current liabilities: Accounts payable........................... $ 131,205 $ 112,384 Interest payable........................... 60,443 64,375 Income taxes payable....................... 7,700 1,339 Other current liabilities.................. 110,357 85,351 Current portion of long-term debt.......... 11,972 62,720 ----------- ----------- Total current liabilities................ 321,677 326,169 Long-term debt............................... 2,451,373 2,903,299 Deferred and other long-term income taxes.... 247,464 225,043 Other liabilities............................ 49,703 36,355 Shareholders' deficit: Common Stock............................... 744 634 Additional paid-in capital................. 1,108,976 895,652 Cumulative translation adjustment.......... 4,717 (2,844) Retained deficit........................... (2,569,274) (2,731,871) ----------- ----------- Total shareholders' deficit.............. (1,454,837) (1,838,429) ----------- ----------- Total liabilities and shareholders' deficit.............................. $ 1,615,380 $ 1,652,437 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. - 24 - FORT HOWARD CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Year Ended December 31, ------------------------------- 1996 1995 1994 ---- ---- ---- Cash provided from (used for) operations: Net income (loss)....................... $ 162,597 $ 14,717 $ (70,295) Depreciation............................ 101,647 98,882 95,727 Non-cash interest expense............... 13,909 12,925 74,238 Deferred income taxes (credit).......... 27,402 4,418 (33,832) Environmental charge.................... 18,000 -- 20,000 Pre-tax loss on debt repurchases........ 13,448 30,734 42,901 Restricted cash......................... (14,916) -- -- (Increase) decrease in receivables...... 34,513 25,443 (17,316) (Increase) decrease in inventories...... 11,828 (32,233) (12,574) (Increase) decrease in income taxes receivable............................ (9,421) 4,500 4,300 Increase (decrease) in accounts payable. 18,821 11,403 (684) Increase (decrease) in interest payable. (3,932) (19,898) 29,419 Increase in income taxes payable........ 6,361 1,115 102 All other, net.......................... (14,928) 4,930 (6,799) ---------- ---------- ---------- Net cash provided from operations... 365,329 156,936 125,187 Cash used for investment activities: Additions to property, plant and equipment............................. (73,436) (47,296) (83,559) Cash provided from (used for) financing activities: Proceeds from long-term borrowings...... -- 1,467,800 750,000 Repayment of long-term borrowings....... (504,025) (1,810,966) (759,202) Debt issuance costs..................... (1,489) (50,054) (32,134) Issuance (repurchase) of Common Stock, net of offering costs.......... 213,434 284,104 (97) ---------- ---------- ---------- Net cash used for financing activities........................ (292,080) (109,116) (41,433) ---------- ---------- ---------- Increase (decrease) in cash............... (187) 524 195 Cash, beginning of year................... 946 422 227 ---------- ---------- ---------- Cash, end of year................... $ 759 $ 946 $ 422 ========== ========== ========== Supplemental Cash Flow Disclosures: Interest paid........................... $ 248,919 $ 317,866 $ 237,650 Income taxes paid (refunded), net....... 49,555 (5,728) 2,483 The accompanying notes are an integral part of these consolidated financial statements. - 25 - FORT HOWARD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. SIGNIFICANT ACCOUNTING POLICIES (A) OPERATIONS -- The Company operates in one industry segment as a manufacturer, converter and marketer of a diversified line of single-use tissue products for the commercial and consumer markets, primarily in the United States and United Kingdom. (B) PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of Fort Howard Corporation and all domestic and foreign subsidiaries and are prepared in conformity with U.S. generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Assets and liabilities of foreign subsidiaries are translated at the rates of exchange in effect at the balance sheet date. Income amounts are translated at the average of the monthly exchange rates. The cumulative effect of translation adjustments is deferred and classified as a cumulative translation adjustment in the consolidated balance sheet. The Company currently does not hedge its translation exposure. The Company does not engage in material hedging activity with respect to foreign currency transaction risks. All significant intercompany accounts and transactions have been eliminated. (C) CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount of cash equivalents approximates fair value due to the short maturity of the investments. At December 31, 1996, the Company had $14,916,000 of cash restricted as collateral under the terms of its 1995 Accounts Receivable Facility. This restricted cash is recorded under "Other Assets" in the consolidated balance sheet. (D) INVENTORIES -- Inventories are carried at the lower of cost or market. Cost is principally determined on a first-in, first-out basis, with a lesser portion determined on an average cost by specific lot method. The elements of costs include materials, labor and overhead. (E) PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are being depreciated on a straight-line basis over useful lives of 30 to 50 years for buildings and 2 to 25 years for equipment. In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of" ("SFAS No. 121"). The Company's adoption of SFAS No. 121 effective January 1, 1995, had no effect on the 1995 consolidated financial statements. Assets under capital leases principally arose in connection with sale and leaseback transactions as described in Note 5 and are stated at the present value of future minimum lease payments. These assets are amortized over the respective periods of the leases which range from 15 to 25 years. - 26 - Amortization of assets under capital leases is included in depreciation expense. The Company follows the policy of capitalizing interest incurred in conjunction with major capital expenditure projects. The amounts capitalized in 1996, 1995 and 1994 were $1,487,000, $2,096,000 and $4,230,000, respectively. (F) REVENUE RECOGNITION -- Sales of the Company's tissue products are recorded upon shipment of the products. (G) ENVIRONMENTAL EXPENDITURES -- Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when material environmental assessments and/or remedial or restoration efforts are probable, and the cost can be reasonably estimated. Recoveries of environmental remediation costs from other potentially responsible parties and recoveries from insurance carriers are not recorded as assets until such time as their receipt is deemed probable and the amounts are reasonably estimable. The Company's accounting policies related to environmental expenditures are in accordance with AICPA Statement of Position 96-1. (H) EMPLOYEE BENEFIT PLANS -- A substantial majority of the Company's employees are covered under defined contribution plans. The Company makes annual discretionary contributions under the plans. Participants may also contribute a certain percentage of their wages to the plans. Costs charged to operations for defined contributions plans were approximately $16,307,000, $13,231,000 and $12,716,000 for 1996, 1995 and 1994, respectively. Employees retiring prior to February 1, 1990, from the Company's U.S. tissue operations who had met certain eligibility requirements are entitled to postretirement health care benefit coverage (see Note 6). These benefits are subject to deductibles, copayment provisions, a lifetime maximum benefit and other limitations. In addition, employees who retire after January 31, 1990 and meet certain age and years of service requirements may purchase health care benefit coverage from the Company up to age 65. The Company has reserved the right to change or terminate this benefit for active employees at any time. Employees of the Company's U.K. tissue operations are not entitled to Company-provided postretirement benefit coverage. (I) INTEREST RATE CAP AGREEMENTS -- The costs of interest rate cap agreements are amortized over the respective lives of the agreements. (J) INCOME TAXES -- Deferred income taxes are provided to recognize temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The principal difference relates to depreciation expense. Deferred income tax expense represents the change in the deferred income tax asset and liability balances, excluding the deferred tax benefit related to extraordinary losses. (K) EARNINGS (LOSS) PER SHARE -- Earnings (loss) per share has been computed on the basis of the average number of common shares outstanding during the years, after giving retroactive effect to a 6.5-for-one stock split on January 31, 1995. The average number of shares used in the computation was 70,088,196, 58,227,712 and 38,103,215 for 1996, 1995 and 1994, respectively. - 27 - The assumed exercise of all outstanding stock options has been excluded from the computation of earnings (loss) per share in 1996, 1995 and 1994 because the result was not material or was antidilutive. 2. BALANCE SHEET INFORMATION December 31, ------------------ 1996 1995 ---- ---- (In thousands) Inventories Raw materials and supplies........................ $ 70,595 $ 80,134 Finished and partly-finished products............. 80,653 82,942 ---------- ---------- $ 151,248 $ 163,076 ========== ========== Property, Plant and Equipment Land.............................................. $ 45,736 $ 45,523 Buildings......................................... 329,923 326,207 Machinery and equipment........................... 1,637,892 1,586,627 Construction in progress.......................... 43,895 13,284 ---------- ---------- $2,057,446 $1,971,641 ========== ========== Capital Lease Assets (Included in Property, Plant and Equipment Totals Above) Buildings......................................... $ 4,448 $ 4,008 Machinery and equipment........................... 187,733 187,007 ---------- ---------- Total assets under capital leases............. $ 192,181 $ 191,015 ========== ========== - 28 - December 31, ------------------- 1996 1995 ---- ---- (In thousands) Other Assets Deferred loan costs, net of accumulated amortization.. $ 62,787 $ 89,180 Prepayments and other................................. 4,559 6,581 Restricted cash....................................... 14,916 -- -------- -------- $ 82,262 $ 95,761 ======== ======== Other Current Liabilities Salaries and wages.................................... $ 61,657 $ 51,797 Contributions to employee benefit plans............... 16,938 13,226 Taxes other than income taxes......................... 6,769 6,442 Other accrued expenses................................ 24,993 13,886 -------- -------- $110,357 $ 85,351 ======== ======== 3. INCOME TAXES Year Ended December 31, ---------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Income Tax Provision Current Federal.................................. $ 2,632 $ (304) $ 1,800 State.................................... 2,761 768 509 Foreign.................................. 5,659 1,533 (2,099) -------- -------- -------- Total current........................ 11,052 1,997 210 Deferred Federal.................................. 27,954 17,227 (18,826) State.................................... 3,281 (2,739) (2,793) Foreign.................................. 1,480 1,916 2,518 -------- -------- -------- Total deferred....................... 32,715 16,404 (19,101) -------- -------- -------- $ 43,767 $ 18,401 $(18,891) ======== ======== ======== - 29 - Year Ended December 31, ----------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Effective Tax Rate Reconciliation U.S. federal tax rate...................... 35.0% 35.0% (34.0)% State income taxes, net.................... 2.7 2.1 (4.1) Long-term income taxes and interest........ (17.0) -- 3.3 Permanent differences related to accruals.. -- -- 3.3 Other, net................................. (0.3) (1.6) 0.5 --------- -------- -------- Effective tax rate......................... 20.4% 35.5% (31.0)% ========= ======== ======== Income (Loss) Before Income Taxes Domestic................................... $ 195,284 $ 39,067 $(62,711) Foreign.................................... 19,216 12,799 1,695 --------- -------- -------- $ 214,500 $ 51,866 $(61,016) ========= ======== ======== The net deferred income tax liability at December 31, 1996, includes $252 million related to property, plant and equipment offset by federal and state loss and tax credit carryforwards totaling $30 million and the tax benefit of accruals which do not meet economic performance requirements for income tax purposes totaling $35 million. The Company has not recorded a valuation allowance with respect to any deferred income tax asset. 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 Code Section 162(k) (which denies deductions for otherwise deductible amounts paid or incurred in connection with stock redemptions). The Company contested the disallowance. In August 1994, the United States 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. The decision in this case was not entered while the Company and the IRS completed the administrative settlement of other adjustments that were not tried before the United States Tax Court. During that period, 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. On December 30, 1996, the United States Tax Court entered its decision allowing the deductions claimed by the Company. As a result of that decision, the Company has reversed in the fourth quarter of 1996 $36 million of income taxes previously accrued for the tax years 1988 through 1995, thereby reducing its income tax expense by $36 million for 1996. Of the $36 million, a receivable of $10 million, including interest, has been recorded for amounts previously paid with respect to this matter. The Company will have approximately $27 million of net operating loss - 30 - carryforwards as of December 31, 1996, for federal income tax purposes which expire as follows: $18 million in 2010 and $9 million in 2011. 4. LONG-TERM DEBT Long-term debt and capital lease obligations, including amounts payable within one year, are summarized as follows: December 31, ---------------- 1996 1995 ---- ---- (In thousands) 1995 Term Loan A, due in varying semi-annual repayments with a final maturity of March 16, 2002 (a).................................. $ 624,000 $ 810,000 1995 Term Loan B, due in varying semi-annual repayments with a final maturity of December 31, 2002 (b)............................... 119,000 330,000 1995 Revolving Credit Facility, due March 16, 2002 (a).................................. 27,300 79,400 Senior Unsecured Notes, 9 1/4%, due March 15, 2001.... 450,000 450,000 Senior Unsecured Notes, 8 1/4%, due February 1, 2002.. 100,000 100,000 Senior Subordinated Notes, 9%, due February 1, 2006... 618,097 650,000 Subordinated Notes, 10%, due March 15, 2003........... 298,500 300,000 Capital lease obligations, at interest rates approximating 10.90%................................ 170,606 175,161 Pollution Control Revenue Refunding Bonds, 7.90%, due October 1, 2005................................. 42,000 42,000 Debt of foreign subsidiaries, at rates ranging from 7.25% to 7.84%, due in varying annual installments through March 2001.................................. 13,842 29,458 ---------- ---------- 2,463,345 2,966,019 Less: Current portion of long-term debt............... 11,972 62,720 ---------- ---------- $2,451,373 $2,903,299 ========== ========== _____________________ (a) Interest on the 1995 Term Loan A and the 1995 Revolving Credit Facility is payable at prime plus 0.75% or, subject to certain limitations, at a reserve adjusted LIBOR rate plus 1.75% subject to downward adjustment if certain financial criteria are met (at a weighted average rate of 7.55% at December 31, 1996). (b) Interest on the 1995 Term Loan B is payable at prime plus 1.50% or at a reserve adjusted LIBOR rate plus 2.50% (at a weighted average rate of 8.08% at December 31, 1996). The Company incurred extraordinary losses of $8 million, $19 million, and $28 million, net of income taxes of $5 million, $12 million and $15 million, in 1996, 1995 and 1994, respectively, representing redemption premiums and write-offs of deferred loan costs associated with refinancing transactions or early repayment of debt in each of those years. Among other restrictions, the 1995 Bank Credit Agreement, the debt of foreign subsidiaries and the Company's indentures: (1) restrict payments of dividends, repayments of subordinated debt, purchases of the Company's Common - 31 - Stock, additional borrowings and acquisition of property, plant and equipment; (2) require that certain financial ratios be maintained at prescribed levels; (3) restrict the ability of the Company to make fundamental changes and to enter into new lines of business, the pledging of the Company's assets and guarantees of indebtedness of others and (4) limit dispositions of assets and investments which might be made by the Company. The Company believes that such limitations should not impair its plans for continued maintenance and modernization of facilities or other operating activities. The Company is charged a 0.5% fee with respect to any unused balance available under its $300 million 1995 Revolving Credit Facility, and a 2.00% fee with respect to any letters of credit issued under the 1995 Revolving Credit Facility. At December 31, 1996, $27 million of borrowings reduced available capacity under the 1995 Revolving Credit Facility to $273 million. The aggregate annual maturities of long-term debt and capital lease obligations for the five years succeeding December 31, 1996, are as follows: 1997-$11,972,000; 1998-$121,726,000; 1999-$133,724,000; 2000-$150,433,000 and 2001-$637,325,000. In September 1995, the Company entered into agreements expiring in July 2000 (the "1995 Receivables Sales Agreements") whereby substantially all the Company's domestic tissue receivables are sold. The Company has retained substantially the same credit risk as if the receivables had not been sold. The Company received $60 million from such initial sales which was applied to the repayment of the 1995 Receivables Facility and may receive up to $25 million of additional proceeds on a revolving basis. The Company retains a residual interest in the receivables sold, thus receivables in the accompanying consolidated balance sheet are only reduced by the net proceeds from the sales which totaled $60 million and $63 million as of December 31, 1996 and 1995, respectively. Under the terms of the 1995 Receivables Sales Agreements, the ongoing costs to the Company from this program are based on LIBOR, plus 0.25% to 0.65%, on the net proceeds received. At December 31, 1996, receivables totaling $57 million, inventories totaling $151 million and property, plant and equipment with a net book value of $1,238 million were pledged as collateral or held in trust under the terms of the 1995 Bank Credit Agreement, the 1995 Receivables Sales Agreements, the debt of foreign subsidiaries and under the indentures for sale and leaseback transactions. Fair Market Value Disclosures The aggregate fair values of the Company's long-term debt and capital lease obligations approximated $2,521 million and $2,975 million at December 31, 1996, and 1995, respectively, compared to aggregate carrying values of $2,463 million and $2,966 million at December 31, 1996 and 1995, respectively. The fair values of the long-term debt and capital lease obligations have been determined principally based on secondary market transactions or trading activity in the securities. Obligations under the 1995 Bank Credit Agreement and debt of foreign subsidiaries bear interest at floating rates. The Company's policy is to enter into interest rate cap agreements as a hedge to effectively fix or limit its exposure to floating interest rates to, at a minimum, comply with the terms of its senior secured debt agreements. The Company is a party to LIBOR- based interest rate cap agreements which limit the interest cost to the Company with respect to $500 million of floating rate obligations to 8% plus the Company's borrowing margin until June 1, 1999. At current market rates at - 32 - December 31, 1996, the fair value of the Company's interest rate cap agreements is $1 million compared to a carrying value of $8 million. The counterparties to the Company's interest rate cap agreements consist of major financial institutions. While the Company is exposed to credit risk to the extent of nonperformance by these counterparties, management monitors the risk of default by the counterparties and believes that the risk of incurring losses due to nonperformance is remote. 5. SALE AND LEASEBACK TRANSACTIONS Certain buildings and machinery and equipment at the Company's tissue mills were sold and leased back from various financial institutions. These leases are treated as capital leases in the accompanying consolidated financial statements. Future minimum lease payments at December 31, 1996, are as follows: Year Ending December 31, Amount ------------------------ ------ (In thousands) 1997................................... $ 23,648 1998................................... 23,438 1999................................... 23,279 2000................................... 22,765 2001................................... 22,636 2002 and thereafter.................... 310,440 -------- Total payments......................... 426,206 Less imputed interest at rates approximating 10.9%............ 255,600 -------- Present value of capital lease obligations.................... $170,606 ======== 6. EMPLOYEE POSTRETIREMENT BENEFIT PLANS Effective January 1, 1995, the Company revised the eligibility requirements for postretirement medical benefits resulting in a reduction in the number of active employees eligible to receive these benefits. An additional change was made to freeze the amount of the monthly postretirement medical benefit at the 1995 amount. As a result of these changes, the accumulated postretirement benefit obligation as of December 31, 1995 was reduced by $10.6 million and the Company recognized a curtailment gain of $3.4 million in 1995. The decrease in the obligation is being amortized over 12 years, the average remaining service period of active employees. - 33 - Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Net Periodic Postretirement Benefit Cost Service cost...................................... $ 83 $ 82 $1,138 Interest cost..................................... 823 871 1,719 Curtailment gain recognized....................... -- (3,389) -- Amortization of prior service cost (benefit)...... (671) (671) 85 ------ ------- ------ Net periodic postretirement benefit cost (gain). $ 235 $(3,107) $2,942 ====== ======= ====== December 31, ---------------- 1996 1995 ---- ---- (In thousands) Unfunded Accumulated Postretirement Benefit Obligation Accumulated postretirement benefit obligation: Retirees............................................ $ 7,906 $ 8,127 Fully eligible active plan participants............. 1,302 1,305 Other active plan participants...................... 1,733 1,980 ------- ------- 10,941 11,412 Unrecognized prior service benefit.................... 6,713 7,385 Unrecognized actuarial losses......................... (4) (435) ------- ------- Accrued postretirement benefit cost................... $17,650 $18,362 ======= ======= The medical trend rate assumed in the determination of the accumulated postretirement benefit obligation at December 31, 1996, begins at 9.5% in 1997, decreases 1% per year to 6.5% in 2000 and remains at that level thereafter. Increasing the assumed medical trend rates by one percentage point in each year would have no material effect on the accumulated postretirement benefit obligation as of December 31, 1996, or net periodic postretirement benefit cost. The discount rate used in determining the accumulated postretirement benefit obligation was 7.5% compounded annually with respect to the 1996 and 1995 valuations. 7. SHAREHOLDERS' DEFICIT The Company is authorized to issue up to 100,000,000 shares of $.01 par value Common Stock. At December 31, 1996, 74,386,222 shares were issued and 74,380,921 shares were outstanding. At December 31, 1995, 63,377,326 shares were issued and 63,370,794 shares were outstanding. The Company is authorized to issue up to 50,000,000 shares of $.01 par value Preferred Stock, none of which were issued or outstanding at December 31, 1996 or December 31, 1995. On May 15, 1996, the Company issued 10 million shares of Common Stock at $20.25 per share (the "1996 Offering"). Proceeds from the 1996 Offering, net - 34 - 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 1996 Offering, resulting in additional new proceeds of $10 million after deducting underwriting commissions. The proceeds of the sale of Common Stock was used to prepay a portion of its indebtedness under the 1995 Bank Credit Agreement. During 1996 the Company issued 419,074 shares of Common Stock at a weighted average price of $15.42 per share as a result of stock option exercises under the Company's employee stock option plans. The net proceeds to the Company of $6 million from these stock option exercises were used to prepay a portion of its indebtedness under the 1995 Bank Credit Agreement. In March and April of 1995, the Company issued 25,269,555 shares of Common Stock at $12.00 per share in the 1995 Offering. Proceeds from the 1995 Offering, net of underwriting commissions and other related expenses totaling $19 million, were $284 million. The 1995 Offering was part of a recapitalization plan 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. Changes in Shareholders' Deficit Accounts Additional Cumulative Common Paid-in Translation Retained Stock Capital Adjustment Deficit ------ ---------- ----------- -------- (In millions) Balance, December 31, 1993..... $0.4 $ 600.1 $(5.1) $(2,676.3) Net loss....................... -- -- -- (70.3) Foreign currency translation adjustment................... -- -- 2.8 -- ---- -------- ----- --------- Balance, December 31, 1994..... 0.4 600.1 (2.3) (2,746.6) Net income..................... -- -- -- 14.7 Common Stock offering.......... 0.2 283.9 -- -- Reclass of Common Stock with put right.................... 0.0 11.7 -- -- Foreign currency translation adjustment................... -- -- (0.5) -- ---- -------- ----- --------- Balance, December 31, 1995..... 0.6 895.7 (2.8) (2,731.9) Net income..................... -- -- -- 162.6 Common Stock offering.......... 0.1 203.6 -- -- Exercise of stock options...... 0.0 6.4 -- -- Tax benefits from exercise of stock options............. -- 1.9 -- -- Other transactions............. 0.0 1.4 -- -- Foreign currency translation adjustment................... -- -- 7.5 -- ---- -------- ----- --------- Balance, December 31, 1996....... $0.7 $1,109.0 $ 4.7 $(2,569.3) ==== ======== ===== ========= - 35 - 8. STOCK OPTIONS The Company has two stock option plans, the 1995 Stock Incentive Plan under which a total of 3,359,662 shares of Common Stock are reserved for awards to officers and key employees as stock options, stock appreciation rights, restricted stock, performance shares, stock equivalents and dividend equivalents and the 1995 Stock Plan for Non-Employee Directors under which a total of 80,000 shares of Common Stock are reserved for grant to non-employee directors, of which 2,854 shares have been granted at December 31, 1996. In addition, stock options to purchase 3,317,834 shares were granted and remain outstanding at December 31, 1996, under predecessor stock plans. The Company accounts for these plans using the intrinsic value based method pursuant to APB Opinion No. 25 and Statement of Financial Accounting Standards No. 123 ("SFAS No. 123") under which compensation expense of $52,000 was recognized in 1996 and no compensation expense was recognized in 1995 and 1994. Had compensation cost for these plans been determined pursuant to the fair value method under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share amounts): 1996 1995 ----------------------- ----------------------- As Reported Pro Forma As Reported Pro Forma ----------- --------- ----------- --------- Net Income................. $ 162,597 $ 161,260 $ 14,717 $ 14,127 Earnings Per Share......... $ 2.32 $ 2.30 $ 0.25 $ 0.24 Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, and additional awards in future years are anticipated, the effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. The fair value of the 1995 and 1996 option grants used to compute the pro forma amounts above was estimated on the grant date using the Black- Scholes option pricing model with the following assumptions used for grants in 1996 and 1995 respectively: risk free interest rates of 6.07% and 5.51%; expected lives of 5 years and 5 years; and expected volatility of 19.26% and 24.32%. The dividend yield was assumed to be zero since the Company does not anticipate paying dividends in the near term. All options issued or to be issued subject to the 1995 Stock Incentive Plan will expire not later than ten years after the date on which they are granted. The vesting schedule and exercisability of stock options under the 1995 Stock Incentive Plan will be determined by the Compensation and Nominating Committee of the Board of Directors. Pursuant to the 1995 Stock Incentive Plan, 12,000 shares were granted as a Restricted Stock Award and 8,000 shares were granted as a Stock Equivalent Award in September 1996. In December 1996, stock options to purchase 750,000 shares were also granted pursuant to the 1995 Stock Incentive Plan. - - 36 - Changes in Stock Options Outstanding Weighted Average Exercise Number Of Price Options Per Option --------- ---------------- Balance, December 31, 1993..................... 