-----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, Ra+igAmySkvFX+0SV6qY2LbM7aGj0Qlmr9OLgWfiFI4aGdVA/bd8mfKvkf7mYegO URLWgxxVno0F17pWbVH95A== 0000038195-96-000005.txt : 19960208 0000038195-96-000005.hdr.sgml : 19960208 ACCESSION NUMBER: 0000038195-96-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960207 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: 96511954 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, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-20473 FORT HOWARD CORPORATION (Exact name of registrant as specified in its charter) Delaware 39-1090992 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1919 South Broadway, Green Bay, Wisconsin 54304 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: 414/435-8821 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, 1996, was $797,248,627. As of January 15, 1996, 63,370,794 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 14, 1996, captioned "Election of Directors," "Ownership of Common Stock by Management," "Principal Stockholders," "Certain Transactions," "Committees of the Board of Directors; Meetings and Compensation of Directors," "Executive Compensation," "Committee Report on Executive Compensation" and "Performance Graph" 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 26% and has focused approximately 60% of its capacity on this segment of the tissue market. In the domestic consumer market, where the Company has an approximate 10% 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. 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. In addition, the Company also produces parent rolls for sale to converters in international markets, including Latin America and the Middle East. 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 brand products such as Mardi Gras, Soft'n Gentle 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 market share of approximately 40% in 1995. 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 Envision, Generation II and Preference Ultra and under the Fort Howard name. Fort Howard's commercial sales force of approximately 200 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 specialized sales teams focused on selling wiper products and its premium quality 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 a significant percentage of products 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--attractive 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 on implementing their "everyday low pricing" strategies. 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 small joint venture to convert parent rolls into finished products in the People's Republic of China in 1995 which will begin operations in the first half of 1996, and 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 12 to the audited consolidated financial statements. - 3 - 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 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 1995 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 approximated 16% in 1995. Fort Sterling has approximately 5% of the 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 $674 million for the five year period ended December 31, 1995, $476 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. 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 3% of its volume. Currently, Fort Howard recycles over 1.4 million tons of wastepaper annually into tissue products. Beginning - 4 - in July 1994, wastepaper prices for the grades of wastepaper used in Fort Howard's products have been volatile. 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. 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 and the Middle East. 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. Continuing emphasis is being placed upon expanding the Company's capability to deink a broader range of wastepaper grades, designing new products, further automating manufacturing operations and developing improved manufacturing and environmental processes. PATENTS, LICENSES, TRADEMARKS AND TRADE NAMES While 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. All brand names are registered trademarks of the Company. A portion of the Company's tissue products are sold under private labels or brand names owned by customers. EMPLOYEES At December 31, 1995, the Company's worldwide employment was approximately 6,800, of which 5,800 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 substantial regulation by various federal, state and local authorities in the U.S., and by national and local authorities in the United Kingdom concerned with 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 1995, the Company made capital expenditures of $4 million with respect to pollution abatement and environmental compliance. The Company expects to commit to approximately $9 million of capital expenditures to maintain compliance with environmental control standards and enhance pollution control at its mills during 1996 and 1997. 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 U.S. 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." U.S. EPA has not formally indicated when the components of the Cluster Rules that deal with wastewater discharges are to be finalized. 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 of approximately $1.2 million. Components of the currently proposed Cluster Rules that address air emissions will have little impact on deinking paper mills such as the Company's mills. However, additional installments of the Cluster Rules, expected to be proposed during 1996 with expected compliance deadlines as late as the year 2000, are expected to specifically address air emissions from deinking mills and likely will have a greater impact on the Company. The Company is presently unable to estimate that impact since the applicable rules have not been proposed and therefore no assurances can be given as to whether the impact will be material to the Company. 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 a voluntary 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 $20 million of accrued liabilities as of December 31, 1995 for estimated or anticipated liabilities and legal and consulting costs relating to environmental matters arising from past operations. The Company expects these costs to be incurred over an extended number of years. While 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. - 7 - 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 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 new 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 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 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 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 5 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 working additional hours and/or adding converting equipment. - 8 - ITEM 3. LEGAL PROCEEDINGS In December 1994, the Company was notified by the U.S. Department of Justice of a civil antitrust investigation into possible agreements in restraint of trade in connection with sales of sanitary paper products. The Company has cooperated in the investigation and in the first and second quarters of 1995 responsed to the Civil Investigative Demand served on the Company. Since July 1992, the Company has been participating with a coalition consisting of industry, local government, Wisconsin Department of Natural Resources ("WDNR") and public interest members studying the nature and extent of PCB (polychlorinated biphenyl) and other sediment contamination of the Lower Fox River in northeast Wisconsin. The objective of the coalition is to identify, recommend and implement cost effective remediation of contaminated deposits which can be implemented on a voluntary basis. The Company anticipates that any remediation of sediment contamination will begin in an area approximately 35 miles upstream of the Company's Green Bay mill. The Company's participation in the studies undertaken by the coalition is voluntary and its contributions to funding those activities to date have not been significant. The Company's participation in the coalition is not an admission of liability for any portion of any remediation and the Company does not believe its participation will prejudice any defenses available to the Company. In addition to its participation in the activities of the coalition, the Company, together with four other companies with facilities along the Fox River (the "Five Companies"), is engaged in discussions with the WDNR regarding their liability in connection with the remediation and restoration of sediment contamination caused by alleged PCB releases to the Fox River. Based upon available information, the Company believes the WDNR has identified other parties, some of whom have substantial resources, whose manufacturing practices allegedly resulted in the release of PCBs to the Fox River. On June 20, 1994, the FWS, a federal natural resources trustee, informed each of the Five Companies that they had been identified as PRPs for purposes of federal 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 "Federal Claims"). 