Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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:
PLAINWELL INC.
Incorporated under the laws of Delaware
I.R.S. Employer Identification No. 38-3391489
200 Allegan Street
Plainwell, Michigan 49080
(616) 685-5851
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange on which
Title of each class registered
Common Stock, par value $1 None
Preferred Stock Purchase Rights None
Securities registered pursuant to Section 12(g) of the Act: None
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. [X] Yes 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant: not applicable.
As of February 28, 1999, 500 shares of the registrant's common stock, par value
$1, were outstanding.
<PAGE>
PLAINWELL INC.
PART I
Item 1. BUSINESS
General
PLAINWELL INC., a Delaware corporation, is a leading U.S. producer and marketer
of value-added paper products for niche markets within the paper industry. We
conduct our business through two divisions: (1) the Consumer Products Division,
which produces private label consumer tissue products such as bath tissue, paper
towels, napkins and facial tissue, and (2) the Specialty Paper Division, which
produces premium coated and uncoated printing papers and release and other
technical/specialty papers. We established leading market positions in certain
of these niche markets by combining high quality products, broad product
offerings, strong customer service, efficient manufacturing and the significant
use of recycled materials.
Consumer Products Division
Our Consumer Products Division manufactures and markets a broad line of consumer
tissue products. The division's broad line of private label consumer tissue
products includes bath tissue, paper towels, napkins and facial tissue which
range from economy to premium quality grades, including premium quality paper
towels and napkins. Our product assortment is designed for the private label
consumer tissue market. With the addition of our "pop-up" tissue line in
mid-1998, we are able to offer retailers one-stop shopping for their private
label tissue needs. The division's premium products include two-ply bath tissue
and paper towels, napkins and paper towels with embossing and colored prints in
a variety of designs. In addition, from time to time the Consumer Products
Division sells excess jumbo rolls of tissue used for conversion into finished
products to other tissue converters.
Our Consumer Products Division has well established relationships with its
customer base and serves as a major private label tissue supplier to many of its
customers. The division sells its products to customers located throughout the
U.S., with a concentration near its manufacturing facilities in the Midwest and
Northeast.
Through our Consumer Products Division we own and operate two fully-integrated
tissue manufacturing and converting facilities located in Eau Claire, Wisconsin
and Ransom, Pennsylvania, with converting and distributing facilities for the
Ransom facility located in nearby Pittston, Pennsylvania. At our Consumer
Products Division, we use primarily recycled fiber as the raw material for our
tissue products.
Specialty Paper Division
Our Specialty Paper Division produces and supplies premium coated and uncoated
printing papers and release, and other technical/specialty papers throughout the
U.S. to end users which require high quality and high performance paper. Premium
printing papers are used for corporate annual reports, high-end advertising
brochures, magazines and catalogs, coffee table books, menus and high quality,
full color desktop publishing. Customers of such products include paper
merchants which market such products to graphic designers and specialty and
commercial printers. Release and other technical/specialty papers include base
papers which are silicone coated by the division's customers and used as a
protective layer or backing paper for pressure sensitive applications.
Applications include release papers for self-adhesive postage stamps, mailing
labels, bar code labels, and labels for retail food packages. Release papers are
also increasingly used to protect industrial adhesives used as fastening systems
for certain automotive trim and aircraft assembly applications as well as for
the manufacture of sound, thermal and electrical insulating materials. Other
technical/specialty papers are used for special dry releases, cigarette
mouthpieces, tamperproof labels, archival bonds and other customer specific
applications. This division's sales force, specialized technical service staff
and research and
-2-
<PAGE>
development team work closely with customers to improve our products and to
develop new products which meet market needs.
Through our Specialty Paper Division, we own and operate a paper mill and
converting plant for the production of specialty paper in Plainwell, Michigan
(the "Plainwell Mill"). At the Plainwell Mill we use a combination of
technologies to produce high recycled content paper which we believe is
comparable to virgin fiber content paper in appearance, performance and selling
price. We also blend a broad range of fibers, including a high percentage of
generally lower cost recycled fibers, into a base sheet which is then coated
using a rod coating technology.
Raw Materials
Most of our raw materials are readily available at competitive prices. When raw
material prices increase, our profitability is dependent on the timing and
degree to which we are able to pass price increases through to our customers.
The impact of raw materials price changes on our financial performance is
contingent on a number of factors including the level of inventories at the time
of a price change, the specific timing and frequency of price changes, and the
lag time that generally accompanies the implementation of selling price changes
following increases in raw materials prices.
Environmental
We are committed to abiding by the environmental, health and safety principles
of the American Forest & Paper Association. We plan each capital project to
comply with applicable environmental regulations and to enhance environmental
protection at existing facilities. We face increasing capital expenditures and
operating costs to comply with expanding and more stringent environmental
regulations, although compliance with existing environmental regulations is not
expected to have a materially adverse effect on our earnings, financial position
or competitive position.
Like other manufacturers of paper and fibre products, we are subject to the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
and similar state "Superfund" laws which impose 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 "PRP's") 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 a company even if contamination is
attributable entirely to prior owners.
In 1990, a predecessor company to our Specialty Paper Division was named as one
of several potentially responsible parties at a Superfund site in Kalamazoo,
Michigan, which has five distinct operable units. These parties may be held
jointly and severally liable for cleanup plus related costs. One operable unit
of the Kalamazoo River Site is the 12th Street Landfill, a property which we
own. We expect to pay for the entire cost of the investigation and remediation
work at this location. We have recorded a liability for the estimated cost to
remediate this unit as well as a receivable for remediation costs recoverable
under an indemnification agreement. Investigations at a second operable unit,
which includes a portion of the Kalamazoo River, continue. Environmental
remediation costs, if any, that may be incurred cannot presently be estimated.
Based on our understanding of the contamination at the Kalamazoo River operable
unit, the involvement of other potentially responsible parties and the indemnity
rights we have against the predecessor company to our Specialty Paper Division,
we do not expect this matter to have a material adverse effect on our
operations, liquidity and financial condition.
Through our Consumer Products Division, we own and operate a landfill in
Washington Township, Wisconsin, for disposal of papermaking sludge. We have
closed two of the three sections of the landfill and are
-3-
<PAGE>
monitoring these sections in accordance with requirements of state environmental
laws. We expect to begin closure of the third section by 2002. We are accruing
estimated closure costs of $1.3 million over the operating life of the landfill.
We also expect to incur monitoring costs estimated at $80,000 per year for 40
years following the closure of the landfill. We believe that, based on current
information on regulatory requirements, the estimates of the landfill closure
costs are adequate, although there can be no assurance that the cost will not
eventually exceed the amount presently estimated.
We are also potentially liable with respect to the Blue Valley Landfill
Superfund Site in Eau Claire, Wisconsin. Based on the amount of material to the
Blue Valley Landfill and our indemnification by a predecessor company, we do not
anticipate that our costs associated with this site will have a material adverse
effect on our operations, liquidity or financial condition.
In 1998 the Environmental Protection Agency published regulations establishing
standards and limitations for non-combustion sources under the Clean Air Act and
revised regulations under the Clean Water Act. The new rules require more
stringent controls on air emissions and wastewater discharges from our paper and
tissue mills. These regulations are collectively referred to as the "cluster
rules". We estimate that compliance with the cluster rules could require up to
$5,000,000 of future capital outlay.
Employees
As of December 31, 1998, we had 1,063 employees, all of whom were full-time
employees. As of December 31, 1998, 100% of our hourly production employees were
covered by collective bargaining agreements. The collective bargaining
agreements covering employees at our Consumer Products Division expire in
September 1999 and March 2000. The collective bargaining agreement covering
employees at the Specialty Paper Division expires in November 2000.
Competition and Seasonality
We have many customers who buy different products and we are not dependent on
any single customer, or group of customers, in any market segment. We have
longstanding relationships with many customers who place orders on a continuing
basis. The nature of our businesses do not allow for large backlogs of orders.
The backlog as of December 31, 1998 was $7.1 million. The second and third
quarters of each year usually generate the highest sales and earnings with our
largest businesses generally experiencing peak operational activity during the
months of May through August.
Sales are generally to well-established companies in the United States. Credit
losses have not been significant. Sales to our ten largest customers in the
aggregate accounted for approximately 60.7% of our consolidated net sales in
1998, with no single customer accounting for sales in excess of 10%.
Accordingly, we believe that the loss of any single customer would not have a
material adverse effect on our operations, liquidity or financial position.
We experience intense competition in the United States marketplace. Our
competitors include a number of large diversified paper and consumer products
companies as well as smaller low-cost regional producers that seek to displace
our products mainly through price competition. We compete on the basis of price,
product quality and performance, product development effectiveness, service and
sales and distribution support. Aggressive competitive pricing actions, which
may become more intense due to changing industry conditions, could reduce
revenues and adversely affect our operating results or financial condition. Due
to the high bulk and low density of these products, their markets are generally
regional or national, with limited imports and exports. Markets for coated and
uncoated and specialty/technical papers, however, can be impacted by increased
imports from Europe, Asia, and Latin America.
-4-
<PAGE>
Research and Development
We conduct limited continuing technical research and development projects
relating to new products and improvements of existing products and processes.
Expenditures for research and development activities are not material.
Item 2. PROPERTIES
At December 31, 1998, we owned manufacturing, converting and warehouse
facilities at the locations shown in the following table:
<TABLE>
<CAPTION>
LOCATION DIVISION TYPE OF FACILITY SQUARE FEET
-------- -------- ---------------- -----------
<S> <C> <C> <C>
Eau Claire, Wisconsin Consumer Products Manufacturing, Converting, 462,000
Distribution, Warehouse
Pittston, Pennsylvania Consumer Products Converting, Distribution, 330,000
Warehouse
Ransom, Pennsylvania Consumer Products Manufacturing 238,000
Plainwell, Michigan Specialty Paper Manufacturing, Converting, 526,000
Distribution, Warehouse
Plainwell, Michigan Specialty Paper Warehouse 40,000
</TABLE>
Our executive offices are currently located in Plainwell, Michigan, with an
anticipated move to Mendota Heights, Minnesota in June 1999. We also lease
warehouse space in Eau Claire, Wisconsin and, on a short-term, as-needed basis,
at locations in Pennsylvania and Michigan.
