-----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, PY9uADp5nGmm3aHP4HKXRBd9CDMTIpTJbdkFVdu+HD6WCzMol2BIJghduACC+AXG U+SRVJUAsYDw7+WthArEvQ== 0001047469-97-004430.txt : 19971113 0001047469-97-004430.hdr.sgml : 19971113 ACCESSION NUMBER: 0001047469-97-004430 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970928 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROWN VANTAGE INC CENTRAL INDEX KEY: 0000948073 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 541752384 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13868 FILM NUMBER: 97716788 BUSINESS ADDRESS: STREET 1: 300 LAKESIDE DR STREET 2: 14TH FL CITY: OAKLAND STATE: CA ZIP: 94612-3592 BUSINESS PHONE: 5108743400 MAIL ADDRESS: STREET 1: 300 LAKESIDE DR STREET 2: 14TH FLOOR CITY: OAKLAND STATE: CA ZIP: 94612-3592 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: September 28, 1997 Commission File Number: 1-13868 CROWN VANTAGE INC. (Exact name of registrant as specified in its charter) Virginia 54-1752384 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 Lakeside Drive, Oakland, CA 94612-3592 (Address of principal executive offices) (Zip Code) (510) 874-3400 (Registrant's telephone number, including area code) Not Applicable (Former name, former address, and former fiscal year, if changed since last report) 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 --- --- Number of shares of no par value common stock outstanding as of the close of business on November 11, 1997: 9,662,912 Shares INDEX CROWN VANTAGE INC. PART I: Financial Information Item 1. Financial Statements - Condensed Consolidated Balance Sheets - September 28, 1997 and December 29, 1996. - Condensed Consolidated Statements of Operations - Three months and nine months ended September 28, 1997 and September 29, 1996. - Condensed Consolidated Statements of Cash Flows - Nine months ended September 28, 1997 and September 29, 1996. - Notes to Condensed Consolidated Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II: Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES 2 PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS CROWN VANTAGE INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS)
ASSETS SEPTEMBER 28, 1997 DECEMBER 29, 1996 ------------------ ----------------- (UNAUDITED) Current Assets: Cash and cash equivalents $ 10,205 $ 1,175 Accounts receivable, net 50,233 56,004 Inventories 94,362 97,975 Prepaid expenses and other current assets 6,787 15,214 Deferred income taxes 14,191 14,191 -------- -------- Total current assets 175,778 184,559 Property, plant and equipment, net 652,678 678,154 Other assets 38,780 36,759 Unamortized debt issue costs 14,554 16,023 Intangibles, net 29,258 30,101 -------- -------- Total Assets $911,048 $945,596 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 45,251 $ 60,612 Accrued liabilities 72,373 80,920 Current portion of long-term debt 10,065 6,761 -------- -------- Total current liabilities 127,689 148,293 Long-term debt 579,626 545,971 Accrued postretirement benefits other than pensions 101,383 101,273 Other long-term liabilities 16,573 19,626 Deferred income taxes 84,664 101,360 -------- -------- Total Liabilities 909,935 916,523 -------- -------- Shareholders' Equity: Preferred Stock, no par value; Authorized - 500,000 shares; Issued and outstanding - None Common Stock, no par value; Authorized - 50,000,000 shares; Issued and outstanding 9,660,584 and 9,107,535 shares at September 28, 1997 and December 29, 1996, respectively 45,659 44,578 Unearned ESOP shares and other (5,692) (7,253) Cumulative foreign currency translation adjustment (126) 3,365 Retained deficit (38,728) (11,617) -------- -------- 1,113 29,073 -------- -------- Total Liabilities and Shareholders' Equity $911,048 $945,596 -------- -------- -------- --------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 CROWN VANTAGE INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Third Quarter (13 weeks) and Nine Months (39 weeks) Ended September 28, 1997 and September 29, 1996 (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE)
Third Quarter Nine Months -------------------- -------------------- 1997 1996 1997 1996 -------- -------- -------- -------- (UNAUDITED) (UNAUDITED) Net sales $226,808 $221,064 $680,381 $704,481 Cost of goods sold 206,210 209,732 631,867 637,206 -------- -------- -------- -------- Gross margin 20,598 11,332 48,514 67,275 Selling and administrative expenses 13,963 13,792 42,732 38,132 -------- -------- -------- -------- Operating Income (Loss) 6,635 (2,460) 5,782 29,143 Interest expense (16,783) (15,337) (49,072) (47,167) Other income, net 71 211 929 603 -------- -------- -------- -------- Loss before income taxes (10,077) (17,586) (42,361) (17,421) Benefit for income taxes (3,452) (8,018) (15,250) (7,953) -------- -------- -------- -------- NET LOSS $ (6,625) $ (9,568) $(27,111) $ (9,468) -------- -------- -------- -------- -------- -------- -------- -------- Loss per share $ (.74) $ (1.11) $ (3.05) $ (1.10) -------- -------- -------- -------- -------- -------- -------- --------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 CROWN VANTAGE INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months (39 weeks) Ended September 28, 1997 and September 29, 1996 (IN THOUSANDS OF DOLLARS)
