<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 15, 1996
REGISTRATION NUMBER 33-88496
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 3
TO
REGISTRATION STATEMENT 33-88496 ON FORM S-1
UNDER THE SECURITIES ACT OF 1933
---------------
S.D. WARREN COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 2621 23-2366983
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>
------------------------
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
(617) 423-7300
(Address, including ZIP Code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
TREVOR L. LARKAN
S.D. WARREN COMPANY
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
(617) 423-7300
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
KRIS F. HEINZELMAN
CRAVATH, SWAINE & MOORE
WORLDWIDE PLAZA
825 EIGHTH AVENUE
NEW YORK, NEW YORK 10019
(212) 474-1000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
S.D. WARREN COMPANY
------------------------
CROSS-REFERENCE SHEET
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION
REQUIRED BY THE ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM AND CAPTION LOCATION IN PROSPECTUS
------------------------------------------------------------- --------------------------------------------------
<C> <S> <C> <C>
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus..................................... Cover Pages of Registration Statement and
Prospectus; Cross-Reference Sheet
2. Inside Front and Outside Back Cover Pages of Prospectus...... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of Earnings to
Fixed Charges................................................ Prospectus Summary; Risk Factors; Selected
Historical Financial Data
4. Use of Proceeds.............................................. Use of Proceeds
5. Determination of Offering Price.............................. *
6. Dilution..................................................... *
7. Selling Security Holders..................................... *
8. Plan of Distribution......................................... Cover Page; Plan of Distribution
9. Description of Securities to be Registered................... Description of the Notes; Description of the
Senior Preferred Stock; Description of the
Exchange Debentures
10. Interests of Named Experts and Counsel....................... *
11. Information with Respect to the Registrant
(a) Description of Business........................... Prospectus Summary; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business
(b) Description of Property........................... Business
(c) Legal Proceedings................................. Business
(d) Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters..... *
(e) Financial Statements.............................. Financial Statements
(f) Selected Financial Data........................... Selected Historical Financial Data; Capitalization
(g) Supplementary Financial Information............... Financial Statements
(h) Management's Discussion and Analysis of Financial
Condition and Results of Operations............... Management's Discussion and Analysis of Financial
Condition and Results of Operations
(i) Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... Management's Discussion and Analysis of Financial
Condition and Results of Operations
(j) Directors, Executive Officers, Promoters and
Control Persons................................... Management
(k) Executive Compensation............................ Management
(l) Security Ownership of Certain Beneficial Owners
and Management.................................... Security Ownership of Certain Beneficial Owners
and Management
(m) Certain Relationships and Related Transactions.... Management
12. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................................... *
</TABLE>
- ------------------------
* Item is omitted because response is negative or item is inapplicable.
i
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
S.D. WARREN COMPANY
[LOGO]
$375,000,000
12% SERIES B SENIOR SUBORDINATED NOTES DUE 2004
AND
$75,000,000
14% SERIES B SENIOR EXCHANGEABLE
PREFERRED STOCK DUE 2006
The 12% Series B Senior Subordinated Notes due 2004 (the "Notes") of S.D.
Warren Company (the "Company") bear interest at the rate of 12% per annum,
payable semi-annually on June 15 and December 15 of each year, commencing June
15, 1995 and are redeemable at the option of the Company, in whole or in part,
at any time on or after December 15, 1999 at the redemption prices set forth
herein. See "Description of the Notes--Optional Redemption". The Notes are
unsecured, subordinated obligations of the Company and rank junior in right of
payment to all existing and future Senior Debt (as defined) of the Company,
including the obligations of the Company under the Credit Agreement (as
defined). At July 3, 1996, the aggregate principal amount of such Senior Debt
was $567.2 million. As of the date hereof, the Company has no subordinated
Indebtedness (as defined) other than the Notes. The Notes will rank senior in
right of payment to or PARI PASSU to any subordinated Indebtedness of the
Company issued hereafter. See "Description of the Notes-- Subordination".
Each share of the Company's 14% Series B Senior Exchangeable Preferred Stock
due 2006 (the "Senior Preferred Stock") has a liquidation preference of $25.00
per share and will rank senior to any Junior Securities (as defined) of the
Company issued hereafter. As of the date hereof, the Company has no Junior
Securities outstanding, other than its common stock. Dividends on the Senior
Preferred Stock will accrue and be cumulative from the date of issuance and will
accrue in each period ending on March 15, June 15, September 15 and December 15
of each year at a rate of 14% per annum of (i) the liquidation preference plus
(ii) the amount of accrued but unpaid dividends from prior periods ending on or
prior to December 15, 1999. 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. See "Description of the Senior Preferred Stock--Dividends". The Senior
Preferred Stock will be 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 set
forth herein. See "Description of the Senior Preferred Stock--Redemption of
Senior Preferred Stock--Optional". The Company is required to redeem the Senior
Preferred Stock on December 15, 2006 at the Specified Amount (as defined). On
any scheduled dividend payment date, the Company may, at its option, exchange
all but not less than all of the shares of Senior Preferred Stock then
outstanding for the Company's 14% Subordinated Exchange Debentures due 2006 (the
"Exchange Debentures"). See "Description of the Senior Preferred
Stock--Exchange" and "Description of the Exchange Debentures".
The Notes, the Senior Preferred Stock and the Exchange Debentures are
referred to collectively herein as the "Securities".
SEE "RISK FACTORS" ON PAGE 9 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is to be used by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJSC") in connection with offers and sales of the Securities in
market making transactions in the over-the-counter market at negotiated prices
related to prevailing market prices at the time of sale. DLJSC may act as
principal or agent in such transactions. The Company will not receive any of the
proceeds from the sale of the Securities.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
The date of this Prospectus is November , 1996
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Securities being offered by this Prospectus. This Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, to which reference is hereby made.
The Registration Statement and the exhibits and schedules thereto may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission located at 7 World Trade Center, New York, New York
10048 and at Citicorp Center, 500 West Madison Street (Suite 1400), Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates or through the World Wide Web (http://www.sec.gov). As
a result of the filing of the Registration Statement with the Commission, the
Company was subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith was
required to file periodic reports and other information with the Commission. The
Company is no longer to be subject to the reporting requirements of the Exchange
Act; however the Company has agreed that, for so long as any of the Securities
remain outstanding, it will furnish to the applicable trustee or transfer agent
and the holders of the Securities, as applicable, and file with the Commission
(unless the Commission will not accept such a filing) (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company was required to file
such forms, including a "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants and
(ii) all reports that would be required to be filed with the Commission on Form
8-K if the Company was required to file such reports.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES,
THE "COMPANY", "S.D. WARREN" OR "WARREN" REFERS TO S.D. WARREN COMPANY. ALL
REFERENCES TO SHIPMENTS REFER TO U.S. DOMESTIC SHIPMENTS OF PAPER, UNLESS
OTHERWISE NOTED. ALL REFERENCES TO FISCAL YEARS IN THIS PROSPECTUS REFER TO THE
COMPANY'S FISCAL YEARS ENDING ON THE LAST SATURDAY IN DECEMBER, EXCEPT FOR
FISCAL 1995 WHICH REFERS TO THE PERIOD FROM DECEMBER 21, 1994 THROUGH SEPTEMBER
27, 1995 (THE "NINE MONTHS ENDED SEPTEMBER 27, 1995"). THIS CHANGE REFLECTS
THAT, EFFECTIVE DECEMBER 20, 1994, THE COMPANY CHANGED ITS FISCAL YEAR TO FISCAL
YEARS ENDING ON THE WEDNESDAY CLOSEST TO SEPTEMBER 30 UNTIL OTHERWISE DETERMINED
BY THE COMPANY'S BOARD OF DIRECTORS.
RISK FACTORS
Before making an investment in the Securities, prospective investors should
consider carefully the factors described in "Risk Factors", including the
consequences of the Company's substantial leverage, the risk that the Company
would be unable to service its debt, the cyclical industry conditions and strong
competiton which the Company faces, the restrictions imposed on the Company by
the Credit Agreement, the dependence of the Company on certain customers, the
subordination of the Securities to Senior Debt of the Company, stringent
regulations faced by the Company and control of the Company by a few significant
shareholders.
MARKET MAKING PROSPECTUS
This Prospectus will be used by DLJSC in connection with offers and sales of
the Securities in market-making transactions in the over-the-counter market at
negotiated prices related to prevailing market prices at the time of sale. DLJSC
may act as principal or agent in such transactions.
THE COMPANY
The Company manufactures printing, publishing and specialty papers and has
pulp and timberland operations vertically integrated with some of its
manufacturing facilities. The Company 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.
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-. The Company
has strong customer relationships and a distribution network for coated paper
which includes over 288 merchant distributing locations.
For the period from December 21, 1994 through September 27, 1995, S.D.
Warren's sales of domestic paper products consisted of coated paper (70.6%),
uncoated paper (13.6%), specialty paper (10.2%) and technical and other paper
products (5.6%). 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 from printing, coated fabric converters, pressure-sensitive laminators,
label printers and other niche market applications.
The Company is a wholly owned subsidiary of SDW Holdings Corporation
("Holdings"). As of the date of this Prospectus, Sappi Limited ("Sappi")
indirectly owns 75.07%, DLJ Merchant Banking Partners, L.P. and certain of its
affiliates ("DLJMB") own 18.35% and UBS Capital LLC ("UBSC") owns 3.92%,
3
<PAGE>
respectively, of the common equity of Holdings on a fully diluted basis. Sappi,
DLJMB and UBSC are collectively referred to herein as the "Investor Group".
Holdings' principal executive offices are located at 2700 Westchester Avenue,
Purchase, NY 10577. The telephone number is (914) 696-0021.
The Company's principal executive offices are located at 225 Franklin
Street, Boston, Massachusetts. The telephone number is (617) 423-7300.
SUMMARY DESCRIPTION OF THE SECURITIES
NOTES:
<TABLE>
<S> <C>
Securities............. $375.0 million aggregate principal amount of 12% Series B Senior
Subordinated Notes due 2004.
Maturity............... December 15, 2004.
Interest............... The Notes bear interest at the rate of 12% per annum, payable
semiannually on June 15 and December 15.
Ranking................ The Notes are general unsecured obligations of the Company and rank
(i) junior in right of payment to all existing and future Senior
Debt (as defined in the indenture pursuant to which the Notes were
issued, the "Indenture") of the Company and (ii) senior in right of
payment to or PARI PASSU in right of payment with all existing and
future subordinated Indebtedness of the Company. At July 3, 1996,
the aggregate principal amount of such Senior Debt was $567.2
million. As of the date hereof, the Company has no subordinated
Indebtedness other than the Notes.
Optional Redemption.... The Notes may be redeemed at the option of the Company, in whole or
in part, on or after December 15, 1999 at a premium declining to
par in 2002, plus accrued and unpaid interest, if any, through the
redemption date. 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 up to $130.0 million
in aggregate principal amount of Notes with the net proceeds
therefrom at 111.0% of the aggregate principal amount thereof, plus
accrued and unpaid interest through the redemption date; PROVIDED,
that at least $245.0 million in aggregate principal amount of Notes
remains outstanding following such redemption. See "Description of
the Notes--Optional Redemption".
Change of Control...... In the event of a Change of Control, the holders of the Notes will
have the right to require the Company to purchase their Notes at a
price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the date of purchase. See
"Description of the Notes--Repurchase at the Option of
Holders--Change of Control".
Covenants.............. The Indenture contains certain covenants that, among other things,
limit the ability of the Company and its subsidiaries to incur
additional Indebtedness and issue preferred stock, pay dividends or
make other distributions, repurchase Equity Interests (as defined)
or PARI PASSU or subordinated Indebtedness, make Restricted
Investments (as defined), engage in sale and leaseback
transactions, create certain liens, enter into certain transactions
with affiliates, sell assets, issue or sell Equity Interests of the
Company's subsidiaries or enter into certain mergers and
consolidations. In addition, under certain circumstances, the
Company will be required to offer to purchase Notes at a price
equal to 101% of the principal amount thereof, plus accrued and
unpaid
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
interest to the date of purchase, with the proceeds of certain
Asset Sales (as defined). See "Description of the Notes--Certain
Covenants;--Repurchase at the Option of Holders--Asset Sales".
</TABLE>
SENIOR PREFERRED STOCK:
<TABLE>
<S> <C>
Securities............. 3,000,000 shares of 14% Series B Senior Exchangeable Preferred
Stock due 2006 of the Company.
Dividends.............. The Company may elect not to pay dividends in cash on or prior to
December 15, 1999, in which case such unpaid dividends shall accrue
and become part of the Specified Amount of the Senior Preferred
Stock upon which dividends must be paid. Dividends on each share
will accrue in each period ending on March 15, June 15, September
15 and December 15 of each year (each a "Dividend Accrual Date"),
in an amount equal to 14% per annum of the Specified Amount
thereof, defined as the sum of (A) such share's liquidation
preference of $25.00 and (B) the amount of dividends with respect
to such share that accrued in prior dividend accrual periods ending
on or prior to December 15, 1999 and were not previously paid in
cash (the "Accumulated Dividends"). It is not anticipated that the
Company will pay any dividends in cash for any period ending on or
prior to December 15, 1999.
Liquidity of Market.... In addition, the terms of the Credit Agreement and the Indenture
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 December 15, 1999.
Liquidation
Preference............ $25.00 per share.
Specified Amount....... The Specified Amount of the Senior Preferred Stock consists of the
Liquidation Preference plus the Accumulated Dividends. As of July
3, 1996, the Specified Amount was $30.97 per share.
Ranking................ The Senior Preferred Stock ranks senior in right of payment with
respect to all Junior Securities (as defined) and PARI PASSU in
right of payment with respect to all Parity Securities (as
defined).
Optional 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 a premium declining to par in 2004, plus all accrued and
unpaid dividends, if any. 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 Senior
Preferred Stock with the proceeds therefrom at a redemption price
equal to 113.0% of the Specified Amount, plus all accrued and
unpaid dividends (other than Accumulated Dividends), 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. See "Description
of the Senior Preferred Stock--Redemption of Senior Preferred
Stock--Optional".
Mandatory Redemption... The Company is required to redeem the Senior Preferred Stock on
December 15, 2006 at a redemption price equal to the Specified
Amount thereof plus all accrued and unpaid dividends (other than
Accumulated Dividends), if any, through the date of redemption.
Change of Control...... In the event of a Change of Control (as defined), holders of Senior
Preferred Stock will have the right to require the Company to
redeem their Senior Preferred Stock, in whole or in part, at a
price equal to 101% of the Specified
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Amount thereof, plus accrued and unpaid dividends (other than
Accumulated Dividends), if any, to the date of purchase. See
"Description of the Senior Preferred Stock--Change of Control".
Voting Rights.......... Holders of Senior Preferred Stock will have limited voting rights,
including (i) those required by law and (ii) that holders of a
majority of the outstanding shares of Senior Preferred Stock,
voting as a separate class, will (a) upon the failure of the
Company (1) with respect to dividend accrual periods ending on and
after March 15, 2000, to pay for more than six consecutive dividend
accrual periods dividends in cash equal to the dividend that
accrued during such dividend accrual period, (2) to satisfy any
mandatory redemption obligation with respect to the Senior
Preferred Stock, (3) to make a Change of Control Offer within 30
days following any Change of Control or (4) to comply with the
covenants set forth in the Certificate of Designations, be entitled
to elect two members to the Board of Directors of the Company, (b)
have the right to approve each issuance by the Company of any
Senior Securities or Parity Securities (other than Senior Preferred
Stock), except that without the approval of the holders of Senior
Preferred Stock, the Company may issue and have outstanding shares
of Parity Securities issued from time to time in exchange for, or
the proceeds of which are used to redeem or repurchase, any or all
of the shares of Senior Preferred Stock or other Parity Securities
and (c) have the right to approve certain mergers, consolidations
and sales of assets. See "Description of the Senior Preferred
Stock--Voting Rights".
Covenants.............. The Certificate of Designations for the Senior Preferred Stock (the
"Certificate of Designations") contains customary covenants that:
(i) limit the ability of the Company to redeem or repurchase Junior
Securities or Parity Securities and pay dividends thereon, (ii)
prohibit, under certain circumstances, certain mergers and
consolidations of and sales of assets by the Company, (iii)
restrict transactions with affiliates and (iv) require the Company
to deliver certain reports and information to the holders.
Exchange Feature....... On any scheduled dividend payment date, the Company may, at its
option, exchange all but not less than all of the shares of Senior
Preferred Stock then outstanding for Exchange Debentures in a
principal amount equal to the Specified Amount of Senior Preferred
Stock held by such holder at the time of such exchange.
</TABLE>
EXCHANGE DEBENTURES:
<TABLE>
<S> <C>
Securities............. 14% Subordinated Exchange Debentures due 2006, limited in principal
amount to the Specified Amount of the Senior Preferred Stock
outstanding on the Exchange Date (as defined), plus such principal
amount of additional Exchange Debentures as may be issued in lieu
of cash interest.
Maturity............... December 15, 2006
Interest............... The Exchange Debentures will bear interest at the rate of 14% per
annum, payable semiannually on June 15 and December 15, commencing
with the first of such dates to occur after the Exchange Date. On
or prior to December 15, 1999, interest may, at the option of the
Company, be paid in cash or by issuing additional Exchange
Debentures with a principal amount equal to such interest. After
December 15, 1999, interest on the Exchange Debentures may be paid
only in cash.
Ranking................ The Exchange Debentures will be unsecured obligations of the
Company, subordinate to all existing and future Senior Debt (as
defined in the indenture
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
pursuant to which the Exchange Debentures will be issued, the
"Exchange Debenture Indenture") of the Company, including the
obligations of the Company under the Credit Agreement and the
Notes. At July 3, 1996, the aggregate amount of such Senior Debt
was $567.2 million.