Item 3. LEGAL PROCEEDINGS
We are a party to various litigation matters incidental to the conduct of our
business. We do not believe that the outcome of any of these proceedings will
have a material adverse effect on our business, financial condition or result of
operations.
The information presented in "Notes to Financial Statements, Note 7 -
Commitments and Contingencies" and "Notes to Financial Statements, Note 8 -
Environmental Remediation" of the 1998 Financial Statements of our Company are
incorporated herein by reference.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Not applicable.
-5-
<PAGE>
Item 6. SELECTED FINANCIAL DATA
PLAINWELL, INC.
1998 Financial Statements
Report Supporting Workpapers
Form 10-K Item 6- Financial Information:
<TABLE>
<CAPTION>
Income
(Loss)
Before
Period Net Gross Operating Extraordinary Total Long-term
Sales Margin Income Item Assets Debt
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 17, 1997 to $ 45,921 $ 5,116 $ 1,938 $ 214 $ 51,892 $ 20,839
December 31, 1997*
Year Ended December $193,181 $ 24,036 $ 8,094 $ (5,053) $225,232 $152,915
31, 1998**
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION FOR THE YEAR ENDED DECEMBER 31, 1998
COMPARED TO THE PERIOD FROM JUNE 17, 1997 (INCEPTION DATE) TO
DECEMBER 31, 1997.
Acquisitions
On March 6, 1998, we purchased substantially all of the assets and assumed
certain related liabilities of the tissue business of Pope & Talbot, Inc., a
business that now comprises our Consumer Products Division. We paid $122.3
million in cash, including the cost of the acquisition assumed $18.8 million of
indebtedness in the form of certain industrial revenue bonds and assumed certain
other liabilities. We accounted for this acquisition using the purchase method
of accounting. The purchase price has been allocated to the estimated fair
values of the assets acquired and the liabilities assumed based on appraisals,
evaluations and other studies. The purchase cost was greater than the estimated
fair value of the net assets acquired. The operating results of the acquired
operation subsequent to the acquisition date is included in the Statement of
Operations. Details of the acquisition are included in Note 2 of the Notes to
the 1998 Financial Statements, which are incorporated herein by reference.
Net Sales
Net sales increased $147.3 million to $193.2 million for the year ended December
31, 1998 compared to $45.9 million for the period from June 17, 1997 (the
inception date) to December 31, 1997.
The increase was attributable to our acquisition of the Consumer Product
Division which added $115.3 million in net sales. Sales for our Speciality Paper
Division increased $32.0 million to $77.9 million for the year ended December
31, 1998 compared to $45.9 million for the period from June 17, 1997 to December
31, 1997. The increase in sales at our Specialty Paper Division was attributable
to a 73.9% increase in the volume of shipments, primarily attributable to a full
year's operation in 1998 as opposed to approximately six and one-half months
operation in 1997, offset by a 2.5% decrease in net selling price.
- - --------
* Financial information for Plainwell Paper Company, the predecessor to
PLAINWELL INC.
** Includes the acquisition of the Consumer Products Division and a full
year's operations for the Speciality Paper Division
-6-
<PAGE>
Cost of Sales and Gross Profit
Cost of sales increased $128.3 million to $169.1 million for the year ended
December 31, 1998 compared to $40.8 million for the period from June 17, 1997 to
December 31, 1997. The increase was a result of our acquisition of the Consumer
Products Division which added $98.2 million in cost of sales. Cost of sales for
the Speciality Paper Division increased $70.9 million to $70.9 million, due
principally to a full year's operation in 1998 as opposed to approximately six
and one-half months operation in 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $13.4 million to $16.7
million for the year ended December 31, 1998 compared to $3.3 million for the
period from June 17, 1997 to December 31, 1997. The increase was attributable to
the acquisition of the Consumer Products Division which added $8.5 in million
selling, general and administrative expenses. Selling, general and
administrative expenses for the Speciality Paper Division increased
approximately $2.5 to $5.8 million, mainly as a result of a full year's
operation in 1998 versus 1997. Corporate general and administrative expenses in
1998 were $2.4 million.
Operating Income
Operating income increased $6.2 million to $8.1 million for the year ended
December 31, 1998 compared to $1.9 million for the period from June 17, 1997 to
December 31, 1997. This increase is attributable to the acquisition of the
Consumer Products Division, as well as to the inclusion of the twelve month
period in 1998 as compared to the period from June 17, 1997 to December 31,
1997.
Interest expense has increased $13.4 million to $14.7 million for the year ended
December 31, 1998 compared to $13 million for the period from June 17, 1997 to
December 31, 1997, primarily due to borrowings and interest expense related to
our acquisition of the Consumer Products Division.
Liquidity and Capital Resources
Pursuant to the terms of the Amended and Restated Loan and Security Agreement
between our company and Fleet Business Credit Corporation (the "Loan
Agreement"), we are required to comply with various financial covenants,
including a covenant to maintain a fixed charge coverage ratio, as defined and
calculated in accordance with the Loan Agreement, of at least 1.00. Our fixed
charge coverage ratio at December 31, 1998 was 0.98 and, as such, does not
comply with such covenant. We are seeking a waiver from Fleet Business Credit
Corporation regarding our non-compliance with this covenant for the period
ending December 31, 1998.
Our primary capital requirements are for working capital, debt service, capital
expenditures and strategic acquisitions. We believe that cash generated from
operations, together with borrowings under our existing credit facility, will be
sufficient to meet our capital needs in the foreseeable future.
Current Account Changes
The March 6, 1998 acquisition of the Consumer Products Division was accounted
for as a purchase and the assets and liabilities, which have been stated at
their fair value, affect the comparison to prior periods. Accounts receivable in
1998 increased by $12.9 million, of which $12.1 million represents the
acquisition of the Consumer Products Division. Excluding the acquisition, the
increase in accounts receivable was principally due to greater volume of sales.
The number of days on which sales are outstanding increased from 27.9 days in
1997 to approximately 33.4 days in 1998 and we believe the collection period for
such accounts receivable is well within industry standards. Inventories
increased $17.1 million compared with 1997, of which $14.8 million was due to
the acquisition of the Consumer Products Division. Finished goods increased
$11.6 million, of which $9.0 million was due to the acquisition of the Consumer
Products
-7-
<PAGE>
Division and the rest was mainly due to our maintenance of higher inventory
levels in order to be more responsive to customer needs. Raw materials increased
$1.6 million, with the acquisition of the Consumer Products Division
contributing $2.0 million to this increase.
Prepaid expenses increased $2.1 million, primarily due to the acquisition of the
Consumer Products Division, which resulted in $1.7 million of the increase.
Accounts payable increased $6.8 million, of which $6.6 million was due to the
acquisition of the Consumer Products Division and the difference was due to
timings of payments. Accrued liabilities increased $13.8 million, of which $10.9
million was due to the acquisition of the Consumer Products Division and the
rest was primarily as a result to a full year's operation in 1998, compared with
partial operations during 1997.
The year-end ratio of current assets to current liabilities was 1.7:1 in 1998,
compared with 1.4:1 in 1997.
Most of the 1998 increase resulted from increases in accounts receivable and in
inventories in proportion to the balances at December 31, 1997.
Capital Commitments and Spending
Our capital expenditures were $4.5 million for the year ended December 31, 1998
compared to $0.6 million for the period from June 17, 1997 to December 31, 1997.
At the end of 1998, authorized but uncompleted capital projects totaled $12.6
million, of which $2.7 million remain to be spent in 1999 and beyond . Our 1999
capital expenditure budget is $7.8 million which, when added to the $2.7 million
carry-over from 1998, results in an estimated capital spending of $10.5 million
in 1999, compared with expenditures of $4.5 million in 1998. The major
expenditures anticipated in 1999 include $1.9 million for equipment maintenance
and replacement projects, $1.7 million for modifications to existing equipment
to improve throughput, capacity and efficiency, $1.5 million for new information
system installations and upgrades, and $2.7 million for new equipment to upgrade
our offerings of premium value-added product lines.
We spent $4.0 million in 1998 on environmental compliance, cleanup and waste
disposal at our operations. We further estimate that future capital spending to
comply with the Cluster Rules and the "GLI" may cost as much as $5.0 million. We
cannot predict if or when such rules will be promulgated such that we will be
required to incur such expenditures. In addition, we have limited
indemnification rights under various agreements with respect to certain
contingent environmental liabilities.
EBITDA, a measure of internal cash flow combining earnings before interest and
income taxes plus non-cash charges for depreciation and amortization, was $18.9
million for 1998, $16.2 million greater than EBITDA of $2.7 million for the
period from June 17, 1997 to December 31, 1997. The increase was due primarily
to the acquisition of the Consumer Products Division, which generated $17.9
million of incremental EBITDA during the year ended December 31, 1998 and which
was offset by the $1.7 million decrease in EBITDA at the Specialty Paper
Division and Corporate Divisions for the year ended December 31, 1998 compared
to $2.7 million for the period from June 17, 1997 to December 31, 1997.
Net cash used in operating activities for the year ended December 31, 1998 was
$2.7 million, up from $4.2 million of net cash used in operating activities for
the period from June 17, 1997 to December 31,1997.