Nine Months -------------------- 1997 1996 -------- --------- (UNAUDITED) Cash Provided by (Used for) Operating Activities: Net loss $(27,111) $ (9,468) Items not affecting cash: Depreciation and cost of timber harvested 61,548 57,712 Amortization of goodwill and other intangibles 844 844 Interest on Pay-in-Kind Notes and other non-cash interest 13,039 12,224 Other, net 1,939 3,009 Changes in current assets and liabilities: Accounts receivable (includes $40,000 sold in 1996) 5,771 49,885 Inventories 3,613 4,109 Other current assets 8,425 (16,296) Accounts payable (7,885) (11,483) Other current liabilities (10,119) (2,424) Decrease in deferred income taxes (16,696) (2,183) Other, net (3,600) 3,748 -------- --------- Cash Provided by Operating Activities 29,768 89,677 -------- --------- Cash Provided by (Used for) Investing Activities: Expenditures for property, plant and equipment (45,005) (58,907) Other, net 2,078 (371) -------- --------- Cash Used for Investing Activities (42,927) (59,278) -------- --------- Cash Provided by (Used for) Financing Activities: Proceeds from draw down of Revolving Credit 97,000 171,000 Repayments of Revolving Credit (74,000) (163,000) Proceeds from issuance of Industrial Revenue Bonds, net 7,241 12,100 Repayments of Term Loans and other long-term debt (8,052) (49,631) -------- --------- Cash Provided by (Used for) Financing Activities 22,189 (29,531) -------- --------- Increase in cash and cash equivalents 9,030 868 Cash and cash equivalents at beginning of year 1,175 5,335 -------- --------- Cash and cash equivalents at end of period $10,205 $ 6,203 -------- --------- -------- ---------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 CROWN VANTAGE INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the consolidated operations, assets and liabilities of Crown Vantage Inc. (the "Parent"), Crown Paper Co., and Crown Paper Co.'s consolidated subsidiaries. Crown Vantage Inc. and subsidiaries (the "Company") became an independent company after the Board of Directors of James River Corporation of Virginia ("James River"), now known as Fort James Corporation ("Fort James"), approved the spin-off of assets, liabilities and operations which comprised a substantial part of James River's Communication Papers Business and the paper-based part of its Food and Consumer Packaging Business ("Predecessor Business"). At the close of business on August 25, 1995, James River distributed to its common shareholders all of the outstanding shares of the Company (the "Distribution"). The Distribution was made in the form of a tax-free dividend on the basis of one share of the Company's common stock for every ten shares of James River common stock. A total of 8,446,362 shares of the Company's common stock was issued and began trading on NASDAQ on August 28, 1995. The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. The condensed consolidated balance sheet as of December 29, 1996 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 28, 1997 are not necessarily indicative of the results that may be expected for the year ended December 28, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in Crown Vantage Inc.'s Annual Report to Shareholders and Form 10-K for the year ended December 29, 1996. Certain 1996 amounts have been reclassified to conform with the 1997 presentation. NOTE 2 --LOSS PER SHARE The computations of earnings (loss) per share for the quarters ended September 28, 1997 and September 29, 1996 are based on the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the periods (8,893,000 and 8,603,000 for the nine months ended September 28, 1997 and September 29, 1996, respectively, and 9,006,000 and 8,623,000 for the quarters ended September 28, 1997 and September 29, 1996, respectively). The number of shares considered outstanding does not include 428,000 shares and 255,000 shares held by the Employee Stock Ownership Plan Trust at September 28, 1997 and September 29, 1996, respectively. In accordance with Statement of Position 93-6 ("Employers' Accounting for Employee Stock Ownership Plans"), shares held by the Trust are not considered outstanding for purposes of computing earnings per share until the shares are committed for release from the Trust. 6 NOTE 3 -- INCOME TAX The income tax benefits for the quarter and nine months ended September 28, 1997 and September 29, 1996 were provided based on the Company's estimated annual tax rates of 36% and 39.8%, respectively. In addition, the Company recognized a benefit of $1.0 million in the third quarter of 1996 for reduction of estimated taxes payable for 1995. NOTE 4 -- LONG TERM DEBT Consolidated long-term debt consists of the following: September 28 December 29 1997 1996 ------------ ----------- (IN THOUSANDS OF DOLLARS) CROWN PAPER CO. Bank Credit Facility: Revolving credit, due 2002 $ 48,000 $ 25,000 Term Loan A, due 2002 39,150 45,712 Term Loan B, due 2003 98,250 99,000 -------- -------- 185,400 169,712 -------- -------- 11% Senior Subordinated Notes, due 2005 250,000 