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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q FINANCIAL INFORMATION*
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1996
Commission file number: 33-88496*
S. D. WARREN COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2366983
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(617-423-7300)
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes __ No __
Not Applicable X*
This report consists of 18 sequentially numbered pages.
- ----------------------------------------------------------------------------
* This report is being voluntarily filed with the Securities and Exchange
Commission (the "Commission") pursuant to the registrant's contractual
obligations to file with the Commission all financial information that would
be required to be filed on a Form 10-Q. The registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
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S. D. WARREN COMPANY
INDEX
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Condensed Statements of Operations for the three months
ended March 29, 1995 and April 3, 1996 3
Condensed Statements of Operations for the period September 24,
1994 through December 20, 1994, December 21, 1994 through
March 29, 1995 and the six months ended April 3, 1996 4
Condensed Balance Sheets at September 27, 1995 and April 3, 1996 5
Condensed Statements of Cash Flows for the period September 24,
1994 through December 20, 1994, December 21, 1994 through
March 29, 1995 and the six months ended April 3, 1996 6
Notes to Condensed Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE 18
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S. D. WARREN COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 29, 1995 APRIL 3, 1996
------------------ ------------------
S. D. WARREN S. D. WARREN
COMPANY AND COMPANY AND
SUBSIDIARIES SUBSIDIARIES
------------------ ------------------
<S> <C> <C>
Sales $349.2 $365.5
Cost of goods sold 264.7 293.1
------ ------
Gross profit 84.5 72.4
Selling, general and administrative expense 28.6 32.7
------ ------
Income from operations 55.9 39.7
Other income (expense), net 0.7 (1.6)
Interest expense 32.0 30.0
------ ------
Income before income taxes 24.6 8.1
Income tax expense 10.3 3.4
------ ------
Net income 14.3 4.7
Dividends and accretion on Series B preferred stock 3.1 3.2
------ ------
Net income applicable to common stockholder $ 11.2 $ 1.5
------ ------
------ ------
Net earnings per common share (in millions) $ 0.11 $ 0.02
------ ------
------ ------
Weighted average number of shares outstanding 100 100
------ ------
------ ------
</TABLE>
See accompanying notes to condensed financial statements
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S. D. WARREN COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD SEPTEMBER PERIOD DECEMBER SIX MONTHS
25, 1994 THROUGH 21, 1994 THROUGH ENDED APRIL 3,
DECEMBER 20, 1994 MARCH 29, 1995 1996
----------------- ---------------- --------------
S. D. WARREN
COMPANY AND S. D. WARREN S. D. WARREN
CERTAIN RELATED COMPANY AND COMPANY AND
AFFILIATES SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
----------------- ---------------- --------------
<S> <C> <C> <C>
Sales $313.6 $370.9 $720.4
Cost of goods sold 258.7 278.8 579.4
------ ------ ------
Gross profit 54.9 92.1 141.0
Selling, general and administrative expense 22.1 30.2 58.6
------ ------ ------
Income from operations 32.8 61.9 82.4
Other income (expense), net (0.5) 0.7 0.5
Interest expense 2.3 43.8 61.3
------ ------ ------
Income before income taxes 30.0 18.8 21.6
Income tax expense 12.0 7.9 8.9
------ ------ ------
Net income $ 18.0 10.9 12.7
------
------
Dividends and accretion on Series B preferred stock 3.4 6.6
------ ------
Net income applicable to common stockholder $ 7.5 $ 6.1
------ ------
------ ------
Net earnings per common share (in millions) $ 0.08 $ 0.06
------ ------
------ ------
Weighted average number of shares outstanding 100 100
------ ------
------ ------
</TABLE>
See accompanying notes to condensed financial statements
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S. D. WARREN COMPANY
CONDENSED BALANCE SHEETS
(IN MILLIONS, UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 27, 1995 APRIL 3, 1996
------------------ -------------
S. D. WARREN S. D. WARREN
COMPANY AND COMPANY AND
SUBSIDIARIES SUBSIDIARIES
------------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 62.2 $ ---
Trade accounts receivable, net 129.4 128.4
Other receivables 24.5 29.3
Inventories 226.5 238.1
