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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD DECEMBER 21, 1994 THROUGH SEPTEMBER 27, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-88496
S.D. WARREN COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 23-2366983
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 FRANKLIN STREET, BOSTON, MA 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area (617) 423-7300
code
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period 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_
The number of shares of Common Stock outstanding as of August 31, 1996 was
100 shares.
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* As of September 27, 1995, the registrant has not been subject to such
filing requirements.
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AMENDMENT TO FORM 10-K
As indicated in Note 2 of the Notes to Financial Statements, the
accompanying financial statements of the Predecessor Corporation (as defined in
the Notes to Financial Statements) for the twelve months ended December 25,
1993, the nine months ended September 24, 1994 and the period from September 25,
1994 through December 20, 1994 had been restated in the S.D. Warren Company's
(the "Company" or "Warren") Annual Report on Form 10-K ("Form 10-K") for the
period December 21, 1994 through September 27, 1995 which had previously been
filed with the Securities and Exchange Commission (the "SEC") in January 1996
(the "initial restatement"). The initial restatement was intended to reflect
adjustments principally related to the timing of the recognition of certain
costs on an accrual basis versus an as incurred basis. It was subsequently
determined that the Predecessor Corporation's policy prior to the initial
restatement of accounting for these costs on an as incurred basis was an
acceptable policy in the application of generally accepted accounting principles
and as such, there was no requirement for the restatement. Accordingly, the
audited financial statements included herein have been restated to agree with
the audited financial statements of the Predecessor Corporation for the twelve
months ended December 25, 1993 and the nine months ended September 24, 1994 and
conform to the presentation included in Warren's Registration Statement on Form
S-4 filed with the SEC and made effective in April 1995. The audited Financial
Statements for the period September 25, 1994 through December 20, 1994 have also
been restated to reflect the effect of accounting for these costs on an as
incurred basis.
In addition, the Successor Corporation (as defined in the Notes to Financial
Statements) has revised its accounting policy with respect to accounting for
certain costs relating to compliance with safety and other governmental laws and
regulations and has adopted a policy of accounting for these costs on an as
incurred basis consistent with that of the Predecessor Corporation. As a result,
the audited financial statements for the period December 21, 1994 through
September 27, 1995 have been restated to reflect the effect of accounting for
these costs on an as incurred basis.
Other Items of this Form 10-K have been updated to reflect the effect of the
aforementioned restatements. However, they have not been updated to reflect
changes in market conditions, revisions to stated estimates or events that have
occurred since the original filing of the Form 10-K in January 1996. Therefore,
this amended Form 10-K should be read in conjunction with the previously issued
Form 10-Q Financial Information for the quarters ended January 3, 1996, April 3,
1996 and July 3, 1996 that were voluntarily filed with the SEC pursuant to the
Successor Corporation's contractual obligations.
PART I
ITEM 1. BUSINESS
GENERAL
S.D. Warren Company ("S.D. Warren", "Warren", the "Company" or the
"Successor Corporation") manufactures printing, publishing and specialty papers
and has pulp and timberland operations vertically integrated with some of its
manufacturing facilities. Warren is the largest producer of coated free paper
(free of groundwood pulp) in the United States. The Company currently operates
four paper mills with total annual production capacity of approximately 1.5
million tons of paper. The Company also owns a sheeting and distribution
facility in Allentown, Pennsylvania, with annual sheeting capacity of
approximately 90,000 tons, and owns approximately 911,000 acres of timberlands
in the State of Maine.
The Company was founded in 1854 and grew through internal growth and
acquisitions until it was acquired by the Scott Paper Company ("Scott") in 1967.
Scott invested significant resources in S.D. Warren, including approximately
$1.0 billion from 1988 through 1994, to upgrade, expand and rebuild many of the
Warren facilities. As of October 8, 1994, SDW Acquisition Corporation ("SDW
Acquisition"), a direct wholly-owned subsidiary of SDW Holdings Corporation
("Holdings"), entered into a definitive agreement (the "Stock Purchase
Agreement") pursuant to which, on December 20, 1994, SDW Acquisition acquired
(the "Acquisition") from Scott all of the outstanding capital stock of Warren.
Immediately following the Acquisition, SDW Acquisition merged with and into
Warren (the "Merger"), with Warren surviving.
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The largest investor in Holdings is Sappi Limited ("Sappi"). Sappi, a South
African company, is the largest forest products company in Africa, the third
largest producer of coated free paper in Europe and one of the world's leading
pulp, paper and timber exporters. Sappi owns and operates a number of timber
processing plants and eight mills in Southern Africa. Outside Africa, Sappi's
operations include four fine paper mills in the United Kingdom and two mills in
Germany which produce coated and uncoated free paper and specialty paper.
Following the Acquisition, Sappi became the largest coated free paper
manufacturer in the world. The other shareholders of Holdings are DLJ Merchant
Banking Partners, L.P. and certain of its affiliates ("DLJMB") and UBS Capital
Corporation ("UBSCC"). As a result of the Merger, Holdings owns all the
outstanding common stock of S.D. Warren. See "Item 12. Security Ownership of
Certain Beneficial Owners and Management" for information regarding the
ownership of Holdings and the Notes to the Company's Financial Statements (the
"Financial Statements") for information regarding the Acquisition and financing
for the Acquisition.
PRINCIPAL PRODUCTS
The paper industry is generally divided into the printing and writing market
segment and the packaging market segment. The printing and writing market
segment is divided into newsprint and fine paper, which includes coated and
uncoated paper. The Company's principal products include coated, uncoated,
specialty and technical papers. The following table illustrates the Company's
major markets, expressed as a percentage of sales, for the twelve months ended
December 25, 1993, the nine months ended September 24, 1994, the period
September 25, 1994 through December 20, 1994 (the "three months" ended December
20, 1994) and the period December 21, 1994 through September 27, 1995 (the "nine
months" ended September 27, 1995):
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Coated paper............................... 71.4% 70.9% 73.9% 70.6%
Uncoated paper............................. 17.8 17.9 18.5 13.6
Specialty paper............................ 5.0 5.0 4.8 10.2
Technical paper and other.................. 5.8 6.2 2.8 5.6
----- ----- ----- -----
Total.................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
The coated paper market is divided into two types of products: coated free
paper and coated groundwood paper. Coated papers are primarily differentiated
into five product grades of decreasing quality and brightness, ranging from #1,
which is premium, to #5, the lowest in quality and price. The Company
principally competes in the coated free paper market which is composed of
product grades #1 through #3, and a limited amount of #4 and #5. The coated
groundwood market is composed of the #4 and #5 product grades. Each grade is
manufactured in a range of basis weights, which is the measurement of a paper's
weight for a given sheet size, as well as differentiated by finish which can be
either gloss, dull or matte. The appearance of coated paper can also be
significantly altered by finishing techniques, such as varnishing, which can
impart a dull or shiny property to a sheet. The coated paper market, in addition
to being segmented by product grade, is divided into products which are coated
on one side and products which are coated on both sides. Paper which is coated
on one side is used in special applications such as consumer product and mailing
label applications. The majority of coated paper production is two-sided which
permits quality printing on both sides of the paper.
Coated paper is used in corporate communications, advertising, brochures,
magazine covers and upscale magazines, catalogues, direct mail promotions and
educational text books. Uncoated paper is used by commercial printers, quick
printers, large in-house copy/printing end-users and small business and home
applications. Specialty and technical papers are used in business form printing,
coated fabric converters, pressure-sensitive laminators, label printers and
other niche market applications.
The market for coated paper has historically experienced price fluctuations
which are driven by production supply, end-user demand and, to a lesser degree,
the availability and relative price of imported
2
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products. The growth in the supply of coated paper is driven by the opening of
new coated paper manufacturing facilities, each of which can take up to three
years to construct. See Management's Discussion and Analysis of Results of
Operations and Financial Condition for information regarding recent market
trends.
COMPETITION
The markets for coated free products are highly competitive with a number of
major companies competing in each market. The Company competes mainly with U.S.
and Canadian producers of coated free paper, and, to a lesser degree, European
producers. The Company's principal competitors in the coated free market are
Champion International Corporation, Westvaco Corporation, Consolidated Papers
Inc., The Mead Corporation, Simpson Paper Co., Repap Wisconsin, Inc. and
Potlatch Corporation. Competition is primarily on the basis of quality, service,
price and breadth of product line, as well as product innovation and sales and
distribution support. Certain of the Company's competitors have greater
financial resources than the Company and certain of the mills operated by its
competitors may be lower cost producers of pulp and coated paper than certain of
the mills operated by the Company.
Several factors contribute to the Company's competitive strengths in the
coated free paper market, including high product quality, technological
innovation, high brand recognition and a strong distribution network. The
Company has a leading market share in the #1 and #3 grades of coated free paper
in North America and is among the leaders with respect to the #2 grade.
DISTRIBUTION
Warren, unlike most of its competition, has made a strategic decision to
sell all of its coated products through the merchant distribution system. The
Company believes this policy increases the focus of the merchant sales force on
the sale of Warren products. Warren was the first to develop merchant
distribution for branded coated paper. In 1917, the Company formed an
association of paper merchants that became the Warren Merchant's Association.
Today, Warren's sales force sells coated paper to approximately 288 merchant
distributing locations. Merchants are authorized to distribute Warren products
by geographic area and handle competitors' lines to cover all segments of the
market. The Company believes it has created a loyal group of merchant customers
because Warren's sales force focuses on generating end-user demand, which is
then serviced by the merchant distributors, and does not compete with the
merchants to make sales.
Merchants perform numerous functions, including sales, credit, warehousing,
local distribution and promotional activities. They purchase the paper from
Warren and resell it, marking up the purchase price from Warren to a competitive
market price. The product is delivered to the customer either directly from the
mill, a Warren distribution center or from the merchant's warehouse. The
merchant handles credit review and payment collection and pays Warren's invoice
without regard to final collection from the end-user customer.
Warren sells uncoated paper in North America through the same network of
merchant distributors that it uses for coated paper, with some exceptions
(approximately 225 merchant locations sell uncoated paper, versus the 288 which
sell coated paper). Warren also distributes uncoated paper through original
equipment manufacturers, catalogues and merchant stores and is beginning to
develop additional distribution channels, such as warehouse clubs, office
superstores and telemarketing.
Warren sells both specialty and technical paper in North America directly to
the customer base through the relevant sales force and ships products directly
from the mill to the customer.
EXPORT SALES
The Company had sales to customers outside of the United States ("Export
Sales") of $67.2 million, $60.0 million, $24.7 million and $90.5 million for the
twelve months ended December 25, 1993, the nine months ended September 24, 1994,
the three months ended December 20, 1994 and the nine months ended September 27,
1995, respectively. Export Sales are primarily to Canada, Europe and the Far
East. The Company's sales outside North America are handled by divisions of
Sappi (see the Notes to Financial Statements).
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CUSTOMERS
For the nine months ended September 27, 1995, the Company's customers that
individually accounted for greater than 10% of sales were Resource Net
International (a division of International Paper Company); Lindenmeyer Paper
Company (owned by Central National-Gottesman Inc.); and Unisource Worldwide,
Inc. (a subsidiary of Alco Standard Corporation). Each of these customers is a
merchant that resells the Company's paper products to a wide range of end users.
As indicated in the Notes to Financial Statements, the loss of any of these
customers could have a material adverse effect on the Company's business and
results of operations.
BACKLOG AND SEASONALITY
Backlog as of September 24, 1994 and September 27, 1995 was not significant.
The Company had approximately one to four weeks of backlog depending upon the
product and basis weights.
The Company's operations are not significantly affected by seasonality. The
first and third quarters of the calendar year tend to be stronger than the
second and fourth quarters.
PATENTS, TRADEMARKS AND LICENSES
S.D. Warren is widely recognized for its product quality and technological
innovation in the development and manufacture of coated free paper, which has
allowed Warren to sustain the franchise value of its name brand products such as
SOMERSET-REGISTERED TRADEMARK-, LUSTRO-REGISTERED TRADEMARK-,
WARRENFLO-REGISTERED TRADEMARK- AND PATINA-REGISTERED TRADEMARK-.
Although Warren owns or licenses a number of patents and patent applications
that are important to its business, they are not material to the conduct of the
Company's business as a whole. Warren believes that its position in each of its
markets depends primarily on such factors as customer service, prompt and
accurate delivery and diversity of products rather than on patent protection.
Warren has a long history of product innovations. It was the first paper
company to develop both one and two-sided coated paper, the first to develop
dull and matte coated paper, the first to develop high bulk-to-weight coated
paper and the first to develop lightweight coated free web. In addition, the
Company has a number of proprietary technologies, including the on-line
finishing technology and its ULTRACAST-REGISTERED TRADEMARK- electronbeam
technology. Warren's on-line finishing technology is used in its production of
coated paper as well as in its production of specialty papers. The Company's
ULTRACAST-REGISTERED TRADEMARK- technology is utilized in specialty papers and
the Company plans to extend this technology into a broader line of unique
products and new market segments.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts continue to focus on creating
new and improved products as well as developing more efficient processes for
producing them. The Company's research facility is located in Westbrook, Maine,
and employs approximately 150 people who work closely with marketing, sales and
manufacturing personnel as well as Warren customers to respond to needs for
technological improvements and to meet market opportunities.
The Company spent approximately $15.3 million, $9.5 million, $3.0 million
and $10.7 million on research and development activities for the twelve months
ended December 25, 1993, the nine months ended September 24, 1994, the three
months ended December 20, 1994 and the nine months ended September 27, 1995,
respectively.
SUPPLY REQUIREMENTS
The principal supply requirements for the manufacture of the Company's
products are wood, pulp, energy and other supplies. Warren believes that it has
adequate sources of these and other raw materials and supplies necessary for the
manufacture of pulp and coated paper for the foreseeable future. In the event
that any of the Company's suppliers is unable to meet its demands, the Company
believes that adequate alternative suppliers or substitute materials would be
available at comparable prices.
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WOOD AND PULP
In Fiscal 1995, the Company manufactured approximately 65% of its pulp
requirements. This vertical integration reduces Warren's exposure to
fluctuations in the market price for pulp. All three of Warren's northern mills
are integrated with respect to hardwood pulp production and Somerset, Maine also
has softwood pulping capability. The Mobile, Alabama facility receives most of
its pulp requirements from an adjacent pulp mill owned by Scott. In connection
with the Acquisition, the Company entered into a long-term pulp supply agreement
with Scott to supply the Company's Mobile paper mill with its wood pulp
requirements (subject to minimum and maximum amounts) at prices generally based
upon market prices, less a discount to reflect transportation and other cost
savings. Scott had previously announced its intention to sell the Mobile pulp
mill, but any sale is apparently on hold due to the recent merger between Scott
and Kimberly-Clark Corporation. The buyer of this facility will be bound by the
terms of the above-mentioned agreement. Additional pulp requirements for the
remaining mills are purchased in the open market. In the event that any of the
Company's pulp suppliers are unable to meet its demands, the Company believes it
could obtain adequate supplies to meet its future pulp requirements.
The Company owns approximately 911,000 gross acres of timberlands in Maine,
789,400 of which are net forested acres. Approximately 433,700 of these acres
produce softwood timber, such as spruce, fir, hemlock and white pine and 355,700
acres produce hardwood timber, such as beech, birch and maple. The Company
believes it can harvest approximately 13,100 acres per year on a sustainable
basis.
Warren currently offers recycled products in all coated and some uncoated
grade lines. The Company uses reprocessed fibers produced from its existing
operations and purchases post consumer waste from several different suppliers to
meet market requirements for recycled products.
ENERGY REQUIREMENTS
Warren's energy requirements are satisfied through wood and by-products
derived from the Company's pulping process (approximately 54% of the total units
of energy), coal (approximately 16%), oil (approximately 16%), purchased steam
from the Mobile utility complex (approximately 7%) and natural gas, electricity
and other (approximately 7%).
A substantial portion of the Company's electricity requirements are
satisfied through cogeneration agreements ("Power Purchase Agreements" or
"Agreements") whereby the Somerset and Westbrook mills each cogenerate
electricity and sell the output to Central Maine Power Company ("CMP"). The
Westbrook and Somerset Agreements require CMP to purchase such energy produced
by these cogeneration facilities at above market rates which has reduced the
Company's historical cost of electrical energy. The Westbrook Agreement expires
October 31, 1997 and the Somerset Agreement expires in the year 2012. The
favorable pricing element of the Somerset Agreement will end on November 30,
1997. The agreements also require the mills to purchase electricity from CMP at
the standard industrial tariff rate. See Management's Discussion and Analysis of
Results of Operations and Financial Condition and the Notes to Financial
Statements.
Muskegon cogenerates electricity and uses the total output in its
operations. The electric utility that supplies the Muskegon mill with standby
power has filed a request with the state to raise its rates for standby power.
The Company has in the past successfully challenged such proposed rate increases
and intends to challenge this increase.
In the past, Scott operated the Mobile facility (including the Warren paper
mill, a pulp mill, a tissue mill and an energy facility) on an integrated basis.
Prior to the Acquisition, Scott sold its energy facility at Mobile and the buyer
entered into a long-term agreement with Warren to provide electric power and
steam to the paper mill.
OTHER SUPPLIES
The Company also requires substantial quantities of other supplies such as
coating clay, latex, starch and TiO(2). All of these materials are supplied by
various suppliers.
5
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EMPLOYEES AND LABOR RELATIONS
As of September 27, 1995, the Company had 4,271 employees. Approximately 69%
of employees are represented by six international unions under ten different
contracts. Prior to the Acquisition, employees at the Company's Mobile facility
were employed under contracts with Scott. The Company negotiated new collective
bargaining agreements with the Mobile employees which were executed upon the
consummation of the Acquisition. In addition, during 1995, the Company
negotiated an initial labor agreement with employees at its Allentown,
Pennsylvania facility. The Company's contract, covering approximately 750
employees, at the Somerset facility expired September 30, 1995. The Somerset
employees are continuing to work under the terms of the expired agreement. The
Company anticipates reaching agreement on a new contract and does not expect a
work stoppage to occur. However, in the event an agreement cannot be reached and
a prolonged work stoppage that results in a curtailment of output ensues, the
Company's financial position, results of operations and cash flows could be
adversely affected. Other than the Somerset contract, there are no labor
agreements subject to renegotiation until 1997. The Company has experienced no
work stoppage in the U.S. in the past eight years and believes that its
relationship with its employees is good.
ENVIRONMENTAL AND SAFETY MATTERS
The Company is subject to a wide variety of increasingly stringent
environmental laws and regulations relating to, among other matters, air
emissions, wastewater discharges, past and present landfill operations and
hazardous waste management. These laws include the Federal Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act and their respective
state counterparts. The Company will continue to incur significant capital and
operating expenditures to maintain compliance with applicable federal and state
environmental laws. These expenditures include costs of compliance with federal
worker safety laws, landfill expansions and wastewater treatment system
upgrades.
In addition to conventional pollutants, minute quantities of dioxins and
other chlorinated organic compounds may be contained in the wastewater effluent
of the Company's bleached kraft pulp mills in Somerset, Westbrook and Muskegon,
Michigan. The most recent National Pollutant Discharge Elimination System
("NPDES") wastewater permit limits proposed by the EPA would limit dioxin
discharges from the Company's Somerset and Westbrook mills to less than the
level of detectability. The Company is presently meeting the EPA's proposed
dioxin limits but it is not meeting the proposed limits for other parameters
(e.g. temperature and color) and is pursuing efforts to revise these other
wastewater permit limits for its facilities. While the permit limitations at
these two facilities are being challenged, the Company continues to operate
under existing EPA permits, which have technically expired, in accordance with
accepted administrative practice. In addition, the Muskegon mill is involved, as
one of various industrial plaintiffs, in litigation with the County of Muskegon
regarding the mill's wastewater treatment permit. The lawsuit challenges the
permit's effluent limits imposed by local ordinance as arbitrary and
unreasonable. In the meantime, the mill also has applied for alternative
effluent limits. Although the Company believes that it will be successful in its
various administrative and judicial challenges to those limits and in any
negotiations of such limits with environmental regulatory authorities, the
imposition of currently proposed limits could require substantial additional
expenditures, including short-term expenditures, and may lead to substantial
fines for any noncompliance.
In November 1993, the EPA announced proposed regulations that would impose
new air and water quality standards aimed at further reductions of pollutants
from pulp and paper mills, particularly those conducting bleaching operations
(generally referred to as the "cluster rules"). Although the EPA has not made
any commitments, final promulgation of the cluster rules may occur in 1996 and
compliance with the rules may be required beginning in 1998. The Company
believes that compliance with the cluster rules, as proposed, may require
aggregate capital expenditures of approximately $76.0 million through 1999. The
ultimate financial impact to the Company of compliance with the cluster rules
will depend upon the nature of the final regulations, the timing of required
implementation and the cost and availability of new technology. The Company also
anticipates that it will incur an estimated $10.0 million to $20.0 million of
capital expenditures through 1999 related to environmental compliance other than
as a result of the cluster rules.
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The Company's mills generate substantial quantities of solid wastes and
by-products that are disposed of at permitted landfills and solid waste
management units at the mills. The Company is currently planning to expand the
landfill at the Somerset mill at a projected total cost of approximately $12.0
million, of which approximately $5.0 million will be spent between 1996 and
1997.
The Muskegon mill has had discussions with the Michigan Department of
Natural Resources ("DNR") regarding a wastewater surge pond adjacent to the
Muskegon Lake. The DNR presently is considering whether the surge pond is in
compliance with Michigan Act 245 (Water Resources Commission Act) regarding
potential discharges from that pond. The matter is now subject to the results of
a pending engineering investigation. There is a possibility that, as a result of
DNR requirements, the surge pond may be closed in the future. The Company
estimates the cost of closure will be approximately $2.0 million. In addition,
if it is necessary to replace the functional capacity of the surge pond with
above-grade structures, the Company preliminarily estimates that up to an
additional $8.0 million may be required for such construction costs.
The Company has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for cleanup
of contamination at seven sites. Based upon the Company's understanding of the
total amount of liability at each site, its calculation of its percentage share
in each proceeding, and the number of potentially responsible parties at each
site, the Company presently believes that its aggregate exposure for these
matters will not be material. Moreover, in accordance with the Stock Purchase
Agreement pursuant to which the Company was acquired by Sappi, the Company's
former parent, Scott, agreed to indemnify and defend the Company for and
against, among other things, the full amount of any damages or costs resulting
from the off-site disposal of hazardous substances occurring prior to the date
of closing, including all damages and costs related to these seven sites. Since
the date of closing of the acquisition agreement, Scott has been performing
under the terms of this environmental indemnity and defense provision and,
therefore, the Company has not expended any funds with respect to these seven
sites.
The Company must comply with a number of federal and state regulations that
govern health and safety in the workplace, the most significant of which is the
Federal Occupational Safety and Health Act ("OSHA"). Pursuant to a voluntary
OSHA program piloted in the State of Maine in 1993, the Company performed a
self-assessment audit with respect to OSHA mandates at its Somerset and
Westbrook mills and submitted a compliance plan to address certain health and
safety matters. The Company anticipates that the total cost of implementing the
compliance plan will be approximately $19.0 million. As of September 27, 1995,
approximately $14.4 million of the total estimated $19.0 million had been
expended. The Company expects that the majority of the remaining costs will be
expended during fiscal years 1996 and 1997. The Company recognizes these costs
as they are incurred.
The Company currently has a five year demolition project in progress at its
Westbrook Facility for health and safety reasons. Total costs of the project are
estimated to be approximately $9.0 million, of which approximately $4.5 million
had been spent as of September 27, 1995. The Company recognizes these costs as
they are incurred.