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 stated that it is undertaking an assessment to determine and quantify the nature and extent of injury to natural resources. The FWS has invited the Five Companies to participate in the development of the type and scope of the assessment and in the performance of the assessment, pursuant to federal regulations. The Five Companies are engaged in discussions with the FWS concerning the nature of their participation in assessment. Based upon presently available information, the Company believes that there are additional parties, some of which may have substantial resources, who may be identified as PRPs for alleged natural resource damages. On July 15, 1992, Region V of the U.S. EPA issued a Finding of Violation to the Company concerning the No. 8 boiler at its Green Bay mill. The Finding alleged violation of regulations issued by the U.S. EPA under the Clean Air Act relating to New Source Performance Standards for Fossil Fuel Fired Steam Generators. On October 5, 1994, the Company and the U.S. EPA, with concurrence from the U.S. Department of Justice, reached an agreement in principle whereby the Company, without admitting any wrongdoing, has agreed to - 9 - make certain modifications to the boiler which will limit its physical capacity to the level specified in the alleged relevant New Source Performance Standards. The physical modifications, which require expenditures of approximately $40,000, will not affect the utility of the No. 8 boiler. In addition, the Company has agreed to pay $350,000 to settle this matter. The Company anticipates that the settlement will be completed in 1996. The Company has $20 million of accrued liabilities as of December 31, 1995 for estimated or anticipated liabilities and legal and consulting costs relating to environmental matters arising from past operations. The Company expects these costs to be incurred over an extended number of years. While 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 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 is contesting the disallowance. In August 1994, the U.S. Tax Court issued its opinion in which it essentially adopted the interpretation of Code Section 162(k) advanced by the IRS and disallowed the deductions claimed by the Company. At present, the U.S. Tax Court is preparing to enter its decision in which it will determine the amount of the tax deficiency owed by the Company. The Company intends to appeal the U.S. Tax Court decision as it bears on the interpretation of Code Section 162(k) to the U.S. Court of Appeals for the Seventh Circuit. In anticipation of its appeal, the Company has paid to the IRS tax of approximately $5 million potentially due for its 1988 tax year pursuant to the U.S. Tax Court opinion along with $4 million for the interest accrued on such tax. If the decision of the U.S. Tax Court is ultimately sustained, the Company estimates that the potential amount of additional taxes due on account of such disallowance for the period 1989 through 1995 would be approximately $38 million exclusive of interest. While the Company is unable to predict the final result of its appeal of the U.S. Tax Court decision with certainty, it has accrued for the potential tax liability as well as for the interest charges thereon for the period 1989 through 1995 and thus the Company believes that the ultimate resolution of this case will not have a material adverse effect on the Company's financial condition or on its results of operations. 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 1995. - 10 - ITEM 1a. 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 .............. 59 Chairman of the Board of Directors and Chairman of the Board and Chief Executive Officer since March Chief Executive Officer 1992; President and Chief Executive Officer from July 1990 to March 1992. Director of Associated Bank Green Bay. Kathleen J. Hempel ............. 45 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. Michael T. Riordan ............. 45 President and Chief Operating Officer President and since March 1992; Vice President Chief Operating Officer prior to that time. Andrew W. Donnelly ............. 53 Executive Vice President for more than Executive Vice President five years. John F. Rowley ................. 55 Executive Vice President for more than Executive Vice President five years. James C. Bowen, Jr.............. 50 Vice President since July 1995; Director Vice President of Consumer Sales prior to that time. George F. Hartmann, Jr. ........ 53 Vice President for more than five years. Vice President R. Michael Lempke .............. 43 Vice President since September 1994; Vice President and Treasurer Treasurer since November 1989. James W. Nellen II ............. 48 Vice President and Secretary for more Vice President and Secretary than five years. Daniel J. Platkowski ........... 44 Vice President for more than five years. Vice President Timothy G. Reilly .............. 45 Vice President for more than five years. Vice President James H. Riehl, Jr.............. 43 Vice President since July 1995; Director Vice President of Consumer Marketing prior to that time. Donald J. Schneider ............ 59 Vice President for more than five years. Vice President Charles L. Szews ............... 39 Vice President since September 1994; Vice President and Controller Controller since November 1989. Charles D. Wilson .............. 50 Vice President since June 1994; Director Vice President of Government Affairs prior to that time. David K. Wong .................. 46 Vice President since June 1993; Director Vice President of Personnel prior to that time. David A. Stevens ............... 46 Assistant Vice President for more than Assistant Vice President five years. - 11 - ITEM 1b. 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, wastepaper prices, costs related to environmental matters, and the impact of current or pending legislation and regulation. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS During the fiscal year ended December 31, 1994, there was no market for the Company's Common Stock. The Company's Common Stock began trading under the symbol FORT on the Nasdaq National Market on March 10, 1995. The range of high and low trade prices of the Company's stock during quarters in which there was an active public trading market 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 The number of holders of record of the Company's Common Stock at December 31, 1995 was approximately 800. 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 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 the 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, ------------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (In millions, except ratios and per share amounts) STATEMENT OF INCOME DATA: Net sales .............................. $ 1,621 $ 1,274 $ 1,187 $ 1,151 $ 1,138 Cost of sales (a)........................ 1,139 867 784 726 713 ------- ------- ------- ------- ------- Gross income............................. 482 407 403 425 425 Selling, general, and administrative (a)(b).................. 122 110 97 97 98 Amortization of goodwill (c)............. -- -- 43 57 57 Goodwill write-off (c)................... -- -- 1,980 -- -- Environmental charge (d)................. -- 20 -- -- -- ------- ------- ------- ------- ------- Operating income (loss) (d).............. 360 277 (1,717) 271 270 Interest expense......................... 310 338 342 338 371 Other (income) expense, net ............. (2) -- (3) 2 (3) ------- ------- ------- ------- ------- Income (loss) before taxes (d)........... 52 (61) (2,056) (69) (98) Income taxes (credit).................... 18 (19) (16) -- (24) ------- ------- ------- ------- ------- Income (loss) before equity earnings, extraordinary items and adjustment for accounting change....... 34 (42) (2,040) (69) (74) Equity in net loss of unconsolidated subsidiaries (e)........ -- -- -- -- (32) ------- ------- ------- ------- ------- Net income (loss) before extraordinary items and adjustment for accounting change................................. 34 (42) (2,040) (69) (106) Extraordinary items - losses on debt repurchases (net of income taxes)...... (19) (28) (12) -- (5) Adjustment for adoption of SFAS No. 106 (net of income taxes) (f).............. -- -- -- (11) -- ------- ------- ------- ------- ------- Net income (loss) (a)(d)................. $ 15 $ (70) $(2,052) $ (80) $ (111) ======= ======= ======= ======= ======= Earnings (loss) per share (d)(g)......... $ 0.25 $ (1.85) $(53.85) $ (2.10) $ (3.17) OTHER DATA: EBITDA (h)............................... $ 459 $ 393 $ 387 $ 410 $ 444 EBITDA as a percent of net sales (h)..... 28.3% 30.8% 32.6% 35.6% 39.0% Depreciation of property, plant and equipment (a)...................... $ 99 $ 96 $ 88 $ 81 $ 116 Non-cash interest expense................ 13 74 101 140 141 Capital expenditures..................... 47 84 166 233 144 Weighted average number of shares of Common Stock outstanding (in thousands) (g)..................... 58,228 38,103 38,107 38,107 34,868 BALANCE SHEET DATA (at end of period): Total assets............................. $ 1,652 $ 1,681 $ 1,650 $ 3,575 $ 3,470 Working capital (deficit)................ (35) (98) (92) (124) 2 Long-term debt (including current portion) and Common Stock with put right.............................. 2,966 3,318 3,234 3,104 2,947 Shareholders' equity (deficit)........... (1,838) (2,148) (2,081) (29) 62
- 13 - (a) Effective January 1, 1992, the Company prospectively changed its estimates of the depreciable lives of certain machinery and equipment. The change had the effect of reducing depreciation expense by approximately $38 million and net loss by $24 million in 1992. (b) 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. See Note 9 of the Company's audited consolidated financial statements. (c) 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. See "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and Note 3 of the Company's audited consolidated financial statements. (d) During the fourth quarter of 1994, the Company recorded an environmental charge totaling $20 million. Excluding the effects of the environmental charge, the Company's operating income, loss before taxes, net loss and loss per share in 1994 would have been $297 million, $41 million, $56 million and $1.47 per share, respectively. (e) As of December 31, 1991, the Company had sold all its international cup operations and had discontinued recording equity in net losses of its residual interest in its former domestic cup operations because the Company's carrying value of such residual investment was reduced to zero. (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 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 1994 environmental charge 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, ---------------------------- 1995 1994 1993 ---- ---- ---- (In millions, except percentages) Net sales: Domestic tissue......................... $1,320 $ 1,060 $ 1,004 International operations................ 