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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended December 31, Commission File Number 1-2300
1994
SCOTT PAPER COMPANY
A Pennsylvania Corporation IRS Employer Identification No. 23-
1065080
Scott Plaza
Philadelphia, Pennsylvania 19113-1585
Telephone (610) 522-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
-------------------------------- ----------------------------------------------
<S> <C>
Cumulative Senior Preferred
Shares (without par value)
Series designated $3.40 Cumula-
tive Senior Preferred Shares.. Philadelphia Stock Exchange
Series designated $4.00 Cumula-
tive Senior Preferred Shares.. Philadelphia Stock Exchange
Common Shares (without par val- New York Stock Exchange; Philadelphia Stock
ue)............................ Exchange; Pacific Stock Exchange
</TABLE>
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT. THE AGGREGATE MARKET VALUE SHALL BE COMPUTED BY REFERENCE TO
THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE BID AND ASKED PRICES OF
SUCH STOCK, AS OF A SPECIFIED DATE WITHIN 60 DAYS PRIOR TO THE DATE OF FILING:
$5,839,610,000 AT THE CLOSE OF BUSINESS ON FEBRUARY 17, 1995.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: 76,086,131 COMMON SHARES
OUTSTANDING AS OF FEBRUARY 17, 1995.
DOCUMENTS INCORPORATED BY REFERENCE: (1) THE COMPANY'S 1994 ANNUAL REPORT TO
SHAREHOLDERS INCORPORATED PARTIALLY IN PARTS I AND II HEREOF AND (2) THE
COMPANY'S PROXY STATEMENT DATED MARCH 10, 1995, INCORPORATED PARTIALLY IN PARTS
II AND III HEREOF.
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1
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PART I
ITEM 1. BUSINESS.
Scott Paper Company continues a business established in 1879. It was
incorporated in Pennsylvania in 1922 as the successor to a company of the same
name incorporated in Pennsylvania in 1905. Its executive offices are located at
Scott Plaza, Philadelphia, Pennsylvania 19113-1585 (tel. 610/522-5000). As used
herein, the terms "Scott" and "Company" refer to Scott Paper Company and its
consolidated domestic and international subsidiaries unless the context
otherwise indicates. Information contained herein is for 1994 or as of December
31, 1994, except as otherwise specified.
For the past several years, the Company's business has consisted of two
segments, tissue products and printing and publishing papers. In December 1994,
the Company sold its printing and publishing papers business, consisting
principally of its wholly-owned subsidiary, S.D. Warren Company. In the
statement of consolidated operations contained in the Company's 1994 Annual
Report to Shareholders, the sold business is reported as a discontinued
operation. Information contained herein is exclusive of the discontinued
operation unless otherwise specified.
Page 39 of the Company's 1994 Annual Report to Shareholders shows, for 1994,
1993 and 1992, the sales, income (loss) before taxes and identifiable assets of
the Company's remaining segment, tissue products, by geographic area. Pages 30
and 31 of the Company's 1994 Annual Report to Shareholders contains information
on the Company's unconsolidated international affiliates in Canada and Mexico,
which are reported on the equity method, including their combined sales, assets
and net income (loss), and Scott's share of their net income (loss). These
pages are incorporated herein by reference.
RESTRUCTURING
In January 1994, the Company announced plans to reduce the number of persons
employed by the Company and its unconsolidated international affiliates from
33,000 to approximately 24,700 over a three-year period, and to realign and
shut down some older and inefficient tissue producing and converting assets in
the United States and Europe. In August 1994, the plan was modified to
accelerate the timing and increase the total of the work force reductions. The
plan was completed by the end of 1994. See "Employees" below.
ASSET SALES
In December 1994, the Company sold its printing and publishing papers
business, consisting principally of its wholly-owned subsidiary, S.D. Warren
Company, to an investor group led by Sappi Limited for $1.6 billion, including
the buyer's assumption of approximately $120 million in debt. In connection
therewith, the Company entered into a long-term agreement to supply pulp from
its Mobile, Alabama pulp mill to the adjacent S.D. Warren mill.
In December 1994, the Company completed the sale of the energy and recovery
complex assets (the "Energy Complex") located at its Mobile, Alabama mill site
to Mobile Energy Services Company, Inc. (MESC), which is a wholly-owned
subsidiary of The Southern Company. The Company received approximately $350
million, consisting of approximately $265 million in cash and the buyer's
assumption, guaranteed by The Southern Company, of $85 million of debt under a
tax-exempt financing relating to the Energy Complex. Under terms of an
agreement, MESC will provide power, steam and pulping liquor to the Scott and
S.D. Warren mills located at this site.
In December 1994, the Company sold substantially all of its interest in Scott
Health Care, a 50%-owned joint venture which manufactures and markets adult
incontinence and wound care products, to Molnlycke AB of Sweden, the other
owner of the venture, for $65.7 million. The remainder of the Company's
interest in Scott Health Care was sold to Molnlycke AB in March 1995. The
Company entered into agreements with separate parties in December 1994 to sell
its United States foodservice products business, including a manufacturing site
in Oshkosh, Wisconsin, and Cross Paperware Limited, its United Kingdom
foodservice business.
Information contained herein is exclusive of the assets and businesses either
sold or subject to a contract of sale by the end of 1994, unless otherwise
specified.
2
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In the fourth quarter of 1994, the Company announced its intention to divest
additional assets, including its remaining timberlands in the United States and
Canada, the Scott Maritimes Limited pulp mill in Nova Scotia, the pulp mill in
Miranda del Ebro, Spain, its 20% interest in companies owning a eucalyptus pulp
mill and timberlands in Chile, the pulp operations at its Everett, Washington
and Mobile, Alabama mills, the energy facility at its Chester, Pennsylvania
mill, and corporate real estate, including its corporate headquarters buildings
near Philadelphia, Pennsylvania. In February 1995 the Company announced that it
had signed a letter of intent to sell the Chester energy facility for $170
million. In March 1995 the Company announced that it had signed an agreement to
sell its corporate headquarters building for $39 million and that its worldwide
headquarters would be relocated to Boca Raton, Florida.
TISSUE PRODUCTS
The Company's tissue products segment includes products (primarily tissue
products) for personal care and environmental cleaning and wiping manufactured
and marketed by the Company and its unconsolidated international affiliates.
The Company believes that this business, including the Company's unconsolidated
international affiliates, is the world's largest manufacturer and marketer of
tissue products in each of the consumer and away-from-home markets.
OPERATIONS IN THE AMERICAS
The Company's principal consumer tissue products marketed in the United
States are listed in the following table:
BATHROOM TISSUE DISPOSABLE TOWELS
--------------- -----------------
Cottonelle, ScotTissue, Family Scott Job Squad, ScotTowels, Viva
FACIAL TISSUE BABY WIPES PREMOISTENED CLEANSINGA CLOTHS
------------- ---------- ------------------------------
Scotties Baby Fresh, Wash a-bye Baby Sofkins, KidFresh
NAPKINS "DO-IT-YOURSELF" PRODUCTS
------- -------------------------
Scott, Viva and Viva Accents Shop Towels on a Roll; Rags in a Box;
napkins Gotcha Covered drop cloths; Ultra
Scrub cloths
The Company's consumer products are marketed principally through
supermarkets, drug stores, warehouse clubs, convenience stores and mass
merchandisers. The principal methods of competition in consumer tissue markets
include product quality, price, design, packaging, advertising and promotion.
ScotTissue bathroom tissue, ScotTowels paper towels, Scotties facial tissue,
Scott napkins and Wash a-bye Baby baby wipes are the Company's principal brands
in the value segment of the consumer market. In the premium segment of the
consumer market, Scott's principal brands include Cottonelle bathroom tissue,
Job Squad and Viva disposable towels and Baby Fresh baby wipes. In addition,
the Company sells a "Do-It-Yourself" line of disposable auto care and home
maintenance products.
The Company's principal competitors in the United States consumer tissue
market are The Procter & Gamble Company, James River Corporation of Virginia,
Kimberly-Clark Corporation and Georgia-Pacific Corporation. The Company
believes that it has the second largest market share in the product categories
listed above, in the aggregate, in the United States. The Company believes that
its principal competitive strengths in the consumer tissue market include the
Scott name and reputation for quality and value, strong market positions and a
strong sales force, and that its principal competitive weaknesses have included
a lack of nationwide distribution of certain premium brands and uneven
marketing support.
3
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The Company's principal away-from-home products marketed in the United States
are listed in the following table:
ENVIRONMENTAL CLEANING AND WIPING
PERSONAL CARE PRODUCTS PRODUCTS
---------------------- ---------------------------------
Bathroom Tissue--JRT, Cottonelle Critical Task Wipers--Micro-Wipes
and ScotTissue and Scottpure
Facial Tissue--Scotties General Purpose Wipers--EconoMizer,
Towels--Scottfold, Scott Select, WypAll and Scottcloth
Sequel and Premiere Custom Wipers--Sani-Prep dairy
Soaps--Sani-Fresh, Sani-Tuff and towels
SureTouch Special Task Systems--Cleanworks
Toilet Seat Covers--P.S. Personal concentrated cleaning chemical
Seats dispensing system, WetTask
Industrial Garments--Durafab cleaning system
Napkins--Scottex and Admiral
FIXTURES
--------
Dispensing systems for bathroom
tissue, towels, soaps, toilet seat
covers, facial tissue, napkins and
wiping products--Windows, In-Sight
and Reflections
The Company's away-from-home products and product systems are sold through a
selective distribution network primarily to manufacturing, lodging, office
building, foodservice and health care establishments and high volume public
facilities. The away-from-home market has generally grown more rapidly than the
consumer market for tissue products, and is expected to continue to do so.
Competition in away-from-home markets is primarily on the basis of price,
product utility, product quality and service. The Company's away-from-home
business continues to aggressively pursue its strategy of meeting the needs of
key end-user markets with distinctive products and product systems.
The Company's principal competitors in the United States away-from-home
products market are Fort Howard Corporation, James River Corporation of
Virginia and Kimberly-Clark Corporation. The Company believes that it has the
second largest market share in the product categories listed above, in the
aggregate, in the United States. The Company believes that its principal
competitive strengths in the away-from-home products market include the Scott
name and reputation for quality and value, strong market positions, a strong
sales force, the capability to manage the sale of products through distributor
organizations and the ability to bring distinctive products and product systems
rapidly to market.
While the restructuring program undertaken in 1994 significantly reduced
corporate overhead and labor density at the Company's United States
manufacturing facilities, which produce both consumer and away-from-home
products, most of these facilities still have relatively complex process flows
and older equipment.
The Company's tissue business in the Americas outside the United States is
conducted by the consolidated subsidiaries in Costa Rica and Honduras and the
unconsolidated affiliates in Canada and Mexico which, together with Scott's
direct or indirect ownership interest therein, are listed below.
CANADA -- Scott Paper Limited (50% owned)
COSTA RICA -- Scott Paper Company de Costa Rica, S.A. (51% owned)
HONDURAS -- Scott Paper Company-Honduras, S.A. de C.V./(1)/
MEXICO -- Compania Industrial de San Cristobal, S.A. (48.8% owned)/(2)/
--------
/(1)/ This subsidiary is 100% owned by Scott Paper Company de Costa Rica, S.A.
/(2)/ An additional 3.1% of this affiliate is owned by a 40%-owned Mexican
affiliate of the Company.
Scott Paper Limited manufactures and markets consumer and away-from-home
products and systems similar to those marketed by the Company in the U.S.,
including Cottonelle, Purex and White Swan bathroom tissue, ScotTowels, Viva
and White Swan disposable towels, Scotties and White Swan facial tissue and
Scott Family napkins, and markets Baby Fresh baby wipes. Scott Paper Limited is
the largest producer of tissue products in Canada.
4
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Compania Industrial de San Cristobal, S.A., through its subsidiaries and
affiliates, manufactures and markets consumer tissue products, including Petalo
bathroom tissue, towels and napkins, Confort and Saba sanitary protection
products and Baby Fresh baby wipes, as well as away-from-home products and
product systems. This affiliate also produces coated and uncoated printing and
writing papers for the Mexican market. In 1994 this affiliate began an
expansion program which includes the installation of a new tissue machine and a
recycled fiber facility. The Costa Rican subsidiary and its subsidiary in
Honduras produce consumer tissue products, principally Natural bathroom tissue,
for Central American and Caribbean markets.
EUROPEAN OPERATIONS
Scott's European tissue business is conducted by the following consolidated
subsidiaries and in certain cases by their wholly-owned subsidiaries, all of
which are wholly-owned directly or indirectly by Scott unless otherwise noted.
BELGIUM -- Scott Continental N.V.
FRANCE -- Scott S.N.C.
GERMANY -- Scott Paper GmbH, Scott GmbH
ITALY -- Scott S.p.A.
THE NETHERLANDS -- Scott Page B.V.
PORTUGAL -- Scott Paper Portugal Lda.
SPAIN -- Scott Iberica, S.A. (99.7% owned)
UNITED KINGDOM -- Scott Limited, Cross Paperware Limited/(1)/
--------
/(1)/ The Company completed the sale of this subsidiary in March 1995.
The Company's European subsidiaries generally market both consumer tissue
products and away-from-home products and product systems in their own
countries, and the products are manufactured either by the same subsidiaries or
by others under arrangements designed to optimize use of the Company's
manufacturing facilities across Europe. The Company's principal consumer
products which are marketed in several European countries include Scottex
bathroom tissue, disposable towels, napkins and facial tissue, Baby Fresh baby
wipes and Cotonelle bathroom tissue and facial tissue. Similar products are
sold under the Andrex trademark in the United Kingdom, the Le Trefle trademark
in France, the Cel trademark in Spain, the Servus and Pro Natur trademarks in
Germany and the Page and Popla trademarks in the Netherlands and Belgium.
The Company's European subsidiaries together constitute the largest marketers
of tissue products in the European Union. The Company's principal competitors
in Europe include companies controlled by The Procter & Gamble Company, James
River Corporation of Virginia and Svenska Cellulosa AB SCA. The subsidiaries in
Belgium, Italy, The Netherlands, Spain and the United Kingdom are the largest
marketers of tissue products in their respective countries; those in France and
Portugal are the second largest; and the German subsidiary is one of the four
largest. The Company's principal competitive strengths in Europe generally
include strong market positions, brand names common to several countries,
certain manufacturing technologies and an increasingly integrated management
and manufacturing system.
PACIFIC OPERATIONS
The Company's tissue business in the Pacific region is conducted by the
consolidated subsidiaries in China, Hong Kong, Japan, Malaysia, Singapore,
Taiwan and Thailand and the unconsolidated affiliate in Korea listed below.
Scott's direct or indirect ownership interest is 100% unless otherwise noted.
5
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CHINA -- Scott Paper (Guangzhou) Limited (75% owned); Scott Paper
(Shanghai) Co., Ltd. (56% owned)/(1)/
HONG KONG -- Scott Paper (Hong Kong) Limited
JAPAN -- Scott Japan Limited
KOREA -- Ssangyong Paper Co., Ltd. (23.8% owned)
MALAYSIA -- Scott Paper (Malaysia) Sdn. Bhd.
SINGAPORE -- Scott Paper (Singapore) Pte. Ltd.
TAIWAN -- Taiwan Scott Paper Corporation (66.7% owned)
THAILAND -- Scott Trading Limited; Thai-Scott Paper Company Limited (99.6%
owned)
--------
/(1)/ This subsidiary was formed in January 1995 and its operations are expected
to commence in 1995.
The Company's Pacific subsidiaries and affiliates in most cases market
consumer tissue products and away-from-home products and product systems in
their own countries, and the products are manufactured either by the same
subsidiaries or by other Company operations. The consumer products sold in this
region include bathroom tissue, disposable towels, napkins, facial tissue and
baby wipes under a variety of trademarks, including Scott, Scottex, Cottonelle,
Baby Fresh, Sujay (in Taiwan) and Andrex and Purex (in Hong Kong).
In August 1994 the Company announced an agreement to form Scott Paper
(Shanghai) Co., Ltd., a joint venture with Shanghai Paper Corporation, China's
largest paper manufacturer, to produce tissue products at a new site in
Shanghai. The facility is expected to start up in 1995. In December 1994 the
Company announced that it had reached an agreement with an Indonesian
corporation to establish a joint venture in that country which would be owned
80% by Scott.
The subsidiaries in Malaysia, Singapore, Taiwan and Thailand are the largest
marketers of tissue products in their respective countries. The Company's
principal competitors in most of the countries in this region in which it
operates are locally based. Tissue markets in this region are growing more
rapidly than in the United States and Europe.
GENERAL
The Company generally maintains inventories to meet the delivery requirements
of its customers, and in most cases the backlog of customer orders is not
significant in relation to sales. The Company has patents and patent
applications which cover some of its products or the processes or equipment
used in manufacturing them. The Company believes that the most significant of
these patents and patent applications relate to certain processes for
manufacturing its higher quality products and pulp. The trademarks for all
major products are federally registered. The Company believes that such
trademarks, as a whole, are material to its business.
SUPPLY OF RAW MATERIAL
The Company's paper products are manufactured principally from wood pulp. The
pulp mills and recycled fiber facilities of the Company's consolidated
operations produce somewhat more than 50% of the amount of pulp used by its
paper manufacturing operations. The Company's unconsolidated affiliates in
Canada and Mexico in the aggregate produce somewhat more than 50% of their own
pulp. Recycled fiber provides approximately 25% of the pulp used by the
Company's consolidated manufacturing operations and approximately the same
percentage of the aggregate pulp requirements of the unconsolidated affiliates
in Canada and Mexico.
Market pulp is a commodity product available from a large number of suppliers
around the world. The Company purchases pulp at market-related prices from
numerous suppliers under contracts which generally extend automatically unless
terminated by either party. In addition, the Company has entered into long term
contracts with Millar Western Pulp Limited of Canada and an affiliate of Millar
Western to purchase approximately 210,000 metric tons per year of chemi-
thermomechanical pulp. The Company owns 20% of Forestal e Industrial Santa Fe,
S.A., which owns and operates a 240,000 metric ton per year eucalyptus pulp
mill in Chile. Under a long term contract with this company, Scott is entitled
to purchase up to 80% of the pulp mill's output and is required to
6
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purchase at least 40% of the output. Each of these long term contracts provides
for pricing which tends to reduce the effect of pulp market fluctuations on the
Company.
The Company's annual harvest of pulpwood from its U.S. and Nova Scotia
timberlands, which constitutes approximately 65% of the total annual harvest
from such timberlands, equals approximately 30% of the requirements of the pulp
mills (excluding recycled fiber facilities) of the Company's consolidated North
American operations. Substantially all of the remainder of the timber harvest
is sold as logs in international and U.S. markets. None of the Company's
consolidated international subsidiaries has significant timberlands.