The Company does not believe that it will have any liability under recent
emergency legislation enacted by the State of Maine to cover a significant
shortfall in the Maine workers' compensation system through assessments of
employers and insurers; however, there can be no assurance that the existing
legislation will fully address the shortfall.
None of these matters, individually or in the aggregate, is expected to have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
ITEM 2. PROPERTIES
Warren's principal executive offices are located in Boston, Massachusetts.
The Company believes that its property and equipment are generally well
maintained, in good operating condition and adequate for its present needs. The
inability to renew any short-term leases would not have a material adverse
effect on the Company's financial position or results of operations.
7
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The following table sets forth the location and use of Warren's principal
facilities, which are owned in fee unless otherwise indicated. All of the
Company's properties are pledged as collateral for the Company's outstanding
indebtedness (see the Notes to Financial Statements).
<TABLE>
<CAPTION>
LOCATION USE
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<S> <C>
Skowhegan, Maine Manufacturing facility for the manufacture of coated paper and softwood and
(Somerset Mill) hardwood pulp.
Muskegon, Michigan Manufacturing facility for the manufacture of coated paper and hardwood pulp and a
warehouse (a).
Mobile, Alabama Manufacturing facility for the manufacture of uncoated paper and specialty paper,
a warehouse, a warehouse/distribution center (b) and offices (c).
Westbrook, Maine Manufacturing facility for the manufacture of specialty paper, high bulk coated
paper and hardwood pulp. A research and development facility is also located at
this site.
Allentown, Pennsylvania Coated paper sheeting facility and distribution center.
</TABLE>
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(a) Subject to a lease expiring in September 1996.
(b) Subject to a lease expiring in December 2014.
(c) Subject to a lease expiring in December 2019.
TIMBERLANDS
The Company owns approximately 911,000 gross acres of timberlands in Maine,
789,400 of which are net forested acres. Approximately 433,700 of these acres
produce softwood timber, such as spruce, fir, hemlock and white pine and 355,700
acres produce hardwood timber such as beech, birch and maple. The Company
believes it can harvest approximately 13,100 acres per year on a sustainable
basis.
CAPACITY
The Company currently operates four mills and a sheeting facility with total
annual production capacity of approximately 1.5 million tons of paper. The
Company's manufacturing facilities were fully utilized during the nine months
ended September 27, 1995.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits, environmental and
administrative proceedings. The relief sought in such lawsuits and proceedings
include injunctions, damages and penalties. Although the final results in these
suits and proceedings cannot be predicted with certainty, it is the present
opinion of management, after consulting with legal counsel, based on the
Company's financial position and the information available to date, that they
will not have a material effect on the Company's financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None during the fourth quarter of fiscal 1995.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the common stock of the
Company or of its parent, Holdings. The common stock of the Company and its
parent has not been traded or sold publicly and accordingly no information with
respect to sales practices or quotations is available.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected statement of operations data, other
financial data, operating data and balance sheet data for S.D. Warren Company
(the "Company" or "Warren") and the Predecessor Corporation (as defined in the
Notes to Financial Statements). The selected financial data for fiscal year
1993, the nine months ended September 24, 1994 and the period from September 25,
1994 to December 20, 1994 are derived from the combined financial statements of
the Predecessor Corporation, which have been audited by Deloitte & Touche LLP.
The selected financial data for the period from December 21, 1994 through
September 27, 1995 are derived from the consolidated financial statements of the
Company which have been audited by Deloitte & Touche LLP. The selected financial
data for fiscal year 1991 and fiscal year 1992 have been prepared from selected
financial data provided to the Company by the Predecessor Corporation's Parent,
Scott Paper Company, in connection with the acquisition of Warren. Operating
data for any period less than a year are not necessarily indicative of the
results that may be expected for the full year.
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 28, 1991 DECEMBER 26, 1992(1) DECEMBER 25, 1993 SEPTEMBER 24, 1994
----------------- --------------------- ----------------- -------------------
<S> <C> <C> <C> <C>
<CAPTION>
S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND COMPANY AND
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED
AFFILIATES AFFILIATES AFFILIATES AFFILIATES
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
----------------- --------------------- ----------------- -------------------
OPERATING DATA: (IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales..................................... $ 1,169.7 $ 1,212.8 $ 1,143.6 $ 828.8
Gross profit.............................. 144.6 182.5 168.1 106.4
Selling, general and administrative
expense.................................. 92.0 91.0 91.7 72.1
Restructuring............................. 38.0 -- 66.1 --
Income from operations.................... 14.6 91.5 10.3 34.3
Other income (expense), net............... 0.1 0.1 0.1 0.1
Interest expense.......................... 9.3 9.0 8.5 6.4
Income tax provision...................... 2.6 32.0 6.5 11.2
Net income (loss)......................... 2.8 50.6 (4.6 ) 16.8
Dividends and accretion on preferred
stock.................................... -- -- -- --
Net income (loss) applicable to common
stockholders............................. 2.8 50.6 (4.6 ) 16.8
SHARE DATA:
Net earnings per common share (in
millions)................................ $ -- $ -- $ -- $ --
Weighted average common shares
outstanding.............................. -- -- -- --
Dividends declared per common share....... -- -- -- --
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital........................... $ 49.4 $ 67.0 $ 47.1 $ 156.2
Total assets.............................. 1,699.4 1,696.8 1,711.7 1,676.9
Total debt (including current
maturities).............................. 125.2 125.7 124.3 119.8
Preferred stock........................... -- -- -- --
Parent's equity........................... 1,185.1 1,152.3 1,088.1 1,136.5
Stockholder's equity...................... -- -- -- --
<CAPTION>
SEPTEMBER 25,
1994 DECEMBER 21, 1994
THROUGH THROUGH
DECEMBER 20, 1994 SEPTEMBER 27, 1995
----------------- -------------------
<S> <C> <C>
S.D. WARREN
COMPANY AND S.D. WARREN
CERTAIN RELATED COMPANY
AFFILIATES AND
(PREDECESSOR) SUBSIDIARIES
----------------- -------------------
OPERATING DATA:
<S> <C> <C>
Sales..................................... $ 313.6 $ 1,155.8
Gross profit.............................. 49.9 269.8
Selling, general and administrative
expense.................................. 22.2 96.7
Restructuring............................. -- --
Income from operations.................... 27.7 173.1
Other income (expense), net............... (0.5) 3.2
Interest expense.......................... 2.3 106.0
Income tax provision...................... 9.9 28.2
Net income (loss)......................... 15.0 42.1
Dividends and accretion on preferred
stock.................................... -- 9.1
Net income (loss) applicable to common
stockholders............................. 15.0 33.0
SHARE DATA:
Net earnings per common share (in
millions)................................ $ -- $ 0.33
Weighted average common shares
outstanding.............................. -- 100
Dividends declared per common share....... -- --
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital........................... $ 233.2 $ 177.6
Total assets.............................. 1,737.1 1,887.6
Total debt (including current
maturities).............................. 119.3 1,127.4
Preferred stock........................... -- 74.5
Parent's equity........................... 1,219.1 --
Stockholder's equity...................... -- 364.8
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes the revision in the estimated useful lives used to compute
depreciation for certain equipment which increased net income by
approximately $26.2 million as well as the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" which reduced net income by
approximately $6.1 million.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
S.D. Warren Company ("S.D. Warren", "Warren", the "Company", or the
"Successor Corporation") manufactures printing, publishing and specialty papers
and has pulp and timberland operations vertically integrated with some of its
manufacturing facilities. Warren is the largest producer of coated free paper
(free of groundwood pulp) in the United States. The Company currently operates
four paper mills with total annual production capacity of approximately 1.5
million tons of paper. The Company also owns a sheeting and distribution
facility in Allentown, Pennsylvania, with annual sheeting capacity of
approximately 90,000 tons, and owns approximately 911,000 acres of timberlands
in the State of Maine.
As of October 8, 1994, SDW Acquisition Corporation ("SDW Acquisition"), a
direct wholly-owned subsidiary of SDW Holdings Corporation ("Holdings"), entered
into a definitive agreement (the "Stock Purchase Agreement") pursuant to which,
on December 20, 1994, SDW Acquisition acquired (the "Acquisition") from Scott
Paper Company ("Scott") all of the outstanding capital stock of Warren.
Immediately following the Acquisition, SDW Acquisition merged with and into
Warren (the "Merger"), with Warren surviving. See the Notes to Financial
Statements for information regarding the Acquisition and financing for the
Acquisition.
The Acquisition has resulted in a new basis of accounting, the adoption of
certain accounting policies which differ from the accounting policies of the
Predecessor Corporation, as defined in the Notes to Financial Statements, and
increases to certain manufacturing costs (purchased pulp and energy within the
Company's Mobile, Alabama facility) resulting from obtaining these manufacturing
resources on a third party versus affiliate basis. As a result, the Predecessor
Corporation's financial statements for periods prior to the Acquisition are not
comparable to the Company's.
The Company wishes to caution readers that this discussion and analysis
contains forward-looking statements which, at the time made, speak about the
future and are based upon management's interpretation of what it believes are
significant factors affecting the Company's business. The Company believes that
various factors could affect the Company's actual results and could cause the
Company's actual results for 1995 and beyond, to differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company.
Such factors include, but are not limited to: global economic and market
conditions; production and capacity in the United States and Europe; production
and pricing levels of pulp and paper; any major disruption in production at key
facilities; alterations in trade conditions in and between the United States and
other countries where the Company does business and changes in environmental,
tax and other laws and regulations.
MARKET OVERVIEW
The paper market is highly cyclical, characterized by periods of supply and
demand imbalance. Between 1988 and 1993, the rate of growth of demand slowed as
a result of the world-wide recession. Conversely, coated paper capacity
increased significantly in North America during such period. In addition, in
1992, North American imports from Europe increased as a result of excess
capacity in Europe and a devaluation of certain European currencies in relation
to the U.S. dollar, causing North American prices to deteriorate. During the
third quarter of calendar year 1994, Warren's net selling prices began to
improve. List price increases of approximately $60 per ton for the #1 and #2
grades and approximately $65 per ton for the #3 grade were announced in August
1994 by Warren and other major coated paper producers, and a further list price
increase for #3 grade of approximately $40 per ton was announced in October 1994
which became effective in December 1994. Warren believes that as a result of
this improved pricing environment, selling price discounts for the #2 and #3
grades were also significantly reduced during the third quarter of 1994. During
the first quarter of 1995, a list price increase of approximately $97 per ton
from the December 1994 price level was achieved for #3 grade web paper. In April
1995, a further 10.5% price increase for the Company's #3 grade web paper, over
the average price for such paper for the first quarter of 1995, was achieved.
However, since the third quarter of 1995, the industry has experienced a
softening in orders across certain product lines as merchants, printers and
other converters have reduced inventory levels which had
10
<PAGE>
increased above normal levels. The reduction in apparent demand has also
resulted in a weakening in prices, with discounting occurring on certain paper
product grades. Management believes that the underlying long-term demand
fundamentals of the industry remain sound and that the impact of this
industry-wide inventory adjustment, on the basis that demand returns to expected
levels during the early part of 1996, will not have a material adverse effect on
the Company's financial position, results of operations or cash flows. However,
any failure of the industry to maintain its recovery in the near future, or any
prolonged or severe weakness in the market for any of the Company's products in
the future, may adversely affect the Company's financial position, results of
operations and cash flows. Although the economy is expected to continue growing,
and the volume of new capacity currently announced by the industry is likely to
be absorbed by anticipated demand growth (as the lead time for any further
significant capacity would likely be two years or longer from announcement), it
is unlikely that prices will continue to rise at the rate of the past year.
The following discussion and analysis should be read in conjunction with the
Financial Statements and the Notes thereto.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 27, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER 24,
1994
The following discussion compares the results of operations for the
Successor Corporation's nine month period ended September 27, 1995 with the
Predecessor Corporation's nine month period ended September 24, 1994. For
purposes of this discussion, the period December 21, 1994 through September 27,
1995 is referred to as the nine month period ended September 27, 1995. The
"Company" refers to both the Predecessor and Successor Corporations.
SALES
The Company's sales for the nine months ended September 27, 1995 were
$1,155.8 million compared to $828.8 million for the nine months ended September
24, 1994, an increase of $327.0 million or 39.5%. Shipment volume increased from
approximately 846,300 tons for the nine months ended September 24, 1994 to
965,000 tons for the nine months ended September 27, 1995 or approximately
14.0%. This increase is primarily attributable to increased volume of coated
free paper. Average net revenue per ton increased by $218.4 or 22.3% across all
grades due to higher selling prices and reduced sales of second quality paper
resulting from improved manufacturing performance achieved during this period.
COST OF GOODS SOLD
The Company's costs of goods sold for the nine months ended September 27,
1995 were $886.0 million compared to $722.4 million for the nine months ended
September 24, 1994, an increase of $163.6 million or 22.6%. This increase is
attributable to the increase in volume sold and increased raw material cost for
purchased pulp and wood and wood chips used to manufacture pulp, partially
offset by a net reduction in labor costs and increased production efficiencies
and output.
The increase in wood and wood chip costs was primarily attributable to the
increased demand for lumber by the housing sector as the economy expanded. The
increase in pulp costs primarily resulted from significantly higher prices on
purchased pulp and the effect of the Company's market-based long-term pulp
supply contract at the Company's Mobile, Alabama facility which was entered into
with Scott at the time of the Acquisition. Prior to the Acquisition, pulp
purchases for the Company's Mobile operations were on a shared cost basis with
other Scott operations located at the Mobile facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses for the nine months ended
September 27, 1995 increased approximately 34.1% or $24.6 million. This increase
is primarily due to the increase in distribution and administrative related
expenses. Distribution related expenses increased primarily as a result of the
increase in sales volume. Administrative expenses increased primarily as a
result of the costs incurred to obtain the appropriate level of administrative
services that were previously performed by Scott. Selling, general and
administrative expenses as a percent of sales remained relatively flat at 8.4%
for the nine months ended September 27, 1995 as compared to 8.7% for the nine
months ended September 24, 1994.
11
<PAGE>
INCOME (LOSS) FROM OPERATIONS
The Company's income from operations for the nine months ended September 27,
1995 was $173.1 million compared to $34.3 million for the nine months ended
September 24, 1994. This increase is primarily attributable to the substantial
increase in gross profit partially offset by the increase in selling, general
and administrative expenses.
OTHER INCOME (EXPENSE), NET
Other income (expense), net for the nine months ended September 27, 1995 was
$3.2 million compared to $0.1 million for the nine months ended September 24,
1994. This increase is primarily due to an increase in interest income. This
increase in interest income is primarily due to interest earned on surplus cash
balances held prior to the application of such balances towards certain business
requirements and the reduction of long-term debt.
INTEREST EXPENSE AND TAXES
Following the Acquisition, Warren's capitalization and tax basis of
accounting changed significantly. As a result, Warren's interest and tax expense
prior to the Acquisition are not comparable to results following the
Acquisition.
The Company's interest expense for the nine months ended September 27, 1995
was $106.0 million compared to $6.4 million for the nine months ended September
24, 1994. This increase reflects the incremental interest costs for the nine
months ended September 27, 1995 associated with the financing of the
Acquisition, as discussed in the Notes to Financial Statements. For the nine
months ended September 27, 1995 interest expense includes the amortization of
deferred financing fees. The Company's hedging activities as discussed in the
Notes to Financial Statements did not have a material effect on the weighted
average borrowing rate or interest expense for the nine months ended September
27, 1995.
The Company's income tax expense was $28.2 million for the nine months ended
September 27, 1995 compared to $11.2 million for the nine months ended September
24, 1994. This increase is primarily attributable to changes in the Company's
earnings levels.
TWELVE MONTHS ENDED DECEMBER 20, 1994 COMPARED TO TWELVE MONTHS ENDED DECEMBER
25, 1993
The following discussion compares the results of operations for the
Predecessor Corporation's approximate twelve month period ended December 20,
1994 with the twelve month period ended December 25, 1993. For purposes of
discussions relating to the twelve month period ended December 20, 1994, the
"Company" refers to the Predecessor Corporation's combined results for the nine
months ended September 24, 1994 and the period September 25, 1994 through
December 20, 1994.
SALES
Sales for the twelve months ended December 20, 1994 were $1,142.4 million
compared to $1,143.6 million for the twelve months ended December 25, 1993.
Shipment volume increased to approximately 1,142,000 tons for the twelve months
ended December 20, 1994 from approximately 1,131,300 tons for the twelve months
ended December 25, 1993. Average net revenue per ton was relatively constant
from period to period.
COST OF GOODS SOLD
Cost of goods sold for the twelve months ended December 20, 1994 were $986.1
million compared to $975.5 million for the twelve months ended December 25,
1993, an increase of $10.6 million. This increase is primarily due to an
increase in raw material costs during 1994 as compared to the previous year
partially offset by a net reduction in labor costs during such period. The
increase in raw material costs was primarily due to the increase in tons shipped
and increased costs for wood and wood chips used to manufacture pulp.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses include marketing and
distribution, research, administrative and general and restructuring expenses.
For the twelve months ended December 20, 1994 the Company's selling, general and
administrative expenses were $94.3 million compared to $157.8 million for the
12
<PAGE>
twelve months ended December 25, 1993, a decrease of $63.5 million or 40.2%.
Excluding a $66.1 million restructuring charge and the effect of gains on land
sales of $4.6 million during the twelve months ended December 25, 1993 that were
not present in the twelve months ended December 20, 1994, selling general and
administrative expenses remained relatively flat from period to period.
INCOME (LOSS) FROM OPERATIONS
Income from operations for the twelve months ended December 20, 1994 was
$62.0 million compared to $10.3 million for the twelve months ended December 25,
1993. Excluding a $66.1 million restructuring charge and the effect of gains on
land sales of $4.6 million during the twelve months ended December 25, 1993,
income from operations would have been $71.8 million for that period. The
decrease in income from operations for the twelve month period ended December
20, 1994 to $62.0 million as compared to $71.8 million for the twelve months
ended December 25, 1993, adjusted for the restructuring charge and the gains on
land sales, is primarily due to the aforementioned increase in cost of goods
sold.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically participated in Scott's cash management system.
Accordingly, cash received from the Company's domestic operations was
administered centrally along with the financing of working capital requirements
and capital expenditures. Effective with the Acquisition, the Company instituted
a cash management program partly administered by its principal lender. The full
administration for cash and treasury management was assumed by the Company in
April 1995.
NINE MONTHS ENDED SEPTEMBER 27, 1995 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
24, 1994
The following discussion compares the Successor Corporation's nine month
period ended September 27, 1995 with the Predecessor Corporation's nine month
period ended September 24, 1994. For purposes of this discussion, the nine month
period ended September 27, 1995 refers to the period December 21, 1994 through
September 27, 1995.
The Company's net cash provided from operating activities was $136.0 million
and $27.8 million for the nine months ended September 27, 1995 and September 24,
1994, respectively. The increase in cash provided by operations for the nine
months ended September 27, 1995 compared to the comparable period in 1994 is
primarily due to an increase in net income, accounts payable and accrued
liabilities, offset by an increase in accounts receivable and inventories.
The Company's operating working capital increased to $174.0 million at
September 27, 1995 compared to $112.4 million at September 24, 1994. Operating
working capital is defined as trade accounts receivables, other receivables and
inventories, less accounts payable, accrued and other current liabilities.
The increase in accounts receivable at September 27, 1995 as compared to the
balance at September 24, 1994 is primarily due to the effect of the receivables
that were factored by the Predecessor Corporation as of September 24, 1994, as
indicated in the Notes to Financial Statements, and the increase in sales. The
increase in inventory at September 27, 1995 compared to September 24, 1994 was
primarily due to enhanced production levels, an increase in purchasing volume,
higher costs of raw materials and the effect of the change in inventory costing
method as indicated in the Notes to Financial Statements. The increase in
accounts payable at September 27, 1995 compared to September 24, 1994 was also
primarily attributable to the increase in purchasing volume and the higher costs
of raw materials.
The Company's current ratio, the ratio of current assets to current
liabilities, was 1.6 at September 27, 1995 compared to 2.3 at September 24,
1994. This decrease is primarily due to the increase in the current portion of
long-term debt and the decrease in the current deferred tax asset offset by the
increase in operating working capital for such period.
The changes in the balances of deferred taxes, goodwill, deferred financing
costs, other assets, current and long-term debt, accrued liabilities and other
long-term liabilities were primarily caused by the Acquisition (see the Notes to
Financial Statements). Accrued liabilities also increased as a result of
interest accrued on the Company's term loan facility.
13
<PAGE>
Net cash used for investing activities for the nine months ended September
27, 1995 was $1,489.6 million compared to $46.4 million for the nine months
September 24, 1994. Net cash used in investing activities for the nine months
ended September 27, 1995 includes the effect of the cash outflows related to the
Acquisition of approximately $1,455.9 million. This amount is net of $43.6
million the Company received from Scott pursuant to a post closing adjustment
mechanism in the Stock Purchase Agreement and includes the cash outflows for
related transaction fees of approximately $19.2 million (see the Notes to
Financial Statements).
Capital expenditures for the nine months ended September 27, 1995 were $33.7
million compared to $32.3 million for the nine months ended September 24, 1994.
Capital spending for the nine months ended September 27, 1995 and September 24,
1994 were primarily for improvements to the Company's manufacturing and
distribution facilities. Capital spending for the nine months ended September
24, 1994 included expenditures of approximately $9.0 million related to the new
sheeting and distribution facility located in Allentown, Pennsylvania, which
began operations in the second quarter of fiscal 1994.
Estimated capital expenditures are expected to approximate $100.0 million
during fiscal year 1996. In addition, due to a wide variety of increasingly
stringent environmental laws and regulations, including compliance with the
cluster rules (see ENVIRONMENTAL AND SAFETY MATTERS), the Company anticipates
that capital expenditures related to environmental compliance will be
approximately $85.0 million to $95.0 million through fiscal year 1999, assuming
the cluster rules are adopted. The Company believes that cash generated by
operations and amounts available under its revolving credit facility will be
sufficient to meet its ongoing operating and capital expenditure requirements.
Net cash provided by financing activities for the nine months ended
September 27, 1995 was $1,340.8 million compared to $21.2 million for the nine
months ended September 24, 1994. Cash provided by financing activities for the
nine months ended September 27, 1995 includes proceeds from long-term debt of
$1,105.7 million which is net of approximately $59.7 million of related
financing fees. The related financing fees have been recorded as a long-term
deferred asset and are being amortized over the life of the debt. During the
nine months ended September 27, 1995, the Company repaid $162.1 million of
amounts primarily borrowed under the Revolving Credit Facility (see the Notes to
Financial Statements). In addition, the Company received net proceeds from the
issuance of preferred and common stock of $65.4 million and $331.8 million,
respectively. Cash provided by financing activities for the nine months ended
September 27, 1995 was primarily utilized for the Acquisition.
TWELVE MONTHS ENDED DECEMBER 20, 1994 COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 25, 1993
The following discussion compares the Predecessor Corporation's approximate
twelve month period ended December 20, 1994 with the twelve month period ended
December 25, 1993. For purposes of this discussion, "Company" refers to the
Predecessor Corporation. The twelve month period ended December 20, 1994 refers
to the Predecessor Corporation's combined results for the nine months ended
September 24, 1994 and the period September 25, 1994 through December 20, 1994.
The Company's net cash provided by operating activities was $81.5 million
for the twelve months ended December 20, 1994 compared to $130.3 million for the
twelve months ended December 25, 1993. This decrease is primarily due to
increased receivables, a reduction in payables and spending related to the
restructuring announced in the fourth quarter of fiscal year 1993.