Other current assets 11.8 12.2
-------- --------
Total current assets 454.4 408.0
Plant assets, net 1,150.7 1,123.2
Timber resources, net 98.4 98.1
Goodwill, net 114.0 111.6
Deferred financing fees, net 53.1 49.1
Other assets, net 24.7 22.4
-------- --------
Total assets $1,895.3 $1,812.4
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 78.6 $ 121.6
Accounts payable 112.2 90.3
Accrued and other current liabilities 108.2 105.8
-------- --------
Total current liabilities 299.0 317.7
-------- --------
Long-term debt:
Term loans 553.8 436.1
Senior subordinated notes 375.0 375.0
Other 120.0 119.5
-------- --------
1,048.8 930.6
-------- --------
Other liabilities 103.8 107.7
-------- --------
Total liabilities 1,451.6 1,356.0
-------- --------
Commitments and contingencies (Note 5)
Series B redeemable exchangeable preferred stock (liquidation value,
$83.5 and $89.7, respectively) 74.5 81.1
-------- --------
Stockholder's equity:
Common stock --- ---
Capital in excess of par value 331.8 331.8
Retained earnings 37.4 43.5
-------- --------
Total stockholder's equity 369.2 375.3
-------- --------
Total liabilities and stockholder's equity $1,895.3 $1,812.4
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed financial statements
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S. D. WARREN COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS, (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD SEPTEMBER PERIOD DECEMBER SIX MONTHS
25, 1994 THROUGH 21, 1994 THROUGH ENDED APRIL 3,
DECEMBER 20, 1994 MARCH 29, 1995 1996
----------------- ---------------- --------------
S. D. WARREN
COMPANY AND S. D. WARREN S. D. WARREN
CERTAIN RELATED COMPANY AND COMPANY AND
AFFILIATES SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
----------------- ---------------- --------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 18.0 $ 10.9 $ 12.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, cost of timber harvested and
amortization 28.8 28.4 57.2
Other 11.6 --- 5.9
Changes in assets and liabilities:
Trade accounts receivable, net (1.7) (15.3) 1.0
Inventories 3.7 (30.8) (11.6)
Accounts payable, accrued and other current
liabilities 6.0 51.8 (35.7)
Accruals for restructuring programs (12.7) --- ---
Other assets and liabilities (15.6) 9.1 (4.4)
------ -------- ------
Net cash provided by operating activities 38.1 54.1 25.1
------ -------- ------
Cash Flows from Investing Activities:
Acquisition, net of related financing costs --- (1,493.7) ---
Proceeds from disposals of plant assets --- --- 2.1
Investments in plant assets and timber resources (14.5) (4.2) (18.3)
------ -------- ------
Net cash used in investing activities (14.5) (1,497.9) (16.2)
------ -------- ------
Cash Flows from Financing Activities:
Proceeds from debt --- 1,105.0 ---
Repayments of debt (0.5) (138.2) (75.0)
Proceeds from equity contribution --- 331.8 ---
Proceeds from issuance of preferred stock, net of
expenses --- 65.4 ---
Bank overdraft --- 4.8 3.9
Predecessor Corporation's parent company capital
infusions, net 47.2 --- ---
------ -------- ------
Net cash provided by (used in) financing activities 46.7 1,368.8 (71.1)
------ -------- ------
Net change in cash and cash equivalents 70.3 (75.0) (62.2)
Cash and cash equivalents, at beginning of period 4.7 75.0 62.2
------ -------- ------
Cash and cash equivalents, at end of period $ 75.0 $ --- $ ---
------ -------- ------
------ -------- ------
</TABLE>
See accompanying notes to condensed financial statements
6
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S. D. WARREN COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements include the
accounts of S. D. Warren Company and its subsidiaries ("S. D. Warren",
"Warren" or the "Company"). Intercompany balances and transactions have been
eliminated in the preparation of the accompanying unaudited condensed
financial statements.
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 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
hereinafter as the "Predecessor Corporation"). Immediately following the
Acquisition, SDW Acquisition merged with and into Warren, with Warren (the
"Successor Corporation") surviving. The Company is wholly-owned by Holdings
which in turn is majority-owned by Sappi Limited ("Sappi").
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 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 Company's financial statements for
the periods subsequent to the Acquisition date are not comparable to the
Predecessor Corporation's financial statements for periods prior to the
Acquisition.