As stated under "Asset Sales" on page 2, the Company has announced its
intention to divest certain pulp and timber operations. If these divestitures
occur, the Company's operations would need to rely more heavily on purchased
fiber, including fiber purchased from the buyers of these facilities.
ENERGY SOURCES
Approximately 47% of the energy requirements of the Company's consolidated
North American operations are generated by the burning of spent pulping liquor,
process wastes, biomass and wood residuals (including purchased biomass and
wood residuals) and anthracite culm at facilities on or adjacent to Company
operations. This percentage excludes the energy generated by the energy complex
adjacent to the Mobile, Alabama mill, which was sold by the Company in December
1994, but includes energy generated by the energy facility at the Company's
Chester, Pennsylvania mill, which the Company has announced its intention to
sell. See "Asset Sales" on page 2.
The remaining 53% of such energy requirements is provided by purchased coal,
oil, natural gas and electricity. Several facilities have the capacity to
alternate between oil and natural gas to take advantage of differences in their
relative prices and availability. Substantially all of the energy requirements
of the Company's consolidated international subsidiaries are provided by
purchased electricity, natural gas and oil.
RESEARCH AND DEVELOPMENT
The Company's research and development programs are principally conducted at
a facility located near Philadelphia, Pennsylvania. During 1994, 1993 and 1992,
exclusive of the discontinued operation, the Company expended approximately
$38.3 million, $47.0 million and $45.2 million, respectively, for research and
development activities. These programs, some of which are conducted jointly
with other organizations, support the development of new and improved products
and product systems and the supporting packaging, converting, process control,
and paper web process development; high-yield and recycled pulp processes; and
the transmission of the results of these programs among the Company and its
consolidated subsidiaries and unconsolidated affiliates. These programs also
support the Company's ongoing efforts to reduce costs and to ensure employee
safety, product safety and environmental protection.
EMPLOYEES
As a result of the restructuring described on page 2 under "Restructuring"
and the sale of S.D. Warren Company and other assets, the number of persons
employed by the Company decreased significantly in 1994. As of December 31,
1994, the Company employed approximately 15,100 persons and its unconsolidated
affiliates in Canada and Mexico employed approximately 4,800 persons. Of the
7,800 persons employed in the consolidated North American operations,
approximately 4,700 are hourly paid employees represented by collective
bargaining units affiliated with regional, national or international unions. Of
these union employees, approximately 33%, 32% and 35% are members of collective
bargaining units whose agreements with the Company expire in 1997, 1998 and
1999, respectively. Of the 7,300 persons employed by the Company's consolidated
international subsidiaries, a significant proportion of the manufacturing
employees are represented by labor unions.
ENVIRONMENTAL MATTERS
The paper industry is subject to a wide variety of laws relating to the
environment in the countries in which the Company operates. The Company
believes it is currently in substantial compliance with these laws in all of
its operations.
7
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The Company and other manufacturers of pulp in the United States face
proposed regulations imposing stringent limits on chlorinated organics, such as
dioxin and chloroform, which may arise from the process of manufacturing
bleached pulp. In 1993, the Environmental Protection Agency (EPA) issued
proposed regulations, which include limitations on a variety of discharges and
emissions. Based on its evaluation of the 1993 proposed regulations, which have
not been finalized, the Company believes that the additional capital
expenditures required to comply with them at its existing sites would be
approximately $250 million in the 1997-1999 period. This estimate could change
depending on several factors, including additional evaluation of the proposed
regulations, changes in the proposed regulations, new developments in control
and process technology, inflation, and the potential sale of pulp mills owned
by the Company.
In 1994, the Company's capital spending for environmental improvements to
existing facilities (including facilities sold during 1994) was approximately
$12 million. It is currently estimated that the capital spending necessary for
such improvements will be approximately $10 million in each of 1995 and 1996.
These amounts do not include the environmental portion of capital expenditures
on new projects. Actual expenditures may vary from these dollar estimates due
to inflation, additional changes in regulatory requirements or new developments
in control technology. As is the case with other companies, capital
expenditures on environmental improvements are in addition to the Company's
normal expenditures for maintenance and replacement of its plant, and generally
result in increased operating costs.
The Company believes that its environmental improvement costs are of the same
general magnitude as those of companies with comparable pulp and paper
operations. The more significant environmental regulations appear to be applied
more or less uniformly throughout the industry. Assuming that such regulations
are applied uniformly in the future, the Company believes that its
environmental improvement costs will not have a material adverse impact on its
relative competitive position.
See Item 3 for a description of litigation with respect to environmental
matters.
CAPITAL EXPENDITURES
The Company's capital expenditures (including capital expenditures on the
discontinued operation and other assets sold by the Company, and excluding
acquisitions and equity investments in unconsolidated international affiliates)
during the past five years were as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------------
(IN MILLIONS)
<S> <C>
1990........................... $ 814.8
1991........................... 314.6
1992........................... 329.7
1993........................... 457.8
1994........................... 375.0
--------
Total........................ $2,291.9
========
</TABLE>
The Company expects to invest $550-650 million on capital projects during the
1995-1996 period. These projects include continued construction of a state-of-
the-art tissue mill in Owensboro, Kentucky, construction of a new converting
facility in Yucca, Arizona, and other projects designed to sustain existing
operations and reduce costs. The Company expects to finance this spending
primarily from internally generated funds.
8
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ITEM 2. PROPERTIES
The location of the manufacturing facilities of the Company (including its
consolidated subsidiaries) and the types of products produced at each facility
are shown below.
AMERICAS
Chester, Pennsylvania--tissue Winslow, Maine--tissue products(/3/)
products Yucca, Arizona--tissue products(/4/)
Dover, Delaware--wet wipe products Durafab, Inc.
Everett, Washington--tissue Cleburne, Texas--industrial
products and pulp garments
Ft. Edward, New York--tissue Italy, Texas--industrial garments
products Scott Maritimes Limited
Hattiesburg, Mississippi--tissue products New Glasgow, Nova Scotia--pulp
Marinette, Wisconsin--tissue Scott Paper Company de Costa Rica,
products S.A.
Mobile, Alabama--tissue products San Jose, Costa Rica--tissue
and pulp(/1/) products
Oconto Falls, Wisconsin--tissue Scott Paper Company-Honduras, S.A.
products de C. V.
Oshkosh, Wisconsin--tabletop San Pedro, Honduras--tissue
products(/2/) products
Owensboro, Kentucky--tissue
products
San Antonio, Texas--personal
cleansing products and systems
EUROPE
Cross Paperware Limited Scott Limited
Dunstable, United Kingdom-- Barrow, United Kingdom--tissue
foodservice products(/5/) products
Scott Continental, N.V. Northfleet, United Kingdom--
Duffel, Belgium--tissue products tissue products
Scott GmbH Scott Page B.V.
Neunkirchen, Germany--wet wipe Gennep, The Netherlands--tissue
products products
Scott Iberica, S.A. Scott Paper GmbH
Aranguren, Spain--base tissue pa- Flensburg, Germany--tissue
per products
Arceniaga, Spain--tissue products Dusseldorf-Reisholz, Germany--
and personal cleansing products tissue products
and systems Scott S.N.C.
Canarias, Canary Islands--tissue Orleans, France--tissue products
products Scott S.p.A.
Hernani, Spain--tissue products Alanno, Italy--tissue products
Miranda del Ebro, Spain--pulp Romagnano, Italy--tissue products
Salamanca, Spain--tissue products Villanovetta, Italy--tissue
products
PACIFIC
Scott Paper (Guangzhou) Limited Scott Paper (Shanghai) Co., Ltd.
Guangzhou Province, China--tissue Shanghai, China--tissue
products products(/4/)
Scott Paper (Hong Kong) Limited Taiwan Scott Paper Corporation
Hong Kong--tissue products(/6/) Hsin Ying, Taiwan--tissue
Scott Paper (Malaysia) Sdn. Bhd. products(/7/)
Kluang, Malaysia--tissue products Tayaun, Taiwan--tissue products
Thai-Scott Paper Company Limited
Samut Prakan, Thailand--tissue
products
-------
/(1)/ Portions of the land under this facility are held under various long-term
operating leases, the more significant of which contain options to
purchase the land.
/(2)/ The Company entered into an agreement to sell this facility in December
1994.
/(3)/ The fiber recycling facility at this mill is held under an operating lease
expiring in 2008 under which the Company has the option of renewing the
lease for terms not exceeding nine additional years or purchasing the
facility for its then fair market value.
/(4)/ These facilities are under construction.
/(5)/ The Company completed the sale of this subsidiary in March 1995.
/(6)/ This facility is held under a short-term renewable lease.
/(7)/ The land and a portion of this facility are subject to a mortgage.
9
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The largest papermaking facilities of the Company (including its consolidated
subsidiaries) are located at Chester, Everett and Mobile. The largest pulp
making facilities listed above are located at Everett, Mobile and New Glasgow.
Various Company plants contain equipment, pollution control facilities and
solid waste disposal facilities which have been financed by issuance of
industrial revenue bonds and are held by the Company under lease or installment
purchase agreements. During 1994 the Company's rate of utilizing its
papermaking capacity (excluding the discontinued operation) was approximately
90%.
The Company's consolidated North American timber resources total
approximately 1.9 million acres, including approximately 1,550,000 acres owned
in fee and approximately 350,000 acres on which the Company has long-term
cutting rights or lease or purchase rights. In the United States, such timber
resources include approximately 646,000 acres in Alabama and Mississippi. In
Canada, the Company's timber resources include approximately 1,213,000 acres
(including long-term cutting rights on 214,000 acres of government lands) in
Nova Scotia. The Company has mineral rights pertaining to substantially all of
its U.S. timberlands but has no mineral rights pertaining to its Canadian
timberlands.
Scott Paper Limited in Canada operates four manufacturing facilities,
Compania Industrial de San Cristobal, S.A. in Mexico operates five
manufacturing facilities and Ssangyong Paper Co., Ltd. in Korea operates four
manufacturing facilities. Forestal e Industrial Santa Fe, S.A. owns a pulp mill
in Chile and Forestal y Agricola Monte Aguila, S.A. (of which the Company also
owns 20%) owns 120,000 acres of forestland in Chile.
See "Asset Sales" on page 2 for a description of certain assets which the
Company has announced that it intends to sell.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in numerous actions in state and federal courts
seeking damages relating to breast implants. The actions allege that the
plaintiffs' breast implants were covered by polyurethane foam manufactured by
the Company's former Foam Division, which was sold in 1983, and that the foam
caused physical and/or psychological harm to the plaintiffs. In each of these
actions the Company is one of several defendants, including the Foam Division's
successor and the manufacturers of implants. The Company believes that only a
small percentage of breast implants were covered by polyurethane foam
manufactured by the Company's Foam Division prior to its sale. Pursuant to an
order of the Multidistrict Litigation Panel, all of the federal cases involving
breast implants have been consolidated for pre-trial purposes in the Northern
District of Alabama. One of these cases, Lindsey et al., v. Dow Corning
Corporation et al., has been provisionally certified by the Court as a class
action for settlement purposes. Included in the provisionally approved class
are all persons who received one or more breast implants before June 1, 1993
("settlement class members"). Some implant recipients have elected to opt out
of the class, but the precise number or the nature of their claims is not known
at this time. The Court has approved a Breast Implant Litigation Settlement
Agreement between settlement class members and certain settling defendants. The
court-approved settlement has been appealed to the Eleventh Circuit Court of
Appeals by various parties and intervenors. If the settlement is affirmed on
appeal and sustained in all other respects, most of the persons with claims
will be compensated for their claims in some amount by the settlement funds.
The Company is not a party to the Settlement Agreement. As a result,
individuals who have received breast implants covered by polyurethane foam
manufactured by the Company's former Foam Division would retain their right to
take legal action against the Company even if they do not opt out of the
Settlement Agreement. The Company believes that it has meritorious defenses
against these claims and intends to conduct a vigorous defense and seek
recovery to the extent provided under its insurance policies, if necessary.
Although the final results of these claims cannot be predicted with certainty,
it is the present opinion of the Company, after consulting with counsel, that
they will not have a material adverse effect on the Company's financial
condition.
The Company is involved in a number of administrative and judicial
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA) and comparable state laws. Most of these proceedings
involve the cleanup of hazardous substances at commercial landfills which
receive waste from many different sources. While joint and several liability is
authorized under CERCLA, as a practical matter, liability for CERCLA cleanups
is generally allocated among many waste generators. The range of reasonably
possible losses in these proceedings, to the extent not already provided for,
is not significant.
10
<PAGE>
In addition, the Company is involved in lawsuits and state and Federal
administrative proceedings under the environmental, antitrust and equal
employment opportunity laws, among others. The relief sought in such lawsuits
and proceedings includes injunctions, damages and penalties.
Although the final results in these suits and proceedings cannot be predicted
with certainty, it is the present opinion of the Company, after consulting with
counsel, that they will not have a material adverse effect on the Company's
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
This item is inapplicable because no matter was submitted during the fourth
quarter of 1994 to a vote of the Company's security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following chart shows, as of March 10, 1995, the names, ages, current
positions and areas of responsibility, and the dates applicable to such
positions and areas of responsibility, for the Company's executive officers.
Previous positions and areas of responsibility over the past five years, where
applicable, are included in footnotes for all persons listed.
There is no "family relationship" between any of these officers or between
any such officer and any Director of the Company. Each officer is elected at
the regular meeting of the Board of Directors next following the Annual Meeting
of Shareholders to serve for one year and until his or her successor is duly
elected and qualified.
<TABLE>
<CAPTION>
CURRENT POSITIONS AND
NAME AGE AREAS OF RESPONSIBILITY POSITION HELD SINCE
---- --- ----------------------- -------------------
<S> <C> <C> <C>
Albert J. Dunlap/(1)/... 57 Chairman and Chief Executive April 1994
Officer and Director
Russell A. Kersh/(2)/... 41 Senior Vice President, Finance June 1994
and Administration
John P. Murtagh/(3)/.... 46 Senior Vice President and General June 1994
Counsel
Secretary July 1994
Richard R. Nicolo- 47 Senior Vice President September 1994
si/(4)/................ Worldwide Consumer Business
P. Newton White/(5)/.... 52 Senior Vice President April 1991
Worldwide Away-From-Home
Business January 1992
Basil L. Anderson/(6)/.. 49 Vice President, Treasurer and February 1992
Chief Financial Officer
Edward B. Betz.......... 60 Vice President and Controller June 1979
</TABLE>
--------
/(1)/ Mr. Dunlap was Managing Director and Chief Executive Officer of
Consolidated Press Holdings Limited from August 1991 to February 1993; was
Chairman and Chief Executive Officer of Gyrestar, Inc. from February 1991
to July 1991; was Chairman and Chief Executive Officer of Anglo Group plc
from April 1989 to July 1990; and was Chairman and Chief Executive Officer
of Cavenham Forest Industries, Inc. from April 1989 to December 1990.
/(2)/ Mr. Kersh was Chief Financial Officer and Chief Operating Officer of
Addidas North America Inc. from January 1993 to May 1994; was Chief
Financial Officer of Gyrestar, Inc. from 1990 to July 1991; was Finance
Director of Anglo Group plc from April 1989 to July 1990; and was Vice
President and Director of Finance of Cavenham Forest Industries, Inc. from
September 1986 to December 1990.
/(3)/ Mr. Murtagh was Director of Recycling Programs from January 1993 to June
1994 and Senior Counsel from October 1988 to December 1992 of
International Paper Company.
/(4)/ Mr. Nicolosi was Chief Executive Officer of Nicolosi & Associates from May
1992 to August 1994 and was Corporate Group Vice President of The Procter
& Gamble Company from June 1989 to April 1992 in charge of consumer paper
products and pulp and cellulose operations.
/(5)/ Mr. White served as Senior Vice President in charge of Scott Worldwide's
Pacific Operations since April 1991 and as Vice President of Scott
Worldwide's Pacific Operations since February 1989.
/(6)/ Mr. Anderson served as Vice President since February 1988 and as Treasurer
since January 1987.
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
See the text under the heading "Stock Exchange Listings" on page 41 of the
Company's 1994 Annual Report to Shareholders, the market price and dividend
information under the heading "Quarterly Highlights" on page 22 thereof, and
the row "Number of common shareholders" on page 40 thereof, which portions of
said pages are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
See page 40 of the Company's 1994 Annual Report to Shareholders, which page
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the text under the heading "Management's Discussion and Analysis" on
pages 17-22 of the Company's 1994 Annual Report to Shareholders, all of which
pages are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the financial statements on pages 23-39 and the information under
"Quarterly Highlights" on page 22 of the Company's 1994 Annual Report to
Shareholders, all of which pages or portions thereof, as the case may be, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
See "Approval of Appointment of Auditors" on page 26 of the Company's Proxy
Statement dated March 10, 1995, which portion of said page is incorporated
herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information with respect to the Company's Directors and Director
nominees, see the information under the heading "Election of Directors" on
pages 4-6 of the Company's Proxy Statement dated March 10, 1995, which pages
are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
See pages 8-19 of the Company's Proxy Statement dated March 10, 1995, which
pages are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information under the headings "Ownership of Shares" on pages 2 and
7-8 of the Company's Proxy Statement dated March 10, 1995, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Certain Transactions" on page 20 of the Company's Proxy Statement dated
March 10, 1995, which portion of said page is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS: The financial statements, including the financial
statement schedules, are listed in the Index to Financial Statements on page 16
hereof.
(b) REPORTS ON FORM 8-K: Reports on Form 8-K were filed on October 11, 1994
(Item 5), October 25, 1994 (Item 5) and December 22, 1994 (Items 2 and 5).
12
<PAGE>
(c) EXHIBITS:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
3(a) --The Company's Articles, as amended effective April 22, 1987,
incorporated by reference to Exhibit 3(a) to the Company's 1989 Annual
Report on Form 10-K.
3(b) --The Company's Bylaws, as amended effective July 19, 1994,
incorporated by reference to Exhibit 3(b) to the Company's Quarterly
Report on Form 10-Q for the third quarter of 1994.
4(a) --Rights Agreement dated as of July 15, 1986 between the Company and
Morgan Guaranty Trust Company of New York, as Rights Agent,
incorporated by reference to Exhibit 1 to the Company's Current Report
on Form 8-K dated July 16, 1986, as amended May 17, 1988 and October
18, 1988, such amendments being incorporated by reference to Exhibits
1 and 2, respectively, to the Company's Current Report on Form 8-K
dated November 28, 1988.