Net cash used by investing activities for the twelve months ended December
20, 1994 was $60.9 million compared to $73.7 million for the twelve months ended
December 25, 1993. This decrease is primarily attributable to decreased
investments in plant assets and timber resources. Capital expenditures for the
twelve months ended December 20, 1994 were $46.8 million compared to $68.9
million for the twelve months ended December 25, 1993. This decrease is
primarily due to spending related to the sheeting and distribution facility
located in Allentown, Pennsylvania, which began operations in the quarter ended
June 25, 1994.
14
<PAGE>
Net cash provided by financing activities for the twelve months ended
December 20, 1994 was $52.3 million compared to a use of cash of $55.8 million
for the twelve months ended December 25, 1993. The $52.3 million net cash flow
for the twelve months ended December 20, 1994 primarily reflects net capital
infusions of $57.0 million the Predecessor Corporation received from Scott. For
the twelve months ended December 25, 1993, Scott made net capital withdrawals of
$54.1 million.
OTHER ITEMS
DEBT AND PREFERRED STOCK
In connection with the Acquisition, the Company's indebtedness was
significantly increased, resulting in significant debt service obligations. At
September 27, 1995, the Company's long-term debt was $1048.8 million compared to
$116.8 million at September 24, 1994, an increase of $932.0 million. Current
maturities of long-term debt increased from $3.0 million at September 24, 1994
to $78.6 million at September 27, 1995. The excess cash balance at September 27,
1995 was primarily used to meet the Company's credit facility obligations during
the first quarter of fiscal 1996. See the Notes to Financial Statements.
The Company has a $250.0 million revolving credit facility to finance
working capital needs. At September 27, 1995, the Company did not have any
borrowings under the facility, resulting in an unused borrowing capacity of
$229.4 million, after giving effect to outstanding letters of credit, which may
be used to finance working capital needs. The Company is required to pay a
commitment fee of 0.5% per annum on the average daily unused commitment
available under the revolving credit facility. See the Notes to Financial
Statements.
In addition, the Company has a Letter of Credit Facility (as defined in the
Notes to Financial Statements) to support certain of its obligations. The
Company had $170.5 million of letters of credit outstanding under its Letter of
Credit Facility at September 27, 1995. The Company pays a commission of 2.5% on
outstanding letters of credit and an issuance fee of 0.25% per annum on letters
of credit issued. See the Notes to Financial Statements.
The Credit Agreement (as defined in the Notes to Financial Statements)
contains restrictive covenants which limit the Company with respect to certain
matters including, among other things, the ability to incur debt, pay dividends,
make acquisitions, sell assets, merge, grant or incur liens, guarantee
obligations, make investments or loans, make capital expenditures, create
subsidiaries or change its line of business. The Credit Agreement also restricts
the Company from prepaying certain of its indebtedness. Under the Credit
Agreement, the Company is required to satisfy certain financial covenants which
will require the Company to maintain specified financial ratios, including a
minimum interest coverage ratio, a minimum debt service ratio and a net worth
test. See the Notes to Financial Statements. As a result of extending the filing
date of the Annual Report on Form 10-K from December 26, 1995 to January 10,
1996, the Company was unable to satisfy specific financial reporting covenants
under the Credit Agreement. As a result, the Company obtained a waiver from the
lenders which extended the requirement to distribute such financial information
through January 17, 1996, at which time management was in compliance with such
covenants.
In addition, the Company is required by the terms of the Credit Agreement to
enter into fixed rate interest protection agreements on a portion of its
outstanding debt. At September 27, 1995, $205.0 million of debt was covered by
such interest rate protection agreements. See the Notes to Financial Statements.
The Company does not anticipate paying cash dividends on the Senior
Preferred Stock (as defined in the Notes to Financial Statements) for any period
ending on or prior to December 15, 1999. The Company intends to retain future
earnings, if any, for use in its business and does not anticipate paying any
cash dividends on the Senior Preferred Stock prior to such date. In addition,
the terms of the Credit Agreement and the indenture (the "Indenture") relating
to the Notes (as defined in the Notes to Financial Statements) limit the amount
of cash dividends the Company may pay with respect to the Senior Preferred Stock
and other equity securities both before and after that date. See the Notes to
Financial Statements.
15
<PAGE>
FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and debt. In addition, the
Company uses interest rate caps and swaps, which are required by the terms of
the Credit Agreement, as a means of managing interest rate risk associated with
the current debt balances. The Company adopted Statement of Financial Accounting
Standards No. 119 ("FAS 119") "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments" in 1995. See the Notes to Financial
Statements.
ENVIRONMENTAL AND SAFETY MATTERS
The Company is subject to a wide variety of increasingly stringent
environmental laws and regulations relating to, among other matters, air
emissions, wastewater discharges, past and present landfill operations and
hazardous waste management. These laws include the Federal Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act and their respective
state counterparts. The Company will continue to incur significant capital and
operating expenditures to maintain compliance with applicable federal and state
environmental laws. These expenditures include costs of compliance with federal
worker safety laws, landfill expansions and wastewater treatment system
upgrades.
In addition to conventional pollutants, minute quantities of dioxins and
other chlorinated organic compounds may be contained in the wastewater effluent
of the Company's bleached kraft pulp mills in Somerset and Westbrook, Maine and
Muskegon, Michigan. The most recent National Pollutant Discharge Elimination
System ("NPDES") wastewater permit limits proposed by the EPA would limit dioxin
discharges from the Company's Somerset and Westbrook mills to less than the
level of detectability. The Company is presently meeting the EPA's proposed
dioxin limits but it is not meeting the proposed limits for other parameters
(e.g. temperature and color) and is pursuing efforts to revise these other
wastewater permit limits for its facilities. While the permit limitations at
these two facilities are being challenged, the Company continues to operate
under existing EPA permits, which have technically expired, in accordance with
accepted administrative practice. In addition, the Muskegon mill is involved, as
one of various industrial plaintiffs, in litigation with the County of Muskegon
regarding the mill's wastewater treatment permit. The lawsuit challenges the
permit's effluent limits imposed by local ordinance as arbitrary and
unreasonable. In the meantime, the mill also has applied for alternative
effluent limits. Although the Company believes that it will be successful in its
various administrative and judicial challenges to those limits and in any
negotiations of such limits with environmental regulatory authorities, the
imposition of currently proposed limits could require substantial additional
expenditures, including short-term expenditures, and may lead to substantial
fines for any noncompliance.
In November 1993, the EPA announced proposed regulations that would impose
new air and water quality standards aimed at further reductions of pollutants
from pulp and paper mills, particularly those conducting bleaching operations
(generally referred to as the "cluster rules"). Although the EPA has not made
any commitments, final promulgation of the cluster rules may occur in 1996 and
compliance with the rules may be required beginning in 1998. The Company
believes that compliance with the cluster rules, as proposed, may require
aggregate capital expenditures of approximately $76.0 million through 1999. The
ultimate financial impact to the Company of compliance with the cluster rules
will depend upon the nature of the final regulations, the timing of required
implementation and the cost and availability of new technology. The Company also
anticipates that it will incur an estimated $10.0 million to $20.0 million of
capital expenditures through 1999 related to environmental compliance other than
as a result of the cluster rules.
The Company's mills generate substantial quantities of solid wastes and
by-products that are disposed of at permitted landfills and solid waste
management units at the mills. The Company is currently planning to expand the
landfill at the Somerset mill at a projected total cost of approximately $12.0
million, of which approximately $5.0 million will be spent between 1996 and
1997.
The Muskegon mill has had discussions with the Michigan Department of
Natural Resources ("DNR") regarding a wastewater surge pond adjacent to the
Muskegon Lake. The DNR presently is considering whether the surge pond is in
compliance with Michigan Act 245 (Water Resources Commission Act) regarding
potential discharges from that pond. The matter is now subject to the results of
a pending
16
<PAGE>
engineering investigation. There is a possibility that, as a result of DNR
requirements, the surge pond may be closed in the future. The Company estimates
the cost of closure could be approximately $2.0 million. In addition, if it is
necessary to replace the functional capacity of the surge pond with above-grade
structures, the Company preliminarily estimates that up to an additional $8.0
million may be required for such construction costs.
The Company has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for cleanup
of contamination at seven sites. Based upon the Company's understanding of the
total amount of liability at each site, its calculation of its percentage share
in each proceeding, and the number of potentially responsible parties at each
site, the Company presently believes that its aggregate exposure for these
matters will not be material. Moreover, in accordance with the agreement
pursuant to which the Company was acquired by Sappi, the Company's former
parent, Scott, agreed to indemnify and defend the Company for and against, among
other things, the full amount of any damages or costs resulting from the
off-site disposal of hazardous substances occurring prior to the date of
closing, including all damages and costs related to these seven sites. Since the
date of closing of the acquisition agreement, Scott has been performing under
the terms of this environmental indemnity and defense provision and, therefore,
the Company has not expended any funds with respect to these seven sites.
The Company must comply with a number of federal and state regulations that
govern health and safety in the workplace, the most significant of which is the
Federal Occupational Safety and Health Act ("OSHA"). Pursuant to a voluntary
OSHA program piloted in the State of Maine in 1993, the Company performed a
self-assessment audit with respect to OSHA mandates at its Somerset and
Westbrook mills and submitted a compliance plan to address certain health and
safety matters. The Company anticipates that the total cost of implementing the
compliance plan will be approximately $19.0 million. As of September 27, 1995,
approximately $14.4 million of the total estimated $19.0 million had been
expended. The Company expects that the majority of the remaining costs will be
expended during fiscal years 1996 and 1997. The Company recognizes these costs
as they are incurred.
The Company currently has a five year demolition project in progress at its
Westbrook Facility for health and safety reasons. Total costs of the project are
estimated to be approximately $9.0 million, of which approximately $4.5 million
had been spent as of September 27, 1995. The Company recognizes these costs as
they are incurred.
The Company does not believe that it will have any liability under recent
emergency legislation enacted by the State of Maine to cover a significant
shortfall in the Maine workers' compensation system through assessments of
employers and insurers; however, there can be no assurance that the existing
legislation will fully address the shortfall.
None of these matters, individually or in the aggregate, is expected to have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
RESTRUCTURING
During the fourth quarter of fiscal year 1993, the Predecessor Corporation
recorded a charge of $66.1 million, primarily for restructuring and productivity
improvement programs. The charge included the estimated effect of further
workforce reductions, as well as actions to consolidate and simplify the
Predecessor Corporation's coated papers business. The remaining reserve balance
as of September 24, 1994 was fully utilized by the Predecessor Corporation prior
to the date of the Acquisition.
LONG-TERM CONTRACTS
A substantial portion of the Company's electricity requirements are
satisfied through cogeneration agreements ("Power Purchase Agreements" or
"Agreements") whereby the Somerset and Westbrook mills each cogenerate
electricity and sell the output to Central Maine Power Company ("CMP"). The
Westbrook and Somerset Agreements require CMP to purchase such energy produced
by these cogeneration facilities at above market rates which has reduced the
Company's historical cost of electrical energy. The Westbrook Agreement expires
October 31, 1997 and the Somerset Agreement expires in the year 2012. The
favorable
17
<PAGE>
pricing element of the Somerset Agreement will end on November 30, 1997. The
agreements also require the mills to purchase electricity from CMP at the
standard industrial tariff rate. See the Notes to Financial Statements.
To properly reflect the fair market value of the acquired Power Purchase
Agreements as of the Acquisition date, the Company established a deferred asset
of approximately $32.3 million, in accordance with APB No. 16. This deferred
asset is recorded with other contracts valued at the Acquisition date as a net
long-term liability. This deferred asset is being amortized over the remaining
life of the favorable Power Purchase Agreements. For the nine months ended
September 27, 1995, amortization expense related to this asset approximated
$10.8 million.
CONSIDERATIONS RELATING TO HOLDINGS' CASH OBLIGATIONS
The Company expects that it may make certain cash payments to Holdings or
other affiliates during fiscal 1996 to the extent cash is available and to the
extent it is permitted to do so under the terms of the Credit Agreement, the
Indenture and the terms of the Senior Preferred Stock. Such payments may
include, among other things, (i) amounts under a tax sharing agreement to be
entered into between the Company and Holdings necessary to enable Holdings to
pay the Company's taxes, (ii) administrative fees to Holdings and amounts to
cover specified costs and expenses of Holdings and (iii) an annual advisory fee
for management advisory services, limited to $1.0 million, to Sappi and/or its
affiliates. To the extent the Company continues to make such payments, it will
do so only to the extent such payments are permitted under the terms of the
Credit Agreement, the Indenture and the terms of the Senior Preferred Stock.
Because Holdings has no material assets other than the outstanding common
stock of the Company (all of which is pledged to the lenders under the Credit
Agreement) and all of the operations of Holdings (other than the management of
its investment in the Company) are currently conducted through the Company and
its subsidiaries, Holdings' ability to meet its cash obligations is dependent
upon the earnings of the Company and its subsidiaries and the distribution or
other provision of those earnings to Holdings. Holdings has no material
indebtedness outstanding (other than advances that may be owed from time to time
to the Company and guarantees in respect of indebtedness of the Company and its
subsidiaries) and Holding's 15% Senior Exchangeable Preferred Stock (the
"Holdings Preferred Stock"), which was issued in connection with the
Acquisition, is not mandatorily redeemable (except upon the occurrence of
certain specified events) and provides that dividends need not be paid in cash
until the year 2000. Holdings does, however, have various obligations with
respect to its equity securities (including in respect of registration rights
granted by Holdings) that are likely to require cash expenditures by Holdings.
The Company believes that the Credit Agreement, the Indenture and the Senior
Preferred Stock permit the Company to pay a dividend or otherwise provide funds
to Holdings to enable Holdings to meet its known cash obligations for the
foreseeable future, provided that the Company meets certain conditions. Among
such conditions are that the Company maintain specified financial ratios and
comply with certain financial tests.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
S.D. WARREN COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
---------
<S> <C>
Independent Auditors' Report............................................................................... 20
Financial Statements of S.D Warren Company
Statements of Operations for the twelve months ended December 25, 1993, the nine months ended September
24, 1994, the period September 25, 1994 through December 20, 1994 and the period December 21, 1994
through September 27, 1995.............................................................................. 21
Balance Sheets as of September 24, 1994 and September 27, 1995........................................... 22
Statements of Cash Flows for the twelve months ended December 25, 1993, the nine months ended September
24, 1994, the period September 25, 1994 through December 20, 1994 and the period December 21, 1994
through September 27, 1995.............................................................................. 23
Statements of Changes in Parent's Equity for the twelve months ended December 25, 1993, the nine months
ended September 24, 1994 and the period September 25, 1994 through December 20, 1994.................... 24
Statement of Changes in Stockholder's Equity for the period December 21, 1994 through September 27,
1995.................................................................................................... 25
Notes to Financial Statements............................................................................ 26
Financial Statement Schedule
II -- Valuation and Qualifying Accounts................................................................ 50
</TABLE>
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of S.D. Warren Company and subsidiaries:
We have audited the consolidated balance sheet of S.D. Warren Company and
subsidiaries (the "Company") as of September 27, 1995 and the related
consolidated statements of operations, changes in stockholder's equity, and cash
flows for the period December 21, 1994 (commencing with the acquisition) through
September 27, 1995. We have also audited the combined balance sheet of S.D.
Warren Company and certain related affiliates (the "Predecessor Corporation") as
of September 24, 1994 and the related combined statements of operations, changes
in parent's equity, and cash flows for the twelve month period ended December
25, 1993, the nine month period ended September 24, 1994 and for the period
September 25, 1994 through December 20, 1994. Our audits also included the
financial statement schedule listed in the Index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, S.D. Warren Company and
certain related affiliates were acquired effective December 20, 1994. The
transaction was accounted for using the purchase method of accounting whereby
the purchase price was allocated to the assets acquired and liabilities assumed
based on their respective fair values. Accordingly, the balance sheet and the
statements of operations, changes in parent's equity and cash flows of the
Predecessor Corporation for the periods referred to in first paragraph of this
report are not comparable with those presented for the Company.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of September 27,
1995 and the results of their operations and their cash flows for period
December 21, 1994 (commencing with the acquisition) through September 27, 1995
in conformity with generally accepted accounting principles. Also, in our
opinion, the combined financial statements of the Predecessor Corporation
present fairly, in all material respects, the financial position of the
Predecessor Corporation at September 24, 1994 and the results of their
operations, and their cash flows for the twelve month period ended December 25,
1993, the nine month period ended September 24, 1994 and for the period
September 25, 1994 through December 20, 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the financial statements, the accompanying
financial statements and financial statement schedule have been restated.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 11, 1996
20
<PAGE>
S.D. WARREN COMPANY
STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RESTATED RESTATED
TWELVE MONTHS NINE MONTHS
ENDED ENDED RESTATED
DECEMBER 25, SEPTEMBER 24, PERIOD SEPTEMBER 25, RESTATED
1993 1994 1994 THROUGH PERIOD DECEMBER 21,
--------------- ----------------- DECEMBER 20, 1994 1994 THROUGH
S.D. WARREN S.D. WARREN ----------------------- SEPTEMBER 27, 1995
COMPANY AND COMPANY AND S.D. WARREN COMPANY AND -------------------
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED S.D. WARREN COMPANY
AFFILIATES AFFILIATES AFFILIATES AND SUBSIDIARIES
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
--------------- ----------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
Sales................... $ 1,143.6 $ 828.8 $ 313.6 $ 1,155.8
Cost of goods sold...... 975.5 722.4 263.7 886.0
--------------- ------ ------ --------
Gross profit............ 168.1 106.4 49.9 269.8
Selling, general and
administrative
expense................ 91.7 72.1 22.2 96.7
Restructuring........... 66.1 -- -- --
--------------- ------ ------ --------
Income from
operations............. 10.3 34.3 27.7 173.1
Other income (expense),
net.................... 0.1 0.1 (0.5) 3.2
Interest expense........ 8.5 6.4 2.3 106.0
--------------- ------ ------ --------
Income before income
taxes.................. 1.9 28.0 24.9 70.3
Income tax expense...... 6.5 11.2 9.9 28.2
--------------- ------ ------ --------
Net income (loss)....... (4.6) 16.8 15.0 42.1
Dividends and accretion
on preferred stock..... -- -- -- 9.1
--------------- ------ ------ --------
Net income (loss)
applicable to common
stockholder............ $ (4.6) $ 16.8 $ 15.0 $ 33.0
--------------- ------ ------ --------
--------------- ------ ------ --------
Net earnings per common
share (in millions).... $ 0.33
--------
--------
Weighted average number
of shares
outstanding............ 100
--------
--------
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
S. D. WARREN COMPANY
BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RESTATED
SEPTEMBER 24, RESTATED
1994 SEPTEMBER 27,
--------------- 1995
S.D. WARREN ---------------
COMPANY S.D. WARREN
AND CERTAIN COMPANY
RELATED AND
AFFILIATES SUBSIDIARIES
(PREDECESSOR) (SUCCESSOR)
--------------- ---------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 4.7 $ 62.2
Trade accounts receivable, net............................ 69.8 129.4
Other receivables......................................... 21.7 24.5
Inventories............................................... 135.7 226.5
Deferred income taxes..................................... 38.5 8.9
Other current assets...................................... 3.6 11.1
--------------- ---------------
Total current assets.................................. 274.0 462.6
Plant assets, net........................................... 1,341.7 1,150.7
Timber resources, at cost less timber harvested............. 28.1 98.4
Goodwill, net............................................... -- 98.1
Deferred financing fees, net................................ -- 53.1
Other assets, net........................................... 33.1 24.7
--------------- ---------------
Total assets.......................................... $ 1,676.9 $ 1,887.6
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 3.0 $ 78.6
Accounts payable.......................................... 73.0 112.2
Accrued and other current liabilities..................... 41.8 94.2
--------------- ---------------
Total current liabilities............................. 117.8 285.0
--------------- ---------------
Long-term debt:
Term loans................................................ -- 553.8
Senior subordinated notes................................. -- 375.0
Other..................................................... 116.8 120.0
--------------- ---------------
116.8 1,048.8
--------------- ---------------
Deferred income taxes....................................... 211.9 21.2
--------------- ---------------
Other liabilities........................................... 93.9 93.3
--------------- ---------------
Total liabilities..................................... 540.4 1,448.3
--------------- ---------------
Commitments and contingencies (Note 16)
Series B redeemable exchangeable preferred stock
(liquidation value, $83.5 million)......................... -- 74.5
--------------- ---------------
Stockholder's equity:
Common stock ($.01 par value; 1,000 shares authorized; 100
shares issued and outstanding at September 27, 1995)..... -- --
Capital in excess of par value............................ -- 331.8
Retained earnings......................................... -- 33.0
Parent's equity........................................... 1,136.5 --
--------------- ---------------
Total stockholder's equity............................ 1,136.5 364.8
--------------- ---------------
Total liabilities and stockholder's equity............ $ 1,676.9 $ 1,887.6
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
S.D. WARREN COMPANY
STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
RESTATED RESTATED
RESTATED NINE MONTHS RESTATED PERIOD DECEMBER
TWELVE MONTHS ENDED PERIOD SEPTEMBER 21,
ENDED SEPTEMBER 24, 25, 1994 THROUGH
DECEMBER 25, 1993 1994 1994 THROUGH SEPTEMBER 27,
----------------- ----------------- DECEMBER 20, 1994 1995
S.D. WARREN S.D. WARREN ------------------- -----------------
COMPANY AND COMPANY AND S.D. WARREN COMPANY S.D. WARREN
CERTAIN RELATED CERTAIN RELATED AND CERTAIN RELATED COMPANY
AFFILIATES AFFILIATES AFFILIATES AND SUBSIDIARIES
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
----------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income (loss)............ $ (4.6) $ 16.8 $ 15.0 $ 42.1
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation, cost of
timber harvested and
amortization.............. 93.1 71.6 28.8 89.8
Deferred income taxes...... 1.0 8.4 15.8 12.3
Gains on asset sales....... (4.6) -- -- --
Changes in assets and
liabilities net of the
effect of the Acquisition:
Trade accounts receivables,
net....................... 2.8 (9.8) (1.7) (23.0)
Inventories................ (13.4) (13.0) 5.4 (57.6)
Accounts payable, accrued
and other current
liabilities............... (17.7) (19.3) 18.6 66.3
Accruals for restructuring
programs.................. 65.3 (28.4) (12.7) --
Other assets and
liabilities............... 8.4 1.5 (15.5) 6.1
------ ------ ------ -----------------
Net cash provided by
operating activities.... 130.3 27.8 53.7 136.0
------ ------ ------ -----------------
Cash Flows from Investing
Activities:
Acquisition, net of related
costs....................... -- -- -- (1,455.9)
Investments in plant assets
and timber resources........ (68.9) (32.3) (14.5) (33.7)
Proceeds from asset sales.... 4.7 -- -- --
Other investing activities... (9.5) (14.1) -- --
------ ------ ------ -----------------
Net cash used in
investing activities.... (73.7) (46.4) (14.5) (1,489.6)
------ ------ ------ -----------------
Cash Flows from Financing
Activities:
Proceeds from long-term
debt........................ 29.8 0.9 -- 1,105.7
Repayments of long-term
debt........................ (31.2) (5.4) (0.5) (162.1)
Proceeds from equity
contribution................ -- -- -- 331.8
Proceeds from issuance of
preferred stock, net of
expenses.................... -- -- -- 65.4
Predecessor Corporation's
parent company capital
(withdrawals) infusions,
net......................... (54.1) 25.4 31.6 --
Other financing activities... (0.3) 0.3 -- --
------ ------ ------ -----------------
Net cash provided by
(used in) financing
activities.............. (55.8) 21.2 31.1 1,340.8
------ ------ ------ -----------------
Net change in cash and cash
equivalents................... 0.8 2.6 70.3 (12.8)
Cash and cash equivalents, at
beginning of period........... 1.3 2.1 4.7 75.0
------ ------ ------ -----------------
Cash and cash equivalents, at
end of period................. $ 2.1 $ 4.7 $ 75.0 $ 62.2
------ ------ ------ -----------------
------ ------ ------ -----------------
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
S.D. WARREN COMPANY
STATEMENTS OF CHANGES IN PARENT'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
PARENT'S
EQUITY
---------
<S> <C>
Balance, December 27, 1992 (Restated).................................................................. $ 1,152.3
Net loss............................................................................................... (4.6)
Foreign currency translation adjustment................................................................ (2.1)
Capital withdrawal, net................................................................................ (54.1)
Minimum pension liability adjustment................................................................... (3.4)
---------
Balance, December 25, 1993 (Restated).................................................................. 1,088.1
Net income............................................................................................. 16.8
Foreign currency translation adjustment................................................................ 1.2
Capital infusion, net.................................................................................. 25.4
Minimum pension liability adjustment................................................................... 5.0
---------
Balance, September 24, 1994 (Restated)................................................................. 1,136.5
Net income............................................................................................. 15.0
Foreign currency translation adjustment................................................................ 1.0
Capital infusion, net.................................................................................. 66.6
---------
Balance, December 20, 1994 Prior to acquisition (Restated)............................................. $ 1,219.1
---------
---------
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
S.D. WARREN COMPANY
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON EXCESS OF RETAINED
COMMON SHARES STOCK PAR VALUE EARNINGS
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 21, 1994............................................ 100 $ -- $ -- $ --
Equity contribution from SDW Holdings Corporation................... -- 331.8 --
Net income.......................................................... -- -- 42.1
Dividends accrued on redeemable exchangeable preferred stock........ -- -- (8.5)
Accretion to liquidation preference value on redeemable exchangeable
preferred stock.................................................... -- -- (0.6)
--- ----------- ----------- -----
Balance, September 27, 1995 (Restated)................................ 100 $ -- $ 331.8 $ 33.0
--- ----------- ----------- -----
--- ----------- ----------- -----
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS, FORMATION AND ACQUISITION
BUSINESS
S.D. Warren Company ("S.D. Warren", "Warren" or the "Company") manufactures
printing, publishing and specialty papers and has pulp and timberland operations
vertically integrated with certain of its manufacturing facilities. The Company
currently operates four paper mills, a sheeting and distribution facility and
owns approximately 911,000 acres of timberlands in the State of Maine.