250,000 Industrial Revenue Bonds, payable to 2026 41,419 34,278 -------- -------- 476,819 453,990 -------- -------- CROWN VANTAGE INC. 11.45% Senior Pay-in-Kind Notes, due 2007 less unamortized discount 112,872 98,742 -------- -------- 589,691 552,732 -------- -------- Less current portion 10,065 6,761 -------- -------- $579,626 $545,971 -------- -------- -------- -------- In August 1997, the Company completed a $2.5 million refinancing of certain industrial revenue bonds (the "Refunding Bonds") issued by the Michigan Strategic Fund. The Refunding Bonds were issued to refinance certain of the Company's water pollution control and sewage and solid waste disposal facilities to be used by the Company. The Refunding Bonds bear interest at 6.25% and are due August 1, 2012. The bonds being refunded were repaid in October 1997. Also in August 1997, the Company finalized an agreement with the Michigan Strategic Fund whereby a total of $4.9 million of bonds (the "Project Bonds") were sold to finance certain sewage and solid waste disposal facilities to be used by the Company. The proceeds from the sale of the Project Bonds were used to finance eligible project costs. Upon sale, an amount equivalent to 50% of the proceeds was prepaid on Term Loan A. The Project Bonds bear interest at 6.5% and are due August 1, 2021. In the fourth quarter of 1997 Term Loan A was entirely repaid (see "Subsequent Events"). 7 Maturities of long-term debt (after repayment of Term Loan A), excluding the revolving credit, for the next five fiscal year ends are: 1998 - $1.0 million; 1999 - $1.0 million; 2000 - $1.3 million; 2001 - $.8 million; and 2002 - $47.0 million. NOTE 5 -- INVENTORIES September 28, 1997 December 29, 1996 ------------------ ----------------- (IN THOUSANDS OF DOLLARS) Raw materials $ 25,209 $ 26,283 Work in process 6,766 7,490 Finished goods 39,943 42,168 Stores and supplies 35,356 34,640 -------- -------- 107,274 110,581 Reduction to state inventories at last-in, first-out cost (12,912) (12,606) -------- -------- $ 94,362 $ 97,975 -------- -------- -------- -------- NOTE 6 -- LITIGATION AND ENVIRONMENTAL MATTERS The Company is a party to various legal proceedings generally incidental to its business and is subject to a variety of environmental protection statutes and regulations. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings involving environmental matters. Although the ultimate disposition of legal proceedings cannot be predicted with certainty, it is the present opinion of the Company's management that the outcome of any claim which is pending or threatened, either individually or on a combined basis, will not have a materially adverse effect on the consolidated financial position of the Company but could materially affect consolidated results of operations in a given period. The Company has accrued estimated landfill site restoration, post-closure and monitoring costs totaling $11.4 million and $11.1 million at September 28, 1997 and December 29, 1996, respectively. In addition, the Company has been identified as a potentially responsible party ("PRP"), along with others, under the Comprehensive Environmental Response, Compensation and Liability Act or similar federal and state laws regarding the past disposal of wastes at approximately 20 sites in the United States. The Company has previously settled its remediation obligations at 11 sites. At 8 other sites, the Company is one of many potentially responsible parties and its alleged contribution to the site and remediation obligation is not considered significant. At one other site, remedial investigation is underway. While it is reasonably possible that a loss may be incurred at these sites, an estimate of potential loss is not yet possible. Based upon its previous experience with respect to the cleanup of hazardous substances as well as the regular detailed review of its known hazardous waste sites and estimated costs to remediate certain sites, the Company has accrued $.5 million and $.7 million at September 28, 1997 and December 29, 1996, respectively. The liabilities can change substantially due to such factors as the solvency of other potentially responsible parties, the Company's share of responsibility, additional information on the nature or extent of contamination, methods of remediation required, and other actions by governmental agencies or private parties. While it is not feasible to predict the outcome of all environmental liabilities, based on its most recent review, management is of the opinion that its share of the costs of investigation and remediation of the sites of which it is currently aware will not have a material adverse effect upon the consolidated financial condition of the Company. However, because of uncertainties associated with remediation activities, regulations, technologies, and the allocation of costs among various other parties, actual costs to be incurred at identified sites may vary from estimates. Therefore, management is unable to determine if the ultimate disposition of all known environmental liabilities will have a material adverse effect on the Company's consolidated results of