164 131 143 Harmon.................................. 137 83 40 ------ ------- ------- Consolidated............................ $1,621 $ 1,274 $ 1,187 ====== ======= ======= Operating income (loss): Domestic tissue (a)(b)(c)............... $ 337 $ 264 $(1,715) International operations (a)............ 18 8 (1) Harmon (a).............................. 5 5 (1) ------ ------- ------- Consolidated (a)(b)(c).................. 360 277 (1,717) Amortization of goodwill and goodwill write-off (a)........................... -- -- 2,023 Depreciation.............................. 99 96 89 Environmental charge (b).................. -- 20 -- Employee stock compensation (c)........... -- -- (8) ------ ------- ------- EBITDA(d)............................... $ 459 $ 393 $ 387 ====== ======= ======= Consolidated net income (loss)............ $ 15 $ (70) $(2,052) ====== ======= ======= EBITDA as a percent of net sales(d)....... 28.3% 30.8% 32.6% _____________________ (a) During the third quarter of 1993, the Company wrote off the remaining unamortized balance of its goodwill of $1.98 billion. See Note 3 to the Company's audited consolidated financial statements. (b) During the fourth quarter of 1994, operating income for domestic tissue operations was reduced by a $20 million environmental charge. See Note 11 to the Company's audited consolidated financial statements. (c) 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. See Note 9 to the Company's audited consolidated financial statements. (d) EBITDA represents operating income plus depreciation of property, plant and equipment, amortization of goodwill, the goodwill write-off, the 1994 environmental charge 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. - 15 - 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 Associates Corp. ("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 achieved from product rationalization in 1994 and the success of 1995 price increases. Wastepaper price trends in the U.K. were similar to those in the U.S. in 1995. - 16 - 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 Recapitalization (see below). Net Income. The Company reported net income of $15 million for 1995 compared to a net loss of $70 million for 1994. FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993 Net Sales. Consolidated net sales for 1994 increased 7.3% compared to 1993 due to increases in domestic tissue net sales and a significant net sales increase by the Company's wastepaper brokerage subsidiary. Domestic tissue net sales increased 5.5% for 1994 compared to 1993 due to higher net selling prices principally in the commercial market and higher sales volume in the consumer and parent roll export markets that were partially offset by a volume decrease in the commercial market. Overall, domestic tissue sales volume for 1994 increased slightly over 1993. The Company's decision to implement net selling price increases in the commercial market during each of the first three quarters of 1993 and to follow with a price increase in the second quarter of 1994 led to the decline in commercial volume during 1994. Net sales of the Company's international operations decreased 8.4% for 1994 compared to 1993. The decrease in international net sales in 1994 was due to significantly lower net selling prices on flat volume. The international net selling price declines were attributable to product mix changes and continued competitive conditions. The significant increase in net sales of the Company's wastepaper brokerage subsidiary during 1994 compared to 1993 principally reflects higher net selling prices. - 17 - Gross income. For 1994, consolidated gross margins decreased to 31.9% from 34.0% in 1993, principally due to lower margins in domestic tissue operations where unit manufacturing cost increases exceeded net selling price increases. Such cost increases primarily resulted from higher wastepaper and other raw material costs, lower converting volume, higher depreciation expense resulting from the start-up of a new paper machine at the Muskogee mill late in the first quarter of 1994 and higher maintenance costs. From July to December 1994, wastepaper prices for the grades of wastepaper used in Fort Howard's products more than doubled. Gross margins of international operations declined in 1994 compared to 1993 principally due to the lower net selling prices and the effects of product rationalization. In addition, from July to December 1994, wastepaper prices for the grades of wastepaper used by international operations increased approximately 65%. Consolidated gross margins also were negatively affected in 1994 by the increased proportion of net sales represented by the Company's wastepaper brokerage subsidiary which typically has lower margins than domestic tissue operations. Selling, General and Administrative Expenses. In the third quarter of 1993, the Company reversed all previously accrued employee stock compensation expense resulting in a reduction of selling, general and administrative expenses of $8 million for 1993. Excluding the effects of the reversal, selling, general and administrative expenses, as a percent of net sales, were 8.6% for 1994 compared to 8.8% for 1993. The decrease resulted principally from the increased proportion of net sales represented by the Company's wastepaper brokerage subsidiary and, to a lesser degree, cost containment. Amortization of Goodwill. As a result of the goodwill write-off in the third quarter of 1993, there was no amortization of goodwill in 1994 compared to $43 million for 1993. Environmental Charge. The Company recorded a $20 million charge in the fourth quarter of 1994 for estimated or anticipated liabilities and legal and consulting costs relating to environmental matters arising from past operations. The Company expects these costs to be incurred over an extended number of years. See "Environmental Matters" and "Legal Proceedings" and Note 11 of the Company's audited consolidated financial statements. Operating Income (Loss). Operating income increased to $277 million in 1994 compared to an operating loss of $1,717 million in 1993. The operating loss in 1993 resulted entirely from the goodwill write-off in the third quarter of 1993. Excluding the environmental charge from 1994 results and amortization of goodwill, the goodwill write-off and the reversal of employee stock compensation expense from 1993 results, operating income would have declined to $297 million in 1994 from $299 million in 1993. Extraordinary Losses. The Company's net loss in 1994 was increased by an extraordinary loss of $28 million (net of income taxes of $15 million) representing the redemption premiums and the write off of deferred loan costs associated with the repayment of long-term debt from the proceeds of the issuance of the 8 1/4% Notes and 9% Notes in 1994. Net Loss. The Company reported a net loss of $70 million for 1994 compared to a net loss of $2,052 million in 1993. The significant net loss for 1993 resulted principally from the goodwill write-off in the third quarter of 1993. - 18 - FINANCIAL CONDITION 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 Recapitalization (see below). 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 Recapitalization. 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. Year Ended December 31, 1994 During 1994, cash increased $195,000. Capital additions of $84 million and debt repayments of $759 million, including the prepayment of $100 million of the 1988 Term Loan, the repurchases of all outstanding 12 3/8% Notes and of $238 million of the 12 5/8% Debentures, a reduction in the 1988 Revolving Credit Facility and the purchase of interest rate cap agreements for $10 million were funded by cash provided from operations of $125 million and net proceeds of the sale of 8 1/4% Notes and 9% Notes of $728 million in February 1994. Receivables increased $17 million during 1994 due principally to higher net selling prices in the domestic tissue and wastepaper brokerage operations and sales volume increases in domestic tissue operations in the fourth quarter of 1994. The $13 million increase in inventories in 1994 resulted from increases in inventory quantities to improve service levels and the revaluation of inventories to reflect higher manufacturing costs. The liability for interest payable increased $29 million due to a change in interest payment schedules resulting from the 1994 debt repurchases from the net proceeds of the sale of the 8 1/4% Notes and 9% Notes in 1994 and for the liability with respect to the 14 1/8% Debentures for interest accruing in cash commencing on November 1, 1994. Principally as a result of all these changes, the net working capital deficit increased to $98 million at December 31, 1994, from a deficit of $92 million at December 31, 1993. The $15 million increase in long-term other liabilities in 1994 principally reflects the classification of $18 million of the environmental charge taken in the fourth quarter as a long-term liability. Deferred and other long-term income taxes declined - 19 - $34 million from 1993 to 1994 principally due to the reversal of deferred income taxes related to continuing operations and the extraordinary item. Cash provided from operations declined in 1994 compared to 1993 principally due to increased interest payments resulting from the 1993 repurchases of all outstanding 14 5/8% Debentures (which accrued interest in kind) from the net proceeds of the sale of the 9 1/4% Notes and 10% Notes in 1993 (which accrue interest in cash) and higher floating interest rates. Cash provided from operations was further impacted by the increases in receivables and inventories. Liquidity and Capital Resources The Company's principal uses of cash for the next several years will be interest and principal payments on its indebtedness and capital expenditures. On April 15, 1995, the Company completed a recapitalization plan (the "Recapitalization") to prepay or redeem a substantial portion of its indebtedness in order to reduce the