At December 31, 1998 long-term debt totaled $152.9 million, compared to $23.8
million at December 1997. The ratio of long-term debt to total capital was 86.0
% at December 31, 1998, an increase of 12.3% from December 31, 1997. The ratio
of long-term debt to stockholders' equity was 651% at December 31,
-8-
<PAGE>
1998 compared to 291.6% at December 31, 1997. From a total of $35.0 million
committed domestic credit lines available at December 31, 1998, $4.9 million
were utilized.
Inflation
We believe that inflation has not had a material impact on the results of
operations of either the Consumer Products Division or the Specialty Paper
Division.
Year 2000 Readiness Disclosure
The "Year 2000" refers generally to the problems that some software may have in
determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results. Currently, many computer systems and software
products are coded to accept only two-digit entries to distinguish the 21st
century dates from 20th century dates. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
such "Year 2000" requirements. If we, or third parties with which we do
business, fail to comply with Year 2000 requirements, the integrity and
reliability of our information databases may also be adversely affected.
In connection with the 1997 acquisition of the Specialty Paper Division by our
sole stockholder, Plainwell Holding Company, a Transition Services Agreement
with Simpson Paper Company ("Simpson") the company from which we purchased such
division, pursuant to which Simpson agreed to provide certain services to us for
a period ending not later than the second anniversary of the acquisition. In
connection with the 1998 acquisition of the Consumer Products Division, we
entered into an 18-month Transition Services Agreement with Pope & Talbot, Inc.
for the purposes of supporting and enhancing the Consumer Products Division's
information systems and applications.
In addition, we engaged a consulting firm to assist in:
(1) inventorizing the Consumer Products Division's existing information
systems;
(2) determining the ongoing use and value of each such system to the Consumer
Products Division;
(3) determining processing capabilities of the systems utilized by the
Specialty Paper Division, their fitness for purpose and certain other
tasks, including Year 2000 status; and
(4) certain other tasks.
We have made an initial assessment of its present Year 2000 status. We intend to
install new software at our Specialty Paper Division and we have engaged third
parties to enhance the functionality and value of existing software and to
concurrently upgrade the related hardware at our Consumer Product Division.
Replacement of Consumer Products Division's financial systems software has begun
and is scheduled for completion in 1999. We expect that these enhancements will
ensure that we are Year 2000 compliant. Based on current estimates, we expect to
incur costs approximating $2.5 million to complete these tasks, the majority of
which are expected to be capital in nature.
We have queried those of our significant suppliers and subcontractors that do
not share information systems with us. To date, we are not aware of any such
third party with a Year 2000 issue that would materially impact our results of
operations, liquidity, or capital resources. However, we have no means of
ensuring that third parties with whom we do business will be Year 2000 ready.
The inability of third parties to complete their Year 2000 resolution process in
a timely fashion could materially impact us. The effect of non-compliance by
such third parties is not determinable.
-9-
<PAGE>
Our management believes it has an effective program in place to resolve the Year
2000 issue in a timely manner. As noted above, we have not yet completed all
necessary phases of the Year 2000 program. In the event that we do not complete
any additional phases, we would be unable to take customer orders, manufacture
and ship products, invoice customers or collect payments. In addition,
disruptions in the economy generally resulting from the Year 2000 issues could
also materially adversely affect us. We could be subject to litigation for
computer systems product failure, for example, equipment shutdown or failure to
properly date business records. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
We have contingency plans for certain critical applications and is working on
such plans for others. These contingency plans involve, among other actions,
manual workarounds, increasing inventories and adjusting staffing strategies.
Forward Looking Statements
Certain statements in the Management's Discussion and Analysis of Financial
Condition and Results of Operation for the Year Ended December 31, 1998 compared
to the period from June 17, 1997 to December 31, 1997 may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Because these forward-looking statements include
risks and uncertainties, actual future results may differ materially from those
expressed in or implied by the statements.
Factors that could cause actual results to differ include, among other things:
(1) increased competition from either domestic or foreign paper producers,
including increases in more competitive capacity through construction of
new mills or conversion of older facilities to produce competitive
products;
(2) variations in demand for our products;
(3) changes in the cost or availability of the raw materials that we use,
particularly market pulp;
(4) costs of compliance with new environmental laws and regulations;
(5) any decisions by us to make a significant acquisition or a significant
increase in production capacity; and
(6) unanticipated costs or problems associated with Year 2000 compliance.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which include changes in U.S. interest rates and
commodity prices. We do not engage in financial transactions for trading or
speculative purposes.
Interest Rate Risk
The interest payable on our Credit Facility is affected by changes in market
interest rates. As of December 31, 1998 we had outstanding debt of $615,000
under the New Credit Facility. Based on borrowings during 1997 through 1998, a
10% increase or decrease in the average cost of our New Credit Facility debt
would not be material. We do not use derivative financial instruments in our
investment portfolio.
Commodity Prices
-10-
<PAGE>
We are exposed to fluctuation in market prices for raw materials and energy
related to our manufacturing operations, for which we are generally able to pass
increases through to customers subject to timing and the degree to which such
increases can be passed on. We manage our exposure to changes in those prices
primarily through the terms of our supply and procurement contracts. This
exposure is material to our company.
Foreign Currency Risks
We have minimal sales outside of the United States and, therefore, have only
minimal exposure to foreign currency exchange risks. We do not hedge against any
foreign currency risks and believe that foreign currency exchange risk is
immaterial.
-11-
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
----
Report of Ernst & Young LLP, independent auditors........................... F-1
Balance Sheets as of December 31, 1998 and 1997............................. F-2
Statements of Operations for the year ended December 31, 1998
and the period from June 17, 1997 through December 31, 1997............... F-3
Statements of Changes in Stockholder's Equity for the year ended
December 31, 1998 and the period from June 17, 1997
through December 31, 1997.................................................. F-4
Statements of Cash Flows for the year ended December 31, 1998
and the period from June 17, 1997 through December 31, 1997.............. F-5
Notes to Financial Statements............................................... F-6
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholders PLAINWELL INC.
We have audited the accompanying balance sheets of PLAINWELL INC. (the Company)
as of December 31, 1998 and 1997, and the related statements of operations,
changes in stockholder's equity and cash flows for the year ended December 31,
1998 and the period from June 17, 1997 through December 31, 1997. Our audits
also included the financial statement schedule for the year ended December 31,
1998 and the period from June 17, 1997 to December 31, 1997, listed in the Index
as Item 14(a). These financial statements and schedule 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 financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the year
ended December 31, 1998 and the period from June 17, 1997 through December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule for the year ended December
31, 1998 and the period from June 17, 1997 to December 31, 1997, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
Ernst & Young LLP
Milwaukee, Wisconsin
February 26, 1999
F-1
<PAGE>
PLAINWELL INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------
(In Thousands, Except
Share Amounts)
<S> <C> <C>
Assets
Current assets:
Cash $ 1,846 $ 772
Accounts receivable 19,387 6,473
Inventories 27,750 10,681
Refundable income taxes 44 852
Deferred income taxes 2,768 674
Prepaid expenses 2,787 718
-------------------------
Total current assets 54,582 20,170
Properties - net 137,410 24,594
Other assets 33,240 7,128
-------------------------
$ 225,232 $ 51,892
=========================
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 14,642 $ 7,221
Notes payable 150 --
Accrued liabilities 18,093 4,309
Current portion of long-term debt -- 3,000
Income taxes payable -- 203
-------------------------
Total current liabilities 32,885 14,733
Long-term debt 152,915 20,839
Other long-term liabilities 11,958 3,360
Deferred income taxes 3,993 4,772
Commitments and contingencies (Note 7)
Stockholder's equity:
Common stock, par value $1 per share: authorized
1,000 shares; issued and outstanding 500 shares 1 1
Paid-in capital 28,319 7,973
Retained earnings (accumulated deficit) (4,839) 214
-------------------------
Total stockholder's equity 23,481 8,188
-------------------------
$ 225,232 $ 51,892
=========================
</TABLE>
See accompanying notes.
F-2
<PAGE>
PLAINWELL INC.
Statements of Operations
<TABLE>
<CAPTION>
Period from
June 17, 1997
Year ended through
December 31, December 31,
1998 1997
---------------------------
(In Thousands)
<S> <C> <C>
Net sales $ 193,181 $ 45,921
Cost of sales 169,145 40,805
-------------------------
Gross margin 24,036 5,116
Selling, general and administrative expense 15,942 3,178
-------------------------
Operating income 2,094 1,938
Interest expense 14,748 1,311
-------------------------
Income (loss) before income taxes and
extraordinary item (6,654) 627
Income tax provision (benefit) (2,198) 413
-------------------------
Net income (loss) before extraordinary item (4,456) 214
Extraordinary item- loss from early retirement of
debt, net of income tax benefit of $391 (597) --
-------------------------
Net income (loss) $ (5,053) $ 214
=========================
</TABLE>
See accompanying notes.
F-3
<PAGE>
PLAINWELL INC.
Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
Retained Earnings
Common Paid-in (Accumulated
Stock Capital Deficit) Total
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at June 17, 1997 $ 1 $ 7,973 $ -- $ 7,974
Net income -- -- 214 214
----------------------------------------------------
Balance at December 31, 1997 1 7,973 214 8,188
Equity contribution -- 24,634 -- 24,634
Dividends paid -- (4,288) -- (4,288)
Net loss -- -- (5,053) (5,053)
----------------------------------------------------
Balance at December 31, 1998 $ 1 $ 28,319 $ (4,839) $ 23,481
====================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
PLAINWELL INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from June 17,
Year ended December 1997 through December
31, 1998 31, 1997
------------------ ---------------------
(In Thousands)
<S> <C> <C>
Operating activities
Net income (loss) $ (5,053) $ 214
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 10,454 766
Amortization of goodwill 331 --
Amortization of deferred finance costs 746 124
Deferred income taxes (2,508) 68
Net changes in operating assets and liabilities;
net of effects of purchase
of Consumer Products Division:
Accounts receivable (3,293) (6,473)
Inventories (382) (1,732)
Prepaid expenses (630) (43)
Accounts payable (847) 2,375
Accrued liabilities 2,852 1,100
Income taxes 240 (812)
Other (4,606) 209
--------- ---------
Net cash used in operating activities (2,696) (4,204)
Investing activities
Capital expenditures (4,535) (563)
Purchase of Consumer Products Division (122,317) --
--------- ---------
Net cash used in investing activities (126,852) (563)
Financing activities
Net borrowings (repayments) on revolving lines of credit (6,224) 6,039
Payments of long-term debt (13,500) (500)
Issuance of long-term debt 130,000 --
Proceeds from equity contribution 24,634 --
Dividends paid (4,288) --
--------- ---------
Net cash provided by financing activities 130,622 5,539
--------- ---------
Increase in cash 1,074 772
Cash at beginning of period 772 --
--------- ---------
Cash at end of period $ 1,846 $ 772
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 9,086 $ 947
Cash paid for taxes 290 1,157
</TABLE>
See accompanying notes.
F-5
<PAGE>
PLAINWELL INC.
Notes to Financial Statements
December 31, 1998
1. Nature of Operations and Significant Accounting Policies
Nature of Operations
PLAINWELL INC. (the Company) is a leading U.S. producer and marketer of value
added paper products for niche markets within the paper industry. The Company
conducts its business through two divisions: the Consumer Products Division,
which produces private label consumer tissue products such as bath tissue, paper
towels, napkins and facial tissue and the Specialty Paper Division, which
produces premium coated and uncoated printing papers and release and other
technical/specialty papers.
The Company is a wholly owned subsidiary of Plainwell Holding Company
(Holdings), which is a wholly owned subsidiary of Plainwell Shasta Holdings,
Inc. Effective March 6, 1998, Plainwell Paper Company merged with and into the
Company and its business operates as the Specialty Paper Division of the
Company. Also effective March 6, 1998, the Company purchased substantially all
of the assets, properties and rights and assumed certain related liabilities of
the tissue business of Pope & Talbot, Inc., which operates as the Consumer
Products Division of the Company (see Note 2).
Basis of Presentation
The Company's financial statements include the accounts of the Specialty Paper
Division and Consumer Products Division. All significant intercompany
transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
using the first-in, first-out method.
Properties
Properties are carried at cost. Costs of maintenance and repairs are charged to
expense as incurred. Upon sale or retirement, the related cost and accumulated
depreciation are removed from the accounts, with the resultant gain or loss
included in income.
F-6
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
For financial reporting purposes, depreciation is computed using the
straight-line method over the useful lives of respective assets.
Estimated Life in
Years
-------------------
Mills, plant and improvements 20 - 40
Equipment 6 - 15
Furniture and fixtures 6 - 10
For income tax purposes, depreciation is calculated primarily using accelerated
methods.
Interest is capitalized in connection with the construction of major projects.
The Company capitalized $52,000 of interest in 1998; no interest was capitalized
in 1997.
Goodwill and Other Intangible Assets
The cost of goodwill is amortized on a straight-line basis over 40 years.
Deferred finance costs are amortized using the interest method over the terms of
the related debt.
Impairment of Long-Lived Assets
Goodwill, other intangible assets, and property, plant and equipment are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss will be recognized for the difference between the fair
value and carrying value of the asset or group of assets. Such analyses
necessarily involve judgment.
Revenue Recognition
Revenues are recognized when goods are shipped to the customer. In determining
net sales, revenues are reduced by commissions, freight, discounts and returns.
F-7
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Research and Development
Research and development costs are charged to expense as incurred and were
$326,000 in 1998 and $92,000 for the period June 17, 1997 to December 31, 1997.
Environmental
Environmental expenditures that increase useful lives are capitalized, while
other environmental expenditures are expensed. Liabilities are recorded when
remedial efforts are probable and the costs can be reasonably estimated. The
estimated closure costs for existing landfills based on current environmental
requirements and technologies are accrued over the expected useful lives of the
landfills. Accruals for estimated losses from environmental remediation
obligations generally are recognized no later than the completion of a remedial
feasibility study. Such accruals are adjusted as further information develops or
circumstances change. Recoveries of environmental remediation costs from other
parties are recognized as assets when their receipt is deemed probable.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain amounts in the financial statements for the period from June 17, 1997
through December 31, 1997 have been reclassified to conform to the 1998
presentation.
New Accounting Standards
During 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (the Statement),
which is required to be adopted for fiscal years beginning after June 15, 1999.
The Statement will require the Company to recognize all derivatives in the
balance sheet at fair value. As of December 31, 1998, the Company has no
derivative instruments. The Company will adopt the Statement no later than
January 1, 2000, and estimates that its effect will not be material to its
results of operations, financial position, or cash flows.
F-8
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
During 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued two Statements of Position
(SOP) that are applicable to the Company, SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," and SOP 98-5,
"Reporting on the Costs of Start-up Activities." SOP 98-1 requires that certain
computer software costs be capitalized and SOP 98-5 requires costs of start-up
activities to be expensed as incurred. Because the Company's accounting policies
were in conformity with those of SOP 98-1 and SOP 98-5, these pronouncements
will have no impact.
Customers
Sales are generally to well-established companies in the United States. Sales
are made on an unsecured basis and credit losses have not been significant.
Sales to the Company's ten largest customers in the aggregate accounted for
approximately 60.7% and 58.5% in 1998 and 1997, respectively. There were no
individual customers, however, to which net sales exceeded 10% of the Company's
net sales. The Company believes the loss of any single customer would not have a
material adverse effect on its financial position.
2. Acquisitions
On June 16, 1997, Holdings acquired from Simpson Paper Company (Simpson), in a
series of transactions, 100% of the common stock of Plainwell Paper Company and
certain inventories for $16.6 million in cash, the assumption of other
liabilities of $6.6 million, the issuance of $4.0 million of Series A Preferred
Stock and an estimated amount payable to the seller of $1.7 million. The total
purchase price, including the costs of the acquisition, was $33.5 million. The
acquisition has been accounted for using the purchase method of accounting, and
the allocation of the purchase price has been pushed down to the reporting
entity. The purchase price has been allocated to the estimated fair values of
the underlying assets acquired and liabilities assumed. Such allocations were
based on appraisals, evaluations, and other studies. The purchase cost was less
than the estimated fair value of the net assets acquired. For financial
reporting purposes, current assets were recorded at fair value and the residual
was allocated to noncurrent assets.
F-9
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
2. Acquisitions (continued)
Effective March 6, 1998, the Company purchased substantially all of the assets,
properties and rights and assumed certain related liabilities of the Consumer
Product Division which previously was the tissue business of Pope & Talbot, Inc.
The Company paid $122.3 million in cash, including the cost of the acquisition,
assumed $18.8 million of indebtedness in the form of the Eau Claire, Wisconsin
Industrial Revenue Bonds and assumed certain other liabilities. The acquisition
has been accounted for using the purchase method of accounting, and the
allocation of the purchase price has been pushed down to the reporting entity.
The purchase price has been allocated to the estimated fair values of the
underlying assets acquired and liabilities assumed. Such allocations were based
on appraisals, evaluations and other studies. The purchase cost was greater than
the estimated fair value of the net assets acquired. For financial reporting
purposes, current assets were recorded at estimated fair value and the residual
was allocated to noncurrent assets, with the excess amounts allocated to
goodwill.
The following unaudited pro forma results of operations assume the acquisitions,
merger and related transactions occurred at the beginning of each period:
Period from June 17,
Year ended 1997 through December
December 31, 1998 31, 1997
----------------------------------------------
(Unaudited, In Thousands)
Net sales $216,151 $118,724
Income (loss) before
extraordinary item (5,377) (873)
This pro forma information does not purport to be indicative of the results that
actually would have been obtained if the combined operations had been conducted
during the periods presented nor are they necessarily indicative of future
operating results.
F-10
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
3. Additional Balance Sheet Information
Balance sheet components are as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------------
(In Thousands)
<S> <C> <C>
Accounts receivable:
Trade receivables $ 19,378 $ 6,509
Miscellaneous receivables 607 382
Advance to affiliate 529 --
Allowance for sales returns (866) (395)
Allowance for doubtful accounts (261) (23)
------------------------------
$ 19,387 $ 6,473
=============================
Inventories:
Paper mill fiber $ 2,616 $ 1,985
Work in progress 4,444 1,916
Finished goods 17,173 5,650
Chemicals and other 3,517 1,130
------------------------------
$ 27,750 $ 10,681
=============================
Properties:
Land $ 2,576 $ 566
Mills, plant and improvements 27,999 4,787
Equipment 116,795 19,532
Furniture and fixtures 1,260 475
------------------------------
148,630 25,360
Less accumulated depreciation 11,220 766
------------------------------
$ 137,410 $ 24,594
=============================
Other assets:
Goodwill, net of accumulated amortization of $331 $ 16,519 $ --
Deferred finance costs, net of accumulated amortization of $746 and $124 6,684 1,148
Due from prior owners for environmental remediation costs 2,000 2,000
Prepaid pension asset 2,915 991
Inventoriable stores 4,023 1,833
Other 1,099 1,156
------------------------------
$ 33,240 $ 7,128
=============================
</TABLE>
F-11
<PAGE>
3. Additional Balance Sheet Information (continued)
PLAINWELL INC.