3,825,646 $16.22 Options Cancelled............................ (82,888) $16.06 --------- ------ Balance, December 31, 1994..................... 3,742,758 $16.22 Options Granted.............................. 743,000 $19.75 Options Cancelled............................ (2,600) $18.46 --------- ------ Balance, December 31, 1995..................... 4,483,158 $16.81 Options Granted.............................. 750,000 $27.75 Options Exercised............................ (419,074) $15.42 Options Cancelled............................ (29,750) $19.61 --------- ------ Balance, December 31, 1996..................... 4,784,334 $18.63 ========= ====== Exercisable at December 31, 1996............... 3,557,134 $16.55 ========= ====== Shares available for future grant at December 31, 1996............................ 1,873,162 ========= 3,317,834 of the 4,784,334 options outstanding at December 31, 1996 have exercise prices of $15.38 or $18.46 with a weighted average exercise price of $16.32 and a weighted average remaining contractual life of 2.6 years. All of these options are exercisable. The remaining 1,466,500 options have exercise prices of $19.75 or $27.75 with a weighted average exercise price of $23.84 and a weighted average remaining contractual life of 9.5 years. 239,300 of these options are exercisable; their weighted average exercise price is $19.75. 9. RELATED PARTY TRANSACTIONS At December 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley Group") and certain of its affiliates controlled 26% of the Company's Common Stock. Morgan Stanley & Co. Incorporated ("MS&Co") has served as lead underwriter with respect to the 1996 Offering, the 1995 Offering and periodic public debt offerings and has received underwriting fees of $3 million in 1996, $7 million in 1995 and $20 million in 1994 in connection with such public offerings. MS&Co is also a market maker with respect to the Company's public debt securities. MS&Co also periodically provides financial advisory services for the Company for which it receives customary fees. Pursuant to an agreement terminated effective December 31, 1994, MS&Co provided financial advisory services to the Company for which the Company paid MS&Co $1 million in 1994. The Company is a party to several interest rate cap agreements (see Note 4) including one such agreement with MS&Co which was purchased in 1994 for $2 million. - 37 - 10. COMMITMENTS AND CONTINGENCIES The Company is subject to a wide range of laws in the United States and other countries that focus on the impact of the environment on human health, the limitation and control of emissions and discharges to the air and waters, the quality of ambient air and bodies of water and the handling, use and disposal of specified substances and solid waste. Financial responsibility for the clean-up or other remediation of contaminated property or for natural resource damages can extend to previously owned or used properties, waterways and properties owned by third parties as well as to prior owners. Since 1992, the Company has been participating in an effort sponsored by the Wisconsin Department of Natural Resources ("WDNR") to study the nature and extent of polychlorinated biphenyl ("PCB") and other sediment contamination of the lower Fox River in northeast Wisconsin. The objective of this effort is to identify cost effective primary restoration of certain sediment deposits. On January 30, 1997, the Company and six other companies (the "Seven Companies") entered into an agreement with WDNR and the Wisconsin Department of Justice ("WDOJ") to investigate claims for natural resources damages, including sediment restoration claims, asserted against the Seven Companies relating to releases of PCBs and other hazardous substances to the lower Fox River ("Agreement") and to pursue a negotiated settlement of those claims under federal and state law. The Agreement also provides that the Seven Companies will make available to the State of Wisconsin a total of $10 million, consisting of work and funds, to, among other purposes, initiate demonstration projects to determine the efficacy of sediment restoration approaches and to underwrite a state led natural resources damage assessment. The parties have agreed to toll certain statute of limitations and forbear from commencing litigation during the term of the Agreement. Based upon available information, the Company believes there are additional parties who may be responsible for releasing PCBs to the Fox River. The United States Department of Interior, Fish and Wildlife Service ("FWS"), a federal natural resource trustee, previously informed each of the Seven Companies that they have been identified as potentially responsible parties for purposes of claims for natural resources damages under CERCLA, commonly known as the "Superfund Act," and the Federal Water Pollution Control Act arising from alleged releases of PCBs to the Fox River and Green Bay system. The FWS alleges that natural resources including endangered species, fish, birds and tribal lands or lands held by the United States in trust for various tribes have been exposed to PCBs that were released from facilities located along the Fox River. The FWS has begun an assessment to determine and quantify the nature and extent of injury to any affected natural resources. On February 3, 1997, the Seven Companies were notified by FWS of its intent to file suit to recover natural resources damages pursuant to Federal law. Based upon available information, the Company believes that there are additional parties who may be identified as PRPs for alleged natural resource damages. The Company recorded an additional environmental charge of $18 million in the fourth quarter of 1996 reflecting revised estimates of costs for environmental matters related to its operations, including legal and consulting costs. The amounts accrued represent estimated gross undiscounted amounts that are based on both internal and external estimates of restoration as well as assumptions as to participation by other companies. The Company expects these costs to be expended over an extended number of years and as of December 31, 1996, has accrued liabilities for environmental matters of approximately $37 million. The ultimate cost to the Company for environmental - 38 - matters cannot be determined with certainty due to the unknown magnitude of the contamination to be addressed, the varying cost of restoration methods that could be employed, the evolving nature of restoration technologies and government regulations and the inability to determine the Company's share of multiparty obligations or the extent to which contributions will be available from other parties. The accrued liabilities reflect the Company's current estimate of the cost of these environmental matters. There can be no assurance that the amount accrued will not increase or decrease. It is reasonably possible that the Company's recorded estimate of these liabilities may change. The Company and its subsidiaries are parties to other lawsuits and state and federal administrative proceedings in connection with their businesses. Although the final results in all such suits and proceedings cannot be predicted with certainty, the Company currently believes that the ultimate resolution of all of 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. 11. GEOGRAPHIC INFORMATION United United States Kingdom Consolidated ------ ------- ------------ (In thousands) 1996 Net sales........................ $ 1,404,935 $175,836 $ 1,580,771 Operating income................. 452,165 24,206 476,371 Identifiable operating assets.... 1,446,363 169,017 1,615,380 1995 Net sales........................ $ 1,457,136 $163,767 $ 1,620,903 Operating income................. 342,534 17,585 360,119 Identifiable operating assets.... 1,490,426 162,011 1,652,437 1994 Net sales........................ $ 1,143,205 $131,240 $ 1,274,445 Operating income................. 268,620 8,183 276,803 Identifiable operating assets.... 1,517,992 162,906 1,680,898 Intercompany sales and charges between geographic areas and export sales are not material. - 39 - 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ----- (In millions, except per share data) 1996 Net sales................ $ 386 $ 402 $ 408 $ 385 $1,581 Gross income............. 147 159 174 156 636 Operating income (a)..... 114 125 135 102 476 Net income before extraordinary item (a). 27 36 43 65 171 Extraordinary item-loss on debt repurchases.... -- (3) -- (5) (8) Net income............... 27 33 43 60 163 Earnings per share: Net income before extraordinary item (a) $ 0.43 $ 0.53 $ 0.58 $ 0.87 $ 2.44 Extraordinary item-loss on debt repurchases.. -- (0.05) -- (0.06) (0.12) Net income per share... $ 0.43 $ 0.48 $ 0.58 $ 0.81 $ 2.32 Dividends per share...... -- -- -- -- -- _____________________ (a) During the fourth quarter of 1996, the Company recorded an environmental charge totaling $18 million and a credit of $36 million to income tax expense reversing income taxes previously accrued for the tax years 1988 through 1995 for previously disallowed income tax deductions for fees and expenses related to 1988 debt financing and refinancing transactions. Excluding the effects of the environmental charge and the income tax expense reversal, the Company's operating income, net income before extraordinary item and net income before extraordinary item per share would have been $120 million, $39 million and $0.52, respectively, for the fourth quarter and $494 million, $145 million and $2.07, respectively, for the year 1996. First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ----- (In millions, except per share data) 1995 Net sales................ $ 367 $ 412 $ 426 $ 416 $ 1,621 Gross income............. 100 115 126 141 482 Operating income......... 71 88 95 106 360 Net income (loss) before extraordinary item..... (9) 7 15 21 34 Extraordinary item-loss on debt repurchases.... (19) -- -- -- (19) Net income (loss)........ (28) 7 15 21 15 Earnings (loss) per share: Net income (loss) before extraordinary item... (0.22) 0.12 0.23 0.33 0.57 Extraordinary item-loss on debt repurchases.. (0.44) -- -- -- (0.32) Net income (loss) per share............ (0.66) 0.12 0.23 0.33 0.25 Dividends per share...... -- -- -- -- -- - 40 - ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT For information regarding executive officers see Part I, Item 4a. For information regarding directors and compliance with Section 16(a) of the Securities and Exchange Act of 1934, see the Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 1997, under the captions "Election of Directors" and "Executive Compensation--Section 16(a) Beneficial Ownership Reporting Compliance" which are incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION See the Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 1997, under the captions "Committees of the Board of Directors; Meetings and Compensation of Directors," "Compensation and Nominating Committee Report on Executive Officer Compensation," "Performance Graph" and "Executive Compensation" which are incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. See the Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 1997, under the captions "Ownership of Common Stock by Management," "Principal Stockholders" and "Executive Compensation--Management Incentive Plan and 1995 Stock Incentive Plan," which are incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 1997, under the caption "Certain Transactions," which is incorporated by reference herein. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. 1. Financial Statements of Fort Howard Corporation Included in Part II, Item 8: Report of Independent Public Accountants. Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994. Consolidated Balance Sheets as of December 31, 1996, and 1995. - 41 - Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. Separate financial statements and supplemental schedules of the Company and its consolidated subsidiaries are omitted since the Company is primarily an operating corporation and its consolidated subsidiaries included in the consolidated financial statements being filed do not have a minority equity interest or indebtedness to any other person or to the Company in an amount which exceeds five percent of the total assets as shown by the consolidated financial statements as filed herein. a. 2. Financial Statement Schedules Report of Independent Public Accountants Schedule II -- Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the audited consolidated financial statements or notes thereto. a. 3. Exhibits Exhibit No. Description ----------- ----------- 3.1 Restated Certificate of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) 3.2 Amended and Restated By-Laws of the Company. (Incorporated by reference to Exhibit 4.2 as filed with the Company's Form S-8 on February 3, 1997.) 4.1 Credit Agreement dated as of March 8, 1995, among the Company, the lenders named therein, and Bankers' Trust Company, Bank of America National Trust and Savings Association and Chemical Bank as arrangers, and Bankers' Trust Company as administrative agent. (Incorporated by reference to Exhibit 4.0 as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) +4.1(A) Amendment No. 1 dated April 8, 1996, to Credit Agreement. +4.1(B) Amendment No. 2 dated October 21, 1996, to Credit Agreement. 4.2 Form of 9 1/4% Senior Note Indenture dated as of March 15, 1993, between the Company and Norwest Bank Wisconsin, N.A., Trustee. (Incorporated by reference to Exhibit 4.1 as filed with the Company's Amendment No. 2 to Form S-2 on March 4, 1993.) 4.3 Form of 10% Subordinated Note Indenture dated as of March 15, 1993, between the Company and the United States Trust Company of New York, Trustee. (Incorporated by reference to Exhibit 4.2 as filed with the Company's Amendment No. 2 to Form S-2 on March 4, 1993.) - 42 - 4.4 Form of 9% Senior Subordinated Note Indenture dated as of February 1, 1994, between the Company and The Bank of New York, Trustee. (Incorporated by reference to Exhibit 4.2 as filed with the Company's Form S-2 on December 17, 1993.) Registrant agrees to provide copies of instruments defining the rights of security holders, including indentures, upon request of the Commission. *10.1 Employment Agreement dated October 15, 1993, with the Company's Chairman. (Incorporated by reference to Exhibit 10 as filed with the Company Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.) +*10.2 Employment Agreements dated December 13, 1996, with the Company's Chief Executive Officer and Chief Financial Officer. +*10.3 Employment Agreements dated December 13, 1996, with certain executive officers of the Company. *10.4 Amended and Restated Stockholders Agreement dated as of March 1, 1995, among the Company, Morgan Stanley Group, MSLEF II, certain institutional investors and the Management Investors which amends and restates the Stockholders Agreement dated as of December 7, 1990, as amended. (Incorporated by reference to Exhibit 10.3(A) as filed with the Company's Annual Report or Form 10-K for the year ended December 31, 1994.) *10.5 Management Incentive Plan as amended and restated as of December 19, 1994. (Incorporated by reference to Exhibit No. 10.2 as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) +*10.5(A) Amendment No. 1 dated April 29, 1996, to Management Incentive Plan. *10.6 Supplemental Retirement Plan. (Incorporated by reference to Exhibit No. 10.7 as filed with Amendment No. 2 to the Company's Form S-1 on October 25, 1988.) *10.6(A) Amendment No. 1 to the Supplemental Retirement Plan. (Incorporated by reference to Exhibit 10.P as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1988.) *10.7 Form of Supplemental Retirement Agreement for the Company's Chief Executive Officer as Amended. (Incorporated by reference to Exhibit 10.M as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1988.) *10.8 Supplemental Retirement Agreements for certain directors and officers. (Incorporated by reference to Exhibit 10.T as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1989.) *10.8(A) Form of Amendment No. 1 to Supplemental Retirement Agreements for certain directors and officers. (Incorporated by reference to Exhibit 10.U as filed with the Company's Form 10-K for the year ended December 31, 1990.) - 43 - *10.8(B) Form of Amendment No. 2 to Supplemental Retirement Agreements for certain directors and officers. (Incorporated by reference to Exhibit 10 as filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.) *10.9 Amended and Restated Management Equity Participation Agreement dated as of August 1, 1988. (Incorporated by reference to Exhibit No. 10.9 as filed with the Company's Amendment No. 2 to Form S-1 on October 25, 1988.) *10.9(A) Letter Agreement dated June 27, 1990, which modifies Amended and Restated Management Equity Participation Agreement. (Incorporated by reference to Exhibit 10.V as filed with the Company's Form 10-K for the year ended December 31, 1990.) *10.9(B) Letter Agreement dated July 31, 1990, among the Company and the Principal Management Investors which amends Amended and Restated Management Equity Participation Agreement. (Incorporated by reference to Exhibit 10.W as filed with the Company's Form 10-K for the year ended December 31, 1990.) *10.9(C) Letter Agreement dated July 31, 1990, between the Company and the Management Investor Committee which amends Amended and Restated Management Equity Participation Agreement. (Incorporated by reference to Exhibit 10.X as filed with the Company's Form 10-K for the year ended December 31, 1990.) *10.9(D) Letter Agreement dated February 7, 1991, between the Company and the Management Investors Committee which amends the Amended and Restated Management Equity Participation Agreement. (Incorporated by reference to Exhibit 10.GG as filed with the Company's Form 10-K for the year ended December 31, 1990.) *10.9(E) Form of Letter Agreement dated February 7, 1991, among the Company, the Management Investors Committee and Management Investors which cancels certain stock options, grants new stock options and amends the Amended and Restated Management Equity Participation Agreement. (Incorporated by reference to Exhibit 10.HH as filed with the Company's Form 10-K for the year ended December 31, 1990.) *10.9(F) Letter Agreement dated March 1, 1995, between the Company and the Management Investors Committee which amends the Amended and Restated Management Equity Participation Agreement. (Incorporated by reference to Exhibit 10.8(F) as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) *10.10 Management Equity Plan. (Incorporated by reference to Exhibit 10.H as filed with the Company's Form 10-K for the year ended December 31, 1991.) *10.10(A) Amendment dated December 28, 1993, to Management Equity Plan. (Incorporated by reference to Exhibit 10.9(A) as filed with the Company's Form 10-K for the year ended December 31, 1993.) - 44 - *10.10(B) Amendment dated March 1, 1995, to the Management Equity Plan. (Incorporated by reference to Exhibit 10.9(B) as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) *10.11 Form of Management Equity Plan Agreement. (Incorporated by reference to Exhibit 10.I as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.12 Participation Agreement dated as of October 20, 1989, among the Company, Philip Morris Credit Corporation, the Loan Participants listed therein, the Connecticut National Bank, Owner Trustee, and Wilmington Trust Company, Indenture Trustee. (Incorporated by reference to Exhibit 10.15 as filed with the Company's Post-Effective Amendment No. 2 to Form S-1 on February 8, 1990.) 10.13 Facility Lease Agreement dated as of October 20, 1989, between the Connecticut National Bank in its capacity as Owner Trustee, the Lessor and the Company as Lessee. (Incorporated by reference to Exhibit 10.16 as filed with the Company's Post-Effective Amendment No. 2 to Form S-1 on February 8, 1990.) 10.14 Power Installation Lease Agreement dated as of October 20, 1989, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee, and the Company. (Incorporated by reference to Exhibit 10.HH as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.15 Equipment Lease Agreement dated as of October 20, 1989, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee, and the Company. (Incorporated by reference to Exhibit 10.II as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.16 Participation Agreement dated as of December 23, 1990, among the Company, Bell Atlantic Tricon Leasing Corporation, Bankers Trust Company, The Connecticut National Bank, Owner Trustee, and Wilmington Trust Company, Indenture Trustee. (Incorporated by reference to Exhibit 10.BB as filed with the Company's Form 10-K for the year ended December 31, 1990.) 10.17 Amended and Restated Equipment Lease Agreement [1990] dated as of December 19, 1991, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee under the Trust Agreement, as Lessor, and the Company, as Lessee. (Incorporated by reference to Exhibit 10.W as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.18 Facility Lease Agreement dated as of December 19, 1991, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee, and the Company. (Incorporated by reference to Exhibit 10.EE as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.19 Equipment Lease Agreement [1991] dated as of December 19, 1991, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee, and the Company. (Incorporated by reference to Exhibit 10.FF as filed with the Company's Form 10-K for the year ended December 31, 1991.) - 45 - 10.20 Power Plant Lease Agreement dated as of December 19, 1991, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee, and the Company. (Incorporated by reference to Exhibit 10.GG as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.21 Amended and Restated Participation Agreement dated as of October 21, 1991, among the Company, Bell Atlantic Tricon Leasing Corporation, Bankers Trust Company, The Connecticut National Bank, Owner Trustee, and Wilmington Trust Company, Indenture Trustee and the Form of the First Amendment thereto dated as of December 13, 1991. (Incorporated by reference to Exhibit 4.3 as filed with the Company's Amendment No. 3 to Form S-3 on December 13, 1991.) *10.22 Deferred Compensation Plan for Non-Employee Directors. (Incorporated by reference to Exhibit No. 10.14 as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) *10.23 1995 Stock Incentive Plan. (Incorporated by reference to Exhibit No. 10.15 as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) *10.23(A) Amendment No. 1 to 1995 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.4 as filed with the Company's Form S-8 on February 3, 1997.) *10.24 Form of Nonqualified Stock Option Agreement dated December 6, 1995. (Incorporated by reference to Exhibit 10.22(A) as filed with the Company's Form 10-K for the year ended December 31, 1995.) *10.24(A) Stock Award Agreement dated September 10, 1996. (Incorporated by reference to Exhibit 10 as filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.) +*10.24(B) Form of Nonqualified Stock Option Agreement dated December 9, 1996. *10.25 1995 Stock Plan for Non-Employee Directors. (Incorporated by reference to Exhibit No. 10.16 as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) +*10.26 Agreement with Company's Chairman dated December 9, 1996, regarding health insurance benefits. +*10.27 Severance Agreement dated December 31, 1996, with a former executive vice president of the Company. +12.1 Statement of Deficiency of Earnings Available to Cover Fixed Charges. +12.2 Statement of Computation of Ratio of Earnings to Fixed Charges. +21 Subsidiaries of Fort Howard Corporation. +23 Consent of Arthur Andersen LLP (included in Part IV at page 49). - 46 - +24 Powers of Attorney (included as part of signature page). +27 Financial Data Schedule for year ended December 31, 1996. - -------------------- *Management contract or compensatory plan or arrangement. +Filed herewith. b. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1996. - 47 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Green Bay, Wisconsin February 4, 1997 By /s/ Michael T. Riordan ---------------------------------- Michael T. Riordan President and Chief Executive Officer POWER OF ATTORNEY The undersigned directors and officers of Fort Howard Corporation hereby constitute and appoint Michael T. Riordan, Kathleen J. Hempel and James W. Nellen II and each of them, with full power to act without the other and with full power of substitution and resubstitution, our true and lawful attorneys- in-fact with full power to execute in our name and behalf in the capacities indicated below any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission and hereby ratify and confirm all that such attorneys-in-fact, or any of them, or their substitutes shall lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacities on the dates indicated: /s/ Donald H. DeMeuse Chairman of the Board February 4, 1997 Donald H. DeMeuse and Director /s/ Michael T. Riordan President, Chief February 4, 1997 Michael T. Riordan Executive Officer and Director /s/ Kathleen J. Hempel Vice Chairman, Chief February 4, 1997 Kathleen J. Hempel Financial Officer and Director /s/ Donald Patrick Brennan Donald Patrick Brennan Director February 3, 1997 /s/ James L. Burke James L. Burke Director February 3, 1997 /s/ Dudley J. Godfrey Dudley J. Godfrey Director February 3, 1997 /s/ David I. Margolis David I. Margolis Director January 30, 1997 /s/ Robert H. Niehaus Robert H. Niehaus Director January 30, 1997 /s/ Frank V. Sica Frank V. Sica Director January 30, 1997 - 48 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Fort Howard Corporation included in this Form 10-K and have issued our report thereon dated January 31, 1997. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, January 31, 1997. _______________________ CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement Nos. 33-63099, 33-64841, 333-00019 and 333-01975 /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, January 31, 1997. - 49 - Schedule II FORT HOWARD CORPORATION VALUATION AND QUALIFYING ACCOUNTS (In thousands) For the Years Ended December 31, ------------------------------ ALLOWANCE FOR DOUBTFUL ACCOUNTS: 1996 1995 1994 ---- ---- ---- Balance at beginning of year............. $2,883 $1,589 $2,366 Additions charged to earnings............ 540 1,209 (92) Charges for purpose for which reserve was created.................. (80) 85 (685) ------ ------ ------ Balance at end of year................... $3,343 $2,883 $1,589 ====== ====== ====== - 50 - INDEX TO EXHIBITS Exhibit No. - ----------- 3.1 Restated Certificate of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) 3.2 Amended and Restated By-Laws of the Company. (Incorporated by reference to Exhibit 4.2 as filed with the Company's Form S-8 on February 3, 1997.) 