operations in a given year. In addition, as is the case with most manufacturing and many other entities, there 8 can be no assurance that the Company will not be named as a PRP at additional sites in the future or that the costs associated with such additional sites would not be material. In December 1993, the EPA published draft rules which contain proposed regulations affecting pulp and paper industry discharges of wastewater and gaseous emissions ("Cluster Rules"). The final Cluster Rules were scheduled to be issued in late 1995; however, issuance has been repeatedly delayed. Current indications are that the rules will be issued in late 1997 with a compliance date of 2001. These Cluster Rules may require significant changes in the pulping, bleaching and/or wastewater treatment processes presently used in some U.S. pulp and paper mills, including some of the Company's mills. Based on the Company's understanding of the proposed rules, the Company estimates that approximately $68 million of capital expenditures may be required to comply with the rules. NOTE 7 -- STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121 Statement of Financial Accounting Standards No. 121 ("Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of") requires that the Company assess the recoverability of its investments in long-lived assets to be held and used in operations whenever events or circumstances indicate that their carrying amounts may be impaired. Such assessment requires that the future cash flows expected to result from use of the assets be estimated and an impairment loss recognized when future cash flows are less than the carrying value of such assets. Estimating future cash flows requires the Company to estimate future production volumes and costs, future sales volumes, demand for the Company's product mix and prices which reflect the use of its long-lived assets and market conditions. Although the Company believes it has a reasonable basis for its estimates, it is reasonably possible that the Company's actual performance could differ from such estimates which could result in a material impairment loss on its long-lived assets (see "Subsequent Events"). NOTE 8 -- EMPLOYEE STOCK OWNERSHIP PLAN On May 2, 1997 Crown Paper Co. and the Company entered into an agreement with the Crown Vantage Inc. Employee Stock Ownership Plan (the "ESOP") whereby the ESOP purchased $3.0 million of Common Stock from the Company. The purchase was funded by a loan to the ESOP from Crown Paper Co. which bears interest at 11% and is due May 1, 2004. The ESOP purchased 500,000 shares of Common Stock of the Company at the average of the high and low prices for the previous 10 day trading period. The shares are to be used to satisfy the Company's matching obligation with respect to the ESOP and are pledged as collateral for the ESOP's debt. As the Company recognizes compensation expense for its matching contribution, shares are committed for release from collateral and shares become outstanding for earnings (loss) per share computations. NOTE 9 -- NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("Earnings per Share") which the Company is required to adopt on December 28, 1997, the Company's 1997 fiscal year end. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. The new requirements exclude the dilutive effect of stock options for calculating primary earnings per share. Adopting Statement of Financial Accounting Standards No. 128 is not expected to materially impact the loss per share for the periods presented. 9 NOTE 10 --SUBSEQUENT EVENTS In October 1997 the Company sold approximately 108,000 acres of timber producing properties for approximately $36 million. These forests have accounted for less than 5% of the wood fiber required by the Company's pulp mills at Berlin and St. Francisville. As part of the transaction in the Northeastern United States, the Company entered into a long-term wood supply contract with the buyer to supply wood for the Berlin mill. The Company has retained ownership of certain standing timber in the Southeastern United States and entered into a cutting plan contract with the buyer in order to continue supplying wood fiber to the St. Francisville mill. Proceeds from the sale of the Company's timber properties were used to prepay Term Loan A. Also in October 1997, the Company repaid the remaining $3.2 million balance of Term Loan A. On October 28, 1997 the Company announced its intention to close its Newark, Delaware facility by the end of the year and seek a buyer for the site. Newark has produced approximately 1,800 tons of paper during the first nine months of 1997. The Company expects to shift most of the Newark mill's production to other mills. The Company anticipates recording a charge related to the closure or divestiture of the mill in the fourth quarter of 1997. 