Notes to Financial Statements (continued)
December 31
1998 1997
---------------------------------
(In Thousands)
Accrued liabilities:
Payroll and fringe benefits $ 7,546 $ 1,642
Interest payable 5,094 178
Payable to Simpson -- 1,852
Customer incentives 1,854 --
Freight 1,177 147
Utilities 1,317 490
Other 1,105 --
---------------------------------
$18,093 $ 4,309
=================================
Other long-term liabilities:
Postretirement obligations $ 8,136 $ 1,234
Accrued pension cost 447 126
Environmental liabilities 3,375 2,000
---------------------------------
$11,958 $ 3,360
=================================
4. Long-Term Obligations and Credit Facility
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------------------
(In Thousands)
<S> <C> <C>
Series B 11% senior subordinated notes due 2008 $130,000 $ --
Term note -- 13,500
Borrowings under revolving line of credit 615 6,839
Notes payable related to tax-exempt bonds issued by:
City of Eau Claire, Wisconsin 18,800 --
City of Plainwell, Michigan 3,500 3,500
---------------------------------
152,915 23,839
Less current portion -- 3,000
---------------------------------
Long-term debt $152,915 $ 20,839
=================================
</TABLE>
F-12
<PAGE>
4. Long-Term Obligations and Credit Facility (continued)
The purchase of the Consumer Products Division was substantially funded through
the March 6, 1998 sale of Series A 11% Senior Subordinated Notes due 2008. The
Series A Senior Subordinated Notes were exchanged on October 10, 1998 with
Series B Senior Subordinated Notes due 2008. Interest on the notes is payable
semiannually on March 1 and September 1.
PLAINWELL INC.
Notes to Financial Statements (continued)
Concurrently with the consummation of the purchase of the Consumer Products
Division and the issuance of the Senior Subordinated Notes, the Company entered
into a New Credit Facility with Sanwa Business Credit Corporation. The New
Credit Facility consists of (i) a five-year revolving line of credit providing
up to $35 million of availability (the Revolver) and (ii) a five-year letter of
credit guaranty providing for a maximum amount of up to $20 million (the LC
Facility) to support obligations of the Company under the Eau Claire Industrial
Revenue Bonds. Borrowings under the Revolver are limited to a borrowing base
based on (i) 85% of the Company's eligible accounts receivable (as defined) and
(ii) 60% of the Company's eligible raw materials and finished goods inventory
(as defined) subject to a cap of $21 million. At December 31, 1998, unused
available borrowings on the Revolver were $25.9 million. Interest on this
facility is payable monthly at either (i) the prime rate plus a margin that
varies between 0% and 0.25% depending on the Company's financial performance and
leverage ratio or (ii) LIBOR plus a margin which varies between 2.0% and 2.75%
depending upon the Company's financial performance and leverage ratio. The
effective rate at December 31, 1998 was 8.0%.
The New Credit Facility is secured by the Company's common stock and tangible
and intangible assets (subject to first priority liens on the Eau Claire,
Wisconsin facility attributable to an applicable IRBs) excluding the Company's
properties located in Ransom and Pittston, Pennsylvania, having a net book value
of $46.2 million. The New Credit Facility requires the Company to maintain
compliance with certain specified financial covenants, including net funded debt
to EBITDA, fixed charge coverage and capital expenditures, and requires
repayment of amounts borrowed upon a change of control of the Company.
On March 6, 1998, the Company's existing credit facilities, consisting of a term
note in the amount of $13.5 million and a revolving line of credit, were prepaid
by the Company. In connection with the early retirement of this debt, the
Company recorded an extraordinary loss of $597,000 which represents the
unamortized balance of debt issuance costs related to the previous credit
agreement.
F-13
<PAGE>
4. Long-Term Obligations and Credit Facility (continued)
The notes payable to the City of Plainwell, Michigan, relate to tax-exempt bonds
issued for the benefit of the Company. The notes payable bear interest at a
variable rate, which was 4.5% and 4.65% at December 31, 1998 and 1997,
respectively. Interest payments are due quarterly and continue until the notes
mature in November 2007.
PLAINWELL INC.
Notes to Financial Statements (continued)
The notes payable to the City of Eau Claire, Wisconsin, relate to tax-exempt,
adjustable rate solid waste disposal revenue bonds which were assumed in
connection with the purchase of the Consumer Products Division. The notes
payable bear interest at a variable rate, which was 4.25% at December 31, 1998.
The Company has a $19.6 million letter of credit to a bank to collateralize the
note payable, for which it pays a commitment fee. Interest payments are due
quarterly and continue until the notes mature in November 2014.
Principal maturities of long-term debt are $615,000 in 2003, and $152.3 million
thereafter.
The fair value of long-term obligations approximates $123 million at December
31, 1998 based upon quoted market prices for the Senior Subordinated Notes and
the present value of future cash flows for the notes payable using the interest
rate of 8.25% on the tax-exempt bonds.
5. Employee Benefit Plans
Pension Benefits and Other Benefits
Substantially all of the Company's employees participate in Company-administered
noncontributory defined-benefit pension plans. The pension plans' assets are
primarily invested in common stock, fixed income securities, and cash
equivalents.
The Company sponsors postretirement medical and life insurance plans for certain
salaried and nonsalaried employees and eligible spouses and dependents of the
employees. The medical plans pay a stated percentage of covered medical expenses
incurred after deducting co-payments made once a stated deductible has been met.
The life insurance plans pay a defined benefit. The Company does not fund these
plans prior to actual incurrence of costs under the plans.
F-14
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
5. Employee Benefit Plans (continued)
The change in benefit obligations for the plans consists of the following
components:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
1998 1997 1998 1997
--------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of period $ 10,142 $ 9,731 $ 1,234 $ 1,168
Service cost 874 270 190 24
Interest cost 2,227 340 687 42
Acquisition 19,217 -- 7,084 --
Actuarial gain -- -- 2,005 --
Benefits paid (1,321) (199) (1,133) --
--------------------------------------------------------------------
Benefit obligation at end of period $ 31,139 $ 10,142 $ 10,067 $ 1,234
====================================================================
Change in plan assets:
Fair value of plan assets at beginning of
period $ 11,493 $ 10,724 $ -- $ --
Actual return on plan assets 3,289 482 -- --
Acquisition 20,903 -- -- --
Employer contributions 188 -- 1,133 404
Benefits paid (1,273) (199) (1,133) (404)
--------------------------------------------------------------------
Fair value of plan assets at end of period $ 34,600 $ 11,007 $ -- $ --
====================================================================
Funded status:
Funded (underfunded) status of the plan $ 3,460 $ 865 $(10,067) $ (1,234)
Unrecognized net actuarial loss (992) -- 1,931 --
--------------------------------------------------------------------
Prepaid pension asset (accrued cost) $ 2,468 $ 865 $ (8,136) $ (1,234)
====================================================================
Weighted-average assumptions as of December 31:
Discount rate 7.75% 7.50% 7.00% 7.50%
Expected return on plan assets 9.00% 9.00% N/A N/A
Rate of compensation increase 5.00% 5.00% N/A N/A
</TABLE>
F-15
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
5. Employee Benefit Plans (continued)
For measurement purposes, an 8.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998. The rate was assumed to
decrease gradually to 5.0% for 2004 and remain at that level thereafter.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
1998 1997 1998 1997
------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 874 $ 270 $ 190 $ 24
Interest cost 2,179 430 687 42
Expected return on plan assets (2,799) (606) -- --
Recognized net actuarial loss -- -- 74 --
------------------------------------------------------------
Net periodic benefit cost $ 254 $ 94 $ 951 $ 66
============================================================
</TABLE>
The funding policy for all of the pension plans is to make contributions to the
plans that are between the minimum amounts required by the Employee Retirement
Income Security Act (ERISA) and the maximum amounts deductible under current
income tax regulations.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
One Percentage One Percentage
Point Point
Increase Decrease
------------------------------------------------
<S> <C> <C>
Effect on total service and interest cost components $978,000 $866,000
Effect on postretirement benefit obligation 99,000 87,000
</TABLE>
Defined Contribution Retirement Plans
The Company sponsors defined benefit 401(k) retirement plans covering
substantially all salaried and hourly employees. The Company matches a
percentage of the participants' qualifying contributions. Total Company
contribution expense was $463,000 in 1998 and $157,000 for the period June 17,
1997 through December 31, 1997.
F-16
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
6. Income Taxes
The income tax provision (benefit) consists of the following components:
Period from June 17,
Year ended 1997 through December
December 31, 1998 31, 1997
----------------------------------------
(In Thousands)
Current:
Federal $ -- $ 48
State 310 297
----------------------------------------
310 345
Deferred:
Federal (2,305) 68
State (203) --
----------------------------------------
(2,508) 68
----------------------------------------
Provision for income taxes $(2,198) $ 413
========================================
The income tax provision (benefit) was different from the amount computed by
applying the United States statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Period from June 17,
Year ended 1997 through December
December 31, 1998 31, 1997
-----------------------------------------------
(In Thousands)
<S> <C> <C>
Provision at federal statutory rates $(2,262) $ 213
State income and franchise taxes, net of
federal income tax benefit 70 196
Other (6) 4
-----------------------------------------------
Provision for income taxes $(2,198) $ 413
===============================================
</TABLE>
F-17
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
6. Income Taxes (continued)
Deferred income taxes are determined based on the estimated future tax effects
of differences between the financial statement and tax bases of assets and
liabilities, given the provisions of the enacted tax laws. The net deferred
income tax liabilities and assets are composed of the following:
December 31
1998 1997
----------------------------
(In Thousands)
Deferred income tax liabilities:
Properties $(7,453) $(5,119)
Environmental recoveries (740) (740)
Pension (260) (368)
Goodwill (233) --
----------------------------
(8,686) (6,227)
Deferred income tax assets:
Accounts receivable 417 88
Inventories 348 162
Vacation and other employee benefits 1,324 339
Inventoriable stores 170 219
Environmental liabilities 1,267 740
Postretirement obligations 787 457
Health insurance accrual 342 85
Workers' compensation accrual 355 --
Net operating loss 2,433 --
Other 18 39
----------------------------
7,461 2,129
----------------------------
Net deferred income tax liability $(1,225) $(4,098)
============================
Included in the balance sheet as:
Current deferred income tax asset $ 2,768 $ 674
Noncurrent deferred income tax liability (3,993) (4,772)
----------------------------
$(1,225) $(4,098)
============================
The Company has net operating loss carryforwards for federal income tax purposes
of approximately $7,000,000 which will expire in 2018.