PREDECESSOR CORPORATION
The unaudited condensed combined interim financial information for the period
September 25, 1994 through December 20, 1994 refers to the Predecessor
Corporation. The unaudited condensed combined financial information for such
period of the Predecessor Corporation, is derived from the audited financial
statements for such period included in the Company's 1995 Annual Report on
Form 10-K. The unaudited condensed combined financial statements of the
Predecessor Corporation are based upon financial information made available
to the Company by Scott, which until December 20, 1994 owned the Company and
accounted for the Company as part of Scott's consolidated financial
statements.
UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary for the fair presentation of the Company's financial
position and results of operations. The accompanying unaudited condensed
financial statements together with the interim condensed financial statements
of the Predecessor should be read in
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conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K and the previously issued Quarterly Report on Form
10-Q Financial Information for the quarter ended January 3, 1996. The
unaudited condensed results of operations for the three and six months ended
April 3, 1996 are not necessarily indicative of results that could be
expected for a full year.
The Company's income before income taxes for the period December 21, 1994
through March 29, 1995 and the three months ended March 29, 1995 have been
increased by $9.7 million and $9.9 million, respectively, from amounts
previously reported as a result of the finalization of purchase accounting
adjustments made in the last quarter of fiscal 1995. In addition, certain
prior period amounts have been reclassified to conform to their current
presentation.
NOTE 2. RELATED PARTY RECEIVABLE
During the three and six months ended April 3, 1996, the Company sold
products to certain subsidiaries of Sappi ("affiliates") at market rates (in
U.S. Dollars). These affiliates then sold the Company's products to external
customers. Proceeds from sales to affiliates are remitted to Warren net of
sales commissions. The Company sold approximately $26.6 million and $42.2
million to affiliates and incurred fees of approximately $1.6 million and
$2.7 million relating to these sales for the three and six months ended April
3, 1996, respectively. Trade accounts receivable at April 3, 1996 includes
approximately $22.8 million due from affiliates. The Company is in the
process of finalizing the written agreements for transactions with these
affiliates.
NOTE 3. INVENTORIES (IN MILLIONS)
SEPTEMBER 27, 1995 APRIL 3, 1996
------------------ -------------
Finished products $ 89.8 $114.4
Work in process 51.0 46.7
Pulp, logs and pulpwood 33.2 27.4
Maintenance parts and other supplies 52.5 49.6
------ ------
$226.5 $238.1
------ ------
------ ------
NOTE 4. LONG-TERM DEBT
On April 23, 1996 the Company entered into an agreement with the Bank of
Montreal ("BMO") whereby BMO, through its securities unit, Nesbitt Burns
Securities ("Nesbitt"), as agent, will provide a five-year, $110.0 million
revolving accounts receivable securitization facility (the "A/R facility")
subject to certain terms and conditions. Under this facility, the Company
established a new subsidiary, S. D. Warren Finance Co. ("SDWF"), into which
the Company will sell, on a non-recourse basis, all of its rights and
interest in its accounts receivable. SDWF in turn will sell certain accounts
receivable to an unrelated financial institution under similar terms.
The A/R facility was entered into in conjunction with an amendment to the
Company's credit facility under which the proceeds from the A/R facility were
used to prepay $100.0 million of the term loans under the credit facility.
Approximately $3.0 million of financing fees that had previously been
deferred will be written off in the third fiscal quarter as a result of this
prepayment.
The amendments to the Company's credit facility included changes to certain
provisions relating to restrictive covenants including, among other things,
the ability to incur debt, pay dividends and sell certain assets. In
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addition, certain provisions relating to interest rates, fees, collateral,
prepayments and affirmative covenants have also been amended.
The current maturities of long-term debt balance of $121.6 million at April
3, 1996 primarily represents the aforementioned prepayment and amounts
payable in December 1996 under the Company's term loan facilities. The
Company has certain prepayment requirements based upon excess cash flow, as
defined. During the six months ended April 3, 1996 payments totaling
approximately $74.9 million were made pursuant to the excess cash flow
requirement. Amounts paid pursuant to the excess cash flow requirement
during the six months ended April 3, 1996 fulfill the majority of the term
loan payments that otherwise would have been required to be paid in June 1996
and reduce future semi-annual installments on a pro rata basis.