FORMATION AND ACQUISITION
As of October 8, 1994, SDW Acquisition Corporation ("SDW Acquisition"), a
direct wholly owned subsidiary of SDW Holdings Corporation ("Holdings"), entered
into a definitive agreement (the "Stock Purchase Agreement") pursuant to which,
on December 20, 1994, SDW Acquisition acquired (the "Acquisition") from Scott
Paper Company ("Scott") all of the outstanding capital stock of Warren, then a
wholly owned subsidiary of Scott, and certain related affiliates of Scott
(referred to herein as the "Predecessor Corporation"). Immediately following the
Acquisition, SDW Acquisition merged with and into Warren (the "Merger"), with
Warren (the "Successor Corporation") surviving.
The Acquisition was accounted for as a purchase, applying the provisions of
Accounting Principles Board Opinion ("APB") No. 16. The final purchase cost is
subject to ongoing negotiations with Scott in accordance with procedures set
forth in the agreement pursuant to which the Acquisition was effected and is
expected to be finalized either through negotiated agreement or arbitration. The
final purchase cost is not expected to be materially different from the
estimates currently included in the Company's financial statements. On a
preliminary basis, the total estimated purchase cost of approximately $1.9
billion, including the effect of liabilities assumed, was allocated to the
assets acquired based on their respective fair values as follows (in millions):
<TABLE>
<S> <C>
Plant assets............................................................... $ 1,186.0
Timber resources........................................................... 98.6
Intangible assets:
Patents.................................................................. 23.0
Goodwill................................................................. 100.6
Financing fees and other assets............................................ 62.8
Current assets, net realizable value in the case of inventories,
receivables and prepaid expenses.......................................... 436.7
---------
$ 1,907.7
---------
---------
</TABLE>
Liabilities assumed in the Acquisition, based on their respective fair
market values, were treated as non-cash activity for presentation in the
Statement of Cash Flows. Liabilities assumed are as follows (in millions):
<TABLE>
<S> <C>
Current liabilities.......................................................... $ 142.6
Long-term debt............................................................... 121.9
Other long-term liabilities.................................................. 80.9
---------
$ 345.4
---------
---------
</TABLE>
To effect the Acquisition, SDW Acquisition issued $75.0 million of 14%
Series A Senior Exchangeable Preferred Stock due 2006 (the "Old Senior Preferred
Stock") and $375.0 million of 12% Series A Senior Subordinated Notes due 2004
(the "Series A Notes") and received $331.8 million from Holdings as a
contribution to capital. The Old Senior Preferred Stock and the Series A Notes
were subject to an exchange offer discussed in Notes 12 and 20. The remaining
purchase price was financed, in part, through the credit
26
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- BUSINESS, FORMATION AND ACQUISITION (CONTINUED)
facilities discussed in Note 12. Indebtedness incurred by SDW Acquisition to
finance the Acquisition was assumed by Warren including preferred stock issued
by SDW Acquisition which was converted into preferred stock of Warren having
identical terms.
Subsequent to the Acquisition, Warren and Scott jointly elected to treat the
stock purchase as an asset purchase pursuant to Internal Revenue Code Section
338 (h) (10).
PRO FORMA INFORMATION (UNAUDITED)
The following table sets forth pro forma information on the Acquisition of
the Predecessor Corporation as though it had occurred on December 26, 1993 and
September 25, 1994, and presents consolidated statements of operations data for
the nine months ended September 24, 1994 and for the year ended September 27,
1995.
Unaudited Pro Forma Statements of Operations Data (in millions):
<TABLE>
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 24, SEPTEMBER 27,
1994 1995
------------- -------------
<S> <C> <C>
Net revenues............................................................... $828.8 $1,469.4
------ -------------
------ -------------
Operating income........................................................... 28.6 202.4
------ -------------
------ -------------
Net income (loss).......................................................... (44.4 ) 41.0
------ -------------
------ -------------
Net income (loss) applicable to common stockholder......................... (53.0 ) 28.9
------ -------------
------ -------------
Net income (loss) per common share......................................... (0.53 ) 0.29
------ -------------
------ -------------
</TABLE>
NOTE 2 -- RESTATEMENTS
The financial statements of the Predecessor Corporation for the twelve
months ended December 25, 1993, the nine months ended September 24, 1994 and the
period from September 25, 1994 through December 20, 1994 included in the
Company's January 1996 filing with the Securities and Exchange Commission (the
"SEC") on Form 10-K for the period December 21, 1994 through September 27, 1995
had been restated (the "initial restatement"). The initial restatement was to
reflect adjustments principally related to the timing of recognizing certain
costs on an accrual basis versus an as incurred basis. These costs related
primarily to environmental and safety remediation. In addition, the Company had
recorded adjustments to various operating expenses, amortization of deferred
start-up and training costs, various employee benefit costs, inventory valuation
and deferred taxes.
Subsequent to the initial restatement, management of the Company, after
discussions with the Staff of the SEC, reconsidered certain adjustments made in
the initial restatement. The Predecessor Corporation's policy of accounting for
these items, primarily safety remediation costs, on an as incurred basis that
lead to the initial restatement was found to be an acceptable policy in the
application of generally accepted accounting principles. As such, the initial
restatement of previously issued financial statements was not required.
Management of the Company concluded that the remaining adjustments made in
the initial restatement were not material in the aggregate and these items have
also been restated. Accordingly, the accompanying financial statements agree
with the audited financial statements of the Predecessor Corporation for the
twelve months ended December 25, 1993 and the nine months ended September 24,
1994 included in the
27
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- RESTATEMENTS (CONTINUED)
Company's filing made with the SEC on Form S-4 in April 1995. The audited
financial statements for the period September 25, 1994 through December 20, 1994
have also been restated to reflect the effect of accounting for these costs on
an as incurred basis.
As a result of the above, the Successor Corporation has reconsidered its
accounting policy with respect to accounting for certain costs relating to
compliance with safety and other governmental laws and regulations and has
adopted a policy of accounting for these costs on an as incurred basis
consistent with that of the Predecessor Corporation. Accordingly, the financial
statements for the period ended September 27, 1995 have also been restated.
Parent's equity of $1,136.9 million as of December 26, 1992 as initially
reported in the Company's Form 10-K, was increased by $15.4 million, net of
related tax benefits, to $1,152.3 as a result of the restatement. The effects of
the restatement are as follows (in millions):
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
-------------- ------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Income (loss) before income taxes:
As previously reported in the Company's Form
10-K.......................................... $ (23.3) $ 22.4 $ 30.0 $ 77.7
As restated.................................... 1.9 28.0 24.9 70.3
Net income (loss):
As previously reported in the Company's Form
10-K.......................................... $ (19.4) $ 12.7 $ 18.0 $ 46.5
As restated.................................... (4.6) 16.8 15.0 42.1
Parent's equity:
As previously reported in the Company's Form
10-K.......................................... $ 1,049.9 $ 1,094.0 $ 1,195.2 $ --
As restated.................................... 1,088.1 1,136.5 1,219.1 --
Stockholder's equity:
As previously reported in the Company's Form
10-K.......................................... $ -- $ -- $ -- $ 369.2
As restated.................................... -- -- -- 364.8
</TABLE>
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of the Company have been
prepared on the accrual basis of accounting and include the accounts of the
Company and its various subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
As the Acquisition resulted in a new basis of accounting and the adoption of
certain accounting policies which differ from the Predecessor Corporation's
accounting policies, the Company's financial statements for the periods
subsequent to the Acquisition date are not comparable to the Predecessor
Corporation's financial statements for the periods prior to the Acquisition.
The following presents the significant accounting policies of the Company.
Except as discussed in Note 4, the significant accounting policies of the
Predecessor Corporation are comparable to the Company.
FISCAL YEAR
The Company and its subsidiaries' fiscal year ends on the last Wednesday in
September until otherwise determined by the Company's Board of Directors.
28
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of highly liquid investments
with insignificant interest rate risk and original maturities of three months or
less at the date of acquisition. Similar investments with original maturities
beyond three months are considered short-term marketable securities. At
September 24, 1994 and September 27, 1995 the Company had no short-term
marketable securities.
OTHER RECEIVABLES
Other receivables primarily represent amounts due from the sale of energy
produced by the Company's cogeneration facilities.
INVENTORIES
Inventories at September 27, 1995 are valued at the lower of cost or market,
using the first-in, first-out (FIFO) cost method. Inventories of maintenance
parts and other supplies are based on purchase cost.
PLANT ASSETS
Plant assets are recorded at cost. As of the date of the Acquisition, in
accordance with APB No. 16, the Company revalued the plant assets of the Company
to fair market value and revised the estimated average useful lives used to
compute depreciation for most of its plant and equipment to a range from three
to twenty years. For financial accounting purposes, depreciation is principally
calculated by the straight-line method over the estimated useful lives of the
assets.
Expenditures for renewals and betterments which increase the useful life or
capacity of plant assets are capitalized. On retirements or sales of assets
which have not been fully depreciated, the cost of plant assets is removed from
the asset account. The Company records gains and losses on the retirement or
sale of plant assets when realized.
Interest expense is capitalized on major construction projects, including
timber resources to the extent that such timber has not yet matured. For the
nine months ended September 24, 1994 and the period December 21, 1994 through
September 27, 1995 (the "nine months" ended September 27, 1995), the Company
capitalized interest of approximately $1.4 million and $0.9 million,
respectively. No interest was capitalized for the twelve months ended December
25, 1993 or the period September 25, 1994 through December 20, 1994 (the "three
months" ended December 20, 1994).
TIMBER RESOURCES
Timber resources are recorded at cost, which includes original costs, road
construction costs, and reforestation costs, such as site preparation and
planting costs. As of the date of the Acquisition, in accordance with APB No.
16, the Company revalued its timber resources to fair market value. Property
taxes, surveying, fire control and other forest management expenses are charged
to expense as incurred.
GOODWILL
Goodwill, which resulted from the Acquisition, is being amortized for
financial statement purposes on a straight-line basis over 25 years. Pursuant to
Statement of Financial Accounting Standards ("FAS") No. 121, on an ongoing
basis, the carrying value of goodwill at the balance sheet date is evaluated on
the basis of whether anticipated operating cash flows generated by the acquired
businesses will recover the recorded asset balance over the estimated useful
life. The goodwill balance at September 27, 1995 was approximately $98.1
million, net of approximately $3.1 million of accumulated amortization.
DEFERRED FINANCING FEES
Deferred financing fees, primarily resulting from the financing of the
Acquisition are being amortized over the average life of the related debt and
are recorded net of accumulated amortization of approximately $7.2 million at
September 27, 1995.
29
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets include intangible assets, primarily patents, arising as part
of the purchase price allocation, of $21.5 million at September 27, 1995. These
intangible assets are being amortized over their estimated useful lives of
approximately eleven years. Intangibles are stated net of accumulated
amortization of approximately $1.5 million at September 27, 1995.
FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board has issued FAS No. 119, "Disclosure
about Derivative Financial Instruments and Fair Value of Financial Instruments."
This statement requires the disclosure of the fair value of most derivative
financial instruments and amends FAS No. 107. The Company uses interest rate
swap agreements ("Swaps") and interest rate cap agreements ("Caps") as a means
of managing interest-rate risk associated with debt balances. These instruments
are matched with either fixed or variable rate debt and are recorded on a
settlement basis as an adjustment to interest expense. Premiums paid to purchase
Caps are amortized as an adjustment to interest expense over the life of the
contract. Cash flows from Swaps and Caps are classified in the Statements of
Cash Flows in the same category as the items being hedged or on a basis
consistent with the nature of the investment. Derivative financial instruments
are not held for trading purposes. The Company adopted FAS No. 119 during 1995.
INCOME TAXES
The tax provisions reflect the application of FAS No. 109, "Accounting for
Income Taxes" for all periods presented. The standard requires an asset and
liability approach to computing deferred income taxes. This approach requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this approach, deferred income taxes are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
WORKERS' COMPENSATION INSURANCE
The Company is primarily self-insured for workers' compensation insurance.
The self insurance claim liability for workers' compensation is based on claims
reported and actuarial estimates of adverse developments and claims incurred but
not reported. The Company's workers' compensation liability is discounted as it
is several years before the claims related to a particular year are paid in
full. The liability has been actuarially determined as the Company's obligation
and the timing of payments associated therewith are reasonably estimateable. The
present value of such claims was determined using discount rates of 7.0%, 8.25%,
5.5% and 5.5% for the twelve months ended December 25, 1993, the nine months
ended September 24, 1994, the three months ended December 20, 1994 and the nine
months ended September 27, 1995, respectively. The current portion of the
liability of $9.0 million and $5.6 million at September 24, 1994 and September
27, 1995, respectively, is included in accrued and other current liabilities.
The noncurrent portion of $23.3 million and $35.0 million at September 24, 1994
and September 27, 1995, respectively, is included in other liabilities.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that pertain to current operations or relate to
future revenues are expensed or capitalized consistent with the Company's
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations, that do not contribute to current
or future revenues, are expensed. Environmental accruals are recorded based on
current interpretations of environmental laws and regulations when it is
probable that a liability has been incurred and the amount of such liability can
be reasonably estimated. Amounts accrued are not discounted and do not include
third-party
30
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recoveries. Liabilities are recognized for remedial activities when the clean-up
is probable and the cost can be reasonably estimated. All available information
is considered including the results of remedial investigation/feasibility
studies (RI/FS). In evaluating any disposal site environmental exposure, an
assessment is made of the Company's potential share of the remediation costs by
reference to the known or estimated volume of the Company's waste that was sent
to the site and the range of costs to treat similar waste at other sites if a
RI/FS is not available.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, represents interest income on cash and cash
equivalents and other nonoperating income and expense items.
EARNINGS PER COMMON SHARE
Earnings per common share is computed using the weighted average number of
common shares outstanding during the period. The Company's net income has been
reduced by Series B preferred stock dividends to arrive at net income applicable
to the common stockholder.
CASH PAID FOR INCOME TAXES
Cash paid for income taxes for the nine months ended September 27, 1995 was
$20.6 million. In periods prior to December 21, 1994 the Predecessor
Corporation's income taxes were paid by Scott.
CASH PAID FOR INTEREST
Cash paid for interest during the twelve months ended December 25, 1993, the
nine months ended September 24, 1994, the three months ended December 20, 1994
and the nine months ended September 27, 1995 was $9.9 million, $5.0 million,
$2.9 million and $75.6 million, respectively.
NOTE 4 -- BASIS OF PRESENTATION AND ACCOUNTING POLICIES -- PREDECESSOR
CORPORATION
BASIS OF PRESENTATION
The combined financial statements of the Predecessor Corporation consist of
Scott's wholly owned subsidiary S.D. Warren Company and its wholly owned
subsidiaries, as well as the net assets and results of operations of the
printing, publishing, and specialty papers businesses in Bornem, Belgium (the
"Belgium Affiliate") and a mill facility located in Mobile, Alabama that were
owned by Scott. All significant transactions between combined entities have been
eliminated.
To facilitate prompt reporting of the Predecessor Corporation's financial
results, the financial statements of the international operation were based on
the twelve months ended November 30, 1993 for fiscal year 1993, August 31, 1994
for the nine months ended September 24, 1994 and December 20, 1994 for the three
months ended December 20, 1994.
The combined financial statements include allocations of costs for services,
including accounting and tax, treasury and cash management, data processing,
legal and environmental, facility and risk management, human resources and labor
relations, and government and public affairs. These costs are allocated based
upon a variety of methods, including: specific identification, based on
estimates of time and services provided; relative identification, based on
relevant criteria that establishes the Predecessor Corporation's relationship to
the entire pool of beneficiaries and formula driven, not specifically
identifiable to the Predecessor Corporation but incurred for the benefit of all
Scott affiliates.
Management believes the allocations reflected in the Statements of
Operations, while reasonable, may not represent the cost of similar activities
on a separate entity basis.
The Mobile, Alabama facility is located adjacent to a Scott tissue
manufacturing facility and as such had historically purchased pulp, utilities
and other services from Scott based on shared cost arrangements.
31
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- BASIS OF PRESENTATION AND ACCOUNTING POLICIES -- PREDECESSOR
CORPORATION (CONTINUED)
Amounts purchased were $101.5 million, $71.0 million and $18.4 million for the
twelve months ended December 25, 1993, the nine months ended September 24, 1994
and the three months ended December 20, 1994, respectively.
PREDECESSOR CORPORATION ACCOUNTING POLICIES
The Predecessor Corporation had accounting policies similar to those of the
Company with the following significant exceptions:
Inventory cost was determined using the last-in, first-out (LIFO) method.
For certain major capital assets, the Predecessor Corporation calculated
depreciation on the units-of-production method during the learning curve phase
of the project. On retirements or sales of plant assets which had not been fully
depreciated, the Predecessor Corporation charged gains and losses to the related
depreciation reserve account. The Predecessor Corporation capitalized certain
pre-operating costs on any single capital project for which such costs were
expected to exceed $3.0 million. The capitalized costs were amortized over a
five year period.
Income taxes for the Predecessor Corporation, through December 20, 1994 were
included in the U.S. consolidated federal income tax return of Scott and on a
separate company basis for state tax purposes. For periods prior to December 21,
1994 the financial statements include a charge in lieu of tax which approximates
the federal tax provision assuming the Predecessor Corporation filed a separate
tax return.
Assets and liabilities of the Predecessor Corporation's foreign operations
were translated into U.S. dollars using year-end exchange rates. Revenues and
expenses of foreign operations were translated at the average exchange rates in
effect during the year. Adjustments resulting from financial statement
translations were included as a separate component of parent's equity. Gains and
losses resulting from foreign currency transactions were included in net income.
NOTE 5 -- ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
(IN MILLIONS)
SEPTEMBER 24, SEPTEMBER 27,
1994 1995
------------- -------------
<S> <C> <C>
Trade accounts receivable.......................................... $ 76.1 $ 135.0
Allowance for doubtful accounts.................................... (6.3) (5.6)
----- ------
$ 69.8 $ 129.4
----- ------
----- ------
</TABLE>
The Company had sales to customers outside of the United States ("Export
Sales") of $67.2 million, $60.0 million, $24.7 million and $90.5 million for the
twelve months ended December 25, 1993, the nine months ended September 24, 1994,
the three months ended December 20, 1994 and the nine months ended September 27,
1995, respectively. Export sales are primarily to Canada, Europe and the Far
East. Export Sales prior to the Acquisition were handled by the Belgium
Affiliate. During 1995, the Belgium Affiliate was closed and its property and
equipment sold. Effective with the closure of the Belgium Affiliate, the
Company's sales outside North America are primarily handled by Sappi Limited
("Sappi") (see Note 21). Sappi is the largest investor in Holdings.
32
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- ACCOUNTS RECEIVABLE (CONTINUED)
Sales to four customers approximated 60.3%, 58.1%, 59.1% and 61.7% of sales
for the twelve months ended December 25, 1993, the nine months ended September
24, 1994, the three months ended December 20, 1994 and the nine months ended
September 27, 1995, respectively. Sales to such customers, which individually,
except as indicated, exceeded 10% of total sales, are indicated as a percentage
of total sales below:
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, 1993 SEPTEMBER 24, 1994 DECEMBER 20, 1994 SEPTEMBER 27, 1995
-------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
1 21.8% 19.4% 25.9% 25.3%
2 14.2 15.5 * 14.1
3 13.2 12.9 12.9 14.6
4 11.1 10.3 12.3 *
</TABLE>
- ---------
* Less than 10% of total sales.
Aggregate trade receivables from these customers, which individually, with
one exception in 1995, exceed 10% of total receivables, were $58.3 million and
$65.8 million as of September 24, 1994 and September 27, 1995, respectively. No
other trade receivables were in excess of 10%. Each of these customers is a
merchant that resells the Company's paper products to a wide range of end users.
The loss of any of these customers could have a material adverse effect on the
Company's business and results of operations.
Prior to the Acquisition, the Predecessor Corporation participated with
Scott in an agreement to sell a percentage ownership interest in a defined pool
of customer receivables. Under terms of the agreement, the Predecessor
Corporation retained substantially the same risk of credit loss as if the
receivables had not been sold. Generally, collections on receivables were
automatically reinvested in new receivables unless either party terminated the
agreement. Proceeds from the initial sale of receivables in 1991 were $35.0
million and this level was maintained for each period through December 7, 1994.
The third party financing agreement was canceled on December 7, 1994 and is
reflected as a $35.0 million non-cash financing activity in the Statement of
Cash Flows. Fees for factored receivables were recorded as interest expense and
were based on the purchaser's level of investment and borrowing costs. During
the twelve months ended December 25, 1993, the nine months ended September 24,
1994 and the three months ended December 20, 1994, such fees aggregated
approximately $1.6 million, $1.2 million and $0.4 million, respectively.