F-18
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
7. Commitments and Contingencies
The Company is involved in various legal proceedings in the ordinary course of
business. Although the final outcome of any legal proceeding or environmental
matter is subject to a great many variables and cannot be predicted with any
degree of certainty, the Company presently believes that the ultimate outcome
from these proceedings would not have a material adverse effect on the current
financial position or on the operations of the Company; however, in any given
future reporting period such proceedings or matters could have a material effect
on the results of operations.
In connection with the purchase of the Consumer Products Division, the Company
entered into an 18-month Transition Services Agreement through September 30,
1999, with the former owner under which the former owner provides certain
information systems support and development services. Total amounts incurred by
the Company in 1998 under this agreement were $2,064,000.
The Company leases certain facilities, vehicles and equipment over varying
periods. None of the agreements contain unusual renewal or bargain purchase
options. As of December 31, 1998, future minimum rental payments under
noncancelable operating leases with an initial term greater than one year were
as follows:
1999 $1,098,000
2000 1,037,000
2001 741,000
2002 542,000
2003 453,000
----------
Total future minimum rental payments $3,871,000
==========
Rent expense was $1,159,000 in 1998 and $192,000 in the period June 17, 1997
through December 31, 1997.
F-19
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
8. Environmental Remediation
The Company is committed to abiding by the environmental, health and safety
principles of the American Forest & Paper Association. Each capital project has
been planned to comply with applicable environmental regulations and to enhance
environmental protection at existing facilities. The Company faces increasing
capital expenditures and operating costs to comply with expanding and more
stringent environmental regulations, although compliance with existing
environmental regulations is not expected to have a materially adverse effect on
the Company's earnings, financial position, or competitive position.
The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) and similar state "Superfund" laws impose 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 cleanup 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 a company even if contamination is
attributable entirely to prior owners.
The Company has been identified by certain governmental entities or other
parties as a potentially responsible party with respect to possible
investigation and cleanup costs associated with certain contaminated sites. The
Company has recorded a liability for the estimated work at the locations and a
receivable for remediation costs recoverable under related indemnification
agreements.
In 1990, a predecessor company to the Company was named as one of several PRPs
at a Superfund site in Kalamazoo, Michigan, which has five distinct operable
units. PRPs may be held jointly and severally liable for cleanup plus related
costs. One operable unit of the Kalamazoo River Site is the 12th Street
Landfill, a property wholly owned by the Company. The Company expects to pay for
the entire cost of the investigation and remediation work at this location. The
Company has recorded a liability for the estimated cost to remediate this unit
as well as a receivable for remediation costs recoverable under an
indemnification agreement. Investigations at a second operable unit, which
includes a
F-20
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
8. Environmental Remediation (continued)
portion of the Kalamazoo River, continue. Environmental remediation costs, if
any, that may be incurred cannot presently be estimated. Based on management's
understanding of the contamination at the Kalamazoo River operable unit, the
involvement of other PRPs and the indemnity rights the Company has against the
Predecessor Company, the Company does not expect this matter to have a material
adverse effect on operations, liquidity and financial condition.
The Company owns and operates a landfill in Washington Township, Wisconsin, for
disposal of its papermaking sludge. The Company has closed two of the three
sections of the landfill and is currently monitoring those sections in
accordance with requirements of state environmental laws. The Company expects to
begin closure of the third section by 2002. Estimated closure costs of $1.3
million are being accrued over the operating life of the landfill. Monitoring
costs estimated at $80,000 per year will be required for 40 years following the
closure of the landfill. The Company believes that, based on current information
and regulatory requirement, the estimates of the landfill closure costs are
adequate, although there can be no assurance that the cost will not eventually
exceed the amount presently estimated.
The Company is also considered a PRP with respect to the Blue Valley Landfill
Superfund Site in Eau Claire, Wisconsin. Based on the amount of material sent to
the Blue Valley Landfill and the Company's indemnification with a predecessor
company, the Company does not anticipate that its costs associated with the site
will have a material adverse effect on its operations, liquidity or financial
condition.
In 1998, the EPA published regulations establishing standards and limitations
for non-combustion sources under the Clean Air Act and revised regulations under
the Clean Water Act. The new rules require more stringent controls on air
emissions and wastewater discharges from the Company's paper and tissue mills.
These regulations are collectively referred to as the "cluster rules." The
Company estimates that future capital spending to comply with the cluster rules
could be up to $5 million.
9. Paid-in Capital and Stockholder's Equity
In connection with the purchase of the Consumer Products Division, the Company
recorded a dividend to Holdings of $4,288,000 to permit Holdings to redeem the
preferred stock of Holdings held by Simpson as required pursuant to change in
control provisions. In connection with this same acquisition, an additional
equity investment of $24,634,000, net of the cost of raising equity, was
contributed to the Company.
F-21
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
9. Paid-in Capital and Stockholder's Equity (continued)
In December 1998, Plainwell Shasta Holdings Inc. was created as the parent of
Plainwell Holdings, Inc. in a non-taxable transaction. In connection with this
restructuring, Plainwell Shasta Holdings Inc. created two affiliated entities to
the Company, Shasta Holdings, Inc. and Shasta Paper Company.
In January 1999, Shasta Paper Company acquired the pulp and paper operations of
Simpson Paper Company located in Anderson, California. In connection with this
transaction, the Company recorded a dividend of $4 million to its parent to
consummate the transaction. Upon the completion of this acquisition, the Company
will have certain affiliated company transactions, including intercompany sales,
shared sales and marketing costs, shared corporate administrative costs, and
shared information services costs.
10. Business Segment Information
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as a source of the Company's
reportable segments. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No.
131 did not affect the results of operations or financial position.
The Company's business segments are (1) the Consumer Products Division, which
produces private label consumer tissue products, such as bath tissue, paper
towels, napkins, and facial tissue and (2) the Specialty Paper Division, which
produces premium coated and uncoated printing papers and release and other high
performance industrial specialty papers. The markets in which the Company sells
its products are affected by several factors, including industry capacities and
the level of economic growth in domestic and international markets. The
principal markets for the Company's products are in the United States.
Segment operating profit is revenue less specific and allocable operating
expenses. General net corporate expenses include nonoperating overhead, interest
expense, amortization of deferred finance costs and interest and other income
(expense). Income before interest and income taxes is used to measure the
performance of the segments and allocate resources.
F-22
<PAGE>
PLAINWELL INC.
Notes to Financial Statements (continued)
10. Business Segment Information (continued)
Segment identifiable assets are those which are directly used in the segment
operations. Corporate assets are principally cash and cash equivalents, deferred
finance costs, refundable income taxes, deferred income taxes, and long-term
debt not specifically collateralized by business segment assets.
Financial information by business segment follows:
<TABLE>
<CAPTION>
Consumer Specialty
Products Paper
Division Division Corporate Total
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1998:
Net sales $115,265 $ 77,916 $ -- $193,181
Income (loss) before interest, income
taxes and extraordinary item 8,617 1,167 (2,436) 7,348
Interest expense 640 157 13,951 14,748
Depreciation and amortization 9,361 1,424 -- 10,785
Capital expenditures 3,749 786 -- 4,535
Total assets 163,065 51,087 11,080 225,232
December 31, 1997:
Net sales $ -- $ 45,921 $ -- $ 45,921
Income (loss) before interest and income
taxes -- 2,415 (601) 1,814
Interest expense -- -- 1,311 1,311
Depreciation and amortization -- 766 -- 766
Capital expenditures -- 563 -- 563
Total assets -- 48,304 3,588 51,982
</TABLE>
F-23
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following table sets forth the names, ages as of February 28, 1999, and a
brief account of the business experience of each person who is a director or
executive officer of our company.
Name Age Position
William I. New................. 54 Chairman, Chief Executive Officer and
President
Francis J. Fitzpatrick......... 58 President--Specialty Paper Division
Gary A. Hayden................. 49 Vice President and General
Manager--Consumer Products Division
Jeffrey A. Arnesen............. 40 Senior Vice President--Finance and
Secretary
David F. Thomas................ 48 Director
John D. Weber.................. 34 Director
William L. New has served as Chairman of the Board of Directors, Chief Executive
Officer and President of the Plainwell Paper Company since June 1997. From
September 1995 through May 1997, Mr. New was President and a Director of the New
Group, Inc., consultants to the paper industry. From 1991 to August 1995, Mr.
New founded and was Chairman, Chief Executive Officer and President of Encore
Paper Company. Prior to that, from 1970 to 1991, Mr. New held various positions
at Wisconsin Tissue, previously an affiliate of Philip Morris (which owned
Plainwell Paper Company over this tenure), including Executive Vice President
and Chief Operating Officer. Since 1991, Mr. New has served as a director of
Integrated Paper Services.
Francis J. Fitzpatrick has served as President of the Speciality Paper Division
since January of 1999. Mr. Fitzpatrick was Executive Vice President and Chief
Operating Officer of Plainwell Paper Company and the Speciality Paper Division
of our company from June 1997. Prior to that he was a principal in Longmeadow
Associates which provided consulting services for product and market development
in the paper industry.