Optional Redemption.... The Exchange Debentures may be redeemed at the option of the
Company, in whole or in part, on or after December 15, 2001 at a
premium declining to par in 2004, plus accrued and unpaid interest
and Liquidated Damages, if any, through the redemption date. 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 Exchange Debentures with the net proceeds
therefrom at a redemption price equal to 113.0% of the aggregate
principal amount thereof, plus accrued and unpaid interest through
the redemption date; PROVIDED, that at least $50.0 million in
aggregate principal amount of Exchange Debentures remains
outstanding immediately following such redemption. See "Description
of the Exchange Debentures--Optional Redemption".
Change of Control...... In the event of a Change of Control, the holders of the Exchange
Debentures will have the right to require the Company to purchase
their Exchange Debentures at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest to the
date of purchase. See "Description of the Exchange
Debentures--Change of Control".
Certain Covenants...... The Exchange Debenture Indenture will contain covenants similar to
the covenants with respect to the Senior Preferred Stock and will
also limit the ability of the Company and its subsidiaries to incur
additional Indebtedness and issue preferred stock, pay dividends or
make other distributions, repurchase Equity Interests or
subordinated Indebtedness or make certain Restricted Investments.
</TABLE>
7
<PAGE>
SUMMARY FINANCIAL DATA (1)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------------------------------------------------------- -------------
PERIOD PERIOD
TWELVE TWELVE SEPTEMBER 25, DECEMBER 21,
MONTHS ENDED MONTHS ENDED TWELVE MONTHS NINE MONTHS 1994 THROUGH 1994 THROUGH
DECEMBER 28, DECEMBER 26, ENDED DECEMBER ENDED SEPTEMBER DECEMBER 20, SEPTEMBER 27,
1991 1992(2) 25, 1993 24, 1994 1994 1995
------------ ------------ -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Sales......................... $ 1,169.7 $ 1,212.8 $ 1,143.6 $ 828.8 $ 313.6 $ 1,155.8
Gross profit.................. 144.6 182.5 168.1 106.4 49.9 269.8
Selling, general and
administrative expenses...... 92.0 91.0 91.7 72.1 22.2 96.7
Restructuring charges......... 38.0 -- 66.1 -- -- --
Income from operations........ 14.6 91.5 10.3 34.3 27.7 173.1
Other income (expense), net... 0.1 0.1 0.1 0.1 (0.5) 3.2
Interest expense.............. 9.3 9.0 8.5 6.4 2.3 106.0
Income tax provision.......... 2.6 32.0 6.5 11.2 9.9 28.2
Extraordinary item, net of
tax.......................... -- -- -- -- -- --
Net income (loss)............. 2.8 50.6 (4.6) 16.8 15.0 42.1
OTHER FINANCIAL DATA:
EBITDA (3).................... $ 180.9 $ 183.1 $ 169.5 $ 105.9 $ 56.5 $ 262.9
Capital expenditures.......... 53.7 70.1 68.9 32.3 14.5 33.7
Depreciation, cost of timber
harvested and amortization... 128.3 91.6 93.1 71.6 28.8 89.8
Ratio of earnings to fixed
charges (4).................. 1.3x 5.8x 1.1x 3.1x 8.2x 1.4x
<CAPTION>
NINE MONTHS
ENDED
JULY 3,
1996
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Sales......................... $ 1,066.8
Gross profit.................. 192.7
Selling, general and
administrative expenses...... 98.1
Restructuring charges......... --
Income from operations........ 94.6
Other income (expense), net... (1.3)
Interest expense.............. 84.3
Income tax provision.......... 3.6
Extraordinary item, net of
tax.......................... (2.0)
Net income (loss)............. 3.4
OTHER FINANCIAL DATA:
EBITDA (3).................... $ 181.0
Capital expenditures.......... 32.2
Depreciation, cost of timber
harvested and amortization... 86.4
Ratio of earnings to fixed
charges (4).................. (5)
</TABLE>
<TABLE>
<CAPTION>
AT JULY 3, 1996
------------------
<S> <C>
(DOLLARS IN
MILLIONS)
BALANCE SHEET DATA:
Working capital............................................................................................. $ 88.7
Plant assets (net).......................................................................................... 1,115.7
Total assets................................................................................................ 1,681.0
Total debt (including current maturities)................................................................... 949.4
Senior preferred stock (6).................................................................................. 84.5
Stockholder's equity........................................................................................ 358.2
</TABLE>
- ------------------------
(1) For a more detailed presentation of the Company's financial statements, see
"Selected Historical Financial Data" and the Company's Financial Statements
included herein.
(2) 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.
(3) EBITDA is defined as income from operations before restructuring expense
plus depreciation, cost of timber harvested and amortization as reported in
the Statements of Cash Flows. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to service and incur
debt. EBITDA should not be considered by an investor as an alternative to
GAAP operating income as an indicator of the Company's operating
performance or as an alternative to the Company's cash flow from operating
activities as a measure of liquidity.
(4) For purposes of computing the ratio of earnings to fixed charges, fixed
charges consist of interest expense on long-term debt, amortization of
deferred financing costs and that portion (one-third) of rentals deemed to
be representative of interest. Earnings consist of income before income
taxes, plus fixed charges.
(5) For the period ended July 3, 1996, the Company's earnings were insufficient
to cover fixed charges by $8.6 million.
(6) Liquidation value was $92.9 million at July 3, 1996.
8
<PAGE>
FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that this Prospectus 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 1996 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.
RISK FACTORS
Prospective investors should consider carefully the following summary of
material risk factors in addition to other information included in this
Prospectus before making an investment in the Securities.
CONSEQUENCES OF SUBSTANTIAL LEVERAGE FOR THE COMPANY AND SECURITYHOLDERS
In connection with the Acquisition, the Company incurred substantial
indebtedness. Consequently, the Company has significant debt service
obligations. As of July 3, 1996, the Company had total outstanding long-term
indebtedness (including the current portion thereof) of $949.4 million and
redeemable preferred stock plus stockholder's equity of $442.7 million,
resulting in a debt to equity and preferred stock ratio of 2.1 to 1. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
The degree to which the Company is leveraged could have important
consequences to holders of the Securities, including the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) certain of the Company's borrowings are and will continue to be
at variable rates of interest, which exposes the Company to the risk of
increased interest rates; (iv) the indebtedness outstanding under the Bank
Financing is secured by substantially all the assets of the Company and matures
prior to the maturity of the Notes and the Exchange Debentures, if issued, and
prior to the date on which the Senior Preferred Stock is required to be
redeemed; (v) the Company may be substantially more leveraged than certain of
its competitors, which may place the Company at a competitive disadvantage; and
(vi) the Company's substantial degree of leverage may hinder its ability to
adjust rapidly to changing market conditions and could make it more vulnerable
in the event of a downturn in general economic conditions or its business. See
"Description of the Credit Agreement and the A/R Facility"; "Description of the
Notes"; and "Description of the Senior Preferred Stock".
RISK OF INABILITY TO SERVICE DEBT
The ability of the Company to make scheduled payments or to refinance its
obligations with respect to its indebtedness depends on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control.
There can be no assurance that its operating results will be sufficient for
payment of its indebtedness in the future.
The Company's operating results will need to be of sufficient magnitude to
meet its debt service obligations, including with respect to the Notes and, if
issued, the Exchange Debentures, and to make mandatory redemption payments with
respect to the Senior Preferred Stock. The Company's operating results have been
negatively affected by market conditions in recent periods and accordingly there
can be no assurance that the Company's operating results will be of sufficient
magnitude to enable the Company to meet its debt service obligations. In the
absence of such operating results, the Company could face substantial liquidity
problems and might be required to dispose of material assets or operations to
meet its debt
9
<PAGE>
service and other obligations, and there can be no assurance as to the timing of
such sales or the proceeds which the Company could realize therefrom. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
CYCLICAL INDUSTRY CONDITIONS; STRONG COMPETITION
The markets for the Company's products are 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 over such period.
In addition, in 1992, North American imports from Europe increased as a result
of excess capacity in Europe
and a devaluation in certain European currencies in relation to the U.S. dollar,
causing North American prices to deteriorate.
The large supply-demand imbalance as a result of significant capacity
additions and, to a lesser degree, imports from Europe caused operating margins
of the Company and its competitors to decline over the period from 1988 through
early 1994. Beginning in mid-1994, however, the industry rebounded from this
decline, with several price increases announced throughout the industry.
However, since the third quarter of 1995, demand for the Company's products
decreased. Accordingly, demand was lower during the nine months ended July 3,
1996 as compared to demand levels during the second half of fiscal 1995. This
decrease is 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 demand resulted in reduced prices, with discounting
occurring on certain paper product grades. Accordingly, the Company realized
lower net selling prices per ton during the first nine months of fiscal year
1996 as compared to prices realized during the second half of fiscal year 1995.
However, because the impact of the increase in prices in 1995 was not realized
until the latter half of fiscal year 1995, net selling prices realized during
the nine months ended July 3, 1996 remained relatively flat as compared to those
prices realized during the same period last year. In addition, the cost of raw
materials decreased during the nine months ended July 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 its ability to benefit from (and its 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 fiscal year 1996. The reduction of inventory levels by the Company's
customers and the weaker market conditions continued into the summer months
which are typically strong due to increased demand from catalog printers. In
addition, new capacity commencing later this year in the United States and
overseas is expected to increase competition for market share and may delay any
improvement in market conditions. The paper market is highly cyclical and 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 affected.
In addition, the North American coated paper industry is highly competitive.
The Company competes mainly with U.S. and Canadian producers of coated free
paper, and, to a lesser degree, European producers. Manufacturers of coated free
paper compete 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. See "Business--The Company--Competition".
RESTRICTIONS IMPOSED BY CREDIT AGREEMENT
The Company's credit agreement with respect to the Bank Financing (the
"Credit Agreement") contains a number of significant covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
assets, incur debt, pay dividends, create liens, make capital expenditures and
make certain investments or acquisitions and otherwise restrict corporate
activities. In addition, under the Credit Agreement, the Company is required to
maintain specified financial ratios, including a minimum interest coverage
ratio, a minimum debt service ratio and a net worth test. The ability of the
Company to
10
<PAGE>
comply with such provisions may be affected by events beyond the Company's
control. In order to comply with some of these covenants, the Company will be
required to achieve financial and operating results which are slightly better
than those achieved historically. There can be no assurance that such results
will be achieved. The breach of any of the covenants could result in a default
under the Credit Agreement. In the event of any such default, depending on the
actions taken by the lenders thereunder (the "Lenders"), the Company could be
prohibited from making any payments of principal or interest on the Notes and,
if issued, the Exchange Debentures and from paying dividends on the Senior
Preferred Stock. In addition, the Lenders could elect to declare all amounts
borrowed under the Credit Agreement, together with accrued interest, to be due
and payable. If the Company were unable to repay such borrowings, the Lenders
could proceed against their collateral. If the indebtedness under the Credit
Agreement were to be accelerated, there can be no assurance that the assets of
the Company would be sufficient to repay such indebtedness and any of the
Securities in full. See "Description of the Credit Agreement and the Accounts
Receivable Facility"; "Description of the Notes--Subordination"; "Description of
the Senior Preferred Stock--Dividends"; and "Description of the Exchange
Debentures--Subordination".
DEPENDENCE ON PRINCIPAL CUSTOMERS
For the nine months ended July 3, 1996, the Company's customers that
individually accounted for greater than 10% of sales were divisions or
subsidiaries of International Paper Company, Central National-Gottesman Inc. and
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 one of these customers could have
a material adverse effect on the Company's business and results of operations.
See "Business--The Company--Customers" and the Notes to Financial Statements.
SUBORDINATION OF NOTES TO SIGNIFICANT SENIOR DEBT
The Notes are unsecured obligations of the Company and are subordinated in
right of payment to all existing and future Senior Debt (as defined in the
Indenture) of the Company. At July 3, 1996, the aggregate principal amount of
such Senior Debt was $567.2 million. As of the date hereof, the Company has no
subordinated Indebtedness other than the Notes. In the event of the bankruptcy,
liquidation or reorganization of the Company, the assets of the Company will be
available to pay obligations on the Notes only after all such Senior Debt of the
Company has been paid in full, and there may not be sufficient assets remaining
to pay amounts due on any or all of the Notes then outstanding. Additional
indebtedness, including Senior Debt, may be incurred by the Company and its
Subsidiaries from time to time, subject to the terms of the Indenture. In
addition, although the Notes may be guaranteed in the future by certain of the
Company's subsidiaries of a certain size, the Notes will be structurally
subordinated to any liabilities or obligations of any subsidiary of the Company
which is not a Guarantor (as defined) and, in any event, will be contractually
subordinated, in accordance with the terms of the Indenture, to such Senior Debt
of each subsidiary which is a Guarantor. See "Description of the
Notes--Subordination".
JUNIOR RANKING OF SENIOR PREFERRED STOCK AND SUBORDINATION OF
EXCHANGE DEBENTURES TO SIGNIFICANT SENIOR DEBT
The Senior Preferred Stock ranks junior in right of payment to all existing
and future liabilities and obligations (whether or not for borrowed money) of
the Company, PARI PASSU with each other class of capital stock or series of
preferred stock issued by the Company that specifically provides that such
series will rank on a parity with Senior Preferred Stock and senior in right of
payment to all common stock and each other class of capital stock or series of
preferred stock issued by the Company that specifically provides that such
series will rank junior to the Senior Preferred Stock or which do not specify
their rank. The holders of the Senior Preferred Stock will have limited voting
rights. See "Description of the Senior Preferred Stock-- Rank; --Voting Rights".
The Exchange Debentures will be unsecured obligations of the Company and
will be subordinated in right of payment to all existing and future Senior Debt
(as defined in the Exchange Debenture Indenture) of the Company, including the
obligations of the Company under the Credit Agreement, the A/R Facility and the
Notes. At July 3, 1996, the aggregate principal amount of such Senior Debt was
$567.2 million. In the event of bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be
11
<PAGE>
available to pay obligations on the Exchange Debentures only after all such
Senior Debt of the Company has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Exchange
Debentures then outstanding. Additional indebtedness, including Senior Debt, may
be incurred by the Company and its subsidiaries from time to time, subject to
the terms of the Exchange Debenture Indenture. In addition, the Exchange
Debentures will be structurally subordinated to any liabilities or obligations
of the Company's subsidiaries. See "Description of the Exchange
Debentures--Subordination".
STRINGENT ENVIRONMENTAL REGULATION; PROPOSED TIMBER REGULATION
The Company and its operations are subject to a wide range of environmental
laws and regulations relating to, among other matters, air emissions, wastewater
discharges, landfill operations and hazardous waste management. Compliance with
these laws and regulations is an increasingly important factor in the Company's
business. The Company will continue to incur capital and operating expenditures
to maintain compliance with applicable federal and state environmental laws and
to meet new regulatory requirements. Such new requirements include the proposed
regulations announced in November 1993 by the United States Environmental
Protection Agency (the "EPA") that would require more stringent controls on air
and water discharges from pulp and paper mills (generally referred to as the
"cluster rules"). Although the EPA has not made any commitments, final
promulgation of portions of the cluster rules may occur in 1996 and compliance
with the rules may be required beginning in 1998. It is expected that the
cluster rules, if adopted as currently proposed, will require the Company to
incur approximately $86.0 million to $96.0 million of capital expenditures
through 1999. The Company also anticipates that through 1999, it will incur an
additional $10.0 million to $20.0 million of capital expenditures related to
environmental compliance, other than as a result of the cluster rules. The
ultimate financial impact of the proposed cluster rules on the Company will
depend upon the nature of the final regulations, the timing of required
implementation and the cost and availability of new technology. Expenditures to
comply with proposed and future environmental laws and regulations could have a
material adverse effect on the Company's business and financial condition. See
"Business--The Company--Environmental and Safety Matters".
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 attempting 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 a 1994 ordinance governing the County's industrial wastewater
pretreatment program. The lawsuit challenges, among other things, the treatment
capacity availability and the local effluent limit provisions of the ordinance.
In July 1996, the Court rendered a decision substantially in favor of the
Company and the other plaintiffs, but the County has appealed the Court's
decision. If the Company and the other plaintiffs do not prevail in that appeal
or are not successful in ongoing negotiations with the County, the Company may
not be able to obtain additional treatment capacity for future expansions and
the County could impose stricter permit limits. The imposition of currently
proposed permit limits or the failure of the Muskegon lawsuit could require
substantial additional expenditures, including short-term expenditures, and may
lead to substantial fines for any noncompliance. See "Business--The
Company--Environmental and Safety Matters".
The Company owns approximately 911,000 gross acres of timberlands in Maine,
789,400 of which are net forested acres. The Company believes that it can
harvest approximately 13,100 acres per year on a sustainable basis. On November
5, 1996, a proposed binding referendum measure to eliminate clearcutting in
unincorporated areas in the State of Maine was defeated. A competing measure,
which could establish new forestry standards stricter than current law, but
which would not completely ban clearcutting, received a plurality vote. This
competing measure was supported by the Company, other major timber interests in
12
<PAGE>
Maine, several environmental groups as well as the Governor of Maine. Under
Maine law, this competing measure will not automatically become law unless it
receives a simple majority of the votes cast in a special election to be held in
1997. If this competing measure does become law, the consequence to the Company
is not expected to be material because such measure generally reflects
sustainable forestry initiatives that have already been voluntarily adopted by
the Company. See "Business--Timberlands".
CONTROL BY MAJORITY STOCKHOLDER
As of the date of this Prospectus, Holdings owned 100% of the Company's
voting stock. Sappi controls approximately 75.07% of Holdings' outstanding
voting stock on a fully diluted basis. Pursuant to a Shareholders Agreement (as
defined) among Sappi, DLJMB, UBSC, Holdings, S.D. Warren (as successor by merger
to SDW Acquisition Corporation ("SDW Acquisition") and certain other parties,
Sappi is entitled to nominate a majority of the Board of Directors of Holdings
and has certain other special approval rights. Accordingly, it is expected that
Sappi will exercise significant influence over the Board of Directors and
business and operations of each of Holdings and the Company. Subject to the
restrictions on corporate actions described under "--Restrictions on Company's
Corporate Actions", Sappi may be deemed to control Holdings and the Company. See
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions".