level and overall cost of its debt, extend certain debt maturities, increase shareholders' equity and enhance its access to capital markets. The Recapitalization included the following components: (1) the offer and sale by the Company of 25,269,555 shares of Common Stock in March and April 1995, at $12.00 per share (the "Offering"); (2) entering into a bank credit agreement (the "1995 Bank Credit Agreement") consisting of a $300 million revolving credit facility (the "1995 Revolving Credit Facility"), an $810 million term loan and a $330 million term loan and entering into a receivables credit agreement consisting of a $60 million term loan (the "1995 Receivables Facility"); (3) the application in March and April 1995 of the net proceeds of the Offering, together with borrowings under the 1995 Bank Credit Agreement and the 1995 Receivables Facility, to prepay or redeem 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); and (4) the payment of transaction costs. Following the Recapitalization, the Company has payment obligations of $63 million in 1996, $114 million in 1997, $138 million in 1998, $152 million in 1999 and $158 million in 2000. In September 1995, the Company entered into receivables sales agreements which segregate certain domestic tissue receivables from the Company's other assets and liabilities for the purpose of effecting the sales of such receivables in order to achieve a lower cost of borrowing based on the credit quality of the receivables. As a result, receivables were reduced by $60 million, the 1995 Receivables Facility was repaid and the interest cost on the 1995 Receivables Facility of 2.5% over LIBOR has been effectively replaced by financing costs equal to 0.25% to 0.65% over LIBOR on $60 million. In connection with these agreements, additional revolving funds of up to $25 million may be available to the Company, resulting in further decreases in receivables and interest costs. At December 31, 1995, the Company had drawn $3 million against the additional revolving funds under these agreements. Capital expenditures were $47 million, $84 million and $166 million in 1995, 1994 and 1993, respectively, including an aggregate of $175 million during those periods for capacity expansions. Subject to market conditions, the Company's current plans to support growth in domestic tissue shipments include adding one world-class (270-inch) tissue paper machine over the next five years. The 1995 Bank Credit Agreement imposes limits for domestic - 20 - 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 $40 million through June 30, 1996, and up to $100 million in the aggregate after June 30, 1996 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, 1995, the capital expenditures carryover available to the Company totaled $31 million. The Company does not believe such limitations will impair its plans for capital expenditures. Capital expenditures are projected to approximate $90 to $100 million annually for the next several years, plus domestic expansion capital spending that is subject to market conditions. 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, 1995, the Company had $221 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 4 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. - 21 - 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, 1995, the Company's internal control systems over financial reporting are adequate and operating effectively in all material respects. Donald H. DeMeuse, Chairman and Kathleen J. Hempel, Vice Chairman Chief Executive Officer and Chief Financial Officer - 22 - 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, 1995 and 1994, and the related consolidated statements of income and cash flows for the years ended December 31, 1995, 1994 and 1993. 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, January 30, 1996. - 23 - FORT HOWARD CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) For the Years Ended December 31, -------------------------------- 1995 1994 1993 ---- ---- ---- Net sales............................. $1,620,903 $ 1,274,445 $ 1,187,387 Cost of sales......................... 1,139,378 867,357 784,054 ---------- ----------- ----------- Gross income.......................... 481,525 407,088 403,333 Selling, general and administrative... 121,406 110,285 96,966 Amortization of goodwill.............. -- -- 42,576 Goodwill write-off.................... -- -- 1,980,427 Environmental charge.................. -- 20,000 -- ---------- ----------- ----------- Operating income (loss)............... 360,119 276,803 (1,716,636) Interest expense...................... 309,915 337,701 342,792 Other (income) expense, net........... (1,662) 118 (2,996) ---------- ----------- ----------- Income (loss) before taxes............ 51,866 (61,016) (2,056,432) Income taxes (credit)................. 18,401 (18,891) (16,314) ---------- ----------- ----------- Income (loss) before extraordinary items............................... 33,465 (42,125) (2,040,118) Extraordinary items--losses on debt repurchases (net of income taxes of $11,986 in 1995, $14,731 in 1994 and $7,333 in 1993)......... (18,748) (28,170) (11,964) ---------- ----------- ----------- Net income (loss)..................... $ 14,717 $ (70,295) $(2,052,082) ========== =========== =========== Earnings (loss) per share: Net income (loss) before extraordinary items............... $ 0.57 $ (1.11) $ (53.54) Extraordinary items................. (0.32) (0.74) (0.31) ---------- ----------- ----------- Net income (loss)................... $ 0.25 $ (1.85) $ (53.85) ========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. - 24 - FORT HOWARD CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) December 31, ------------------- 1995 1994 ---- ---- Assets Current assets: Cash and cash equivalents.................. $ 946 $ 422 Receivables, less allowances of $2,883 in 1995 and $1,589 in 1994............... 97,707 123,150 Inventories................................ 163,076 130,843 Deferred income taxes...................... 29,000 20,000 Income taxes receivable.................... 700 5,200 ----------- ----------- Total current assets..................... 291,429 279,615 Property, plant and equipment................ 1,971,641 1,932,713 Less: Accumulated depreciation............. 706,394 611,762 ----------- ----------- Net property, plant and equipment........ 1,265,247 1,320,951 Other assets................................. 95,761 80,332 ----------- ----------- Total assets........................... $ 1,652,437 $ 1,680,898 =========== =========== Liabilities and Shareholders' Deficit Current liabilities: Accounts payable........................... $ 112,384 $ 100,981 Interest payable........................... 64,375 84,273 Income taxes payable....................... 1,339 224 Other current liabilities.................. 85,351 75,450 Current portion of long-term debt.......... 62,720 116,203 ----------- ----------- Total current liabilities................ 326,169 377,131 Long-term debt............................... 2,903,299 3,189,644 Deferred and other long-term income taxes.... 225,043 209,697 Other liabilities............................ 36,355 41,162 Common Stock with put right.................. -- 11,711 Shareholders' deficit: Common Stock............................... 634 381 Additional paid-in capital................. 895,652 600,090 Cumulative translation adjustment.......... (2,844) (2,330) Retained deficit........................... (2,731,871) (2,746,588) ----------- ----------- Total shareholders' deficit.............. (1,838,429) (2,148,447) ----------- ----------- Total liabilities and shareholders' deficit.............................. $ 1,652,437 $ 1,680,898 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. - 25 - FORT HOWARD CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Year Ended December 31, ------------------------------- 1995 1994 1993 ---- ---- ---- Cash provided from (used for) operations: Net income (loss)........................ $ 14,717 $(70,295) $(2,052,082) Depreciation and amortization............ 98,882 95,727 130,671 Goodwill write-off....................... -- -- 1,980,427 Non-cash interest expense................ 12,925 74,238 100,844 Deferred income taxes (credit)........... 4,418 (33,832) (17,874) Environmental charge..................... -- 20,000 -- Employee stock compensation.............. -- -- (7,832) Pre-tax loss on debt repurchases......... 30,734 42,901 19,297 (Increase) decrease in receivables....... 25,443 (17,316) (2,343) Increase in inventories.................. (32,233) (12,574) (17,294) (Increase) decrease in income taxes receivable............................. 4,500 4,300 (7,000) Increase (decrease) in accounts payable.. 11,403 (684) (2,740) Increase (decrease) in interest payable.. (19,898) 29,419 21,797 Increase (decrease) in income taxes payable................................ 1,115 102 (1,670) All other, net........................... 4,930 (6,799) 6,854 ---------- -------- ----------- Net cash provided from operations.... 156,936 125,187 151,055 Cash used for investment activities: Additions to property, plant and equipment.............................. (47,296) (83,559) (165,539) Cash provided from (used for) financing activities: Proceeds from long-term borrowings....... 1,467,800 750,000 887,088 Repayment of long-term borrowings........ (1,810,966) (759,202) (841,399) Debt issuance costs...................... (50,054) (32,134) (31,160) Issuance (repurchase) of Common Stock, net of offering costs........... 284,104 (97) (6) ---------- -------- ----------- Net cash provided from (used for) financing activities............... (109,116) (41,433) 14,523 ---------- -------- ----------- Increase (decrease) in cash................ 524 195 39 Cash, beginning of year.................... 422 227 188 ---------- -------- ----------- Cash, end of year.................... $ 946 $ 422 $ 227 ========== ======== =========== Supplemental Cash Flow Disclosures: Interest paid............................ $ 317,866 $237,650 $ 228,360 Income taxes paid (refunded), net........ (5,728) 2,483 4,432 The accompanying notes are an integral part of these consolidated financial statements. - 26 - FORT HOWARD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 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. Certain reclassifications have been made to conform prior years' data to the current format. (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. (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. (E) PROPERTY, PLANT AND EQUIPMENT -- Effective with the Acquisition (as defined below), property, plant and equipment were adjusted to their estimated fair values and 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 6 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. Amortization of assets under capital leases is included in depreciation expense. - 27 - The Company follows the policy of capitalizing interest incurred in conjunction with major capital expenditure projects. The amounts capitalized in 1995, 1994 and 1993 were $2,096,000, $4,230,000 and $8,369,000, 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 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. (H) GOODWILL -- In 1988, FH Acquisition Corp., a company organized on behalf of The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II"), acquired the Company in a leveraged buyout and was subsequently merged with and into the Company (the "Acquisition"). Goodwill (the acquisition costs in excess of the fair value of net assets of acquired businesses) acquired in connection with the Acquisition and the purchases of other businesses was amortized on a straight-line basis over 40 years through the third quarter of 1993 when the Company wrote off its remaining goodwill balance (see Note 3). (I) 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 $13,231,000, $12,716,000 and $12,725,000 for 1995, 1994 and 1993, respectively. The Company follows SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" which requires that the expected cost of postretirement health care benefits be charged to expense during the years that employees render service (see Note 7). 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. 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. (J) INTEREST RATE CAP AGREEMENTS -- The costs of interest rate cap agreements are amortized over the respective lives of the agreements. - 28 - (K) INCOME TAXES -- The Company follows SFAS No. 109, "Accounting for Income Taxes." As a result, 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. (L) 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 58,227,712, 38,103,215 and 38,107,154 for 1995, 1994 and 1993, respectively. The assumed exercise of all outstanding stock options has been excluded from the computation of earnings (loss) per share in 1995, 1994 and 1993 because the result was not material or was antidilutive. 2. BALANCE SHEET INFORMATION December 31, ------------------ 1995 1994 ---- ---- (In thousands) Inventories Raw materials and supplies........................ $ 80,134 $ 63,721 Finished and partly-finished products............. 82,942 67,122 ---------- ---------- $ 163,076 $ 130,843 ========== ========== Property, Plant and Equipment Land.............................................. $ 45,523 $ 44,422 Buildings......................................... 326,207 325,395 Machinery and equipment........................... 1,586,627 1,527,865 Construction in progress.......................... 13,284 35,031 ---------- ---------- $1,971,641 $1,932,713 ========== ========== Capital Lease Assets (Included in Property, Plant and Equipment Totals Above) Buildings......................................... $ 4,008 $ 4,012 Machinery and equipment........................... 187,007 186,281 ---------- ---------- Total assets under capital leases............. $ 191,015 $ 190,293 ========== ========== - 29 - December 31, ------------------- 1995 1994 ---- ---- (In thousands) Other Assets Deferred loan costs, net of accumulated amortization.. $89,180 $76,640 Prepayments and other................................. 6,581 3,692 ------- ------- $95,761 $80,332 ======= ======= Other Current Liabilities Salaries and wages.................................... $51,797 $41,959 Contributions to employee benefit plans............... 13,226 12,816 Taxes other than income taxes......................... 6,442 5,615 Other accrued expenses................................ 13,886 15,060 ------- ------- $85,351 $75,450 ======= ======= 3. GOODWILL Low industry operating rates and aggressive competitive activity among tissue producers resulting from a recession, additions to capacity and other factors adversely affected tissue industry operating conditions and the Company's operating results from 1991 through September 30, 1993. The Company determined that its projected results would not support the future amortization of the Company's remaining goodwill balance at September 30, 1993. Accordingly, the Company wrote-off its remaining goodwill balance of $1.98 billion in the third quarter of 1993. 4. INCOME TAXES Year Ended December 31, ---------------------------- 1995 1994 1993 ---- ---- ---- (In thousands) Income Tax Provision Current Federal.................................. $ (304) $ 1,800 $ (6,012) State.................................... 768 509 465 Foreign.................................. 1,533 (2,099) (225) ------- -------- -------- Total current........................ 1,997 210 (5,772) Deferred Federal.................................. 17,227 (18,826) (7,731) State.................................... (2,739) (2,793) (2,956) Foreign.................................. 1,916 2,518 145 ------- -------- -------- Total deferred....................... 16,404 (19,101) (10,542) ------- -------- -------- $18,401 $(18,891) $(16,314) ======= ======== ======== - 30 - Year Ended December 31, ----------------------------- 1995 1994 1993 ---- ---- ---- (In thousands) Effective Tax Rate Reconciliation U.S. federal tax rate...................... 35.0% (34.0)% (34.0)% Amortization of intangibles................ -- -- 33.4 State income taxes, net.................... 2.1 (4.1) (0.1) Interest on long-term income taxes......... -- 3.3 -- Permanent differences related to accruals.. -- 3.3 -- Other, net................................. (1.6) 0.5 (0.1) ------- -------- -------- Effective tax rate......................... 35.5% (31.0)% (0.8)% ======= ======== ======== Income (Loss) Before Income Taxes Domestic................................... $39,067 $(62,711) $(2,048,746) Foreign.................................... 12,799 1,695 (7,686) ------- -------- ----------- $51,866 $(61,016) $(2,056,432) ======= ======== =========== The net deferred income tax liability at December 31, 1995 includes $242 million related to property, plant and equipment offset by the recognition of federal and state loss and tax credit carryforwards totaling $71 million. All other components of the gross deferred income tax assets and gross deferred income tax liabilities are individually not significant. 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 is contesting the disallowance. In August 1994, the U.S. Tax Court issued its opinion in which it essentially adopted the interpretation of Code Section 162(k) advanced by the IRS and disallowed the deductions claimed by the Company. At present, the U.S. Tax Court is preparing to enter its decision in which it will determine the amount of the tax deficiency owed by the Company. The Company intends to appeal the U.S. Tax Court decision as it bears on the interpretation of Code Section 162(k) to the U.S. Court of Appeals for the Seventh Circuit. In anticipation of its appeal, the Company has paid to the IRS tax of approximately $5 million potentially due for its 1988 tax year pursuant to the U.S. Tax Court opinion along with $4 million for the interest accrued on such tax. If the decision of the U.S. Tax Court is ultimately sustained, the Company estimates that the potential amount of additional taxes due on account - 31 - of such disallowance for the period 1989 through 1995 would be approximately $38 million exclusive of interest. While the Company is unable to predict the final result of its appeal of the U.S. Tax Court decision with certainty, it has accrued for the potential tax liability as well as for the interest charges thereon for the period 1989 through 1995 and thus the Company believes that the ultimate resolution of this case will not have a material adverse effect on the Company's financial condition or on its results of operations, and could result in a reversal of previously provided income taxes in the event of a resolution of the matter in the favor of the Company. It is possible that certain legislative activities could bring resolution to this matter in 1996. Should the matter proceed to the U.S. Court of Appeals, it is likely that it will not be resolved until 1997 or later. Assuming a favorable resolution of the U.S. Tax Court decision, the Company will have approximately $137 million of net operating loss carryforwards as of December 31, 1995 for federal income tax purposes which expire as follows: $8 million in 2007, $47 million in 2008, $69 million in 2009 and $13 million in 2010. The aggregate amount of net operating loss carryforwards available to the Company as of December 31, 1995 could be reduced to approximately $66 million if the U.S. Tax Court decision is affirmed. During 1994, the Company reclassified $11 million from the liability for other long-term income taxes to the liability for current income taxes principally to reflect the payments totaling $9 million made to the IRS with respect to the 1988 tax year. - 32 - 5. LONG-TERM DEBT Long-term debt and capital lease obligations, including amounts payable within one year, are summarized as follows: December 31, ---------------- 1995 1994 ---- ---- (In thousands) 1995 Term Loan A, due in varying semi-annual repayments with a final maturity of March 16, 2002 (a).................................. $ 810,000 $ -- 1995 Term Loan B, due in varying semi-annual repayments with a final maturity of December 31, 2002 (b)............................... 