-12-
<PAGE>
From 1982 to 1990, Mr. Fitzpatrick was President of Westfield River Paper
Company. Prior to 1982, he was Director of marketing and sales for the Nicolet
Division, previously an affiliate of Philip Morris (which owned Plainwell Paper
Company over this tenure).
Gary A. Hayden has served as Vice President and General Manager--Consumer
Products Division from since June 1997 and served as Division Manufacturing
Manager for the tissue business of Pope & Talbot from 1996 to 1998. Prior to
that, Mr. Hayden served as Resident Manager for the Eau Claire, Wisconsin
facility. From 1977 to 1993 Mr. Hayden worked in various operational and
managerial capacities for Pope & Talbot.
Jeffrey A. Arnesen has served as Senior Vice President of Finance for PLAINWELL
INC., since July 1998. Prior to that he was President of Michigan Carton
Company, an operating division of Field Container Company, L.P., which is a
privately held integrated manufacturer of folding cartons, recycled paperboard
and printing inks. Prior to that he was Vice President, Corporate Controller at
Field Container Company. From 1981 to 1992, he was with BDO Seidman, an
international public accounting firm focusing on emerging businesses.
David F. Thomas is a director of our company. Mr. Thomas has been President of
399 Venture Partners since December 1994. In addition, Mr. Thomas has been a
Managing Director of Citicorp Venture Capital, Ltd., an affiliate of 399 Venture
Partners, for over five years. Mr. Thomas is currently a director of Lifestyle
Furnishings International Ltd., Galey & Lord, Inc., Anvil Knitwear, Inc., Stage
Stores, Inc., Neenah Foundry Company and a number of private companies.
John D. Weber is a director of our company. Since 1994, Mr. Weber has been a
Vice President at Citicorp Venture Capital, Ltd. Previously, Mr. Weber worked at
Putnam Investments from 1992 through 1994. Mr. Weber is a director of Anvil
Knitwear, Inc., Neenah Foundry Company and a number of private companies.
We will reimburse directors for any out-of-pocket expenses incurred by them in
connection with services provided in their capacity as directors. In addition,
we may compensate directors for services provided in such capacity.
Item 11. EXECUTIVE COMPENSATION
The name of each of our executive officers and their compensation for the year
ended December 31, 1998 and the period June 17, 1997 (inception date) to
December 31, 1997 are summarized as follows:
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Principal Year Annual Compensation Salary Bonus All Other Compensations
Position ($) ($) $
<S> <C> <C> <C> <C>
William L. New 1998 $325,959 $-- $--
President and Chief 1997 $168,030 $-- $--
Executive Officer
Francis J. Fitzpatrick 1998 $140,004 $-- $143,439*
Vice President 1997 $108,159 $-- $--
Gary A. Hayden 1998 $125,513 $-- $--
Vice President 1997 $-- $-- $--
</TABLE>
- - --------
* All other compensation for Francis J. Fitzpatrick includes Automobile
Allowance, Relocation Expenditures, and other compensation.
-12-
<PAGE>
Compensation Committee Interlocks and Insider Participation
Messrs. Thomas and Weber comprise the members of the Compensation Committee of
the Board of Directors.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of our issued and outstanding capital stock is owned by Plainwell Holding
Company. All of the issued and outstanding capital stock of Plainwell Holding
Company is owned by Plainwell Shasta Holding Company. Plainwell Holding Company,
through an investment in Plainwell Shasta Holding Company, is an affiliate of
399 Venture Partners. The management shareholders also have, through an
investment in Plainwell Shasta Holding Company, a beneficial interest in our
company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December of 1998, Plainwell Shasta Holdings, Inc. was created as the parent
of Plainwell Holdings, Inc. in a non-taxable transaction. In connection with
this restructuring, Plainwell Shasta Holdings, Inc. in turn created two entities
affiliated to our company: Shasta Holdings, Inc. and Shasta Paper Company. In
January, 1999, Shasta Paper Company acquired the pulp and paper operations of
Simpson Paper Company located in Anderson, California. In connection with this
acquisition, we recorded a dividend of $4.0 million that was issued to Plainwell
Shasta Holdings, Inc. Since the acquisition of and the issuance of the dividend,
our company has engaged in a series of affiliated company transactions,
including intercompany sales, shared sales and marketing costs, shared corporate
administrative costs, shared corporate administrative costs and shared
information services costs. The terms and conditions of such transactions have
been determined to be fair to the noteholders from a financial perspective in
accordance with the terms and conditions of the Indenture.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Document List
1. Financial Statements
The balance sheet of Plainwell Inc. as of December 31, 1998 and Plainwell Paper
Company (its predecessor company) as of December 31, 1997, and the related
statements of operations, changes in stockholder's equity, and cash flows for
the year ended December 31, 1998 and the period June 17, 1997 through December
31, 1997 including the notes thereto, is set forth under Item 8 of this Annual
Report. The "Report of Independent Accountants" as presented in the 1998
Financial Statements of PLAINWELL INC., also set forth under Item 8 of this
Annual Report.
2. Financial Statement Schedules
No other schedules are files as part of this Annual Report because they are not
applicable or are not required.
Schedule II (Valuation and Qualifying Accounts for the year ended December 31,
1998 and the period June 17, 1997 through December 31, 1997) is found on page 16
of this Annual Report.
The Report of Independent Accountants is found on page 15 of this Annual Report.
-13-
<PAGE>
3. Exhibits filed or incorporated by reference
The exhibits that are required to be filed or incorporated by reference herein
are listed in the Exhibit Index found on pages 17 -18 hereof.
b. Reports on Form 8-K
None
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.
PLAINWELL INC.
(Registrant)
March 30, 1999 By /s/ JEFFREY A. ARNESEN
Jeffrey A. Arnesen
Senior Vice President Finance and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated.
By /s/ WILLIAM L. NEW
William L. New
Chairman of the Board
By /s/ DAVID F.THOMAS
David F. Thomas
Director
By /s/ JOHN D. WEBER
John D. Weber
Director
Each of the above signatures is affixed as of March 30, 1999.
-14-
<PAGE>
PLAINWELL INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Balance at Additions
beginning charged to costs Balance
Description of period and expenses Deductions end of period
- - -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Valuations accounts deducted
from assets to which they
apply--for accounts
receivable allowances
Year Ended December 31, 1998 $ 418 $ 4,153 $3,444 $1,127
Period from June 17, 1997
through December 31, 1997 $ -- $1,785 $1,367 $ 418
</TABLE>
-15-
<PAGE>
EXHIBITS INDEX
EXHIBIT DESCRIPTION
NUMBER
- - ----------- -----------------------------------------------------------------
*3.1 Certificate of Incorporation of PLAINWELL INC. (Filed as Exhibit
3.1 to Form S-4 filed September 3, 1998. Registration number
333-51857 and incorporated herein by reference.)
*3.2 By-laws of PLAINWELL INC. (Filed as Exhibit 3.2 to Form S-4 filed
September 3, 1998. Registration number 333-51857 and incorporated
herein by reference.)
*4.1 Indenture dated as of March 6, 1998 between PLAINWELL INC. and
United States Trust Company of New York (Filed as Exhibit 4.1 to
Form S-4 filed September 3, 1998. Registration number 333-51857
and incorporated herein by reference.)
*4.2 Purchase Agreement dated as of March 3, 1998 among PLAINWELL
INC., Bear, Stearns & Co. Inc. and Salomon Brothers Inc. (Filed
as Exhibit 4.2 to Form S-4 filed September 3, 1998. Registration
number 333-51857 and incorporated herein by reference.)
*4.3 Exchange and Registration Rights Agreement dated as of March 6,
1998 among PLAINWELL INC., Bear, Stearns & Co. Inc. and Salomon
Brothers Inc. (Filed as Exhibit 4.3 to Form S-4 filed September
3, 1998. Registration number 333-51857 and incorporated herein by
reference.)
*10.1 Amended and Restated Loan and Security Agreement dated as of
March 6, 1998 by and between PLAINWELL INC. and Sanwa Business
Credit Corporation as Agent for the Lenders (Filed as Exhibit
10.1 to Form S-4 filed September 3, 1998. Registration number
333-51857 and incorporated herein by reference.)
*10.2 Agreement of Purchase and Sale dated as of January 22, 1998, by
and among Pope & Talbot, Inc., Pope & Talbot, Wis., Inc.,
Plainwell Holding Company and PLAINWELL INC. (Filed as Exhibit
10.2 to Form S-4 filed September 3, 1998. Registration number
333-51857 and incorporated herein by reference.)
*10.3 Transition Services Agreement dated as of March 6, 1998 by and
between PLAINWELL INC. and Pope & Talbot, Inc. (Filed as Exhibit
10.3 to Form S-4 filed September 3, 1998. Registration number
333-51857 and incorporated herein by reference.)
*10.4 Transition Services Agreement dated as of June 16, 1997 by and
between Plainwell Paper Company and Simpson Paper Company (Filed
as Exhibit 10.4 to Form S-4 filed September 3, 1998. Registration
number 333-51857 and incorporated herein by reference.)
24
<PAGE>
*10.12 Collective Bargaining Agreement dated November 29, 1995 by and
between Pope & Talbot, Inc., CPD - Ransom/Pittston Township and
United Paperworkers International Union AFL-CIO and
Ransom/Pittston Township, Local Number 1448 (Filed as Exhibit
10.12 to Form S-4 filed September 3, 1998. Registration number
333-51857 and incorporated herein by reference.)
*10.13 Collective Bargaining Agreement dated April 1, 1997 by and
between Pope & Talbot, Wis., Inc., Eau Claire, Wisconsin and the
United Paperworkers International Union and its affiliated Local
No. 42 (Filed as Exhibit 10.13 to Form S-4 filed September 3,
1998. Registration number 333-61857 and incorporated herein by
reference.)