RESTRICTIONS ON THE COMPANY'S CORPORATE ACTIONS
Pursuant to the Shareholders Agreement, the Company has agreed not to take
certain corporate actions, including (i) dispositions of certain subsidiaries or
divisions of the Company, (ii) the hiring or dismissal of the chief executive
officer or chief financial officer of the Company, (iii) any merger in which the
Company is not the surviving corporation and (iv) any change in the capital
structure of the Company (including the incurrence of indebtedness) involving
amounts in excess of specified thresholds, without not only approval by the
majority of the board of Holdings present at a meeting at which a Quorum exists
but also approval by at least one Sappi Group director, the DLJ Group director
and, in certain cases, the UBS Group director (as such terms are defined in the
Shareholders Agreement). Consequently, each of the Sappi Group, the DLJ Group
and, in certain cases, the UBS Group effectively have the power to block such
actions. In addition, the Shareholders Agreement provides that the annual
business plan or budget of the Company must be approved by a director designated
by each of such Groups. Compliance with such special approval requirements could
delay or be disruptive to the normal corporate functioning of the Company. See
"Security Ownership of Certain Beneficial Owners and Management--Shareholders
Agreement".
REQUIREMENT TO DO BUSINESS WITH SAPPI AFFILIATES
Pursuant to the Shareholders Agreement, if the Company sells products
outside of the United States and Canada, it is, subject to certain exceptions,
required to enter into arms' length marketing agreements with affiliates of
Sappi relating to such sales. For the nine months ended July 3, 1996, the
Company sold approximately $71.1 million of products through affiliates of Sappi
and expensed fees of approximately $4.3 million. See "Certain Relationships and
Related Transactions--Transactions With Related Parties".
During fiscal year 1996, the Company began purchasing products from certain
affiliates in U.S. Dollars primarily for sale to external customers. The Company
receives commissions from the affiliates on such sales. To date, these
transactions have not been material.
RESTRICTIONS ON MAKING A CHANGE OF CONTROL OFFER; ANTITAKEOVER EFFECTS
OF CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control, as defined in the Indenture, the
Certificate of Designations or the Exchange Debenture Indenture, as the case may
be, each holder of Notes, Senior Preferred Stock or, if issued, Exchange
Debentures, will have the right to require the Company to purchase all or part
of such holder's Notes, Senior Preferred Stock or, if issued, Exchange
Debentures, at a repurchase price equal to 101% of the aggregate principal
amount or Specified Amount thereof, as the case may be, plus accrued and unpaid
interest or dividends (other than Accumulated Dividends) or interest, as the
case may
13
<PAGE>
be. See "Description of the Notes--Repurchase at the Option of Holders--Change
of Control"; "Description of the Senior Preferred Stock--Change of Control"; and
"Description of the Exchange Debentures-- Change of Control".
The Credit Agreement and the A/R Facility each contain, and other
indebtedness may contain, prohibitions of certain events which would constitute
a Change of Control. In addition, the exercise by the holders of the Notes, the
Senior Preferred Stock or, if issued, the Exchange Debentures of their right to
require the Company to repurchase the Notes, the Senior Preferred Stock or, if
issued, the Exchange Debentures could cause a default under the Credit Agreement
or such other indebtedness, even if the Change of Control itself does not.
Finally, the Company's ability to pay cash to the holders of the Notes, the
Senior Preferred Stock or, if issued, the Exchange Debentures, upon a repurchase
may be limited by the Company's then existing financing resources. See
"Description of the Credit Agreement and the A/R Facility".
The Change of Control purchase feature of the Notes, the Senior Preferred
Stock or, if issued, the Exchange Debentures and the Change of Control
prohibitions in each of the Credit Agreement and the A/R Facility may in certain
circumstances discourage or make more difficult a sale or takeover of the
Company and, thus, the removal of incumbent management.
TAX CONSEQUENCES OF DISTRIBUTIONS WITH RESPECT TO THE SENIOR PREFERRED STOCK
AND EXCHANGE OF EXCHANGE DEBENTURES
The redemption price of the Senior Preferred Stock substantially exceeds its
issue price. As a result, a holder will be required to treat such excess as a
series of constructive distributions on the Senior Preferred Stock occurring
over the life of such stock. To the extent of the Company's current and
accumulated earnings and profits (as calculated for Federal income tax
purposes), the amount of each such constructive distribution will be includible
in a holder's income as ordinary dividend income (subject to the applicable
dividends received deduction) at the time such distribution is deemed to occur,
notwithstanding that the cash attributable to such income will not be received
by the holder until a subsequent period.
The Company may, at its option and under certain circumstances, exchange
Exchange Debentures for the Senior Preferred Stock. Any such exchange will be a
taxable event to holders of the Senior Preferred Stock. Furthermore, the
Exchange Debentures will be treated as having been issued with original issue
discount ("OID") for Federal income tax purposes. Holders of Exchange Debentures
will be required to include such OID (as ordinary income) in income over the
life of the Exchange Debentures, in advance of the receipt of the cash
attributable to such income. See "Certain Federal Income Tax Considerations".
LIMITATION ON CASH DIVIDENDS; OBLIGATIONS WITH RESPECT TO HOLDINGS PREFERRED
STOCK
The Company is not required to pay cash dividends on the Senior Preferred
Stock until March 15, 2000. 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 for any period ending on or prior to December 15,
1999. In addition, the terms of the Credit Agreement and the Indenture 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
"Description of the Credit Agreement and the A/R Facility"; "Description of the
Notes--Certain Covenants"; and "Description of the Senior Preferred
Stock--Dividends". In addition, the Company would have to fund any cash
dividends payable with respect to the 15% Senior Exchangeable Preferred Stock of
Holdings ("Holdings Preferred Stock"). Holdings is not required to pay cash
dividends on the Holdings Preferred Stock until March 15, 2000. See "The
Acquisition".
RISK THAT NOTE OFFERING DETERMINED A FRAUDULENT CONVEYANCE
Various laws enacted for the protection of creditors may apply to the Notes
and, if issued, the Exchange Debentures. If a court in a lawsuit by a creditor
or a representative of creditors (such as a trustee in bankruptcy or the Company
itself as debtor-in-possession) were to determine that SDW Acquisition or the
Company did not receive fair consideration or reasonably equivalent value for
incurring the indebtedness evidenced by the Notes and, if issued, the Exchange
Debentures, and at the time of such incurrence SDW Acquisition or the Company
(i) was insolvent or was rendered insolvent by such incurrence, (ii) had
14
<PAGE>
unreasonably small capital with which to carry on its business and all
businesses in which it intended to engage or (iii) intended to incur, or
believed it would incur, debts beyond its ability to repay as such debts
matured, then such court could invalidate, in whole or in part, such
indebtedness as a fraudulent conveyance. The obligations of the Company under
the Notes and, if issued, the Exchange Debentures, could then be avoided, in
which case a court may direct the return of all payments made thereunder to the
Company or to a fund for the benefit of its creditors. Alternatively, a court
could subordinate the Notes and, if issued, the Exchange Debentures, to all
existing and future indebtedness of the Company.
The measure of insolvency for purposes of the foregoing will vary depending
upon which jurisdiction's law is being applied. Generally, however, an entity
would be considered insolvent if (i) the amount of its debts (including certain
contingent liabilities) is greater than all of its assets at a fair valuation or
(ii) the present fair saleable value of its assets is less than the amount that
will be required to pay its probable liabilities on its existing debts as they
become absolute and mature.
In rendering opinions with respect to the validity of the Notes and, if
issued, the Exchange Debentures, counsel did not express any opinion as to
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, including federal and state statutes dealing with
fraudulent conveyances.
LIQUIDITY OF MARKET
Although DLJSC has advised the Company that it currently makes a market in
the Securities, it is not obligated to do so and may discontinue such market
making at any time without notice. The Securities are not listed on any national
securities exchange or admitted to trading in the National Association of
Securities Dealers Automated Quotation System. Accordingly, no assurance can be
given as to the liquidity of the trading market for any of the Securities. If a
trading market is not maintained, holders of the Securities may experience
difficulty in reselling such Securities or may be unable to sell them at all.
Future trading prices of the Securities will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities. Depending on prevailing
interest rates, the market for similar securities and other factors, including
the financial condition of the Company, the Securities may trade at a discount
from their principal amount or liquidation preference, as the case may be.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of any Securities in
any market making transaction in connection with which this Prospectus may be
delivered.
DIVIDEND POLICY
The Company is not required to pay cash dividends on the Senior Preferred
Stock until March 15, 2000. 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 for any period ending on or prior to December 15,
1999. In addition, the terms of the Credit Agreement and the Indenture 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
"Description of the Credit Agreement and the A/R Facility"; "Description of the
Notes--Certain Covenants"; and "Description of the Senior Preferred
Stock--Dividends".
15
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company at July 3, 1996. This table should be read in conjunction with the
Company's Financial Statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(IN
MILLIONS)
-----------
<S> <C>
Current portion of long-term debt.................................................................... $ 46.6
-----------
Long-term debt:
Revolving Credit Facility (1)...................................................................... --
Term Loan Facility (1)............................................................................. 411.4
Notes.............................................................................................. 375.0
Other (2).......................................................................................... 116.4
-----------
Total long-term debt............................................................................. 902.8
-----------
Senior Preferred Stock (3)........................................................................... 84.5
-----------
Stockholder's equity:
Common Stock and paid-in capital................................................................... 331.8
Retained earnings.................................................................................. 26.4
-----------
Total stockholder's equity....................................................................... 358.2
-----------
Total capitalization........................................................................... $ 1,392.1
-----------
-----------
</TABLE>
- ------------------------
(1) SDW Acquisition financed the Acquisition in part through borrowings of
$630.0 million under senior secured term loan facilities (the "Term Loan
Facilities") and initial borrowings of $160.2 million under a $250.0 million
revolving credit facility (the "Revolving Credit Facility" and, together
with the Term Loan Facilities, the "Bank Financing"). The Company and SDWF
(as defined) obtained the five-year A/R Facility, the proceeds of which were
used to prepay, in an aggregate principal amount, $100.0 million of the
final installments of the Tranche A Term Loans (as defined) and Tranche B
Term Loans (as defined). See "Description of the Credit Agreement and the
A/R Facility".
(2) Consists principally of tax-exempt industrial revenue and pollution control
bonds.
(3) Liquidation value, including unpaid dividends, was $92.9 million at July 3,
1996.
16
<PAGE>
SELECTED HISTORICAL 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 (whose report expresses
an unqualified opinion and includes an explanatory paragraph relating to the
comparability of the Predecessor Corporation's financial statements). 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. This data
should be read in conjunction with the Company's Financial Statement appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWELVE NINE SEPTEMBER 25,
MONTHS TWELVE MONTHS TWELVE MONTHS MONTHS 1994
ENDED ENDED ENDED ENDED THROUGH
DECEMBER 28, DECEMBER 26, DECEMBER 25, SEPTEMBER 24, DECEMBER 20,
1991 1992(1) 1993 1994 1994
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
<CAPTION>
S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
S.D. WARREN COMPANY COMPANY COMPANY COMPANY
COMPANY AND AND AND AND AND
CERTAIN CERTAIN CERTAIN CERTAIN CERTAIN
RELATED RELATED RELATED RELATED RELATED
AFFILLIATES AFFILIATES AFFILIATES AFFILIATES AFFILIATES
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
------------ ------------- ------------- ------------- -------------
(IN MILLIONS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Sales............................................... $ 1,169.7 $ 1,212.8 $ 1,143.6 $ 828.8 $ 313.6
Gross profit........................................ 144.6 182.5 168.1 106.4 49.9
Selling, general and administrative expenses........ 92.0 91.0 91.7 72.1 22.2
Restructuring charges............................... 38.0 -- 66.1 -- --
Income from operations.............................. 14.6 91.5 10.3 34.3 27.7
Other income (expense), net......................... 0.1 0.1 0.1 0.1 (0.5)
Interest expense.................................... 9.3 9.0 8.5 6.4 2.3
Income tax provision................................ 2.6 32.0 6.5 11.2 9.9
Extraordinary item, net of tax...................... -- -- -- -- --
Net income (loss)................................... 2.8 50.6 (4.6) 16.8 15.0
Dividends and accretion on Senior Preferred Stock... -- -- -- -- --
Net income (loss) applicable to common
stockholders...................................... 2.8 50.6 (4.6) 16.8 15.0
SHARE DATA:
Net earnings per common share (in millions)......... $ -- $ -- $ -- $ -- $ --
Weighted average common shares outstanding.......... -- -- -- -- --
OTHER FINANCIAL DATA:
EBITDA (2).......................................... 180.9 183.1 169.5 105.9 56.5
Capital expenditures................................ 53.7 70.1 68.9 32.3 14.5
Depreciation, cost of timber harvested and
amortization...................................... 128.3 91.6 93.1 71.6 28.8
Ratio of earnings to fixed charges (3).............. 1.3x 5.8x 1.1x 3.1x 8.2x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital..................................... $ 49.4 $ 67.0 $ 47.1 $ 156.2 $ 233.2
Total assets........................................ 1,699.4 1,696.8 1,711.7 1,676.9 1,737.1
Total debt (including current maturities)........... 125.2 125.7 124.3 119.8 119.3
Senior Preferred Stock (5).......................... -- -- -- -- --
Parent's equity..................................... 1,185.1 1,152.3 1,088.1 1,136.5 1,219.1
Stockholder's equity................................ -- -- -- -- --
<CAPTION>
DECEMBER 21, NINE
1994 MONTHS
THROUGH ENDED
SEPTEMBER 27, JULY 3,
1995 1996
------------- ---------------
<S> <C> <C>
S.D. WARREN S.D. WARREN
COMPANY COMPANY
AND AND
SUBSIDIARIES SUBSIDIARIES
(SUCCESSOR) (SUCCESSOR)
------------- ---------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Sales............................................... $ 1,155.8 $ 1,066.8
Gross profit........................................ 269.8 192.7
Selling, general and administrative expenses........ 96.7 98.1
Restructuring charges............................... -- --
Income from operations.............................. 173.1 94.6
Other income (expense), net......................... 3.2 (1.3)
Interest expense.................................... 106.0 84.3
Income tax provision................................ 28.2 3.6
Extraordinary item, net of tax...................... -- (2.0)
Net income (loss)................................... 42.1 3.4
Dividends and accretion on Senior Preferred Stock... 9.1 10.0
Net income (loss) applicable to common
stockholders...................................... 33.0 (6.6)
SHARE DATA:
Net earnings per common share (in millions)......... $ 0.33 $ (0.07)
Weighted average common shares outstanding.......... 100 100
OTHER FINANCIAL DATA:
EBITDA (2).......................................... 262.9 181.0
Capital expenditures................................ 33.7 32.2
Depreciation, cost of timber harvested and
amortization...................................... 89.8 86.4
Ratio of earnings to fixed charges (3).............. 1.4x (4)
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital..................................... $ 177.6 $ 88.7
Total assets........................................ 1,887.6 1,681.0
Total debt (including current maturities)........... 1,127.4 949.4
Senior Preferred Stock (5).......................... 74.5 84.5
Parent's equity..................................... -- --
Stockholder's equity................................ 364.8 358.2
</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.
(2) EBITDA is defined as income from operations before restructuring expense
plus depreciation, cost of timber harvested and amortization as reported in
the Statements of Cash Flows. EBITDA is presented because it is a widely
accepted financial indicator of a Company's ability to service and incur
debt. EBITDA should not be considered by an investor as an alternative to
GAAP operating income, as an indicator of the Company's operating
performance or as an alternative to the Company's cash flow from operating
activities as a measure of liquidity.
(3) For purposes of computing the ratio of earnings to fixed charges, fixed
charges consist of interest expense on long-term debt, amortization of
deferred financing costs and that portion (one third) of rentals deemed to
be representative of interest. Earnings consist of income before income
taxes, plus fixed charges.
(4) For the period ended July 3, 1996, the Company's earnings were insufficient
to cover fixed charges by $8.6 million.
(5) Liquidation value was $92.9 million at July 3, 1996.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, demand for the Company's products
has decreased. Accordingly, demand for the Company's products was lower during
the nine months ended July 3, 1996 as compared to demand levels during the
second half of fiscal 1995. This decrease is 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 demand resulted in
reduced prices, with discounting occurring on certain paper product grades.
Accordingly, the Company realized lower net selling prices per ton during the
first nine months of fiscal year 1996 as compared to prices realized during the
second half of fiscal year 1995. However, because the impact of the increase in
prices in 1995 was not realized until the latter half of fiscal year 1995, net
selling prices realized during the nine months ended July 3, 1996 remained
relatively flat as compared to those prices realized during the same period last
year. In addition, the cost of raw materials decreased during the nine months
ended July 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 its ability to benefit
from (and its 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 fiscal 1996. The reduction of inventory levels by the Company's
customers and the weaker market conditions continued into the summer months
which are typically strong due to increased demand from catalog printers. In
addition, new capacity commencing later this year in the United States and
overseas is expected to increase competition for market share and may delay any
improvement in market conditions. The paper market is highly cyclical and 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 affected.
The following discussion and analysis should be read in conjunction with the
Financial Statements of the Company appearing elsewhere in this Prospectus.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JULY 3, 1996 COMPARED TO THE NINE MONTHS ENDED JUNE 28, 1995
The following discussion compares the nine months ended July 3, 1996 with
the nine months ended June 28, 1995. As used herein, the nine months ended June
28, 1995 refers to the Predecessor Corporation for the period September 25, 1994
through December 20, 1994 combined with the Successor Corporation for the period
December 21, 1994 through June 28, 1995. For purposes of this discussion,
"Predecessor
18
<PAGE>
Corporation" refers to Warren and certain related affiliates on or prior to
December 20, 1994 (during which time Warren was a wholly owned subsidiary of
Scott) and "Successor Corporation" refers to Warren after December 20, 1994.