330,000 -- 1995 Revolving Credit Facility, due March 16, 2002 (i).................................. 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... 650,000 650,000 Subordinated Notes, 10%, due March 15, 2003........... 300,000 300,000 Capital lease obligations, at interest rates approximating 10.9%................................. 175,161 182,936 Pollution Control Revenue Refunding Bonds, 7.90%, due October 1, 2005................................. 42,000 42,000 Debt of foreign subsidiaries, at rates ranging from 7.60% to 8.66%, due in varying annual installments through March 2001.................................. 29,458 47,193 1988 Term Loan, repaid in 1995........................ -- 224,534 1988 Revolving Credit Facility, repaid in 1995........ -- 196,500 1993 Term Loan, repaid in 1995........................ -- 100,000 Senior Secured Notes, repaid in 1995.................. -- 300,000 Subordinated Debentures, 12 5/8%, redeemed in 1995.... -- 145,815 Junior Subordinated Discount Debentures, interest payable in kind at 14 1/8%, redeemed in 1995........ -- 566,869 ---------- ---------- 2,966,019 3,305,847 Less: Current portion of long-term debt............... 62,720 116,203 ---------- ---------- $2,903,299 $3,189,644 ========== ========== _____________________ (a) Interest on the 1995 Term Loan A and the 1995 Revolving Credit Facility is payable at prime plus 1.5% or, subject to certain limitations, at a reserve adjusted LIBOR rate plus 2.5% subject to downward adjustment if certain financial criteria are met (at a weighted average rate of 8.26% at December 31, 1995). (b) Interest on the 1995 Term Loan B is payable at prime plus 1.5% or at a reserve adjusted LIBOR rate plus 3.0% (at a weighted average rate of 8.74% at December 31, 1995). As a part of the Recapitalization and Offering (see Note 8), the Company entered into a bank credit agreement (the "1995 Bank Credit Agreement") consisting of a $300 million revolving credit facility and $1,140 million of - 33 - term loans; and entered into a receivables credit agreement consisting of a $60 million term loan (the "1995 Receivables Facility"). The net proceeds of the Offering, together with borrowings of $1,414 million under the 1995 Bank Credit Agreement and 1995 Receivables Facility, were used to prepay or repurchase all the outstanding indebtedness under the 1988 Bank Credit Agreement, the 1993 Term Loan and the Senior Secured Notes, to redeem all outstanding 14 1/8% Debentures (at par) and 12 5/8% Debentures (at 102.5% of the principal amount thereof) and to pay transaction costs. The Company incurred extraordinary losses of $19 million, $28 million and $12 million, net of income taxes of $12 million, $15 million and $7 million, in the first quarters of 1995, 1994 and 1993, respectively, representing redemption premiums and write-offs of deferred loan costs associated with refinancing transactions 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 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 2.75% fee with respect to any letters of credit issued under the 1995 Revolving Credit Facility. At December 31, 1995, $79 million of borrowings reduced available capacity under the 1995 Revolving Credit Facility to $221 million. The aggregate annual maturities of long-term debt and capital lease obligations for the five years succeeding December 31, 1995, are as follows: 1996-$62,720,000; 1997-$114,353,000; 1998-$137,687,000; 1999-$152,342,000 and 2000-$158,371,000. 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 $63 million as of December 31, 1995. 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, 1995, receivables totaling $94 million, inventories totaling $163 million and property, plant and equipment with a net book value of $1,258 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. - 34 - Fair Market Value Disclosures The aggregate fair values of the Company's long-term debt and capital lease obligations approximated $2,975 million and $3,152 million compared to aggregate carrying values of $2,966 million and $3,306 million at December 31, 1995 and 1994, 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 6% plus the Company's borrowing margin until June 1, 1996 and to 8% plus the Company's borrowing margin from June 1, 1996 until June 1, 1999. At current market rates at December 31, 1995, the fair value of the Company's interest rate cap agreements is $2 million compared to a carrying value of $11 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. 6. 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, 1995, are as follows: Year Ending December 31, Amount ------------------------ ------ (In thousands) 1996................................... $ 22,540 1997................................... 23,649 1998................................... 23,649 1999................................... 23,272 2000................................... 22,980 2001 and thereafter.................... 333,467 -------- Total payments......................... 449,557 Less imputed interest at rates approximating 10.9%............ 274,396 -------- Present value of capital lease obligations.................... $175,161 ======== - 35 - 7. 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. Year Ended December 31, ----------------------- 1995 1994 1993 ---- ---- ---- (In thousands) Net Periodic Postretirement Benefit Cost Service cost...................................... $ 82 $1,138 $1,140 Interest cost..................................... 871 1,719 1,800 Curtailment gain recognized....................... (3,389) -- -- Amortization of prior service cost (benefit)...... (671) 85 99 ------- ------ ------ Net periodic postretirement benefit cost (gain). $(3,107) $2,942 $3,039 ======= ====== ====== December 31, ---------------- 1995 1994 ---- ---- (In thousands) Unfunded Accumulated Postretirement Benefit Obligation Accumulated postretirement benefit obligation: Retirees............................................ $ 8,127 $ 7,068 Fully eligible active plan participants............. 1,305 3,411 Other active plan participants...................... 1,980 11,505 ------- ------- 11,412 21,984 Unrecognized prior service benefit.................... 7,385 -- Unrecognized actuarial gains (losses)................. (435) 457 ------- ------- Accrued postretirement benefit cost................... $18,362 $22,441 ======= ======= The medical trend rate assumed in the determination of the accumulated postretirement benefit obligation at December 31, 1995 begins at 10.5% in 1996, decreases 1% per year to 6.5% for 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, 1995 or net periodic postretirement benefit cost. The discount rate used in determining the accumulated postretirement benefit obligation was 7.5% and 8% compounded annually with respect to the 1995 and 1994 valuations, respectively. - 36 - 8. SHAREHOLDERS' DEFICIT In March 1995, the Certificate of Incorporation was restated to create two classes of stock and eliminate the formerly authorized nonvoting Common Stock. The Company is authorized to issue up to 100,000,000 shares of $.01 par value Common Stock. At December 31, 1995, 63,377,326 shares were issued and 63,370,794 shares were outstanding. At December 31, 1994, 38,107,778 shares were issued and 38,101,239 shares were outstanding (after giving retroactive effect to a 6.5-for-one stock split on January 31, 1995). 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, 1995. At December 31, 1994, 600,000 shares of $.01 par value nonvoting Common Stock had been authorized, of which none were issued or outstanding. In March and April of 1995, the Company issued 25,269,555 shares of Common Stock at $12.00 per share in a public offering (the "Offering"). Proceeds from the Offering, net of underwriting commissions and other related expenses totaling $19 million, were $284 million. The Offering was part of a recapitalization plan (the "Recapitalization") implemented by the Company to prepay or redeem a substantial portion of its indebtedness in order to reduce the level and overall cost of its debt, extend certain debt maturities, increase shareholders' equity and enhance its access to capital markets (see Note 5). The balance of Common Stock with put right outstanding at the date of the Offering of approximately $12 million was reclassified to Common Stock and Additional Paid-In Capital in the accompanying consolidated financial statements because the put right terminated effective with the consummation of the Offering. - 37 - Changes in Shareholders' Deficit Accounts Additional Cumulative Common Paid-in Translation Retained Stock Capital Adjustment Deficit ------ ---------- ----------- -------- (In millions) Balance, December 31, 1992..... $0.4 $600.1 $(3.9) $ (625.6) Net loss....................... -- -- -- (2,052.1) Decrease in fair market value of Common Stock with put right......... -- -- -- 1.4 Foreign currency translation adjustment................... -- -- (1.2) -- ---- ------ ----- --------- 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) ==== ====== ===== ========= 9. STOCK OPTIONS On January 31, 1995, the Company's shareholders approved 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 approved 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. In addition, 3,740,158 stock options were granted and remain outstanding at December 31, 1995 under predecessor stock plans. 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. In December 1995, 1,231 shares were granted pursuant to the 1995 Stock Plan for Non-Employee Directors. - 38 - Prior to the Offering, the Company amortized the excess of the fair market value of its Common Stock over the strike price of options granted to employees over the periods the options vested. Subsequent to the Offering, no amortization is required because the options are not putable to the Company. There was no employee stock compensation expense in 1995 or 1994. Due to the effects of adverse tissue industry operating conditions on its long-term earnings forecast as of September 30, 1993, the Company decreased the estimated fair market valuation of its Common Stock and, as a result, reversed all previously accrued employee stock compensation expense in 1993. The reversal of the accrued employee stock compensation expense resulted in a credit to operations of $8 million for 1993. Changes in Stock Options Outstanding Exercise Number Of Price Options Per Option --------- --------------- Balance, December 31, 1992..................... 