NOTE 6 -- INVENTORIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 24, SEPTEMBER 27,
1994 1995
------------- -------------
<S> <C> <C>
Finished products.................................................. $ 41.5 $ 89.8
Work in Process.................................................... 31.3 51.0
Pulp, logs and pulpwood............................................ 13.2 33.2
Maintenance parts and other supplies............................... 49.7 52.5
------ ------
$ 135.7 $ 226.5
------ ------
------ ------
Excess of replacement cost over LIFO valued inventories............ $ 48.7 $ --
------ ------
------ ------
</TABLE>
33
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PLANT ASSETS
<TABLE>
<CAPTION>
(IN MILLIONS)
SEPTEMBER SEPTEMBER
24, 27,
1994 1995
----------- -----------
<S> <C> <C>
Plant assets, at cost:
Land and buildings............................................... $ 288.5 $ 170.1
Plant and equipment.............................................. 2,202.6 1,045.6
----------- -----------
2,491.1 1,215.7
Accumulated depreciation........................................... (1,149.4) (65.0)
----------- -----------
$ 1,341.7 $ 1,150.7
----------- -----------
----------- -----------
</TABLE>
As of the Acquisition, the Company revalued plant assets to fair market
value, based upon independent appraisals, and revised the estimated useful lives
used to calculate depreciation for most plant assets, and as a result, the
Company's plant asset balances as of September 27, 1995 are not comparable to
September 24, 1994.
Plant and equipment includes assets acquired under capital leases of $8.0
million and $2.0 million at September 24, 1994 and September 27, 1995,
respectively. Related allowances for depreciation were $5.7 million and $1.0
million, respectively.
Expenditures for research and development are charged to expense as
incurred. Research and development costs were $15.3 million, $9.5 million, $3.0
million and $10.7 million for the twelve months ended December 25, 1993, the
nine months ended September 24, 1994, the three months ended December 20, 1994
and the nine months ended September 27, 1995, respectively.
NOTE 8 -- DEPRECIATION & COST OF TIMBER HARVESTED (IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Depreciation of plant assets.............. $ 91.9 $ 69.9 $ 27.3 $ 65.0
Cost of timber harvested and amortization
of logging roads......................... 0.8 0.5 0.2 1.8
----- ----- ----- -----
$ 92.7 $ 70.4 $ 27.5 $ 66.8
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
NOTE 9 -- INCOME TAXES
The domestic and foreign components of income before taxes are as follows
(in millions):
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Domestic.................................. $ 5.1 $ 24.8 $ 22.4 $ 67.9
Foreign................................... (3.2) 3.2 2.5 2.4
------ ----- ----- -----
$ 1.9 $ 28.0 $ 24.9 $ 70.3
------ ----- ----- -----
------ ----- ----- -----
</TABLE>
34
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- INCOME TAXES (CONTINUED)
The components of the tax provisions are as follows (in millions):
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Current:
Federal................................. $ 6.7 $ 2.6 $ (5.7) $ 14.9
Foreign................................. (1.2) 1.2 1.0 0.1
State and local......................... -- (1.0) (1.2) 0.9
------ ----- ----- -----
Total current......................... 5.5 2.8 (5.9) 15.9
------ ----- ----- -----
Deferred:
Federal................................. 0.8 5.8 13.0 8.1
Foreign................................. (0.2) -- -- --
State and local......................... 0.4 2.6 2.8 4.2
------ ----- ----- -----
Total deferred........................ 1.0 8.4 15.8 12.3
------ ----- ----- -----
$ 6.5 $ 11.2 $ 9.9 $ 28.2
------ ----- ----- -----
------ ----- ----- -----
</TABLE>
The components of the deferred tax provisions are as follows (in millions):
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Restructuring reserve...................... $ (22.5) $ 22.9 $ 9.9 $ (0.3)
Inventory.................................. 0.1 -- 0.1 5.3
Plant assets............................... 30.2 9.3 (17.0) 16.4
General reserves........................... (3.6) (16.6) 28.6 0.2
AMT credit carryforwards................... (8.4) (2.5) (0.8) (9.3)
Tax loss carryforwards..................... (0.2) (4.7) (5.0) --
Effect of tax rate change.................. 5.4 -- -- --
Valuation allowance -- -- -- --
------ ------ ----- -----
Deferred tax provision..................... $ 1.0 $ 8.4 $ 15.8 $ 12.3
------ ------ ----- -----
------ ------ ----- -----
</TABLE>
35
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- INCOME TAXES (CONTINUED)
The components of the deferred tax assets and (liabilities) are as follows
(in millions):
<TABLE>
<CAPTION>
SEPTEMBER
24, SEPTEMBER 27,
1994 1995
----------- -------------
<S> <C> <C>
Current:
Deferred tax assets:
Restructuring reserves........................................... $ 17.5 $ 0.3
General reserves................................................. 19.5 7.9
Inventory........................................................ 1.5 1.3
----------- ------
Total current deferred tax assets.............................. 38.5 9.5
----------- ------
Deferred tax liabilities:
Inventory........................................................ -- --
General reserves................................................. -- (0.6)
----------- ------
Total current deferred tax liabilities......................... -- (0.6)
----------- ------
Net current deferred tax asset..................................... 38.5 8.9
----------- ------
Noncurrent:
Deferred tax assets:
Alternative minimum tax credit carryforwards..................... 52.4 9.3
Tax loss carryforwards........................................... 2.4 --
General reserves................................................. 36.5 21.3
Valuation allowance.............................................. (0.3) --
----------- ------
Total non-current deferred tax assets.......................... 91.0 30.6
----------- ------
Deferred tax liabilities:
Property, plant and equipment.................................... (296.6) (13.4)
Other............................................................ (6.3) (38.4)
----------- ------
Total non-current deferred tax liability....................... (302.9) (51.8)
----------- ------
Net noncurrent deferred tax liability.............................. (211.9) (21.2)
----------- ------
Net deferred tax liability..................................... $ (173.4) $ (12.3)
----------- ------
----------- ------
</TABLE>
The differences between the U.S. statutory income tax rate and the Company's
effective income tax rate are:
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. statutory income tax rate............ 35.0% 35.0% 35.0% 35.0%
State income taxes, net of federal
benefit.................................. 14.4 3.8 4.2 4.9
International............................. 3.6 0.4 0.3 0.1
Effect of tax rate increase on deferred
taxes.................................... 292.3 -- -- --
Other factors............................. (3.2) 0.8 0.3 0.1
----- --- --- ---
Effective tax rate........................ 342.1% 40.0% 39.8% 40.1%
----- --- --- ---
----- --- --- ---
</TABLE>
As of September 27, 1995, the Company had available an alternative minimum
tax credit carryforward for tax return purposes of $9.3 million. This credit
carries forward to future taxable years indefinitely.
36
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- ACCRUED AND OTHER CURRENT LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 24, SEPTEMBER 27,
1994 1995
------------- -------------
<S> <C> <C>
Accrued salaries, wages and employee benefits...................... $ 17.8 $ 49.9
Accrued interest................................................... -- 23.8
Accrued workers' compensation...................................... 9.0 5.6
Restructuring reserve.............................................. 12.7 --
Other accrued expenses............................................. 2.3 14.9
----- ------
$ 41.8 $ 94.2
----- ------
----- ------
</TABLE>
NOTE 11 -- RESTRUCTURING
During the fourth quarter of fiscal year 1993, the Predecessor Corporation
recorded a charge of $66.1 million, primarily for restructuring and productivity
improvement programs. The charge included the estimated effect of future
workforce reductions, as well as actions to consolidate and simplify the
Predecessor Corporation's coated papers business. The remaining reserve balance
of approximately $12.7 million as of September 24, 1994 was fully utilized by
the Predecessor Corporation prior to the date of the Acquisition.
NOTE 12 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
(IN MILLIONS)
SEPTEMBER
SEPTEMBER 24, 27,
1994 1995
------------- -----------
<S> <C> <C>
Credit Agreement:
Term Loan, Tranche A............................................. $ -- $ 305.0
Term Loan, Tranche B............................................. -- 325.0
Series B Senior Subordinated Notes................................. -- 375.0
Revenue Bonds...................................................... 116.7 121.3
Capital Leases..................................................... 3.1 1.1
------ -----------
119.8 1,127.4
Current maturities of long-term debt............................... 3.0 78.6
------ -----------
Long-term debt..................................................... $ 116.8 $ 1,048.8
------ -----------
------ -----------
</TABLE>
CREDIT AGREEMENT
In connection with the Acquisition, the Company entered into an agreement
(the "Credit Agreement") with Chemical Bank and 43 other domestic and
international lenders on December 20, 1994, which provided for a $1.1 billion
senior secured credit facility consisting of $630.0 million in term loan
facilities, a $250.0 million revolving credit facility ("Revolving Credit
Facility") and a $220.0 million letter of credit facility ("Letter of Credit
Facility") to support certain debt assumed by the Company as part of the
Acquisition. The term loan facilities consist of a Tranche A facility and a
Tranche B facility. The Credit Agreement extends through December 2002.
The interest rates under the Credit Agreement are determined, at the
election of the Company, at either (a) a reference rate (the highest of (i) the
prime rate announced by Chemical Bank, (ii) the secondary market rate for three
month certificates of deposit (adjusted for reserves) plus 1% and (iii) the
federal funds rate in effect from time to time plus 0.5%) plus 1.5% to 2.0% or
(b) LIBOR plus 2.5% to 3.0%. The applicable interest rates for the Revolving
Credit Facility and Tranche A term loans are tied to certain financial ratios
and can be reduced if specified ratios are achieved. At September 27, 1995, the
interest rates on the Tranche A and Tranche B term loans were 8.38% and 8.82%,
respectively.
37
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- LONG-TERM DEBT (CONTINUED)
Borrowings under the Credit Agreement are guaranteed by Holdings and each of
its U.S. subsidiaries, and such borrowings and guarantees are secured by
security interests (subject to certain other permitted liens) in (a) all the
capital stock of the Company and each of its U.S. subsidiaries and 65% of the
common stock and 100% of the preferred stock of each foreign subsidiary (if any)
and (b) all assets (subject to certain limitations) owned by the Company and its
subsidiaries.
The Company's long-term debt agreements contain covenants which limit the
Company with respect to certain matters including, among other things, the
ability to incur debt, pay dividends, make acquisitions, sell assets, merge,
grant or incur liens, guarantee obligations, make investments or loans, make
capital expenditures, create subsidiaries or change its line of business.
Dividend payments are limited to those amounts necessary to enable Holdings to
pay certain obligations and maintain minimum cash balances. The Company is also
restricted from prepaying certain of its indebtedness and is required to satisfy
certain financial covenants which require the Company to maintain specified
financial ratios and comply with certain financial tests, including a minimum
interest coverage ratio, a minimum debt service ratio and a net worth test. Such
covenants are not considered by the Company to be of a restrictive nature in
conducting its business activities. As a result of extending the filing date of
the Annual Report on Form 10-K from December 26, 1995 to January 10, 1996, the
Company was unable to satisfy specific financial reporting covenants under the
Credit Agreement. As a result, the Company obtained a waiver from the lenders
which extended the requirement to distribute such financial information through
January 17, 1996, at which time management was in compliance with such
covenants.
Under the terms of the Credit Agreement, the Company is required to enter
into interest rate protection agreements. At September 27, 1995, the Company had
entered into two swap agreements, under which the interest rate has been fixed
with respect to $75.0 million of notional principal amount at rates between
7.43% to 9.95%, and two cap agreements, pursuant to which another $130.0 million
of notional principal amount has been capped at rates between 8.0% to 9.5%. Net
receipts or payments under the agreements are recognized as adjustments to
interest expense. The swap and cap agreements expire at varying dates between
December 1997 and January 2000. At September 27, 1995, the Company has
unrealized gains of $0.2 million on its interest rate caps and unrealized losses
of $3.2 million on its interest rate swaps.
TERM LOANS
On the Acquisition date, the Company borrowed $305.0 million under the
Tranche A term loan facility and $325.0 million under the Tranche B term loan
facility. The term loan facilities continued to be fully drawn at September 27,
1995.
The Tranche A loan is payable in semi-annual installments commencing June
30, 1996 with the last installment payable on December 31, 2001. The Tranche B
Loan is payable in semi-annual installments commencing June 30, 1996 with a
balloon payment of $258.0 million in the year 2002.
The Company is required to prepay the term loan facilities with (i) 100% of
the net proceeds of certain asset sales, (ii) 100% of the net proceeds of
certain incurrences of indebtedness and (iii) 50% of the net proceeds from
issuances of equity after December 20, 1994 by Holdings or any of its
subsidiaries. The Company is also required to prepay the term loan facilities
annually in an amount equal to 75% of the Excess Cash Flow (as defined) of the
Company and its subsidiaries for the prior fiscal year, except that the Company
will only be required to prepay an amount equal to 50% of such Excess Cash Flow
if (a) the aggregate outstanding principal amount of the term loan facilities is
less than $250 million and (b) certain financial ratios are achieved. Subsequent
to September 27, 1995, the Company made a payment of approximately
38
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- LONG-TERM DEBT (CONTINUED)
$74.9 million in compliance with this Excess Cash Flow prepayment requirement.
Amounts paid in Compliance with the Excess Cash Flow requirement fulfill 100% of
the payment otherwise required to be paid in June, 1996. In addition, additional
amounts reduce future semi-annual installments on a pro rata basis.
REVOLVING CREDIT FACILITY
Under the Revolving Credit Facility, the Company has a borrowing limit in
the amount of $250.0 million. A portion of the revolving credit commitments is
available to the Company as a swing line commitment in the amount of $25.0
million and a letter of credit commitment in the amount of $75.0 million. At
September 27, 1995, $20.6 million of the available credit line was utilized to
guarantee the issuance of letters of credit and $229.4 million of the facility
remained available. The Company pays a quarterly commitment fee equal to 0.5%
per annum on the unused portion of the Revolving Credit Facility.
LETTER OF CREDIT FACILITY
In accordance with the agreement pursuant to which the Acquisition was
effected, letters of credit in an aggregate face amount of $220.0 million were
issued in favor of Scott for its ongoing obligations under nine separate tax
exempt bond financings and the financing of the Biomass Cogeneration Facility in
Westbrook, Maine. The Company assumed responsibility for Scott's obligations
under the assumed financings. At September 27, 1995, such letters of credit
outstanding aggregated approximately $170.5 million. The decrease to $170.5 at
September 27, 1995 is primarily due to the remarketing of certain obligations
which had previously been guaranteed by Scott (see REVENUE BONDS, below).
The Company pays a commission of 2.5% per annum on outstanding letters of
credit. After December 20, 1995, the commission will be equal to the Applicable
Margin for LIBOR loans (2.5%, subject to reduction). In addition, the Company
also pays an issuance fee of 0.25% per annum on letters of credit issued.
SERIES B SENIOR SUBORDINATED NOTES
In connection with the Acquisition, the Company issued Series A Notes
bearing interest at a rate of 12% payable semiannually. The Series A Notes were
redeemable at the option of the Company, in whole or in part, at any time on or
after December 15, 1999 at a premium declining to par in 2002.
On May 31, 1995, the Company consummated an exchange offer pursuant to which
it offered to (1) exchange the existing Series A Notes for an equivalent amount
of 12% Series B Senior Subordinated Notes due 2004 (the "Series B Notes" and
together with the Series A Notes, the "Notes") having substantially identical
terms and (2) exchange the Old Senior Preferred Stock for an equivalent amount
of its existing 14% Series B Senior Exchangeable Preferred Stock due 2006 (the
"Senior Preferred Stock") having substantially identical terms. Such exchange
transactions were contemplated in the original issues of the Series A Notes and
the Old Senior Preferred Stock (collectively, the "Exchanged Securities"), and
accordingly, the deferred financing costs for the Exchanged Securities were not
written off upon exchange. Capitalized financing costs related to the exchange
offer were not material.
The Series B Notes are unsecured, subordinated obligations of the Company
and rank i) junior in right of payment to all existing and future Senior Debt
(as defined for purposes of the Notes), including obligations of the Company
under the Credit Agreement and ii) senior in right of payment to or pari passu
in right of payment with all existing and future subordinated indebtedness.
REVENUE BONDS
The Company assumed $119.3 million of revenue bonds from Scott. Such debt is
comprised of nine separate tax-exempt municipal bond issues (the "Issues")
relating to certain environmental and solid waste disposal projects. The issues
have various maturities ranging from 1996 through 2022. The Company assumed
responsibility for Scott's obligations under the Issues but with respect to each
Issue (other than the
39
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- LONG-TERM DEBT (CONTINUED)
Issue which was remarketed on August 21, 1995, as described below) Scott remains
either contingently liable as a guarantor, or directly liable as the original
obligor. Interest rates on these issues at September 24, 1994 and September 27,
1995 ranged from 3.3% to 9.4% and 5.75% to 9.375%, respectively. Bonds in an
amount of $44.0 million bearing variable interest rates were re-marketed on
August 21, 1995 as fixed interest rate bonds. The Company became the sole
obligor under the bonds and a $49.5 million letter of credit issued in favor of
Scott was canceled. The trustee for each Issue has been granted or assigned the
issuer's rights under a sale, lease purchase or loan agreement, as the case may
be, between the relevant issuer and the Company relating to each respective
project and, in respect of two of the Issues, a security interest in the project
financed thereby.
FUTURE MATURITIES OF LONG-TERM DEBT
Scheduled maturities of long-term debt, including capital leases and sinking
fund payments, at September 27, 1995 are as follows (in millions):
<TABLE>
<S> <C>
1996.............................. $ 78.6
1997.............................. 46.4
1998.............................. 59.0
1999.............................. 54.3
2000.............................. 60.6
Thereafter........................ 828.5
---------
$ 1,127.4
---------
---------
</TABLE>
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and cash
equivalents, receivables, accounts payable, and debt. In addition, the Company
uses interest rate caps and swaps, which were required under the terms of the
Credit Agreement, as a means of managing interest rate risk associated with
outstanding debt. Summarized below are the carrying values and fair values of
the Company's financial instruments. The carrying amounts for cash, cash
equivalents, receivables and payables approximate fair value due to the
short-term nature of these instruments. Accordingly, these items have been
excluded from the table below.
<TABLE>
<CAPTION>
(IN MILLIONS)
SEPTEMBER 24, 1994 SEPTEMBER 27, 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Balance Sheet Financial Instruments:
Term Loans, Tranche A and B........................... $ -- $ -- $ 630.0 $ 630.0
Notes................................................. -- -- 375.0 414.9
Revenue Bonds and Capital Leases...................... 119.8 126.0 122.4 119.1
</TABLE>
The fair value of the Notes, Revenue Bonds and Capital Leases was estimated
by the Company based upon discussions with its investment bankers. The principal
amount of the Tranche A and B Term Loans approximate market since they are
variable rate instruments which reprice monthly.
The Company's off-balance sheet financial instruments include the Revolving
Credit Facility, the Letter of Credit Facility and interest rate caps and swaps.
At September 27, 1995, the total carrying amount of these financial instruments
was $1.6 million and unrealized losses thereon approximated $3.0 million.
The fair value of interest rate swaps and caps is the estimated amount that
the Company would pay or receive to terminate the swap agreement at the
reporting date, taking into account current interest rates and
40
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
the current credit-worthiness of the swap counterparties. The fair value of the
Revolving Credit Facility and the Letter of Credit Facility are based upon fees
currently charged for similar agreements or on the estimated cost to terminate
the obligation at the reporting date.
As of September 24, 1994, the Predecessor Corporation entered into forward
foreign exchange contracts with a Scott owned affiliate to hedge foreign
currency intercompany transactions and balances for periods consistent with its
committed exposures. The Predecessor Corporation's forward exchange contracts,
which had a gross notional value of approximately $7.5 million at September 24,
1994, matured during 1994 and 1995 with no material gain or loss recorded.
A significant portion of the Company's sales and accounts receivable are
from four major customers. None of the Company's other financial instruments
represent a concentration of credit risk because the Company has dealings with a
variety of major banks and customers worldwide. None of the Company's off-
balance sheet financial instruments would result in a significant loss to the
Company if the other party failed to perform according to the terms of its
agreement, as any such loss would generally be limited to the unrealized gain in
any contract.
NOTE 14 -- LEASES
The Company leases office and warehouse space and various office and
manufacturing equipment under operating leases. Unexpired lease terms for
operating leases range from one to six years. Most leases contain renewal
options and options to purchase such equipment at fair market value. Rental
expense relating to these leases was $9.0 million, $4.9 million, $0.8 million
and $2.4 million for the twelve months ended December 25, 1993, the nine months
ended September 24, 1994, the three months ended December 20, 1994 and the nine
months ended September 27, 1995, respectively.
Additionally, the Company has other commitments, which expire in 2008, to
operate a biomass cogeneration facility adjacent to its Westbrook mill and to
purchase its steam and electricity output on a take-or-pay basis (the
"Cogeneration Obligation"). Under the Cogeneration Obligation, the Company paid
approximately $7.0 million each for the twelve months ended December 25, 1993,
the nine months ended September 24, 1994 and the nine months ended September 27,
1995. No payments were made during the three months ended December 20, 1994.
The future minimum obligations under leases and other commitments having an
initial or remaining noncancelable term in excess of one year as of September
27, 1995 are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER, OPERATING LEASES OTHER COMMITMENTS
- ------------------------------------------ ------------------- -------------------
<S> <C> <C>
1996...................................... $ 3.3 $ 7.0
1997...................................... 2.0 7.5
1998...................................... 1.5 7.8
1999...................................... 1.3 7.3
2000...................................... 1.3 7.4
Thereafter................................ 0.4 71.2
--- ------
$ 9.8 $ 108.2
--- ------
--- ------
</TABLE>
Certain lease obligations and the Cogeneration Obligation contain scheduled
payment increases. The Company is recognizing expenses associated with these
contracts on a straight-line basis over the related contract's terms.
41
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 15 -- ENVIRONMENTAL AND SAFETY MATTERS
The Company is subject to a wide variety of increasingly stringent
environmental laws and regulations relating to, among other matters, air
emissions, wastewater discharges, past and present landfill operations and
hazardous waste management. These laws include the Federal Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act and their respective
state counterparts. The Company will continue to incur significant capital and
operating expenditures to maintain compliance with applicable federal and state
environmental laws. These expenditures include costs of compliance with federal
worker safety laws, landfill expansions and wastewater treatment system
upgrades.
In addition to conventional pollutants, minute quantities of dioxins and
other chlorinated organic compounds may be contained in the wastewater effluent
of the Company's bleached kraft pulp mills in Somerset and Westbrook, Maine and
Muskegon, Michigan. The most recent National Pollutant Discharge Elimination
System ("NPDES") wastewater permit limits proposed by the EPA would limit dioxin
discharges from the Company's Somerset and Westbrook mills to less than the
level of detectability. The Company is presently meeting the EPA's proposed
dioxin limits but it is not meeting the proposed limits for other parameters
(e.g. temperature and color) and is pursuing efforts to revise these other
wastewater permit limits for its facilities. While the permit limitations at
these two facilities are being challenged, the Company continues to operate
under existing EPA permits, which have technically expired, in accordance with
accepted administrative practice. In addition, the Muskegon mill is involved, as
one of various industrial plaintiffs, in litigation with the County of Muskegon
regarding the mill's wastewater treatment permit. The lawsuit challenges the
permit's effluent limits imposed by local ordinance as arbitrary and
unreasonable. In the meantime, the mill also has applied for alternative
effluent limits. Although the Company believes that it will be successful in its
various administrative and judicial challenges to those limits and in any
negotiations of such limits with environmental regulatory authorities, the
imposition of currently proposed limits could require substantial additional
expenditures, including short-term expenditures, and may lead to substantial
fines for any noncompliance.
In November 1993, the EPA announced proposed regulations that would impose
new air and water quality standards aimed at further reductions of pollutants
from pulp and paper mills, particularly those conducting bleaching operations
(generally referred to as the "cluster rules"). Although the EPA has not made
any commitments, final promulgation of the cluster rules may occur in 1996 and
compliance with the rules may be required beginning in 1998. The Company
believes that compliance with the cluster rules, as proposed, may require
aggregate capital expenditures of approximately $76.0 million through 1999. The
ultimate financial impact to the Company of compliance with the cluster rules
will depend upon the nature of the final regulations, the timing of required
implementation and the cost and availability of new technology. The Company also
anticipates that it will incur an estimated $10.0 million to $20.0 million of
capital expenditures through 1999 related to environmental compliance other than
as a result of the cluster rules.