SALES
The Company's sales for the nine months ended July 3, 1996 were $1,066.8
million compared to $1,077.9 million for the nine months ended June 28, 1995.
Both average net revenue per ton and shipment volume were relatively flat during
the nine months ended July 3, 1996 as compared to the same period last year.
COST OF GOODS SOLD
The Company's cost of goods sold for the nine months ended July 3, 1996 was
$874.1 million compared to $853.7 million for the nine months ended June 28,
1995, an increase of $20.4 million or 2.4%. This increase was primarily
attributable to costs related to lower production during the first fiscal
quarter, the net effect of a power outage which resulted in a loss of production
for approximately 24 days during the second fiscal quarter, unplanned
maintenance costs and inventory valuation adjustments.
The increase in pulp costs which occurred during the first fiscal quarter of
1996 as compared to the same period last year was offset by a decrease in the
market price of pulp during the third quarter as compared to the same period in
fiscal year 1995. The Company expects the lower pulp costs to continue through
the remainder of the fiscal year.
The increase in cost of goods sold resulted in gross profit as a percent of
sales decreasing to 18.1% for the nine months ending July 3, 1996 from 20.8% for
the same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense was $98.1 million for the nine
months ended July 3, 1996 compared to $81.6 million for the nine months ended
June 28, 1995, an increase of $16.5 million. Selling, general and administrative
expense as a percent of sales increased to 9.2% for the nine months ended July
3, 1996 as compared to 7.6% for the nine months ended June 28, 1995. This
increase was primarily due to additional administrative expenses 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 nine months ended July 3, 1996 was
$84.3 million compared to $76.3 million for the nine months ended June 28, 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 nine months ended June 28, 1995, fees associated with a bridge loan made
available to the Company at the time of the Acquisition.
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. 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
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 was primarily attributable
19
<PAGE>
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 cost of goods sold for the nine months ended September 27,
1995 was $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 was
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 expense 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.
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 was 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 was primarily due to an increase in interest income which
resulted from 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 was primarily attributable to changes in the Company's
earnings levels.
20
<PAGE>
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 the 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 was 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 expense includes marketing and
distribution, research, administrative and general expenses. For the twelve
months ended December 20, 1994 the Company's selling, general and administrative
expense was $94.3 million compared to $91.7 million for the twelve months ended
December 25, 1993, an increase of $2.6 million or 2.8%.
RESTRUCTURING
During the fourth quarter of the twelve months ended December 25, 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 as of September 24, 1994 was fully utilized by the
Predecessor Corporation prior to the date of the Acquisition.
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, was primarily due to the aforementioned increase in cost of goods
sold.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED JULY 3, 1996 COMPARED TO NINE MONTHS ENDED JUNE 28, 1995
The Company's net cash provided by operating activities was $147.4 million
for the nine months ended July 3, 1996 as compared to $108.1 million for the
nine months ended June 28, 1995. This increase was primarily due to $90.0
million of proceeds received resulting from the sale of the Company's accounts
receivable as indicated in the Notes to Condensed Financial Statements. This
increase was partially offset by the decrease in net income, accounts payable
and accrued and other current liabilities.
Inventory tons increased at July 3, 1996 as compared to September 27, 1995
primarily due to a decline in demand as a result of weakened market conditions.
Although inventory tons increased, the inventories balance reflected on the
Condensed Balance Sheet indicates a decrease during such period due to
adjustments to the carrying value of certain inventories to net realizable
value. The decrease in accounts payable at July 3, 1996 compared to September
27, 1995 was primarily attributable to declining pulp prices when compared to
the end of fiscal year 1995. Accrued and other current liabilities decreased
during the nine months ended July 3, 1996 as compared to the balance at
September 27, 1995 primarily as a result of a significant semiannual interest
payment made in June 1996.
The Company's operating working capital decreased to $110.9 million at July
3, 1996 compared to $174.0 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.
This decrease primarily resulted from the sale of the Company's receivables.
The Company's ratio of current assets to current liabilities was 1.4 at July
3, 1996 compared to 1.6 at September 27, 1995. This decrease reflects the effect
of the sale of the Company's accounts receivable, partially offset by a decrease
in the current maturities of long-term debt, accounts payable and accrued and
other current liabilities.
Net cash used in investing activities for the nine months ended July 3, 1996
was $30.0 million compared to $1,522.5 million for the nine months ended June
28, 1995. Net cash used in investing activities for the nine months ended June
28, 1995 includes the effect of the cash outflows related to the Acquisition of
approximately $1,493.7 million.
Capital expenditures for the nine months ended July 3, 1996 were $32.2
million compared to $29.4 million for the nine months ended June 28, 1995.
Capital spending for the nine months ended July 3, 1996 and June 28, 1995 was
primarily for improvements to the Company's manufacturing and distribution
facilities.
Capital expenditures were expected to approximate $50.0 million during
fiscal year 1996 due to a wide variety of increasingly stringent environmental
laws and regulations, including compliance with the cluster rules (see the Notes
to Unaudited Condensed Financial Statements). The Company anticipates that
aggregate capital expenditures related to environmental compliance will be
approximately $86.0 million to $96.0 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 nine months ended July 3, 1996
was $177.8 million compared to net cash provided of $1,409.7 million for the
nine months ended June 28, 1995. During the nine months ended July 3, 1996, the
Company borrowed and repaid $56.1 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 semiannual installments on a pro rata basis. In addition, in April 1996,
the Company utilized the cash received from the aforementioned sale of the
Company's accounts receivable and amounts on hand to repay $100 million of its
outstanding long-term debt (see Notes to Unaudited Condensed Financial
Statements). Cash provided by financing activities for the nine months ended
June 28, 1995 includes proceeds from long-term debt of $1,130.1 million. During
the nine months ended June 28, 1995, the Company repaid $162.2
22
<PAGE>
million of amounts primarily borrowed under the Company's revolving 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 nine months ended June 28, 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 $31.6 million.
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 receivable, 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 a 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 Facilities.
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 (as defined) 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.
23
<PAGE>
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.
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
At July 3, 1996, the Company's long-term debt was $902.8 million compared to
$1,048.8 million at September 27, 1995, a decrease of $146.0 million. The
current maturities of long-term debt balance of $46.6 million at July 3, 1996
primarily represents the amounts payable in December 1996 and June 1997 under
the Company's term loan facilities. The current maturities of long-term debt
balance as of September 27, 1995 primarily reflects payments totalling $74.9
million made during the first quarter of fiscal year 1996 pursuant to an excess
cash flow requirement as indicated in the Notes to Condensed Financial
Statements. In addition, the Company paid $100.0 million in April 1996 on
amounts outstanding under the Company's credit facility obligations. The funds
used for this debt payment were primarily provided by the aforementioned sale of
the Company's accounts receivable. Approximately $3.3 million of financing fees
that had previously been deferred were written off in the third fiscal quarter
as a result of this prepayment. This write-off of $3.3 million has been recorded
as an extraordinary item in the Company's Condensed Statement of Operations net
of a $1.3 million tax effect as indicated in the Notes to Unaudited Condensed
Financial Statements.
The Company has a $250.0 million revolving credit facility to finance
working capital needs. At July 3, 1996, the Company did not have any borrowings
outstanding under this facility, resulting in an unused
24
<PAGE>
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 on the unused daily
commitment available under the revolving credit facility. The fee ranges between
0.375% and 0.50% per annum and is based upon the achievement of a certain
financial ratio. From September 27, 1995 through April 26, 1996 (as of which
date the Credit Agreement was amended and restated) this fee was 0.50% and from
April 26, 1996 through July 3, 1996 this fee was 0.375%.
In addition, the Company has a Letter of Credit Facility (as defined) 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
each of July 3, 1996 and September 27, 1995. The Company pays a commission and a
fronting fee between 1.0% and 2.5% and between 0.20% and 0.25%, respectively, on
the outstanding letters of credit balance. Such fees are based on the
achievement of a certain financial ratio. From September 27, 1995 through April
26, 1996, the commission was 2.50% and the fronting fee was 2.50%, and from
April 26, 1996 through July 3, 1996 the commission and fronting fees were 1.75%
and 0.20%, respectively.
The Credit Agreement, which was amended and restated as of April 26, 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.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and debt. 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.
During the third quarter of fiscal 1996, the Company commenced transacting
business in currencies other than the U.S. Dollar, primarily the Japanese Yen.
The Company manages the potential exposure associated with transacting in
foreign currencies through the use of foreign currency forward contracts. These
contracts are used to offset the effects of exchange rate fluctuations on a
portion of the underlying foreign currency denominated exposure. These exposures
include firm intercompany trade accounts receivable. Realized and unrealized
gains and losses on these contracts at July 3, 1996 were insignificant. See the
Notes to Unaudited Condensed Financial Statements for additional information.
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 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.
25
<PAGE>
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. As of July 3, 1996, accumulated
amortization related to this asset was $19.8 million.
SUBSEQUENT EVENTS
On October 17, 1996, a fire occurred at an outside warehouse location in
Muskegon, Michigan, which resulted in the loss of approximately 8,000 tons of
inventory valued in excess of $5.5 million. While the Company cannot reasonably
estimate at this time the total loss experienced, or the amount to be recovered
under its insurance policies, it does not expect that total losses will exceed
its insurance coverage limits.
Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. Damage to mill equipment is being repaired and normal
operating mill conditions are being restored. While the mill is not yet
operating at full production, the Company anticipates that it will be in the
near future. While the Company cannot reasonably estimate at this time the total
loss experienced, or the exact amount to be recovered under its insurance
policies, early indications suggest that such amounts may be significant.
However, total losses are not expected to exceed the Company's insurance
coverage limits, which include both business interruption and property loss
coverage.
On October 24, 1996, the Company announced a restructuring plan that will
likely result in a pretax charge of approximately $10.0 million in the first
quarter of fiscal 1997. The charge will be taken to cover the one-time costs
related to the reduction of up to approximately 200 salaried positions, or
approximately 14% of the Company's salaried workforce.
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". FAS No. 121
addresses the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill when the events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The implementation of FAS No. 121 is not expected to have a
material impact on the Company's financial position, results of operations or
cash flows.
In October 1995, the Financial Accounting Standards Board issued FAS No. 123
"Accounting for Stock-Based Compensation". FAS No. 123 addresses the financial
accounting and reporting standards for stock-based employee compensation plans.
FAS No. 123 permits an entity to either record the effects of stock-based
employee compensation plans in its financial statements or present pro-forma
disclosures in the notes to the financial statements. The implementation of FAS
No. 123 is not expected to have a material impact the Company's financial
position, results of operations or cash flows.
In October 1996, the Financial Accounting Standards Board issued FAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." FAS No. 125 addresses accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities.
FAS No. 125 is required to be adopted in 1997. The implementation of FAS No. 125
is not expected to have a material impact on the Company's financial position,
results of operations or cash flows.
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
26
<PAGE>
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 Holdings' 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.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Deloitte & Touche LLP were appointed independent auditors to Holdings, the
parent of the Company, prior to the Acquisition. Coopers & Lybrand L.L.P. served
as independent accountants of the Predecessor Corporation prior to the
Acquisition and, upon completion of the Acquisition, Deloitte & Touche LLP
replaced Coopers & Lybrand L.L.P. as independent auditors of the Predecessor
Corporation. 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 to be filed
with the Commission. As a result, the Company engaged Deloitte & Touche LLP to
reaudit the Predecessor Corporation's financial statements included in this
Prospectus.
27
<PAGE>
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 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 entered into the Stock Purchase Agreement
pursuant to which, on December 20, 1994, SDW Acquisition acquired from Scott all
of the outstanding capital stock of Warren, then a wholly owned subsidiary of
Scott, and certain related affiliates of Scott. Immediately following the
Acquisition, SDW Acquisition merged with and into Warren (the "Merger"), with
Warren surviving.
SDW Holdings Corporation owns all the outstanding Common Stock of Warren.
The largest investor in Holdings is 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 DLJMB and UBSC. 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 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
28
<PAGE>
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. Speciality 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 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 "Risk Factors--Cyclical Industry Conditions; Strong Competition" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" 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. See "Risk Factors--Cyclical Industry
Conditions; Strong Competition".
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 is the leading seller of #1 and #3 grades of coated free paper in North
America and is among the leaders with respect to the #2 grade based on sales for
the nine months ended July 3, 1996.
DISTRIBUTION
The Company, 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 the Company's products. Warren was the first to develop merchant
distribution for branded coated paper. In 1917, Warren formed an association of
paper merchants that became the Warren Merchant's Association. Today, the
Company'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 their purchase price from Warren to a
competitive market price. The product is delivered to the customer either
directly from the
29
<PAGE>
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.
The Company 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). The Company 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.
The Company 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 "Certain Relationships and Related Transactions--Transactions with
Related Parties" and "Risk Factors--Requirement to Do Business with Sappi
Affiliates".
CUSTOMERS
For the nine months ended July 3, 1996, the Company's customers that
individually accounted for greater than 10% of sales were divisions or
subsidiaries of International Paper Company, Central National-Gottesman Inc.,
and 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. See "Risk Factors--Dependence on Principal Customers" and the Notes
to Financial Statements.
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 the Company 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. The Company 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.
The Company 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. The Company'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.
30
<PAGE>
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.
The research personnel work closely with marketing, sales and manufacturing
personnel as well as the Company's 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. The Company 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.
WOOD AND PULP
In fiscal 1995, the Company manufactured approximately 65% of its pulp
requirements. This vertical integration reduces the Company's exposure to (and
ability to benefit from) fluctuations in the market price for pulp. All three of
the Company's northern mills are integrated with respect to hardwood pulp
production and the Somerset mill 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. See "Risk Factors--Stringent Environmental Regulation; Proposed Timber
Regulation" and "Business-- Timberlands".
The Company 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 suppliers to
meet market requirements for recycled products.
ENERGY REQUIREMENTS
The Company's energy requirements are satisfied through wood and by-products
derived from the Company's pulping processs (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 is satisfied
through cogeneration agreements ("the 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
31
<PAGE>
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 Financial Condition and Results of Operations".
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.
EMPLOYEES AND LABOR RELATIONS
As of July 3, 1996, the Company had 4,156 employees. Approximately 68% 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 flow could be
adversely affected. Other than the Somerset contract, there are no labor
agreements subject to renegotiation until June 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 satisfactory.
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. See "Risk Factors--Stringent Environmental Regulation; Proposed Timber
Regulation".
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 attempting 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
32
<PAGE>
accepted administrative practice. In addition, the Muskegon mill is involved, as
one of various industrial plaintiffs, in litigation with the County of Muskegon
regarding a 1994 ordinance governing the County's industrial wastewater
pretreatment program. The lawsuit challenges, among other things, the treatment
capacity availability and local effluent limit provisions of the ordinance. In
July 1996, the Court rendered a decision substantially in favor of the Company
and the other plaintiffs, but the County has appealed the Court's decision. If
the Company and the other plaintiffs do not prevail in that appeal or are not
successful in ongoing negotiations with the County, the Company may not be able
to obtain additional treatment capacity for future expansions and the County
could impose stricter permit limits. The imposition of currently proposed permit
limits or the failure of the Muskegon lawsuit 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 portions 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, if adopted as currently
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 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.
Warren 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, as a result of the Acquisition, Warren'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 program
sponsored by the State of Maine, in 1993, the Predecessor Corporation performed
a self-assessment audit with respect to OSHA mandates at its Somerset and
Westbrook mills and
33
<PAGE>
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 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.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position,
results of operations or cash flows.
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.
The following table sets forth the location and use of the Company's
principal facilities, which are owned in fee unless otherwise indicated. All of
the Company's properties are pledged as collateral under Warren's Credit
Facilities (see the Notes to Financial Statements).
<TABLE>
<CAPTION>
LOCATION USE
- --------------------------- -------------------------------------------------------------------------------------
<S> <C>
Skowhegan, Maine Manufacturing facility for the manufacture of coated paper and softwood and hardwood
(Somerset Mill) 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>
- ------------------------
(a) Subject to a lease that expired in September 1996, but which has been
extended through April 1997.
(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 that it can harvest approximately 13,100 acres per year on a
sustainable basis.
On November 5, 1996, a proposed binding referendum measure to eliminate
clearcutting in unincorporated areas in the State of Maine was defeated. A
competing measure, which could establish new forestry standards stricter than
current law, but which would not completely ban clearcutting, received a
plurality
34
<PAGE>
vote. This competing measure was supported by the Company, other major timber
interests in Maine, several environmental groups as well as the Governor of
Maine. Under Maine law, this competing measure will not automatically become law
unless it receives a simple majority of the votes cast in a special election to
be held in 1997. If this measure does become law, the consequence to the Company
is not expected to be material because such measure generally reflects
sustainable forestry initiatives that have already been voluntarily adopted by
the Company. See "Risk Factors--Stringent Environmental Regulation; Proposed
Timber Regulation".
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. However, as a result of weaker market conditions, the
Company temporarily reduced production levels at certain of its manufacturing
facilities during the first quarter of this fiscal year. See "Risk
Factors--Cyclical Industry Conditions; Strong Competition"; "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
35
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
THE COMPANY
Set forth below are the names, ages (at July 3, 1996) and positions of the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- ------------------------------------------------------
<S> <C> <C>
Eugene van As 57 Director, Chairman of the Board
Monte R. Haymon 58 Director, President, Chief Executive Officer
James H. Frick, Jr. 57 Director, Vice President(1)
O. Harley Wood 54 Director, Vice President
William E. Hewitt 61 Director, Vice President
Trevor L. Larkan 41 Director, Chief Financial Officer, Vice President,
Treasurer, Secretary
E. Dannis Herring 43 Director, Vice President
Pablo P. Zamora 54 Vice President
Lewis W. Mohler 59 Vice President
</TABLE>
- ------------------------
(1) Mr. Frick retired as Vice President--Sales and Marketing effective August 1,
1996. Mr. Frick continues to serve as a Director of the Company and has
entered into a consulting agreement with the Company for the period August
1, 1996 through July 31, 1999. The fee for such consulting services to be
paid to Mr. Frick under such agreement is not considered significant.