4(b) --Indenture dated as of October 1, 1989 between the Company and The
Chase Manhattan Bank (National Association), as Trustee, incorporated
by reference to Exhibit 4 filed with the Company's Current Report on
Form 8-K dated October 20, 1989.
4(c) --In reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K, there are
not being filed various instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries, because the total
amount of securities authorized under each instrument does not exceed
10% of the total assets of the Company and its subsidiaries on a
consolidated basis. The Company hereby agrees to furnish a copy of any
such instrument to the Commission upon request.
10(a)* --The Company's 1979 Stock Option Plan, as amended, incorporated by
reference to Exhibit A to the prospectus contained in Registration
Statement No. 33-28777 on Form S-8, filed with the Commission on May
19, 1989.
10(b)* --The Company's 1986 Stock Option and Restricted Stock Plan, as
amended, incorporated by reference to Exhibit B to the prospectus
contained in Registration Statement No. 33-28777 on Form S-8, filed
with the Commission on May 19, 1989.
10(c)* --The Company's 1989 Stock Option and Restricted Stock Plan,
incorporated by reference to Exhibit C to the prospectus contained in
Registration Statement No. 33-28777 on Form S-8, filed with the
Commission on May 19, 1989.
10(d)* --The Company's 1994 Long-Term Incentive Plan, as amended July 19,
1994, incorporated by reference to Exhibit 4(a) to the Company's
Registration Statement No. 33-56159 on Form S-8, filed with the
Commission on October 25, 1994.
10(e)* --The Company's Performance Plan, including Schedule 1 thereto, as
amended effective January 1, 1993, incorporated by reference to
Exhibit 10(d) to the Company's 1992 Annual Report on Form 10-K.
10(f)* --The Company's Performance Award Deferral Plan, as amended effective
April 16, 1991, incorporated by reference to Exhibit 10(e) to the
Company's 1991 Annual Report on Form 10-K.
10(g)* --The Company's Supplemental Executive Retirement Plan, as amended,
incorporated by reference to Exhibit 10(f) to the Company's 1989
Annual Report on Form 10-K.
10(h)* --The Company's Directors' Deferred Compensation Plan, as amended
effective July 19, 1994, incorporated by reference to Exhibit 10(d) to
the Company's Quarterly Report on Form 10-Q for the third quarter of
1994.
10(i)* --The Company's Directors' Retirement Benefit Plan, as amended July 19,
1994, incorporated by reference to Exhibit 10(c) to the Company's
Quarterly Report on Form 10-Q for the third quarter of 1994.
10(j)* --The Company's Deferred Compensation Plan, as amended, incorporated by
reference to Exhibit 10(i) to the Company's 1988 Annual Report on Form
10-K.
10(k)* --The Company's Supplemental Long-Term Disability Plan, established as
of July 1, 1992, incorporated by reference to Exhibit 10 to the
Company's Quarterly Report on Form 10-Q for the second quarter of
1993.
10(l)* --Agreement between the Company and Philip E. Lippincott, dated January
25, 1994, incorporated by reference to Exhibit 10(m) to the Company's
1993 Annual Report on Form 10-K.
10(m)* --Agreement dated August 11, 1994 between the Company and J. Richard
Leaman, Jr., incorporated by reference to Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q for the third quarter of 1994.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10(n)* --Employment Agreement dated April 19, 1994 between the Company and
Albert J. Dunlap, incorporated by reference to Exhibit 10(a) to the
Company's Quarterly Report on Form 10-Q for the second quarter of
1994.
10(o)* --Form of Restricted Stock Agreement dated as of September 16, 1994
between the Company and certain grantees of restricted shares under
the 1994 Long-Term Incentive Plan, including Albert J. Dunlap, Basil
L. Anderson, Edward B. Betz, Paolo Forlin, Russell A. Kersh, John P.
Murtagh, Richard R. Nicolosi and P. Newton White, incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q for the third quarter of 1994.
10(p)* --Form of Agreement between the Company and Russell A. Kersh, John P.
Murtagh and Richard R. Nicolosi dated June 30, 1994 and September 19,
1994, respectively.
12 --Statement re computation of ratio of earnings to fixed charges.
13 --The Company's 1994 Annual Report to Shareholders.
21 --The Company's Subsidiaries.
23 --Consent of Independent Accountants.
24 --Power of Attorney.
</TABLE>
--------
* These items are management contracts or compensatory plans or arrangements
required to be filed as an exhibit to this form pursuant to Item 14(c) of
this report.
14
<PAGE>
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.
Scott Paper Company
------------------------------------
(REGISTRANT)
By /s/ Albert J. Dunlap
----------------------------------
ALBERT J. DUNLAP
CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
Date: March 30, 1995
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 AND ON THE DATES INDICATED.
SIGNATURE AND TITLE DATE
------------------- ----
March 30, 1995
By /s/ Albert J. Dunlap
----------------------------------
ALBERT J. DUNLAP
CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
March 30, 1995
By /s/ Russell A. Kersh
----------------------------------
RUSSELL A. KERSH
SENIOR VICE PRESIDENT--FINANCE
AND ADMINISTRATION
March 30, 1995
By /s/ Basil L. Anderson
----------------------------------
BASIL L. ANDERSON
VICE PRESIDENT, TREASURER AND
CHIEF FINANCIAL OFFICER
March 30, 1995
By /s/ Edward B. Betz
----------------------------------
EDWARD B. BETZ
VICE PRESIDENT AND
CONTROLLER
PURSUANT TO GENERAL INSTRUCTION D TO FORM 10-K, THIS REPORT HAS BEEN SIGNED
BELOW BY A MAJORITY OF THE BOARD OF DIRECTORS:
WILLIAM A. ANDRES RICHARD K. LOCHRIDGE
JACK J. CROCKER BRUCE K. MACLAURY
ALBERT J. DUNLAP GARY L. ROUBOS
PETER HARF
A majority of the Board of Directors
By /s/ Frank W. Bubb, III
--------------------------------------
FRANK W. BUBB, III
ATTORNEY-IN-FACT
Date: March 30, 1995
15
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The consolidated financial statements appearing on pages 23 through 39 of the
accompanying 1994 Annual Report to Shareholders, are incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13. The report of Coopers &
Lybrand L.L.P. dated January 31, 1995 on the consolidated balance sheet of the
Company as of December 31, 1994, and the related consolidated statements of
operations, cash flows and common shareholders' equity for the year then ended
is also incorporated by reference in said Exhibit 13. With the exception of the
aforementioned information and the information incorporated by reference in
Items 1, 5, 6, 7 and 8, the 1994 Annual Report to Shareholders is not to be
deemed filed as part of this report. The following Financial Statement Schedule
should be read in conjunction with the consolidated financial statements in
such 1994 Annual Report to Shareholders:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Predecessor Independent Accountants on Consolidated Balance
Sheet as of December 25, 1993 and the related Consolidated Statements of
Operations, Cash Flows and Common Shareholders' Equity for each of the
two years in the period ended December 25, 1993.......................... 17
Report of Independent Accountants on 1994 Financial Statement Schedule.... 18
Report of Predecessor Independent Accountants on 1992 and 1993 Financial
Statement Schedule....................................................... 19
Financial Statement Schedule:
II -- Valuation and Qualifying Accounts............................... 20
</TABLE>
Financial statement schedules other than those listed above are omitted
because they are not applicable or the required information is shown in the
consolidated financial statements or the related financial review.
Columns omitted from schedules filed have been omitted because the
information is not applicable.
Separate financial statements for each 50% or less owned affiliate have been
omitted because the registrant's proportionate share of each such company's
profit before income taxes and total assets is less than 20% of the respective
consolidated amounts and the registrant's investment in and advances to each
such company are less than 20% of the consolidated total assets of the
registrant.
16
<PAGE>
REPORT OF PREDECESSOR INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
SCOTT PAPER COMPANY
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of cash flows and of common shareholders' equity as
of and for each of the two years in the period ended December 25, 1993
(appearing on pages 24 through 39 of the Scott Paper Company 1994 Annual Report
to Shareholders which has been incorporated by reference in this Form 10-K
Annual Report) present fairly, in all material respects, the financial
position, results of operations and cash flows of Scott Paper Company and its
subsidiaries as of and for each of the two years in the period ended December
25, 1993, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above. We have not audited the consolidated financial
statements of Scott Paper Company for any period subsequent to December 25,
1993.
PRICE WATERHOUSE LLP
Philadelphia, PA
January 25, 1994, except as to the subheading
"Discontinued operation" in Note 2,
which is as of December 20, 1994.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
1994 FINANCIAL STATEMENT SCHEDULE
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
SCOTT PAPER COMPANY
Our report on the 1994 consolidated financial statements of Scott Paper
Company has been incorporated by reference in the Form 10-K from page 23 of the
1994 Annual Report to Shareholders of Scott Paper Company. In connection with
our audit of such financial statements, we have also audited the related 1994
financial statement schedule listed in the index on page 16 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P
Philadelphia, Pennsylvania
January 31, 1995
18
<PAGE>
REPORT OF PREDECESSOR INDEPENDENT ACCOUNTANTS ON
1992 AND 1993 FINANCIAL STATEMENT SCHEDULE
TO THE BOARD OF DIRECTORS
SCOTT PAPER COMPANY
Our audits of the consolidated financial statements referred to in our report
dated January 25, 1994 appearing on page 17 of this Form 10-K also included an
audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-
K for the years 1993 and 1992. In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
January 25, 1994
19
<PAGE>
SCOTT PAPER COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------ ---------- ---------- --------------- -----------
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS/(1)/ END OF YEAR
------------------------------ ---------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Year 1994
*Allowance for customer:
Discounts & allowances..... $13.3 $ 6.9 $ (6.5) $13.7
Doubtful items............. 12.0 3.7 (2.2) 13.5
----- ----- ------ -----
$25.3 $10.6 $ (8.7) $27.2
===== ===== ====== =====
Year 1993
*Allowance for customer:
Discounts & allowances..... $18.9 $ 2.6 $ (8.2) $13.3
Doubtful items ............ 11.7 4.5 (4.2) 12.0
----- ----- ------ -----
$30.6 $ 7.1 $(12.4) $25.3
===== ===== ====== =====
Year 1992
*Allowance for customer:
Discounts & allowances..... $18.1 $1.4 $ (.6) $18.9
Doubtful items ............ 10.1 5.6 (4.0) 11.7
----- ----- ------ -----
$28.2 $7.0 $ (4.6) $30.6
===== ===== ====== =====
</TABLE>
--------
* Applied as deductions from the receivables account.
/(1)/ Consists of writeoffs, net of recoveries, and foreign currency translation
adjustments in accordance with FAS No. 52. Also, in 1994 there is a
reduction of $5.7 million representing the balances of S.D. Warren's
accounts, which were included as part of the sale of its net assets.
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------- ---------- --------- ---------- -----------
BALANCE AT
BEGINNING BALANCE AT
DESCRIPTION OF YEAR ADDITIONS REDUCTIONS END OF YEAR
-------------------------------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Year 1994
Deferred Taxes Valuation Allow-
ance.......................... $174.5 $ 52.1 $(41.1) $185.5
====== ====== ====== ======
Year 1993
Deferred Taxes Valuation Allow-
ance.......................... -- $174.5/(1)/ -- $174.5
====== ====== ====== ======
</TABLE>
--------
/(1)/ Includes $92.7 million due to the adoption of FAS No. 109 in the first
quarter.
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
3(a) --The Company's Articles, as amended effective April 22, 1987,
incorporated by reference to Exhibit 3(a) to the Company's 1989 Annual
Report on Form 10-K.
3(b) --The Company's Bylaws, as amended effective July 19, 1994,
incorporated by reference to Exhibit 3(b) to the Company's Quarterly
Report on Form 10-Q for the third quarter of 1994.
4(a) --Rights Agreement dated as of July 15, 1986 between the Company and
Morgan Guaranty Trust Company of New York, as Rights Agent,
incorporated by reference to Exhibit 1 to the Company's Current Report
on Form 8-K dated July 16, 1986, as amended May 17, 1988 and October
18, 1988, such amendments being incorporated by reference to Exhibits
1 and 2, respectively, to the Company's Current Report on Form 8-K
dated November 28, 1988.
4(b) --Indenture dated as of October 1, 1989 between the Company and The
Chase Manhattan Bank (National Association), as Trustee, incorporated
by reference to Exhibit 4 filed with the Company's Current Report on
Form 8-K dated October 20, 1989.
4(c) --In reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K, there are
not being filed various instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries, because the total
amount of securities authorized under each instrument does not exceed
10% of the total assets of the Company and its subsidiaries on a
consolidated basis. The Company hereby agrees to furnish a copy of any
such instrument to the Commission upon request.
10(a)* --The Company's 1979 Stock Option Plan, as amended, incorporated by
reference to Exhibit A to the prospectus contained in Registration
Statement No. 33-28777 on Form S-8, filed with the Commission on May
19, 1989.
10(b)* --The Company's 1986 Stock Option and Restricted Stock Plan, as
amended, incorporated by reference to Exhibit B to the prospectus
contained in Registration Statement No. 33-28777 on Form S-8, filed
with the Commission on May 19, 1989.
10(c)* --The Company's 1989 Stock Option and Restricted Stock Plan,
incorporated by reference to Exhibit C to the prospectus contained in
Registration Statement No. 33-28777 on Form S-8, filed with the
Commission on May 19, 1989.
10(d)* --The Company's 1994 Long-Term Incentive Plan, as amended July 19,
1994, incorporated by reference to Exhibit 4(a) to the Company's
Registration Statement No. 33-56159 on Form S-8, filed with the
Commission on October 25, 1994.
10(e)* --The Company's Performance Plan, including Schedule 1 thereto, as
amended effective January 1, 1993, incorporated by reference to
Exhibit 10(d) to the Company's 1992 Annual Report on Form 10-K.
10(f)* --The Company's Performance Award Deferral Plan, as amended effective
April 16, 1991, incorporated by reference to Exhibit 10(e) to the
Company's 1991 Annual Report on Form 10-K.
10(g)* --The Company's Supplemental Executive Retirement Plan, as amended,
incorporated by reference to Exhibit 10(f) to the Company's 1989
Annual Report on Form 10-K.
10(h)* --The Company's Directors' Deferred Compensation Plan, as amended
effective July 19, 1994, incorporated by reference to Exhibit 10(d) to
the Company's Quarterly Report on Form 10-Q for the third quarter of
1994.
10(i)* --The Company's Directors' Retirement Benefit Plan, as amended July 19,
1994, incorporated by reference to Exhibit 10(c) to the Company's
Quarterly Report on Form 10-Q for the third quarter of 1994.
10(j)* --The Company's Deferred Compensation Plan, as amended, incorporated by
reference to Exhibit 10(i) to the Company's 1988 Annual Report on Form
10-K.
10(k)* --The Company's Supplemental Long-Term Disability Plan, established as
of July 1, 1992, incorporated by reference to Exhibit 10 to the
Company's Quarterly Report on Form 10-Q for the second quarter of
1993.
10(l)* --Agreement between the Company and Philip E. Lippincott, dated January
25, 1994, incorporated by reference to Exhibit 10(m) to the Company's
1993 Annual Report on Form 10-K.
10(m)* --Agreement dated August 11, 1994 between the Company and J. Richard
Leaman, Jr., incorporated by reference to Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q for the third quarter of 1994.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10(n)* --Employment Agreement dated April 19, 1994 between the Company and
Albert J. Dunlap, incorporated by reference to Exhibit 10(a) to the
Company's Quarterly Report on Form 10-Q for the second quarter of
1994.
10(o)* --Form of Restricted Stock Agreement dated as of September 16, 1994
between the Company and certain grantees of restricted shares under
the 1994 Long-Term Incentive Plan, including Albert J. Dunlap, Basil
L. Anderson, Edward B. Betz, Paolo Forlin, Russell A. Kersh, John P.
Murtagh, Richard R. Nicolosi and P. Newton White, incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q for the third quarter of 1994.
10(p)* --Form of Agreement between the Company and Russell A. Kersh, John P.
Murtagh and Richard R. Nicolosi dated June 30, 1994 and September 19,
1994, respectively.
12 --Statement re computation of ratio of earnings to fixed charges.
13 --The Company's 1994 Annual Report to Shareholders.
21 --The Company's Subsidiaries.
23 --Consent of Independent Accountants.
24 --Power of Attorney.
</TABLE>
--------
* These items are management contracts or compensatory plans or arrangements
required to be filed as an exhibit to this form pursuant to Item 14(c) of
this report.
22
<PAGE>
EXHIBIT 10(P)
, 1994
Mr.
Dear
In consideration of your agreement to be employed in a key executive position
with Scott Paper Company ("Scott"), Scott agrees, in the event of your
involuntary termination/(1)/ from Scott, or a Change of Control as that term is
defined in Scott's 1994 Long-Term Incentive Plan, to pay you in a lump sum,
within 30 days of the effective date of the termination or change of control,
an amount equal to your then-current annual salary plus an amount determined by
multiplying your preceding year's bonus under the Scott Performance Plan, or
any replacement or other annual incentive plan, by a fraction, the numerator of
which is the number of days you are employed during the then-current year and
the denominator of which is 365.
You will not be entitled to any benefit under Scott's Termination Pay Plan
for Salaried Employees or any replacement severance pay program. During the
year following your termination, you will be obligated to reimburse Scott for
any unemployment compensation you apply for and receive.
Please acknowledge your receipt and agreement to the terms of this letter by
your signature below.
Very truly yours,
A. J. Dunlap
Chairman and Chief Executive Officer
Accepted and Agreed:
_____________________________
DATE:
_________________________
/(1)/ An "involuntary termination" excludes a separation which is voluntary, on
account of death, retirement or serious misconduct.