4.1 Credit Agreement dated as of March 8, 1995, among the Company, the lenders named therein, and Bankers' Trust Company, Bank of America National Trust and Savings Association and Chemical Bank as arrangers, and Bankers' Trust Company as administrative agent. (Incorporated by reference to Exhibit 4.0 as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) +4.1(A) Amendment No. 1 dated April 8, 1996, to Credit Agreement. +4.1(B) Amendment No. 2 dated October 21, 1996, to Credit Agreement. 4.2 Form of 9 1/4% Senior Note Indenture dated as of March 15, 1993, between the Company and Norwest Bank Wisconsin, N.A., Trustee. (Incorporated by reference to Exhibit 4.1 as filed with the Company's Amendment No. 2 to Form S-2 on March 4, 1993.) 4.3 Form of 10% Subordinated Note Indenture dated as of March 15, 1993, between the Company and the United States Trust Company of New York, Trustee. (Incorporated by reference to Exhibit 4.2 as filed with the Company's Amendment No. 2 to Form S-2 on March 4, 1993.) 4.4 Form of 9% Senior Subordinated Note Indenture dated as of February 1, 1994, between the Company and The Bank of New York, Trustee. (Incorporated by reference to Exhibit 4.2 as filed with the Company's Form S-2 on December 17, 1993.) Registrant agrees to provide copies of instruments defining the rights of security holders, including indentures, upon request of the Commission. *10.1 Employment Agreement dated October 15, 1993, with the Company's Chairman. (Incorporated by reference to Exhibit 10 as filed with the Company Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.) +*10.2 Employment Agreements dated December 13, 1996, with the Company's Chief Executive Officer and Chief Financial Officer. +*10.3 Employment Agreements dated December 13, 1996, with certain executive officers of the Company. - 51 - *10.4 Amended and Restated Stockholders Agreement dated as of March 1, 1995, among the Company, Morgan Stanley Group, MSLEF II, certain institutional investors and the Management Investors which amends and restates the Stockholders Agreement dated as of December 7, 1990, as amended. (Incorporated by reference to Exhibit 10.3(A) as filed with the Company's Annual Report or Form 10-K for the year ended December 31, 1994.) *10.5 Management Incentive Plan as amended and restated as of December 19, 1994. (Incorporated by reference to Exhibit No. 10.2 as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) +*10.5(A) Amendment No. 1 dated April 29, 1996, to Management Incentive Plan. *10.6 Supplemental Retirement Plan. (Incorporated by reference to Exhibit No. 10.7 as filed with Amendment No. 2 to the Company's Form S-1 on October 25, 1988.) *10.6(A) Amendment No. 1 to the Supplemental Retirement Plan. (Incorporated by reference to Exhibit 10.P as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1988.) *10.7 Form of Supplemental Retirement Agreement for the Company's Chief Executive Officer as Amended. (Incorporated by reference to Exhibit 10.M as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1988.) *10.8 Supplemental Retirement Agreements for certain directors and officers. (Incorporated by reference to Exhibit 10.T as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1989.) *10.8(A) Form of Amendment No. 1 to Supplemental Retirement Agreements for certain directors and officers. (Incorporated by reference to Exhibit 10.U as filed with the Company's Form 10-K for the year ended December 31, 1990.) *10.8(B) Form of Amendment No. 2 to Supplemental Retirement Agreements for certain directors and officers. (Incorporated by reference to Exhibit 10 as filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.) *10.9 Amended and Restated Management Equity Participation Agreement dated as of August 1, 1988. (Incorporated by reference to Exhibit No. 10.9 as filed with the Company's Amendment No. 2 to Form S-1 on October 25, 1988.) *10.9(A) Letter Agreement dated June 27, 1990, which modifies Amended and Restated Management Equity Participation Agreement. (Incorporated by reference to Exhibit 10.V as filed with the Company's Form 10-K for the year ended December 31, 1990.) *10.9(B) Letter Agreement dated July 31, 1990, among the Company and the Principal Management Investors which amends Amended and Restated Management Equity Participation Agreement. (Incorporated by - 52 - reference to Exhibit 10.W as filed with the Company's Form 10-K for the year ended December 31, 1990.) *10.9(C) Letter Agreement dated July 31, 1990, between the Company and the Management Investor Committee which amends Amended and Restated Management Equity Participation Agreement. (Incorporated by reference to Exhibit 10.X as filed with the Company's Form 10-K for the year ended December 31, 1990.) *10.9(D) Letter Agreement dated February 7, 1991, between the Company and the Management Investors Committee which amends the Amended and Restated Management Equity Participation Agreement. (Incorporated by reference to Exhibit 10.GG as filed with the Company's Form 10-K for the year ended December 31, 1990.) *10.9(E) Form of Letter Agreement dated February 7, 1991, among the Company, the Management Investors Committee and Management Investors which cancels certain stock options, grants new stock options and amends the Amended and Restated Management Equity Participation Agreement. (Incorporated by reference to Exhibit 10.HH as filed with the Company's Form 10-K for the year ended December 31, 1990.) *10.9(F) Letter Agreement dated March 1, 1995, between the Company and the Management Investors Committee which amends the Amended and Restated Management Equity Participation Agreement. (Incorporated by reference to Exhibit 10.8(F) as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) *10.10 Management Equity Plan. (Incorporated by reference to Exhibit 10.H as filed with the Company's Form 10-K for the year ended December 31, 1991.) *10.10(A) Amendment dated December 28, 1993, to Management Equity Plan. (Incorporated by reference to Exhibit 10.9(A) as filed with the Company's Form 10-K for the year ended December 31, 1993.) *10.10(B) Amendment dated March 1, 1995, to the Management Equity Plan. (Incorporated by reference to Exhibit 10.9(B) as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) *10.11 Form of Management Equity Plan Agreement. (Incorporated by reference to Exhibit 10.I as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.12 Participation Agreement dated as of October 20, 1989, among the Company, Philip Morris Credit Corporation, the Loan Participants listed therein, the Connecticut National Bank, Owner Trustee, and Wilmington Trust Company, Indenture Trustee. (Incorporated by reference to Exhibit 10.15 as filed with the Company's Post-Effective Amendment No. 2 to Form S-1 on February 8, 1990.) 10.13 Facility Lease Agreement dated as of October 20, 1989, between the Connecticut National Bank in its capacity as Owner Trustee, the Lessor and the Company as Lessee. (Incorporated by reference to Exhibit 10.16 as filed with the Company's Post-Effective Amendment No. 2 to Form S-1 on February 8, 1990.) - 53 - 10.14 Power Installation Lease Agreement dated as of October 20, 1989, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee, and the Company. (Incorporated by reference to Exhibit 10.HH as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.15 Equipment Lease Agreement dated as of October 20, 1989, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee, and the Company. (Incorporated by reference to Exhibit 10.II as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.16 Participation Agreement dated as of December 23, 1990, among the Company, Bell Atlantic Tricon Leasing Corporation, Bankers Trust Company, The Connecticut National Bank, Owner Trustee, and Wilmington Trust Company, Indenture Trustee. (Incorporated by reference to Exhibit 10.BB as filed with the Company's Form 10-K for the year ended December 31, 1990.) 10.17 Amended and Restated Equipment Lease Agreement [1990] dated as of December 19, 1991, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee under the Trust Agreement, as Lessor, and the Company, as Lessee. (Incorporated by reference to Exhibit 10.W as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.18 Facility Lease Agreement dated as of December 19, 1991, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee, and the Company. (Incorporated by reference to Exhibit 10.EE as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.19 Equipment Lease Agreement [1991] dated as of December 19, 1991, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee, and the Company. (Incorporated by reference to Exhibit 10.FF as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.20 Power Plant Lease Agreement dated as of December 19, 1991, between The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee, and the Company. (Incorporated by reference to Exhibit 10.GG as filed with the Company's Form 10-K for the year ended December 31, 1991.) 10.21 Amended and Restated Participation Agreement dated as of October 21, 1991, among the Company, Bell Atlantic Tricon Leasing Corporation, Bankers Trust Company, The Connecticut National Bank, Owner Trustee, and Wilmington Trust Company, Indenture Trustee and the Form of the First Amendment thereto dated as of December 13, 1991. (Incorporated by reference to Exhibit 4.3 as filed with the Company's Amendment No. 3 to Form S-3 on December 13, 1991.) *10.22 Deferred Compensation Plan for Non-Employee Directors. (Incorporated by reference to Exhibit No. 10.14 as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) - 54 - *10.23 1995 Stock Incentive Plan. (Incorporated by reference to Exhibit No. 10.15 as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) *10.23(A) Amendment No. 1 to 1995 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.4 as filed with the Company's Form S-8 on February 3, 1997.) *10.24 Form of Nonqualified Stock Option Agreement dated December 6, 1995. (Incorporated by reference to Exhibit 10.22(A) as filed with the Company's Form 10-K for the year ended December 31, 1995.) *10.24(A) Stock Award Agreement dated September 10, 1996. (Incorporated by reference to Exhibit 10 as filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.) +*10.24(B) Form of Nonqualified Stock Option Agreement dated December 9, 1996. *10.25 1995 Stock Plan for Non-Employee Directors. (Incorporated by reference to Exhibit No. 10.16 as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) +*10.26 Agreement with Company's Chairman dated December 9, 1996, regarding health insurance benefits. +*10.27 Severance Agreement dated December 31, 1996, with a former executive vice president of the Company. +12.1 Statement of Deficiency of Earnings Available to Cover Fixed Charges. +12.2 Statement of Computation of Ratio of Earnings to Fixed Charges. +21 Subsidiaries of Fort Howard Corporation. +23 Consent of Arthur Andersen LLP (included in Part IV at page 49. +24 Powers of Attorney (included as part of signature page). +27 Financial Data Schedule for year ended December 31, 1996. - -------------------- *Management contract or compensatory plan or arrangement. +Filed herewith. - 55 - EX-4.1(A) 2 Exhibit 4.1(A) -------------- AMENDMENT NO. 1 TO CREDIT AGREEMENT AMENDMENT No. 1, dated as of April 8, 1996 ("Amendment"), to the Credit Agreement, dated as of March 8, 1995 (the "Credit Agreement"), by and among FORT HOWARD CORPORATION, a Delaware corporation (the "Company"), each of the parties identified as a Lender (collectively, the "Lenders"; each, a "Lender") signatory thereto, BANKERS TRUST COMPANY, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION and CHEMICAL BANK, as Arrangers (collectively, the "Arrangers;" each, an "Arranger") and BANKERS TRUST COMPANY, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). R E C I T A L S: A. The Company has requested that the Administrative Agent, the Arrangers and the Lenders amend certain provisions of the Credit Agreement; and B. The Administrative Agent, the Arrangers and the Lenders have considered and agreed to the Company's requests, upon the terms and conditions set forth in this Amendment. A G R E E M E N T: NOW, THEREFORE, in consideration of the foregoing and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein that is defined in the Credit Agreement (including those terms that are defined in the Credit Agreement after giving effect to this Amendment) shall have the meaning assigned to such term in the Credit Agreement. SECTION 2. Consent to IRB Financing. The Lenders hereby consent to, and agree to waive any provision of the Loan Documents which otherwise might prohibit, the conveyance of a portion of the land comprising the Company's Green Bay, Wisconsin Mill in connection with the consummation by the Company of a transaction to finance the construction of the Green Bay Sludge Boiler if such transaction complies in all material respects with the requirements set forth in Exhibit A annexed hereto. The Lenders hereby authorize the Arrangers to determine, in their reasonable judgment, whether or not any particular transaction proposed by the Company satisfies the requirements of the immediately preceding sentence and to deliver, on behalf of the Lenders, an instrument confirming such satisfaction; provided, however, that the Arrangers shall not have any liability for such determination unless such determination shall have been made in bad faith or shall constitute gross negligence. The Arrangers and the Lenders hereby authorize the Administrative Agent to execute and deliver, on behalf of the Lenders, any and all instruments necessary to effect any transaction determined by the Arrangers to satisfy such requirements. The Company shall provide to the Administrative Agent and the Arrangers any documents or information requested by the Arrangers or the Administrative Agent to enable the Arrangers and the Administrative Agent to make the determinations and perform the obligations contemplated in this Section 2. SECTION 3. Amendments to Article I of the Credit Agreement. (a) Subsection 1.1 of the Credit Agreement is hereby amended by adding thereto the following new definitions in the appropriate alphabetical order: "'Amendment Effective Date' means the date that all the conditions set forth in Section 6 of Amendment No. 1 shall have been satisfied." "'Amendment No. 1' means Amendment No. 1 to Credit Agreement, dated as of April 8, 1996, relating to this Agreement." (b) Subsection 1.1 of the Credit Agreement is hereby further amended as follows: The definition of "ABR Spread" is hereby amended by (i) inserting therein after the words "from time to time in effect", the words, "in respect of Tranche A Loans and Revolving Loans", and (ii) deleting therefrom the words "2% per annum" and inserting in lieu thereof the words "the percent per annum from time to time in effect in respect of Tranche B Loans pursuant to paragraph (d) of subsection 2.5.1." The definition of "Commitment Percentage" is hereby deleted and replaced with the following: "'Commitment Percentage' means (1) .50%, when the LIBOR Spread in respect of Tranche A Loans and Revolving Loans is 2.00% or greater, (2) .375% when the LIBOR Spread in respect of Tranche A Loans and Revolving Loans is 1.75%, 1.50% or 1.25%, (3) .25% when the LIBOR Spread in respect of Tranche A Loans and Revolving Loans is 1.00% or .75% and (4) .1875%, when the LIBOR Spread in respect of Tranche A Loans and Revolving Loans is .625%." The definition of "LIBOR Spread" is hereby amended by (i) inserting therein after the words "from time to time in effect", the words, "in respect of Tranche A Loans and Revolving Loans", and (ii) deleting therefrom the words "3% per annum" and inserting in lieu thereof the words "the percent per annum from time to time in effect in respect of Tranche B Loans pursuant to paragraph (d) of subsection 2.5.1." SECTION 4. Amendments to Article II to the Credit Agreement. (a) Subsection 2.5.1(d) of the Credit Agreement is hereby amended by deleting the table captioned "Interest Rate Step-Downs for Tranche A Loans and Revolving Loans" and inserting in lieu thereof the following: "Interest Rate Step-Downs for Tranche A Loans and Revolving Loans Category 1 ABR Spread LIBOR Spread When none of the Categories below is applicable 1.50% 2.50% Category 2 Ratio 1: 1.60 to 1 or higher 1.25% 2.25% Ratio 2: 3.00 to 1 or lower Category 3 Ratio 1: 1.75 to 1 or higher 1.00% 2.00% Ratio 2: 2.75 to 1 or lower Category 4 Ratio 1: 2.25 to 1 or higher 0.75% 1.75% Ratio 2: 2.50 to 1 or lower Category 5 Ratio 1: 2.75 to 1 or higher 0.50% 1.50% Ratio 2: 2.25 to 1 or lower Category 6 Ratio 1: 3.00 to 1 or higher 0.25% 1.25% Ratio 2: 2.00 to 1 or lower Category 7 Ratio 1: 3.25 to 1 or higher 0.00% 1.00% Ratio 2: 1.50 to 1 or lower "Interest Rate Step-Downs for Tranche B Loans Category 1 ABR Spread LIBOR Spread When none of the Categories below is applicable 2.00% 3.00% Category 2 Ratio 1: 1.60 to 1 or higher 1.75% 2.75% Ratio 2: 3.00 to 1 or lower Category 3 Ratio 1: 1.75 to 1 or higher 1.50% 2.50% Ratio 2: 2.75 to 1 or lower (b) A new Section 2.13 is hereby added to the Credit Agreement as follows: "2.13 Certain Computations. All interest, fees and other amounts accruing under this Agreement on or prior to, or determined in respect of any day accruing on or prior to the Amendment Effective Date shall be computed and determined as provided in this Agreement before giving effect to Amendment No. 1. Notwithstanding Section 2.5.1(d) of this Agreement, the adjustment to each of the ABR Spread and the LIBOR Spread, as provided in Amendment No. 1, shall be effective upon the Amendment Effective Date and set based upon the most recent financial statements delivered to the Administrative Agent after giving pro forma effect to the pre-payment referenced in Section 6(b) of this Amendment." SECTION 5. Representations And Warranties. The Company hereby represents and warrants to the Administrative Agent, the Arrangers and the Lenders that the representations, agreements and warranties of the Company set forth in the Credit Agreement as amended, supplemented or modified by this Amendment (except for the representations and warranties set forth in subsection 4.1.3 of the Credit Agreement) are true and correct in all material respects to the same extent as though made on and as of the date hereof, except that such representations and warranties need not be true and correct to the extent that changes in facts and conditions on which such representations and warranties are based are required or permitted under the Credit Agreement as so amended, supplemented or modified. The certifications set forth in the form of Officers' Certificate of the Company described in Section 6 of this Amendment are incorporated into this Amendment by this reference as representations and warranties of the Company. In the event any of the representations or warranties referred to in the two immediately preceding sentences is untrue in any material respect or in the event the Company shall breach any agreement on its part to be performed or observed pursuant to this Amendment, the Administrative Agent, the Arrangers and the Lenders shall have the rights and remedies contemplated in the Credit Agreement to the same extent as if such representations and warranties or agreements had been set forth therein. SECTION 6. Conditions to Effectiveness of Amendment. Upon the fulfillment of the following conditions the amendments contemplated by this Amendment shall become effective: (a) The Company shall have completed, no later than September 30, 1996, an offering of Common Stock and shall have received at least $180,000,000 in cash proceeds (net of underwriting discounts and commissions, other banking and investment fees, attorneys' and accountants' fees and other customary fees and costs associated therewith) from the sale of such Common Stock. (b) The Tranche B Lenders shall have received a prepayment pursuant to subsection 2.7.1 of the Credit Agreement in a principal amount not less than $178,000,000. (c) The Administrative Agent shall have received (i) duly executed counterparts hereof that have been executed at the time and in the manner as provided in subsection 9.6 of the Credit Agreement, it being understood that delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be as effective as delivery of a manually executed counterpart of this Amendment and (ii) the following documents with sufficient copies, where appropriate, for each Lender and CG&R: (x) an Officer's Certificate of the Company, in the form of exhibit B annexed to this Amendment; (y) an opinion of James W. Nellen, II, Vice President and General Counsel to the Company, in form and substance reasonably satisfactory to the Administrative Agent; and (z) an opinion of Shearman & Sterling, counsel to the Company, in form and substance reasonably satisfactory to the Administrative Agent as to the enforceability of this Amendment and such other matters as the Administrative Agent shall reasonably request. The parties constituting the Lenders hereby authorize the Administrative Agent to deliver to the Company an instrument acknowledging on behalf of the Lenders the satisfaction of the conditions specified in this Section 6. SECTION 7. Fees. If the Amendment Effective Date shall occur, the Company shall pay to each of the Lenders that has executed and delivered to the Administrative Agent a signature page to this Amendment on or before April 10, 1996, a fee equal to .10% of the principal amount, if any, of such Lender's Tranche A Commitment, Tranche B Commitment and Revolving Loan Commitment in effect immediately prior to the effectiveness of this Amendment but after giving effect to the reduction of Commitments as a result of the prepayment contemplated in Section 6(b) of this Amendment. Such payment shall be paid on the Amendment Effective Date. SECTION 8. Miscellaneous. (a) Except as expressly contemplated in this Amendment, all terms, provisions, covenants, representations, warranties, agreements and conditions of the Company contained in the Credit Agreement shall remain in full force and effect and shall not otherwise be deemed to be waived, modified or amended hereby. (b) THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. (c) This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. The provisions of this Amendment may be amended or waived by the same parties that would be required to amend or waive such provisions if such provisions were set forth in the Credit Agreement. (d) This Amendment shall not constitute a consent to or waiver or modification of any other provision, term or condition of the Credit Agreement. All terms, provisions, covenants, representations, warranties, agreements and conditions contained in the Credit Agreement, as amended hereby, shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. By: /s/ R. Michael Lempke R. Michael Lempke Vice President and Treasurer 1988 LENDERS, PURCHASERS AND 1992 LENDERS: BANKERS TRUST COMPANY, Individually and as 1988 Lead Manager, 1988 Agent and 1992 Agent EX-4.1(B) 3 Exhibit 4.1(B) -------------- AMENDMENT NO. 2 TO CREDIT AGREEMENT AMENDMENT NO. 2 TO CREDIT AGREEMENT, dated as of October 21, 1996, relating to the Credit Agreement, dated as of March 8, 1995, as amended by Amendment No. 1 to Credit Agreement, dated as of April 8, 1996 ("Amendment No. 1"; such Credit Agreement, as amended by Amendment No. 1 being the "Credit Agreement"), by and among FORT HOWARD CORPORATION, a Delaware corporation (the "Company"), as borrower, and each of the parties identified as a Lender (collectively, the "Lenders"; each, a "Lender") signatory thereto, BANKERS TRUST COMPANY, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION and THE CHASE MANHATTAN BANK (formerly known as "Chemical Bank"), as Arrangers (collectively, the "Arrangers"; each, an "Arranger") and BANKERS TRUST COMPANY, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). R E C I T A L S : A. The Company has requested that the Arrangers and the Lenders (1) consent to the purchase and retirement by the Company of certain indebtedness of the Company; (2) waive the operation of Sections 6.5 and 6.16 of the Credit Agreement to the extent necessary to permit the Company to effect such purchase and retirement; and (3) amend, consent to or waive certain other provisions of the Credit Agreement, all in accordance with, and subject to, the terms and conditions set forth below; and B. The Administrative Agent, the Arrangers and the Lenders have considered and agreed to the Company's request, and are executing and delivering this agreement to evidence such amendment, consent and waiver. A G R E E M E N T : NOW, THEREFORE, in consideration of the foregoing and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein that is defined in the Credit Agreement shall have the meaning assigned to such term in the Credit Agreement. SECTION 2. Consent to Acquisition of Indebtedness. (a) The Lenders hereby consent to, and agree to waive any provision of Section 6.5 or 6.16 of the Credit Agreement which (but for this Section 2) might prohibit, restrict or condition (otherwise than pursuant to this Agreement), the Company's purchasing of, at any time and from time to time, in whole or in part, Subordinated Notes and Senior Unsecured Notes (the Subordinated Notes and the Senior Unsecured Notes so purchased in accordance with this Section 2(a) being, collectively, the "Amendment No. 2 Covered Notes"), in such aggregate amounts, subject to such allocations (as between the Subordinated Notes and the Senior Unsecured Notes to be so purchased and as among the various outstanding issues of such Subordinated Notes and Senior Unsecured Notes), for consideration originating from, or financed by, such sources, and on such other terms and conditions, as the Company shall elect in its sole discretion, but, in any event, subject to the following terms: (i) any Indebtedness incurred to finance any such purchase shall not violate the provisions of Section 6.1 of the Credit Agreement, (ii) all such purchases shall be concluded not later than December 31, 1997, (iii) the total amount of consideration (including any premium and all transaction costs , but excluding, in any event, any and all accrued interest) paid by the Company in respect of all such purchases shall not exceed, in the aggregate, $100,000,000, (iv) at the time of each such purchase there shall not have occurred and be continuing any Event of Default or Potential Event of Default referred to in Section 7.1, 7.6, 7.7, 7.9, 7.13 or 7.14 of the Credit Agreement, and (v) substantially contemporaneously with each such purchase, the Company shall cause the acquired Securities to be surrendered to it or the trustee in respect thereof and cancelled. (b) The Lenders hereby agree that, anything in the Credit Agreement to the contrary notwithstanding, the sum referred to in clause (B) of the definition of "Excess Cash Flow" in respect of the 1996 and the 1997 fiscal years of the Company shall not include (whether by virtue of subclause (B)(5) or (B)(8) of such definition or otherwise) any amount paid by the Company to acquire (including, without limitation, any premium or transaction costs but excluding, in any event, any and all accrued interest) Amendment No. 2 Covered Notes. (c) The provisions of this Section 2 shall not be construed as limiting any rights of the Company to purchase Subordinated Indebtedness of the Company and/or Senior Unsecured Notes that existed under Section 6.5 or 6.16 of the Credit Agreement immediately preceding the execution of this agreement, and any and all such rights shall continue in force following the execution and delivery hereof and the acquisition of any debt Securities of the Company contemplated in this Section 2. SECTION 3. Consent to Green Bay Sludge Boiler Financing. (a) The Lenders hereby consent to, and agree to waive any provision of Section 5.11, 5.12 or 5.17 of the Credit Agreement or any other provision of the Loan Documents (other than Section 6.1 of the Credit Agreement) which (but for this Section 3) might prohibit, restrict or condition (otherwise than pursuant to this Agreement and Exhibit A to Amendment No. 1, as amended and supplemented hereby), (i) the consummation by the Company of the GB Financing (as defined in Exhibit A to Amendment No. 1) for the construction of the Green Bay Sludge Boiler and (ii) in connection therewith, the conveyance of a portion of the land comprising the Company's Green Bay, Wisconsin Mill, but only if such transaction (including such conveyance) complies in all material respects with the requirements set forth in Exhibit A to Amendment No. 1. (b) The Lenders further hereby agree that, if the GB Financing shall meet the requirements of