3,737,506 $15.38 to 18.46 Options Granted.............................. 98,800 18.46 Options Cancelled............................ (10,660) 15.38 to 18.46 --------- --------------- Balance, December 31, 1993..................... 3,825,646 15.38 to 18.46 Options Cancelled............................ (82,888) 15.38 to 18.46 --------- --------------- Balance, December 31, 1994..................... 3,742,758 15.38 to 18.46 Options Granted.............................. 743,000 19.75 Options Cancelled............................ (2,600) 18.46 --------- --------------- Balance, December 31, 1995..................... 4,483,158 $15.38 to 19.75 ========= =============== Exercisable at December 31, 1995............... 3,740,158 $15.38 to 18.46 ========= =============== Shares available for future grant at December 31, 1995............................ 2,616,662 ========= In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued. Beginning in 1996, the Company will begin to make pro forma disclosures of stock-based compensation cost utilizing the fair value based method of accounting pursuant to SFAS No. 123, but currently intends to continue to report stock-based compensation expense in its consolidated financial statements for years following 1995 under the intrinsic value based method permitted under Accounting Principles Board Opinion No. 25 and SFAS No. 123. 10. RELATED PARTY TRANSACTIONS Morgan Stanley Group Inc. ("Morgan Stanley Group") and an affiliate acquired a substantial majority equity interest in the Company to effect the Acquisition. At December 31, 1995, Morgan Stanley Group and certain of its affiliates controlled 37.8% of the Company's Common Stock. - 39 - Morgan Stanley & Co. Incorporated ("MS&Co") has served as lead underwriter with respect to the Offering and periodic public debt offerings and has received underwriting fees of $7 million in 1995, $20 million in 1994 and $20 million in 1993 in connection with such public offerings. Since the Acquisition, MS&Co has also been a market maker with respect to the Company's public debt securities. 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 each of 1994 and 1993. The Company is a party to several interest rate cap agreements (see Note 5) including one such agreement with MS&Co which was purchased in 1994 for $2 million. 11. COMMITMENTS AND CONTINGENCIES The Company is subject to substantial regulation by various federal, state and local authorities in the U.S. and national and local authorities in the U.K. concerned with 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 wastes. 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. The Company is involved in a voluntary investigation and potential clean-up of the Lower Fox River in Wisconsin and has been named as a potentially responsible party for alleged natural resource damages related to the Lower Fox River and Green Bay system. In addition, the Company makes capital expenditures and incurs operating expenses for clean-up obligations and other environmental matters arising in its on-going operations. The Company recorded a $20 million charge in the fourth quarter of 1994 for estimated or anticipated liabilities and legal and consulting costs relating to environmental matters arising from past operations. The Company expects these costs to be incurred over an extended number of years and as of December 31, 1995 continues to have accrued liabilities for environmental matters of approximately $20 million. The ultimate cost to the Company for environmental matters cannot be determined with certainty due to the often unknown magnitude of the contamination to be addressed, the varying cost of remediation methods that could be employed, the evolving nature of remediation 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. While 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. 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. - 40 - 12. GEOGRAPHIC INFORMATION United United States Kingdom Consolidated ------ ------- ------------ (In thousands) 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 1993 Net sales........................ $ 1,044,174 $143,213 $ 1,187,387 Operating loss................... (1,715,777) (859) (1,716,636) Identifiable operating assets.... 1,486,166 163,621 1,649,787 Intercompany sales and charges between geographic areas and export sales are not material. In 1993, the Company determined that its projected results would not support the future amortization of the Company's remaining goodwill balance. Accordingly, the Company wrote off its remaining goodwill balance of $1,980 million in the third quarter of 1993, resulting in charges of $1,968 million and $12 million to the operating income of the United States and United Kingdom operations, respectively. 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) 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...... -- -- -- -- -- - 41 - First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ----- (In millions, except per share data) 1994 Net sales................ $ 275 $ 315 $ 340 $ 344 $ 1,274 Gross income............. 87 107 113 100 407 Operating income......... 60 79 85 53 277 Net loss before extraordinary item..... (15) (2) -- (25) (42) Extraordinary item-loss on debt repurchases.... (28) -- -- -- (28) Net loss................. (43) (2) -- (25) (70) Loss per share: Net (loss) before extraordinary item... (0.40) (0.05) 0.01 (0.65) (1.11) Extraordinary item-loss on debt repurchases.. (0.74) -- -- -- (0.74) Net loss per share..... (1.14) (0.05) 0.01 (0.65) (1.85) Dividends per share...... -- -- -- -- -- - 42 - 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 Item 1a. on this form. 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 14, 1996, under the captions "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" 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 14, 1996, under the captions "Committees of the Board of Directors; Meetings and Compensation of Directors," "Executive Compensation," "Committee Report on Executive Compensation" and "Performance Graph," 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 14, 1996, 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 14, 1996, 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, 1995, 1994 and 1993. - 43 - Consolidated Balance Sheets as of December 31, 1995 and 1994. Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993. 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 Indendent 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 3.2 as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) 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 arrangeers, 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.) 4.2 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.) - 44 - 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 Agreements dated October 15, 1993 with the Company's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. (Incorporated by reference to Exhibit No. 10 as filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.) *10.1(A) Amendments dated January 1, 1995 to Employment Agreements dated October 15, 1993, with the Company's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. (Incorporated by reference to Exhibit No. 10.6(A) as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) *10.2 Employment Agreements dated December 10, 1993 with certain executive officers of the Company. (Incorporated by reference to Exhibit 10.13 as filed with the Company's Form S-2 on December 17, 1993.) *10.2(A) Amendments to Employment Agreements with certain executive officers of the Company. (Incorporated by reference to Exhibit No. 10.13(A) as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) *10.3 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 Form 10-K for the year ended December 31, 1994.) *10.4 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 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.) *10.5(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.) *10.6 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.) - 45 - *10.7 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.) *10.7(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 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.) *10.8(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.) *10.8(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.) *10.8(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.) *10.8(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.) *10.8(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.) *10.8(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.) *10.9 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.) - 46 - *10.9(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.) *10.9(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.) *10.10 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.) 10.11 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.) 10.12 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.) 10.13 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.) 10.14 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.) 10.15 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.) 10.16 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.) 10.17 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.) - 47 - 10.18 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.) 10.19 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.) 