NOTE 5. ENVIRONMENTAL MATTERS AND LITIGATION
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. None of these expenditures,
individually or in the aggregate, is expected to have a material adverse
effect on the Company's business or financial condition.
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 has received approval from the Muskegon Department of
Natural Resources ("DNR") for alternative effluent limits which are now
reflected in the local limits. Although the Company believes that it will
continue to be successful in its various administrative and judicial
challenges to more restrictive limits and in any negotiations of such limits
with environmental regulatory authorities, the imposition of more restrictive
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
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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 DNR regarding a
wastewater surge pond adjacent to the Muskegon Lake. The DNR is presently
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 would 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 costs 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, 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.
None of these environmental 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.
The Company does not believe that it will have any liability under recent
emergency legislation enacted in 1995 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.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The Acquisition (as defined in the Notes to Condensed Financial Statements)
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 Condensed 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 Company's financial statements for periods subsequent to the Acquisition
are not comparable to the Predecessor Corporation's financial statements for
the periods prior to the Acquisition.
This discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially
from those set forth in the forward-looking statements.
The following discussion and analysis should be read in conjunction with the
accompanying Condensed Financial Statements and the Notes thereto, the
Company's Annual Report on Form 10-K and the previously issued Quarterly
Report on Form 10-Q Financial Information for the quarter ended January 3,
1996.
MARKET CONDITIONS
The Company's sales volumes decreased during the six months ended April 3,
1996 due to a softening in orders experienced by the industry across certain
product lines primarily resulting from merchants, printers and other
converters reducing their inventory levels which had increased above normal
levels. The decline in apparent demand resulted in reduced prices, with
discounting occurring on certain paper product grades. Although the Company
realized lower net selling prices as a result of discounting during the
first half of fiscal year 1996 as compared to the prices realized at the end
of fiscal year 1995, net selling prices realized during the three and six
months ended April 3, 1996 are higher than those realized during the same
periods last year. In addition, the cost of raw materials decreased during
the six months ended April 3, 1996 as compared to prices at the end of fiscal
year 1995 due to the decrease in the market price of pulp. However, the
Company manufactures approximately 65% of its pulp requirements which reduces
the Company's exposure to fluctuations in the market price for pulp.
As a result of the weaker market conditions, the Company temporarily reduced
production levels at certain of its manufacturing facilities during the first
quarter of this fiscal year. The reduction of inventory levels by the
Company's customers and the weaker market conditions continued through the
second fiscal quarter. The Company expects that this weaker trend will
reverse by the end of the third fiscal quarter and is forecasting an increase
in demand during the final fiscal quarter. To the extent that the weaker
market trend does not reverse or becomes more pervasive within the Company's
existing product lines, the Company's sales, gross margins and cash flows
will continue to be adversely effected.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 3, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH 29,
1995
SALES
The Company's sales for the three months ended April 3, 1996 were $365.5
million compared to $349.2 million for the three months ended March 29, 1995,
an increase of $16.3 million or 4.7%. The increase is primarily due to a
2.8% increase in average net revenue per ton and a 1.9% increase in shipment
volume during such period.
COST OF GOODS SOLD
The Company's costs of goods sold for the three months ended April 3, 1996
were $293.1 million compared to $264.7 million for the three months ended
March 29, 1995, an increase of $28.4 million or 10.7%. This increase
primarily resulted from lower levels of production at certain of its
manufacturing facilities and the effect of a power outage at one of the
Company's principal manufacturing facilities. The power outage resulted in a
loss of production for approximately 24 days. The effect of the power outage
was partially offset by the deferral of approximately $5.5 million of
manufacturing costs that were covered by the Company's business interruption
insurance. The Company also adjusted the carrying value of certain
inventories to net realizable value during this quarter. These increases
were partially offset by a net reduction in labor costs.
The increase in cost of goods sold resulted in gross profit as a percent of
sales decreasing to 19.8% for the three months ended April 3, 1996 from 24.2%
for the same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $32.7 million for the three
months ended April 3, 1996 compared to $28.6 million for the three months
ended March 29, 1995, an increase of $4.1 million. Selling, general and
administrative expenses as a percent of sales increased to 8.9% for the three
months ended April 3, 1996 compared to 8.2% for the three months ended March
29, 1995. This increase is primarily due to an increase in administrative
expenses primarily resulting from the costs incurred to maintain the
appropriate level of administrative services that were previously performed
by Scott.