paragraph (a) of this Section 3 and the Company shall have delivered the Officer's Certificate and survey contemplated in Exhibit A to Amendment No. 1: (i) the Green Bay Sludge Boiler shall constitute "Existing Mill Expansion Equipment" (as defined in the Credit Agreement and in the Mortgage for the Company's Green Bay, Wisconsin Mill, after giving effect to Section 4 of this agreement); (ii) the construction of the Green Bay Sludge Boiler shall constitute an Existing Mill Expansion Transaction; and (iii) the GB financing shall constitute a Permitted Expansion Financing. (c) The Lenders hereby authorize the Arrangers (and, by executing a counterpart of this Agreement, the Arrangers hereby agree) to determine, in their reasonable judgment, whether or not any particular transaction proposed by the Company satisfies the requirements of subsection 3(a) above and to deliver, on behalf of the Lenders, an instrument confirming such satisfaction; provided, however, that the Arrangers shall not have any liability for such determination unless such determination shall have been made in bad faith or shall constitute gross negligence. The Arrangers and the Lenders hereby authorize the Administrative Agent and the Collateral Trustee (and, by executing a counterpart of this Agreement, the Administrative Agent and the Collateral Trustee hereby agree) to execute and deliver, on behalf of the Lenders (and, in the case of the Collateral Trustee, the other beneficiaries under the Collateral Trust Agreement) any and all instruments necessary to effect any transaction so determined by the Arrangers to satisfy such requirements and to prepare and record, where appropriate, written instruments to give public notice of the amendments contemplated in Section 4 of this agreement. The Company shall provide to the Administrative Agent, the Arrangers and the Collateral Trustee any documents or information requested by the Administrative Agent, the Arrangers and the Collateral Trustee to enable the Administrative Agent, the Arrangers and the Collateral Trustee to make the determinations and perform the obligations contemplated in this Section 3 with respect to the satisfaction of such requirements. (d) To the extent that this Section 3 is inconsistent with Section 2 of Amendment No. 1 or Exhibit A thereto, the provisions of this Section 3 shall govern. SECTION 4. Amendment of Wisconsin and Oklahoma Mill Mortgages. Each of the Mill Mortgages relating to the Company's Mills at Green Bay, Wisconsin, and Muskogee, Oklahoma, is hereby amended to delete the reference in clause (iv) of Section 4.1 thereof to the words "Expansion Equipment" and insert in lieu thereof the words "Existing Mill Expansion Equipment". Upon request of the Collateral Trustee, the Company shall execute, acknowledge, deliver and cause to be recorded in the appropriate recording offices amendments of each such Mill Mortgage to give public notice of the foregoing provisions of this Section 4. SECTION 5. Representations and Warranties. The Company hereby represents and warrants to the Administrative Agent, the Arrangers and the Lenders that, on and as of the date hereof (after giving effect to Sections 2, 3 and 4 of this agreement), the representations and warranties of the Company set forth in the Credit Agreement (except for the representations and warranties set forth in subsection 4.1.3 of the Credit Agreement) are true and correct in all material respects to the same extent as though made on and as of the date hereof, except that such representations and warranties need not be true and correct to the extent that changes in facts and conditions on which such representations and warranties are based are required or permitted under the Credit Agreement and except to the extent that such representations and warranties specifically relate to an earlier date, in which case such representations and warranties were true and correct in all material respects on and as of such earlier date. The certifications set forth in the form of Officer's Certificate of the Company described in Section 6 of this agreement are incorporated into this agreement by this reference as representations and warranties of the Company. In the event any of the representations and warranties referred to in the two immediately preceding sentences is untrue in any material respect on and as of the respective dates specified therein or in the event the Company shall breach any agreement on its part to be performed or observed pursuant to this agreement, the Administrative Agent and the Lenders shall have the rights and remedies contemplated in the Credit Agreement to the same extent as if such representations and warranties or agreements had been set forth therein. SECTION 6. Conditions to Effectiveness. This agreement shall become effective when the Administrative Agent shall have received (i) duly executed counterparts hereof that have been executed at the time and in the manner as provided in Section 9.6 of the Credit Agreement, it being understood that delivery of an executed counterpart of a signature page to this agreement by telecopier shall be as effective as delivery of a manually executed counterpart of this agreement and (ii) the following documents with sufficient copies, where appropriate, for each Lender and CG&R: (w) a consent of Fort Howard Holding, Inc. and HAC Holding Corp. to the execution and delivery of Amendment No. 1 and this Agreement, in the form of Exhibit A annexed to this agreement; (x) an Officer's Certificate of the Company, in the form of Exhibit B annexed to this agreement; (y) an opinion of James W. Nellen, II, Vice President and General Counsel to the Company, in the form of Exhibit C annexed to this agreement; and (z) an opinion of Shearman & Sterling, counsel to the Company, in the form of Exhibit D annexed to this agreement. SECTION 7. Miscellaneous. (a) Except as expressly contemplated in this agreement, all terms, provisions, covenants, representations, warranties, agreements and conditions of the Company contained in the Credit Agreement shall remain in full force and effect and shall not otherwise be deemed to be waived, modified or amended hereby. (b) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (c) This agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. The provisions of this agreement may be amended or waived by the same parties that would be required to amend or waive such provisions if such provisions were set forth in the Credit Agreement. (d) This agreement shall not constitute a consent to or waiver or modification of any provision, term or condition of the Credit Agreement other than the provisions expressly referred to above. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. By: /s/ R. Michael Lempke R. Michael Lempke Vice President and Treasurer 1988 LENDERS, PURCHASERS AND 1992 LENDERS: BANKERS TRUST COMPANY, Individually and as 1988 Lead Manager, 1988 Agent and 1992 Agent EX-10.2 4 Exhibit 10.2 ------------ December 13, 1996 Mr. Michael T. Riordan Fort Howard Corporation 1919 South Broadway Green Bay, WI 54304 Dear Mr. Riordan: WHEREAS, Fort Howard Corporation (the "Company") considers it essential to its best interests and the best interests of its stockholders to foster the continuous employment of its key management personnel and, accordingly, the Company desires to continue to employ Michael T. Riordan ("you" or the "Executive"), upon the terms and conditions hereinafter set forth; WHEREAS, the Executive desires to continue to be employed by the Company, upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the covenants and agreements hereunder set forth, the parties hereto agree as follows: 1. TERM OF AGREEMENT. This Agreement shall commence as of January 1, 1997 and shall continue in effect until December 31, 2001; PROVIDED, HOWEVER, that the term of this Agreement shall automatically be extended without further action by either party for additional one-year periods unless, not later than six months prior to the end of the then effective term, either the Company or the Executive shall have given written notice that such party does not intend to extend this Agreement. The duration of the initial term and any subsequent extension is hereinafter referred to as the "Term." 2. TERMS OF EMPLOYMENT. During the Term, you agree to be a full- time employee of the Company serving in the position of President and Chief Executive Officer and to devote substantially all of your working time and attention to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities associated with your position as President and Chief Executive Officer of the Company, to use your best efforts to perform faithfully and efficiently such responsibilities. In addition, you agree to serve in such other capacities or offices to which you may be assigned, appointed or elected from time to time by the Board of Directors of the Company (the "Board"). Nothing herein shall prohibit you from devoting your time to civic and community activities or managing personal investments, as long as the foregoing do not interfere with the performance of your duties hereunder. 3. COMPENSATION. (i) As compensation for your services under this Agreement, you shall be entitled to receive a base salary plus an annual incentive compensation bonus ("bonus"), each to be agreed upon from time to time between you and the Company acting in good faith; PROVIDED, HOWEVER, that your base salary shall at no time be less than your base salary as of the date hereof. In addition, you shall be entitled to participate in any additional 1 bonus arrangement (an "additional bonus arrangement") which may be agreed upon from time to time between you and the Company acting in good faith. The Company shall have the right to reduce prospectively your base salary, bonus and participation in any additional bonus arrangement, as in effect from time to time, pursuant to an across-the-board compensation reduction or deferral program similarly affecting all executive officers of the Company. (ii) In addition to compensation provided for in Subsection (i) of this Section 3, the Company agrees to continue in effect (A) any compensation or benefit plan in which you participate as of the date hereof which is material to your total compensation, or any substitute plan adopted in place of any such plan, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan which shall include the bonus and any additional bonus arrangement) has been made with respect to such plan; PROVIDED, HOWEVER, that no substitute plan or equitable arrangement shall be adopted with respect to the Fort Howard Profit Sharing Plan or the Fort Howard Supplemental Retirement Plan except pursuant to a mutual agreement between you and the Board, and (B) your ability to participate therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the opportunities provided and the level of your participation relative to other participants, than exists on the date hereof. (iii) The Company shall reimburse you for all reasonable travel, entertainment and other business expenses incurred by you in the performance of your responsibilities under this Agreement promptly upon receipt of written substantiation of such expenses. You shall also be paid all additional amounts necessary to discharge all federal and state tax liabilities incurred by you that are attributable to all deemed compensation arising as a consequence of your personal use of property owned or leased by the Company, including federal and state taxes assessed against such additional compensation. 4. TERMINATION OF EMPLOYMENT. Your employment may be terminated by either the Company or you by giving a Notice of Termination, as defined in Subsection (iv) of this Section 4. If your employment should terminate during the Term, your entitlement to benefits shall be determined in accordance with Section 5 hereof. (i) DISABILITY. If, as a result of your incapacity due to physical or mental illness, you are, or are reasonably likely to become, unable to perform your duties hereunder for more than six consecutive months or six months in aggregate during any twelve-month period, your employment may be terminated for "Disability." (ii) CAUSE. Termination of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with the Company in your established position on a full- time basis (other than any such failure resulting from your Disability and other than any such actual or anticipated failure after the issuance of a Notice of Termination by you for Good Reason as defined in Subsections 4(iv) and 4(iii), respectively) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, (B) the willful engaging by you in conduct which is significantly injurious to the Company, monetarily or otherwise, after written demand for cessation of such conduct is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have engaged in such conduct and the injury to the Company, (C) your conviction of 2 a crime involving moral turpitude, (D) your abuse of illegal drugs or other controlled substances or your habitual intoxication or (E) the breach of any of your material obligations hereunder. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless knowingly done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. (iii) GOOD REASON. For purposes of this Agreement, "Good Reason" shall mean the occurrence, without your express written consent, of any of the following circumstances unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination, as such terms are defined in Subsections (v) and (iv) of this Section 4, respectively, given in respect thereof: (A) the assignment to you of any duties inconsistent with your status as an executive officer of the Company or your removal from any office specified in Section 2 hereof; (B) any reduction in your base salary as in effect from time to time, except for across-the-board salary reductions similarly affecting all executive officers; (C) the failure by the Company to pay or provide to you within seven (7) days of your written demand any amount of base salary or bonus or any benefit which is due, owing and payable to you pursuant to the terms of any applicable arrangement or policy or pursuant to the terms hereof, except pursuant to an across-the-board compensation deferral similarly affecting all executive officers, or to pay to you any portion of an installment of deferred compensation due under any deferred compensation program of the Company; (D) except in the case of across-the-board reductions or eliminations similarly affecting all executive officers or as otherwise contemplated under Section 3 hereof, the failure by the Company to (I) continue in effect any compensation plan in which you participate which is material to your total compensation, including but not limited to the Company's plans currently in effect or hereafter adopted, and any plans adopted in substitution therefor, (II) continue to provide you with benefits substantially similar, in aggregate, to the Company's life insurance, medical, dental, health, accident or disability plans in which you are participating at the date of this Agreement or (III) continue to provide you with the number of paid vacation days to which you are eligible on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the date of this Agreement; (E) the relocation of the Company's principal executive office to a location more than fifty miles distant from its current location, or the Company's requiring you to perform services at a location that would be a violation of the terms of Section 6 hereof; (F) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 7 hereof; or (G) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements 3 of Subsection (iv) of this Section 4, and for purposes of this Agreement, no such purported termination shall be effective. Your continued employment with the Company shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (iv) NOTICE OF TERMINATION. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (A) if your employment is terminated for Disability pursuant to Subsection (i) of this Section 4, thirty (30) days after Notice of Termination is given (PROVIDED that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), (B) if your employment is terminated by reason of your death, the date of your death, and (C) if your employment is terminated by the Company for Cause, by you for Good Reason or by either party for any other reason (other than Disability or death), the date specified in the Notice of Termination (which, in the case of a termination by the Company for Cause shall not be less than fifteen (15) days, and in the case of a termination by you for Good Reason, shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 5. COMPENSATION UPON TERMINATION OR DURING DISABILITY. Upon termination of your employment with the Company during the Term, you shall be entitled to the following benefits: (i) If your employment is terminated for Disability, you shall receive until the third anniversary of the Date of Termination all compensation payable to you under the Company's disability and medical plans and programs, as in effect on the date of such termination plus an additional payment from the Company (if necessary) such that the aggregate amount received by you in the nature of salary continuation from all sources equals your base salary at the date in effect on the date of such termination. After the third anniversary of the Date of Termination, your benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs, PROVIDED that such terms shall not be less advantageous to you than the terms of such programs in effect as of the date hereof. The obligations of the Company under this Section 5(i) shall be terminated by your death after becoming Disabled and prior to the third anniversary of the Date of Termination. (ii) (A) If your employment shall be terminated (I) by the Company for Cause, or (II) by you other than for Good Reason, the Company shall pay you your full base salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation or benefit plans of the Company (excluding, in the case of termination by the Company for Cause, any bonus and vacation pay and any entitlement under any 4 additional bonus arrangement otherwise payable to you pursuant to the terms of the applicable plan or program of the Company, and in the case of your voluntary termination other than for Good Reason, excluding any bonus pay and any entitlement under any additional bonus arrangement) at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (B) If your employment shall be terminated by reason of your death, the Company shall pay your estate your full base salary through the Date of Termination and for a period of 12 whole calendar months thereafter plus, if the Date of Termination shall not occur on the first day of a calendar month, the balance of the month in which the Date of Termination occurs, at the rate in effect at the time of your death, plus any accrued bonus or entitlement under any additional bonus arrangement prorated for the portion of the bonus measurement period occurring prior to the date of your death, plus all other amounts to which you are entitled under any compensation or benefit plans of the Company at the date of your death, and the Company shall have no further obligation to you, your beneficiaries or your estate under this Agreement. (iii) If your employment shall be terminated (a) by the Company other than for Cause or Disability or (b) by you for Good Reason, then you shall be entitled to the benefits provided below: (A) the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given (or, if greater, at the rate in effect 30 days prior to the time Notice of Termination is given), plus all other amounts which you have accrued under any compensation or benefit plans of the Company, including, without limitation, any bonus pursuant to the Company's Management Incentive Plan and any entitlement under any additional bonus arrangement accrued through the Date of Termination for the portion of the applicable bonus measurement period occurring prior to the Date of Termination, at the time such payments are due, except as otherwise provided below; (B) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay to you your full base salary at the rate in effect immediately prior to the time Notice of Termination is given (or, if greater, at the rate in effect 30 days prior to the time Notice of Termination is given), payable periodically in accordance with past payroll practices, until the third anniversary of the Date of Termination; (C) in lieu of any further bonus payments and any entitlements under any additional bonus arrangement for periods subsequent to the Date of Termination, the Company shall pay to you a bonus payable in each January following the Date of Termination in respect of the previous calendar year equal to the quotient obtained by aggregating the bonuses received by you pursuant to the Company's Management Incentive Plan and any additional bonus arrangement in respect of the three calendar years ending prior to the Date of Termination (the "Bonus Period") and dividing such sum by three, with each such January bonus payment adjusted to reflect any changes in the Consumer Price Index since the midpoint of the period commencing on the first day of the Bonus Period and ending on the Date of Termination. Such bonus shall be paid in respect of each calendar 5 year or portion thereof ending after the Date of Termination until the third anniversary of the Date of Termination, and shall be prorated for partial years, if any, including, without limitation, the portion of the calendar year occurring after the Date of Termination and the final calendar year in respect of which any such January bonus is payable pursuant to this Section 5(iii)(C); (D) until the third anniversary of the Date of Termination, you will continue to participate in all other compensation and benefit plans (including perquisites) in which you were participating immediately prior to the time Notice of Termination is given, or comparable plans substituted therefor, including, without limitation, the Fort Howard Supplemental Retirement Plan and the Supplemental Retirement Agreement between you and the Company; PROVIDED, HOWEVER, that if you are ineligible (E.G., by operation of law or the terms of the applicable plan) to continue to participate in any such plan the Company shall provide you with a comparable level of compensation or benefits; (E) The Company shall pay to you all reasonable legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement), except any such fees or expenses incurred by you in seeking to enforce a claim which is determined by the arbitrator, pursuant to Section 11, to have been frivolous in nature or not brought or pursued in good faith; (F) In order to assist you in obtaining new employment, the Company shall provide you with outplacement services, including access to an office and secretarial assistance for a period not to exceed 12 months and at a cost not to exceed $12,000; and (G) If you should die after the termination of employment and prior to the end of the period of payment provided for in paragraphs (B), (C) and (D) hereof, the Company shall pay your estate any amounts that are or become payable pursuant to any of such paragraphs until the end of the Term. (iv) You shall not be required to mitigate the amount of any payment provided for in subsection (iii) of this Section 5 by seeking other employment, and the amount of any payment provided for in this Section 5 shall not be reduced by any compensation earned by you as a result of your employment by another employer; PROVIDED, HOWEVER, that any medical or dental welfare benefit otherwise receivable by you pursuant to Subsection 5(iii)(D) shall be reduced to the extent a comparable benefit of the same type would normally be made available to you during the applicable period of benefit continuation set forth in such Subsection, and any such benefit actually received by you shall be reported to the Company. (v) In addition to all other amounts payable to you under this Section 5, you shall be entitled to receive all benefits payable to you under any plan or agreement of the Company relating to retirement benefits, including, without limitation, the Supplemental Retirement Plan and the Supplemental Retirement Agreement between you and the Company. 6 6. LOCATION. Your services shall be performed at the Company's current headquarters location, or at such other place within a fifty-mile radius of such current location as the Board may from time to time deem appropriate. Notwithstanding the foregoing, you shall be required to travel to the extent necessary to the performance of your responsibilities under this Agreement. You shall use Company owned or leased aircraft for purposes of such travel whenever practicable, and the Company recognizes that it may from time to time be necessary, appropriate, desirable or convenient for you to be accompanied in such travel by persons who are not employees of the Company, including your spouse and other members of your family. 7. SUCCESSORS; BINDING AGREEMENT. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled to hereunder if you were to terminate your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 8. NOTICES. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, PROVIDED that all notices to the Company shall be directed to the attention of the Board with copies to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. NONCOMPETITION. (i) Until the Date of Termination, you agree not to enter into competitive endeavors and not to undertake any commercial activity which is contrary to the best interests of the Company or its affiliates, including becoming an employee, owner (except for passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of (a) any firm or person engaged in the operation of a business engaged in the acquisition of industrial businesses or (b) any firm or person which (i) directly competes with a line or lines of business of the Company or any subsidiary of the Company accounting for ten percent (10%) or more of the Company's or such subsidiary's gross sales, revenues or earnings before taxes, (ii) derives ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly competes with the Company or any subsidiary of the Company or (iii) is a distributor of any of the products of the Company or any subsidiary of the Company, where the distribution of such products accounts for ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes. Notwithstanding any provision of this Agreement to the contrary, you agree that your breach of the provisions of this Section 9(i) shall permit the Company to terminate your employment for Cause. 7 (ii) After the Date of Termination and during any period that you continue to be paid your salary (including any other payments in lieu of salary) pursuant to Section 5 hereof, you agree not to become an employee, owner (except for passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of any firm or person which (i) directly competes with a business of the Company or any subsidiary of the Company producing any class of products accounting for ten percent (10%) or more of the Company's or such subsidiary's gross sales, revenues or earnings before taxes or (ii) is a distributor of any of the products of the Company or any subsidiary of the Company, where the distribution of such products accounts for ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes. During the period of payment provided in Section 5 hereof, you will be available, consistent with other responsibilities that you may then have, to answer questions and provide advice to the Company. Notwithstanding anything in this Agreement to the contrary, you agree that, from and after any breach by you of the provisions of this Section 9(ii), the Company shall cease to have any obligations to make payments to you under this Agreement. (iii) You acknowledge and agree that damages for breach of the covenant not to compete in this Section 9 will be difficult to determine and will not afford a full and adequate remedy, and therefore agree that the Company, in addition to any other remedies that may otherwise be available for a breach of this Section 9 (including, without limitation, as set forth in Section 9(ii) above, by seeking actual damages pursuant to Section 11 hereof and pursuant to awards under the Company's 1995 Stock Incentive Plan), may seek specific enforcement of the covenant not to compete in any court of competent jurisdiction, including, without limitation, by the issuance of a temporary or permanent injunction, without the necessity of a bond. You and the Company agree that the provisions of this covenant not to compete are reasonable. However, should any court or arbitrator determine that any provision of this covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties agree that this covenant not to compete should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable. (iv) The provisions of this Section 9 shall supersede the covenants restricting competition by the Executive set forth in (i) Article VII of the Company's Management Equity Plan and any applicable agreement entered into between the Company and the Executive pursuant thereto and (ii) Article IX of the Amended and Restated Management Equity Participation Agreement, dated as of August 8, 1988, between the Company and the other parties signatory thereto, as amended and supplemented from time to time. 10. CONFIDENTIALITY. (i) You shall not knowingly disclose or reveal to any unauthorized person, during or after the Term, any trade secret or other confidential information relating to the Company or any of its affiliates, or any of their respective businesses or principals, such as, without limitation, dealers' or distributors' lists and manufacturing processes, and you confirm that such information is the exclusive property of the Company and its affiliates. You agree to hold as the Company's property all memoranda, books, papers, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, whether made by you or otherwise coming into your possession and, on termination of your employment, or on demand of the Company at any time, to deliver the same to the Company. 