10.20 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). *10.21 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). *10.22 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). +*10.22(A) Form of Nonqualified Stock Option Agreement dated December 6, 1995. *10.23 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). +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 51). +25 Powers of Attorney (included as part of signature page). +27 Financial Data Schedule for year ended December 31, 1995. - -------------------- *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, 1995. - 48 - 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 6 1996 By /s/ Donald H. DeMeuse ---------------------------------- Donald H. DeMeuse, Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY The undersigned directors and officer of Fort Howard Corporation hereby constitute and appoint Donald H. DeMeuse, 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 6, 1996 Donald H. DeMeuse Chief Executive Officer and Director /s/ Kathleen J. Hempel Vice Chairman, Chief February 6, 1996 Kathleen J. Hempel Financial Officer and Director /s/ Michael T. Riordan President, Chief February 6, 1996 Michael T. Riordan Operating Officer and Director /s/ Donald Patrick Brennan Director February 2, 1996 Donald Patrick Brennan /s/ James L. Burke Director February 2, 1996 James L. Burke /s/ Dudley J. Godfrey Director February 2, 1996 Dudley J. Godfrey /s/ David I. Margolis Director February 1, 1996 David I. Margolis - 49 - /s/ Robert H. Niehaus Director February 2, 1996 Robert H. Niehaus /s/ Frank V. Sica Director February 2, 1996 Frank V. Sica /s/ Charles L. Szews Vice President and February 6, 1996 Charles L. Szews Controller and Principal Accounting Officer - 50 - 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 30, 1996. 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. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, January 30, 1996. ______________________ 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 and 333-00019. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin February 5, 1996. - 51 - Schedule II FORT HOWARD CORPORATION VALUATION AND QUALIFYING ACCOUNTS (In thousands) For the Years Ended December 31, --------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: 1995 1994 1993 ---- ---- ---- Balance at beginning of year.......... $1,589 $2,366 $1,376 Additions charged to earnings......... 1,209 (92) 1,633 Charges for purpose for which reserve was created............... 85 (685) (643) ------ ------ ------ Balance at end of year................ $2,883 $1,589 $2,366 ====== ====== ====== - 52 - INDEX TO EXHIBITS Exhibit No. - ----------- *3.1 Restated Certificate of Incorporation of the Company. (Incorporated by reference to Exxhibit 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 3.2 as filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) 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 arrangeers, 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.) 4.2 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 Agreements dated October 15, 1993 with the Company's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. (Incorporated by reference to Exhibit No. 10 as filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.) *10.1(A) Amendments dated January 1, 1995 to Employment Agreements dated October 15, 1993, with the Company's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. (Incorporated by reference to Exhibit No. 10.6(A) as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) - 53 - *10.2 Employment Agreements dated December 10, 1993 with certain executive officers of the Company. (Incorporated by reference to Exhibit 10.13 as filed with the Company's Form S-2 on December 17, 1993.) *10.2(A) Amendments to Employment Agreements with certain executive officers of the Company. (Incorporated by reference to Exhibit No. 10.13(A) as filed with the Company's Amendment No. 1 to Form S-1 on February 8, 1995.) *10.3 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 Form 10-K for the year ended December 31, 1994.) *10.4 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 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.) *10.5(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.) *10.6 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.) *10.7 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.) *10.7(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 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.) *10.8(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.) - 54 - *10.8(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.) *10.8(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.) *10.8(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.) *10.8(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.) *10.8(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.) *10.9 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.) *10.9(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.) *10.9(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.) *10.10 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.) 10.11 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.) - 55 - 10.12 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.) 10.13 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.) 10.14 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.) 10.15 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.) 10.16 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.) 10.17 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.) 10.18 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.) 10.19 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.) 10.20 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). - 56 - *10.21 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). *10.22 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). +*10.22(A) Form of Nonqualified Stock Option Agreement dated December 6, 1995. *10.23 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). +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 51). +25 Powers of Attorney (included as part of signature page). +27 Financial Data Schedule for year ended December 31, 1995. - -------------------- *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, 1995. - 57 - EX-10.22 2 EXHIBIT 10.22(A) FORM OF NONQUALIFIED STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT dated as of December 6, 1995, (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 the date specified at the foot of the signature page hereof. 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 at the foot of the signature page hereof. Each such Stock Option shall entitle the Participant to purchase, upon payment of the exercise price (the "Exercise Price") specified at the foot of the signature page hereof, 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: (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 Board 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 Board 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 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 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 any Subsidiary. In the event of 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 of (or subsequent to) 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, 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. 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 at the foot of this Award Agreement (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. 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. IN WITNESS WHEREOF, the Company has caused this Award Agreement to be executed by its duly authorized officer and the Participant has executed this Award Agreement, both as of the day and year first above written. FORT HOWARD CORPORATION By: ___________________________________ Cheryl A. Thomson Assistant Secretary PARTICIPANT _______________________________________ Name: Address: Number of Stock Options: Exercise Price: $19.75 Date of Grant: December 6, 1995 EX-12.1 3 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 1991 ---- ---- ---- ---- Earnings: Loss before taxes.......... $(61,016) $(2,056,432) $ (69,800) $ (97,999) Interest expense........... 337,701 342,792 338,374 371,186 One-fourth of operating lease rental expense..... 1,881 1,731 1,632 1,356 -------- ----------- --------- --------- $278,566 $(1,711,909) $ 270,206 $ 274,543 ======== =========== ========= ========= Fixed Charges: Interest expense........... $337,701 $ 342,792 $ 338,374 $ 371,186 Capitalized interest....... 4,230 8,369 11,047 5,331 One-fourth of operating lease rental expense..... 1,881 1,731 1,632 1,356 -------- ----------- --------- --------- $343,812 $ 352,892 $ 351,053 $ 377,873 ======== =========== ========= ========= Deficiency of Earnings Available to Cover Fixed Charges (1).......... $(65,246) $(2,064,801) $ (80,847) $(103,330) ======== =========== ========= ========= (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 4 EXHIBIT 12.2 FORT HOWARD CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In thousands, except ratio) For the Year Ended December 31, 1995 ------------------ Earnings: Income before taxes.................................. $ 51,866 Interest expense..................................... 309,915 One-fourth of operating lease rental expense......... 2,168 -------- $363,949 ======== Fixed Charges: Interest expense..................................... $309,915 Capitalized interest................................. 2,096 One-fourth of operating lease rental expense......... 2,168 -------- $314,179 ======== Ratio of Earnings to Fixed Charges..................... 1.2 === EX-21 5 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 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORT HOWARD CORPORATION'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000038195 FORT HOWARD CORPORATION 1,000 U.S. DOLLARS YEAR DEC-31-1995 DEC-31-1995 1 946 0 100,590 2,883 163,076 291,429 1,971,641 706,394 1,652,437 326,169 2,903,299 634 0 0 (1,839,063) 1,652,437 1,620,903 1,620,903 1,139,378 1,139,378 0 0 309,915 51,866 18,401 33,465 0 (18,748) 0 14,717 0.25 0.25
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