<PAGE>
EXHIBIT 12. STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(/1/)
(UNAUDITED)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
------ ------ ------ ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations
before taxes and share
of earnings of
international equity
affiliates............. $ 18.8 $(64.0) $192.6 $(265.8) $380.0
Adjustments to earnings
(loss):
Minority interest in
majority-owned
subsidiaries
having fixed charges. 6.6 8.9 9.1 10.4 10.3
Share of earnings
(loss) before taxes
of fifty percent
owned equity
affiliates........... 9.7 6.8 (3.6) 3.2 5.6
Distributed income of
less than fifty
percent owned equity
affiliates and share
of loss, if any, if
debt is guaranteed... -- -- 14.5 -- --
Previously capitalized
interest amortized
during the period.... 2.6 3.3 2.5 2.4 2.7
Fixed charges net of
capitalized interest. 225.6 203.4 176.4 156.9 161.7
------ ------ ------ ------- ------
Earnings (loss) before
taxes and fixed charges
as adjusted............ $263.3 $158.4 $391.5 $ (92.9) $560.3
====== ====== ====== ======= ======
Fixed charges (see
below)................. $247.2 $208.4 $178.5 $ 164.6 $172.0
====== ====== ====== ======= ======
Ratio of earnings to
fixed charges.......... 1.1x/(2)/ /(3)(2)/ 2.2x /(3)(2)/ 3.3x
====== ====== ====== ======= ======
Fixed charges:
Interest incurred..... $205.0 $169.5 $144.3 $ 132.7 $141.9
Share of interest
incurred of fifty
percent owned equity
affiliates........... 25.8 20.7 15.0 12.7 12.5
Portion of rental
expense which
represents an
appropriate interest
factor............... 15.6 17.5 18.5 18.3 16.8
Share of portion of
rental expense which
represents an
appropriate interest
factor for fifty
percent owned equity
affiliates........... 0.8 0.7 0.7 0.9 0.8
------ ------ ------ ------- ------
Total fixed charges..... 247.2 208.4 178.5 164.6 172.0
Less:
Capitalized
interest........... (21.6) (5.0) (2.1) (7.7) (10.3)
------ ------ ------ ------- ------
Total fixed charges net
of capitalized
interest............... $225.6 $203.4 $176.4 $ 156.9 $161.7
====== ====== ====== ======= ======
</TABLE>
--------
/(1)/ S.D. Warren, the Company's printing and publishing papers subsidiary, was
sold on December 20, 1994, and is reflected as a discontinued operation in
the statement of consolidated operations in the Company's 1994 Annual
Report to Shareholders. Accordingly, these computations exclude earnings
(losses) and net fixed charges of this discontinued operation for all
years presented.
/(2)/ Excluding the special items referred to on page 40 of the Company's 1994
Annual Report to Shareholders, the ratio of earnings to fixed charges
would have been 1.5, 2.0 and 1.9 for 1990, 1991 and 1993, respectively.
/(3)/ Earnings did not cover fixed charges by $50.0 million and $257.5
million in 1991 and 1993, respectively.
<PAGE>
Management's Discussion and Analysis
As a result of the decision by the Company to focus on its core tissue
business, S.D. Warren, the Company's printing and publishing papers subsidiary,
was sold on December 20, 1994, and is reflected as a discontinued operation in
the Company's statement of consolidated operations. For 1994, S.D. Warren's
results include an allocation of interest expense and income taxes, and prior
years' results have been reclassified to this same basis of reporting. See
Discontinued Operation in Note 2.
Results of Operations -- 1994 vs. 1993
Consolidated sales for the continuing business for 1994 were essentially
the same as in 1993 at approximately $3.6 billion. Income from continuing
operations was $501.6 million for 1994 versus a loss of $146.1 million in 1993.
Net income for 1994 was $209.8 million, or $2.81 per share, versus a net loss
for 1993 of $277.0 million, or $3.75 loss per share.
The Company's results for both 1994 and 1993 included the effects of
special items, which are discussed further below. Excluding the special items
for both periods, income from continuing operations increased 59% to $406.5
million in 1994 versus $255.0 million in 1993, and net income increased 82% to
$214.4 million in 1994 from $117.6 million in 1993.
The following table presents earnings for 1994 and 1993, as reported and
excluding special items.
<TABLE>
<CAPTION>
1994 1993
----------------------------------------
Excluding Excluding
(In millions, except Special Special
on a per share basis) Reported Items Reported Items
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (Loss)
from continuing
operations $501.6 $406.5 $(146.1) $255.0
Net Income (Loss) $209.8 $214.4 $(277.0) $117.6
Earnings (Loss) per share $2.81 $2.87 $(3.75) $1.58
</TABLE>
The special items for 1994 totaled a net charge of $.06 per share and included:
<TABLE>
<CAPTION>
Per Share
----------------------------------------------------------------
<S> <C>
Sales of the energy facility in Mobile,
Alabama and Scott Health Care $ .81
Share of restructuring charge -- Canadian affiliate (.05)
Premiums related to the Company's debt reduction program (.82)
Sale of S.D. Warren -
----------------------------------------------------------------
Total $(.06)
----------------------------------------------------------------
</TABLE>
For 1993, special items totaled a net charge of $5.33 per share and were
comprised of:
<TABLE>
<CAPTION>
Per Share
----------------------------------------------------------------
<S> <C>
Restructuring charge $(5.15)
Share of nonrecurring items -- Mexican affiliate (.20)
Changes in the U.S. tax law (.14)
Premium related to the Company's debt retirement (.13)
Cumulative effect of adoption of FAS 109,
Accounting for Income Taxes .29
----------------------------------------------------------------
Total $(5.33)
----------------------------------------------------------------
</TABLE>
In August 1994, the Company's previously announced restructuring program was
expanded and also accelerated in order to be completed by year end 1994. No
additional charges were required to accomplish the expanded program. The
revised program included additional reductions in the worldwide work force,
significant decreases in controllable expenses and the closure or reduction of
capacity at certain older, high-cost production facilities (see Note 3). The
restructuring program resulted in the elimination of approximately 11,000
positions. These actions, together with the sale of S.D. Warren and other
businesses, brought the total year end employee level to 19,900. The Company
anticipates annual pretax benefits of approximately $340 million from the
successful implementation of the program.
As shown on the statement of consolidated operations, the following table
presents income and earnings per share from continuing operations before
extraordinary loss and cumulative effect of
accounting change.
<TABLE>
<CAPTION>
1994 1993
------------------------------------------
Excluding Excluding
(In millions, except Special Special
on a per share basis) Reported Items Reported Items
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (Loss) $264.1 $207.6 $(237.8) $108.2
Earnings (Loss) per share $3.54 $2.78 $(3.22) $1.45
</TABLE>
With the completion of the sale of the printing and publishing papers
subsidiary, Scott's continuing operations are reported in one
segment -- "Tissue Products." The following is a discussion and analysis of
this segment and the information which appears in Note 28. In order to provide
a better basis for comparison, results of operations are discussed both as
reported and excluding special items.
Tissue Products
This segment consists primarily of tissue products for personal care,
environmental cleaning and wiping, health care and foodservice. Consolidated
sales for the
17
<PAGE>
tissue products segment were approximately $3.6 billion in 1994,
essentially equal to 1993. Consolidated operations reported income from
operations of $513.3 million in 1994 versus a loss from operations of $54.8
million in 1993. Excluding special items in both years, income from operations
was approximately 48% higher in 1994 than in 1993. Excluding special items, the
operating margin for the global tissue business was 12.7% in 1994 compared with
8.5% in 1993, primarily due to the benefit of cost reductions associated with
the restructuring program. In the fourth quarter of 1994, as the effect of the
restructuring efforts began to be more fully realized, the global tissue
business reported a record operating margin from normal operations of 15.5%.
United States
Sales revenue for Scott's total tissue products business increased
approximately 1% in 1994 compared with 1993 while sales volume decreased
approximately 1%. For the year, sales volume of away-from-home products
increased while sales volume of consumer products was lower. For 1994, average
selling prices for tissue products were approximately 2% better than in 1993.
Income from operations, excluding special items in both years, increased 53% to
$289.6 million, primarily due to cost improvements in all areas of the business
as a result of the restructuring program.
Europe
Markets in the Company's European region were weak for most of 1994,
contributing to a decline in both sales revenue and volume of approximately 5%
compared with 1993. Despite lower sales, income from operations, excluding
special items, increased 45% in 1994 to $121.6 million. The increase in income
from operations was due to the benefit from restructuring and other cost
reductions, including reduced promotional spending, which more than offset
lower sales volume and higher pulp prices. Average selling prices were about
the same in 1994 compared with 1993. However, selected price increases were
implemented in the second half of 1994.
Pacific and Latin America
In the Pacific and Latin American regions, sales volume increased 6% and
sales revenue in 1994 was approximately 9% higher than in 1993. Income from
operations, excluding special items in 1993, increased 31% due to higher
volume, cost reductions and price increases which more than offset higher pulp
prices and other inflation.
International Equity Affiliates
Scott's share of international equity affiliates' earnings was $23.9
million in 1994 versus a loss of $21.7 million in 1993. Excluding special items
in both years, Scott's share of net income from international equity affiliates
increased 60% to $27.3 million in 1994. The improved results in both the
Canadian and Mexican affiliates were mainly due to cost reductions and
increased volume in Canada which more than offset higher pulp prices and other
inflation. Due to the change in the reporting date of its year end, the Mexican
operation's annual results include December 1994, which although adversely
affected by the devaluation of the peso during that period, did not have a
material impact on earnings per share.
Interest, Other Income and Taxes
Interest expense in 1994 was $131.2 million versus $123.8 million in 1993,
after the allocation of interest to the discontinued operation for both years.
The increase was primarily due to higher market interest rates.
Other income and expense totaled $9.6 million in 1994 versus $4.1 million
in 1993, largely due to increased interest income.
The Company reported income tax expense of $139.8 million in 1994 versus a
tax benefit of $49.7 million in 1993, excluding allocations of taxes to the
discontinued operation and to the extraordinary loss due to extinguishment of
debt in both years. Excluding the effects of special items in both years, the
effective tax rates for continuing operations for 1994 and 1993 were
approximately 37% and 40%, respectively.
See the Financial Review Notes for further detail on the above items.
Discontinued Operation --
Printing and Publishing Papers
On December 20, 1994, the Company completed the sale of S.D. Warren, its
former printing and publishing papers subsidiary, for $1.6 billion including
the assumption of debt. As part of the sale, Scott agreed to retain certain
retiree and other liabilities, which are not expected to have a material impact
on future reported earnings. The sale of S.D. Warren did not result in any gain
or loss. See Discontinued Operation in Note 2.
Results for S.D. Warren, net of interest expense and income taxes, were
income of $6.8 million in 1994 compared with a loss of $51.3 million in 1993.
Excluding special items in 1993, S.D. Warren reported income of $9.4 million in
1993. Manufacturing cost improvements and higher sales volume were not
sufficient to offset lower average selling prices, higher market pulp prices
and inflation.
18
<PAGE>
Returns and Margins
<TABLE>
<CAPTION>
1994 1993
--------------------------------------------------------------------------
Excluding Excluding
Special Special
Reported Items Reported Items
---------------------------------------------------------------------------
<S> <C> <C> <C>
Operating margin --
tissue business 14.3% 12.7% (1.5)% 8.5%
Return on investment 5.7% 6.6% (3.1)% 4.5%
Return on common
shareholders' equity 12.7% 13.0% (14.4)% 5.9%
---------------------------------------------------------------------------
</TABLE>
Trends
The continued improvement of the U.S. economy generally resulted in a
strengthening of the Company's markets as 1994 progressed. This trend is
expected to continue into 1995. With the completion of the sale of S.D. Warren
and the decision by the Company to focus on its core tissue business, the
demand for the Company's products is expected to be less cyclical in the future.
The economies in the European region appear to be in the early stages of
recovery, which should improve growth prospects in that region. However,
results from Scott's operations in Europe could be negatively impacted if the
dollar were to strengthen relative to the currencies in countries where the
Company has significant operations. Markets in the Pacific rim, including the
Company's recently announced ventures in China and Indonesia, represent
significant opportunities for future growth and development. In Mexico, where
the Company's affiliate has recently announced capacity expansion, longer term
prospects continue to be favorable despite the recent devaluation of the peso.
Limited capacity expansion has been announced around the world, and
industry forecasts for tissue markets indicate that worldwide operating rates
are expected to gradually strengthen during 1995 and 1996 compared with the
relatively weak operating rates of the past several years. The Company has also
announced price increases in many of its markets around the world and is
working to implement them. In view of overall market growth which is expected
to be modest, the Company is accelerating its successful strategy of supplying
innovative products and services to away-from-home markets and is repositioning
and implementing a new global strategy for its key consumer brands.
As a net buyer of pulp, Scott has benefited over the last several years
from declining market prices for this commodity. However, much of this benefit
has been negated by lower selling prices for finished products, especially in
those markets where there are many competitors whose primary source of fiber is
purchased pulp. Over the long term, pulp prices tend to follow a cyclical
pattern, and as 1994 progressed, pulp and waste paper prices increased
dramatically. Further price increases were announced in early 1995. The Company
may be negatively impacted if prices paid by Scott for pulp increase without a
corresponding increase in the selling prices for finished products. To reduce
the Company's exposure to this cyclicality, a portion of Scott's pulp supply is
purchased on the basis of a multi-year moving average price. In addition, the
Company continues to review its use of pulp, including potential increases in
the use of recycled fiber.
As part of its strategy to focus on its core tissue business and reduce
capital intensity, the Company has announced plans to divest a number of
non-core assets in 1995, including the energy complex at its Chester,
Pennsylvania facility and various pulp mill and timber assets. It is difficult
to estimate the impact of the anticipated transactions on the Company's overall
cost structure as operating cost increases may result from these potential
asset sales while interest expense will be reduced.
Scott and other manufacturers of pulp in the U.S. face proposed
regulations imposing stringent limits on emissions including chlorinated
organics, such as dioxin and chloroform, which may arise from the process of
manufacturing bleached pulp. In 1993, the Environmental Protection Agency (EPA)
issued proposed regulations, which included limitations on a variety of
discharges and emissions. Based on its evaluation of the 1993 proposed
regulations, the Company believes that the additional capital expenditures
required to comply with them at its existing sites would be approximately $250
million implemented in the 1997-1999 period. This estimate could change further
depending on several factors, including additional evaluation of the proposed
regulations, changes in the proposed regulations, new developments in control
and process technology, and inflation.
During 1994, five-year labor agreements were ratified at three of Scott's
manufacturing sites in the U.S. There are no agreements to be negotiated at
large U.S. sites in 1995.
[CHART ENTITLED "RETURN ON EQUITY" APPEARS HERE]
19
<PAGE>
Liquidity and Capital Resources
Cash flow provided by operating activities was $211.9 million in 1994
compared with $315.8 million and $417.3 million in 1993 and 1992, respectively.
The reduction in operating cash flows was primarily due to cash payments for
the restructuring program and $100.0 million to repurchase previously factored
customer receivables. These cash outflows were partially offset by improved
income resulting from the Company's restructuring efforts.
During 1994, the Company sold various nonstrategic assets, primarily S.D.
Warren, the energy complex at the Mobile, Alabama mill, and substantially all
of the Company's interest in Scott Health Care. Proceeds from these sales
totaled approximately $2 billion, which includes debt assumed by the acquirers.
The Company has announced plans to divest other non-core assets in 1995,
including the energy complex at its Chester, Pennsylvania facility, and various
pulp and timber assets.
The Company used the above proceeds to retire $1,477 million of debt of
which $768 million occurred prior to the end of the year. The debt retirements
consist of prepayments of term loans of $150 million and debentures of $784
million (see Note 16), assumptions of debt of $205 million and repayments of
commercial paper and other debt of $338 million. The Company has also announced
its intention to use a portion of the proceeds to repurchase $300 million of
its common shares.
Total capital expenditures were $375.0 million in 1994 compared with
$457.8 million and $329.7 million in 1993 and 1992, respectively. See Note 7 for
continuing operations' expenditures. During 1995 and 1996, the Company plans to
invest $550-$650 million in capital projects. The projects include continued
spending on the tissue mill in Owensboro, Kentucky, the new converting facility
in Arizona, and other projects designed to sustain existing operations and
reduce costs. The Company expects to finance this spending primarily from
internally generated funds.
In May 1994 and December 1993, the Company issued $45 million and $110
million, respectively, of tax-exempt bonds to finance portions of the Owensboro
tissue mill. During 1993, the Company issued $200 million in publicly held
long-term debt used primarily to pay maturing debt. The bonds issued in 1994
and 1993 were not affected by the debt reduction program initiated in December
1994.
The Company has both variable rate debt and variable rate financial
assets. Variable rate financial assets reduce the Company's exposure to
increasing interest rates on its variable rate debt. At the end of 1994,
variable rate financial assets were approximately equal to variable rate debt.
When variable rate assets are netted against debt, the variable rate portion of
the Company's debt was 49% and 39% as of December 25, 1993 and December 26,
1992, respectively.
To maintain flexibility in meeting its financing needs, the Company has
two revolving bank credit facilities totaling $775 million which were unused as
of December 31, 1994, and December 25, 1993.
Results of Operations -- 1993 vs. 1992
Consolidated sales from continuing operations in 1993 decreased 7% to $3.6
billion compared with $3.9 billion in 1992, primarily due to the impact of
unfavorable European foreign exchange rates. Results of continuing operations
were a loss of $146.1 million in 1993 versus income from operations of $322.9
million in the prior year. The Company recorded a net loss of $277.0 million,
or a per-share loss of $3.75, versus net income of $167.2 million and earnings
per share of $2.26 in 1992.
The Company's results for 1993 included the effects of special items
amounting to approximately $394.6 million after tax, or $5.33 per share.
Excluding the effects of special items, net income was $117.6 million and
earnings per share were $1.58. Restructuring charges related to S.D. Warren,
the Company's former printing and publishing papers subsidiary, are included in
the results of the discontinued operation, which also include appropriate
allocations of interest expense and income taxes.
The following table presents earnings for 1993 and 1992, both as reported
and excluding special items in 1993. See page 17 for a discussion of the
special items.
<TABLE>
<CAPTION>
1993 1992
--------------------------------------------
Excluding
(In millions, except Special
on a per share basis) Reported Items Reported
-----------------------------------------------------------------------------
<S> <C> <C> <C>
(Loss) Income from
continuing operations $(146.1) $255.0 $322.9
Net (Loss) income $(277.0) $117.6 $167.2
(Loss) Earnings per share $(3.75) $1.58 $2.26
</TABLE>
Tissue Products
The following is a discussion and analysis of the "Tissue Products"
segment and the information which appears in Note 28. In order to provide a
better basis for comparison, results of operations are discussed both as
reported and excluding special items. Consolidated sales for the tissue products
segment were $3.6 billion in 1993 compared with $3.9 billion in 1992.
Consolidated operations reported a loss from operations of $54.8 million in 1993
versus income from operations of $374.7 million in 1992. Excluding special items
in 1993, income from operations for the global tissue business was $305.2
million in 1993, down 19% from $374.7 million in 1992. Excluding special items
in 1993, the operating margin was 8.5% in 1993 compared with 9.7% in 1992.
20
<PAGE>
United States
In 1993, sales revenue for Scott's total tissue products business was up
slightly over 1992. Sales volume decreased 1%, while average selling prices for
tissue products were approximately 2% better than in 1992 despite the
continuation of extremely competitive market conditions.
Excluding special items in 1993, income from operations decreased 11%.