8 (ii) Any ideas, processes, characters, productions, schemes, titles, names, formats, adaptations, plots, slogans, catchwords, incidents, treatment, and dialogue which you may conceive, create, organize, prepare or produce during the period of your employment and which ideas, processes, etc. relate to any of the businesses of the Company, shall be owned by the Company and its affiliates whether or not you should in fact execute an assignment thereof to the Company, but you agree to execute any assignment thereof or other instrument or document which may be reasonably necessary to protect and secure such rights to the Company. (iii) You shall comply in all respects with the terms of the Employees' Agreement with regard to Proprietary Information Including Inventions, Patents, Copyrights, Trade Secrets and Confidential Information between you and the Company. (iv) Notwithstanding anything in this Agreement to the contrary, you agree that from and after any breach by you of the provisions of this Section 10 during any period of payment provided in Section 5 hereof, the Company shall cease to have any obligations to make payments to you under this Agreement. 11. ARBITRATION. (i) Except as contemplated by Section 9(iii) and Section 11(iii) hereof, any dispute or controversy arising under or in connection with this Agreement that cannot be mutually resolved by the parties to this Agreement and their respective advisors and representatives shall be settled exclusively by arbitration in New York, New York before one arbitrator of exemplary qualifications and stature, who shall be selected jointly by an individual to be designated by the Company and an individual to be selected by you, or if such two individuals cannot agree on the selection of the arbitrator, who shall be selected by the American Arbitration Association. (ii) The parties agree to use their best efforts to cause (A) the two applicable individuals set forth in the preceding Section 11(i), or, if applicable, the American Arbitration Association, to appoint the arbitrator within 30 days of the date that a party hereto, after the issuance of a Notice of Termination hereunder, notifies the other party that a dispute or controversy exists that necessitates the appointment of an arbitrator, and (B) any arbitration hearing to be held within 30 days of the date of selection of the arbitrator and, as a condition to his or her selection, such arbitrator must consent to be available for a hearing at such time. (iii) Judgment may be entered on the arbitrator's award in any court having jurisdiction; PROVIDED, HOWEVER, that you shall be entitled to seek specific performance of your right to be paid and to participate in benefit programs until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Company and you hereby agree that the arbitrator shall be empowered to enter an equitable decree mandating specific enforcement of the terms of this Agreement. (iv) The Company shall bear all expenses of the arbitrator incurred in any arbitration hereunder. The Company shall also pay your reasonable legal fees in connection with such arbitration as you incur them; PROVIDED that in the event you seek arbitration and the arbitrator determines that your claims are frivolous in nature or were not brought or pursued in good faith, you will promptly return to the Company all amounts paid by the Company for such fees. 9 12. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 5 and your obligations under Sections 9 and 10 hereof shall survive the expiration of the Term of this Agreement. 13. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. ENTIRE AGREEMENT. This Agreement and the other agreements expressly referred to herein contain the entire agreement by the parties with respect to the matters covered herein and supersede any prior agreement (including, without limitation, any prior employment agreement), condition, practice, custom, usage and obligation with respect to such matters insofar as any such prior agreement, condition, practice, custom, usage or obligation might have given rise to any enforceable right. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, FORT HOWARD CORPORATION By: /s/ Donald H. DeMeuse ------------------------- Name: Donald H. DeMeuse Title: Chairman of the Board Agreed to this 17th day ---- of December, 1996 -------- By /s/ Michael T. Riordan ------------------------ Michael T. Riordan December 13, 1996 Ms. Kathleen J. Hempel Fort Howard Corporation 1919 South Broadway Green Bay, WI 54304 Dear Ms. Hempel: WHEREAS, Fort Howard Corporation (the "Company") considers it essential to its best interests and the best interests of its stockholders to foster the continuous employment of its key management personnel and, accordingly, the Company desires to continue to employ Kathleen J. Hempel ("you" or the "Executive"), upon the terms and conditions hereinafter set forth; WHEREAS, the Executive desires to continue to be employed by the Company, upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the covenants and agreements hereunder set forth, the parties hereto agree as follows: 1. TERM OF AGREEMENT. This Agreement shall commence as of January 1, 1997 and shall continue in effect until December 31, 1999; PROVIDED, HOWEVER, that the term of this Agreement shall automatically be extended without further action by either party for additional one-year periods unless, not later than six months prior to the end of the then effective term, either the Company or the Executive shall have given written notice that such party does not intend to extend this Agreement. The duration of the initial term and any subsequent extension is hereinafter referred to as the "Term." 2. TERMS OF EMPLOYMENT. During the Term, you agree to be a full- time employee of the Company serving in the position of Vice Chairman and Chief Financial Officer and to devote substantially all of your working time and attention to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities associated with your position as Vice Chairman and Chief Financial Officer of the Company, to use your best efforts to perform faithfully and efficiently such responsibilities. In addition, you agree to serve in such other capacities or offices to which you may be assigned, appointed or elected from time to time by the Board of Directors of the Company (the "Board"). Nothing herein shall prohibit you from devoting your time to civic and community activities or managing personal investments, as long as the foregoing do not interfere with the performance of your duties hereunder. 3. COMPENSATION. (i) As compensation for your services under this Agreement, you shall be entitled to receive a base salary plus an annual incentive compensation bonus ("bonus"), each to be agreed upon from time to time between you and the Company acting in good faith; PROVIDED, HOWEVER, that your base salary shall at no time be less than your base salary as of the date hereof. In addition, you shall be entitled to participate in any additional bonus arrangement (an "additional bonus arrangement") which may be agreed upon 2 from time to time between you and the Company acting in good faith. The Company shall have the right to reduce prospectively your base salary, bonus and participation in any additional bonus arrangement, as in effect from time to time, pursuant to an across-the-board compensation reduction or deferral program similarly affecting all executive officers of the Company. (ii) In addition to compensation provided for in Subsection (i) of this Section 3, the Company agrees to continue in effect (A) any compensation or benefit plan in which you participate as of the date hereof which is material to your total compensation, or any substitute plan adopted in place of any such plan, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan which shall include the bonus and any additional bonus arrangement) has been made with respect to such plan; PROVIDED, HOWEVER, that no substitute plan or equitable arrangement shall be adopted with respect to the Fort Howard Profit Sharing Plan or the Fort Howard Supplemental Retirement Plan except pursuant to a mutual agreement between the Chief Executive Officer of the Company and the Board, and (B) your ability to participate therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the opportunities provided and the level of your participation relative to other participants, than exists on the date hereof. (iii) The Company shall reimburse you for all reasonable travel, entertainment and other business expenses incurred by you in the performance of your responsibilities under this Agreement promptly upon receipt of written substantiation of such expenses. You shall also be paid all additional amounts necessary to discharge all federal and state tax liabilities incurred by you that are attributable to all deemed compensation arising as a consequence of your personal use of property owned or leased by the Company, including federal and state taxes assessed against such additional compensation. 4. TERMINATION OF EMPLOYMENT. Your employment may be terminated by either the Company or you by giving a Notice of Termination, as defined in Subsection (iv) of this Section 4. If your employment should terminate during the Term, your entitlement to benefits shall be determined in accordance with Section 5 hereof. (i) DISABILITY. If, as a result of your incapacity due to physical or mental illness, you are, or are reasonably likely to become, unable to perform your duties hereunder for more than six consecutive months or six months in aggregate during any twelve-month period, your employment may be terminated for "Disability." (ii) CAUSE. Termination of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with the Company in your established position on a full- time basis (other than any such failure resulting from your Disability and other than any such actual or anticipated failure after the issuance of a Notice of Termination by you for Good Reason as defined in Subsections 4(iv) and 4(iii), respectively) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, (B) the willful engaging by you in conduct which is significantly injurious to the Company, monetarily or otherwise, after written demand for cessation of such conduct is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have 3 engaged in such conduct and the injury to the Company, (C) your conviction of a crime involving moral turpitude, (D) your abuse of illegal drugs or other controlled substances or your habitual intoxication or (E) the breach of any of your material obligations hereunder. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless knowingly done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. (iii) GOOD REASON. For purposes of this Agreement, "Good Reason" shall mean the occurrence, without your express written consent, of any of the following circumstances unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination, as such terms are defined in Subsections (v) and (iv) of this Section 4, respectively, given in respect thereof: (A) the assignment to you of any duties inconsistent with your status as an executive officer of the Company or your removal from any office specified in Section 2 hereof; (B) any reduction in your base salary as in effect from time to time, except for across-the-board salary reductions similarly affecting all executive officers; (C) the failure by the Company to pay or provide to you within seven (7) days of your written demand any amount of base salary or bonus or any benefit which is due, owing and payable to you pursuant to the terms of any applicable arrangement or policy or pursuant to the terms hereof, except pursuant to an across-the-board compensation deferral similarly affecting all executive officers, or to pay to you any portion of an installment of deferred compensation due under any deferred compensation program of the Company; (D) except in the case of across-the-board reductions or eliminations similarly affecting all executive officers or as otherwise contemplated under Section 3 hereof, the failure by the Company to (I) continue in effect any compensation plan in which you participate which is material to your total compensation, including but not limited to the Company's plans currently in effect or hereafter adopted, and any plans adopted in substitution therefor, (II) continue to provide you with benefits substantially similar, in aggregate, to the Company's life insurance, medical, dental, health, accident or disability plans in which you are participating at the date of this Agreement or (III) continue to provide you with the number of paid vacation days to which you are eligible on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the date of this Agreement; (E) the relocation of the Company's principal executive office to a location more than fifty miles distant from its current location, or the Company's requiring you to perform services at a location that would be a violation of the terms of Section 6 hereof; (F) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 7 hereof; or 4 (G) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) of this Section 4, and for purposes of this Agreement, no such purported termination shall be effective. Your continued employment with the Company shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (iv) NOTICE OF TERMINATION. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (A) if your employment is terminated for Disability pursuant to Subsection (i) of this Section 4, thirty (30) days after Notice of Termination is given (PROVIDED that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), (B) if your employment is terminated by reason of your death, the date of your death, and (C) if your employment is terminated by the Company for Cause, by you for Good Reason or by either party for any other reason (other than Disability or death), the date specified in the Notice of Termination (which, in the case of a termination by the Company for Cause shall not be less than fifteen (15) days, and in the case of a termination by you for Good Reason, shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 5. COMPENSATION UPON TERMINATION OR DURING DISABILITY. Upon termination of your employment with the Company during the Term, you shall be entitled to the following benefits: (i) If your employment is terminated for Disability, you shall receive until the third anniversary of the Date of Termination all compensation payable to you under the Company's disability and medical plans and programs, as in effect on the date of such termination plus an additional payment from the Company (if necessary) such that the aggregate amount received by you in the nature of salary continuation from all sources equals your base salary at the date in effect on the date of such termination. After the third anniversary of the Date of Termination, your benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs, PROVIDED that such terms shall not be less advantageous to you than the terms of such programs in effect as of the date hereof. The obligations of the Company under this Section 5(i) shall be terminated by your death after becoming Disabled and prior to the third anniversary of the Date of Termination. (ii) (A) If your employment shall be terminated (I) by the Company for Cause, or (II) by you other than for Good Reason, the Company shall pay you your full base salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation or benefit 5 plans of the Company (excluding, in the case of termination by the Company for Cause, any bonus and vacation pay and any entitlement under any additional bonus arrangement otherwise payable to you pursuant to the terms of the applicable plan or program of the Company, and in the case of your voluntary termination other than for Good Reason, excluding any bonus pay and any entitlement under any additional bonus arrangement) at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (B) If your employment shall be terminated by reason of your death, the Company shall pay your estate your full base salary through the Date of Termination and for a period of 12 whole calendar months thereafter plus, if the Date of Termination shall not occur on the first day of a calendar month, the balance of the month in which the Date of Termination occurs, at the rate in effect at the time of your death, plus any accrued bonus or entitlement under any additional bonus arrangement prorated for the portion of the bonus measurement period occurring prior to the date of your death, plus all other amounts to which you are entitled under any compensation or benefit plans of the Company at the date of your death, and the Company shall have no further obligation to you, your beneficiaries or your estate under this Agreement. (iii) If your employment shall be terminated (a) by the Company other than for Cause or Disability or (b) by you for Good Reason, then you shall be entitled to the benefits provided below: (A) the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given (or, if greater, at the rate in effect 30 days prior to the time Notice of Termination is given), plus all other amounts which you have accrued under any compensation or benefit plans of the Company, including, without limitation, any bonus pursuant to the Company's Management Incentive Plan and any entitlement under any additional bonus arrangement accrued through the Date of Termination for the portion of the applicable bonus measurement period occurring prior to the Date of Termination, at the time such payments are due, except as otherwise provided below; (B) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay to you your full base salary at the rate in effect immediately prior to the time Notice of Termination is given (or, if greater, at the rate in effect 30 days prior to the time Notice of Termination is given), payable periodically in accordance with past payroll practices, until the third anniversary of the Date of Termination; (C) in lieu of any further bonus payments and any entitlements under any additional bonus arrangement for periods subsequent to the Date of Termination, the Company shall pay to you a bonus payable in each January following the Date of Termination in respect of the previous calendar year equal to the quotient obtained by aggregating the bonuses received by you pursuant to the Company's Management Incentive Plan and any additional bonus arrangement in respect of the three calendar years ending prior to the Date of Termination (the "Bonus Period") and dividing such sum by three, with each such January bonus payment adjusted to reflect any changes in the Consumer Price Index since the midpoint of the 6 period commencing on the first day of the Bonus Period and ending on the Date of Termination. Such bonus shall be paid in respect of each calendar year or portion thereof ending after the Date of Termination until the third anniversary of the Date of Termination, and shall be prorated for partial years, if any, including, without limitation, the portion of the calendar year occurring after the Date of Termination and the final calendar year in respect of which any such January bonus is payable pursuant to this Section 5(iii)(C); (D) until the third anniversary of the Date of Termination, you will continue to participate in all other compensation and benefit plans (including perquisites) in which you were participating immediately prior to the time Notice of Termination is given, or comparable plans substituted therefor, including, without limitation, the Fort Howard Supplemental Retirement Plan and the Supplemental Retirement Agreement between you and the Company; PROVIDED, HOWEVER, that if you are ineligible (E.G., by operation of law or the terms of the applicable plan) to continue to participate in any such plan the Company shall provide you with a comparable level of compensation or benefits; (E) The Company shall pay to you all reasonable legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement), except any such fees or expenses incurred by you in seeking to enforce a claim which is determined by the arbitrator, pursuant to Section 11, to have been frivolous in nature or not brought or pursued in good faith; (F) In order to assist you in obtaining new employment, the Company shall provide you with outplacement services, including access to an office and secretarial assistance for a period not to exceed 12 months and at a cost not to exceed $12,000; and (G) If you should die after the termination of employment and prior to the end of the period of payment provided for in paragraphs (B), (C) and (D) hereof, the Company shall pay your estate any amounts that are or become payable pursuant to any of such paragraphs until the end of the Term. (iv) You shall not be required to mitigate the amount of any payment provided for in subsection (iii) of this Section 5 by seeking other employment, and the amount of any payment provided for in this Section 5 shall not be reduced by any compensation earned by you as a result of your employment by another employer; PROVIDED, HOWEVER, that any medical or dental welfare benefit otherwise receivable by you pursuant to Subsection 5(iii)(D) shall be reduced to the extent a comparable benefit of the same type would normally be made available to you during the applicable period of benefit continuation set forth in such Subsection, and any such benefit actually received by you shall be reported to the Company. (v) In addition to all other amounts payable to you under this Section 5, you shall be entitled to receive all benefits payable to you under any plan or agreement of the Company relating to retirement benefits, including, without limitation, the Supplemental Retirement Plan and the Supplemental Retirement Agreement between you and the Company. 7 6. LOCATION. Your services shall be performed at the Company's current headquarters location, or at such other place within a fifty-mile radius of such current location as the Board may from time to time deem appropriate. Notwithstanding the foregoing, you shall be required to travel to the extent necessary to the performance of your responsibilities under this Agreement. You shall use Company owned or leased aircraft for purposes of such travel whenever practicable, and the Company recognizes that it may from time to time be necessary, appropriate, desirable or convenient for you to be accompanied in such travel by persons who are not employees of the Company, including your spouse and other members of your family. 7. SUCCESSORS; BINDING AGREEMENT. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled to hereunder if you were to terminate your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 8. NOTICES. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, PROVIDED that all notices to the Company shall be directed to the attention of the Board with copies to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. NONCOMPETITION. (i) Until the Date of Termination, you agree not to enter into competitive endeavors and not to undertake any commercial activity which is contrary to the best interests of the Company or its affiliates, including becoming an employee, owner (except for passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of (a) any firm or person engaged in the operation of a business engaged in the acquisition of industrial businesses or (b) any firm or person which (i) directly competes with a line or lines of business of the Company or any subsidiary of the Company accounting for ten percent (10%) or more of the Company's or such subsidiary's gross sales, revenues or earnings before taxes, (ii) derives ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly competes with the Company or any subsidiary of the Company or (iii) is a distributor of any of the products of the Company or any subsidiary of the Company, where the distribution of such products accounts for ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes. Notwithstanding any provision of this Agreement to 8 the contrary, you agree that your breach of the provisions of this Section 9(i) shall permit the Company to terminate your employment for Cause. (ii) After the Date of Termination and during any period that you continue to be paid your salary (including any other payments in lieu of salary) pursuant to Section 5 hereof, you agree not to become an employee, owner (except for passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of any firm or person which (i) directly competes with a business of the Company or any subsidiary of the Company producing any class of products accounting for ten percent (10%) or more of the Company's or such subsidiary's gross sales, revenues or earnings before taxes or (ii) is a distributor of any of the products of the Company or any subsidiary of the Company, where the distribution of such products accounts for ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes. During the period of payment provided in Section 5 hereof, you will be available, consistent with other responsibilities that you may then have, to answer questions and provide advice to the Company. Notwithstanding anything in this Agreement to the contrary, you agree that, from and after any breach by you of the provisions of this Section 9(ii), the Company shall cease to have any obligations to make payments to you under this Agreement. (iii) You acknowledge and agree that damages for breach of the covenant not to compete in this Section 9 will be difficult to determine and will not afford a full and adequate remedy, and therefore agree that the Company, in addition to any other remedies that may otherwise be available for a breach of this Section 9 (including, without limitation, as set forth in Section 9(ii) above, by seeking actual damages pursuant to Section 11 hereof and pursuant to awards under the Company's 1995 Stock Incentive Plan), may seek specific enforcement of the covenant not to compete in any court of competent jurisdiction, including, without limitation, by the issuance of a temporary or permanent injunction, without the necessity of a bond. You and the Company agree that the provisions of this covenant not to compete are reasonable. However, should any court or arbitrator determine that any provision of this covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties agree that this covenant not to compete should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable. (iv) The provisions of this Section 9 shall supersede the covenants restricting competition by the Executive set forth in (i) Article VII of the Company's Management Equity Plan and any applicable agreement entered into between the Company and the Executive pursuant thereto and (ii) Article IX of the Amended and Restated Management Equity Participation Agreement, dated as of August 8, 1988, between the Company and the other parties signatory thereto, as amended and supplemented from time to time. 10. CONFIDENTIALITY. (i) You shall not knowingly disclose or reveal to any unauthorized person, during or after the Term, any trade secret or other confidential information relating to the Company or any of its affiliates, or any of their respective businesses or principals, such as, without limitation, dealers' or distributors' lists and manufacturing processes, and you confirm that such information is the exclusive property of the Company and its affiliates. You agree to hold as the Company's property 9 all memoranda, books, papers, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, whether made by you or otherwise coming into your possession and, on termination of your employment, or on demand of the Company at any time, to deliver the same to the Company. (ii) Any ideas, processes, characters, productions, schemes, titles, names, formats, adaptations, plots, slogans, catchwords, incidents, treatment, and dialogue which you may conceive, create, organize, prepare or produce during the period of your employment and which ideas, processes, etc. relate to any of the businesses of the Company, shall be owned by the Company and its affiliates whether or not you should in fact execute an assignment thereof to the Company, but you agree to execute any assignment thereof or other instrument or document which may be reasonably necessary to protect and secure such rights to the Company. (iii) You shall comply in all respects with the terms of the Employees' Agreement with regard to Proprietary Information Including Inventions, Patents, Copyrights, Trade Secrets and Confidential Information between you and the Company. (iv) Notwithstanding anything in this Agreement to the contrary, you agree that from and after any breach by you of the provisions of this Section 10 during any period of payment provided in Section 5 hereof, the Company shall cease to have any obligations to make payments to you under this Agreement. 