The Company's mills generate substantial quantities of solid wastes and
by-products that are disposed of at permitted landfills and solid waste
management units at the mills. The Company is currently planning to expand the
landfill at the Somerset mill at a projected total cost of approximately $12.0
million, of which approximately $5.0 million will be spent between 1996 and
1997.
The Muskegon mill has had discussions with the Michigan Department of
Natural Resources ("DNR") regarding a wastewater surge pond adjacent to the
Muskegon Lake. The DNR presently is considering whether the surge pond is in
compliance with Michigan Act 245 (Water Resources Commission Act) regarding
potential discharges from that pond. The matter is now subject to the results of
a pending engineering investigation. There is a possibility that, as a result of
DNR requirements, the surge pond may be closed in the future. The Company
estimates the cost of closure will be approximately $2.0 million. In
42
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 -- ENVIRONMENTAL AND SAFETY MATTERS (CONTINUED)
addition, if it is necessary to replace the functional capacity of the surge
pond with above-grade structures, the Company preliminarily estimates that up to
an additional $8.0 million may be required for such construction costs.
The Company has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for cleanup
of contamination at seven sites. Based upon the Company's understanding of the
total amount of liability at each site, its calculation of its percentage share
in each proceeding, and the number of potentially responsible parties at each
site, the Company presently believes that its aggregate exposure for these
matters is not material. Moreover, as a result of the Acquisition, Scott agreed
to indemnify and defend the Company for and against, among other things, the
full amount of any damages or costs resulting from the off-site disposal of
hazardous substances occurring prior to the date of closing, including all
damages and costs related to these seven sites. Since the date of closing of the
Acquisition, Scott has been performing under the terms of this environmental
indemnity and defense provision and, therefore, the Company has not expended any
funds with respect to these seven sites.
The Company must comply with a number of federal and state regulations that
govern health and safety in the workplace, the most significant of which is the
Federal Occupational Safety and Health Act ("OSHA"). Pursuant to a voluntary
OSHA program piloted in the State of Maine in 1993, the Company performed a
self-assessment audit with respect to OSHA mandates at its Somerset and
Westbrook mills and submitted a compliance plan to address certain health and
safety matters. The Company anticipates that the total cost of implementing the
compliance plan will be approximately $19.0 million. As of September 27, 1995,
approximately $14.4 million of the total estimated $19.0 million had been
expended. The Company expects that the majority of the remaining costs will be
expended during fiscal years 1996 and 1997. The Company recognizes these costs
as they are incurred.
The Company currently has a five year demolition project in progress at its
Westbrook Facility for health and safety reasons. Total costs of the project are
estimated to be approximately $9.0 million, of which approximately $4.5 million
had been spent as of September 27, 1995. The Company recognizes these costs as
they are incurred.
The Company does not believe that it will have any liability under recent
emergency legislation enacted by the State of Maine to cover a significant
shortfall in the Maine workers' compensation system through assessments of
employers and insurers; however, there can be no assurance that the existing
legislation will fully address the shortfall.
None of these matters, individually or in the aggregate, is expected to have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
The Mobile, Alabama paper mill was historically operated by Scott as part of
an integrated facility (including a tissue mill, a pulp mill and energy
facility). In connection with the Acquisition, the Company entered into
long-term (25 years initially, subject to mill closures and certain FORCE
MAJEURE events) supply agreements with Scott for the supply of pulp and water
and the treatment of effluent at the Mobile Mill. Wood pulp will be supplied
generally at market prices. Pulp prices will be discounted, primarily because of
the lower delivery costs due to the elimination of freight costs associated with
delivering pulp to Warren's Mobile paper mill and pulp qualities will be subject
to minimum (170,000 to 182,400 tons per year) and maximum (220,000 to 233,400
tons per year) limits. Prices for other services to be provided by Scott will
generally be based upon cost. Prior to the Acquisition, Scott sold its energy
facility at Mobile to Mobile Energy Services Corporation ("MESC"). In connection
with the sale of the energy facility, MESC entered into a long-term agreement
with the Company to provide electric power and steam to the paper mill at rates
43
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
generally comparable to market tariffs, including fuel cost and capital recovery
components. Scott, MESC and the Company have also entered into a long-term
shared facilities and services agreement (the "Shared Facilities Agreement")
with respect to medical and security services, common roads and parking areas,
office space and similar items and a comprehensive master operating agreement
providing for the coordination of services and integration of operations among
the energy facility, the paper mill, the pulp mill and the tissue mill. Annual
fees under the Shared Facilities Agreement are expected to be approximately $1.5
million per year through the 25 year term of the agreement. The Company has the
option to cancel certain non-essential services covered by the Shared Services
Agreement at any time prior to the end of the 25 year term.
A substantial portion of the Company's electricity requirements are
satisfied through cogeneration agreements ("Power Purchase Agreements" or
"Agreements") whereby the Somerset and Westbrook mills each cogenerate
electricity and sell the output to Central Maine Power Company ("CMP"). The
Westbrook and Somerset Agreements require CMP to purchase such energy produced
by these cogeneration facilities at above market rates which has reduced the
Company's historical cost of electrical energy. The Westbrook Agreement expires
October 31, 1997 and the Somerset Agreement expires in the year 2012. The
favorable pricing element of the Somerset Agreement will end on November 30,
1997. The agreements also require the mills to purchase electricity from CMP at
the standard industrial tariff rate.
To properly reflect the fair market value of the acquired Power Purchase
Agreements as of the Acquisition date, the Company established a deferred asset
of approximately $32.3 million, in accordance with APB No. 16. This deferred
asset is recorded with other contracts valued at the Acquisition date as a net
long-term liability. This deferred asset is being amortized over the remaining
life of the favorable Power Purchase Agreements. For the nine months ended
September 27, 1995, amortization expense related to this asset approximated
$10.8 million.
The Company is also involved in various other lawsuits and administrative
proceedings. The relief sought in such lawsuits and proceedings include
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 legal counsel, that they will not have a
material effect on the Company's financial position, results of operations or
cash flows.
NOTE 17 -- RETIREMENT BENEFITS
PENSION PLANS
Prior to the Acquisition, employees participated in two (Company sponsored)
hourly pension plans and a salaried pension plan and two Scott sponsored hourly
pension plans. The assets and related benefit obligations of employees electing
retirement prior to the Acquisition were transferred from the Company sponsored
plans to Scott plans prior to December 20, 1994 and remain assets and
obligations of Scott. During 1994 the assets and obligations relating to S.D.
Warren's active employees were allocated to four newly formed pension plans
based on the requirements of Section 414(l) of the Internal Revenue Code and the
regulations thereunder. Management and the Plan's trustees believe such
allocation is reasonable.
The four defined-benefit, trusteed pension plans provide retirement benefits
for substantially all employees. Benefits provided are primarily based on
employees' years of service and compensation. The Company's funding policy
complies with the requirements of Federal law and regulations. Plan assets
consist of equity securities, bonds and short-term investments.
44
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 -- RETIREMENT BENEFITS (CONTINUED)
The funded status of the company-sponsored pension plans is shown below (in
millions):
<TABLE>
<CAPTION>
SEPTEMBER 24, SEPTEMBER 27,
1994 1995
------------- -------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested....................................................... $ 115.2 $ 71.3
Nonvested.................................................... 5.3 18.0
------ ------
Accumulated benefit obligation............................. 120.5 89.3
Additional obligation for future salary increases.............. 2.0 27.2
------ ------
Projected benefit obligation................................... 122.5 116.5
Plan assets at fair value...................................... 105.3 102.5
------ ------
Projected benefit obligation in excess of plan assets.......... (17.2) (14.0)
Unrecognized amounts
Transition obligation........................................ 5.0 --
Prior service cost........................................... 8.1 --
Unrecognized net gain........................................ (1.7) (8.5)
------ ------
Accrued pension cost........................................... (5.8) (22.5)
Adjustment for minimum liability............................... (10.4) --
------ ------
Net pension liability (amount is included in other long-term
liabilities).................................................. $ (16.2) $ (22.5)
------ ------
------ ------
</TABLE>
The net pension cost for the Company sponsored plans include the following
components (in millions):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Service cost-benefits earned during the
period.................................... $ 1.5 $ 1.5 $ 0.4 $ 4.5
Interest cost on projected benefit
obligation................................ 8.4 6.5 2.1 6.9
Actual return on plan assets............... (18.9) (0.8) 2.7 (10.4)
Net deferral............................... 10.7 (5.4) (4.7) 4.2
------ ----- ----- ------
Net pension cost........................... $ 1.7 $ 1.8 $ 0.5 $ 5.2
------ ----- ----- ------
------ ----- ----- ------
</TABLE>
Pension expense allocated to the Company relating to its participation in
the Scott plans was $5.5 million, $5.7 million and $1.9 million for the year
ended December 25, 1993, the nine months ended September 24, 1994 and the three
months ended December 20, 1994, respectively.
The projected benefit obligation at September 24, 1994 and September 27,
1995 was determined using an assumed discount rate of 8.25% and 8.0%,
respectively, and an assumed long-term rate of compensation increase of 5.5% and
5.25% respectively. The assumed rate of return on plan assets (on an annualized
basis) was 10.5%, 10.5%, 10.5% and 9.0% for the twelve months ended December 25,
1993, the nine months ended September 24, 1994, the three months ended December
20, 1994 and the nine months ended September 27, 1995, respectively.
SAVINGS PLAN
The Predecessor Corporation's contributions to various savings plans were
based on employee contributions and compensation and totaled $5.5 million, $3.8
million and $0.6 million for the twelve months ended December 25, 1993, the nine
months ended September 24, 1994 and the three months ended December 20, 1994,
respectively. The Company currently sponsors two 401(k) deferred contribution
plans
45
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 -- RETIREMENT BENEFITS (CONTINUED)
covering substantially all Company employees pursuant to which the Company is
obligated to match, up to specified amounts, employee contributions. Company
contributions to these plans totaled $3.8 million for the nine months ended
September 27, 1995.
NOTE 18 -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FAS No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions" requires the accrual of postretirement benefits other than pensions
(such as health care benefits) during the years of employee service. The Company
sponsors a defined benefit postretirement plan that provides health care and
life insurance benefits to eligible retired employees. Employees are generally
eligible for benefits upon retirement and completion of a specified number of
years of service. Obligations relating to employees electing retirement prior to
December 20, 1994 were not assumed by the Company at Acquisition. Such
obligations remain the obligations of Scott.
The following schedule provides the plan's funded status and obligations (in
millions):
<TABLE>
<CAPTION>
SEPTEMBER SEPTEMBER 27,
24, 1994 1995
----------- -------------
<S> <C> <C>
Accumulated postretirement benefit obligations (APBO):
Retirees..................................................... $ 65.3 $ --
Active Participants.......................................... 38.6 25.7
----------- ------
Total APBO................................................... 103.9 25.7
Plan assets at fair value...................................... -- --
----------- ------
APBO in excess of plan assets.................................. (103.9) (25.7)
Unrecognized transition obligation........................... 63.9 --
Unrecognized net actuarial gain.............................. (13.1) (1.8)
----------- ------
Net postretirement liability................................... $ (53.1) $ (27.5)
----------- ------
----------- ------
</TABLE>
Components of the net periodic postretirement benefit expense are as follows
(in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED THREE MONTHS NINE MONTHS
DECEMBER 25, SEPTEMBER 24, ENDED DECEMBER ENDED SEPTEMBER
1993 1994 20, 1994 27, 1995
------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Service cost............................... $ 3.2 $ 2.7 $ 0.9 $ 2.0
Interest cost on APBO...................... 7.9 5.0 1.7 1.6
Net amortization and deferral.............. 6.0 4.0 1.3 --
----- ----- --- ---
Net postretirement benefit cost............ $ 17.1 $ 11.7 $ 3.9 $ 3.6
----- ----- --- ---
----- ----- --- ---
</TABLE>
The discount rates used to estimate the accumulated benefit obligations as
of September 24, 1994 and September 27, 1995 were 8.25% and 8.0% respectively.
The health care cost trend rates used to value APBO were 12.4%, 10.5%, 10.5% and
9.0% at December 25, 1993, September 24, 1994, December 20, 1994 and September
27, 1995, respectively, decreasing gradually to an ultimate rate of 5.0% in the
year 2007. A one-percentage point increase in the assumed health care trend rate
for each future year would increase the APBO by approximately 8.7% at September
27, 1995 and would increase the sum of the benefits earned and interest cost
components of net postretirement benefit cost for 1995 by approximately 14.7%
Effective December 26, 1993, Scott adopted FAS No. 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.
46
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 -- OTHER LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 24, SEPTEMBER 27,
1994 1995
------------- -------------
<S> <C> <C>
Accrued workers' compensation.................................. $ 23.3 $ 35.0
Accrued pension and other postretirement benefits.............. 62.3 50.0
Other accrued liabilities...................................... 8.3 8.3
----- -----
$ 93.9 $ 93.3
----- -----
----- -----
</TABLE>
NOTE 20 -- REDEEMABLE EXCHANGEABLE PREFERRED STOCK
The Company has authorized 10.0 million shares of redeemable exchangeable
preferred stock from which the Company's Board of Directors designated a series
consisting of 3.0 million shares of Old Senior Preferred Stock. The Old Senior
Preferred Stock was issued in connection with the financing of the Acquisition.
The Old Senior Preferred Stock was exchanged for Senior Preferred Stock on May
31, 1995.
The Senior Preferred Stock has a liquidation preference of $25.00 per share
(aggregate liquidation preference is $75.0 million, plus accumulated dividends).
The Senior Preferred Stock was recorded at the net proceeds of $65.4 million
received from the issuance after deducting stock issuance costs and
approximately $6.9 million paid to Holdings for class A warrants which were
issued in conjunction with the Old Senior Preferred Stock. The excess of the
liquidation preference over the carrying value is being accreted by periodic
charges to retained earnings over the life of the issue.
Dividends are cumulative and accrue quarterly at a rate of 14% per annum of
(a) the liquidation preference amount and (b) the amount of accrued but unpaid
dividends from prior dividend accrual periods ending on or prior to December 15,
1999 ("Accumulated Dividends"). The Company does not expect to pay dividends on
the Senior Preferred Stock in cash for any period ending on or prior to December
15, 1999. Cumulative dividends on Senior Preferred Stock that have not been paid
at September 27, 1995 are $8.5 million and are included in the carrying amount
of the Senior Preferred Stock as indicated below (in millions):
<TABLE>
<S> <C>
Issuance on December 21, 1994 for cash (at fair value on date of issuance).................................... $65.4
Accretion to redemption value................................................................................. 0.6
Dividends on preferred stock.................................................................................. 8.5
-----
Balance, September 27, 1995................................................................................... $74.5
-----
-----
</TABLE>
REDEMPTION
The Senior Preferred Stock is redeemable at the option of the Company, in
whole or in part, at any time on or after December 15, 2001 at the redemption
prices (expressed as a percentage of the Specified Amount) with respect to the
Senior Preferred Stock set forth below plus all accrued and unpaid liquidated
damages and dividends (excluding any Accumulated Dividends but including an
amount equal to a pro rated dividend from the immediately preceding dividend
accrual date to the redemption date), if any, if redeemed during the twelve
month period beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -------------
<S> <C>
2001.............................................................................. 104.2%
2002.............................................................................. 102.8%
2003.............................................................................. 101.4%
2004.............................................................................. 100.0%
</TABLE>
"Specified Amount" on any specific date with respect to any share of Senior
Preferred Stock means the sum of (i) the liquidation preference with respect to
such share and (ii) the Accumulated Dividends with respect to such share.
47
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 -- REDEEMABLE EXCHANGEABLE PREFERRED STOCK (CONTINUED)
In the event that Holdings consummates one or more public offerings of its
common stock on or before December 15, 1997, the Company may, at its option,
redeem the Senior Preferred Stock with the proceeds therefrom at a redemption
price equal to 113% of the Specified Amount, plus all accrued and unpaid
liquidated damages and dividends (excluding any Accumulated Dividends but
including an amount equal to a pro rated dividend from the immediately preceding
dividend accrual date to the redemption date), if any, through the redemption
date; provided, that at least $50.0 million in aggregate specified amount of
Senior Preferred Stock remains outstanding immediately following such
redemption.
The Company is required to redeem the Senior Preferred Stock on December 15,
2006 at the Specified Amount plus all accrued and unpaid damages and dividends
(excluding any Accumulated Dividends but including an amount equal to a pro
rated dividend from the immediately preceding dividend accrual date to the
redemption date).
At any scheduled dividend payment date, the Company may, at its option,
exchange all of the shares of the Senior Preferred Stock then outstanding for
the Company's 14% Series B Subordinated Exchange Debentures due 2006.
In the event of a Change of Control, as defined, the holders of Senior
Preferred Stock will have the right to require the Company to redeem such Senior
Preferred Stock, in whole or in part, at a price equal to 101% of the Specified
Amount thereof, plus accrued and unpaid liquidated damages and dividends
(excluding any Accumulated Dividends but including an amount equal to a pro
rated dividend from the immediately preceding dividend accrual date to the
redemption date).
Holders of the Senior Preferred Stock have limited voting rights, customary
for preferred stock, and the right to elect two additional directors upon
certain events such as the Company failing to pay dividends in cash for more
than six consecutive dividend accrual periods ending after December 15, 1999.
NOTE 21 -- RELATED PARTY TRANSACTIONS
Pursuant to the limitations on restricted payments outlined in the Credit
Agreement, the indenture relating to the Notes and the Senior Preferred Stock,
the Company may make cash payments to Holdings, including, among other things,
(i) amounts under a tax sharing agreement to be entered into between the Company
and Holdings necessary to enable Holdings to pay the Company's taxes and (ii)
administrative fees to Holdings and amounts to cover various specified costs and
expenses of Holdings. The associated administrative fee expensed during the nine
months ended September 27, 1995 was approximately $0.8 million.
The Company has contracted through a management services agreement (the
"Management Services Agreement") and central cost allocation agreement (the
"Central Cost Allocation Agreement") with two subsidiaries of Sappi, Sappi
Trading AG (referred to as "SIM" as the company is in the process of changing
its name to Sappi International Management AG) and Sappi Management Services
Limited ("SMS") to provide management advisory services. The aggregate fee to be
charged to the Company by SIM and SMS is limited to an annual amount of $1.0
million. For the nine months ended September 27, 1995, the Company incurred a
related management fee expense of approximately $0.8 million.
The Management Services Agreement with SIM establishes an agreement whereby
SIM provides strategic and corporate planning advice, financial and legal
services and services relating to public affairs and human resources. The
Company agrees to pay a service fee to SIM which is determined based upon the
Company's proportionate share in the aggregate amount of costs which SIM incurs
in providing services to the entire number of group companies which have entered
into agreements of this nature with SIM, plus a profit mark-up of 10%. The
Company's proportionate share is based upon the time spent on Company services
divided by total time spent by SIM on total group company services. This
agreement commenced on January 1, 1995 and is effective until terminated by
either party with six months written notice.
48
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 -- RELATED PARTY TRANSACTIONS (CONTINUED)
The Central Cost Allocation Agreement with SMS provides for general
technical and administrative support services to supplement the services
provided by SIM. The Company has agreed to pay a service fee to SMS which is
determined based upon the Company's proportionate share in the aggregate amount
of costs which SMS incurs in providing services to the entire number of group
companies which have entered into agreements of this nature with SMS, plus a
profit mark-up of 10%. The Company's proportionate share is based upon the
Company's inventory turnover divided by total inventory turnover of SMS group
companies. This agreement commenced on January 1, 1995 and is effective for one
year unless terminated by either party with six months written notice.
Warren has also entered into a cross licensing agreement with Sappi
Deutschland, the worldwide holding company for all European and U.S. business
operations of the Sappi group, and Hannover Papier AG ("Hannover"), a subsidiary
of Sappi. Pursuant to this agreement, the Company and Hannover have agreed to
enter into specific written agreements to share paper processing techniques and
have also agreed to enter into specific distribution agreements whereby the
Company has agreed to use its distribution network in the United States to
facilitate and increase Hannover's exports. Sappi Deutschland will facilitate
the licensing process. No specific agreements have been entered into in
connection with this cross licensing agreement as of September 27, 1995.
During fiscal 1995, the Company sold products to certain Sappi subsidiaries
(Sappi Europe, SA and Specialty Pulp Services) at market rates. These
subsidiaries then sold the Company's product to external customers and remitted
the proceeds from such sales to Warren, net of a sales commission. The Company
sold $33.0 million of products to subsidiaries of Sappi and expensed fees of
approximately $1.1 million relating to these sales for the nine months ended
September 27, 1995. Trade accounts receivable at September 27, 1995 includes
approximately $12.4 million due from subsidiaries of Sappi. The Company is in
the process of formalizing a written agreement for this relationship.
NOTE 22 -- SUBSEQUENT EVENTS (UNAUDITED)
In April 1996, the Company amended its Credit Agreement and changed certain
provisions relating to restrictive covenants including, among other things, the
ability to incur additional debt, pay dividends and sell certain assets. In
addition, certain provisions relating to interest rates, fees, collateral,
prepayments and affirmative covenants were amended.
On April 23, 1996, in conjunction with the amendment to the Company's Credit
Agreement, the Company entered into a five year agreement which provides for the
sale of all of the Company's trade accounts receivable, net of all related
allowances, through a bankruptcy remote subsidiary to an unrelated financial
institution (the "A/R Facility"). The cash proceeds from the sale are based upon
a computation of eligible trade accounts receivable and the subsidiary retains
an undivided interest in the remaining "ineligible" trade accounts receivable.
As collections reduce the trade accounts receivable sold, participating
interests in new trade accounts receivable are sold. The proceeds from the A/R
Facility along with $10.0 million of available cash on hand were used to prepay
$100.0 million of the term loans under the amended Credit Agreement.
Approximately $3.3 million of financing fees that had previously been deferred
were written off as a result of this prepayment.
In November 1996, a ballot initiative in the State of Maine will include a
binding referendum measure that, if approved by voters, will impose restrictions
on the harvesting of timberlands in unincorporated areas in the State of Maine,
which includes all of the Company's timberlands. Although the outcome of the
proposed referendum cannot be predicted with any certainty, the effect of
complying with the provisions of the referendum, if approved, may have a
material adverse effect on the Company's financial condition, results of
operations and cash flows.
49
<PAGE>
SCHEDULE II
S.D. WARREN COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND (PRINCIPALLY END OF
PERIOD EXPENSES WRITE-OFFS) PERIOD
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Nine months ended September 27, 1995........................ $ 5.4 $ 0.2 $ -- $ 5.6
Three months ended December 20, 1994........................ 6.3 -- 0.9 5.4
Nine months ended September 24, 1994........................ 5.4 0.9 -- 6.3
Twelve months ended December 25, 1993....................... 4.7 0.7 -- 5.4
Allowance for inventory obsolescence (Restated):
Nine months ended September 27, 1995........................ $ -- $ 4.1 $ -- $ 4.1
Three months ended December 20, 1994........................ 2.1 0.5 -- 2.6
Nine months ended September 24, 1994........................ 2.3 0.6 0.8 2.1
Twelve months ended December 25, 1993....................... 2.6 -- 0.3 2.3
Reserve for restructuring:
Three months ended December 20, 1994........................ $ 12.7 $ -- $ 12.7 $ --
Nine months ended September 24, 1994........................ 91.7 -- 79.0 12.7
Twelve months ended December 25, 1993....................... 26.4 66.1 0.8 91.7
</TABLE>
50
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Deloitte & Touche LLP were appointed independent auditors to SDW Holdings'
Corporation, the parent of the Company, prior to the Acquisition of the
Predecessor Corporation. Coopers & Lybrand L.L.P. served as independent
accountants to the Predecessor Corporation prior to the Acquisition and upon
completion of the Acquisition, Deloitte & Touche LLP replaced Coopers & Lybrand
L.L.P. as the Company's independent auditors. There were no disagreements
between the Predecessor Corporation and Coopers & Lybrand L.L.P. on matters of
accounting and financial disclosure in the two years and subsequent interim
period preceding their replacement by Deloitte & Touche LLP.