*10.14 Loan Agreement dated November 1, 1983 by and between Economic
Development Corporation of the City of Plainwell and Plainwell
Paper Company (Filed as Exhibit 10.14 to Form S-4 filed September
3, 1998. Registration number 333-51857 and incorporated herein by
reference.)
*10.15 Indenture of Trust dated November 1, 1983 by and among Economic
Development Corporation of the City of Plainwell and First &
Merchants National Bank (Filed as Exhibit 10.15 to Form S-4 filed
September 3, 1998. Registration number 333-51857 and incorporated
herein by reference.)
10.16 Amendment No. 1 to the Amended and Restated Loan and Security
Agreement dated June 3, 1998 by and between Plainwell Inc., Sanwa
Business Credit Corporation and Lasalle National Bank.
27.1 Financial Data Schedule
AMENDMENT NO. 1
TO
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This AMENDMENT NO. 1 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(this "Amendment") is entered into as of this 3rd day of June, 1998, by and
between PLAINWELL INC., a Delaware corporation ("Borrower"), SANWA BUSINESS
CREDIT CORPORATION, a Delaware corporation ("Agent"), for itself as a Lender and
as Agent for Lenders, and LASALLE NATIONAL BANK, as Lender. Unless otherwise
specified herein, capitalized terms used in this Amendment shall have the
meanings ascribed to them in the Loan Agreement (as hereinafter defined).
RECITALS
WHEREAS, Borrower, Agent and Lenders have entered into that certain Amended
and Restated Loan and Security Agreement, dated as of March 6, 1998 (as further
amended, supplemented, restated or otherwise modified from time to time, the
"Loan Agreement"); and
WHEREAS, Borrower has requested that Agent and Lenders enter into certain
amendments to the Loan Agreement; and
WHEREAS, Agent and Lenders have agreed to enter into certain amendments to
the Loan Agreement upon the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the mutual execution hereof and other
good and valuable consideration, the parties hereto agree as follows:
SECTION 1. Definitions. The definitions of "Fixed Charges", "Funded Debt",
"Leverage Ratio" and "Subordinated Notes" shall be amended to read in their
entirety as follows:
"Fixed Charges" shall mean, for any fiscal period, determined for the
Borrower and its Subsidiaries on a consolidated basis, scheduled principal
payments on its Indebtedness plus interest expenses accrued, in each case,
during such period.
"Funded Debt" shall mean, with respect to any Person, all Indebtedness for
borrowed money evidenced by notes, bonds, debentures, or similar evidences
of Indebtedness and which by its terms matures more than one year from, or
is directly or indirectly renewable or extendible at such Person's option
under a revolving credit or similar agreement obligating
<PAGE>
the lender or lenders to extend credit over a period of more than one year
from the date of creation thereof, and specifically including Capital Lease
Obligations, current maturities of long-term debt, revolving credit and
short-term debt extendible beyond one year at the option of the debtor, and
also including, in the case of Borrower, without duplication, the
Obligations, including the Eau Claire L/C Liability and Lender Guaranty
Liabilities, and Guaranteed Indebtedness consisting of guaranties of Funded
Debt of other Persons.
"Leverage Ratio" shall mean, for Borrower on a consolidated basis, as of
the last day of any Fiscal Quarter, the ratio of (i) Funded Debt less
Subordinated Debt and less Unrestricted Cash to (ii) EBITDA for the
trailing twelve months (or shorter period if specified) then ended.
"Subordinated Notes" shall mean $130,000,000 principal amount of 11% Senior
Subordinated Notes due 2008.
SECTION 2. Financial Covenants. The financial covenants set forth in
subsections 7.11 and 7.12 of the Loan Agreement are amended to read in their
entirety as follows:
7.11. Fixed Charge Coverage Ratio.
The Borrower shall maintain a Fixed Charge Coverage Ratio measured as
of the last day of each Fiscal Quarter for the trailing twelve months then
ended (or for each Fiscal Quarter ending on or prior to March 31, 1999 for
the period commencing on the Closing Date and ending on the last day of
such Fiscal Quarter) equal to or greater than the respective Fixed Charge
Coverage Ratios set forth below:
2
<PAGE>
---------------------------------------------------------------
Measurement Fixed Charge
Period Ending: Coverage Ratio:
---------------------------------------------------------------
June 30, 1998 1.0 to 1.0
---------------------------------------------------------------
September 30, 1998 1.0 to 1.0
---------------------------------------------------------------
December 31, 1998 1.0 to 1.0
---------------------------------------------------------------
March 31, 1999 1.0 to 1.0
---------------------------------------------------------------
June 30, 1999 1.0 to 1.0
---------------------------------------------------------------
September 30, 1999 1.0 to 1.0
---------------------------------------------------------------
December 31, 1999 1.0 to 1.0
---------------------------------------------------------------
March 31, 2000 1.1 to 1.0
---------------------------------------------------------------
June 30, 2000 1.15 to 1.0
---------------------------------------------------------------
September 30, 2000 1.15 to 1.0
---------------------------------------------------------------
December 31, 2000 and the last day of 1.25 to 1.0
each Fiscal Quarter thereafter
---------------------------------------------------------------
7.12. Leverage Ratio.
The Borrower shall maintain a Leverage Ratio of not more than 2.0 to
1.0 measured as of the last day of each Fiscal Quarter for the trailing
twelve months then ended (or for each Fiscal Quarter ending on or prior to
March 31, 1999 for the period commencing on the Closing Date and ending on
the last day of such Fiscal Quarter).
SECTION 3. Representations And Warranties Of Borrower. Borrower represents
and warrants that:
(a) the execution, delivery and performance by Borrower of this
Amendment have been duly authorized by all necessary corporate action and
this Amendment is a legal, valid and binding obligation of Borrower
enforceable against Borrower in accordance with its terms, except as the
enforcement thereof may be subject to (i) the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors' rights generally and (ii) general principles of equity
(regardless of whether such enforcement is sought in a proceeding in equity
or at law);
(b) each of the representations and warranties contained in the Loan
Agreement is true and correct in all material respects on and as of the
date hereof as if made on the date hereof, except to the extent that such
representations and warranties expressly relate to an earlier date;
(c) neither the execution, delivery and performance of this Amendment
nor the consummation of the transactions contemplated hereby does or shall
contravene, result in a breach of, or violate (i) any provision of
3
<PAGE>
Borrower's certificate or articles of incorporation or bylaws, (ii) any law
or regulation, or any order or decree of any court or government
instrumentality, or (iii) any indenture, mortgage, deed of trust, lease,
agreement or other instrument to which Borrower is a party or by which
Borrower or any of its property is bound, except in any such case to the
extent such conflict or breach has been waived by a written waiver
document, a copy of which has been delivered to Agent on or before the date
hereof; and
(d) after giving effect to this Amendment, no Default or Event of
Default shall have occurred and be continuing under the Loan Agreement.
SECTION 4. Condition To Effectiveness. This Amendment shall be effective
upon satisfaction of the following conditions precedent:
(a) Execution and delivery of this Amendment by the parties hereto.
(b) The representations and warranties contained herein shall be true
and correct in all respects.
SECTION 5. Reference To And Effect Upon The Loan Agreement.
(a) Except as specifically amended above, the Loan Agreement and the
other Financing Agreements shall remain in full force and effect and are
hereby ratified and confirmed.
(b) The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of Agent or any
Lender under the Loan Agreement or any Financing Agreement, nor constitute
a waiver of any provision of the Loan Agreement or any Financing Agreement,
except as specifically set forth herein. Upon the effectiveness of this
Amendment, each reference in the Loan Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of similar import shall mean and
be a reference to the Loan Agreement as amended hereby.
SECTION 6. Costs And Expenses. Borrower agrees to reimburse Agent for all
fees, costs and expenses, including the fees, costs and expenses of counsel or
other advisors for advice, assistance, or other representation in connection
with this Amendment.
SECTION 7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS
PROVISIONS) OF THE STATE OF ILLINOIS.
SECTION 8. Headings. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purposes.
4
<PAGE>
SECTION 9. Counterparts. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed an original, but
all such counterparts shall constitute one and the same instrument.
(signature page follows)
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto hereupon set their hands as of the
date first written above.
PLAINWELL INC.
By: /s/George E. Mangarelli
--------------------------------------
Title: Executive Vice President and
Chief Executive Officer
-----------------------------------
SANWA BUSINESS CREDIT CORPORATION
By: /s/Lawrence J. Placik
--------------------------------------
Title: Vice President
-----------------------------------
LaSALLE NATIONAL BANK
By: /s/ Thomas J. Ranville
--------------------------------------
Title: Vice President
-----------------------------------
5
EXHIBIT 21.1
SUBSIDIARY CORPORATIONS OF PLAINWELL INC.
December 31, 1998
State of
Name Incorporation
None
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLAINWELL
INC. 1998 ANNUAL FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,846,000
<SECURITIES> 0
<RECEIVABLES> 19,387,000
<ALLOWANCES> 1,127,000
<INVENTORY> 27,750,000
<CURRENT-ASSETS> 54,582,000
<PP&E> 137,410,000
<DEPRECIATION> 10,454,000
<TOTAL-ASSETS> 225,232,000
<CURRENT-LIABILITIES> 32,855,000
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 23,480,000
<TOTAL-LIABILITY-AND-EQUITY> 225,232,000
<SALES> 193,181,000
<TOTAL-REVENUES> 193,181,000
<CGS> 169,145,000
<TOTAL-COSTS> 185,833,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,348,000
<INTEREST-EXPENSE> 14,002,000
<INCOME-PRETAX> (6,654,000)
<INCOME-TAX> (2,198,000)
<INCOME-CONTINUING> (4,456,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (587,000)
<CHANGES> 0
<NET-INCOME> (5,053,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