11. ARBITRATION. (i) Except as contemplated by Section 9(iii) and Section 11(iii) hereof, any dispute or controversy arising under or in connection with this Agreement that cannot be mutually resolved by the parties to this Agreement and their respective advisors and representatives shall be settled exclusively by arbitration in New York, New York before one arbitrator of exemplary qualifications and stature, who shall be selected jointly by an individual to be designated by the Company and an individual to be selected by you, or if such two individuals cannot agree on the selection of the arbitrator, who shall be selected by the American Arbitration Association. (ii) The parties agree to use their best efforts to cause (A) the two applicable individuals set forth in the preceding Section 11(i), or, if applicable, the American Arbitration Association, to appoint the arbitrator within 30 days of the date that a party hereto, after the issuance of a Notice of Termination hereunder, notifies the other party that a dispute or controversy exists that necessitates the appointment of an arbitrator, and (B) any arbitration hearing to be held within 30 days of the date of selection of the arbitrator and, as a condition to his or her selection, such arbitrator must consent to be available for a hearing at such time. (iii) Judgment may be entered on the arbitrator's award in any court having jurisdiction; PROVIDED, HOWEVER, that you shall be entitled to seek specific performance of your right to be paid and to participate in benefit programs until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Company and you hereby agree that the arbitrator shall be empowered to enter an equitable decree mandating specific enforcement of the terms of this Agreement. (iv) The Company shall bear all expenses of the arbitrator incurred 10 in any arbitration hereunder. The Company shall also pay your reasonable legal fees in connection with such arbitration as you incur them; PROVIDED that in the event you seek arbitration and the arbitrator determines that your claims are frivolous in nature or were not brought or pursued in good faith, you will promptly return to the Company all amounts paid by the Company for such fees. 12. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 5 and your obligations under Sections 9 and 10 hereof shall survive the expiration of the Term of this Agreement. 13. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. ENTIRE AGREEMENT. This Agreement and the other agreements expressly referred to herein contain the entire agreement by the parties with respect to the matters covered herein and supersede any prior agreement (including, without limitation, any prior employment agreement), condition, practice, custom, usage and obligation with respect to such matters insofar as any such prior agreement, condition, practice, custom, usage or obligation might have given rise to any enforceable right. 11 If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, FORT HOWARD CORPORATION By /s/ Michael T. Riordan ----------------------------- Name: Michael T. Riordan Title: President and Chief Executive Officer Agreed to this 27th day ---- of December, 1996 -------- By /s/ Kathleen J. Hempel ----------------------- Kathleen J. Hempel EX-10.3 5 Exhibit 10.3 ------------ December 13, 1996 Mr. John F. Rowley Fort Howard Corporation 1919 South Broadway Green Bay, Wisconsin 54304 Dear Mr. Rowley: WHEREAS, Fort Howard Corporation (the "Company") considers it essential to its best interests and the best interests of its stockholders to foster the continuous employment of its key management personnel and, accordingly, the Company desires to continue to employ John F. Rowley ("you" or the "Executive"), upon the terms and conditions hereinafter set forth; WHEREAS, the Executive desires to continue to be employed by the Company, upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the covenants and agreements hereunder set forth, the parties hereto agree as follows: 1. TERM OF AGREEMENT. This Agreement shall commence as of January 1, 1997 and shall continue in effect until December 31, 1999; PROVIDED, HOWEVER, that the term of this Agreement shall automatically be extended without further action by either party for additional one-year periods unless, not later than six months prior to the end of the then effective term, either the Company or the Executive shall have given written notice that such party does not intend to extend this Agreement. The duration of the initial term and any subsequent extension is hereinafter referred to as the "Term." 2. TERMS OF EMPLOYMENT. During the Term, you agree to be a full- time employee of the Company serving in the position of Executive Vice President and to devote substantially all of your working time and attention to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities associated with your position as of the Company, to use your best efforts to perform faithfully and efficiently such responsibilities. In addition, you agree to serve in such other capacities or offices to which you may be assigned, appointed or elected from time to time by the Board of Directors of the Company (the "Board"). Nothing herein shall prohibit you from devoting your time to civic and community activities or managing personal investments, as long as the foregoing do not interfere with the performance of your duties hereunder. 3. COMPENSATION. (i) As compensation for your services under this Agreement, you shall be entitled to receive a base salary plus an annual incentive compensation bonus ("bonus"), each to be agreed upon from time to time between you and the Company acting in good faith; PROVIDED, HOWEVER, that your base salary shall at no time be less than your base salary as of the date hereof. The Company shall have the right to reduce prospectively your base salary and bonus, as in effect from time to time, pursuant to an across-the- board compensation reduction or deferral program similarly affecting all 2 executive officers of the Company. (ii) In addition to compensation provided for in Subsection (i) of this Section 3, the Company agrees to continue in effect (A) any compensation or benefit plan in which you participate as of the date hereof which is material to your total compensation, or any substitute plan adopted in place of any such plan, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan which shall include the bonus) has been made with respect to such plan; PROVIDED, HOWEVER, that no substitute plan or equitable arrangement shall be adopted with respect to the Fort Howard Profit Sharing Plan or the Fort Howard Supplemental Retirement Plan except pursuant to a mutual agreement between the Chief Executive Officer of the Company and the Board, and (B) your ability to participate therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the opportunities provided and the level of your participation relative to other participants, than exists on the date hereof. 4. TERMINATION OF EMPLOYMENT. Your employment may be terminated by either the Company or you by giving a Notice of Termination, as defined in Subsection (iv) of this Section 4. If your employment should terminate during the Term, your entitlement to benefits shall be determined in accordance with Section 5 hereof. (i) DISABILITY. If, as a result of your incapacity due to physical or mental illness, you are, or are reasonably likely to become, unable to perform your duties hereunder for more than six consecutive months or six months in aggregate during any twelve month period, your employment may be terminated for "Disability." (ii) CAUSE. Termination of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with the Company in your established position on a full- time basis (other than any such failure resulting from your Disability and other than any such actual or anticipated failure after the issuance of a Notice of Termination by you for Good Reason as defined in Subsections 4(iv) and 4(iii), respectively) after a written demand for substantial performance is delivered to you by the Chief Executive Officer of the Company, which demand specifically identifies the manner in which the Chief Executive Officer of the Company believes that you have not substantially performed your duties, (B) the willful engaging by you in conduct which is significantly injurious to the Company, monetarily or otherwise, after written demand for cessation of such conduct is delivered to you by the Chief Executive Officer of the Company, which demand specifically identifies the manner in which the Chief Executive Officer of the Company believes that you have engaged in such conduct and the injury to the Company, (C) your conviction of a crime involving moral turpitude, (D) your abuse of illegal drugs or other controlled substances or your habitual intoxication or (E) the breach of any of your material obligations hereunder. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless knowingly done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. (iii) GOOD REASON. For purposes of this Agreement, "Good Reason" shall mean the occurrence, without your express written consent, of any of the following circumstances unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination, as such terms are defined in Subsections (v) and (iv) of this Section 4, respectively, given in respect thereof: (A) any reduction in your base salary as in effect from time to time, except for across-the-board salary reductions similarly affecting 3 all executive officers; (B) the failure by the Company to pay or provide to you within seven (7) days of your written demand any amount of base salary or bonus or any benefit which is due, owing and payable to you pursuant to the terms of any applicable arrangement or policy or pursuant to the terms hereof, except pursuant to an across-the-board compensation deferral similarly affecting all executive officers, or to pay to you any portion of an installment of deferred compensation due under any deferred compensation program of the Company; (C) except in the case of across-the-board reductions or eliminations similarly affecting all executive officers or as otherwise contemplated under Section 3 hereof, the failure by the Company to (I) continue in effect any compensation plan in which you participate which is material to your total compensation, including but not limited to the Company's plans currently in effect or hereafter adopted, and any plans adopted in substitution therefor, (II) continue to provide you with benefits substantially similar, in aggregate, to the Company's life insurance, medical, dental, health, accident or disability plans in which you are participating at the date of this Agreement or (III) continue to provide you with the number of paid vacation days to which you are eligible on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the date of this Agreement; (D) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 7 hereof; or (E) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) of this Section 4, and for purposes of this Agreement, no such purported termination shall be effective. Your continued employment with the Company shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (iv) NOTICE OF TERMINATION. Any purported termination of your employment by the Company or by you shall be communicated by written notice of termination (a "Notice of Termination") to the other party hereto in accordance with Section 8 hereof. (v) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (A) if your employment is terminated for Disability pursuant to Subsection (i) of this Section 4, thirty (30) days after Notice of Termination is given (PROVIDED that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), (B) if your employment is terminated by reason of your death, the date of your death, and (C) if your employment is terminated by the Company for Cause, by you for Good Reason or by either party for any other reason (other than Disability or death), the date specified in the Notice of Termination (which, in the case of a termination by the Company for Cause shall not be less than fifteen (15) days, and in the case of a termination by you for Good Reason, shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 5. COMPENSATION UPON TERMINATION OR DURING DISABILITY. Upon termination of your employment with the Company during the Term, you shall be entitled to the following benefits: 4 (i) If your employment is terminated for Disability, you shall receive until the first anniversary of the Date of Termination all compensation payable to you under the Company's disability and medical plans and programs, as in effect on the date of such termination plus an additional payment from the Company (if necessary) such that the aggregate amount received by you in the nature of salary continuation from all sources equals your base salary at the rate in effect on the date of such termination. After the first anniversary of the Date of Termination, your benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs, PROVIDED that such terms shall not be less advantageous to you than the terms of such programs in effect as of the date hereof. (ii) (A) If your employment shall be terminated (I) by the Company for Cause, or (II) by you other than for Good Reason, the Company shall pay you your full base salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation or benefit plans of the Company (excluding, in the case of termination by the Company for Cause, any bonus and vacation pay otherwise payable to you pursuant to the terms of the applicable plan or program of the Company, and in the case of your voluntary termination other than for Good Reason, excluding any bonus pay) at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (B) If your employment shall be terminated by reason of your death, the Company shall pay your estate your full base salary through the Date of Termination and for a period of 6 whole calendar months thereafter plus, if the Date of Termination shall not occur on the first day of a calendar month, the balance of the month in which the Date of Termination occurs, at the rate in effect at the time of your death, plus any accrued bonus prorated for the portion of the bonus measurement period occurring prior to the date of your death, plus all other amounts to which you are entitled under any compensation or benefit plans of the Company at the date of your death, and the Company shall have no further obligation to you, your beneficiaries or your estate under this Agreement. (iii) If your employment shall be terminated (a) by the Company other than for Cause or Disability or by you for Good Reason or (b) by the Company other than for Cause or Disability or by you for Good Reason within one year following the date on which a Change in Control (as defined in Appendix A hereto) of the Company occurs (a "Change in Control Termination"), then you shall be entitled to the benefits provided below: (A) the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given (or, if greater, at the rate in effect 30 days prior to the time Notice of Termination is given), plus all other amounts to which you are entitled under any compensation or benefit plans of the Company, including, without limitation, any bonus arrangement accrued through the Date of Termination for the portion of the applicable bonus measurement period occurring prior to the Date of Termination, at the time such payments are due, except as otherwise provided below; (B) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay to you your full base salary at the rate in effect immediately prior to the time Notice of Termination is given (or, if greater, at the rate in effect 30 days prior to the time Notice of Termination is given), payable periodically in accordance with past payroll practices, until the first 5 anniversary (second anniversary in the event of a Change in Control Termination) of the Date of Termination; (C) in lieu of any further bonus payments for periods subsequent to the Date of Termination, the Company shall pay to you a bonus payable in each January following the Date of Termination in respect of the previous calendar year equal to the quotient obtained by aggregating the bonuses received by you pursuant to the Company's Management Incentive Plan in respect of the three calendar years ending prior to the Date of Termination (the "Bonus Period") and dividing such sum by three, with each such January bonus payment adjusted to reflect any changes in the Consumer Price Index since the midpoint of the period commencing on the first day of the Bonus Period and ending on the Date of Termination. Such bonus shall be paid in respect of each calendar year or portion thereof ending after the Date of Termination until the first anniversary (second anniversary in the event of a Change in Control Termination) of the Date of Termination, and shall be prorated for the portion of the calendar year, if any, occurring after the Date of Termination and the final calendar year in respect of which any such January bonus is payable pursuant to this Section 5(iii)(C); (D) until the first anniversary (second anniversary in the event of a Change in Control Termination) of the Date of Termination, you will continue to participate in all other compensation and benefit plans (including perquisites) in which you were participating immediately prior to the time Notice of Termination is given, or comparable plans substituted therefor, including, without limitation, the Fort Howard Supplemental Retirement Plan and the Supplemental Retirement Agreement between you and the Company; PROVIDED, HOWEVER, that if you are ineligible (e.g., by operation of law or the terms of the applicable plan) to continue to participate in any such plan the Company shall provide you with a comparable level of compensation or benefits; (E) in order to assist you in obtaining new employment, the Company shall provide you with outplacement services, including access to an office and secretarial assistance for a period not to exceed 12 months and at a cost not to exceed $12,000; and (F) if you should die after the termination of employment and prior to the end of the period of payment provided for in paragraphs (B), (C) and (D) hereof, the Company shall pay your estate any amounts that are or become payable pursuant to any of such paragraphs until the first anniversary (second anniversary in the event of a Change in Control Termination) of the Date of Termination. (iv) You shall not be required to mitigate the amount of any payment provided for in subsection (iii) of this Section 5 by seeking other employment, and the amount of any payment provided for in this Section 5 shall not be reduced by any compensation earned by you as the result of your employment by another employer; PROVIDED, HOWEVER, that any medical or dental welfare benefit otherwise receivable by you pursuant to subsection 5(iii)(D) shall be reduced to the extent a comparable benefit of the same type would normally be made available to you during the applicable period of benefit continuation set forth in such Subsection, and any such benefit actually received by you shall be reported to the Company. (v) In addition to all other amounts payable to you under this Section 5, you shall be entitled to receive all benefits payable to you under any plan or agreement of the Company relating to retirement benefits, including, without limitation, the Supplemental Retirement Plan 6 and the Supplemental Retirement Agreement between you and the Company. 6. SUCCESSORS; BINDING AGREEMENT. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled to hereunder if you were to terminate your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 7. NOTICES. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, PROVIDED that all notices to the Company shall be directed to the attention of the Board with copies to the secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 8. NONCOMPETITION. (i) Until the Date of Termination, you agree not to enter into competitive endeavors and not to undertake any commercial activity which is contrary to the best interests of the Company or its affiliates, including becoming an employee, owner (except for passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of (a) any firm or person engaged in the operation of a business engaged in the acquisition of industrial businesses or (b) any firm or person which (i) directly competes with a line or lines of business of the Company or any subsidiary of the Company accounting for ten percent (10%) or more of the Company's or such subsidiary's gross sales, revenues or earnings before taxes, (ii) derives ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly competes with the Company or any subsidiary of the Company or (iii) is a distributor of any of the products of the Company or any subsidiary of the Company, where the distribution of such products accounts for ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes. Notwithstanding any provision of this Agreement to the contrary, you agree that your breach of the provisions of this Section 8(i) shall permit the Company to terminate your employment for Cause. (ii) Through the second anniversary of the Date of Termination, you agree not to become an employee, owner (except for passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of any firm or person which (i) directly competes with a line or lines of business of the Company or any subsidiary of the Company accounting for ten percent (10%) or more of the Company's or such subsidiary's gross sales, revenues or earnings before taxes, (ii) derives ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly competes with the Company or 7 any subsidiary of the Company or (iii) is a distributor of any of the products of the Company or any subsidiary of the Company, where the distribution of such products accounts for ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes. During the period through the second anniversary of the Date of Termination, you will be available, consistent with other responsibilities that you may then have, to answer questions and provide advice to the Company. Notwithstanding anything in this Agreement to the contrary, you agree that, from and after any breach by you of the provisions of this Section 8(ii), the Company shall cease to have any obligations to make payments to you under this Agreement. (iii) You acknowledge and agree that damages for breach of the covenant not to compete in this Section 8 will be difficult to determine and will not afford a full and adequate remedy, and therefore agree that the Company, in addition to any other remedies that may otherwise be available for a breach of this Section 8 (including, without limitation, as set forth in Section 8(ii) above, by seeking actual damages and pursuant to awards under the Company's Management Equity Plan and 1995 Stock Incentive Plan and the Amended and Restated Management Equity Participation Agreement, dated as of August 8, 1988, between the Company and the other parties thereto, as amended and supplemented from time to time), may seek specific enforcement of the covenant not to compete in any court of competent jurisdiction, including, without limitation, by the issuance of a temporary or permanent injunction, without the necessity of a bond. You and the Company agree that the provisions of this covenant not to compete are reasonable. However, should any court or arbitrator determine that any provision of this covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties agree that this covenant not to compete should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable. 9. CONFIDENTIALITY. (i) You shall not knowingly disclose or reveal to any unauthorized person, during or after the Term, any trade secret or other confidential information relating to the Company or any of its affiliates, or any of their respective businesses or principals, such as, without limitation, dealers' or distributors' lists and manufacturing processes, and you confirm that such information is the exclusive property of the Company and its affiliates. You agree to hold as the Company's property all memoranda, books, papers, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, whether made by you or otherwise coming into your possession and, on termination of your employment, or on demand of the Company at any time, to deliver the same to the Company. (ii) Any ideas, processes, characters, productions, schemes, titles, names, formats, adaptations, plots, slogans, catchwords, incidents, treatment, and dialogue which you may conceive, create, organize, prepare or produce during the period of your employment and which ideas, processes, etc. relate to any of the businesses of the Company, shall be owned by the Company and its affiliates whether or not you should in fact execute an assignment thereof to the Company, but you agree to execute any assignment thereof or other instrument or document which may be reasonably necessary to protect and secure such rights to the Company. (iii) You shall comply in all respects with the terms of the Employees' Agreement with regard to Proprietary Information Including Inventions, Patents, Copyrights, Trade Secrets and Confidential Information between you and the Company. (iv) Notwithstanding anything in this Agreement to the contrary, you agree that from and after any breach by you of the provisions of this Section 9 during any period of payment provided in Section 5 hereof, the 8 Company shall cease to have any obligations to make payments to you under this Agreement. 10. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 5 and your obligations under Sections 8 and 9 hereof shall survive the expiration of the Term of this Agreement. 11. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 12. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. ENTIRE AGREEMENT. This Agreement and the other agreements expressly referred to herein contain the entire agreement by the parties with respect to the matters covered herein and supersede any prior agreement (including, without limitation, any prior employment agreement), condition, practice, custom, usage and obligation with respect to such matters insofar as any such prior agreement, condition, practice, custom, usage or obligation might have given rise to any enforceable right. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, FORT HOWARD CORPORATION By /s/ Michael T. Riordan -------------------------- Name: Michael T. Riordan Title: President and Chief Executive Officer Agreed to this 18th day ---- of December, 1996 -------- By /s/ John F. Rowley --------------------- APPENDIX A ---------- "CHANGE IN CONTROL" OF THE COMPANY A "Change in Control" of the Company shall be defined in accordance with the definitions set forth below: "Affiliate" and "Associate" have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. "Beneficial Owner" has the meaning ascribed to such term in Rule 13d-3 promulgated under the Exchange Act. A "Change in Control" of the Company shall be deemed to have occurred when (A) any Person (other than (x) the Company, any subsidiary of the Company, any employee benefit plan of the Company or of any subsidiary of the Company, or any person or entity organized, appointed or established by the Company or any subsidiary of the Company for or pursuant to the terms of any such plan, (y) Morgan Stanley Group Inc., a Delaware corporation, The Morgan Stanley Leveraged Equity Fund II, L.P., a Delaware limited partnership ("MSLEF II"), Fort Howard Equity Investors, L.P., a Delaware limited partnership ("FHEI"), Fort Howard Equity Investors II, L.P., a Delaware limited partnership ("FHEII"), or any of their respective Affiliates or (z) any general or limited partner of MSLEF II, FHEI or FHEII), alone or together with its Affiliates and Associates (collectively, an "Acquiring Person"), shall become the Beneficial Owner of twenty percent (20%) or more of the then outstanding shares of Common Stock or the Combined Voting Power of the Company's then outstanding voting securities (except pursuant to an offer for all outstanding shares of Common Stock at a price and upon such terms and conditions as a majority of the Continuing Directors determine to be in the best interests of the Company and its shareholders (other than an Acquiring Person on whose behalf the offer is being made)), or (B) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director who is a representative or nominee of an Acquiring Person) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of a least a majority of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (collectively, the "Continuing Directors"), cease for any reason to constitute a majority of the Board. "Combined Voting Power" means the combined voting power of the Company's then outstanding voting securities. "Common Stock" means the Voting Common Stock, par value $.01 per share, of the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Person" means any person, entity or "group" within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act. SCHEDULE TO EXHIBIT 10.3 Pursuant to Instruction 2 to Item 601 of Regulation S-K, the following Employment Agreements have been omitted from Exhibit 10.3 because they are substantially identical to the one included in all material respects except for the parties thereto: NAME POSITION ---- -------- Daniel J. Platkowski Senior Vice President James W. Nellen II Vice President Timothy G. Reilly Senior Vice President EX-10.5(A) 6 Exhibit 10.5(A) --------------- AMENDMENT NO. 1 TO THE FORT HOWARD CORPORATION MANAGEMENT INCENTIVE PLAN AS AMENDED AND RESTATED DECEMBER 19, 1994 Section 9 of the Management Incentive Plan is hereby amended effective as of February 27, 1996, to read in its entirety as follows: 9. TERMINATION AND AMENDMENT The Board, or if so designated by the Board, the Committee, may terminate the Plan, in whole or in part, at any time, or may, from time to time, amend the Plan in such respects as the Board or the Committee as the case may be, may deem advisable, PROVIDED that no such termination or amendment shall impair any rights which have accrued under the Plan. Executed at Green Bay, Wisconsin, this 29th day of April, 1996. FORT HOWARD CORPORATION By: /s/ James W. Nellen II Title: Vice President EX-10.24(B) 7 Exhibit 10.24(B) ---------------- FORM OF NOTICE OF GRANT OF STOCK OPTIONS FORT HOWARD CORPORATION AND OPTION AGREEMENT ID: 39-1090992 1919 S BROADWAY P.O. BOX 19130 GREEN BAY, WI 54307-9130 - ------------------------------------------------------------------------------ (Name) Option Number: (Address) Plan: 1995 ID: - ------------------------------------------------------------------------------ Effective 12/9/96, you have been granted a(n) Non-Qualified Stock Option to buy shares of FORT HOWARD CORPORATION (the Company) stock at ------- $27.7500 per share. The total option price of the shares granted is $ . ---------- Shares in each period will become fully vested on the date shown. Shares Vest Type Full Vest Expiration ------ --------- --------- ---------- On Vest Date 12/9/97 12/9/06 On Vest Date 12/9/98 12/9/06 On Vest Date 12/9/99 12/9/06 On Vest Date 12/9/00 12/9/06 On Vest Date 12/9/01 12/9/06 - ------------------------------------------------------------------------------ By your signature and the Company's signature below, you and the Company agree that these options are granted and governed by the terms and conditions of the Company's Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document. - ------------------------------------------------------------------------------ /s/ 12/9/96 - ------------------------------------------ ----------------------------- FORT HOWARD CORPORATION Date - ------------------------------------------ ----------------------------- Name Date STOCK OPTION AGREEMENT dated as of December 9, 1996, (the "AWARD AGREEMENT") between FORT HOWARD CORPORATION, a Delaware corporation (the "COMPANY"), and the other party signatory hereto (the "PARTICIPANT"). WHEREAS, the Participant is currently an officer or key employee of the Company or one of its Subsidiaries and, pursuant to the Company's 1995 Stock Incentive Plan (the "PLAN") and upon the terms and subject to the conditions hereinafter set forth, the Company desires to provide the Participant with an additional incentive to remain in its employ or the employ of one of its Subsidiaries and to increase his or her interest in the success of the Company by granting to the Participant Nonqualified Stock Options (the "STOCK OPTIONS") to purchase shares of Common Stock, par value $.01 per share, of the Company (the "COMMON STOCK"); NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto agree as follows: 1. DEFINITIONS; INCORPORATION OF PLAN TERMS. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan, a copy of which is attached hereto. This Award Agreement and the Stock Options shall be subject to the Plan, the terms of which are hereby incorporated herein by reference, and in the event of any conflict or inconsistency between the Plan and this Award Agreement, the Plan shall govern. The date of grant with respect to the Stock Options (the "DATE OF GRANT") shall be December 9, 1996. 2. CERTAIN RESTRICTIONS. None of the Stock Options or any rights or interests therein may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of, except by will or the laws of descent and distribution or pursuant to a "qualified domestic relations order" as defined in the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder. During the Participant's lifetime, a Stock Option shall be exercisable only by the Participant (or an "alternate payee" under a "qualified domestic relations order" as defined in the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder). Each transferee of a Stock Option by will or the laws of descent and distribution or pursuant to a qualified domestic relations order shall, as a condition to the transfer thereof, execute an agreement pursuant to which it shall become a party to this Award Agreement. 3. GRANT OF STOCK OPTIONS. Subject to the terms and conditions contained herein and in the Plan, the Company hereby grants to the Participant, effective as of the Date of Grant, the number of Stock Options specified on the Notice of Grant of Stock Options to which this Award Agreement is attached. Each such Stock Option shall entitle the Participant to purchase, upon payment of the exercise price (the "EXERCISE PRICE") specified on the Notice of Grant of Stock Options to which this Award Agreement is attached, one share of Common Stock. The Stock Options shall be exercisable as hereinafter provided. 4. TERMS AND CONDITIONS OF OPTIONS. The Stock Options evidenced hereby are subject to the following terms and conditions: 2 (a) VESTING. Unless previously vested or forfeited in accordance with the terms of the Plan or this Award Agreement, 20% of the Participant's Stock Options shall vest and become exercisable as of each of the first five anniversaries of the Date of Grant; PROVIDED, HOWEVER, that in the event of the death or Disability of the Participant, or a termination of the Participant's employment by the Company or any of its Subsidiaries without Cause (as defined below), 100% of the Participant's Stock Options shall vest and become exercisable as of the date of death, Disability or termination; PROVIDED FURTHER, HOWEVER, that no Stock Option shall under any circumstances be exercisable during the first six months after the Date of Grant. In the event of a Change in Control and except as the Committee (as constituted immediately prior to such Change in Control) may otherwise determine in its sole discretion, all Stock Options then outstanding, whether or not vested, (other than any Stock Option granted within six months of such Change in Control) shall become fully exercisable as of the date of the Change in Control. For purposes of this Award Agreement, "CAUSE" (i) has the meaning specified in an employment agreement applicable to the Participant, or (ii) in the event the Participant does not have an employment agreement that defines "Cause", means the occurrence of any of the following circumstances: (A) the wilful and continued failure by the Participant to substantially perform his or her duties with the Company in his or her established position on a full-time basis (other than any such failure resulting from Disability) after a written demand for substantial performance is delivered to the Participant by the Company's Chief Executive Officer, which demand specifically identifies the manner in which the Chief Executive Officer believes that he or she has not substantially performed such duties; (B) the wilful engaging by the Participant in conduct which is significantly injurious to the Company, monetarily or otherwise, after a written demand for cessation of such conduct is delivered to the Participant by the Company's Chief Executive Officer, which demand specifically identifies the manner in which the Chief Executive Officer believes that the Participant has engaged in such conduct and the injury to the Company; (C) the conviction of the Participant of a crime involving moral turpitude; or (D) the Participant's abuse of illegal drugs or other controlled substances or habitual intoxication. For purposes of the foregoing definition of "Cause", no act, or failure to act, on the part of the Participant shall be deemed wilful unless knowingly done, or omitted to be done, by the Participant not in good faith and without reasonable belief that such action or omission was in the best interests of the Company. (b) OPTION PERIOD. The Stock Options shall not be exercisable following the tenth anniversary of the Date of Grant, and shall be subject to earlier termination as provided herein and in the Plan. Upon termination of the Participant's employment with the Company or any of its Subsidiaries for 3 any reason, the Participant (or the Participant's legal representative or beneficiary) may exercise any Stock Option to the extent it was exercisable on the date of termination in accordance with, and subject to the terms and conditions of, Section 13 of the Plan; PROVIDED, HOWEVER, that if such termination of the Participant's employment is by reason of death, Disability or Retirement, the Stock Options, to the extent exercisable on the date of termination, shall remain exercisable for a period (the "EXERCISE PERIOD") equal to the remainder of the stated term of such Stock Options, and if the Participant dies during the Exercise Period, any unexercised Stock Option may thereafter be exercised to the extent it was exercisable on the date of Disability or Retirement, by the legal representative or beneficiary of the Participant, for the remainder of the Exercise Period; PROVIDED FURTHER, HOWEVER, that if such termination of the Participant's employment is by the Company or any of its Subsidiaries without Cause, the Stock Options, to the extent exercisable on the date of termination, shall remain exercisable for a period equal to the shorter of two years from the date of termination and the remainder of the stated term of such Stock Options. Upon termination of the Participant's employment with the Company or any of its Subsidiaries for any reason, any Stock Options which have not theretofore vested (and which do not vest by reason of such termination of employment) shall terminate and be cancelled without any consideration being paid therefor. Notwithstanding the foregoing, in the event that the Participant's employment with the Company or any of its Subsidiaries terminates for any reason within six months of the Date of Grant, the Participant's Stock Options shall terminate and be cancelled as of the date of such termination without any consideration being paid therefor. (c) NOTICE OF EXERCISE. Subject to Sections 4(d) and 4(f) hereof, the Participant may exercise any or all of the Participant's vested Stock Options by giving written notice of exercise to the Secretary of the Company (and, if such exercise is pursuant to a "cashless exercise" procedure adopted pursuant to, and on the terms and conditions specified in, Section 7(f) of the Plan, to the applicable broker or dealer) in accordance with Section 7(f) of the Plan. The date of exercise of a Stock Option shall be the later of (i) the date on which the Company (and such broker or dealer, if applicable) receives such written notice or (ii) the date on which the conditions provided in Sections 4(d) and 4(f) hereof are satisfied. (d) PAYMENT. Prior to the issuance of a certificate pursuant to Section 4(g) hereof evidencing the shares of Common Stock acquired pursuant to the exercise of Stock Options, the Participant shall have paid to the Company (i) the aggregate Exercise Price of all vested Stock Options which shall have been exercised, in cash, certified or bank check, note or other instrument acceptable to the Committee and (ii) such amount as may be necessary to satisfy the tax withholding requirements described in Section 7(b) hereof. Unless otherwise determined by the Committee in its sole discretion, payment of the Exercise Price may also be made in full or in part by delivery of shares of Common Stock (or a certification of ownership of such Common Stock acceptable to the Company) with a Fair Market Value (determined as of the date of exercise of such Stock Option) at least equal to such full or partial payment; PROVIDED, HOWEVER, that unless otherwise determined by the Committee in its sole discretion, the payment of the Exercise Price in shares of Common Stock shall not be permitted if such payment or any rights in respect thereof would result in adverse accounting consequences to the Company. Unless otherwise determined by the Committee in its sole discretion, the Participant 4 may also exercise a Stock Option through a "cashless exercise" procedure adopted pursuant to, and on the terms and conditions specified in, Section 7(f) of the Plan. (e) SHAREHOLDER RIGHTS. The Participant shall have no rights as a shareholder with respect to any shares of Common Stock issuable upon the exercise of a Stock Option until a certificate or certificates evidencing such shares shall have been issued to the Participant, and, subject to Sections 15(b) and 15(c) of the Plan, no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date on which the Participant shall become the holder of record thereof. (f) LIMITATION ON EXERCISE. A Stock Option shall not be exercisable unless and until (i) a registration statement under the Securities Act of 1933, as amended, has been duly filed and declared effective pertaining to the Common Stock subject to such Stock Option and such Common Stock shall have been qualified under applicable state "blue sky" laws, or (ii) the Committee in its sole discretion determines that such registration and qualification are not required as a result of the availability of an exemption from such registration and qualification. The exercise of a Stock Option or the disposition of any shares of Common Stock issuable upon the exercise of a Stock Option shall be subject to the Company's policies and procedures relating to employee trading in the Company's securities. (g) ISSUANCE OF CERTIFICATE. As soon as practicable following the exercise of any Stock Options, a certificate evidencing the number of shares of Common Stock issued in connection with such exercise shall be issued in the name of the Participant. 5. REPRESENTATIONS AND WARRANTIES. The Participant is aware of and familiar with the restrictions imposed on the transfer of any Stock Options. The Participant represents that (i) this Award Agreement has been duly executed and delivered by the Participant and constitutes a legal, valid and binding agreement of the Participant, enforceable against the Participant in accordance with its terms, except as limited by any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally and by general principles of equity and (ii) the Participant is acquiring shares of Common Stock hereunder for investment, solely for his own account and not with a view to, or for resale with, the distribution or other disposition thereof. 6. ENGAGING IN COMPETITION WITH THE COMPANY. (i) For a period of two years from the date of termination of the employment of the Participant with the Company or any direct or indirect Subsidiary of the Company, the Participant shall not become an employee, owner (except for passive investments of not more than three percent of the outstanding shares of, or any other equity interest in any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of any firm or Person which either directly competes with a line or lines of business of the Company or any Subsidiary accounting for ten percent (10%) or more of the Company's or such Subsidiary's gross sales, revenues or earnings before taxes or derives ten percent (10%) or more of such firm's or Person's gross sales, revenues or earnings before taxes from a line or lines of business which directly competes with the Company or 5 any Subsidiary. In addition to any other remedies that may otherwise be available for a breach by the Participant of the non-compete provisions set forth in the first sentence of this Section 6(i) (or the provisions of Section 6(ii) below), the Committee, in its sole discretion, may require that the Participant promptly pay to the Company, in the case of any Stock Options exercised within six (6) months before or two (2) years after such termination of employment, an amount in cash equal to the difference between the Fair Market Value of a share of Common Stock on the date of exercise of such Stock Options and the Exercise Price of such Stock Options multiplied by the number of shares of Common Stock subject to such Stock Options. If, in any judicial proceeding, a court shall refuse to enforce all of the separate covenants deemed included in the first sentence of this Section 6(i), the Company and the Participant intend that those of such covenants which, if eliminated, would permit the remaining separate covenants to be enforced in such proceedings shall, for the purpose of such proceedings, be deemed eliminated from such provisions. (ii) The Participant agrees to observe the terms of any confidentiality, secrecy or other non-competition agreement that he or she has previously entered into with the Company (the terms of which shall be incorporated by reference into this Award Agreement) and agrees that, in the event of any breach of any such agreement by the Participant, he or she shall be subject to the provisions of the second sentence of Section 6(i) above. 7. MISCELLANEOUS. (a) NO RIGHTS TO GRANTS OR CONTINUED EMPLOYMENT. The Participant shall not have any claim or right to receive grants of Stock Options or other Awards under the Plan. Nothing in the Plan or in any Award or in this Award Agreement shall confer upon the Participant any right to continued employment with the Company or any Subsidiary, as the case may be, or interfere in any way with the right of the Company or a Subsidiary to terminate the employment of the Participant at any time, with or without cause. (b) TAX WITHHOLDING. It shall be a condition to the obligation of the Company to deliver any certificates evidencing Common Stock pursuant to the exercise of a Stock Option that the Participant pay to the Company such amount as may be required by the Company for the purpose of satisfying any federal, state, or local tax withholding requirements. Prior to the Company's determination of such withholding liability, the Participant may make an irrevocable election to satisfy, in whole or in part, such obligation to remit taxes by (i) delivering shares of Common Stock (or a certification of ownership of such Common Stock acceptable to the Company) with a Fair Market Value (determined as of the date of exercise or such other appropriate date as may be determined by the Company) at least equal to the tax due, (ii) directing the Company to withhold shares of Common Stock that would otherwise be received by the Participant, or (iii) utilizing a "cashless exercise" procedure adopted pursuant to Section 7(f) of the Plan; PROVIDED, HOWEVER, that unless otherwise determined by the Committee in its sole discretion, payment of such taxes in shares of Common Stock shall not be permitted if such payment or any rights in respect thereof would result in adverse accounting consequences to the Company. Any such election may be denied by the Committee in its sole discretion, or may be made subject to certain conditions specified by the Committee, including, without limitation, 6 conditions intended to avoid the imposition of liability against the Participant under Section 16(b) of the Exchange Act. (c) NO RESTRICTION ON RIGHT OF COMPANY TO EFFECT CORPORATE CHANGES. Neither the Plan nor this Award Agreement shall affect or restrict in any way the right or power of the Company or its shareholders to make or authorize any adjustment, recapitalization, reorganization or other change in the capital structure or business of the Company, or any merger or consolidation of the Company, or any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of the assets or business of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (d) EXCHANGE ACT. Notwithstanding anything contained in the Plan or this Award Agreement to the contrary, if the consummation of any transaction under the Plan or this Award Agreement would result in the possible imposition of liability on the Participant pursuant to Section 16(b) of the Exchange Act, the Committee shall have the right, in its sole discretion, but shall not be obligated, to defer such transaction to the extent necessary to avoid such liability, but in no event for a period in excess of 180 days. 8. SURVIVAL; ASSIGNMENT. (a) All agreements, representations and warranties made herein and in any certificates delivered pursuant hereto shall survive the issuance to the Participant of the Stock Options and any shares of Common Stock and, notwithstanding any investigation heretofore or hereafter made by the Participant or the Company or on the Participant's or the Company's behalf, shall continue in full force and effect. Except as expressly provided in the Plan or this Award Agreement, the Participant may not assign any of his rights hereunder. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the heirs and permitted successors and assigns of such party; and all agreements herein by or on behalf of the Company, or by or on behalf of the Participant, shall bind and inure to the benefit of the heirs and permitted successors and assigns of such parties hereto. (b) The Company shall have the right to assign to any of its affiliates any of its rights, or to delegate to any of its affiliates any of its obligations, under this Award Agreement. 9. CERTAIN REMEDIES. Without intending to limit the remedies available to the Company, the Participant agrees that damages at law will be an insufficient remedy in the event the Participant violates the terms of this Award Agreement. The Participant agrees that the Company may apply for and have injunctive or other equitable relief in any court of competent jurisdiction to restrain the breach or threatened breach of, or otherwise specifically to enforce, any of the provisions hereof. 7 10. ARBITRATION. Any dispute or controversy arising under or in connection with this Award Agreement shall be settled exclusively by arbitration in a location mutually agreed to by the Company and the Participant before one arbitrator of exemplary qualifications and stature who shall be jointly selected by the Company and the Participant, or if the Company and the Participant cannot agree on the selection of the arbitrator, such arbitrator shall be selected by the American Arbitration Association. The parties agree to use their best efforts to cause (i) the arbitrator to be appointed within 30 days of the date that either party hereto notifies the other party that a dispute or controversy exists that necessitates the appointment of an arbitrator, and (ii) any arbitration hearing to be held within 30 days of the date of selection of the arbitrator and, as a condition to his or her selection, such arbitrator must consent to be available for a hearing at such time. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The parties hereto also agree that the arbitrator shall be empowered to enter an equitable decree mandating specific enforcement of the terms of this Award Agreement. The Company shall bear all expenses of the arbitrator incurred in any arbitration hereunder, PROVIDED that in the event that the Participant seeks arbitration and the arbitrator determines that such claims are frivolous in nature or were not brought or pursued in good faith, the Participant will promptly reimburse the Company for all amounts paid by the Company for such expenses. Each party hereto will pay its own legal fees in connection with any such arbitration. 11. NOTICES. All notices and other communications provided for herein shall be in writing and shall be delivered by hand or sent by certified or registered mail, return receipt requested, postage prepaid, addressed, if to the Participant, to his attention at the mailing address set forth on the Notice of Grant of Stock Options to which this Award Agreement is attached (or to such other address as the Participant shall have specified to the Company in writing) and, if to the Company, to it at 1919 South Broadway, Green Bay, Wisconsin 54304, Attention: Secretary. All such notices shall be conclusively deemed to be received and shall be effective, if sent by hand delivery, upon receipt, or if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed. 12. WAIVER. The waiver by either party of compliance with any provision of this Award Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Award Agreement, or of any subsequent breach by such party of a provision of this Award Agreement. 13. ENTIRE AGREEMENT; GOVERNING LAW. The Notice of Grant of Stock Options, this Award Agreement and the Plan set forth the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof. This Award Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same agreement. The headings of sections and subsections herein are included solely for convenience of reference and shall not affect the meaning of any of the provisions of this Award Agreement. This Award Agreement shall be governed by, and construed in accordance with, the laws of the State of Wisconsin without giving effect to conflicts of law principles. 