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
directors and executive officers of the Company.
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.
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 Vice President--Coated
Printing and Publishing from January 1984 through December 1994 and Vice
President/Division Manager Printing and Publishing beginning in 1975.
36
<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, 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 Procter 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.
37
<PAGE>
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. 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
YEAR SALARY OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION (1)(2) ($) (#) (3)
- ------------------------------------------------------------ ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Eugene van As............................................... 1995 $ -- $ -- $ --1995
Chief Executive Officer and President (4)
J. Richard Leaman, Jr....................................... 1995 211,074 0 0
Former Chief Executive Officer 1994 448,767 25,000(6) 504,334
and 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--Sales and Marketing (7) 1994 183,967 6,000(6) 161,924
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 1994 150,222 4,500(6) 6,707
and 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 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,
$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"
consists 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 Warren paid Sappi a fee.
(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 not considered
significant.
38
<PAGE>
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 Warren by Scott.
(7) Mr. Frick retired effective August 1, 1996 and will receive a distribution
pursuant to a Supplemental Executive Retirement Program in early 1997. This
amount will be treated as compensation and is not considered significant.
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 Company maintains a
Supplemental Executive Retirement Program for certain key executives. This plan
is a non-qualified deferred compensation plan.
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
39
<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.
40
<PAGE>
THE ACQUISITION
As of October 8, 1994, SDW Acquisition, a direct wholly owned subsidiary of
Holdings, entered into a definitive agreement (the "Stock Purchase Agreement")
pursuant to which, on December 20, 1994, SDW Acquisition acquired from Scott all
of the outstanding capital stock of Warren for a net cash purchase price of
approximately $1.5 billion, plus the assumption of various liabilities,
including approximately $121.9 million of outstanding indebtedness (including
capital leases) of the Company, subject to there being a Net Assets (as defined
therein) value of $1.6 billion at closing. Pursuant to the provisions of the
Stock Purchase Agreement, $75.0 million of cash was required to be on Warren's
balance sheet on the Closing Date, effectively reducing the cash purchase price
by such amount. Based on a closing Net Assets calculation delivered to the
Company by Scott pursuant to the Stock Purchase Agreement (the "Seller's Net
Assets Calculation"), the purchase price was reduced by approximately $43.6
million pursuant to a post-closing adjustment mechanism. The Company and Scott
have resolved a dispute regarding the Seller's Net Assets Calculation pursuant
to dispute procedures established in the Stock Purchase Agreement. The actual
amount of the purchase price adjustment was $48.0 million. Scott has since been
acquired by Kimberly-Clark Corporation.
The largest investor in Holdings is Sappi, which 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. With the S.D. Warren Acquisition, Sappi
became the largest coated free paper manufacturer in the world. Sappi is based
in Johannesburg, South Africa and employs approximately 23,000 people worldwide.
SDW Acquisition financed the Acquisition (including approximately $87.7
million of transaction expenses) with the following sources of funds: (i)
borrowings of $630.0 million under the Term Loan Facilities and initial
borrowings of $160.2 million under the $250.0 million Revolving Credit Facility,
of which $75.0 million was available for repayment following the Acquisition
with cash required to be on Warren's balance sheet at closing, (ii) the issuance
of $375.0 million of SDW Acquisition 12% Senior Subordinated Notes due 2004 (the
"SDW Acquisition Notes" and the offering thereof the "Note Offering"), (iii) the
issuance of $75.0 million in liquidation preference of SDW Acquisition 14%
Senior Exchangeable Preferred Stock due 2006 (the "SDW Acquisition Senior
Preferred Stock") as part of Units (the "Units" and the Offering thereof, the
"Unit Offering" and, together with the Note Offering, the "Offerings")
consisting of SDW Acquisition Senior Preferred Stock and Class A Warrants and
(iv) a net common equity contribution of $331.8 million from Holdings. Holdings'
common equity contribution was financed through the purchase of common equity
and Class B warrants of Holdings ("Class B Warrants") by the Investor Group, the
purchase of $37.5 million in liquidation preference of Holdings Preferred Stock
by DLJMB and UBSC and the issuance of Class A warrants of Holdings (the "Class A
Warrants") as part of the Unit Offering. The Bank Financing also included a
$220.0 million Letter of Credit Facility, pursuant to which letters of credit
were issued to support an existing letter of credit arranged by Scott and to
support the Company's obligations with respect to certain indebtedness and
capital and operating leases.
Immediately following the Acquisition, SDW Acquisition merged with and into
S.D. Warren and (i) the indebtedness outstanding under the Bank Financing and
the SDW Acquisition Notes was assumed by the Company (the "Series A Notes") and
(ii) the SDW Acquisition Senior Preferred Stock was converted into an equivalent
amount of the Company's 14% Series A Senior Exchangeable Preferred Stock due
2006 (the "Old Senior Preferred Stock").
Pursuant to an exchange offer consummated on May 31, 1995 (the "Exchange
Offer"), the Notes were issued by the Company for the Series A Notes and the
Senior Preferred Stock was issued by the Company in exchange for the Old Senior
Preferred Stock.
41
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is a wholly owned subsidiary of Holdings. Pursuant to the Credit
Agreement, certain guarantees and the Facilities (as defined) are secured by
security interests in all of the common stock of Warren. See "Description of the
Credit Agreement--Guarantees and Collateral Security". The following table sets
forth certain information with respect to the beneficial ownership of Common
Stock as of the date of this Prospectus. See "Risk Factors--Significant
Influence by Majority Stockholder".
<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............................................................... 6,593,749(3) 19.28
Partners, L.P. and certain
of its affiliate
140 Broadway
New York, NY 10005
UBS Capital LLC.................................................................... 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.
(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): DLJMB, 3,468,749 shares and UBSC, 693,750 shares. In addition,
UBSC's ownership includes 89,844 shares of Common Stock issuable upon
exercise of Class A Warrants that UBSC purchased in connection with its
purchase of the Units.
SHAREHOLDERS AGREEMENT
The following summary of the material provisions of the Shareholders
Agreement (as defined) 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 the Registration Statement of which this Prospectus forms a part.
In connection with the Acquisition, Sappi, an affiliate of Sappi, DLJMB,
UBSC, 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 following the Acquisition.
See "Risk Factors--Restrictions on the Company's Corporate Actions". The
following is a summary of the material terms of the Shareholders Agreement.
Capitalized terms used 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
42
<PAGE>
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. UBSC and its permitted transferees (the "UBS
Group") have the right to designate one director. The chief executive officer of
the Company is also a director and does not count as a designee for any member
of 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 (as defined), 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 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 (as defined)
(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 the
marketing agreements referred to below under "--Miscellaneous Provisions";
(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.
43
<PAGE>
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 (as defined) 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 (as defined) 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 (as defined); 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 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 (as defined) 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.
44
<PAGE>
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
Act, 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 arms' 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 exceptions, be required to enter into arms' length
marketing agreements with affiliates of Sappi. Each Shareholder has agreed not
to use Confidential Information (as defined) 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) 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).
45
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE COMPANY'S MOBILE FACILITY: ARRANGEMENTS WITH SCOTT
The Company'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, 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 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 nonessential 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 recent 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
(an affiliate of DLJSC), UBSC, Holdings and the Company (as successor by merger
to SDW Acquisition) entered into a Shareholders Agreement. See "Security
Ownership of Certain Beneficial Owners and Management--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 UBSC received a sponsor fee in the amount of $553,753.
In addition, DLJSC, an affiliate of DLJMB, received a sponsors 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.
TRANSACTIONS INVOLVING DLJMB AND UBSC
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 to acquire 3,593,749 shares of Common
Stock, and 3,125,000 shares of Common Stock; (ii) UBSC, 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; (iii)
DLJSC 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.
46
<PAGE>
Following the Acquisition, the Units became separately transferable. On July
6, 1995, DLJMB sold all of its Holdings Preferred Stock and 125,000 Class B
Warrants and UBSC sold all of its Holdings Preferred Stock and 25,000 Class B
Warrants.
TRANSACTIONS WITH RELATED PARTIES
Pursuant to the limitations on restricted payments outlined in the Credit
Agreement, the Indenture 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 incurred by the Company during the
nine months ended July 3, 1996 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
International Management AG ("SIM") 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 July 3, 1996, 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.
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 until
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 the entity through which Sappi holds its
interest in Holdings, 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 July 3, 1996.
The Company sells products to certain Sappi subsidiaries (primarily Sappi
Europe, SA, Specialty Pulp Services and U.S. Paper Corporation) at market rates.
These subsidiaries then sell the Company's products to external customers and
remitted the proceeds from such sales to Warren, net of a sales commission. For
the nine months ended July 3, 1996, the Company sold $71.1 million of products
to Sappi subsidiaries and expensed fees of approximately $4.3 million relating
to such sales. Trade accounts receivable at July 3, 1996 include approximately
$24.3 million due from subsidiaries of Sappi. The Company is in the process of
formalizing written agreements for these relationships. See "Risk
Factors--Control by Majority Stockholder".
47
<PAGE>
During fiscal year 1996, the Company began purchasing products from certain
affiliates in U.S. Dollars primarily for sale to external customers. The Company
receives commissions from the affiliates on such sale. These transactions to
date have not been material.
DESCRIPTION OF THE NOTES
GENERAL
The Notes were issued pursuant to an indenture between SDW Acquisition and
The Bank of New York, as trustee (the "Trustee") dated as of December 20, 1994
(the "SDW Acquisition Indenture") as amended by the supplemental indenture
between the Company and the Trustee dated as of December 20, 1994 (the
"Supplemental Indenture" and, with the SDW Acquisition Indenture, the
"Indenture"), a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus constitutes a part. The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Notes are subject to all such terms, and Holders of Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of the material provisions of the Indenture is qualified
in its entirety by reference to the Indenture, including the definitions therein
of certain terms used below, and the Trust Indenture Act. The definitions of
certain terms used in the following summary are set forth below under "--Certain
Definitions".
The Notes are general unsecured obligations of the Company, rank senior in
right of payment to or PARI PASSU in right of payment with all future
subordinated Indebtedness of the Company (including the Exchange Debentures, if
issued) and rank junior in right of payment to all existing and future Senior
Debt of the Company. See "--Subordination".
As of the date of this Prospectus, all of the Company's Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on December 15, 2004. Interest on the Notes will
accrue at the rate of 12% per annum and will be payable semi-annually in arrears
on each June 15 and December 15, to Holders of record on the immediately
preceding June 1 and December 1. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. Principal, premium, if any, and
interest, if any, on the Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or, at
the option of the Company, payment of interest may be made by check mailed to
the Holders of the Notes at their respective addresses set forth in the register
of Holders of Notes. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Notes were issued in denominations of $1,000 and integral
multiples thereof.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the Company's option prior to December 15, 1999. Thereafter, the
Notes will be subject to redemption at the option of the Company, in whole or in
part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on December 15 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------------ -----------
<S> <C>
1999.................................................................... 104.500%
2000.................................................................... 103.000%
2001.................................................................... 101.500%
2002 and thereafter..................................................... 100.000%
</TABLE>
48
<PAGE>
On or prior to December 15, 1997, the Company may redeem from time to time
up to $130.0 million in aggregate principal amount of Notes at a redemption
price of 111.0% of the principal amount thereof, plus accrued and unpaid
interest thereon to the redemption date, with the net proceeds of one or more
public offerings of common stock of Holdings; PROVIDED that at least $245.0
million in aggregate principal amount of Notes remain outstanding immediately
after such redemption; and PROVIDED FURTHER that such redemption shall occur
within 45 days of the date of the closing of any such public offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; PROVIDED
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
SUBORDINATION
The payment of principal, premium, if any, and interest on the Notes is
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full of all Senior Debt, whether outstanding on the Issue Date or
thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
winding up, receivership or similar proceeding relating to the Company or its
property, an assignment for the benefit of creditors or any marshalling of the
Company's assets and liabilities, in each such case whether voluntary or
involuntary, domestic or foreign, the holders of Senior Debt of the Company will
be entitled to receive payment in full of all Obligations due in respect of such
Senior Debt (including interest after the commencement of any such proceeding in
accordance with the terms of the applicable Senior Debt, whether or not such
interest is an allowed claim enforceable against the debtor in a bankruptcy case
under Title 11 of the United States Code) before the Holders of Notes will be
entitled to receive any payment (including any payment or other distribution
that may be payable by reason of the payment of any other Indebtedness of the
Company (including, without limitation, the Exchange Debentures) being
subordinated to the payment of the Notes) with respect to the Notes, and until
all Obligations with respect to Senior Debt of the Company are paid in full, any
such distribution to which the Holders of Notes would be entitled shall be made
to the holders of such Senior Debt (except that so long as the Notes are not
treated in any case or proceeding or other event described above as part of the
same class of claims as the Senior Debt or any class of claim on a parity with
or senior to the Senior Debt for any payment or distribution, Holders of Notes
may receive securities that are subordinated at least to the same extent as the
Notes to Senior Debt of the Company and any securities issued in exchange for
such Senior Debt and that are authorized by an order or decree of a court of
competent jurisdiction in a reorganization proceeding under any applicable
bankruptcy, insolvency or similar law which gives effect to the subordination of
the Notes to Senior Debt in a manner and with an effect which would be required
if this parenthetical clause were not included in this paragraph; PROVIDED that
the Senior Debt is assumed by the new corporation, if any, resulting from any
such reorganization or readjustment and issuing such securities.).
The Company also may not make any payment upon or in respect of the Notes
whether on account of principal, interest, premiums or otherwise (except in such
subordinated securities) if: (i) a default in the payment of the principal of,
premium, if any, or interest on any Senior Debt occurs and is continuing beyond
any applicable period of grace or (ii) any other default occurs and is
continuing with respect to Designated
49
<PAGE>
Senior Debt or would occur as a consequence of such payment that permits holders
of the Designated Senior Debt as to which such default relates to accelerate its
maturity without further notice (except such notice as may be required to effect
such acceleration) or lapse of time and the Trustee receives a notice of such
default (a "Payment Blockage Notice") from the Company or any representative of
the holders of any such Designated Senior Debt (including the administrative
agent under the Credit Agreement). Payments on the Notes may and shall be
resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in case of a non-payment default, the earlier
of the date on which such non-payment default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Debt has been accelerated and not
paid. No new period of payment blockage may be commenced within 365 days after
the receipt by the Trustee of any prior Payment Blockage Notice. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice.
The Indenture further requires that the Company promptly notify holders of
Senior Debt of the Company if payment of the Notes is accelerated because of an
Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. At July 3, 1996, the
aggregate principal amount of Senior Debt of the Company was $567.2 million. The
Indenture limits, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Debt, that the Company and its Restricted
Subsidiaries can incur. See "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock".
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase (the "Change of Control Payment").
Within 30 days following any Change of Control, the Company will mail a notice
to each Holder stating: (1) that the Change of Control Offer is being made
pursuant to the covenant entitled "Change of Control" and that all Notes
properly tendered will be accepted for payment; (2) the purchase price and the
purchase date, which will be no earlier than 30 days nor later than 60 days from
the date such notice is mailed (the "Change of Control Payment Date"); (3) that
any Note not properly tendered will continue to accrue interest; (4) that,
unless the Company defaults in the payment of the Change of Control Payment, all
Notes accepted for payment pursuant to the Change of Control Offer will cease to
accrue interest after the Change of Control Payment Date; (5) that Holders
electing to have any Notes purchased pursuant to a Change of Control Offer will
be required to surrender the Notes, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Notes completed, or transfer the Notes by
book-entry, to the Paying Agent at the address specified in the notice prior to
the close of business on the third Business Day preceding the Change of Control
Payment Date; (6) that Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of Notes delivered for purchase, and a statement that such
Holder is withdrawing his election to have such Notes purchased; and (7) that
Holders whose Notes are being purchased only in part will be issued new Notes
equal in principal amount to the unpurchased portion of the Notes surrendered
(or transferred by book-entry), which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof.
On the Change of Control Payment Date, the Company will, to the extent
lawful: (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together
50
<PAGE>
with an Officers' Certificate stating the aggregate principal amount of Notes or
portions thereof being purchased by the Company. The Paying Agent will promptly
mail to each Holder of Notes so tendered the Change of Control Payment for such
Notes, and the Trustee will promptly authenticate and mail (or cause to be
transferred by book-entry) to each Holder a new Note equal in principal amount
to any unpurchased portion of the Notes surrendered, if any; PROVIDED that each
such new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Indenture provides that, prior to complying with the provisions of
this covenant, but in any event within 90 days following a Change of Control,
the Company will either repay all outstanding Senior Debt or obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Debt to permit the repurchase of Notes required by this covenant. The Company
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
The Credit Agreement prohibits the Company from purchasing any Notes and
also provides that a Change of Control will constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Credit Agreement. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of Notes.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1 and Rule 13e-4, in connection
with any offer required to be made by the Company to repurchase the Notes as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the Indenture, the
Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the Indenture by
virtue thereof.
The provisions relative to the Company's obligation to make an offer to
repurchase the Notes as a result of a Change of Control may be waived or
modified with the written consent of the Holders of a majority in principal
amount of the Notes.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, engage in an Asset Sale unless: (i) the Company
(or such Restricted Subsidiary, as the case may be) receives consideration at
the time of such Asset Sale at least equal to the fair market value (as
determined by the Board of Directors) of the assets sold or otherwise disposed
of and (ii) at least 85% of the consideration therefor received by the Company
or such Restricted Subsidiary is in the form of Cash Equivalents; PROVIDED that
the amount of (x) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet or in the notes thereto) of the Company
or any Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Notes or any guarantee thereof) that are assumed by the
transferee of any such assets and (y) any notes or other obligations received by
the Company or any such Restricted Subsidiary from such transferee that are
promptly converted by the Company or such Restricted Subsidiary into cash (to
the extent of the cash received) shall be deemed to be Cash Equivalents for
purposes of this provision.