10 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Crown Vantage Inc. and subsidiaries (the "Company") is a major producer of value-added paper products for a diverse array of end-uses. The Company's two business sectors and corresponding principal product categories are (i) printing and publishing papers, for applications such as special interest magazines, books, custom business forms and corporate communications and promotions (e.g., annual reports and stationery); and (ii) specialty papers, principally for food and retail packaging applications and conversion into such items as coffee filters, cups and plates. The Company operates 11 facilities using 33 paper machines and is approximately 75% integrated with the Company's pulp operations. The Company's two largest facilities are integrated operations located in St. Francisville, Louisiana and Berlin and Gorham, New Hampshire. St. Francisville produces coated groundwood papers for magazines and catalogs and uncoated specialty converting papers. Berlin-Gorham primarily produces uncoated printing and publishing papers as well as market pulp. The Company also produces uncoated printing and publishing papers at its non-integrated facilities in Adams, Massachusetts; Newark, Delaware; Ypsilanti, Michigan; and Dalmore and Guardbridge, Scotland. The Company's food and retail packaging papers are produced primarily at non-integrated facilities in Port Huron and Parchment, Michigan, and Milford, New Jersey. In addition to its primary paper-making operations, the Company operates a cast-coating facility in Richmond, Virginia. RESULTS OF OPERATIONS The Company's net sales for each business sector as well as pulp and miscellaneous are as follows: Net Sales and Tonnage by Sector for the Nine Months Ended September 28, 1997 September 29, 1996 ------------------- -------------------- Tons Sales Tons Sales ------- -------- ------- -------- (thousands) (thousands) Printing and Publishing Papers Coated groundwood 213,769 $147,839 193,396 $170,546 Uncoated 182,875 177,561 181,885 181,112 Specialty Papers Food and retail packaging 175,887 222,545 176,880 229,703 Converting 132,975 117,437 125,341 112,547 Pulp and Miscellaneous 40,652 14,999 28,742 10,573 ------- -------- ------- -------- 746,158 $680,381 706,244 $704,481 ------- -------- ------- -------- ------- -------- ------- -------- 11 Net Sales and Tonnage by Sector for the Nine Months Ended September 28, 1997 September 29, 1996 ------------------- -------------------- Tons Sales Tons Sales ------- -------- ------- -------- (thousands) (thousands) Printing and Publishing Papers Coated groundwood 70,913 $ 52,713 69,362 $ 53,191 Uncoated 59,251 57,505 60,084 56,613 Specialty Papers Food and retail packaging 58,606 72,838 57,722 69,681 Converting 44,301 37,427 44,647 37,419 Pulp and Miscellaneous 16,496 6,325 11,659 4,160 ------- -------- ------- -------- 249,567 $226,808 243,474 $221,064 ------- -------- ------- -------- ------- -------- ------- -------- NET SALES The Company's net sales decreased 3.4% to $680.4 million for the nine months ended September 28, 1997 as compared to $704.5 million for the same period in 1996. Net sales increased 2.6% to $226.8 million for the quarter ended September 28, 1997 as compared to $221.1 million for the same period in 1996. The decrease for the nine month period of 1997 resulted primarily from an 8.6% decline in average selling price per ton, which was partially offset by a 5.7% increase in sales volume. The increase in net sales for the quarter ended September 28, 1997 as compared to the quarter ended September 29, 1996 was primarily due to a 2.5% increase in sales volume. Net sales of coated groundwood paper (which is used principally in the production of magazines and catalogs) for the nine month period ended September 28, 1997 were $147.8 million, a decline of 13.3% as compared to the same period in 1996. Sales volume increased 20,400 tons for the first nine months of 1997 compared to 1996, while the average sales price per ton declined 21.6% from $882 in 1996 to $692 in 1997. During the third quarter of 1997 as compared to the third quarter of 1996 a 2.2% increase in volume was offset by a 3.1% decrease in average selling price per ton. Net sales of uncoated printing and publishing papers decreased $3.6 million from $181.1 million for the first nine months of 1996 to $177.6 million for the first nine months of 1997, a 2.0 % decline. Average selling price per ton for the first nine months of 1997 declined by $25 (or 2.5%) as compared to the same period in 1996, while 1997 sales volume increased .5% as compared to 1996. Net sales of uncoated printing and publishing papers in the third quarter of 1997 increased 1.6% to $57.5 million from the third quarter of 1996. The increase from third quarter 1996 to third quarter 1997 is due to an average sales price per ton increase of 3.0% which was partially offset by a volume decrease of 1.4%. Food and retail packaging paper net sales totaled $222.5 million during the first nine months of 1997, a $7.2 million decline from the same period in 1996. The 3.1% decrease in net sales is primarily the result of a 2.6% decrease in average selling price per ton during the nine month period ended September 28, 1997 as compared to the same period in 1996. Price movements within the Company's food and retail packaging papers business are closely aligned with pulp price changes. Industry pulp prices began