8 SCHEDULE TO EXHIBIT 10.24(B) Pursuant to Instruction 2 to Item 601 of Regulation S-K, the Stock Option Agreements for the Chief Executive Officer and the Chief Financial Officer have been omitted from Exhibit 10.24(B) because they are substantially identical to the one included in all material respects except for the following difference in paragraphs 4(a)(A) and 4(a)(B): "Board" replaces "Chief Executive Officer" EX-10.26 8 Exhibit 10.26 ------------- December 9, 1996 Mr. Donald H. DeMeuse Re: Health Insurance Dear Don: This letter sets forth Fort Howard Corporation's (the "COMPANY") agreement to continue, on the terms set forth below, your health insurance benefits following your retirement from the Company. Until the earlier of your sixty-fifth birthday (or if you die before your sixty-fifth birthday, until your wife, Gail's ("MRS. DEMEUSE"), sixty-fifth birthday) and the date on which you and Mrs. DeMeuse are no longer eligible to participate in the Company's Employees' Beneficiary Association Plan (the "ASSOCIATION PLAN"), the Company will continue your and Mrs. DeMeuse's medical and dental coverage under the Association Plan, subject to the terms and conditions set forth in the Association Plan as in effect on October 1, 1996, except that the Company agrees that, for purposes of determining the benefits to which you and Mrs. DeMeuse are entitled under the Association Plan, the "lifetime maximum benefit" applicable to you and Mrs. DeMeuse under the Association Plan will be deemed to be $1,000,000. In that regard, any benefits provided to you and Mrs. DeMeuse in excess of the lifetime maximum benefit permitted under the Association Plan will be provided on an after-tax basis. The Company further agrees to reimburse you and Mrs. DeMeuse, on an after-tax basis, for (i) your and Mrs. DeMeuse's share of the premiums payable for such coverage and (ii) any other out-of-pocket costs incurred by you and Mrs. DeMeuse in connection with such coverage (up to a maximum of $1,500 for each of you and Mrs. DeMeuse for any calendar year). Effective as of the earlier of your sixty-fifth birthday (or Mrs. DeMeuse's sixty-fifth birthday, if you die before your sixty-fifth birthday) and the date on which you and Mrs. DeMeuse are no longer eligible to participate in the Association Plan, the Company will arrange for medical and dental coverage (the "ADDITIONAL COVERAGE"), at the Company's expense, for you and Mrs. DeMeuse. The Additional Coverage will be made available until your and Mrs. DeMeuse's death, and will provide a level of benefits, on an after-tax basis, substantially equivalent to that provided to you and Mrs. DeMeuse under the Association Plan as in effect immediately prior to your or Mrs. DeMeuse's, as the case may be, sixty-fifth birthday or, if earlier, the date on which you and Mrs. DeMeuse are no longer eligible to participate in the Association Plan. Mr. Donald H. DeMeuse December 9, 1996 Page 2 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Please acknowledge your agreement to the foregoing by signing the enclosed copy of this letter and returning it to the undersigned. Sincerely, /s/ Michael T. Riordan Michael T. Riordan President and Chief Executive Officer Accepted and Agreed: /s/ Donald H. DeMeuse - -------------------------- Donald H. DeMeuse December 9, 1996 EX-10.27 9 Exhibit 10.27 ------------- Fort Howard Corporation 1919 South Broadway Green Bay, Wisconsin 54307-9130 December 31, 1996 Andrew W. Donnelly Dear Andy: This letter agreement (the "AGREEMENT") sets forth our mutual agreement concerning your resignation as an executive officer and employee of Fort Howard Corporation, a Delaware corporation (the "COMPANY"). 1. RESIGNATION. (a) You hereby confirm that you have resigned, effective as of October 18, 1996, from your position as Executive Vice President of the Company and from all other officerships that you held as of such date with the Company or any of its subsidiaries or affiliates, and you hereby resign, effective as of December 31, 1996 (the "SEVERANCE EFFECTIVE DATE"), as an employee of the Company and its subsidiaries and affiliates. (b) The Company will continue to pay you your base salary at the current rate of $330,000 per annum (the "BASE SALARY"), and you will continue to participate in the employee benefit plans of the Company in which you are currently participating, until the Severance Effective Date. (c) You will have no authority to bind, or make any commitments or otherwise act on behalf of, the Company or any of its subsidiaries or affiliates in any manner whatsoever on or after October 18, 1996. You agree not to take any action which would cause any third party to assume that you have such authority. (d) It is hereby expressly agreed that the termination of your employment with the Company and its subsidiaries and affiliates will be treated as a termination by the Company without "cause" for purposes of any applicable plan, arrangement or agreement between you and the Company or its subsidiaries or affiliates including, without limitation, the Stock Option Agreement dated as of December 6, 1995 between the Company and you (the "1995 OPTION AGREEMENT"). 2. SEVERANCE BENEFITS. The Company will provide you with the following severance payments and benefits: (a) SALARY CONTINUATION. The Company will continue to pay you the Base Salary over the period commencing on January 1, 1997 and ending on October 18, 1998. Such amounts will be payable in accordance with the Company's payroll practices. (b) MIP BONUS. The Company will pay you a bonus in the amount of $363,000 (the "1996 BONUS") pursuant to the terms of the Company's Management Incentive Plan (the "MIP") for the year ending December 31, 1996. The 1996 Bonus will be paid to you at the time MIP bonuses for 1996 are generally paid to participating employees. 2 (c) ADDITIONAL BONUS. The Company will pay you an additional bonus in the amount of $321,178, which will be paid to you as promptly as practicable after January 31, 1998. (d) BENEFIT PLAN PARTICIPATION. (i) HEALTH INSURANCE. The Company will continue your health and dental insurance coverage, and continue to pay the employer portion of the applicable premiums, until the earlier of October 18, 1998 and the date on which you are covered under another group health plan. You agree to promptly notify the Company in writing in the event that you obtain coverage under another group health plan. (ii) LIFE INSURANCE. The Company will continue your group life insurance coverage, and continue to pay the employer portion of the applicable premiums, until October 18, 1998. (e) RETIREMENT PLANS. For purposes of (i) the Company's Profit Sharing Plan (the "PROFIT SHARING PLAN") and (ii) the Company's Supplemental Retirement Plan and the Supplemental Retirement Agreement dated as of January 1, 1989 between the Company and you, as amended (collectively, the "SERP"), you will be eligible for a Company contribution for the year ending December 31, 1996 pursuant to the terms of the Profit Sharing Plan and the SERP. Such Company contribution will be calculated in accordance with the terms of the Profit Sharing Plan and the SERP, and will be allocated to you at the time contributions for 1996 are generally allocated to participating employees. Your vested accrued benefits under the SERP will be distributed to you in a lump sum as promptly as practicable after you reach age 62. In lieu of any benefits for periods beginning after the Severance Effective Date under the Profit Sharing Plan and the SERP, the Company will pay to you in cash as promptly as practicable after March 31, 1998 an amount equal to the Company contribution that would have been allocated to your accounts under the Profit Sharing Plan and the SERP for the year ending December 31, 1997 had your employment continued through the end of such year, assuming that your Base Salary remained at $330,000 per annum. (f) OUTPLACEMENT. In lieu of any provision of or payment for outplacement, an office and secretarial assistance, the Company will pay to you $50,000 in cash as promptly as practicable after January 31, 1997. (g) NO OTHER COMPENSATION OR BENEFITS; DEATH. Except as otherwise specifically provided herein, you will not be entitled to any compensation or benefits or to participate in any past, present or future employee benefit programs or arrangements of the Company or any of its subsidiaries or affiliates after the Severance Effective Date, PROVIDED that you will be entitled to receive your vested accrued benefits under the Profit Sharing Plan and the SERP in accordance with the terms and conditions thereof. In the event of your death prior to the end of the period of payment provided for in this paragraph 2, the Company will pay to your estate or designated beneficiary any amounts that are or become payable pursuant to this paragraph 2. 3. FORT HOWARD STOCK. Your shares of Common Stock, par value $.01 per share (the "COMMON STOCK"), of the Company (the "SHARES"), which Shares were purchased by you pursuant to (i) the Amended and Restated Management Equity Participation Agreement, dated as of August 8, 1988, by and among FH Holdings Corp., a Delaware corporation, and the other parties signatory thereto, as amended and supplemented from time to time 3 (collectively, the "MEPA") and (ii) the Management Equity Agreement dated as of April 30, 1991 (the "1991 MANAGEMENT EQUITY AGREEMENT") will remain subject to the terms and conditions of the MEPA or the 1991 Management Equity Agreement, as the case may be, and the Stockholders Agreement dated as of March 1, 1995 (the "STOCKHOLDERS AGREEMENT") among the Company and the other parties signatory thereto. 4. FORT HOWARD STOCK OPTIONS. Your options (the "OPTIONS") to purchase shares of Common Stock, which Options were granted to you pursuant to (i) the MEPA, (ii) the 1991 Management Equity Agreement and (iii) the 1995 Option Agreement, will remain subject to, and will be exercisable in accordance with, the terms and conditions of (A) the MEPA, the 1991 Management Equity Agreement or the 1995 Option Agreement, as the case may be, and (B) to the extent applicable, the Stockholders Agreement. For purposes of the 1995 Option Agreement, your employment shall be deemed to have terminated as of the Severance Effective Date. 5. CONSULTING ENGAGEMENT. In consideration of the payments and benefits provided to you hereunder, you agree to serve as a consultant to the Company for the period (the "CONSULTING PERIOD") beginning on January 1, 1997 and ending on December 31, 1998. Your services hereunder during the Consulting Period will consist of such consulting and advisory services, and will be provided at such times, as may be reasonably requested (after taking into account any obligations you may have to another employer) from time to time by the Board of Directors or Chief Executive Officer of the Company; PROVIDED, HOWEVER, that such services will not be required for more than 4 days during any one-month period. The Company will reimburse you for any reasonable out-of-pocket expenses incurred by you in connection with the performance of such consulting and advisory services, PROVIDED that such expenses have been approved in writing in advance by the Chief Executive Officer of the Company. 6. NONEMPLOYEE STATUS. You will not be treated as an employee of the Company or any of its subsidiaries or affiliates at any time after the Severance Effective Date (including, without limitation, during the Consulting Period) for purposes of any past, present or future employee benefit plan, program or arrangement of the Company or any of its subsidiaries or affiliates. 7. ENGAGING IN COMPETITION WITH THE COMPANY. (a) Through October 18, 1998, except as the Company may otherwise expressly agree in writing, you will not become an employee, owner (except for passive investments of not more than three percent of the outstanding shares of, or any other equity interest in any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent, consultant or director of any firm or person which (i) directly competes with a line or lines of business of the Company or any subsidiary of the Company located in North America or the United Kingdom and which accounts for ten percent (10%) or more of the Company's or such subsidiary's gross sales, revenues or earnings before taxes, (ii) derives ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly competes with a line or lines of business of the Company or any subsidiary of the Company located in North America or the United Kingdom or (iii) is a distributor (other than a retailer) of any of the products of the Company or any subsidiary of the Company, or any of the products of any other firm or 4 person which directly competes with a line or lines of business of the Company or any subsidiary of the Company located in North America or the United Kingdom. The Company agrees that it will, at your request, consult with you from time to time concerning the application of the foregoing restrictions. You and the Company agree that the scope of your noncompetition covenant will be as set forth in this Section 7(a), notwithstanding any noncompetition covenant contained in any other agreement between you and the Company. (b) CONFIDENTIALITY. You hereby agree to observe the terms of any confidentiality or secrecy agreement that you have entered into with the Company or any of its subsidiaries or affiliates prior to the date hereof (including, without limitation, the Employees' Agreement with regard to Proprietary Information including Inventions, Patents, Copyrights, Trade Secrets and Confidential Information between you and the Company), the terms of which are incorporated herein by reference as if such terms were set forth herein in full. (c) REMEDIES. You acknowledge and agree that a breach of any of the covenants contained in this Section 7 may result in material and irreparable injury to the Company or its subsidiaries or affiliates for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, in addition to any other remedies that may otherwise be available for a breach of this Section 7 (including, without limitation, the remedies described in the MEPA, the 1991 Management Equity Agreement and the 1995 Option Agreement), the Company will be entitled to seek a temporary restraining order and/or a preliminary or permanent injunction (without the necessity of a bond) restraining you from engaging in activities prohibited by this Section 7 or such other relief as may be required to specifically enforce any of the covenants in this Section 7. The parties agree that the restrictions contained in this Section 7 are reasonable. However, if for any reason it is determined that the restrictions under this Section 7 are not reasonable or the consideration therefor is inadequate, such restrictions will be interpreted or modified to include as much of the duration and scope identified in this Section 7 as will render such restrictions valid and enforceable. 8. COOPERATION. From and after the date hereof, you will (i) cooperate in all reasonable respects (after taking into account any employment obligations you may have) with the Company and its affiliates and their respective directors, officers, attorneys and experts in connection with the conduct of any action, proceeding, investigation or litigation involving the Company or any of its affiliates, including any such action, proceeding, investigation or litigation in which you are called to testify and (ii) promptly respond to all reasonable requests by the Company and its affiliates relating to information concerning actual or prospective customers of the Company which may be in your possession. If you are called to testify in connection with the ongoing antitrust investigation involving the Company in Ohio, Florida and New York, you will be entitled to consult with counsel designated by the Company at the Company's expense. The Company will reimburse you for any reasonable out-of-pocket expenses incurred by you in connection with your compliance with this Section 8, PROVIDED that such expenses have been approved in writing in advance by the Chief Executive Officer of the Company. 5 9. RETURN OF PROPERTY. On or prior to the date hereof, you will surrender to the Company all property of the Company and its affiliates in your possession and all property made available to you in connection with your employment by the Company, including, without limitation, any and all records, manuals, customer lists, notebooks, computers, computer programs and files, papers, electronically stored information and documents kept or made by you in connection with your employment. 10. NO PUBLIC COMMENT. You and the Company agree to refrain from making, directly or indirectly, now or at any time in the future (i) any derogatory comment concerning the other party or any of such other party's subsidiaries or affiliates, current or former directors, officers or employees or (ii) any other comment that could reasonably be expected to be detrimental to the business or financial prospects of the other party or any of such other party's subsidiaries or affiliates, to the news or other media, any employees of such other party or any of its subsidiaries or affiliates, or any individual or entity with whom such other party or any of its subsidiaries or affiliates has or may reasonably expect to have a business relationship. 11. BREACH OF AGREEMENT. (a) In the event of any material breach by you of any provision of Section 7, 8, 9 or 10 of this Agreement, which breach, if susceptible to cure, is not cured by you in accordance with Section 11(b) below, the Company will cease to have any obligation to make payments or provide benefits to you under this Agreement. (b) If the Company believes that you have materially breached any provision of Section 7, 8, 9 or 10 of this Agreement, the Company will provide you prompt written notice of such alleged breach, which notice will identify which provision(s) allegedly has been violated and specify in reasonable detail what action or inaction by you constitutes the grounds for such allegation. You will be provided at least 20 days to cure any such alleged breach (unless the breach is such that it cannot be cured). In the event that any such breach is cured by you pursuant to this Section 11(b) to the reasonable satisfaction of the Company, the Company's obligations under this Agreement will continue in effect retroactive to the date of such breach. 12. RELEASE. (a) GENERAL RELEASE. (i) In consideration of the payments and benefits provided to you under this Agreement, you hereby release and forever discharge the Company, its subsidiaries and affiliates and each of their respective officers, employees, directors and agents from any and all claims, actions and causes of action (collectively, "CLAIMS"), including, without limitation, any Claims arising under any applicable federal, state, local or foreign law, that you may have, or in the future may possess, arising out of (x) your employment relationship with and service as an employee or officer of the Company or any of its subsidiaries or affiliates, and the termination of such relationship or service, or (y) any event, condition, circumstance or obligation that occurred, existed or arose on or prior to the date hereof; PROVIDED, HOWEVER, that the release set forth in this Section 12(a)(i) will not apply to (A) the obligations of the Company under this Agreement and (B) the obligations of the Company and its subsidiaries to continue to provide officer indemnification. You further agree that the payments and benefits described in this Agreement will be in full satisfaction of any and all claims for payments or benefits, whether express or implied, that you may have against the Company or any of its subsidiaries or affiliates arising out of 6 your employment relationship, your service as an employee or officer of the Company or any of its subsidiaries or affiliates and the termination thereof. (ii) The Company and its subsidiaries and affiliates hereby release and forever discharge you, your estate and your legal representatives from any and all Claims, including, without limitation, any Claims arising under any applicable federal, state, local or foreign law, that it may have, or in the future may possess, arising out of (x) your employment relationship with and service, on or prior to the date hereof, as an employee or officer of the Company or any of its subsidiaries or affiliates, and the termination of such relationship or service, or (y) any event, condition, circumstance or obligation that occurred, existed or arose on or prior to the date hereof; PROVIDED, HOWEVER, that the release set forth in this Section 12(a)(ii) will not apply to (A) your obligations under this Agreement and the plans and agreements referred to herein, (B) any act or omission of yours which is in violation of any applicable civil or criminal law or regulation and (C) any materially false or misleading statement made by you to any customer, distributor or supplier of the Company or any of its subsidiaries or affiliates. (b) SPECIFIC RELEASE OF ADEA CLAIMS. In consideration of the payments and benefits provided to you under this Agreement, you hereby release and forever discharge the Company, each of its subsidiaries and affiliates and each of their respective officers, employees, directors and agents from any and all claims, actions and causes of action that you may have as of the date you sign this Agreement arising under the Federal Age Discrimination in Employment Act of 1967, as amended, and the applicable rules and regulations promulgated thereunder ("ADEA"). By signing this Agreement, you hereby acknowledge and confirm the following: (i) you were advised by the Company in connection with your termination to consult with an attorney of your choice prior to signing this Agreement and to have such attorney explain to you the terms of this Agreement, including, without limitation, the terms relating to your release of claims arising under ADEA; (ii) you have been given a period of not fewer than 21 days to consider the terms of this Agreement and to consult with an attorney of your choosing with respect thereto; and (iii) you are providing the release and discharge set forth in this Section 12(b) only in exchange for consideration in addition to anything of value to which you are already entitled. 13. MISCELLANEOUS. (a) ENTIRE AGREEMENT. This Agreement, the MEPA, the 1991 Management Equity Agreement (including the Company's Management Equity Plan), the 1995 Option Agreement (including the Company's 1995 Stock Incentive Plan) and the Stockholders Agreement set forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby and supersede and replace any express or implied prior agreement (including, without limitation, the Employment Agreement dated December 10, 1993, as amended effective January 1, 1995, between the Company and you) with respect to the terms of your employment and the termination thereof which you may have had with the Company or any of its subsidiaries or affiliates. This Agreement may be amended only by a written document signed by the parties hereto. (b) GOVERNING LAW. This Agreement will be governed by, and construed in accordance with, the laws of the State of New York. 7 (c) NO MITIGATION. It is expressly agreed that you will not be required to mitigate any payments or benefits due to you from the Company or its affiliates under this Agreement or otherwise by seeking alternative employment, nor will any payments from, or benefits provided by, the Company or any of its affiliates be reduced by any amounts or benefits received in connection with any such alternative employment (except as may be required under this Agreement or the terms of the applicable benefit plan, arrangement or agreement). (d) WITHHOLDING TAXES. Any payments made or benefits provided to you under this Agreement will be reduced by any applicable withholding taxes. (e) NOTICES. Any notices required or made pursuant to this Agreement will be in writing and will be deemed to have been given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, as follows: if to Andrew W. Donnelly: (address) with a copy to: Gerald C. Condon, Jr. & Associates Riverwalk Plaza, Suite 301 200 Washington Street Green Bay, WI 54301 if to the Company: Fort Howard Corporation 1919 South Broadway Green Bay, WI 54307-9130 Attention: James W. Nellen II with a copy to: Jeffrey P. Crandall Shearman & Sterling 599 Lexington Avenue New York, NY 10022 or to such other address as either party may furnish to the other in writing in accordance with this Section 13(e). Notices of change of address will be effective only upon receipt. 14. REVOCATION. This Agreement may be revoked by you within the 7-day period commencing on the date you sign this Agreement (the "REVOCATION PERIOD"). In the event of any such revocation by you, all obligations of the Company under this Agreement and will terminate and be of no further force and effect as of the date of such revocation. 8 No such revocation by you will be effective unless it is in writing and signed by you and received by the Company prior to the expiration of the Revocation Period. FORT HOWARD CORPORATION By /s/ James W. Nellen II ----------------------- Name: James W. Nellen II Title: Vice President Accepted and Agreed: /s/ Andrew W. Donnelly - ----------------------------- Andrew W. Donnelly Dated: December 31, 1996 EX-12.1 10 EXHIBIT 12.1 FORT HOWARD CORPORATION DEFICIENCY OF EARNINGS AVAILABLE TO COVER FIXED CHARGES (In thousands) For the Years Ended December 31, ------------------------------ 1994 1993 1992 ---- ---- ---- Earnings: Loss before taxes.......... $(61,016) $(2,056,432) $ (69,800) Interest expense........... 337,701 342,792 338,374 One-fourth of operating lease rental expense..... 1,881 1,731 1,632 -------- ----------- --------- $278,566 $(1,711,909) $ 270,206 ======== =========== ========= Fixed Charges: Interest expense....... $337,701 $ 342,792 $ 338,374 Capitalized interest....... 4,230 8,369 11,047 One-fourth of operating lease rental expense..... 1,881 1,731 1,632 -------- ----------- --------- $343,812 $ 352,892 $ 351,053 ======== =========== ========= Deficiency of Earnings Available to Cover Fixed Charges (1).......... $(65,246) $(2,064,801) $ (80,847) ======== =========== ========= (1) For purposes of these computations, earnings consist of consolidated loss before taxes plus fixed charges (excluding capitalized interest) of both consolidated and unconsolidated subsidiaries. Fixed charges consist of interest on indebtedness (including capitalized interest and amortization of deferred loan costs) plus that portion (deemed to be one-fourth) of operating lease rental expense representative of the interest factor. EX-12.2 11 EXHIBIT 12.2 FORT HOWARD CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In thousands, except ratios) For the Years Ended December 31, ------------------ 1996 1995 ---- ---- Earnings: Income before taxes.............................. $214,500 $ 51,866 Interest expense................................. 258,948 309,915 One-fourth of operating lease rental expense..... 2,361 2,168 -------- -------- $475,809 $363,949 ======== ======== Fixed Charges: Interest expense................................. $258,948 $309,915 Capitalized interest............................. 1,487 2,096 One-fourth of operating lease rental expense..... 2,361 2,168 -------- -------- $262,796 $314,179 ======== ======== Ratio of Earnings to Fixed Charges (1)............. 1.8 1.2 === === (1) For purposes of these computations, earnings consist of consolidated income before taxes plus fixed charges (excluding capitalized interest) of both consolidated and unconsolidated subsidiaries. Fixed charges consist of interest on indebtedness (including capitalized interest and amortization of deferred loan costs) plus that portion (deemed to be one-fourth) of operating lease rental expense representative of the interest factor. EX-21 12 EXHIBIT 21 SUBSIDIARIES OF FORT HOWARD CORPORATION NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION - ------------------ --------------------------------- FORT HOWARD EXPORT, LTD. U.S. VIRGIN ISLANDS FORT STERLING LIMITED ENGLAND HARMON ASSOC., CORP. NEW YORK FORT HOWARD DE MEXICO S.A. DE C.V. MEXICO EX-27 13
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORT HOWARD CORPORATION'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000038195 FORT HOWARD CORPORATION 1,000 U.S. DOLLARS YEAR DEC-31-1996 DEC-31-1996 1 759 0 66,537 3,343 151,248 285,322 2,057,446 809,650 1,615,380 321,677 2,451,373 744 0 0 (1,455,581) 1,615,380 1,580,771 1,580,771 944,257 944,257 0 0 258,948 214,500 43,767 170,733 0 (8,136) 0 162,597 2.32 2.32
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