Within one year after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option: (a) to permanently
reduce borrowings under the Credit Agreement or repay, prepay or purchase any
other Senior Debt of the Company or any Guarantor (and, in the case of revolving
51
<PAGE>
credit borrowings, to correspondingly permanently reduce commitments with
respect thereto) or (b) to an Investment in another business, the making of a
capital expenditure or the acquisition of long-term/tangible assets, in each
case, in a Permitted Business. Pending the final application of any such Net
Proceeds, the Company may temporarily reduce revolving credit borrowings under
the Credit Agreement or otherwise invest such Net Proceeds in any manner that is
not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds". When the aggregate amount of Excess
Proceeds exceeds $25.0 million, the Company will be required to make an offer to
all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 101% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the date
of purchase, in accordance with the procedures set forth in the Indenture. To
the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
Notes surrendered by holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1 and Rule 13e-4, in connection
with any offer required to be made by the Company to repurchase the Notes as a
result of an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the Indenture, the
Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the Indenture by
virtue thereof.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution (or payment of fees or other amounts in lieu
thereof) on account of the Company's or any of its Restricted Subsidiaries'
Equity Interests (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable (A) to the Company or any Wholly Owned Restricted
Subsidiary of the Company that is a Guarantor or (B) pro rata to all holders of
Capital Stock of a Restricted Subsidiary of the Company); (ii) purchase, redeem
or otherwise acquire or retire for value any Equity Interests of the Company or
any Restricted Subsidiary or other Affiliate of the Company (other than any such
Equity Interests owned by the Company or any Wholly Owned Restricted Subsidiary
of the Company that is a Guarantor); (iii) purchase, redeem or otherwise acquire
or retire for value any Indebtedness that is PARI PASSU with or subordinated to
the Notes (other than Notes), except at final maturity or in accordance with the
mandatory redemption or repurchase provisions set forth in the original
documentation governing such Indebtedness; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments"), unless, at
the time of such Restricted Payment:
(a) no Default shall have occurred and be continuing or would occur as a
consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described below under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (including Restricted Payments
52
<PAGE>
permitted by clauses (i), (ii) and (xvi) of the next succeeding paragraph
but excluding Restricted Payments permitted by clauses (iii) through (xv),
(xvii) and (xviii) of the next succeeding paragraph), is less than the sum
(without duplication) of:
(A) 50% of the Consolidated Net Income of the Company (determined by
excluding amounts included in clause (D)) for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the Issue Date to the end of the Company's most recently
ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit);
(B) 100% of the aggregate net cash proceeds received by the Company
from the issue or sale after the Issue Date of Equity Interests
of the Company or of debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Subsidiary of the Company and
other than Disqualified Stock or debt securities that have been converted
into Disqualified Stock);
(C) the aggregate cash received by the Company after the Issue Date
as capital contributions to the Company; and
(D) the amount of the net reduction in Investments in Unrestricted
Subsidiaries resulting from (1) the payment of cash dividends or
the repayment in cash of the principal of loans or the cash return on any
Investment, in each case to the extent received by the Company or any
Wholly Owned Restricted Subsidiary of the Company from Unrestricted
Subsidiaries, (2) to the extent that any Restricted Investment that was
made after the Issue Date is sold for cash or otherwise liquidated or
repaid for cash, the after-tax cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any) and (3)
the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued as provided in the definition of "Investment"), such aggregate
amount of the net reduction in Investments not to exceed in the case of
any Unrestricted Subsidiary, the amount of Restricted Investments
previously made by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary, which amount was included in the calculation of
the amount of Restricted Payments.
The foregoing provisions will not prohibit: (i) the making of any Restricted
Payment within 60 days after the date of declaration thereof or the making of
any binding commitment in respect thereof, if at said date of declaration or
commitment such Restricted Payment would have complied with the provisions of
the Indenture; (ii) the redemption, repurchase, retirement or other acquisition
of any Equity Interests of the Company, or the defeasance, redemption or
repurchase of PARI PASSU or subordinated Indebtedness in exchange for, or out of
the proceeds of, the substantially concurrent sale (other than to a Subsidiary
of the Company) of Equity Interests of the Company (other than any Disqualified
Stock) or out of the proceeds of a substantially concurrent cash capital
contribution received by the Company; (iii) the defeasance, redemption or
repurchase of PARI PASSU or subordinated Indebtedness with the net proceeds from
an Incurrence of Indebtedness permitted by the covenant described under
"--Incurrence of Indebtedness and Issuance of Preferred Stock"; (iv) the
repurchase, redemption or other acquisition or retirement for value of (or
payments to Holdings which are used by Holdings to repurchase, redeem or
otherwise acquire or retire for value) any Equity Interests of Holdings held by
employees of Holdings, the Company or its Subsidiaries pursuant to any employee
equity subscription agreement, stock incentive agreement or stock ownership
arrangement; PROVIDED that (A) the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$5.0 million in any twelve-month period plus the aggregate cash proceeds
received by the Company during such twelve-month period from any reissuance of
Equity Interests of Holdings to employees of Holdings, the Company and its
Subsidiaries and (B) no Default shall have occurred and be continuing
immediately after such transaction; (v) the defeasance, redemption or repurchase
of PARI PASSU or subordinated Indebtedness with Excess Proceeds to the extent
such Excess Proceeds may be used for general corporate purposes as described
under "Repurchase at the Option of Holders-- Asset Sales"; (vi) the issuance of
the Exchange Debentures in exchange for the Senior Preferred Stock;
53
<PAGE>
(vii) the payment of (A) a Restricted Payment to Holdings promptly following the
Merger to be used by Holdings to pay Transaction Costs, (B) an administrative
fee to Holdings in an amount not to exceed $2.0 million in any calendar year and
(C) a yearly advisory fee to Sappi and/or its Affiliates of $1.0 million in lieu
of charges to 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; PROVIDED that no such payments in clause (B) above shall
be paid to Affiliates of Holdings; (viii) Restricted Investments in an aggregate
amount outstanding not to exceed $10.0 million; (ix) the payment of
distributions to Holdings pursuant to the Tax Sharing Agreement; (x) in the
event that the Company elects to issue the Exchange Debentures in exchange for
the Senior Preferred Stock, any cash payments made in lieu of the issuance of
Exchange Debentures having a face amount less than $1,000 and any cash payments
representing accrued and unpaid Liquidated Damages and dividends and, in the
event that Holdings elects to issue Holdings Debentures in exchange for the
Holdings Preferred Stock, a Restricted Payment to Holdings in an amount equal to
any cash payments by Holdings made in lieu of the issuance of Holdings
Debentures having a face amount less than $1,000 and any cash payments by
Holdings representing accrued and unpaid Liquidated Damages and dividends; (xi)
in the event that the Company pays any interest in kind with respect to the
Exchange Debentures, any cash payments made in lieu of fractional Exchange
Debentures with respect thereto and, in the event that Holdings pays any
interest in kind with respect to the Holdings Debentures, a Restricted Payment
to Holdings in an amount equal to any cash payments by Holdings in lieu of
fractional Holdings Debentures with respect thereto; (xii) upon exercise of the
Warrants, a Restricted Payment to Holdings equal to any cash payments made by
Holdings in lieu of the issuance of fractional Warrant Shares; (xiii) the
repurchase of the Senior Preferred Stock in accordance with the terms thereof
upon the occurrence of a Change of Control and a Restricted Payment to Holdings
equal to the amount required to be paid by Holdings to repurchase the Holdings
Preferred Stock in accordance with the terms thereof upon the occurrence of a
Change of Control; (xiv) the purchase, repurchase or other acquisition of PARI
PASSU or subordinated Indebtedness purchased in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in each case
due within 12 months of the date of acquisition; (xv) payments permitted by
clauses (v) and (ix) of the covenant described under the caption "--Transactions
with Affiliates"; (xvi) an Investment in a joint venture at least 50% owned by
the Company where the consideration for such Investment consists of existing
coating, laminating or finishing machines at the Company's Westbrook, Maine and
Mobile, Alabama facilities; provided that such joint venture does not Incur or
at any time have outstanding any Indebtedness (other than Indebtedness
consisting of a Lien on such machines to secure Indebtedness under the Credit
Agreement); (xvii) an Investment in an amount up to $15.0 million for the
development of a de-inked fiber facility and businesses related thereto being
sponsored by the Bronx Community Paper Company; and (xviii) a Restricted Payment
to Holdings equal to any cash payments made by Holdings representing liquidated
damages under the Warrant Agreement.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, Incur any Indebtedness
(including Acquired Debt) and that the Company will not issue any Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
Preferred Stock; PROVIDED that the Company or any Guarantor may Incur
Indebtedness (including Acquired Debt) or the Company may issue Disqualified
Stock if the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is Incurred
or such Disqualified Stock is issued would have been at least (a) 1.75 to 1 if
such Indebtedness is Incurred or such Disqualified Stock is issued on or prior
to December 15, 1997 and (b) 2.0 to 1 thereafter.
54
<PAGE>
The foregoing provisions will not apply to:
(i)
the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness under the revolving credit facility contained in the
Credit Agreement or any other revolving credit facility; PROVIDED that the
aggregate principal amount of such Indebtedness outstanding at any time
shall not exceed $250.0 million;
(ii)
the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness under the term loan facility contained in the Credit
Agreement in an aggregate principal amount at any time outstanding not to
exceed $630.0 million, less the aggregate amount of all repayments of
principal, optional or mandatory, with respect to such Indebtedness that
have been made since the Issue Date;
(iii)
the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness under the letter of credit facility contained in the
Credit Agreement in an aggregate principal amount (with letters of credit
being deemed to have a principal amount equal to the maximum potential
liability of the Company and its Restricted Subsidiaries thereunder) at any
time outstanding not to exceed the lesser of (A) $220.0 million, less the
aggregate amount of all commitment reductions, optional or mandatory, with
respect to such Indebtedness that have been made since the Issue Date and
(B) the outstanding amount of the Obligations supported by such letter of
credit facility;
(iv)
the Incurrence by the Company or any of its Restricted Subsidiaries
of the Existing Indebtedness;
(v)
the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by the Notes or any Guarantee of the
Notes, respectively;
(vi)
the Incurrence by the Company or any Guarantor of Indebtedness
represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, including obligations with respect to industrial
revenue bonds to construct new facilities, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in the business of the Company
or such Guarantor, in an aggregate principal amount not to exceed $50.0
million at any time outstanding;
(vii)
the Incurrence by the Company or any Guarantor of Indebtedness
consisting of Attributable Debt in an aggregate amount not to exceed
$50.0 million at any time outstanding;
(viii)
the Incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Debt in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be Incurred;
(ix)
the Incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of
its Wholly Owned Restricted Subsidiaries that is a Guarantor;
(x)
the Incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations with respect to Indebtedness of such entity
permitted by the terms of the Indenture to be outstanding; and
(xi)
the Incurrence by the Company or any Guarantor of Indebtedness (in
addition to Indebtedness permitted by any other clause of this
paragraph or by the first paragraph of this covenant) in an aggregate
principal amount at any time outstanding not to exceed $75.0 million.
For purposes of determining any particular amount of Indebtedness under the
foregoing covenant, Guarantees, liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included. For purposes of determining compliance
with the foregoing covenant, (A) in the event that an item of Indebtedness meets
the criteria of more than one of the types of Indebtedness described above, the
Company, in its sole discretion, will classify such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one of
the above clauses, (B) an item of Indebtedness may be split between more than
one of the types of Indebtedness
55
<PAGE>
described above and Indebtedness under the Credit Agreement, in excess of the
amounts permitted under clauses (i), (ii) and (iii) above, may be Incurred under
any of the other categories of permitted Indebtedness and (C) the amount of
Indebtedness issued at a price that is less than or greater than the principal
amount thereof will be equal to the amount of the liability in respect thereof
determined in conformity with GAAP.
LIENS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, create, incur, assume or suffer to exist any
Liens upon any of their respective assets to secure, directly or indirectly, any
Indebtedness of the Company or any Restricted Subsidiary that is subordinated
(pursuant to its terms) in right and priority of payment to any other
Indebtedness of the Company or such Restricted Subsidiary, unless the Notes are
equally and ratably secured for as long as such secured Indebtedness is so
secured; PROVIDED that if such subordinated Indebtedness is subordinated
(pursuant to its terms) in right and priority of payment to the Notes or any
Restricted Subsidiary's obligation under its Guarantee of the Notes, as the case
may be, the Lien securing such subordinated Indebtedness shall be subordinate to
the Lien securing the Notes or such Restricted Subsidiary's obligation under its
Guarantee, as the case may be, with the same relative priority as such
subordinated Indebtedness shall have with respect to the Notes or such
Restricted Subsidiary's obligation under its Guarantee, as the case may be;
PROVIDED FURTHER that this clause shall not be applicable to any Liens arising
from any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which Lien is not
applicable to the Company or any of its Restricted Subsidiaries, or the
properties or assets of the Company or any of its Restricted Subsidiaries, other
than the Person, or the property or assets of the Person, so acquired, and any
amendments, modifications, restatements or renewals thereof; PROVIDED that such
amendments, modifications, restatements or renewals do not give rise to Liens on
any assets other than assets encumbered by Liens arising under agreements as in
effect at the time of such acquisition.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to: (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the Issue Date and any amendments, modifications,
restatements or renewals thereof; PROVIDED that such amendments, modifications,
restatements or renewals are no more restrictive with respect to such dividend
and other payment restrictions than those contained in the applicable agreements
as in effect on the Issue Date, (b) the Credit Agreement and related collateral
documents as in effect on the Issue Date, and any amendments, modifications,
restatements, refundings, replacements restructurings or refinancings thereof;
PROVIDED that such amendments, modifications, restatements, refundings,
replacements, restructurings or refinancings are no more restrictive with
respect to such dividend and other payment restrictions than those contained in
the Credit Agreement and related collateral documents as in effect on the Issue
Date, (c) the Indenture and the Notes and any amendments, modifications,
restatements or renewals thereof, (d) applicable law, (e) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, and any
amendments, modifications, restatements or renewals thereof; PROVIDED that such
amendments, modifications, restatements or renewals are no more restrictive with
respect to such dividend and other payment restrictions than those contained in
the applicable agreements as in effect at the time of such acquisition, (f) by
reason of customary non-assignment
56
<PAGE>
provisions in leases entered into in the ordinary course of business, (g)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii) above
on the property so acquired, (h) Permitted Refinancing Debt; PROVIDED that the
restrictions with respect to such dividend and other payment restrictions
contained in the agreements governing such Permitted Refinancing Debt are no
more restrictive than those contained in the agreements governing the
Indebtedness being refinanced, (i) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the capital stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition; PROVIDED
that such sale would not violate the Indenture, or (j) in the case of clause
(iii), restrictions contained in the security agreements securing Indebtedness
of a Restricted Subsidiary to the extent such restrictions restrict the transfer
of the property subject to such agreements.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions to, another Person
unless: (i) the resulting, surviving or transferee person (the "Successor
Company") is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the Successor
Company (if other than the Company) assumes all the obligations of the Company
under the Notes, and the Indenture and the Registration Rights Agreements
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) immediately after such transaction no Default exists; and (iv)
the Successor Company (A) will have Consolidated Net Worth (immediately after
the transaction on a pro forma basis but prior to any purchase accounting
adjustments resulting from the transaction) equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction and
(B) will, at the time of such transaction but after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "--Incurrence
of Indebtedness and Issuance of Preferred Stock".
Notwithstanding clauses (iii) and (iv) in the immediately preceding
paragraph, any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Company.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture with the same
effect as if such Successor Company had been named as the Company in the
Indenture; PROVIDED that the predecessor Company shall not be relieved from the
obligation to pay the principal of and interest on the Notes, except in the case
of a sale of all of the Company's assets that meets the requirements of the
first paragraph of this covenant.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into or make any contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless: (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable transaction by the
Company or such Restricted Subsidiary with an unrelated Person and (ii)(a) with
respect to any Affiliate Transaction involving aggregate consideration in excess
of $5.0 million, the Board of Directors determines that such Affiliate
Transaction complies with clause (i) above and such Affiliate Transaction has
been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $10.0 million, the Company delivers to the Trustee an
opinion from an investment banking firm of national standing with non-investment
grade debt underwriting experience and with total assets in excess of $5.0
billion to the effect that the terms of such Affiliate Transaction are fair to
the Company or such Restricted Subsidiary, as the case may be, from a financial
point of view or an opinion
57
<PAGE>
from a third party appraiser of national standing to the effect that the terms
of such Affiliate Transaction are at least as favorable to the Company or such
Restricted Subsidiary as might reasonably have been obtained in a comparable
arm's length transaction with an unaffiliated third party. Notwithstanding the
foregoing, nothing in this covenant will prohibit any of the following: (i) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business; (ii) transactions between or
among the Company and/or its Restricted Subsidiaries; (iii) transactions
permitted by the provisions of the Indenture described above under the caption
"--Restricted Payments"; (iv) the payment of reasonable fees to directors of the
Company or its Restricted Subsidiaries; (v) Investments in employees in the
ordinary course of business; (vi) any Tax Sharing Agreement; PROVIDED that the
aggregate amount payable by the Company pursuant thereto shall not exceed the
sum of (A) the amount of taxes which the Company would have been liable for on a
stand-alone basis plus (B) the amount of any state net worth tax applicable to
Holdings; (vii) arrangements between (x) the Company and its Restricted
Subsidiaries and (y) Sappi Limited and its Affiliates providing for the sales of
such other's products; PROVIDED that, in each case, the amount of any sales
commissions, fees or other amounts in connection therewith shall be in
accordance with standard industry practice; (viii) any issuance of securities or
other payments, awards or grants in cash, securities or otherwise pursuant to,
or the funding of, employment arrangements, stock options and stock ownership
plans of the Company entered into in the ordinary course of business and
approved by the Board of Directors and (ix) Affiliate Transactions pursuant to
agreements existing at the time of the Merger.