During 1995, Coopers & Lybrand L.L.P. informed the Company that they would
not consent to the use of their report on the Predecessor Corporation's
financial statements in certain anticipated registration statements of the
Company and or Sappi Limited to be filed with the Securities and Exchange
Commission. As a result, the Company engaged Deloitte & Touche LLP to reaudit
the Predecessor Corporation financial statements included in Item 8 of this
Annual Report on Form 10-K.
51
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and
executive officers of Warren as of the filing date of this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- -----------------------------------------------------------
<S> <C> <C>
Eugene van As 55 Director
Monte R. Haymon 58 Director, President, Chief Executive Officer
James H. Frick, Jr 56 Director, Vice President
O. Harley Wood 53 Director, Vice President
William E. Hewitt 60 Director, Vice President
Trevor L. Larkan 40 Director, Chief Financial Officer, Vice President,
Treasurer, Secretary
E. Dannis Herring 43 Director, Vice President
Pablo P. Zamora 53 Vice President
Lewis W. Mohler 58 Vice President
</TABLE>
Messrs. van As, Hewitt and Larkan have been Directors since December 20,
1994. Mr. Frick has been a Director since March 21, 1989. Messrs. Herring and
Wood have been Directors since March 17, 1992. Mr. Haymon has been a Director
since October 1, 1995. Directors of the Company are elected annually to serve
until the next annual meeting of stockholders of the Company and until their
successors have been elected or appointed and qualified. Executive officers are
appointed by, and serve at the direction of, the Board of Directors of the
Company.
Set forth below is a brief account of the business experience of each of the
officers and directors of the Company as of the filing date of this Annual
Report on Form 10-K.
ORGANIZATION
EUGENE VAN AS served as President and Chief Executive Officer of the Company
from April 30, 1995 through September 30, 1995. Mr. van As has been Executive
Chairman of Sappi since 1991. He joined Sappi in 1977 as the Managing Director
and Chief Executive Officer of Sappi. He is also a director of Malbak Limited,
Olivetti Africa Limited, the Council for Scientific and Industrial Research and
the South African Foreign Trade Organization.
MONTE R. HAYMON was appointed President and Chief Executive Officer of
Warren on October 1, 1995. Previously he had been President and Chief Operating
Officer of Ply-Gem Industries, and for thirteen years, President and Chief
Executive Officer of Packaging Corporation of America, a division of Tenneco. In
addition to his business experience, Mr. Haymon is a member of the Board of
Directors of Evanston Hospital, a member of the Board of Trustees of Tufts
University as well as Chairman of the Board of Overseers of the Engineering
School. Mr. Haymon is a former member of the Board of Directors of the National
Association of Manufacturers. He is also a former Trustee of both the Institute
of Paper & Science and American Forest Products Association.
JAMES H. FRICK, JR., became Vice President -- Sales and Marketing in
December 1994. Prior to assuming such a position, Mr. Frick held various
positions with the Company since joining the Company in 1961, including as Vice
President -- Coated Printing and Publishing from January 1984 through December
1994 and Vice President/Division Manager printing and publishing beginning in
1975.
52
<PAGE>
O. HARLEY WOOD became Vice President -- Manufacturing of Warren in March
1991. Mr. Wood joined Scott in January 1989 as Vice President of Manufacturing
Development for its U.S. tissue businesses. Prior to joining Scott, Mr. Wood had
held various positions with Procter and Gamble since 1964.
WILLIAM E. HEWITT was appointed a non-executive director of S.D. Warren at
the time of the Acquisition. He has been the Executive Director -- Finance of
Sappi since 1987. He qualified as a chartered accountant in 1957. He has held
executive financial positions in the motor, steel, transportation and retailing
sectors and was Group Financial Director, Toyota (South Africa) until 1987. Mr.
Hewitt is a director of Sappi, Limited.
TREVOR L. LARKAN, having most recently been Financial Director for Sappi,
Southern Africa, a division of Sappi Limited, since 1992, he transferred to
Warren as Vice President and Treasurer with effect from January 1, 1995. In May
1995, Mr. Larkan was also appointed Chief Financial Officer of the Company. A
chartered accountant, he specialized in treasury management during the early and
mid-1980s, joining Saiccor, the dissolving pulp subsidiary of Courtaulds Plc in
1986. Soon after the acquisition of Saiccor by Sappi in 1988, he was appointed
Financial and Commercial Director of that division.
E. DANNIS HERRING became Vice President -- Procurement and Distribution in
May of 1995. Prior to such time, Mr. Herring held various positions with the
Company, including serving as Controller from 1992 to 1994 and as Chief
Financial Officer from March 1994 to May 1995. Mr. Herring began his career with
Scott in 1974 in Warren's Mobile, Alabama mill.
PABLO P. ZAMORA became Vice President -- Research and Development for the
Company in February 1995. Prior to such time, Mr. Zamora had been with the James
River Corporation as Vice President -- Research and Development and Chief
Technology Officer. From 1984 to 1990 he held the title of Vice President --
Product Development for Tambrands, Incorporated. Mr. Zamora also held several
technical management positions during a 16-year period of employment with
Proctor and Gamble.
LEWIS W. MOHLER has been Vice President and General Manager of the
Specialties business since July 1992. Prior to such time, Mr. Mohler has held
various positions with Warren since he joined the Company in 1966, including as
General Manager of the Pressure Sensitive business from 1988 to 1992.
53
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION
The following tables set forth information with respect to the compensation
of the Chief Executive Officer and the four other most highly compensated
individuals who served as officers of S.D. Warren during 1995. All references to
shares, options and stock appreciation rights ("SARs") therein refer to shares
of Scott Paper Company ("Scott"), S.D. Warren's former parent. S.D. Warren has
not granted shares, options or SARs to its employees prior to or during the
fiscal year ended September 27, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------- ------------- ALL OTHER
NAME AND YEAR SALARY OPTIONS/SARS COMPENSATION
PRINCIPAL POSITION (1)(2) ($) (#) (3)
- ---------------------------------------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Eugene van As 1995 $ -- $ -- $ --
Chief Executive Officer and President
(4)
J. Richard Leaman, Jr. 1995 211,074 0 0
Former Chief Executive Officer and 1994 448,767 25,000(6) 504,334
President (5) 1993 441,096 25,000 24,303
Pablo Zamora 1995 154,329 0 3,186
Vice President -- Research and
Development
James H. Frick 1995 152,744 0 37,017
Vice President -- Coated Printing and 1994 183,967 6,000(6) 161,924
Publishing
O. Harley Wood 1995 134,601 0 157,803
Vice President -- Manufacturing 1994 173,025 6,000(6) 54,493
E. Dannis Herring 1995 121,745 0 6,807
Vice President -- Procurement and 1994 150,222 4,500(6) 6,707
Distribution
</TABLE>
- ------------------------
(1) Information with respect to years prior to 1995 is being provided only for
Messrs. Leaman, Frick, Wood and Herring to the extent that information with
respect to their compensation has previously been required to be filed with
the Securities and Exchange Commission.
(2) Compensation for 1995, 1994, and 1993 is for the fiscal year December 21,
1994 through September 27, 1995, the nine months ended September 24, 1994
combined with the period September 25, 1994 through December 20, 1994, and
the twelve months ended December 25, 1993, respectively.
(3) The amounts shown under "All Other Compensation" consist of matching
contributions under the Salaried Investment Plan, imputed income for life
insurance premiums for each year shown and educational assistance payouts
plus payments made upon withdrawals of vacation accrued consisting of
$17,260 in 1993 for Mr. Leaman, $7,460 both in 1995 and 1994 for Mr. Frick
and $3,078 in 1995 and $2,532 in 1994 for Mr. Herring, and $13,310 for Mr.
Wood in 1995. In addition, the amounts shown under "All Other Compensation"
consist of bonuses associated with the sale of S.D. Warren by Scott in the
amount of $500,000 for Mr. Leaman, $150,000 for Mr. Frick and $50,000 for
Mr. Wood paid in 1994 and $140,000 paid by Scott to Mr. Wood in 1995 under a
supplemental retirement plan.
(4) From April 30, 1995 through September 27, 1995, Mr. van As, Chief Executive
Officer of Sappi Limited, served as Chief Executive Officer and President of
S.D. Warren without additional compensation, but pursuant to a management
services agreement under which S.D. Warren paid Sappi a fee.
54
<PAGE>
(5) Mr. Leaman resigned from his position as Chief Executive Officer on April
30, 1995. Mr. Leaman was compensated based upon a consulting contract from
December 21, 1994 through April 30, 1995 and was therefore not an employee
during that period. Mr. Leaman was reimbursed for the increase in his state
personal income tax liability resulting from his employment in Massachusetts
upon becoming President in 1991. These amounts are considered immaterial.
Mr. Leaman's compensation was approved by Eugene van As, Chairman of the
Board of the Company, based upon the compensation paid to him by Scott. The
compensation of the other executive officers was determined by Mr. van As
and the Company's Vice President of Human Resources, in consultation with
the Company's compensation consultant and approved by Mr. van As.
(6) All options granted by Scott in 1994 were forfeited prior to the end of 1994
in connection with the sale of S.D. Warren by Scott.
The following table provides information on stock option exercises during
1995 by each person named in the Summary Compensation Table, and provides
information on the number and value of stock options, both exercisable and
unexercisable, held by each such person on September 27, 1995.
AGGREGATED OPTION EXERCISES IN 1995 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT YEAR END YEAR END
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------------------- ----------- ---------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
J. Richard Leaman, Jr. 200,000 $4,481,513 0/0 0/0
James H. Frick 44,000 871,600 0/0 0/0
O. Harley Wood 0 0 0/0 0/0
E. Dannis Herring 4,000 119,619 0/0 0/0
</TABLE>
PENSION BENEFITS
As of October 31, 1994, the Company assumed sponsorship of the portion of
the Scott qualified plans which covered employees who would continue to be
employed by the Company after the closing of the Acquisition (the "Closing
Date"). The defined benefit plan which covers the executive officers (the
"Salaried Plan") provides benefits based on a participant's years of service and
highest compensation during the final years of employment. Generally, the hourly
defined benefit plan provides covered employees with a stated amount of
retirement benefit for each year of service.
The following table shows the estimated annual retirement benefits payable
to participants with specified amounts of compensation and years of credited
service at normal retirement age under the Salaried Plan. The estimated
retirement benefits are the amounts payable in the form of a single life annuity
and do not take into account the reduction with respect to years of credited
service after 1978 equal to a percentage (up to a maximum of 50%) of the
participant's Social Security benefit.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE (2)
AVERAGE FINAL ------------------------------------------------------------------
COMPENSATION (1) 15 20 25 30 35 40
- ------------------------- --------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$100,000................. $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500 $ 60,000
125,000................. 28,125 37,500 46,875 56,250 65,625 75,000
150,000................. 33,750 45,000 56,250 67,500 78,750 90,000
200,000................. 45,000 60,000 75,000 90,000 105,000 120,000
</TABLE>
- ------------------------
(1) A participant's "Average Final Compensation" is the average of the
participant's annual compensation in the four calendar years (whether or not
consecutive), out of the last ten years of the participant's employment, in
which the participant's annual compensation was highest. "Annual
compensation" includes salary and bonuses paid in such year. For this
purpose, years of employment with, and
55
<PAGE>
compensation paid by, Scott prior to the Acquisition are taken into account.
To comply with tax qualification requirements under the Internal Revenue
Code, annual compensation taken into account for any participant under the
Salaried Plan may not exceed $150,000. However, effective January 1, 1995,
the Company adopted a plan (the "SERP") to provide supplementary retirement
benefits where benefits are lost under the qualified plans as a result of
the statutory limitations and the benefits are reflected in the table.
Accordingly, the covered compensation of each executive officer for 1995 was
equal to the amounts of salary and bonus shown on the Summary Compensation
Table above. There also is a statutory limitation on the amount of annual
benefit which may be paid under the Salaried Plan. Benefits which accrued
under the Plan in excess of the statutory limitations are also protected
under the SERP.
(2) The named executive officers had the following full years of credited
service under the Salaried Plan as of September 30, 1995: Messrs. Frick, 34;
Wood, 6; and Herring, 21. Neither Mr. van As nor Mr. Leaman participates in
the salaried plan. The Company also adopted, effective January 1, 1995, the
Plan for Individual Deferred Compensation Arrangements in which Messrs. Wood
and Zamora participated. If Mr. Zamora remains with the Company for five
years from February 19, 1995, this Plan will pay him a supplemental benefit
as if he had an additional five years of credited service under the Salaried
Plan and five more after 10 years of employment. Mr. Wood will receive a
benefit under this Plan based upon an additional 10 years of credited
service if he is employed by the Company for five years from February 1,
1994.
In addition to the foregoing plans, the Company sponsors two collectively
bargained pension plans in the U.S. and one salaried plan in Belgium. The
collectively bargained plans provide benefits of stated amounts for each year of
credited service and the international plan provides benefits based on years of
service and compensation. No executive officer is covered by any of these other
plans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the issued and outstanding common stock of the Company is owned
beneficially and of record by Holdings. Holdings has pledged such stock to the
lenders under the Credit Agreement in support of its guarantee thereunder. In
the event of a default by Holdings in respect of its obligations under such
guarantee, the lenders under the Credit Agreement could exercise their powers
under such pledge and thereby obtain control of the Company. The following table
sets forth certain information with respect to the beneficial ownership of
common stock of Holdings ("Common Stock") as of September 27, 1995.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------------
NAME AND ADDRESS OF NUMBER OF PERCENT OF CLASS
BENEFICIAL OWNER SHARES OUTSTANDING (1)
- ------------------------------------------------ -------------- -----------------
<S> <C> <C>
Sappi Limited (2) 26,976,561 87.80
48 Ameshoff Street
Braamfontein 2001
Republic of South Africa
DLJ Merchant Banking Partners, L.P.
and certain of its affiliates ("DLJMB") 6,593,749(3) 19.28
140 Broadway
New York, NY 10005
UBS Capital LCC ("UBSCC") 1,408,594(3) 4.47
299 Park Avenue
New York, NY 10171
</TABLE>
- ------------------------
(1) Percentages have been calculated assuming, in the case of each person or
group listed, the exercise of all warrants and options owned (which are
exercisable within 60 days following September 27, 1995) by each such person
or group, respectively, but not the exercise of any warrants or options
owned by any other person or group.
56
<PAGE>
(2) Sappi's shares are held through one of its subsidiaries.
(3) Includes the following shares of Common Stock subject to Class B Warrants
(as defined in Item 13): DLJMB, 3,468,749 shares and UBSCC, 693,750 shares.
In addition, UBSCC's ownership includes 89,844 shares of Common Stock
subject to Class A Warrants.
SHAREHOLDERS AGREEMENT
In connection with the Acquisition, Sappi, an affiliate of Sappi, DLJMB,
UBSCC, Holdings and the Company (as successor by merger to SDW Acquisition)
entered into a shareholders agreement, as amended (the "Shareholders
Agreement"), which contains certain agreements with respect to the capital stock
and corporate governance of Holdings and the Company. The following summary
containing material provisions of the Shareholders Agreement is qualified in its
entirety by reference to the complete text of the Shareholders Agreement, a copy
of which has been filed as an exhibit to this Annual Report on Form 10-K.
Capitalized terms set forth below and not otherwise defined have the meanings
assigned thereto in the Shareholders Agreement.
CORPORATE GOVERNANCE
The Board of Directors of Holdings (the "Holdings Board") will initially
consist of nine members. Sappi and its permitted transferees (the "Sappi Group")
have the right to designate a majority of the Holdings Board (initially five
directors) subject to the conditions that (a) if the Sappi Group owns less than
50% of its original holdings of Common Stock, the Sappi Group will lose such
right and will be allowed to designate two directors of the Holdings Board and
(b) if the value of the Sappi Group's original holdings of Common Stock is below
a specified threshold, the Sappi Group will lose its right to designate a second
director. DLJMB and certain of its affiliates and their permitted transferees
(the "DLJ Group") originally had the right to designate two directors; however,
the value of the DLJ Group's original investment fell below a specified
threshold, and as a result, the DLJ Group lost its rights to designate a second
director. UBSCC and its permitted transferees (the "UBS Group") have the right
to designate one director. The chief executive officer of the Company will also
be a director and will not count as a designee for any of Sappi, DLJMB or UBSCC
(collectively, the "Investor Group"). If any of the Sappi Group, the DLJ Group
or the UBS Group should own less than a specific percentage of the Common Stock,
such group will, subject to certain exceptions, lose all rights to designate a
director, which rights would not be regained through the subsequent acquisition
of additional shares of Common Stock other than shares acquired upon the
exercise of certain warrants acquired by such Group.
"Board Approval" generally requires the affirmative vote of at least a
majority of the directors at a duly convened meeting of the Holdings Board at
which a Quorum (as defined below) is present. "Special Board Approval" generally
requires (a) Board Approval, (b) approval by at least one DLJ Group director (if
any) and (c) approval by at least one Sappi Group director (if any).
"Extraordinary Board Approval" generally requires (a) Board Approval, (b)
approval by at least one DLJ Group director (if any), (c) approval by at least
one Sappi Group director (if any) and (d) approval by a UBS Group director (if
any). A "Quorum" of the Holdings Board (or any committee thereof) generally
requires (a) a majority of directors present to be Sappi Group directors (so
long as the Sappi Group is entitled to designate a majority of Directors to the
Holdings Board); (b) a DLJ Group director (so long as the DLJ Group is entitled
to one director); and (c) after the Sappi Group loses its right to have a
majority of its directors on the Holdings Board, a Sappi Group director (so long
as the Sappi Group is entitled to one director). There is no requirement to have
a majority of Sappi Group directors present after the Sappi Group loses its
right to have a majority of its directors on the Holdings Board.
Each of the following actions requires Extraordinary Board Approval:
(a) prior to an Initial Public Offering, any amendment of the
Certificate or Articles of Incorporation or By-laws of Holdings or the
Company; (b) approval of any annual business plan or budget of Holdings or
the Company; (c) hiring or dismissal of the chief executive officer or chief
financial officer of Holdings or the Company; (d) certain issuances of
capital stock of Holdings or the Company (or issuances of securities
exchangeable, convertible or exercisable for such capital stock); (e) any
merger
57
<PAGE>
or similar transaction involving (i) Holdings or (ii) the Company (but only
if the Company is not the surviving corporation); (f) any sale of Holdings
or the Company; (g) any sale of all or substantially all the assets of
Holdings or the Company; (h) any transaction, contract or arrangement with
an affiliate of Holdings or with a Shareholder (or an affiliate thereof) if
such transaction is not in the business plan or budget (and identified
therein as an affiliate transaction) and involves an amount in excess of $1
million (Board Approval is required for certain transactions that involve $1
million or less); (i) entering into certain designated marketing agreements;
(j) the grant of any registration or similar rights to any person other than
various rights granted in connection with the Acquisition and (k) the
selection of the managing underwriters in connection with any Underwritten
Public Offering.
Each of the following transactions requires the approval specified below:
(a) any merger involving (i) the Company where it is the surviving
entity or (ii) any subsidiary of the Company; (b) any sale of a subsidiary
of the Company or any division of the Company; (c) any sale of substantially
all the assets of any subsidiary or division of the Company; (d) any change
in the capital structure (including the incurrence of indebtedness) of
Holdings or the Company or any subsidiary thereof; (e) any appointment or
dismissal of auditors and principal legal counsel of Holdings or the
Company; (f) any voluntary filing of or failure to oppose a bankruptcy
petition; (g) compensation of the chief executive officer of Holdings or the
Company and (h) any declaration or payment of any dividend by Holdings if
not paid out of earnings (other than dividends on common stock of the
Company so long as Holdings owns 100% of such common stock and dividends on
Holdings Preferred Stock or Senior Preferred Stock). Any transaction
described in (e) through (h) above requires Special Board Approval. Any
transaction described in clauses (a) through (d) above requires Special
Board Approval if it involves more than $50 million or if it involves more
than $25 million and is not specifically set forth in an approved budget or
business plan. Any such transaction requires Board Approval if it involves
more than $20 million or if it involves more than $10 million and is not
specifically set forth in an approved budget or business plan. In addition,
Special Board Approval is required for any contract involving the receipt or
expenditure of more than $20 million in any one year or more than $50
million over the term of the contract.
In addition to the transactions that are described in the preceding
paragraph as requiring Board Approval, the following transactions require Board
Approval: (a) any declaration or payment of any dividend or distribution by
Holdings or the Company if paid out of earnings (other than dividends on Company
common stock so long as Holdings owns 100% of such common stock); (b)
compensation of the chief financial officer of Holdings or the Company; and (c)
election or appointment of the members of the Company's Board of Directors.
Board Approval is also required for any other contract involving the receipt or
expenditure of more than $10 million in any one year or more than $25 million
over the term of the contract and for certain transactions, contracts or
arrangements with an affiliate of Holdings or with any Shareholder (or any
affiliate thereof).
PREEMPTIVE RIGHTS
Except in certain circumstances, upon any issuance of Common Stock
Equivalents of Holdings, the Sappi Group, the DLJ Group and the UBS Group have
preemptive rights with respect to such Common Stock Equivalents.
TRANSFER RESTRICTIONS
Except for certain permitted dispositions, members of the Sappi Group may
not transfer any Shares until the earlier of an Initial Public Offering by
Holdings or December 20, 1997 (the earlier of such dates, the "Restriction
Termination Date"). After the Restriction Termination Date, members of the Sappi
Group may transfer Shares as follows: transfers in a public offering upon
exercise of registration rights; transfers pursuant to Rule 144 of the
Securities Act (subject, in certain circumstances, to certain "first offer" and
"tag along" rights); transfers (subject to certain "first offer" and "tag along"
rights) to a person who becomes a party to the Shareholders Agreement and who is
not an Adverse Person; and transfers pursuant to certain specified pledge
arrangements. Shareholders who are not members of the Sappi Group (collectively,
the "Minority Shareholders") may transfer Shares as follows: subject to certain
restrictions, transfers in a public
58
<PAGE>
offering upon exercise of registration rights; transfers pursuant to Rule 144
(subject, in certain circumstances, to certain "first offer" and "tag along"
rights); transfers pursuant to "tag along" rights; and transfers (subject to
certain "first offer" and "tag along" rights) to a person who becomes a party to
the Shareholders Agreement and who is not an Adverse Person. Members of the
Sappi Group may participate in such Initial Public Offering only after the
Minority Shareholders have participated to the fullest extent requested by such
Minority Shareholders. After June 18, 1998, the DLJ Group or the UBS Group may,
under certain circumstances, transfer the right to designate a director of
Holdings (but not any Special Approval or Extraordinary Approval rights). Any
Shareholder may transfer Shares to a Permitted Transferee who is not an Adverse
Person and who becomes a party to the Shareholders Agreement or to Sappi
(subject to certain "tag along" rights) or any of its Permitted Transferees.