Manufacturing cost improvements and improved product pricing had a favorable
impact on income from operations, but these positive factors were offset by
manufacturing cost inflation, higher freight and distribution expenses, and
increased spending for strategic product development and marketing.
Europe
Sales volume in the Company's European region was 3% less than in 1992 and
sales revenue decreased 20%, of which approximately 16% was related to changes
in exchange rates due to the continuing strength of the U.S. dollar. Also
impacting results were competitive pricing pressures and the region's weak
economies. Excluding special items in 1993, income from operations declined 31%
compared with 1992 and, excluding the change in exchange rates, was 6% lower
than in 1992. Productivity gains and manufacturing cost improvements achieved
by the European businesses partially offset the negative impact of the lower
sales volume and pricing.
Pacific and Latin America
In the Pacific and Latin American regions, sales volume for the Company's
consolidated operations grew 5% compared with 1992, and sales revenue in 1993
was 5% higher than in the previous year. Income from operations, excluding
special items in 1993, decreased 19%.
International Equity Affiliates
Scott's share of international equity affiliates' earnings was a loss of
$21.7 million compared with earnings of $5.4 million in 1992.
Excluding special items in 1993, Scott's share of net income from its
Mexican affiliate more than doubled, primarily due to improvement in its
consumer business. The Company's Canadian affiliate also reported improved
results in 1993 mainly due to cost reductions.
Interest, Other Income and Taxes
Interest expense for 1993 was $123.8 million compared with $141.4 million
in 1992, after allocation of interest to the discontinued operation for both
years. The decrease was primarily due to reduced interest rates and favorable
foreign exchange impacts.
Other income and expense items reflect income of $4.1 million in 1993 down
$7.0 million from 1992 largely due to lower interest income.
The Company reported a tax benefit of $49.7 million in 1993 compared with
taxes on income of $50.5 million in 1992, after allocation of taxes to the
discontinued operation in both years. Excluding the effects of special items in
both years, the effective tax rates for continuing operations for 1993 and 1992
were approximately 40% and 26%, respectively.
See the Financial Review Notes for further detail on the above items.
Discontinued Operation --
Printing and Publishing Papers
Results for S.D. Warren, net of interest expense and income taxes, were a
loss of $51.3 million in 1993 compared with income of $19.7 million in 1992.
Excluding restructuring charges in 1993, S.D. Warren reported income of $9.4
million, a 52% decrease compared with 1992. Lower sales volume and lower
average selling prices were the result of intense competitive activity and
increased levels of imports into the U.S. markets. Results in 1992 were
affected by increased costs associated with the shutdown and rebuild of the
recovery boiler at the Somerset mill in Skowhegan, Maine.
Returns and Margins
<TABLE>
<CAPTION>
1993 1992
----------------------------------------------------------------
Excluding
Special
Reported Items Reported
----------------------------------------------------------------
<S> <C> <C> <C>
Operating margin --
tissue business (1.5)% 8.5% 9.7%
Return on investment (3.1)% 4.5% 5.9%
Return on common
shareholders' equity (14.4)% 5.9% 8.2%
</TABLE>
21
<PAGE>
Accounting Standards Changes
In the first quarter of 1994, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 112 (FAS 112), Employers' Accounting for
Post-employment Benefits. This standard requires employers to recognize and,
when necessary, accrue for the estimated cost of benefits provided to former or
inactive employees after employment but before retirement. The effect on the
Company of adopting this statement was not material.
In 1994, the Company adopted FASB Statement No. 119 (FAS 119), Disclosures
about Derivative Financial Instruments and Fair Value of Financial Instruments,
which requires certain disclosures about derivative financial instruments. This
statement does not affect how the Company accounts for financial instruments on
its balance sheet or income statement. Note 17 provides information regarding
the Company's financial instruments.
In the first quarter of 1993, the Company adopted FASB Statement No. 109
(FAS 109), Accounting for Income Taxes. The Company reported a positive
adjustment for the cumulative effect of adopting FAS 109 of $21.7 million, or
$.29 per share. See Note 14.
In the first quarter of 1992, the Company adopted FASB Statement No. 106
(FAS 106), Employers' Accounting for Postretirement Benefits Other Than
Pensions, as discussed in Note 24.
The accounting standards changes have no impact on the Company's cash
flow.
Effects of Changing Prices
The moderate levels of inflation during recent years have not had a
material effect on the Company. Although the replacement cost of assets
increases during inflationary periods, cash flow and earnings can be maintained
through the ability to increase selling prices when market conditions permit
and also through the repayment of debt with dollars that have reduced
purchasing power.
Quarterly Highlights (Unaudited)
<TABLE>
<CAPTION>
1994(1) 1993(1)
------------------------------------------- --------------------------------------------
(In millions, except 1st 2nd 3rd 4th 1st 2nd 3rd 4th
on a per share basis) Quarter Quarter Quarter Quarter(4) Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $828.7 $914.3 $877.3 $960.8 $868.3 $927.5 $884.3 $ 904.8
Gross margin(2) 231.9 285.0 268.0 285.4 236.0 257.4 256.7 258.4
Income (Loss) from:
Continuing operations 28.5 50.3 54.5 130.8 17.2 23.7 21.6 (300.3)
Discontinued operation (3.3) (10.1) 6.1 14.1 6.3 (.2) 3.0 (60.4)
Extraordinary loss on
early extinguishment
of debt - - - (61.1) - - - (9.6)
Cumulative effect of
change in accounting
for income taxes - - - - 21.7 - - -
--------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 25.2 $ 40.2 $ 60.6 $ 83.8 $ 45.2 $ 23.5 $ 24.6 $(370.3)
================================================================================================================================
Dollars per common share:
Income (Loss) from:
Continuing operations $ .38 $ .68 $ .72 $ 1.76 $ .23 $ .32 $ .29 $ (4.06)
Discontinued operation (.04) (.14) .08 .19 .09 - .04 (.82)
Extraordinary loss on early
extinguishment of debt - - - (.82) - - - (.13)
Cumulative effect of change
in accounting for
income taxes - - - - .29 - - -
--------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss)(3) $ .34 $ .54 $ .80 $ 1.13 $ .61 $ .32 $ .33 $ (5.01)
Dividends .20 .20 .20 .20 .20 .20 .20 .20
--------------------------------------------------------------------------------------------------------------------------------
Market price - high $46 3/4 $53 3/4 $66 3/8 $70 5/8 $41 $37 7/8 $35 1/2 $39 3/4
- low 39 1/2 37 1/4 50 5/8 60 33 3/4 31 7/8 31 32 3/8
================================================================================================================================
</TABLE>
(1) See Management's Discussion and Analysis for discussion of special items.
(2) Sales less product costs.
(3) Based on the average common shares outstanding at the end of each period.
(4) Contains 14 week quarter, all others shown are 13 weeks.
22
<PAGE>
Financial Review
Responsibility For Financial Statements
To the Shareholders
Scott Paper Company
The Financial Review has been prepared by the Company in conformity with
generally accepted accounting principles to reflect the substance of all
relevant events and transactions. The Company is responsible for all information
and representations contained in the Financial Review and for the estimates and
judgments required for its preparation.
In order to meet this responsibility, the Company maintains a system of
internal accounting controls which is designed to provide what are believed to
be reasonable assurances that assets are safeguarded, transactions are executed
in accordance with the Company's authorization and financial records are
reliable as a basis for preparation of financial statements. The Company is
continually modifying its system of internal accounting controls in response to
changes in business conditions and operations. Support for this system is
provided by the Company's internal auditors through their periodic audits of
Scott's operations throughout the world.
The Company's independent accountants, Coopers & Lybrand L.L.P., are
engaged to conduct an independent audit of the Company's financial statements,
which includes such review of the system of internal accounting controls to
determine their auditing procedures as they consider necessary in the
circumstances. Their opinion on the fairness of reported operating results and
financial condition appears on this page.
The Company's Board of Directors has had an Audit Committee composed
solely of outside directors since 1969. This Committee reviews the Company's
accounting controls and policies as well as its practices in financial reporting
to shareholders and the public. It meets on a timely basis with the internal
auditors, the independent accountants and Company management to review their
work and to ensure that each is properly fulfilling its responsibilities. In
addition, the internal auditors and independent accountants each meet
periodically with the Committee, without Company management present, to discuss
the results of their audit work and related matters.
It is the policy of the Company to conduct its affairs in a manner
designed to earn the respect of the public as a reputable and honest business
firm. This is reflected in Company policy statements on the conduct of domestic
and international business activities, conflicts of interests, internal
accounting controls and compliance with antitrust, environmental and other laws.
These policies are communicated regularly to employees and compliance is
monitored regularly by the Company in an effort to provide reasonable assurances
of their continuing effectiveness.
Scott Paper Company
Report of Independent Accountants
To the Shareholders and Board of Directors
Scott Paper Company
We have audited the accompanying consolidated balance sheet of Scott Paper
Company and its subsidiaries as of December 31, 1994, and the related
consolidated statements of operations, cash flows and common shareholders'
equity for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of Scott Paper Company and its subsidiaries for the years ended
December 25, 1993 and December 26, 1992 were audited by other auditors whose
report dated January 25, 1994, included an explanatory paragraph that described
the changes in accounting for income taxes in 1993 and postretirement benefits
other than pensions in 1992 as discussed under Accounting Policies in the
Financial Review Notes.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1994 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Scott
Paper Company and its subsidiaries as of December 31, 1994, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103
January 31, 1995
23
<PAGE>
Consolidated Operations
--------------------------------------------------
Scott Paper Company
<TABLE>
<CAPTION>
(In millions, except on a per share basis) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $3,581.1 $3,584.9 $3,856.0
--------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Product costs 2,510.8 2,576.4 2,745.7
Marketing and distribution 479.9 536.7 572.0
Research, administration and general 189.0 208.3 218.3
Restructuring and divestments - 401.1 -
Other (100.2) 8.5 (2.9)
--------------------------------------------------------------------------------------------------------------------------
3,079.5 3,731.0 3,533.1
--------------------------------------------------------------------------------------------------------------------------
Income (Loss) from continuing operations 501.6 (146.1) 322.9
Interest expense 131.2 123.8 141.4
Other income and (expense) 9.6 4.1 11.1
--------------------------------------------------------------------------------------------------------------------------
Income (Loss) from continuing operations before taxes 380.0 (265.8) 192.6
Income taxes 139.8 (49.7) 50.5
--------------------------------------------------------------------------------------------------------------------------
Income (Loss) from continuing operations before share of earnings (loss)
of international equity affiliates, extraordinary loss and cumulative
effect of accounting change 240.2 (216.1) 142.1
Share of earnings (loss) of international equity affiliates 23.9 (21.7) 5.4
--------------------------------------------------------------------------------------------------------------------------
Income (Loss) from continuing operations before extraordinay loss and
cumulative effect of accounting change 264.1 (237.8) 147.5
--------------------------------------------------------------------------------------------------------------------------
Discontinued operation -- printing and publishing papers:
Income (Loss) from operations through December 20, 1994,
net of income tax expense (benefit) of $4.0, $(14.3) and $8.0 for
1994, 1993 and 1992, respectively 6.8 (51.3) 19.7
Gain (Loss) on disposal - - -
--------------------------------------------------------------------------------------------------------------------------
Income (Loss) before extraordinary loss and cumulative
effect of accounting change 270.9 (289.1) 167.2
Extraordinary loss on early extinguishment of debt, net of
income tax benefit of $35.8 and $5.2 for 1994 and 1993, respectively (61.1) (9.6) -
Cumulative effect of change in accounting for income taxes - 21.7 -
--------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 209.8 $ (277.0) $ 167.2
==========================================================================================================================
Per share:
Income (Loss) from continuing operations before extraordinary loss and
cumulative effect of accounting change $3.54 $(3.22) $1.99
Income (Loss) from discontinued printing and publishing papers operation .09 (.69) .27
Extraordinary loss on early extinguishment of debt (.82) (.13) -
Cumulative effect of change in accounting for income taxes - .29 -
--------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per share $2.81 $(3.75) $2.26
==========================================================================================================================
Dividends per share $.80 $.80 $.80
Average common shares outstanding 74.7 74.0 73.9
==========================================================================================================================
</TABLE>
The Financial Review, pages 23-39, is an integral part of these statements.
24
<PAGE>
Consolidated Balance Sheet
-----------------------------------------------------
Scott Paper Company
<TABLE>
<CAPTION>
(Millions) December 31, 1994 December 25, 1993
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Current assets
Cash and cash equivalents $1,114.0 $ 133.6
Receivables 592.2 600.3
Inventories 401.9 523.7
Deferred income tax asset 146.6 277.9
Prepaid items and other 53.8 74.4
-----------------------------------------------------------------------------------------------------------------------
2,308.5 1,609.9
Plant assets, at cost $ 4,625.0 $ 7,357.5
Accumulated depreciation (2,143.0) 2,482.0 (3,302.2) 4,055.3
-------- --------
Timber resources, at cost less timber harvested 84.2 113.0
Investments in international equity affiliates 174.3 223.8
Investments in and advances to other equity affiliates 53.0 84.1
Construction funds held by trustees 79.5 87.1
Notes receivable 220.0 220.0
Goodwill and other assets 224.6 231.9
-----------------------------------------------------------------------------------------------------------------------
Total $5,626.1 $6,625.1
=======================================================================================================================
Liabilities and Shareholders' Equity:
Current liabilities
Payable to suppliers and others $ 810.8 $ 891.5
Current maturities of long-term debt 764.8 180.2
Accrued taxes on income 254.7 59.1
Accruals for restructuring programs 108.6 639.0
-----------------------------------------------------------------------------------------------------------------------
1,938.9 1,769.8
Long-term debt 1,093.1 2,366.2
Deferred income taxes 344.5 612.3
Other liabilities 497.2 301.1
-----------------------------------------------------------------------------------------------------------------------
3,873.7 5,049.4
Preferred shares 7.1 7.1
Common shareholders' equity
Common shares $ 506.1 $ 450.4
Reinvested earnings 1,509.6 1,358.1
Cumulative translation adjustment (259.2) (227.5)
Treasury shares (11.2) 1,745.3 (12.4) 1,568.6
-----------------------------------------------------------------------------------------------------------------------
Total $5,626.1 $6,625.1
=======================================================================================================================
</TABLE>
The Financial Review, pages 23-39, is an integral part of these statements.
25
<PAGE>
Consolidated Cash Flows
---------------------------------------------------
Scott Paper Company
<TABLE>
<CAPTION>
(Millions) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 209.8 $ (277.0) $ 167.2
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change - (21.7) -
Share of earnings/loss of affiliates, net of distributions (20.4) 29.0 16.0
Depreciation, cost of timber harvested and amortization 310.3 300.3 291.0
Deferred income taxes (121.8) (93.9) (2.9)
Extraordinary loss on extinguishment of debt, net of taxes 61.1 9.6 -
Gains on asset sales (99.5) (5.7) (12.9)
Postretirement benefits, net (funding) cost (36.0) 30.7 17.1
Changes in current assets and current liabilities net of
effects from businesses divested:
(Increase) Decrease in receivables (129.5) 7.5 (9.3)
Increase in inventories (2.2) (9.5) (4.1)
Decrease (Increase) in prepaid items and other 16.2 (10.3) (10.5)
(Decrease) Increase in payable to suppliers and others (28.2) (78.9) 43.4
(Decrease) Increase in accruals for restructuring programs (166.1) 429.1 (95.4)
Increase in accrued taxes on income 218.2 6.6 17.7
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 211.9 315.8 417.3
--------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Investments in plant assets, timber resources and other assets (375.0) (457.8) (329.7)
Proceeds from businesses divested and asset sales, net of debt
assumed by acquirers 1,780.9 5.7 103.9
Decrease (Increase) in construction funds 6.0 (85.0) -
Advances to affiliates, net (2.1) (2.3) (6.6)
Other investing (11.4) 11.0 (11.8)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,398.4 (528.4) (244.2)
--------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net decrease in short-term borrowings (36.8) (143.7) (192.6)
Proceeds from issuance of long-term debt 733.1 815.4 403.7
Repayments of long-term debt (1,249.7) (389.3) (363.8)
Premiums paid on early retirement of debt and interest rate swaps (59.3) - -
Dividends paid (60.0) (59.5) (59.4)
Proceeds from exercise of stock options 45.2 .8 3.7
Other financing (8.2) (13.3) (5.2)
--------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (635.7) 210.4 (213.6)
--------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 5.8 (5.9) (2.4)
--------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 980.4 (8.1) (42.9)
Cash and cash equivalents at beginning of year 133.6 141.7 184.6
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,114.0 $ 133.6 $ 141.7
==========================================================================================================================
</TABLE>
The Financial Review, pages 23-39, is an integral part of these statements.
26
<PAGE>
Consolidated Common Shares --
------------------------------------------------------
Scott Paper Company
<TABLE>
<CAPTION>
(Millions)
-----------------------------------------------------------------------
Of 200,000,000 Authorized
Common Shares (1) Cumulative
------------------------------ Common Reinvested Translation Treasury
Shares Issued Treasury Shares Total Shares Earnings Adjustment Shares
-------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C> <C> <C> <C>
74,335,384 592,144 Balance at December 28, 1991 $1,981.8 $439.2 $1,609.6 $ (52.6) $(14.4)
Net income 167.2 - 167.2 - -
Shares issued for the exercise
of stock options, stock awards
150,334 (16,264) and restricted stock 6.3 5.9 - - .4
Dividends paid on
Common shares (59.1) - (59.1) - -
Preferred shares (.3) - (.3) - -
Foreign currency translation
adjustment (69.0) - - (69.0) -
Minimum pension
liability adjustment (9.1) - (9.1) - -
-------------------------------------------------------------------------------------------------------------------------------
74,485,718 575,880 Balance at December 26, 1992 2,017.8 445.1 1,708.3 (121.6) (14.0)
Net loss (277.0) - (277.0) - -
Shares issued for the exercise
of stock options, stock awards
56,066 (64,404) and restricted stock 6.9 5.3 - - 1.6
Dividends paid on
Common shares (59.2) - (59.2) - -
Preferred shares (.3) - (.3) - -
Foreign currency translation
adjustment (105.9) - - (105.9) -
Minimum pension
liability adjustment (13.7) - (13.7) - -
-------------------------------------------------------------------------------------------------------------------------------
74,541,784 511,476 Balance at December 25, 1993 1,568.6 450.4 1,358.1 (227.5) (12.4)
Net income 209.8 - 209.8 - -
Shares issued for the exercise
of stock options, stock awards
1,509,686 (55,278) and restricted stock 56.9 55.7 - - 1.2
Dividends paid on
Common shares (59.7) - (59.7) - -
Preferred shares (.3) - (.3) - -
Foreign currency translation
adjustment (31.7) - - (31.7) -
Minimum pension
liability adjustment 1.7 - 1.7 - -
-------------------------------------------------------------------------------------------------------------------------------
76,051,470 456,198 Balance at December 31, 1994 $1,745.3 $506.1 $1,509.6 $(259.2) $(11.2)
===============================================================================================================================
</TABLE>
(1) Without par value
The Financial Review, pages 23-39, is an integral part of these statements.