SALE/LEASEBACK TRANSACTIONS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any Sale/Leaseback Transaction;
PROVIDED that the Company may enter into a Sale/Leaseback Transaction if: (i)
the Company could have (a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such Sale/Leaseback Transaction pursuant to the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock" and (b) incurred a Lien to secure such Indebtedness
pursuant to the covenant described above under the caption "--Liens", (ii) the
gross cash proceeds of such Sale/Leaseback Transaction are at least equal to the
fair market value (as determined in good faith by the Board of Directors) of the
property that is the subject of such Sale/Leaseback Transaction and (iii) the
transfer of assets in such Sale/Leaseback Transaction is permitted by, and the
Company applies the proceeds of such transaction in compliance with, the
covenant described above under the caption "--Repurchase at the Option of
Holders--Asset Sales".
NO SENIOR SUBORDINATED DEBT
The Indenture provides that (i) the Company will not Incur any Indebtedness
that is subordinate or junior in right of payment to any Senior Debt of the
Company and senior in any respect in right of payment to the Notes and (ii) no
Guarantor will Incur any Indebtedness that is subordinate or junior in right of
payment to any Senior Debt of such Guarantor and senior in any respect in right
of payment to the Guarantee by such Guarantor of the Notes.
GUARANTEE OF THE NOTES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, transfer any assets, businesses, divisions, real
property or equipment to any Restricted Subsidiary or acquire a new Restricted
Subsidiary unless (i) such transferee or acquired Restricted Subsidiary enters
into or has entered into a Guarantee of the Notes in accordance with the terms
of the Indenture or (ii) the aggregate fair market value (as determined in good
faith by the Board of Directors) at the time of such transfer or acquisition of
the assets, businesses, divisions, real property or equipment proposed to be
transferred or the Capital Stock proposed to be acquired, together with the
aggregate fair market value of all assets, businesses, divisions, real property
or equipment previously transferred pursuant to this clause (ii) and Capital
Stock previously acquired pursuant to this clause (ii) (in each case as valued
at the time of transfer or acquisition), does not exceed $40.0 million; PROVIDED
that, in the case of clause (ii), if the Restricted Subsidiary to which such
transfer was made or whose Capital Stock was acquired subsequently enters into a
Guarantee of the Notes, such transfer or acquisition thereafter shall be treated
as having been made pursuant to clause (i).
58
<PAGE>
Any such Guarantee of the Notes by a Restricted Subsidiary will be
subordinated to all Senior Debt of such Restricted Subsidiary, including any
guarantee by such Restricted Subsidiary of the Company's obligations under the
Credit Agreement, on substantially the same terms as the Notes are subordinated
to Senior Debt of the Company. Any such Guarantee by a Restricted Subsidiary
will be limited in amount to an amount not to exceed the maximum amount that can
be guaranteed by that Restricted Subsidiary without rendering such Guarantee
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally. With such
limitations, such Guarantee could be effectively subordinated to all other
Indebtedness (including guarantees and other contingent liabilities) of such
Restricted Subsidiary and, depending on the amount of such Indebtedness, such
Restricted Subsidiary's liability on its Guarantee could be reduced to zero.
Upon the sale or other disposition of a Restricted Subsidiary that is a
Guarantor (other than to the Company or an Affiliate of the Company) permitted
by the Indenture, such Restricted Subsidiary will be released and relieved from
all of its obligations under its Guarantee.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Subsidiary to, engage in any
business other than a Permitted Business.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture, the Registration Rights Agreement or the Notes, unless such
consideration is offered to be paid or agreed to be paid to all Holders of the
Notes that so consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Trustee and the Holders of Notes (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. In addition, the Company has agreed
that, for so long as any Notes remain outstanding, it will furnish to the
Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED
SUBSIDIARIES
The Indenture provides that the Company (i) will not, and will not permit
any Restricted Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Capital Stock of any Wholly Owned Restricted Subsidiary
of the Company to any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company), unless (a) such transfer, conveyance,
sale, lease or other disposition is of all the Capital Stock of such Wholly
Owned Restricted Subsidiary and (b) the cash Net Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with the
covenant described above under the caption "--Repurchase at the Option of
Holders--Asset Sales", and (ii) will not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Restricted
Subsidiary of the Company.
59
<PAGE>
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due of the principal of or premium, if
any, on the Notes (whether or not prohibited by the subordination provisions of
the Indenture); (iii) failure by the Company to comply with the provisions
described above under the caption "--Change of Control"; (iv) failure by the
Company for 30 days after notice from the Trustee or holders of 25% of the
aggregate principal amount of the Notes then outstanding to comply with the
covenants described under "--Restricted Payments", "--Incurrence of Indebtedness
and Issuance of Preferred Stock" or "--Merger, Consolidation or Sale of Assets"
above; (v) failure of the Company for 60 days after notice from the Trustee or
Holders of 25% of the aggregate principal amount of the Notes then outstanding
to comply with any of its other agreements in the Indenture, (other than any
agreement for the benefit of holders of the Senior Preferred Stock) or the
Notes; (vi) default under any mortgage, indenture or instrument under which
there may be issued, or by which there may be secured or evidenced, any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or
is created after the Issue Date, which default (a) is caused by a failure to pay
principal of or premium, if any, on such Indebtedness when due after giving
effect to any applicable grace periods provided in such Indebtedness on the date
of such default (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness (which Indebtedness has not been repaid and as
to which such default has not been cured or such acceleration has not been
rescinded), together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated (which Indebtedness has not been repaid and as to which such
default has not been cured or such acceleration has not been rescinded),
aggregates $20.0 million or more; (vii) failure by the Company or any Restricted
Subsidiary which is a Significant Subsidiary to pay final judgments aggregating
in excess of $20.0 million, which judgments are not paid, discharged, bonded or
stayed for a period of 60 days; (viii) except as permitted in the Indenture, any
Guarantee of the Notes is held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or any
Guarantor, or Person acting on behalf of any Guarantor, shall deny or disaffirm
its obligations under its Guarantee of the Notes; and (ix) certain events of
bankruptcy or insolvency with respect to the Company or any Restricted
Subsidiary which is a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to the Company, all outstanding Notes will become due
and payable without further action or notice. Holders of the Notes may not
enforce the Indenture or the Notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the Notes notice of any continuing
Default (except a Default relating to the payment of principal or interest), if
it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
December 15, 1999 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to December 15, 1999, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
60
<PAGE>
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default and its consequences under the Indenture except
a continuing Default in the payment of interest on, or the principal of, the
Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default, to deliver to the Trustee a statement specifying
such Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes and the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and does not affect any
Holder's right to sue under federal securities laws for violations thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"), except for: (i) the rights of Holders of outstanding Notes to
receive payments from the trust described below in respect of the principal of,
premium, if any, and interest on such Notes when such payments are due, (ii) the
Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment, and
bankruptcy, receivership, rehabilitation and insolvency events with respect to
the Company) described under "Events of Default" will no longer constitute an
Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the Issue Date, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default shall have occurred and be continuing on the
date of such deposit (other than a Default resulting from the borrowing of funds
to be applied to make such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit; (v) such Legal
61
<PAGE>
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds are not subject to any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Company must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders of Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed. The
registered Holder of a Note will be treated as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of a
majority in principal amount of the Notes then outstanding (including consents
obtained in connection with a tender offer or exchange offer for Notes), and any
existing default or compliance with any provision of the Indenture or the Notes
may be waived with the consent of the Holders of a majority in principal amount
of the then outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes, (iii)
reduce the rate of or change the time for payment of interest on any Note, (iv)
waive a Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders of
at least a majority in aggregate principal amount of the Notes and a waiver of
the payment default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the Notes, (vi) make any change in
the provisions of the Indenture relating to waivers of past Defaults or the
rights of Holders of Notes to receive payments of principal of or premium, if
any, or interest on the Notes, (vii) waive a redemption payment with respect to
any Note, (viii) except as otherwise permitted in the Indenture, release any
Guarantor from its obligations under its Guarantee of the Notes, or change any
Guarantee of the Notes in any manner that would adversely affect Holders of
Notes, or (ix) make any change in the foregoing amendment and waiver provisions.
In addition, without affecting the right of any third party beneficiary to
consent to such amendment, any amendment to the provisions of Article 10 of the
Indenture (which relate to subordination) will require the consent of the
Holders of at least 75% in aggregate principal amount of the Notes then
outstanding, if such amendment would adversely affect the rights of Holders of
Notes.
Notwithstanding the foregoing, without notice to or the consent of any
Holder of Notes, the Company and the Trustee may amend or supplement the
Indenture or the Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
Notes in the case of a merger or consolidation, to secure the Notes, to add
Guarantees with respect to the Notes, to make any change that would provide any
additional rights or benefits to the Holders of Notes or that does not adversely
affect the legal rights under the Indenture of any such Holder, or to comply
with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
62
<PAGE>
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions with the Company and its Affiliates; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in the case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to constitute control of such Person. In no event shall the Initial
Purchaser, UBSC or any of their Affiliates be deemed Affiliates of the Company
for purposes of the covenants contained in the Indenture.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition
(collectively, "dispositions") of any assets (including by way of a
Sale/Leaseback Transaction) other than dispositions of inventory or timber (but
not timberland) in the ordinary course of business, (ii) the issuance by any
Restricted Subsidiary of Equity Interests of such Restricted Subsidiary and
(iii) the disposition by the Company or any of its Restricted Subsidiaries of
Equity Interests of any Restricted Subsidiary of the Company, in the case of
either clause (i), (ii) or (iii), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $1.0 million
or (b) for net proceeds in excess of $1.0 million. Notwithstanding the
foregoing, the following will not be deemed to be Asset Sales: (i) a disposition
of assets by the Company to a Wholly Owned Restricted Subsidiary or by a Wholly
Owned Restricted Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary,
(iii) a disposition consisting of a Restricted Payment permitted by the covenant
described above under the caption "--Restricted Payments" and (iv) the
disposition of all or substantially all of the assets of the Company and its
Subsidiaries taken as a whole permitted by the covenant described above under
the caption "--Merger, Consolidation or Sale of Assets".
"ATTRIBUTABLE DEBT" in respect of a Sale/Leaseback Transaction means, at the
time of determination, the present value (discounted at the rate of interest
implicit in such transaction, determined in accordance with
63
<PAGE>
GAAP or, in the event that such rate of interest is not reasonably determinable,
discounted at the rate of interest borne by the Notes) of the obligation of the
lessee for net rental payments during the remaining term of the lease included
in such Sale/Leaseback Transaction (including any period for which such lease
has been extended or may, at the option of the lessor, be extended).
"BOARD OF DIRECTORS" means, unless otherwise specified, the Board of
Directors of the Company or any authorized committee thereof.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" of any person means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) in the case of any Person, any
other interest or participation that confers the right to receive a share of the
profits and losses of, or distributions of assets of, such Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States Government, or
any agency or instrumentality thereof, having maturities of not more than one
year from the date of acquisition, (iii) marketable general obligations issued
by any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing within one year from
the date of acquisition thereof and, at the time of acquisition, having a credit
rating of A or better from either Standard & Poor's Corporation or Moody's
Investors Service, Inc., (iv) certificates of deposit, time deposits, eurodollar
time deposits, overnight bank deposits, bankers' acceptances and repurchase
agreements having maturities of not more than one year from the date of the
acquisition of any domestic commercial bank the long-term debt of which is rated
at the date of acquisition thereof at least A or the equivalent thereof by
Standard & Poor's Corporation, or A or the equivalent thereof by Moody's
Investors Service, Inc., and having capital and surplus in excess of $500
million, (v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii), (iii) and (iv)
entered into with any bank meeting the qualifications specified in clause (iv)
above and (vi) commercial paper rated at the date of acquisition thereof at
least A-2 or the equivalent thereof by Standard & Poor's Corporation or P-2 or
the equivalent thereof by Moody's Investors Service, Inc., or carrying an
equivalent rating by a nationally recognized rating agency, if both of the two
named rating agencies cease publishing ratings of investments, and in either
case maturing within 270 days after the date of acquisition.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of Holdings or
the Company to any Person or group (as such term is used in Sections 13(d)(3)
and 14(d)(2) of the Exchange Act) other than the Principals or their Related
Parties, (ii) the adoption of a plan relating to the liquidation or dissolution
of Holdings or the Company, (iii) any Person or group (as defined above), other
than the Principals or their Related Parties, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a Person shall be deemed to have "beneficial ownership" of all shares that any
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 40% of the total voting power of the Voting Stock of the Company, including
by way of merger, consolidation or otherwise; PROVIDED that the Principals or
their Related Parties "beneficially own" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Voting Stock of the Company than
such other Person (for the purposes of this clause (iii), any Person shall be
deemed to beneficially own any Voting Stock of a corporation (the "specified
corporation"), held by any other corporation (the "parent corporation"), if such
Person "beneficially owns" (with respect to any Person or group other than the
Principals or their Related Parties, as defined in clause (iii) above or, with
respect to the Principals or their Related Parties, as defined in the proviso to
clause (iii) above, directly or indirectly,
64
<PAGE>
more than 50% of the voting power of the Voting Stock of such parent
corporation) and (iv) the first day on which a majority of the members of the
Board of Directors of Holdings or the Company are not Continuing Directors.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period plus (i) provision for taxes based on income or profits of such
Person and its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was included in computing such Consolidated Net Income, plus
(ii) the sum of (A) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued, to the extent
that such expense was deducted in computing Consolidated Net Income (including
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financing, and
net payments (if any) pursuant to Hedging Obligations but excluding amortization
of deferred financing fees) and (B) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such period,
and (C) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a
Lien on assets of such Person or one of its Restricted Subsidiaries (whether or
not such Guarantee or Lien is called upon), plus (iii) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other non-cash charges (including non-cash charges created by the
application of Statement of Financial Accounting Standards, No. 106 but
excluding any other such non-cash charge to the extent that it represents an
accrual of or reserve for cash charges in any future period) of such Person and
its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash charges were deducted in computing
such Consolidated Net Income, in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the provision
for taxes based on the income or profits of, and the depreciation and
amortization and other non-cash charges of, a Restricted Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that (i) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Restricted Subsidiary, (ii) the Net Income of
any Restricted Subsidiary shall be excluded to the extent that the declaration
or payment of dividends or similar distributions by that Restricted Subsidiary
of that Net Income is not at the date of determination permitted without any
prior governmental approval (which has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders, (iii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of Preferred Stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of
65
<PAGE>
such declaration and payment, but only to the extent of any cash received by
such Person upon issuance of such Preferred Stock, less (x) all write-ups (other
than write-ups resulting from foreign currency translations and write-ups of
tangible assets of a going concern business made within 12 months after the
acquisition of such business) subsequent to the Issue Date in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of Holdings or the Company who (i) was a member of such
Board of Directors on the Issue Date or (ii) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election or with the written approval of Sappi Limited.
"CREDIT AGREEMENT" means that certain Credit Agreement, dated as of December
20, 1994, as amended and restated as of April 26, 1996, by and among the
Company, Chemical Bank (now known as The Chase Manhattan Bank), as
administrative agent, and the several lenders party thereto, providing for (i)
up to $630.0 million of term loan borrowings, (ii) up to $250.0 million of
revolving credit borrowings (including letters of credit), and (iii) up to
$220.0 million of additional letters of credit, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, extended, modified, renewed,
refunded, replaced, restructured or refinanced from time to time.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"DESIGNATED SENIOR DEBT" means (i) so long as the Senior Bank Debt is
outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior Debt
permitted under the Indenture the principal amount of which (or as to which the
commitment to lend) is $50.0 million or more and that has been designated by the
Company as "Designated Senior Debt".
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is one year and one day after the date on which the Notes mature; PROVIDED
that "Disqualified Stock" will not include the Senior Preferred Stock or any
other Preferred Stock of the Company which is issued in exchange for or the
proceeds of which are used to redeem or repurchase the Senior Preferred Stock so
long as such other Preferred Stock does not require the Company to pay dividends
with respect to such Preferred Stock, to make a redemption payment or to
repurchase such Preferred Stock in any amount in excess of the amounts thereof
required in the Senior Preferred Stock or at a time earlier than required in the
Senior Preferred Stock.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE DEBENTURES" means the Company's 14% Series A Subordinated Exchange
Debentures due 2006 and the Company's 14% Series B Subordinated Exchange
Debentures due 2006 exchangeable for the Company's Senior Preferred Stock.
"EXCHANGE OFFER" means the exchange offer to be filed with the Commission
relating to the Series B Securities pursuant to the Registration Rights
Agreement with the Initial Purchaser.
"EXISTING INDEBTEDNESS" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Agreement or the Notes)
in existence on the Issue Date.
66
<PAGE>
"FIXED CHARGES" means, with respect to any Person for any period, the sum
(without duplication) of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued, to the
extent that such expense was deducted in computing Consolidated Net Income
(including amortization of original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations, imputed
interest with respect to Attributable Debt, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers' acceptance
financings and net payments (if any) pursuant to Hedging Obligations but
excluding amortization of deferred financing fees), (ii) the consolidated
interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period, (iii) any interest expense on Indebtedness of
another Person that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon)
and (iv) the product of (a) all cash dividend payments (and non-cash dividend
payments in the case of a Person that is a Restricted Subsidiary) on any series
of Preferred Stock of such Person other than payments to the Company or any of
its Restricted Subsidiaries, times (b) a fraction, the numerator of which is one
and the denominator of which is one minus the then current combined effective
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, Guarantees or repays,
repurchases or redeems any Indebtedness (other than revolving credit borrowings)
or issues, repurchases or redeems Preferred Stock subsequent to the commencement
of the period for which the Fixed Charge Coverage Ratio is being calculated but
prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee, repayment, repurchase or redemption of such Indebtedness
and such issuance, repurchase or redemption of Preferred Stock, as if the same
had occurred at the beginning of the applicable four-quarter reference period.