RIGHT OF FIRST OFFER
If either (i) any Minority Shareholder proposes to transfer any Shares to
any Person other than to one of its Permitted Transferees or to Sappi or any of
its Permitted Transferees or (ii) any member of the Sappi Group proposes to
transfer any Shares other than to one of its Permitted Transferees, such
Shareholder (the "Selling Shareholder") is required to offer to sell such
securities to certain other Shareholders party to the Shareholders Agreement and
Holdings. Sales of Shares to a Permitted Transferee of the seller or to Sappi or
any of its Permitted Transferees are not subject to these first offer
provisions.
PARTICIPATION RIGHTS
Under certain circumstances, if a member of the Sappi Group proposes to
transfer any Shares, it must offer the Minority Shareholders the right to
participate in such transfer. In addition, under certain circumstances, if any
member of the DLJ Group or the UBS Group is selling equity securities of
Holdings or the Company it must offer members of the group whose member is not
the selling Shareholder a right to participate in such sale.
REGISTRATION RIGHTS
Members of the Sappi Group, the DLJ Group and the UBS Group have the right,
subject to certain limitations, to require Holdings to register all or a portion
of their Registrable Stock (as defined) under the Act by giving written notice
to Holdings of such demand (a "Demand Registration"). Subject to certain
limitations, the Sappi Group and the DLJ Group each have the right to make up to
three Demand Registrations and the UBS Group has the right to make one Demand
Registration. The Shareholders Agreement also grants members of the DLJ Group
the right, under certain circumstances, to transfer one demand right to a
transferee of shares of Common Stock, subject to certain limitations. Holdings
has agreed to pay all reasonable expenses incurred in connection with the first
two Demand Registrations effected pursuant to the Shareholders Agreement. If a
Demand Registration involves an underwritten public offering, any underwriters
involved in such offering have the right, subject to certain limitations, to
limit the Registrable Stock included in such registration, in which case
Shareholders requesting the Demand Registration shall, subject to certain
exceptions, have priority over Shareholders exercising piggyback rights
(described below).
In addition, under certain circumstances, Shareholders holding Class B
Warrants can require registration by Holdings to permit the exercise of such
Class B Warrants.
PIGGYBACK RIGHTS
Under certain circumstances, if Holdings registers Common Stock under the
Securities Act of 1933, each Shareholder (and certain transferees of members of
the DLJ Group and UBS Group) will have the right, subject to certain
limitations, to require Holdings to include such Shareholder's (or transferee's)
Registrable Stock in such registration.
MISCELLANEOUS PROVISIONS
If certain of Sappi's foreign operations intend to sell products into the
United States that are the same as or substantially similar to, or compete with,
the Company's products, they will, subject to certain exceptions, be required to
enter into an arm's length marketing agreement with the Company, and if the
Company intends to sell products outside of the United States and Canada, it
will, subject to certain
59
<PAGE>
exceptions, be required to enter into arm's length marketing agreements with
affiliates of Sappi. Each Shareholder has agreed not to use Confidential
Information in any way that is reasonably likely to result in a material
detriment to the business of the Company in the United States or to the business
of Sappi and its affiliates outside the United States. Moreover, each
Shareholder has agreed not to disclose Confidential Information, subject to
certain limitations (including that members of the Sappi Group may disclose
Confidential Information to Sappi and its affiliates in the ordinary course of
business).
Any amendment to the Shareholders Agreement requires the approval of
Holdings (with Board Approval) and representatives of the Sappi Group, the DLJ
Group and the UBS Group (but only so long as a Group is entitled to designate
one director, subject to certain exceptions) but not the approval of the
Company.
TERMINATION
The Shareholders Agreement terminates on the earliest of (a) the tenth
anniversary of such Agreement unless earlier terminated, (b) subject to certain
exceptions, the merger, consolidation or sale of substantially all of the assets
of Holdings, (c) on the date on which none of the Sappi Group, the DLJ Group or
the UBS Group is entitled to designate a member of the Board or (d) upon written
agreement among Holdings, the Sappi Group (if it is entitled to designate a
member of the Board), the DLJ Group (if it is entitled to designate a member of
the Board) and the UBS Group (if it is entitled to designate a member of the
Board).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
S.D. WARREN'S MOBILE FACILITY: ARRANGEMENTS WITH SCOTT
S.D. Warren's Mobile, Alabama paper mill was historically operated by Scott
as part of an integrated facility (including a tissue mill, a pulp mill and
energy facility). In connection with the Acquisition, S.D. Warren entered into
long-term (25 years initially, subject to mill closures and certain FORCE
MAJEURE events) supply agreements with Scott for the supply of pulp and water
and the treatment of effluent at the Mobile facility. Wood pulp will be supplied
generally at market prices. Pulp prices will be discounted, primarily because of
the lower delivery costs due to the elimination of freight costs associated with
delivering pulp to Warren's Mobile paper mill and pulp quantities will be
subject to minimum (170,000 to 182,400 tons per year) and maximum (220,000 to
233,400 tons per year) limits. Prices for other services to be provided by Scott
will generally be based upon cost. Prior to the Acquisition, Scott sold its
energy facility at Mobile to Mobile Energy Services Corporation ("MESC"). In
connection with the sale of the energy facility, MESC entered into a long-term
agreement with Warren to provide electric power and steam to the paper mill at
rates generally comparable to market tariffs, including fuel cost and capital
recovery components. Scott, MESC and Warren have also entered into a long-term
shared facilities and services agreement (the "Shared Facilities Agreement")
with respect to medical and security services, common roads and parking areas,
office space and similar items and a comprehensive master operating agreement
providing for the coordination of services and integration of operations among
the energy facility, the paper mill, the pulp mill and the tissue mill. Annual
fees under the Shared Facilities Agreement are expected to be approximately $1.5
million per year through the 25 year term of the agreement. Warren has the
option to cancel certain non-essential services covered by the Shared Services
Agreement at any time prior to the end of the 25 year term. Scott had previously
announced its intention to sell the Mobile pulp mill, but any sale is apparently
on hold due to the merger between Scott and Kimberly-Clark Corporation. The
buyer of the mill will be bound by the terms of the above-mentioned agreements.
SHAREHOLDERS AGREEMENT
In connection with the Acquisition, Sappi, one of Sappi's affiliates, DLJMB,
UBSCC, Holdings and the Company (as successor by merger to SDW Acquisition)
entered into the Shareholders Agreement.
INVESTOR GROUP AGREEMENTS
The Company paid certain sponsor fees, reimbursed expenses for and provided
indemnification to, members of the Investor Group in connection with the
Acquisition and the financing thereof. Sappi received a sponsor fee in the
amount of $3,752,543 and UBSCC received a sponsor fee in the amount of $553,753.
In addition, Donaldson, Lufkin & Jenrette Securities Corporation, an affiliate
of DLJMB, received a sponsors
60
<PAGE>
fee in the amount of $2,768,766. The Company pays a yearly advisory fee to Sappi
and/or its Affiliates of up to $1.0 million. As a result of this fee, Sappi and
its Affiliates generally will not charge the Company for time spent on Company
matters by the senior executive officers of Sappi and its Affiliates or for
related travel and out-of-pocket expenses (see Note 21 to Financial Statements).
TRANSACTIONS INVOLVING DLJMB AND UBSCC
In connection with the Acquisition (i) DLJMB purchased for an aggregate
consideration of $65.0 million, $31.25 million in liquidation preference of
Holdings Preferred Stock, Class B Warrants (the "Class B Warrants") to acquire
3,593,749 shares of Common Stock, and 3,125,000 shares of Common Stock; (ii)
UBSCC, purchased for an aggregate consideration of $20.2 million, $6.25 million
in liquidation preference of the Holdings Preferred Stock, Class B Warrants to
acquire 718,750 shares of Common Stock, 625,000 shares of Common Stock and
300,000 Units as defined in Note 21 to the Financial Statements, (iii)
Donaldson, Lufkin and Jenrette Securities Corporation, an affiliate of DLJMB,
provided investment banking services to Holdings and Warren in connection with
the offering of 2,700,000 Units, for which it received a customary underwriting
discount; and (iv) an affiliate of DLJMB provided a standby bridge loan
commitment for which it received approximately $5.6 million and was reimbursed
for expenses.
Following the Acquisition, the Units became separately transferable and
UBSCC sold the Senior Preferred Stock which comprised a portion of the Units.
On July 6, 1995, DLJMB sold 1,250,000 shares of Holdings Preferred Stock and
125,000 Class B Warrants and UBSCC sold 250,000 shares of Holdings Preferred
Stock and 25,000 Class B Warrants.
TRANSACTIONS WITH RELATED PARTIES
See Note 21 to the Financial Statements for information related to
transactions with related parties.
61
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS. The financial statements listed under Item 8
are filed as a part of this Annual Report.
(2) FINANCIAL STATEMENT SCHEDULES. FINANCIAL STATEMENT SCHEDULE
VIII--VALUATION AND QUALIFYING ACCOUNTS LISTED UNDER ITEM 8 IS FILED
AS PART OF THIS ANNUAL REPORT.
(3) EXHIBITS. The exhibits listed on the accompanying Index to Exhibits
are filed as a part of this Annual Report.
(b) REPORTS ON FORM 8-K. The Company did not file any Current Reports on
Form 8-K during the last quarter of the period covered by this Annual
Report.
62
<PAGE>
S.D. WARREN COMPANY
INDEX TO EXHIBITS
ITEM 14(A)(3)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
- ------------- -------------------------------------------------------------------- -------------------------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of the Registrant. Incorporated herein by
reference to Exhibit 3.1 to
Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
3.2 By-laws of the Registrant. Incorporated herein by
reference to Exhibit 3.2 to
Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
4.1 Certificate of Designations, Preferences and Relative, Incorporated herein by
Participating, Optional and other Special Rights of Preferred Stock reference to Exhibit 4.3 to
and Qualifications, Limitations and Restrictions thereof of 14% the Company's Registration
Series B Senior Exchangeable Preferred Stock due 2006 of S.D. Statement 33-88496 on Form
Warren Company, dated as of December 20, 1994. S-4.
4.2 Form of the Exchange Debenture Indenture between S.D. Warren Company Incorporated herein by
and the United States Trust Company of New York relating to S.D. reference to Exhibit 4.4 to
Warren Company's 14% Series A Subordinated Exchange Debentures due the Company's Registration
2006 and 14% Series B Subordinated Exchange Debentures due 2006. Statement 33-88496 on Form
S-4.
10.1 Credit and Guarantee Agreement dated as of December 20, 1994 among Incorporated herein by
SDW Holdings Corporation, SDW Acquisition Corporation (and reference to Exhibit 10.1 to
following the merger, S.D. Warren Company as successor thereto), Amendment No. 1 to the
the Lenders (as defined therein) and Chemical Bank, as Agent. Company's Registration
Statement 33-88496 on Form
S-4.
10.2 Securities Subscription Agreement, dated as of December 20, 1994, Incorporated herein by
among SDW Holdings Corporation, SDW Acquisition Corporation (and reference to Exhibit 10.3 to
following the merger, S.D. Warren Company as successor thereto), the Company's Registration
and each of Sappi Limited, Sappi Deutschland GmbH, DLJ Merchant Statement 33-88496 on Form
Banking Partner, L.P. and certain of its affiliates and UBS Capital S-4.
Corporation.
10.3 Second Amended and Restated Shareholders Agreement dated as of Incorporated herein by
December 20, 1994, among Sappi Limited, Sappi Deutschland GmbH, DLJ reference to Exhibit 10.3
Merchant Banking Partners, L.P. and certain of its affiliates, UBS to the Company's Registration
Capital Corporation, SDW Holdings Corporation and S.D. Warren Statement 33-88496 on Form
Company as successor to SDW Acquisition Corporation. 10-K.
</TABLE>
63
<PAGE>
S.D. WARREN COMPANY
INDEX TO EXHIBITS
ITEM 14(A)(3)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
- ------------- -------------------------------------------------------------------- -------------------------------
<S> <C> <C>
10.4 Participation Agreement dated as of January 1, 1982 among Scott Incorporated herein by
Paper Company, as Purchaser, General Electric Credit Corporation, reference to Exhibit 10.5 to
as Owner Participant and The Connecticut Bank and Trust Company, as Amendment No. 1 to the
Owner Trustee. Company's Registration
Statement 33-88496 on Form
S-4.
10.5 Refinancing Participation Agreement dated as of December 15, 1986, Incorporated herein by
among Scott Paper Company, as Purchaser, General Electric Credit reference to Exhibit 10.6 to
Corporation, as Owner Participant, and The Connecticut Bank and Amendment No. 1 to the
Trust Company National Association, as Owner Trustee. Company's Registration
Statement 33-88496 on Form
S-4.
10.6 Power Sales Agreement dated as of January 1, 1982, between The Incorporated herein by
Connecticut Bank and Trust Company, Owner Trustee, as Seller, and reference to Exhibit 10.7 to
Scott Paper Company, as Purchaser, as amended by the First Amendment No. 1 to the
Amendment dated as of December 15, 1986. Company's Registration
Statement 33-88496 on Form
S-4.
10.7 Ground Lease Agreement dated as of January 1, 1982 between Scott Incorporated herein by
Paper Company, as Lessor, and The Connecticut Bank and Trust reference to Exhibit 10.8 to
Company, Owner Trustee, as Lessee, as amended by First Amendment Amendment No. 1 to the
dated as of December 15, 1986. Company's Registration
Statement 33-88496 on Form
S-4.
10.8 Operating Agreement dated as of January 1, 1982 between The Incorporated herein by
Connecticut Bank and Trust Company, as Owner Trustee, and Scott reference to Exhibit 10.9 to
Paper Company, as Operator, as amended by First Amendment dated as Amendment No. 1 to the
of December 15, 1986. Company's Registration
Statement 33-88496 on Form
S-4.
10.9 Tax Indemnification Agreement dated as of January 1, 1982, among Incorporated herein by
General Electric Credit Corporation, Owner Participant, The reference to Exhibit 10.10 to
Connecticut Bank and Trust Company, as Owner Trustee, and Scott Amendment No. 1 to the
Paper Company, Purchaser, as amended by the Amendment dated as of Company's Registration
November 25, 1986. Statement 33-88496 on Form
S-4.
</TABLE>
64
<PAGE>
S.D. WARREN COMPANY
INDEX TO EXHIBITS
ITEM 14(A)(3)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
- ------------- -------------------------------------------------------------------- -------------------------------
<S> <C> <C>
10.10 Facilities Agreement dated as of January 1, 1982 between Scott Paper Incorporated herein by
Company and The Connecticut Bank and Trust Company, as Owner reference to Exhibit 10.11 to
Trustee, as amended by First Amendment dated as of December 15, Amendment No. 1 to the
1986. Company's Registration
Statement 33-88496 on Form
S-4.
10.11 Indenture and Security Agreement dated as of December 15, 1986, Incorporated herein by
among The Connecticut Bank and Trust Company National Association, reference to Exhibit 10.12 to
as Westbrook Owner Trustee and Winslow Owner Trustee, Scott Paper Amendment No. 1 to the
Company, and The Bank of New York, as Indenture Trustee. Company's Registration
Statement 33-88496 on Form
S-4.
10.12 Transfer Agreement dated as of June 29, 1986 between Scott Paper Incorporated herein by
Company and S.D. Warren Company, as amended October 25, 1990, as reference to Exhibit 10.13 to
further amended November 1, 1993. Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
10.13 Stock Purchase Agreement by and among Scott Paper Company, Sappi Incorporated herein by
Limited and SDW Acquisition Corporation dated as of October 8, reference to Exhibit 10.14
1994. Company's Registration
Statement 33-88496 on Form
S-4.
10.14 Supplemental Agreement to Stock Purchase Agreement dated as of Incorporated herein by
October 8, 1994 by and among Scott Paper Company, Sappi Limited and reference to Exhibit 10.15 to
SDW Acquisition Corporation dated as of December 19, 1994. Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
10.14(a) Extension of Time Period specified in Section 1.6(e) of the Stock Incorporated herein by
Purchase agreement dated as of October 8, 1994 by and among Scott reference to Exhibit 10.15(a)
Paper Company, Sappi Limited and SDW Acquisition Corporation. to Amendment No. 5 to the
Company's Registration
Statement 33-88496 on Form
S-4.
</TABLE>
65
<PAGE>
S.D. WARREN COMPANY
INDEX TO EXHIBITS
ITEM 14(A)(3)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
- ------------- -------------------------------------------------------------------- -------------------------------
<S> <C> <C>
10.15 Assignment and Assumption Agreement (relating to Westbrook Biomass Incorporated herein by
Financing) dated as of December 20, 1994 between Scott Paper reference to Exhibit 10.16 to
Company and S.D. Warren Company. Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
10.16 General Assignment and Assumption Agreement dated as of December 20, Incorporated herein by
1994 by and between Scott Paper Company, Scott Continental N.V. and reference to Exhibit 10.17 to
S.D. Warren Company. Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
10.17 Contract dated as of August 1, 1978 between Central Maine Power Incorporated herein by
("CMP") and S.D. Warren Company, as amended by Amendment dated as reference to Exhibit 10.18 to
of May 15, 1982, as further amended by Amendment dated as of Amendment No. 1 to the
October 27, 1982. Company's Registration
Statement 33-88496 on Form
S-4.
10.18 Westbrook Long-term Contract for the Sale of Electricity to CMP, Incorporated herein by
dated October 27, 1982 between CMP and Scott Paper Company, S.D. reference to Exhibit 10.19 to
Warren Division. Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
10.19 Agreement for Electric Service for the Westbrook Mill of S.D. Warren Incorporated herein by
Company dated as of August 1, 1983 between CMP and S.D. Warren reference to Exhibit 10.20 to
Company. Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
10.20 Agreement for Electric Service for Scott Paper Company, S.D. Warren Incorporated herein by
Division, Somerset County, dated as of December 1, 1982 between CMP reference to Exhibit 10.21 to
and S.D. Warren, as amended by Amendment dated as of July 9, 1990. Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
</TABLE>
66
<PAGE>
S.D. WARREN COMPANY
INDEX TO EXHIBITS
ITEM 14(A)(3)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
- ------------- -------------------------------------------------------------------- -------------------------------
<S> <C> <C>
10.21 Power Purchase Agreement between Scott Paper Company, S.D. Warren Incorporated herein by
Division (Somerset) and CMP dated as of December 1, 1982, as reference to Exhibit 10.22 to
amended by Amendment dated April 11, 1983, as further amended by Amendment No. 1 to the
Amendment dated July 9, 1990. Company's Registration
Statement 33-88496 on Form
S-4.
10.22 Pulp Supply Agreement between Scott Paper Company and S.D. Warren Incorporated herein by
Company dated as of December 20, 1994. reference to Exhibit 10.23 to
Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
10.23 Paper Mill Energy Services Agreement between S.D. Warren Company and Incorporated herein by
Mobile Energy Services Company, Inc. dated as of December 12, 1994. reference to Exhibit 10.24 to
Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
10.24 Master Operating Agreement among Scott Paper Company, S.D. Warren Incorporated herein by
Company and Mobile Energy Services Company, Inc. dated as of reference to Exhibit 10.25 to
December 12, 1994. Amendment No. 1 to the
Company's Registration
Statement 33-88496 on Form
S-4.
10.25 Purchase Agreement dated as of December 13, 1994, among SDW Holdings Incorporated herein by
Corporation, SDW Acquisition Corporation, Sappi Limited, DLJ reference to Exhibit 1.1 to
Merchant Banking, Inc. and certain of its affiliates, UBS Capital the Company's Registration
Corporation and Donaldson, Lufkin & Jenrette Securities Corporation Statement 33-88496 on Form
(the "Purchase Agreement"). S-4.
10.26 Amendment Number 1 to the Purchase Agreement, dated as of December Incorporated herein by
19, 1994, among SDW Holdings Corporation, SDW Acquisition reference to Exhibit 1.2 to
Corporation, Sappi Limited, DLJ Merchant Banking, Inc. and certain the Company's Registration
of its affiliates, UBS Capital Corporation and Donaldson, Lufkin & Statement 33-88496 on Form
Jenrette Securities Corporation. S-4.
</TABLE>
67
<PAGE>
S.D. WARREN COMPANY
INDEX TO EXHIBITS
ITEM 14(A)(3)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
- ------------- -------------------------------------------------------------------- -------------------------------
<S> <C> <C>
10.27 Amendment Number 2 to the Purchase Agreement, dated as of December Incorporated herein by
20, 1994, among SDW Holdings Corporation, S.D. Warren Company and reference to Exhibit 1.3 to
Donaldson, Lufkin & Jenrette Securities Corporation. the Company's Registration
Statement 33-88496 on Form
S-4.
10.28 Registration Rights Agreement, dated as of December 20, 1994 by and Incorporated herein by
between SDW Acquisition Corporation and Donaldson, Lufkin & reference to Exhibit 1.4 to
Jenrette Securities Corporation (the "Registration Agreement"). the Company's Registration
Statement 33-88496 on Form
S-4.
10.29 Amendment Number 1 to the Registration Rights Agreement, dated as of Incorporated herein by
December 20, 1994, by and between S.D. Warren Company and reference to Exhibit 1.5 to
Donaldson, Lufkin & Jenrette Securities Corporation. the Company's Registration
Statement 33-88496 on Form
S-4.
21.1 Subsidiaries of the Registrant. Incorporated herein by
reference to Exhibit 21.1 to
the Company's Registration
Statement 33-88496 on Form
S-4.
27.0 Financial Data Schedules
</TABLE>
68
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS CAUSED THIS AMENDED REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
S.D. WARREN COMPANY
Date: September 11, 1996 By: /s/ MONTE R. HAYMON
---------------------------------
Monte R. Haymon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
AMENDED REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
/s/ MONTE R. HAYMON President, Chief September 11,
- ----------------------------------- Executive Officer and 1996
Monte R. Haymon Director (Principal
Executive Officer)
/s/ TREVOR L. LARKAN Chief Financial Officer, September 11,
- ----------------------------------- Vice President, 1996
Trevor L. Larkan Treasurer, Secretary and
Director (Principal
Financial and Accounting
Officer)
/s/ JAMES H. FRICK, JR. Vice President and September 11,
- ----------------------------------- Director 1996
James H. Frick, Jr.
/s/ E. DANNIS HERRING Vice President and September 11,
- ----------------------------------- Director 1996
E. Dannis Herring
/s/ O. HARLEY WOOD Vice President and September 11,
- ----------------------------------- Director 1996
O. Harley Wood
69
<PAGE>
Printed in U.S.A. on Patina 70 lb/104 gsm text and 65 lb/176 gsm cover.
This paper is made from a renewable resource.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM S.D. WARREN
COMPANY'S (THE "COMPANY") CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
9/27/95 AND BALANCE SHEET AS OF 9/27/95 FOUND ON PAGES 21 & 22, RESPECTIVELY,
OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K/A FOR THE YEAR ENDED 9/27/95,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1995
<PERIOD-START> DEC-21-1994
<PERIOD-END> SEP-27-1995
<CASH> 62,200
<SECURITIES> 0
<RECEIVABLES> 135,000
<ALLOWANCES> (5,600)
<INVENTORY> 226,500
<CURRENT-ASSETS> 462,600
<PP&E> 1,215,700
<DEPRECIATION> 65,000
<TOTAL-ASSETS> 1,887,600
<CURRENT-LIABILITIES> 285,000
<BONDS> 1,048,800
74,500
0
<COMMON> 0
<OTHER-SE> 364,800
<TOTAL-LIABILITY-AND-EQUITY> 1,887,600
<SALES> 1,155,800
<TOTAL-REVENUES> 1,155,800
<CGS> 886,000
<TOTAL-COSTS> 886,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 200,000
<INTEREST-EXPENSE> 106,000
<INCOME-PRETAX> 70,300
<INCOME-TAX> 28,200
<INCOME-CONTINUING> 42,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,100
<EPS-PRIMARY> 330
<EPS-DILUTED> 330
</TABLE>