27
<PAGE>
Financial Review Notes
1. Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all
majority-owned domestic and international subsidiaries listed on page 41. This
listing includes the percentage of direct or indirect ownership by Scott. All
significant intercompany transactions have been eliminated.
Fiscal Year End
The Company's fiscal year ends on the last Saturday in December, which
results in a 52- or 53-week year. Fiscal year 1994 consisted of 53 weeks while
fiscal years 1993 and 1992 consisted of 52 weeks. To facilitate prompt reporting
of Scott's financial results, the financial statements of most of the
international subsidiaries and affiliates are based on the twelve months ending
November 30.
Accounting Standards Changes
In 1994, the Company adopted Financial Accounting Standards Board (FASB)
Statement No. 112 (FAS 112), Employers' Accounting for Postemployment Benefits.
This standard requires employers to recognize and when necessary accrue for the
estimated cost of benefits provided to former or inactive employees after
employment but before retirement. The effect on the Company of adopting this
statement was not material.
In 1994, the Company adopted FASB Statement No. 119 (FAS 119), Disclosures
about Derivative Financial Instruments and Fair Value of Financial Instruments,
which requires certain disclosures about derivative financial instruments. This
statement does not affect how the Company accounts for financial instruments on
its balance sheet or income statement. Note 17 provides information regarding
the Company's financial instruments.
In 1993, the Company adopted FASB Statement No. 109 (FAS 109), Accounting
for Income Taxes. See Note 14 for discussion and analysis of the deferred tax
accounts.
In 1992, the Company adopted FASB Statement No. 106 (FAS 106), Employers'
Accounting for Postretirement Benefits Other Than Pensions. See Note 24.
Other Accounting Policies
Goodwill and acquired patents and trademarks are amortized over various
periods not exceeding 40 years. The realizability of goodwill and other
intangibles is evaluated periodically to assess recoverability and if warranted
impairment would be recognized. Expenditures for all other patents and
trademarks are charged to income as incurred. Other significant accounting
policies are included in the Notes of the Financial Review to which they apply.
2. Asset Sales and Proceeds
During 1994, the Company sold several nonstrategic assets, which are
discussed below.
Asset Sales
On December 16, 1994, the Company completed the sale of the energy and
recovery complex assets (the "Energy Complex") located at its Mobile, Alabama
mill site to Mobile Energy Services Company, Inc. (MESC), which is a
wholly-owned subsidiary of The Southern Company. Scott received approximately
$350 million, consisting of approximately $265 million in cash and the buyer's
assumption, guaranteed by The Southern Company, of $85 million of debt under a
tax-exempt financing relating to the Energy Complex. Under terms of an
agreement, MESC will provide power, steam and pulping liquor to the mills
located at this site.
On December 23, 1994, the Company sold substantially all of its interest
in a 50% owned joint venture for $65.7 million. This venture manufactures and
markets adult incontinence and wound care products under the name "Scott Health
Care."
The above asset sales resulted in an aggregate pre-tax gain of $95.1
million. This gain is included in income (loss) from continuing operations under
the caption "Other."
Discontinued Operation
On December 20, 1994, the Company completed the sale of S.D. Warren
Company, its former printing and publishing papers subsidiary, to an investor
group led by Sappi Limited. The Company received $1.6 billion which included the
buyer's assumption of approximately $120 million in debt. The sale of S.D.
Warren did not result in any gain or loss being recorded.
[CHART ENTITLED "NUMBER OF EMPLOYEES" APPEARS HERE]
28
<PAGE>
S.D. Warren's operations have been segregated and reported as a
discontinued operation in the accompanying statement of consolidated operations
and prior years have been reclassified to conform to the current year's
presentation. However, the prior years' consolidated balance sheet and statement
of consolidated cash flows have not been reclassified.
The condensed statement of operations related to the discontinued operation
for the years ended December 1994, 1993 and 1992 is presented below:
<TABLE>
<CAPTION>
(Millions) 1994 1993 1992
--------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $1,145.3 $1,143.9 $1,235.3
Costs and expenses 1,134.5 1,209.5 1,207.6
--------------------------------------------------------------------------
Income (Loss) before
income taxes 10.8 (65.6) 27.7
Income taxes 4.0 (14.3) 8.0
--------------------------------------------------------------------------
Net Income (Loss) $ 6.8 $ (51.3) $ 19.7
==========================================================================
</TABLE>
The effective tax rates for the discontinued operation varied from the federal
tax rates primarily due to the tax on foreign operations in 1994, the tax rate
increase on deferred taxes in 1993, and depreciation and state income taxes in
1992.
Proceeds
A portion of the proceeds from the sale of S.D. Warren and other asset
sales were used to retire debt as part of the Company's debt retirement program
(see Note 16). In addition to supporting this program a portion of the balance
remaining in cash and cash equivalents is intended to be used for the previously
announced $300 million repurchase of the Company's common shares.
3. Restructuring
In 1993, the Company recorded a charge for its planned restructuring and
productivity improvement programs. The plan included the estimated costs to
further reduce its work force as well as the costs to realign and shut down some
older and inefficient assets. The 1993 charge of $489.6 million was combined
with the balance from previous restructuring plans of $149.4 million. Included
in the 1993 charge was $88.5 million for S.D. Warren.
In August 1994, this plan was modified to accelerate the timing and
increase the total of the work force reductions. This expanded plan was
completed by year end 1994 and no additional charges were needed to achieve the
restructuring. The major elements of the 1994 plan were:
<TABLE>
<CAPTION>
Charges Reserve
Against December 31
(Millions) Reserve 1994
-------------------------------------------------------------
<S> <C> <C>
Cost of work force reductions $330.1 $ 83.8
Plant rationalization 107.7 11.8
Divested businesses 78.5 11.9
Other 14.1 1.1
-------------------------------------------------------------
$530.4 $108.6
=============================================================
</TABLE>
The costs for work force reductions relate to pension and medical benefit
enhancements for retirement eligible terminations and severance payments (see
Notes 24 and 25). Under the terms of the Company's termination policies most
remaining severance payments will be paid in 1995. The plant rationalization
charges were primarily related to equipment write-offs and disposals. The
charges for divested businesses relate to the Company's foodservice business
units, two of which are in the process of being sold, and to the discontinued
operation.
4. Receivables
<TABLE>
<CAPTION>
December 31 December 25
(Millions) 1994 1993
-----------------------------------------------------------
<S> <C> <C>
Customer receivables $534.2 $516.6
Allowance for discounts and
doubtful items (27.2) (25.3)
-----------------------------------------------------------
507.0 491.3
Other receivables 85.2 109.0
-----------------------------------------------------------
$592.2 $600.3
===========================================================
</TABLE>
During 1991, the Company entered into an agreementto sell a percentage ownership
interest in a defined pool of the Company's customer receivables. The Company
paid fees based on the purchaser's level of investment and borrowing costs.
During 1994, 1993 and 1992, the Company recorded $4.8 million, $4.5 million and
$5.0 million, respectively, of these fees as interest expense. In December 1994,
at no additional cost, the Company terminated this agreement by paying $100.0
million to repurchase these receivables.
5. Inventories
<TABLE>
<CAPTION>
December 31 December 25
(Millions) 1994 1993
-------------------------------------------------------------------
<S> <C> <C>
Finished products $150.6 $220.0
Work in process 56.0 69.6
Pulp, logs and pulpwood 90.1 67.5
Maintenance parts 65.5 106.2
Other materials and supplies 39.7 60.4
-------------------------------------------------------------------
$401.9 $523.7
===================================================================
</TABLE>
Of the Company's total inventories of $401.9 million, $127.3 million represents
inventories with cost determined by using the last-in, first-out (LIFO) method.
If inventories had been valued at the latest production or purchase cost, they
would have been $75.4 million higher at December 31, 1994 and $126.6 million
higher at December 25, 1993 than the amounts shown above. The significant
decrease between years is primarily due to the sale of S.D. Warren and is
accounted for as part of the sale transaction. Where the LIFO method is not
used, inventories are valued on a basis of average current manufacturing or
purchase cost.
29
<PAGE>
6. Plant Assets
<TABLE>
<CAPTION>
December 31 December 25
(Millions) 1994 1993
------------------------------------------------------------
<S> <C> <C>
Plant assets, at cost
Land $ 65.4 $ 73.0
Buildings 645.3 895.7
Machinery and equipment 3,914.3 6,388.8
------------------------------------------------------------
4,625.0 7,357.5
Accumulated depreciation (2,143.0) (3,302.2)
------------------------------------------------------------
$ 2,482.0 $ 4,055.3
============================================================
</TABLE>
7. Capital Expenditures
<TABLE>
<CAPTION>
(Millions) 1994 1993
------------------------------------------------------------
<S> <C> <C>
Plant and other assets $330.2 $376.8
Timber resources 2.9 5.9
Continuing operations 333.1 382.7
Discontinued operation 41.9 75.1
------------------------------------------------------------
Total $375.0 $457.8
============================================================
</TABLE>
Expenditures for renewals and betterments which increase the useful life or
capacity of plant assets, as well as reforestation costs, are capitalized. Costs
for repairs and maintenance are expensed.
The unexpended appropriations for capital additions at December 31, 1994
were approximately $246.7 million compared with $388.4 million at the end of
1993.
Expenditures for research and development are charged to income as
incurred and for continuing operations were $38.3 million, $47.0 million and
$45.2 million for the years 1994, 1993 and 1992, respectively.
8. Depreciation and Cost of Timber Harvested
<TABLE>
<CAPTION>
(Millions) 1994 1993 1992
----------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation of buildings,
machinery and equipment $199.0 $188.9 $173.5
Cost of timber harvested and
amortization of logging roads 5.6 5.0 4.3
----------------------------------------------------------------------
Continuing operations $204.6 $193.9 $177.8
======================================================================
</TABLE>
Depreciation expense for the discontinued operation was $85.2 million, $87.2
million and $88.0 million for 1994, 1993 and 1992, respectively.
Depreciation is principally calculated by the straight-line method. For
certain major capital additions, depreciation is calculated on the units-of-
production method during the learning curve phase of the project.
Depreciation is based on average useful lives of 20 years for pulp and
paper mill equipment, 15 years for finishing and converting equipment and 20 to
50 years for buildings.
The cost of timber harvested is determined by calculating that portion of
the investment in timber which the current year's harvest bears to the total
standing timber. Amortization is the cost of logging roads absorbed as timber is
harvested and is based on the estimated recoverable timber in areas serviced by
the roads.
On normal retirements or sales, the cost of plant assets is removed from
the asset account and charged to the related depreciation reserve account.
Amounts realized from such dispositions are credited to the reserve account.
9. International Equity Affiliates
The Company's international equity affiliates are Scott Paper Limited
(Canada) and Compauia Industrial de San Cristubal, S.A. (Mexico). These
affiliates are principally engaged in the manufacture and sale of sanitary paper
products similar to those sold by the Company. A minority-owned Mexican
affiliate owns approximately 3% of the Company's Mexican affiliate. The Company
views this indirect investment as temporary.
In 1994, the Company changed the reporting date for its Mexican affiliate
from November 30 to December 31. The effect of this change on the Company's
statement of consolidated operations was not material. However, a reduction of
$56.1 million occurred in its investment account due to foreign currency
translation adjustments primarily due to the devaluation of the peso.
In 1994, the Company's Canadian affiliate recorded net charges before
taxes of $10.6 million for restructuring that were primarily for work force
reductions.
In 1993, the Company's Mexican affiliate recorded net charges before taxes
of $45.6 million for restructuring including work force reductions and mill
closings related to its printing and writing papers business.
The following statements show the Company's investments in and share of
the earnings of the unconsolidated international affiliates using the equity
method of accounting.
<TABLE>
<CAPTION>
Investments in International Equity Affiliates
December 31 December 25
(Millions) 1994 1993
-------------------------------------------------------------------
<S> <C> <C>
Cost $ 53.2 $ 53.2
Equity in undistributed earnings 121.1 170.6
-------------------------------------------------------------------
$174.3 $223.8
===================================================================
</TABLE>
<TABLE>
<CAPTION>
Changes in Investments in
International Equity Affiliates
(Millions) 1994 1993
-------------------------------------------------------------------
<S> <C> <C>
Scott's share of:
Earnings (Loss) $ 23.9 $(21.7)
Cumulative effect of change in
accounting for income taxes - 3.7
Cash dividends paid to Scott (.6) (.6)
-------------------------------------------------------------------
Increase (Decrease) in
reinvested earnings 23.3 (18.6)
Dispositions and other .9 .1
Foreign currency translation (73.7) (3.9)
-------------------------------------------------------------------
Decrease in investments $(49.5) $(22.4)
===================================================================
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
International Equity Affiliates-Combined
Earnings of International Equity Affiliates
(Millions) 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $792.6 $782.0 $729.1
Costs and expenses 708.3 754.1 694.2
Restructuring 10.6 45.6 -
---------------------------------------------------------------------------
Income (Loss) from operations 73.7 (17.7) 34.9
Interest expense 10.3 15.8 18.4
Other income and (expense) (13.3) 4.6 6.4
---------------------------------------------------------------------------
Income (Loss) before taxes 50.1 (28.9) 22.9
Income taxes 3.7 12.8 12.3
---------------------------------------------------------------------------
Income (Loss) before
cumulative effect 46.4 (41.7) 10.6
Cumulative effect of change in
accounting for income taxes - 7.4 -
---------------------------------------------------------------------------
Net Income (Loss) $ 46.4 $(34.3) $ 10.6
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Financial Position of International Equity Affiliates
(Millions) 1994 1993
---------------------------------------------------------------------------
<S> <C> <C>
Current assets $229.0 $300.1
Plant assets, net 387.7 460.6
Other assets 21.0 27.2
---------------------------------------------------------------------------
Total assets 637.7 787.9
---------------------------------------------------------------------------
Current liabilities 160.4 151.2
Long-term debt 85.3 105.6
Other liabilities and deferred credits 63.5 106.5
---------------------------------------------------------------------------
Total liabilities 309.2 363.3
---------------------------------------------------------------------------
Shareholders' equity 328.5 424.6
Other investors' share 154.2 200.8
---------------------------------------------------------------------------
Scott's investment $174.3 $223.8
===========================================================================
</TABLE>
10. Investments in and Advances to Other
Equity Affiliates
The Company's other equity affiliates are various unconsolidated 50% or
less owned companies and joint ventures. The results from operations of these
affiliates are included in other operating income and expense.
At December 31, 1994, the Company's investments in and advances to other
equity affiliates totaled $53.0 million, which primarily represents the
Company's investment in companies which own a pulp mill, forestland and a tree
plantation in Chile.
The Company has an agreement with one of the Chilean affiliates obligating
the Company to purchase a minimum of 40% of the pulp mill's production at
market-related prices until 2001. The Company also has an option to purchase up
to 80% of the mill's production.
11. Payable to Suppliers and Others
<TABLE>
<CAPTION>
December 31 December 25
(Millions) 1994 1993
---------------------------------------------------------------------------
<S> <C> <C>
Payable to suppliers $493.7 $580.1
Accrued salaries, wages and
employee benefits 129.1 146.8
Taxes, other than on income 21.1 22.9
Accrued interest 48.7 50.8
Other accrued expenses 118.2 90.9
---------------------------------------------------------------------------
$810.8 $891.5
===========================================================================
</TABLE>
12. Income (Loss) Before Taxes
<TABLE>
<CAPTION>
(Millions) 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C>
Continuing Operations
Domestic $254.8 $(247.7) $105.9
International 125.2 (18.1) 86.7
$380.0 $(265.8) $192.6
Discontinued Operation
Domestic $ 5.5 $ (61.4) $ 27.7
International 5.3 (4.2) -
---------------------------------------------------------------------------
$ 10.8 $ (65.6) $ 27.7
===========================================================================
Extraordinary Loss
Domestic $ (96.9) $ (14.8) -
===========================================================================
</TABLE>
Domestic operations include the accounts of Scott Maritimes Limited, a wholly-
owned Canadian subsidiary, which produces pulp primarily for transfer to Scott
papermaking operations in the United States. However, the income tax expense of
Scott Maritimes Limited is included in foreign taxes on income.
13. Income Taxes
The components of income tax expense are:
<TABLE>
<CAPTION>
(Millions) 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C>
Current-Federal $ 213.4 $ 2.1 $29.6
-Foreign 15.7 26.1 30.1
-State and local 17.8 1.7 1.7
---------------------------------------------------------------------------
246.9 29.9 61.4
---------------------------------------------------------------------------
Deferred-Federal (137.2) (87.6) .9
-Foreign 17.0 (11.6) (5.1)
-State and local (18.7) .1 1.3
---------------------------------------------------------------------------
(138.9) (99.1) (2.9)
---------------------------------------------------------------------------
$ 108.0 $ (69.2) $58.5
===========================================================================
</TABLE>
Income tax expense is included in the financial statements
as follows:
<TABLE>
<CAPTION>
(Millions) 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C>
Continuing operations $139.8 $(49.7) $50.5
Discontinued operation 4.0 (14.3) 8.0
Extraordinary loss (35.8) (5.2) -
---------------------------------------------------------------------------
$108.0 $(69.2) $58.5
===========================================================================
</TABLE>
31
<PAGE>
14. Deferred Taxes
In the first quarter of 1993, the Company adopted FAS 109 and reported a
positive adjustment for the cumulative effect of $21.7 million or $.29 per
share. This standard requires that deferred taxes be accounted for using an
asset and liability approach. Under this approach the deferred taxes must be
based on the enacted tax rates in effect for the years in which the assets and
liabilities are expected to reverse.
Under FAS 109, the cumulative deferred tax liabilities and (assets) were
comprised of the following:
<TABLE>
<CAPTION>
December 31 December 25
(Millions) 1994 1993
--------------------------------------------------------------
<S> <C> <C>
Depreciation $ 365.5 $667.4
Installment sales 137.9 137.9
Other 62.0 49.9
--------------------------------------------------------------
Total deferred tax liabilities 565.4 855.2
--------------------------------------------------------------
Restructuring program charges (37.5) (260.8)
Tax loss carryforwards (200.3) (140.2)
Employee benefits (158.7) (90.5)
Alternative minimum
tax credit carryforward - (71.4)
Other (156.5) (132.4)
--------------------------------------------------------------
Total deferred tax (assets) (553.0) (695.3)
--------------------------------------------------------------
Valuation allowance 185.5 174.5
--------------------------------------------------------------
Net deferred tax liabilities $ 197.9 $334.4
==============================================================
</TABLE>
Valuation allowances relate to the potentially unusable portion of tax loss
carryforwards of $562.9 million which are in jurisdictions outside the United
States. Losses in the amount of $220.6 million have an unlimited carryover
period, while the remaining losses expire between the years 1995 and 2001.