to decline in first quarter 1996 and remained at low levels through the third quarter of 1997; although, pulp prices showed a slight increase for the third quarter of 1997 as compared to the third 12 quarter of 1996. The decline in pulp prices negatively affected average selling prices per ton in the first nine months of 1997 as compared to the first nine months of 1996. For the third quarter of 1997, net sales were $72.8 million, a 4.5% increase from third quarter 1996. Sales volume increased 1.5% and average sales price per ton increased 3.0% from quarter to quarter. Net sales of specialty converting papers during the first nine months of 1997 were $117.4 million, a 4.3 % increase compared to the first nine months of 1996. The increase is the result of a 6.1 % increase in tons sold in 1997 compared to 1996 which was partially offset by a 1.6 % decrease in average selling price per ton. Net sales of specialty converting papers in the third quarter of 1997 totaled $37.4 million, which is unchanged from third quarter 1996 net sales. The Richmond mill is rapidly phasing out production of approximately 10,000 tons (annualized) for a customer representing approximately one third of the mill's capacity. The loss of these tons could have a material negative impact on the sales and operating results for the converting sector in the fourth quarter of 1997 and beyond, but it is not expected to materially impact sales or operating results for the Company as a whole. The Company has begun the effort to develop new products and business to replace the lost tonnage. The ultimate impact on net sales and operating results depends on the Company's timing of replacement of the lost tons and the terms of the sales agreements. Net sales of pulp and miscellaneous products increased to $15.0 million for the nine months ended September 28, 1997 as compared to $10.6 million in the same period of 1996. Tons of pulp sold is a function of market demand as well as managing, to the Company's best advantage, internal pulp integration. Tons sold in the first nine months of 1997 increased to 40,652 compared to 28,742 in the same period of 1996. In the third quarter of 1997 net sales increased to $6.3 million from $4.2 million in the third quarter of 1996. The increase in net sales for the third quarter of 1997 as compared to the third quarter of 1996 is due to an increase in average selling price per ton of 7.5% and a 4,837 ton increase in sales volume. OPERATING INCOME (LOSS)
Operating Income by Sector Operating Income by Sector for the Quarter Ended for the Nine Months Ended ------------------------------ ------------------------------ Sept. 28, 1997 Sept. 29, 1996 Sept. 28, 1997 Sept. 29, 1996 -------------- -------------- -------------- -------------- (Thousands) (Thousands) Printing and Publishing Papers $2,161 $(1,086) $(8,341) $21,004 Food and retail packaging 1,530 (1,366) 5,913 3,853 Converting 1,730 820 7,743 10,321 Pulp and Miscellaneous 1,214 (828) 467 (6,035) $6,635 $(2,460) $ 5,782 $29,143
The Company had operating income of $5.8 million for the nine month period in 1997 compared to operating income of $29.1 million for the same period in 1996. Lower prices in the first three quarters of 1997 decreased operating income by $60.5 million as compared to the same period in 1996. Higher volumes and lower costs in the first nine months of 1997 as compared to the same period in 1996 improved operating performance by $36.4 million and $.8 million, respectively. In the third quarter of 1997, operating income was $6.6 million, compared to an operating loss of $2.5 million for the third quarter of 1996. Operating income increased in the third quarter of 1997 as compared to the third quarter of 1996 primarily due to increased volumes and lower costs which increased operating performance by $5.5 million and $3.6 million, respectively. The lower costs for the third quarter of 1997 as compared to third quarter of 1996 were primarily due to reductions in manufacturing costs which were partially offset by increases in pulp costs. 13 Operating income for printing and publishing papers decreased to a loss of $8.3 million in the nine months of 1997 compared to income of $21.0 million for the same period in 1996. The decrease in operating income resulted primarily from the decrease in paper prices discussed above. Operating income of $2.2 million in the third quarter of 1997 increased by $3.3 million from a $1.1 million operating loss in the third quarter of 1996. The increase was primarily due to the net .6% increase in volume and reduced manufacturing costs. Food and retail packaging operating income increased from $3.9 million for the first nine months of 1996 to $5.9 million in the first nine months of 1997. The increase in operating profits is attributable to lower pulp costs and other cost saving initiatives during the first nine months of 1997 as compared to the same period in 1996. Lower pulp costs generally benefit operating results at the Company's packaging mills that are non-integrated. These cost savings were partially offset by the decline of 2.6% in average sales price per ton when comparing