INTEREST EXPENSE
The Company's interest expense for the three months ended April 3, 1996 was
$30.0 million compared to $32.0 million for the three months ended March 29,
1995. Interest expense includes the amortization of deferred financing fees.
SIX MONTHS ENDED APRIL 3, 1996 COMPARED TO THE SIX MONTHS ENDED MARCH 29, 1995
The following discussion compares the six months ended April 3, 1996 with the
six months ended March 29, 1995. As used herein, the six months ended March
29, 1995 refers to the Predecessor Corporation for the period September 24,
1994 through December 20, 1994 combined with the Successor Corporation for
the period December 21, 1994 through March 29, 1995.
12
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SALES
The Company's sales for the six months ended April 3, 1996 were $720.4
million compared to $684.5 million for the six months ended March 29, 1995,
an increase of $35.9 million or 5.2%. The increase is primarily due to a
9.6% increase in average net revenue per ton partially offset by a 4.0%
decrease in shipment volume during such period.
COST OF GOODS SOLD
The Company's costs of goods sold for the six months ended April 3, 1996 were
$579.4 million compared to $537.5 million for the six months ended March 29,
1995, an increase of $41.9 million or 7.8%. This increase is attributable to
the increase in raw material cost for purchased pulp during the first quarter
and the aforementioned lower production levels, a power outage and inventory
valuation adjustments experienced during the second quarter. These increases
were partially offset by a net reduction in labor costs.
The increase in pulp costs during the first quarter primarily resulted from
higher prices on purchased pulp, as compared to the same period last year,
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.
The increase in cost of goods sold resulted in gross profit as a percent of
sales decreasing to 19.6% for the six months ending April 3, 1996 from 21.5%
for the same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $58.6 million for the six
months ended April 3, 1996 compared to $52.3 million for the six months ended
March 29, 1995, an increase of $6.3 million. Selling, general and
administrative expenses as a percent of sales increased to 8.1% for the six
months ended April 3, 1996 as compared to 7.6% for the six months ended March
29, 1995. This increase is primarily due to an increase in administrative
expenses primarily resulting from the costs incurred to maintain the
appropriate level of administrative services that were previously performed
by Scott.
INTEREST EXPENSE AND TAXES
Following the Acquisition, the Company's capitalization and tax basis of
accounting changed significantly. As a result, interest and tax expense prior
to the Acquisition are not comparable to results following the Acquisition.
The Company's interest expense for the six months ended April 3, 1996 was
$61.3 million compared to $46.1 million for the six months ended March 29,
1995. This increase reflects the incremental interest costs associated with
the financing of the Acquisition. For all periods subsequent to the
Acquisition date, interest expense includes the amortization of deferred
financing fees and, for the six months ended March 29, 1995, fees associated
with a bridge loan made available to the Company at the time of the
Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Effective with the Acquisition, the Company began managing its own funding
requirements. Prior to the Acquisition, the Predecessor Corporation
participated in Scott's cash management system. Accordingly, cash
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received from the Predecessor Corporation's domestic operations was
administered centrally along with the financing of working capital
requirements and capital expenditures.
The Company's net cash provided by operating activities was $25.1 million for
the six months ended April 3, 1996 as compared to $92.2 million for the six
months ended March 29, 1995. This decrease is primarily due to decreases in
net income, accounts payable and accrued and other current liabilities and an
increase in inventories.
The increase in inventories at April 3, 1996 as compared to the balance at
September 27, 1995 is primarily due to the aforementioned decline in demand
due to the weakening in market conditions during the six months ended April
3, 1996 partially offset by the adjustments to the carrying value of certain
inventories to net realizable value during the three months ended April 3,
1996. The decrease in accounts payable at April 3, 1996 compared to September
27, 1995 was primarily attributable to a decrease in purchasing volume
resulting from decreased production levels and declining pulp prices when
compared to the end of the fiscal year 1995.
The Company's operating working capital increased to $199.7 million at April
3, 1996 compared to $160.0 million at September 27, 1995. Operating working
capital is defined as trade accounts receivable, other receivables and
inventories less accounts payable and accrued and other current liabilities.
The Company's ratio of current assets to current liabilities was 1.3 at April
3, 1996 compared to 1.5 at September 27, 1995. This decrease is primarily due
to the increase in current maturities of long-term debt partially offset by
the increase in operating working capital for such period.