For the year prior to the adoption of FAS 109, the deferred income tax
provision resulted from the following:
<TABLE>
<CAPTION>
(Millions) 1992
----------------------------------------------------------------
<S> <C>
Restructuring program charges $ 26.1
Depreciation 3.2
Interest expense (6.5)
Other operating expenses (13.7)
Other (12.0)
----------------------------------------------------------------
Deferred tax provision $ (2.9)
================================================================
</TABLE>
Deferred taxes resulted from recognizing items of income and expense on income
tax returns in periods other than when they affected reported earnings.
15. Effective Tax Rate
The effective tax rate on income from continuing operations varied from
the federal tax rate of 35% in 1994 and 1993 and 34% in 1992 because of the
following factors:
<TABLE>
<CAPTION>
Percent of Income (Loss)
Before Taxes 1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C>
Federal tax rate 35% (35)% 34%
State income taxes 2 - -
International subsidiaries taxes (6) 7 (7)
Dividends from international
subsidiaries and affiliates 4 6 3
Depreciation - - (4)
Effect of tax rate increase
on deferred taxes - 3 -
Other factors 2 - -
----------------------------------------------------------------
Effective tax rate 37% (19)% 26%
================================================================
</TABLE>
The Company's share of undistributed earnings of its consolidated international
subsidiaries and unconsolidated international affiliates, which is intended to
be permanently reinvested and on which no U.S. taxes have been provided, totaled
approximately $545 million at the end of 1994.
16. Long-Term Debt
<TABLE>
<CAPTION>
Average Payable December 31 December 25
Rate(1) Through 1994 1993
--------------------------------------------------------------------
(Millions)
----------------------
<S> <C> <C> <C> <C>
Debentures 8.5% 2023 $ 425.7 $1,095.4
Revenue bonds 5.9% 2024 331.4 493.5
Notes 6.3% 2009 85.0 468.0
Commercial paper 5.6% Various 22.5 154.8
Capital leases 7.6% Various 4.5 12.9
Other currencies 6.8% 2007 233.1 157.4
--------------------------------------------------------------------
1,102.2 2,382.0
Less Unamortized Discount (9.1) (15.8)
--------------------------------------------------------------------
$1,093.1 $2,366.2
====================================================================
</TABLE>
(1) At December 31, 1994
Scheduled maturities of long-term debt and sinking
fund payments, in millions, at December 31, 1994 are:
<TABLE>
<S> <C> <C> <C>
1996 $ 43.7 1999 $ 8.3
1997 10.3 2000 112.3
1998 89.3 2001-2024 829.2
</TABLE>
The Company maintains several long-term and short-term credit facilities of
which $799.4 million and $54.8 million, respectively, were unused as of December
31, 1994. These agreements are subject to normal banking terms and conditions.
Commitment fees to maintain such facilities totaled $2.2 million in each of the
last three years and are included in interest expense. Since commercial paper
and similar short-term borrowings are supported by the unused portion of $775.0
million of long-term credit agreements, these borrowings are classified as long-
term debt.
32
<PAGE>
The debentures and notes represent unsecured borrowings. Of the Company's
$256.8 million of variable rate industrial revenue bonds, $250.0 million are
supported by letters of credit which expire in 1998.
Using a portion of the proceeds from the sale of S.D. Warren and other
asset sales, the Company retired certain long-term debt and terminated related
interest rate swaps. During the period December 21, 1994 through January 12,
1995, the Company retired $784.2 million of publicly-held debentures and notes
with rates ranging from 8.3% to 10.0%, pursuant to a tender offer to repurchase
such securities in the open market. Also retired during this period were $150.0
million of bank term loans with rates ranging from 9.3% to 10.6%. A portion of
these debentures, notes and bank term loans were retired subsequent to December
31, 1994 and totaled $686.2 million, including an accrual for premium costs of
$46.5 million. This amount is classified as current maturities. Included in the
amounts retired during January 1995 are debentures and notes that were not
repurchased in the open market but were defeased by placing $221.3 million of
U.S. government obligations in an irrevocable trust to be used solely for
satisfying scheduled debt service payments. Interest rate swaps, which had the
net effect of converting $575.0 million of fixed rate liabilities to variable
rate liabilities, were terminated prior to December 31, 1994.
As a result of these actions, the Company recognized an extraordinary loss
of $61.1 million, net of tax benefits of $35.8 million, for the net premiums
paid to retire debt and terminate swaps prior to their scheduled maturities.
During December 1993, the Company initiated a plan to purchase and retire
its $72.1 million 11.5% debentures prior to their scheduled maturity. As a
result, the Company recognized an extraordinary charge of $9.6 million, net of
tax benefits of $5.2 million, for the premium to be paid and the write-off of
related unamortized debt discount and issuance costs. Using funds provided by
the issuance of commercial paper, the Company retired the debentures in early
1994.
17. Financial Instruments
In addition to the financial instruments disclosed in Note 16 and other
Notes in the Financial Review, the Company enters into derivative financial
instruments for purposes other than trading and does not engage in speculation.
Forward foreign exchange contracts and currency swaps hedge foreign currency
transactions and balances for periods consistent with the Company's committed
exposures. The Company's forward exchange contracts, which mature in 1995, and
currency swaps, which mature in 1995 through 1997, reduce the Company's risk due
to exchange rate movements because gains and losses on these instruments offset
losses and gains on the assets, liabilities and transactions being hedged. Gains
and losses related to remeasurements of currency swaps and forward contracts are
included in cumulative translation adjustments when such instruments are
designated as hedges of net investments in the Company's foreign subsidiaries.
All other remeasurement gains and losses are included in the statement of
consolidated operations.
The Company manages exposure to interest rates by entering into interest
rate swap agreements which are recognized as adjustments of interest expense
over the borrowing period. The interest rate swaps which were not terminated in
1994 mature in 1995.
<TABLE>
<CAPTION>
Fair Values of Financial Instruments
December 31, 1994 December 25, 1993
----------------------------------------------------------
Gross Gross
Notional Notional
or Principal Fair or Principal Fair
(Millions) Amount Value Amount Value
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and
cash equivalents $ 1,114.0 $ 1,114.0 $ 133.6 $ 133.6
Long-term notes
receivable 220.0 220.0 220.0 220.0
Current maturities and
long-term debt (1,857.9) (1,857.0) (2,546.4) (2,797.3)
Foreign currency
contracts 235.3 3.0 363.8 4.0
Currency swaps 143.0 (11.7) 263.5 (32.8)
Interest rate swaps 93.6 (1.3) 915.3 (9.4)
==================================================================================
</TABLE>
The estimated fair values of the Company's financial instruments are generally
based on quoted market prices or on current rates available to the Company for
financial instruments of similar remaining maturities and do not include
potential tax effects or possible expenses incurred in settling the
transactions.
The counterparties to interest rate swaps, foreign currency swaps and
forward exchange contracts consist of a number of major international financial
institutions. The Company continually monitors its positions and the credit
ratings of its counterparties, and limits the amount of agreements or contracts
it enters into with any one party. Although the Company may be exposed to credit
losses in the event of nonperformance by these counterparties, it does not
anticipate losses due to the control procedures described above.
33
<PAGE>
18. Interest Expense
<TABLE>
<CAPTION>
(Millions) 1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C>
Gross interest expense $202.3 $192.1 $211.8
Capitalized interest (10.7) (8.9) (2.9)
Interest expense allocated
to divestments and
discontinued operation (60.4) (59.4) (67.5)
----------------------------------------------------------------
Interest expense $131.2 $123.8 $141.4
================================================================
</TABLE>
Interest expense is capitalized on major construction projects. Interest expense
has been allocated to the discontinued operation based on the ratio of net
assets sold to the sum of consolidated common shareholders' equity and
consolidated debt less debt specifically related to the discontinued operation.
19. Leases
A capital lease transfers substantially all of the benefits and risks of
ownership of the leased property to the Company. On the Company's consolidated
balance sheet, the following amounts of capitalized leases are included in plant
assets and the related obligations are included in debt:
<TABLE>
<CAPTION>
December 31 December 25
(Millions) 1994 1993
---------------------------------------------------------------
<S> <C> <C>
Plant assets under capital leases $ 42.8 $ 58.1
Accumulated depreciation (21.6) (30.2)
---------------------------------------------------------------
Net capital leases $ 21.2 $ 27.9
===============================================================
Current lease obligations $ 2.5 $ 6.4
Long-term lease obligations 4.5 12.9
---------------------------------------------------------------
Capital lease obligations $ 7.0 $ 19.3
===============================================================
</TABLE>
All other leases are accounted for as operating expenses. Rental expense for
operating leases for continuing operations was $50.6 million, $54.9 million and
$55.5 million for 1994, 1993 and 1992, respectively. In 1994, $18.3 million
represented payments on short-term leases (those expiring within one year of the
balance sheet date).
The future minimum obligations under leases having an initial or remaining
noncancelable term in excess of one year as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Capital Operating
(Millions) Leases Leases
--------------------------------------------------------------
<S> <C> <C>
1995 $ 2.9 $ 19.0
1996 2.3 14.8
1997 1.4 14.5
1998 .3 11.0
1999 .2 10.7
Later years 1.3 65.2
--------------------------------------------------------------
Future minimum obligations 8.4 $135.2
======
Interest portion (1.4)
--------------------------------------------
Capital lease obligations $ 7.0
============================================
</TABLE>
20. Other Income and (Expense)
<TABLE>
<CAPTION>
(Millions) 1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 19.9 $ 14.5 $18.4
Minority interest (10.3) (10.4) (9.1)
Other - - 1.8
--------------------------------------------------------------
$ 9.6 $ 4.1 $11.1
==============================================================
</TABLE>
Interest income includes $1.2 million in each of 1994, 1993 and 1992 on advances
to affiliates.
21. Supplemental Cash Flow Information
Cash and cash equivalents consist of cash on hand and investments in
short-term, highly liquid securities which generally have maturities when
purchased of three months or less.
Cash payments for income taxes and for interest net of amounts capitalized
follow:
<TABLE>
<CAPTION>
(Millions) 1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C>
Income taxes $ 43.3 $ 12.5 $ 30.3
Interest, net 195.8 181.9 195.3
==============================================================
</TABLE>
[CHART ENTITLED "CAPITAL EXPENDITURES" APPEARS HERE]
34
<PAGE>
22. Stock Option and Incentive Plans
Under the Company's stock option plans, the Company may grant nonqualified
stock options to aid in attracting and retaining employees by encouraging such
employees to invest in the Company's common shares and providing them with
increased incentives to promote the well-being of Scott.
Under these plans, 343,789, 24,500 and 41,000 restricted common shares
were granted to certain key management employees in 1994, 1993 and 1992,
respectively. The restricted common shares outstanding may not be transferred,
pledged or otherwise disposed of for specified vesting periods.
Stock appreciation rights and stock option transactions for the three
years ended December 31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
Stock Appreciation Rights
(Thousands) 1994 1993 1992
------------------------------------------------------------
<S> <C> <C> <C>
Balance outstanding at
beginning of year 112.8 125.6 137.7
Rights granted 11.0 10.0 11.0
Rights exercised (15.3) (16.8) (23.1)
Rights expired, surrendered
or forfeited (107.0) (6.0) -
------------------------------------------------------------
Balance outstanding at
end of year 1.5 112.8 125.6
============================================================
</TABLE>
<TABLE>
<CAPTION>
Stock Options
(In thousands, except for prices) 1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C>
Balance outstanding at
beginning of year 4,365.0 3,759.8 3,335.8
Options granted 4,033.0 677.4 666.3
Average price $54.48 $38.50 $43.53
Options exercised for cash (1,167.0) (31.6) (111.9)
Average price $38.73 $26.30 $33.00
Options expired, surrendered
or forfeited (457.0) (40.6) (130.4)
----------------------------------------------------------------
Balance outstanding at
end of year 6,774.0 4,365.0 3,759.8
Average price $49.53 $41.30 $41.64
----------------------------------------------------------------
At year end:
Closing stock price $69.125 $39.625 $36.000
Options exercisable 3,572.2 3,939.0 3,427.0
Shares available for option
grants and restricted
stock awards 632.6 761.7 1,450.1
================================================================
</TABLE>
The Company's bonus plans provide incentive and reward to approximately 3,700
salaried and certain hourly employees in the U.S. In addition, various
international subsidiaries also have incentive plans for key personnel. For the
years 1994, 1993 and 1992 the expense under these plans for continuing
operations totaled $32.9 million, $18.1 million and $38.0 million, respectively.
Most of the bonuses are paid in cash in the year following the year for
which they are awarded. To the extent deferral has been elected for years other
than 1992 and 1993 by certain highly paid recipients, bonuses are payable wholly
or partially in cash or shares in a designated subsequent year or upon
termination of employment. Under the terms of these plans 8,981, 22,941 and
10,957 treasury shares were delivered to participants in 1994, 1993 and 1992,
respectively, for bonuses earned in prior years.
23. Preferred Shares
<TABLE>
<CAPTION>
December 31 December 25 December 26
(Millions) 1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C>
Shares outstanding(1)
46,205 ($3.40 series) $4.7 $4.7 $4.7
24,435 ($4.00 series) 2.4 2.4 2.4
-------------------------------------------------------------------
$7.1 $7.1 $7.1
===================================================================
</TABLE>
(1) Total of 70,640 authorized cumulative senior preferred shares without par
value
In addition, the Company has authorized but unissued 10,000,000 Series Preferred
Shares, without par value, of which 800,000 have been reserved for issuance as
Series B Junior Participating Preferred Shares.
[CHART ENTITLED "CAPITALIZATION" APPEARS HERE]
35
<PAGE>
24. Postretirement Benefits Other Than Pensions
The Company sponsors retiree health care and life insurance benefit plans.
Substantially all of the Company's U.S. employees and certain international
employees may become eligible for these benefits at retirement after meeting
minimum age and service requirements. The Company funds benefits on a pay-as-
you-go basis, with some retirees paying a portion of the costs.
The Company accrues the estimated cost of these benefits during the
participants' active service periods up to the dates on which they become
eligible for full benefits. The unrecognized transition obligation is amortized
on a straight-line basis over the average remaining service period of active
plan participants, which is approximately 13 years.
<TABLE>
<CAPTION>
Financial Status of Postretirement Benefit Plans
December 31 December 25
(Millions) 1994 1993
------------------------------------------------------------------
<S> <C> <C>
Accumulated Postretirement
Benefit Obligations:
Retirees $228.8 $183.1
Fully eligible active participants 10.2 52.2
Other active participants 38.0 94.2
------------------------------------------------------------------
Total APBO 277.0 329.5
Unrecognized transition obligation (94.5) (224.1)
Unrecognized net actuarial gain (loss) 22.3 (27.3)
------------------------------------------------------------------
Accrued postretirement benefit cost $204.8 $ 78.1
==================================================================
Assumptions used to value the APBO:
Discount rate 8.5% 7.0%
Health care cost trend rate 8.7% 10.9%
==================================================================
</TABLE>
<TABLE>
<CAPTION>
Net Postretirement Benefit Cost
(Millions) 1994 1993 1992
------------------------------------------------------------------
<S> <C> <C> <C>
Benefits earned during the year $10.8 $ 9.3 $ 8.2
Interest cost on benefits earned in
prior years 20.1 23.5 23.2
Amortization of items not
previously recognized:
Transition obligation 16.3 17.1 18.4
Net actuarial (gains) losses (.1) .8 -
------------------------------------------------------------------
Net postretirement benefit cost $47.1 $50.7 $49.8
==================================================================
</TABLE>
The health care cost trend rate used to value the APBO is assumed to decrease
gradually to an ultimate rate of 5% in 2007. A one-percentage point increase in
the assumed health care cost trend rates for each future year would increase the
APBO at December 31, 1994 by approximately 5.7% and would increase the sum of
the benefits earned and interest cost components of net postretirement benefit
cost for 1994 by approximately 8.7%.
In connection with the asset sales referred to in Note 2, the Company
transferred postretirement benefit liabilities to the respective buyers. The net
postretirement benefit curtailment and settlement loss recognized related to
these sales was $34.3 million.
The Company's restructuring described in Note 3 included $67.2 million of
costs for enhanced termination postretirement benefits and curtailment losses.
The above costs associated with the asset sales and the restructuring program
increased the Company's accrued postretirement benefit cost.
The Company is required to adopt FAS 106 for its international plans no
later than 1995. Based upon preliminary estimates, the Company does not
anticipate that the effects will be material. The cost of providing these
benefits, which was not significant for the years 1994, 1993 and 1992, is
currently recognized as expense when paid.
25. Retirement Plans
Defined Contribution Plans
The Company sponsors savings plans covering substantially all employees in
the U.S. The Company's contributions to the plans are based on employee's
contributions and compensation. The Company's contributions totaled $15.6
million, $15.0 million and $16.2 million in 1994, 1993 and 1992, respectively.
Effective January 1, 1995, U.S. salaried employees are covered by a
defined contribution retirement plan. The Company's contributions to the plan
will be based on age and compensation.
Defined Benefit Plans
The Company and most of its consolidated subsidiaries sponsor defined
benefit pension or, in certain countries, termination pay plans covering
substantially all employees. Company contributions to these plans are made in
accordance with applicable laws and tax regulations. Assets of funded plans are
invested and benefits are paid primarily through trusts. Approximately 71% and
73% of the funded plans' assets were invested in equity securities at year end
1994 and 1993, respectively. The remainder was invested in bonds, short-term
investments and real estate funds.
Plans covering U.S. salaried employees provide pension benefits that are
based on years of service, up to December 31, 1994, and compensation during the
final years of employment. Plans covering U.S. hourly employees provide benefits
of stated amounts for each year of service or benefits based on years of service
and compensation during the final years of employment. Pension benefits for
employees of consolidated international subsidiaries are based primarily on
years of service and compensation. Prior service cost is amortized on a
straight-line basis over the
36
<PAGE>
participants' average remaining service period for
plans with compensation-related benefit formulas and over seven years for other
plans.
In connection with the asset sales referred to in Note 2, the Company
transferred pension liabilities and assets to the respective buyers. The net
pension curtailment and settlement loss recognized related to these sales was
$5.0 million.