the two periods. Operating results increased from a net loss of $1.4 million in the third quarter of 1996 to $1.5 million operating income in the third quarter of 1997. Third quarter 1997 operating results improved primarily due to the 3.0% increase in average net sales price which was partially offset by higher pulp costs in the third quarter of 1997 as compared to the third quarter of 1996. Operating income for converting papers decreased to $7.7 million in the first nine months of 1997 as compared to $10.3 million in the first nine months of 1996. The decrease in operating profits is primarily attributable to the average selling price per ton decreasing 1.6% for the first nine months of 1997 compared to 1996. Operating profits for the third quarter of 1997 increased to $1.7 million from operating profits of $.8 million in the third quarter of 1996 (see "Net Sales"). Selling and administrative expenses increased $4.6 million for the nine month period of 1997 compared to the same period in 1996. The increase is due to higher commissions, higher depreciation on certain computer systems placed in service after September 29, 1996, and expenses associated with the Company's accounts receivable securitization which were classified as interest expense in the first quarter and most of the second quarter in 1996. Selling and administrative expenses were virtually the same for the third quarter 1997 as compared to the third quarter 1996. INTEREST EXPENSE Interest expense for the nine month periods of 1997 and 1996 was $49.1 million and $47.2 million, respectively. Interest expense for the third quarters of 1997 and 1996 was $16.8 and $15.3, respectively. LIQUIDITY AND SOURCES OF CAPITAL In connection with the Spin-Off, the Company obtained $250 million in financing through a public offering of Senior Subordinated Notes and $253 million initial borrowings under a $350 million credit facility from a group of banks (collectively, the "Financing"). The net proceeds from the Financing were paid to James River together with $100 million Senior Pay-in-Kind Notes as a return of James River's capital investment. Under the bank credit facility the revolving credit available is in the aggregate amount of $150 million with a $75 million sublimit for letters of credit (of which $41.1 million has been used at September 28, 1997) and can be used for general corporate purposes, working capital needs and 14 permitted investments. At September 28, 1997, $48.0 million of the revolving credit was outstanding and $60.9 million of the aggregate line was available if needed. Cash flows provided by operating activities were $29.8 million for the nine months ended September 28, 1997 compared to $89.7 million for the nine months ended September 29, 1996. The decrease in operating cash flows is mainly attributable to the $27.1 million loss as compared to a $9.5 million net loss for the first nine months of 1997 and 1996, respectively, and the sale of $40 million of trade accounts receivable in June 1996. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $69.1 million for the first nine months of 1997 as compared to $88.3 million for the comparable period in 1996. The Company's business is capital intensive. Pulp and paper mills generally consist of an extensive network of buildings, machinery, and equipment, which require continual upgrades, replacement, modernization and improvement. The Company's capital expenditures for the nine months ended September 28, 1997 were $45.0 million compared to $58.9 million in the same period in 1996. Approximately $7.9 million of 1997 capital expenditures represents amounts that were accrued at December 29, 1996 for which cash payments were made in 1997. The majority of the $7.9 million represents final cash payments related to the rebuild of a coated paper-machine at the Company's St. Francisville, Louisiana mill. The remaining 1997 expenditures primarily represented capital maintenance projects. Capital expenditure projects during the first nine months of 1996 related to capital maintenance projects, construction of a wastewater treatment plant at Parchment, Michigan, and the start of the Company's rebuild of the Number 1 paper machine at the St. Francisville mill. The Company's strategic capital plan involves aggregate capital expenditures for the remainder of 1997 of approximately $16 million. These capital expenditures are primarily capital maintenance projects and are expected to be financed by cash flows from operations and available financing sources. In August 1997, the Company completed a $2.5 million refinancing of certain industrial revenue bonds (the "Refunding Bonds") issued by the Michigan Strategic Fund. The Refunding Bonds were issued to refinance certain of the Company's water pollution and sewage and solid waste disposal facilities to be used by the Company. The Refunding Bonds bear interest at 6.25% and are due August 1, 2012. The bonds being refunded were repaid in October 1997. Also in August 1997, the Company finalized an agreement with the Michigan Strategic Fund whereby a total of $4.9 million of bonds (the "Project Bonds") were sold to