Net cash used in investing activities for the six months ended April 3, 1996
was $16.2 million compared to $1,512.4 million for the six months ended March
29, 1995. Net cash used in investing activities for the six months ended
March 29, 1995 includes the effect of the cash outflows related to the
Acquisition of approximately $1,493.7 million.
Capital expenditures for the six months ended April 3, 1996 were $18.3
million compared to $18.7 million for the six months ended March 29, 1995.
Capital spending for the six months ended April 3, 1996 and March 29, 1995
was primarily for improvements to the Company's manufacturing and
distribution facilities.
Estimated capital expenditures are expected to approximate $70.0 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 the Notes to Condensed Financial Statements), 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 used in financing activities for the six months ended April 3, 1996
was $71.1 million compared to net cash provided of $1,415.5 million for the
six months ended March 29, 1995. During the six months ended April 3, 1996,
the Company borrowed and repaid $53.5 million under its revolving credit
facility and paid approximately $74.9 million of outstanding borrowings under
its term loan facilities in compliance with an excess cash flow payment
requirement. Amounts paid in compliance with the excess cash flow requirement
fulfill the majority of payments otherwise required to be paid in June 1996
and reduce future semi-annual installments on a pro rata basis. Cash
provided by financing activities for the six months ended March 29, 1995
includes proceeds from long-term debt of $1,105.0 million. During the six
months ended March 29, 1995, the Company repaid $138.7 million of amounts
primarily borrowed under the Company's revolving
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credit facility. 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 six months ended
March 29, 1995 was primarily utilized for the Acquisition. During the period
from September 25, 1994 through December 20, 1994, the Predecessor
Corporation received a net capital infusion from the Predecessor
Corporation's parent company of approximately $47.2 million.
OTHER ITEMS
DEBT AND PREFERRED STOCK
At April 3, 1996, the Company's long-term debt was $930.6 million compared to
$1,048.8 million at September 27, 1995, a decrease of $118.2 million. Current
maturities of long-term debt increased from $78.6 million at September 27,
1995 to $121.6 million at April 3, 1996. This increase results from $100.0
million paid in April 1996 on amounts outstanding under the Company's credit
facility obligations. The funds used for this debt payment were provided by
the sale of the Company's accounts receivable which was done in conjunction
with an amendment to the Company's credit facility as indicated in the Notes
to Condensed Financial Statements. Approximately $3.0 million of financing
fees that had previously been deferred will be written off in the third
fiscal quarter as a result of this prepayment. 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
Condensed Financial Statements).
The Company has a $250.0 million revolving credit facility to finance working
capital needs. At April 3, 1996, the Company did not have any borrowings
outstanding under this facility, resulting in an unused borrowing capacity of
approximately $249.0 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, which is based on the achievement of a
certain financial ratio, of between 0.375% and 0.5% per annum on the average
daily unused commitment available under the revolving credit facility.
In addition, the Company has a letter of credit facility to support certain
obligations of the Company. The Company had approximately $170.5 million of
letters of credit outstanding under its letter of credit facility at April 3,
1996 and September 27, 1995. The Company pays a commission, which is based
on the achievement of a certain financial ratio, of between 1.0% and 2.5% on
outstanding letters of credit and an issuance fee of 0.125% per annum on
letters of credit issued.
The Company's credit agreement, which was amended in April 1996 as indicated
in the Notes to Condensed 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.
The Company does not anticipate paying cash dividends on its senior preferred
stock 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 Company's series B senior
subordinated notes 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.
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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 that 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, 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Intentionally omitted. *
ITEM 2. CHANGES IN SECURITIES
Intentionally omitted. *
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Intentionally omitted. *
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Intentionally omitted. *
ITEM 5. OTHER INFORMATION
Intentionally omitted. *
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Intentionally omitted. *
- -----------------------------------------------------------------------------
* This report is being voluntarily filed with the Commission pursuant to the
registrant's contractual obligations to file with the Commission all
financial information that would be required to be filed on a Form 10-Q. The
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
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SIGNATURE
The registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
S. D. Warren Company
Date: May 16, 1996 By: /s/ TREVOR L. LARKAN
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Trevor L. Larkan
Vice President (Principal Financial Officer)
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