The Company's restructuring described in Note 3 included $109.7 million of
costs for enhanced termination pension benefits and curtailment losses. The
above pension costs associated with the sales and the restructuring program
increased the Company's accrued pension cost.
<TABLE>
<CAPTION>
Funded Status of Defined Benefit Pension Plans
December 31, 1994 December 25, 1993
(Millions) Plans in which Plans in which
-----------------------------------------------------------------------------------------------------------------------------------
Assets Exceed Accum. Benefits Assets Exceed Accum. Benefits
Accum. Benefits Exceed Assets Accum. Benefits Exceed Assets
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Present value of future benefit payments based on
service to date and:
Present pay levels - Vested $181.7 $1,103.7 $381.8 $ 932.8
- Non-vested 5.5 41.0 16.4 63.7
---------------------------------------------------------------
Total Accumulated Benefit Obligation (ABO) 187.2 1,144.7 398.2 996.5
Projected pay increases 20.0 72.3 34.8 131.7
---------------------------------------------------------------
Total Projected Benefit Obligation (PBO) 207.2 1,217.0 433.0 1,128.2
Fair value of plan assets available for benefits 234.8 997.2 474.2 885.9
---------------------------------------------------------------
Assets in excess of (less than) PBO 27.6 (219.8) 41.2 (242.3)
Items not yet recognized in the consolidated balance sheet:
Unamortized net asset (10.1) (31.6) (21.9) (21.6)
Unamortized prior service cost 8.5 17.9 10.0 34.4
Unrecognized net actuarial and investment (gains) losses (7.5) 87.0 14.6 118.1
Adjustment for minimum liability - (44.1) - (61.8)
---------------------------------------------------------------
Prepaid (Accrued) pension cost recognized in the consolidated
balance sheet $ 18.5 $ (190.6) $ 43.9 $(173.2)
===================================================================================================================================
Weighted average assumptions used to value benefit obligations:
Discount rate 8.5% 7.1%
Assumed rate of increase in compensation levels 5.2% 4.6%
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Net Pension Expense
(Millions) 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Benefits earned during the year $ 36.9 $ 33.8 $ 33.3
Interest cost on benefits earned in prior years 110.1 111.3 108.9
Net investment loss (income) on plan assets:
Actual 7.6 (242.1) (68.9)
Deferral of difference between actual and
expected income (138.3) 120.3 (52.0)
Amortization of items not previously recognized:
Net transition asset (5.4) (5.4) (5.6)
Prior service cost 6.7 8.2 5.8
Net actuarial and investment losses 3.9 1.3 1.0
-----------------------------------------------------------------------------------------------------------------------------------
Net pension expense $ 21.5 $ 27.4 $ 22.5
===================================================================================================================================
Weighted average assumptions used to determine
net pension expense:
Expected long-term rate of return on plan assets 10.2% 10.5% 10.5%
Discount rate for benefit obligations 7.1% 8.2% 8.3%
Assumed rate of increase in compensation levels 4.6% 5.6% 5.8%
===================================================================================================================================
</TABLE>
37
<PAGE>
26. Litigation
The Company is a defendant in numerous actions in state and federal
courts seeking damages relating to breast implants. The actions allege that the
plaintiffs' breast implants were covered by polyurethane foam manufactured by
the Company's former Foam Division, which was sold in 1983, and that the foam
caused physical or psychological harm to the plaintiffs. In each of these
actions the Company is one of several defendants, including the Foam Division's
successor and the manufacturers of the implants. The Company believes that a
small percentage of breast implants were covered by polyurethane foam
manufactured by the Company's Foam Division prior to its sale. The Company has
chosen not to enter into a proposed global settlement of these actions because
it believes that it has meritorious defenses against these claims and intends to
conduct a vigorous defense and to seek insurance recovery to the extent provided
under its insurance policies, if necessary. The Company is also involved in
lawsuits and administrative and legal proceedings under other laws, including
those relating to the protection of the environment. Although the final results
in these suits and proceedings cannot be predicted with certainty, it is the
present opinion of the Company, after consulting with counsel, that they will
not have a material adverse effect on the Company's financial condition.
27. Shareholder Rights Plan
Under the terms of a Shareholder Rights Plan adopted in 1986 and amended in
1988, the Company's Board of Directors declared a dividend distribution of one
right for each two outstanding common shares. The rights may not be exercised or
traded apart from the common shares to which they are attached unless a person
or group has acquired, obtained the right to acquire, or commenced a tender
offer for, at least 20% of the Company's outstanding common shares. In such
event, each right will become exercisable for one one-hundredth of a Series B
Junior Participating Preferred Share, of which 800,000 have been reserved for
issuance, for a price of $180. If a person or group acquires 20% or more of the
Company's outstanding common shares other than through an offer which provides
fair value to all common shareholders; or the Company is the surviving
corporation in a merger with a holder of 20% or more of its common shares and
such shares are not changed or exchanged; or a holder of 20% or more of the
Company's common shares engages in certain self-dealing transactions with the
Company, each right will become exercisable for common shares worth $360 and the
rights held by the acquirer will become null and void. If the Company is
involved in a merger and its common shares are changed or exchanged, or if more
than 50% of its assets or earnings power is sold or transferred, each right will
become exercisable for common stock of the acquirer worth $360. The rights will
expire on July 25, 1996 unless earlier redeemed by the Company for $.05 per
right. Subject to its right to extend the redemption period, the Company may
redeem the rights at any time until ten days after any person or group has
acquired, or obtained the right to acquire, at least 20% of the Company's
outstanding common shares.
[CHART ENTITLED "SALES BY GEOGRAPHIC AREA" APPEARS HERE]
38
<PAGE>
28.
Business Segments--
Consolidated Operations
Since the sale of the Company's printing and publishing papers operation
on December 20, 1994 (see Note 2) the Company operates in one segment--tissue
products. This segment includes a broad range of products (primarily tissue
products) for personal care, environmental cleaning and wiping, health care and
foodservice. Pulp and timberlands operations which are vertically integrated
with those businesses are also included.
The Company's investment in international equity affiliates of $174.3
million in 1994, $223.8 million in 1993 and $246.2 million in 1992 is included
in Corporate assets. Information concerning the operations of international
equity affiliates is contained in Note 9.
<TABLE>
<CAPTION>
Geographic Area
Income (Loss) Identifiable
Year (Millions) Sales Before Taxes Assets(1)(2)
------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
1994 United States $2,169.8 $ 349.7 $2,184.7
Europe 1,128.1 121.6 1,327.6
Pacific and Latin America 283.2 42.0 280.9
------------------------------------------------------------------------------------------------------------
Subtotal--Tissue Products 3,581.1 513.3 3,793.2
Corporate - (11.7) 1,832.9
Interest expense - 131.2 -
Other income and (expense) - 9.6 -
------------------------------------------------------------------------------------------------------------
Consolidated total $3,581.1 $ 380.0 $5,626.1
============================================================================================================
1993 United States $2,138.8 $ (55.7) $2,156.9
Europe 1,185.2 (17.0) 1,356.6
Pacific and Latin America 260.9 17.9 247.2
------------------------------------------------------------------------------------------------------------
Subtotal--Tissue Products 3,584.9 (54.8) 3,760.7
Corporate restructuring - (41.1) -
Corporate - (50.2) 2,864.4
Interest expense - 123.8 -
Other income and (expense) - 4.1 -
------------------------------------------------------------------------------------------------------------
Consolidated total $3,584.9 $(265.8) $6,625.1
============================================================================================================
1992 United States $2,122.2 $ 213.2 $1,981.4
Europe 1,485.7 121.9 1,566.6
Pacific and Latin America 248.1 39.6 232.5
------------------------------------------------------------------------------------------------------------
Subtotal--Tissue Products 3,856.0 374.7 3,780.5
Corporate - (51.8) 2,519.1
Interest expense - 141.4 -
Other income and (expense) - 11.1 -
------------------------------------------------------------------------------------------------------------
Consolidated total $3,856.0 $ 192.6 $6,299.6
============================================================================================================
</TABLE>
(1) Includes investments in and advances to other equity affiliates in each of
1994, 1993 and 1992 of: Tissue Products--$50.3, $57.3, and $65.3;
Corporate $2.7, $26.8 and $22.8, respectively.
(2) Corporate includes discontinued Printing and Publishing Papers segment
assets of $1,851.8 and $1,842.2 in 1993 and 1992, respectively.
39
<PAGE>
Five-Year Financial Summary (1)
--------------------------------------------------------------------------------
Scott Paper Company
<TABLE>
<CAPTION>
(Millions) 1994(2) 1993(3) 1992(4) 1991(5) 1990(5)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $3,581.1 $3,584.9 $3,856.0 $3,793.4 $3,902.0
-------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Product costs 2,510.8 2,576.4 2,745.7 2,734.4 2,848.5
Marketing and distribution 479.9 536.7 572.0 540.9 528.3
Research, administration and general 189.0 208.3 218.3 221.3 224.3
Restructuring and divestments - 401.1 - 267.6 111.5
Other (100.2) 8.5 (2.9) (4.0) 40.7
-------------------------------------------------------------------------------------------------------------------------------
3,079.5 3,731.0 3,533.1 3,760.2 3,753.3
-------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from continuing operations 501.6 (146.1) 322.9 33.2 148.7
Interest expense 131.2 123.8 141.4 164.3 155.6
Other income and (expense) 9.6 4.1 11.1 67.1 25.7
-------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from continuing operations before taxes 380.0 (265.8) 192.6 (64.0) 18.8
Income taxes 139.8 (49.7) 50.5 (4.1) (24.2)
-------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from continuing operations before share
of earnings (loss) of international equity affiliates,
extraordinary loss and cumulative effect
of accounting change 240.2 (216.1) 142.1 (59.9) 43.0
Share of earnings (loss) of international equity affiliates 23.9 (21.7) 5.4 30.2 37.8
-------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from continuing operations before
extraordinary loss and cumulative effect of
accounting change 264.1 (237.8) 147.5 (29.7) 80.8
-------------------------------------------------------------------------------------------------------------------------------
Discontinued operation:
Income (Loss) from operations through
December 20, 1994, net of income taxes 6.8 (51.3) 19.7 (40.2) 67.2
Gain (Loss) on disposal - - - - -
-------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before extraordinary loss and
cumulative effect of accounting change 270.9 (289.1) 167.2 (69.9) 148.0
Extraordinary loss on early extinguishment of debt,
net of income tax benefit (61.1) (9.6) - - -
Cumulative effect of change in accounting
for income taxes - 21.7 - - -
-------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 209.8 $ (277.0) $ 167.2 $ (69.9) $ 148.0
===============================================================================================================================
Dollars per common share
Income (Loss) from continuing operations before
extraordinary loss and cumulative effect of
accounting change $3.54 $(3.22) $1.99 $(.41) $1.10
Income (Loss) from discontinued operation .09 (.69) .27 (.54) .91
Extraordinary loss on early extinguishment of debt (.82) (.13) - - -
Cumulative effect of change in accounting
for income taxes - .29 - - -
-------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) $2.81 $(3.75) $2.26 $(.95) $2.01
-------------------------------------------------------------------------------------------------------------------------------
Dividends $.80 $.80 $.80 $.80 $.80
Market price - high 70 5/8 41 46 46 5/8 51 3/8
- low 37 1/4 31 34 1/2 29 1/2 30
===============================================================================================================================
(Millions)
Total assets at year end $5,626.1 $6,625.1 $6,299.6 $6,492.6 $6,900.5
Long-term debt at year end 1,093.1 2,366.2 2,030.6 2,333.2 2,454.9
Capital expenditures--continuing operations 333.1 382.7 273.2 269.1 426.2
Depreciation and cost of
timber harvested--continuing operations 204.6 193.9 177.8 215.3 205.6
===============================================================================================================================
Income (Loss) from operations as a percentage of sales 14.0% (4.1)% 8.4% .9% 3.8%
Debt as a percentage of total capitalization 41.7% 50.6% 45.7% 48.5% 49.5%
Return on common shareholders' equity 12.7% (14.4)% 8.2% (3.3)% 6.9%
===============================================================================================================================
Average common shares outstanding (Millions) 74.7 74.0 73.9 73.7 73.6
Number of common shareholders (Thousands) 34.4 37.7 37.9 39.5 40.7
Number of employees (Thousands) 15.1 25.9 26.5 29.1 30.8
===============================================================================================================================
</TABLE>
(1) See Management's Discussion and Analysis and Note 2 of the Financial Review
for description of the discontinued operation.
(2) Earnings per share included net special charges of $.06. Excluding special
items earnings per share for continuing operations in 1994 were $2.78. See
Management's Discussion and Analysis.
(3) Loss per share included net special charges of $5.33. Excluding special
items earnings would have been $1.58. See Management's Discussion and Analysis.
(4) Reflects the adoption of FAS 106, Employers' Accounting for Postretirement
Benefits, and the revision of estimated useful lives for depreciable assets
which increased net income by $35.3 million and earnings per share by $.48.
(5) (Loss) Earnings per share for 1991 and 1990 include net special charges of
$2.49 and $1.36 respectively, for special items related to the Company's
business improvement program. Excluding these items, earnings per share for 1991
and 1990 were $1.54 and $3.37, respectively.
40
<PAGE>
Stock Exchange Listings
Common Shares -- Listed on the New York, Philadelphia and Pacific Stock
Exchanges.
Stock Symbol -- SPP
Cumulative Senior Preferred Shares -- Listed on the Philadelphia Stock
Exchange.
41
<PAGE>
EXHIBIT 21. SUBSIDIARIES
Scott Paper Company, a corporation organized under the laws of Pennsylvania,
has the following subsidiaries and affiliates. Information is shown as of
December 31, 1994. Not listed are certain small subsidiaries, including dam,
water power, finance and inactive subsidiaries, which, if considered in the
aggregate as a single subsidiary, would not constitute a significant
subsidiary.
<TABLE>
<CAPTION>
PERCENTAGE
ORGANIZED OF VOTING
UNDER THE SECURITIES
LAWS OF OWNED/(1)/
------------------- ----------
<S> <C> <C>
Consolidated subsidiaries
Cape Chignecto Lands Limited................ Canada 100%
Cartiera Scott Sud S.p.A. .................. Italy 100%
Cross Paperware Limited..................... United Kingdom 100%/(2)/
Delaware Overseas Finance, Inc. ............ Delaware 100%
Discott II, Inc. ........................... Delaware 100%
Durafab, Inc. .............................. Texas 100%
Escuhbia Oil Company........................ Alabama 100%
Excell Paper Sales Company.................. Pennsylvania 100%
Financo Ltd. ............................... Cayman Islands,
British West Indies 100%
Health Care Company......................... Delaware 100%/(2)/
Owikeno Lake Timber Company Limited......... Canada 100%
Riscott Insurance, Ltd. .................... Bermuda 100%
Scott CB Holding Co. ....................... Delaware 100%
Scott Continental, N.V. .................... Belgium 100%
Scott European Holdings, Inc. .............. Delaware 100%
Scott GmbH.................................. Germany 100%
Scott Graphics, Inc. ....................... Massachusetts 100%
Scott Iberica, S.A. ........................ Spain 99.7%
Scott Investment Company.................... Delaware 100%
Scott Japan Limited......................... Japan 100%
Scott Limited............................... United Kingdom 100%
Scott Maritimes Limited..................... Canada 100%
Scott Miranda, S.A. ........................ Spain 100%
Scott Page B.V. ............................ Netherlands 100%
Scott Paper Beteiligungsgesellschaft mbH.... Germany 100%
Scott Paper Company de Costa Rica, S.A. .... Costa Rica 51%
Scott Paper Company--Honduras, S.A. de
C.V. ...................................... Honduras 51%/(3)/
Scott Paper Coordination Center, N.V. ...... Belgium 100%
Scott Paper GmbH............................ Germany 100%
Scott Paper (Guangzhou) Limited............. China 75%
Scott Paper (Hong Kong) Limited............. Hong Kong 100%
Scott Paper International Finance (Nether-
lands), B.V. .............................. Netherlands 100%
Scott Paper International, Limited.......... Hong Kong 100%
Scott Paper International Trade Venture (Eu-
rope), B.V. ............................... Belgium 100%
Scott Paper (Malaysia) Sdn. Bhd. ........... Malaysia 100%
Scott Paper Overseas Finance Limited........ Cayman Islands,
British West Indies 100%
Scott Paper Portugal Lda. .................. Portugal 100%
Scott Paper (Shanghai) Co., Ltd. ........... China 56%/(4)/
Scott Paper (Singapore) Pte. Ltd. .......... Singapore 100%
Scott Paper (U.K.) Ltd. .................... United Kingdom 100%
</TABLE>
<PAGE>
EXHIBIT 23. CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8 (Numbers 33-56159,
33-56161 and 33-56379) and on Form S-3 (Numbers 33-49888 and 33-56157) of Scott
Paper Company of our report dated January 31, 1995, on our audit of the
consolidated financial statements of Scott Paper Company as of December 31,
1994, and for the year then ended, appearing on page 23 of the Annual Report to
Shareholders, which is incorporated in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page 18 of this Form 10-K.
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
March 29, 1995
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8 (Numbers 33-56159,
33-56161 and 33-56379) and on Form S-3 (Numbers 33-49888 and 33-56157) of Scott
Paper Company of our report dated January 25, 1994, except as to the subheading
"Discontinued operation" in Note 2, which is as of December 20, 1994, appearing
on page 17 of this Form 10-K. We also consent to the incorporation by reference
of our report on the Financial Statement Schedule, which appears on page 19 of
this Form 10-K.
Price Waterhouse LLP
Philadelphia, Pennsylvania
March 29, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> DEC-26-1993
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 1,114
<SECURITIES> 0
<RECEIVABLES> 534
<ALLOWANCES> 27
<INVENTORY> 402
<CURRENT-ASSETS> 2,309
<PP&E> 4,625
<DEPRECIATION> 2,143
<TOTAL-ASSETS> 5,626
<CURRENT-LIABILITIES> 1,939
<BONDS> 1,093
<COMMON> 495
0
7
<OTHER-SE> 1,250
<TOTAL-LIABILITY-AND-EQUITY> 5,626
<SALES> 3,581
<TOTAL-REVENUES> 3,581
<CGS> 2,511
<TOTAL-COSTS> 2,511
<OTHER-EXPENSES> (100)
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> 380
<INCOME-TAX> 140
<INCOME-CONTINUING> 264
<DISCONTINUED> 7
<EXTRAORDINARY> (61)
<CHANGES> 0
<NET-INCOME> 210
<EPS-PRIMARY> 2.81
<EPS-DILUTED> 2.81
</TABLE>