finance certain sewage and solid waste disposal facilities to be used by the Company. The proceeds from the sale of the Project Bonds were used to finance eligible project costs. Upon sale, an amount equivalent to 50% of the proceeds was prepaid on Term Loan A. The Project Bonds bear interest at 6.5% and are due August 1, 2021. In the fourth quarter of 1997 Term Loan A was entirely repaid (see "Subsequent Events"). SUBSEQUENT EVENTS In October 1997, the Company sold approximately 108,000 acres of timber producing properties for approximately $36 million. These forests have accounted for less than 5% of the wood fiber required by the Company's pulp mills at Berlin and St. Francisville. As part of the transaction in the Northeastern United States, the Company entered into a long-term wood supply contract with the buyer to supply wood for the Berlin mill. The Company has retained ownership of certain standing timber in the Southeastern United States and entered into a cutting plan contract with the buyer in order to continue 15 supplying wood fiber to the St. Francisville mill. Proceeds from the sale of the Company's timber properties were used to prepay Term Loan A. Also in October 1997, the Company repaid the remaining $3.2 million balance of Term Loan A. On October 28, 1997 the Company announced its intention to close its Newark, Delaware facility by the end of the year and seek a buyer for the site. Newark has produced approximately 1,800 tons of paper during the first nine months of 1997. The Company expects to shift most of the Newark mill's production to other mills. The Company anticipates recording a charge related to the closure or divestiture of the mill in the fourth quarter of 1997. The Company believes closure of the Newark mill is a necessary step towards optimizing productivity. The Company's statements concerning Newark and related optimization of productivity are forward looking and subject to various risks and uncertainties which could cause the actual results to be materially different from the Company's current expectations. These include, but are not limited to the actual timing of the closure, the amount of the closure charge and disposition proceeds of the Newark mill, possible difficulties in shifting Newark production to other mills, successful implementation of the plans for optimizing production, and other factors. 16 PART II -- OTHER INFORMATION ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Ex. 11 Statement re: Computation of Per Share Earnings Ex. 27 Financial Data Schedule (Electronic Filing Only) (b) Reports on Form 8-K -- None SIGNATURES Pursuant to the requirements 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. CROWN VANTAGE INC. (Registrant) /s/ R. Neil Stuart /s/ Michael J. Hunter - ---------------------------------- ---------------------- R. Neil Stuart Michael J. Hunter Senior Vice President, Vice President, Chief Financial Officer Chief Accounting Officer (Duly Authorized Officer) (Duly Authorized Chief Accounting Officer) November 12, 1997 EX-11 2 EXHIBIT 11 EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (in thousands, except per share loss)
Nine Months Nine Months Ended September 28, 1997 Ended September 29, 1996 ------------------------- -------------------------- Primary Fully Diluted Primary Fully Diluted --------- ------------- --------- ------------- Average shares outstanding 8,893 8,893 8,603 8,569 Effect of dilutive stock options - 0 0 0 0 --------- ------------- --------- ------------- Totals 8,893 8,893 8,603 8,569 --------- ------------- --------- ------------- --------- ------------- --------- ------------- Net loss $(27,111) $(27,111) $(9,468) $(9,468) --------- ------------- --------- ------------- --------- ------------- --------- ------------- Loss per share $ (3.05) $ (3.05) $ (1.10) $ (1.10) --------- ------------- --------- ------------- --------- ------------- --------- ------------- Three Months Three Months Ended September 28, 1997 Ended September 29, 1996 ------------------------- -------------------------- Primary Fully Diluted Primary Fully Diluted --------- ------------- --------- ------------- Average shares outstanding 9,006 9,006 8,623 8,622 Effect of dilutive stock options 0 0 0 0 --------- ------------- --------- ------------- Totals 9,006 9,006 8,623 8,622 --------- ------------- --------- ------------- --------- ------------- --------- ------------- Net loss $(6,625) $(6,625) $(9,568) ($9,568) --------- ------------- --------- ------------- --------- ------------- --------- ------------- Loss per share $ (.74) $ (.74) $ (1.11) $(1.11) --------- ------------- --------- ------------- --------- ------------- --------- -------------
The effect of stock options are not included as they would be anti-dilutive because of the Company's net loss for the periods presented. 18 EX-27 3 EXHIBIT 27
5 1,000 9-MOS DEC-28-1997 DEC-30-1996 SEP-28-1997 10,205 0 50,233 0 94,362 175,778 1,261,827 609,149 911,048 127,689 579,626 0 0 45,659 (44,546) 911,048 680,381 680,381 631,867 674,599 0 0 49,072 (42,361) (15,250) 5,782 0 0 0 (27,111) (3.05) (3.05)
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