For purposes of making the computation referred to above, all calculations shall
give effect to pro forma adjustments as follows: (i) acquisitions that have been
made by the Company or any of its Restricted Subsidiaries, including through
mergers or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have occurred on the
first day of the four-quarter reference period, (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, and (iii) the Fixed Charges attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Restricted Subsidiaries following the Calculation
Date. For purposes of this definition, whenever pro forma effect is to be given
to an acquisition, discontinued operations or operations of businesses disposed
of, the amount of Consolidated Cash Flow relating thereto or the amount of Fixed
Charges associated with any Indebtedness issued in connection therewith, the pro
forma calculations shall be determined in good faith by a responsible financing
or accounting Officer of the Company. If any Indebtedness bears a floating rate
of interest and is being given pro forma effect, the interest on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any interest rate protection agreement applicable to such Indebtedness
if such interest rate protection agreement has a remaining term in excess of
twelve months).
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
67
<PAGE>
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including letters of credit and reimbursement
agreements in respect thereof), of all or any part of any Indebtedness.
"GUARANTOR" means any Subsidiary of the Company that guarantees the Notes
pursuant to the covenant described under "--Certain Covenants--Guarantee of the
Notes".
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other similar agreements
or arrangements.
"HOLDINGS" means SDW Holdings Corporation and its successors.
"HOLDINGS DEBENTURES" means Holdings' 15% Subordinated Exchange Debentures
due 2011 exchangeable for the Holdings Preferred Stock.
"HOLDINGS PREFERRED STOCK" means Holdings' 15% Senior Exchangeable Preferred
Stock.
"INCUR" means, with respect to any Indebtedness, to incur, create, issue,
assume, guarantee or otherwise become liable for or with respect to the payment
of, contingently or otherwise, such Indebtedness; PROVIDED that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"INDEBTEDNESS" means, with respect to any Person, without duplication, (i)
any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, (ii) all Indebtedness of others secured
by a Lien on any asset of such Person whether or not such Indebtedness is
assumed by such Person (the amount of such Indebtedness with respect to such
Person being deemed to be the lesser of the value of such asset or the amount of
the Indebtedness of others so secured), (iii) the Guarantee by such Person of
any Indebtedness of any other Person and (iv) Attributable Debt associated with
Sale/Leaseback Transactions.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans (including
guarantees of Indebtedness or other obligations), advances or capital
contributions, purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities and all other items that are
or would be classified as investments on a balance sheet prepared in accordance
with GAAP. For purposes of the covenant described above under "--Certain
Covenants--Restricted Payments", (i) "Investment" in a Subsidiary shall include
the portion (proportionate to the Company's Equity Interest in such Subsidiary)
of the fair market value (as determined in good faith by the Board of Directors)
of such Subsidiary at the time that such Subsidiary is designated an
Unrestricted Subsidiary; PROVIDED that upon a redesignation of such Subsidiary
as a Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's Equity
Interest in such Subsidiary) of the fair market value (as determined in good
faith by the Board of Directors) of the net assets of such Subsidiary at the
time of such redesignation; and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer, in each case as determined in good faith by the Board of
Directors.
"ISSUE DATE" means the date on which the Old Notes were originally issued.
68
<PAGE>
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement and any lease in the
nature thereof).
"LIQUIDATED DAMAGES" means all liquidated damages then owing pursuant to the
Registration Rights Agreements. When used with respect to the Notes or the
Senior Preferred Stock, "Liquidated Damages" means such liquidated damages
related to the Notes or the Senior Preferred Stock, respectively.
"MERGER" means the merger of SDW Acquisition and S.D. Warren.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however, (i) any gain (or
loss), together with any related provision for taxes on such gain (or loss),
realized in connection with (a) any Asset Sale or (b) the disposition of any
securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries, (ii) any extraordinary gain (or loss), together with any related
provision for taxes on such extraordinary gain (or loss), (iii) any non-cash
product costs resulting from the write-up (if any) of the assigned value of the
Company's inventory at the time of the Merger over the first-in first-out
valuation of such inventory and (iv) any write-off of the fees for the unused
subordinated bridge financing arranged by the Company in anticipation of the
Merger.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including any
cash received upon the sale or other disposition of any non-cash consideration
received in any Asset Sale), net of the direct costs relating to such Asset Sale
(including legal, accounting and investment banking fees, and sales commissions)
and any relocation expenses incurred as a result thereof, taxes paid or payable
as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the assets that were the
subject of such Asset Sale, any reserve for adjustment in respect of the sale
price of such asset or assets established in accordance with GAAP and any other
reserve against liabilities associated with such assets and retained by the
Company or any of its Restricted Subsidiaries established in accordance with
GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Notes being offered hereby) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFERING" means the offering of the Notes and the Units pursuant to the
Offering Memorandum dated December 13, 1994.
"PERMITTED BUSINESS" means the business in which the Company and its
Restricted Subsidiaries were engaged in on the date of the Merger (after giving
effect thereto) and businesses incidental, ancillary or related thereto.
"PERMITTED INVESTMENTS" means (i) any Investments in the Company or in a
Restricted Subsidiary of the Company; (ii) any Investments in Cash Equivalents;
(iii) Investments by the Company or any Restricted Subsidiary of the Company in
a Person, if as a result of such Investment (a) such Person becomes a Restricted
Subsidiary of the Company or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted
69
<PAGE>
Subsidiary of the Company that is a Guarantor; (iv) Investments consisting of
consideration received by the Company or a Restricted Subsidiary in an Asset
Sale which consideration is not and is not required to be in the form of Cash
Equivalents pursuant to the covenant described above under "--Repurchase at the
Option of Holders--Asset Sales"; (v) receivables owing to the Company or any
Restricted Subsidiary if created or acquired in the ordinary course of business;
(vi) stock, obligations or securities received in settlement of debts created in
the ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; (vii) endorsements of negotiable
instruments and other similar negotiable documents; and (viii) notes from
employees, officers, directors and their transferees issued to the Company
representing payment of the exercise price of options or other purchase rights
to purchase common stock of the Company.
"PERMITTED REFINANCING DEBT" means any Indebtedness of the Company or any of
its Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, restructure, renew, replace, defease or refund
other Indebtedness of the Company or any of its Restricted Subsidiaries;
PROVIDED that: (i) the principal amount of such Permitted Refinancing Debt does
not exceed the principal amount of the Indebtedness so extended, refinanced,
renewed, replaced, restructured, defeased or refunded (plus the amount of
premiums and reasonable fees and expenses incurred in connection therewith);
(ii) such Permitted Refinancing Debt has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; PROVIDED that
this clause (ii) will not be applicable to any Permitted Refinancing Debt with
respect to Indebtedness under the Credit Agreement; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing Debt
is subordinated in right of payment to, the Notes on terms at least as favorable
to the Holders of Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"PREFERRED STOCK", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"PRINCIPALS" means Sappi Limited, DLJ Merchant Banking Partners, L.P., DLJ
Merchant Banking, Inc., DLJ International Partners, C.V., DLJ Offshore Partners,
C.V., DLJ Merchant Banking Funding, Inc. and UBS Capital LLC.
"REGISTRATION RIGHTS AGREEMENTS" means (i) that certain Registration Rights
Agreement dated the Closing Date between the Company and the Initial Purchaser
and (ii) that certain Registration Rights Agreement dated the Closing Date
between the Company and UBSC.
"RELATED PARTY" with respect to any Principal means (i) any controlling
stockholder, majority owned Subsidiary, or spouse or immediate family member (in
the case of an individual) of such Principal or (ii) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons beneficially holding a majority interest of which consist of such
Principal and/or such other Persons referred to in the immediately preceding
clause (i).
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
70
<PAGE>
"SALE/LEASEBACK TRANSACTION" means an arrangement relating to property owned
on the Issue Date or thereafter acquired whereby the Company or a Restricted
Subsidiary transfers such property to a Person and leases it back from such
Person, other than (i) any such arrangement (a) the term of which is for not
more than one year and (b) the Attributable Debt associated with which is less
than $1.0 million (aggregating any series of related transactions), and (ii) any
such arrangement between the Company and a Wholly Owned Restricted Subsidiary or
between Wholly Owned Restricted Subsidiaries.
"SENIOR BANK DEBT" means the Indebtedness outstanding under the Credit
Agreement or any Hedging Obligation entered into with any Senior Bank Lender as
such agreements may be restated, further amended, supplemented or otherwise
modified from time to time.
"SENIOR BANK LENDER" means any of the banks or other financial institutions
from time to time parties to the Credit Agreement.
"SENIOR DEBT" means with respect to the Company or any Guarantor, any
Indebtedness Incurred by the Company or such Guarantor, unless the instrument
under which such Indebtedness is Incurred expressly provides that it is on a
parity with or subordinated in right of payment to the Notes or, in the case of
a Guarantor, the Guarantee of the Notes by such Guarantor; PROVIDED that Senior
Debt will not include (a) any liability for federal, state, local or other taxes
owed or owing, (b) any Indebtedness owing to any Subsidiaries of the Company,
(c) any trade payables or (d) any Indebtedness that is incurred in violation of
the Indenture. The Senior Bank Debt shall be treated as Senior Debt of the
Company.
"SENIOR PREFERRED STOCK" means the Company's 14% Series A Senior
Exchangeable Preferred Stock due 2006 and the Series B Exchangeable Preferred
Stock.
"SERIES B EXCHANGEABLE PREFERRED STOCK" means the Company's 14% Series B
Senior Exchangeable Preferred Stock due 2006.
"SERIES B EXCHANGE DEBENTURES" means the Company's 14% Series B Subordinated
Exchange Debentures due 2006.
"SERIES B NOTES" means the Company's 12% Series B Senior Subordinated Notes
due 2004 issued pursuant to the Indenture.
"SERIES B SECURITIES" means the Series B Notes and the Series B Exchangeable
Preferred Stock or the Series B Exchange Debentures, as applicable.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date
hereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"TAX SHARING AGREEMENT" means any tax sharing agreement between the Company
and Holdings or any other person with which the Company is required to, or is
permitted to, file a consolidated tax return or with which the Company is or
could be part of a consolidated group for tax purposes.
"TRANSACTION COSTS" means the aggregate transaction costs of the Company and
Holdings incurred in connection with the Merger or related financings and in an
aggregate amount not to exceed $87.7 million.
"UNITS" means 3,000,000 units, each consisting of one share of Senior
Preferred Stock and one Warrant.
71
<PAGE>
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution
and (ii) any Subsidiary of an Unrestricted Subsidiary; but, in each case, only
to the extent that such Subsidiary: (a) has no Indebtedness other than Non-
Recourse Debt; PROVIDED that the Company or any of its Restricted Subsidiaries
may Guarantee, endorse, agree to provide funds for the payment or maintenance
of, or otherwise become directly or indirectly liable with respect to,
Indebtedness of an Unrestricted Subsidiary but only to the extent that the
Company or such Restricted Subsidiary could make an Investment in such
Unrestricted Subsidiary pursuant to the covenant described above under "Certain
Covenants--Restricted Payments" and any such arrangement shall be deemed an
Incurrence of Indebtedness by the Company or such Restricted Subsidiary for
purposes of the covenant described above under "Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock"; (b) subject to clause (a) above,
is a Person with respect to which neither the Company nor any of its Restricted
Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results; and (c) has at least one director on its board of directors
that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption "Certain
Covenants--Restricted Payments". If, at any time, any Unrestricted Subsidiary
would fail to meet the requirements of an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture
and any Indebtedness of such Subsidiary shall be deemed to be Incurred by a
Restricted Subsidiary of the Company as of such date (and, if such Indebtedness
is not permitted to be Incurred as of such date under the covenant described
under the caption "Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock", the Company shall be in default of such covenant). The Board
of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED that such designation shall
be deemed to be an Incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the covenant described under the caption "Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock", and (ii) no Default would be in
existence following such designation. To the extent applicable, such newly
designated Restricted Subsidiary shall comply with the covenant described under
the caption "Certain Covenants--Guarantee of the Notes".
"VOTING STOCK" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"WARRANTS" means the warrants to purchase 898,440 shares of Common Stock of
Holdings to be issued as part of the Units and Class B Warrants to purchase
6,289,060 shares of Common Stock of Holdings to be issued contemporaneously
therewith.
"WARRANT AGREEMENT" means the Warrant Agreement dated as of the Closing Date
between Holdings and The Bank of New York pursuant to which the Warrants to be
issued as part of the Units are issued.
"WARRANT SHARES" means the Common Stock of Holdings issuable upon the
exercise of the Warrants.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the sum of all such payments.
72
<PAGE>
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
DESCRIPTION OF THE SENIOR PREFERRED STOCK
The Senior Preferred Stock was issued pursuant to a Certificate of
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (the "CERTIFICATE OF DESIGNATIONS"), a copy of which is
filed as an exhibit to the Registration Statement of which this Prospectus
constitutes a part. The following summary of the material provisions of the
Senior Preferred Stock is qualified in its entirety by reference to the
provisions of the Certificate of Designations relating thereto. The definitions
of certain terms used in the Certificate of Designations and in the following
summary are substantially the same as those used in the Indenture. For a
description thereof, see "Description of the Notes--Certain Definitions".
GENERAL
Pursuant to the Certificate of Designations, 3,000,000 shares of the Senior
Preferred Stock with a liquidation preference of $25.00 per share were
authorized for issuance. The Senior Preferred Stock is fully paid and
nonassessable and holders thereof will have no preemptive rights in connection
therewith.
The Old Senior Preferred Stock was initially issued as part of the Unit
Offering. Each Unit offered thereby consisted of one share of Old Senior
Preferred Stock of the Company and one Warrant to purchase 0.29948 shares of
Common Stock of Holdings. As of March 29, 1995, the Old Senior Preferred Stock
and the Warrants became separately transferable. Effective upon consummation of
the Exchange Offer on May 31, 1995, the Senior Preferred Stock was issued by the
Company in exchange for the Old Senior Preferred Stock.
The liquidation preference or Specified Amount of the Senior Preferred Stock
is not necessarily indicative of the price at which shares of the Senior
Preferred Stock will actually trade at or after the time of their issuance, and
the Senior Preferred Stock may trade at prices below its liquidation preference
or Specified Amount. The market price of the Senior Preferred Stock can be
expected to fluctuate with changes in the financial markets and economic
conditions, the financial condition and prospects of the Company and other
factors that generally influence the market prices of securities.
All "distributions" with respect to the Senior Preferred Stock, including
the payment of dividends, the accrual of Accumulated Dividends, the exchange of
the Senior Preferred Stock for Exchange Debentures, redemptions, repurchases and
distributions upon a liquidation, dissolution or winding up of the Company, are
subject to the provisions of the Pennsylvania Business Corporation Law,
including provisions which prohibit any "distributions" if, after giving effect
thereto, the Company would be unable to pay its debts as they become due in the
usual course of its business or the total assets of the Company would be less
than its total liabilities.
RANK
The Senior Preferred Stock, with respect to dividend rights and rights on
liquidation, winding up and dissolution, ranks: (i) senior to all classes of
common stock of the Company and each other class of capital stock or series of
preferred stock issued by the Company after the Offerings the terms of which
provide that such series will rank junior to the Senior Preferred Stock or which
do not specify their rank (collectively referred to with the common stock of the
Company as "JUNIOR SECURITIES"); (ii) on a parity with each other class of
capital stock or series of preferred stock issued by the Company after the
Offerings that specifically provides that such series will rank on a parity with
the Senior Preferred Stock (collectively referred to as "PARITY SECURITIES");
and (iii) junior to each other class of capital stock or series of preferred
stock issued by the Company after the Offering that specifically provides that
such series will rank senior to the Senior Preferred Stock (collectively
referred to as "SENIOR SECURITIES"). In addition, creditors and stockholders of
the Company's subsidiaries will have priority over the Senior Preferred Stock
with respect to claims on the assets of such subsidiaries. The Company may not
issue any Parity Securities or Senior Securities or any obligation
73
<PAGE>
or security convertible into or evidencing the right to purchase Parity
Securities or Senior Securities without the approval of the holders of a
majority of the outstanding shares of Senior Preferred Stock then outstanding,
voting as a separate class, except that without the approval of the holders of
Senior Preferred Stock, the Company may issue or have outstanding shares of
Parity Securities issued from time to time in exchange for, or the proceeds of
which are used to redeem or repurchase, any or all of the shares of Senior
Preferred Stock or any other Parity Securities. See "--Voting Rights".
DIVIDENDS
Holders of Senior Preferred Stock will be entitled to receive, when, as and
if declared by the board of directors of the Company, out of funds legally
available therefor, dividends on the Senior Preferred Stock, at the rate of 14%
per annum of the Specified Amount (as defined below). Dividend accrual periods
will end on March 15, June 15, September 15 and December 15 of each year (each,
a "Dividend Accrual Date"). It is not expected that the Company will pay any
dividends in cash for any period ending on or prior to December 15, 1999, and in
any event, the Company will be restricted from paying such dividends in cash by
the terms of its debt instruments. See "Risk Factors--Restrictions Imposed by
Credit Agreement;--Limitation on Cash Dividends; Obligations with Respect to
Holdings Preferred Stock". Cash dividends paid by the Company from time to time
will be applied to unpaid dividends in the order in which such dividends
accrued; PROVIDED, that to the extent cash dividends are not paid currently on
the Senior Preferred Stock for a dividend accrual period ending on or prior to
December 15, 1999, the Company may pay such dividends thereafter only insofar as
the Company repurchases or redeems such Senior Preferred Stock. Dividends
payable for any period less than a full dividend period will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Accrued and unpaid
dividends, if any, will not bear interest or, except to the extent included in
clause (ii) of the first sentence of this paragraph, bear dividends thereon.
Dividends will cease to accrue in respect of shares of the Senior Preferred
Stock on the Exchange Date (as defined below) or on the date of their earlier
redemption or repurchase by the Company. See "Certain Federal Income Tax
Considerations".
REDEMPTION OF SENIOR PREFERRED STOCK
OPTIONAL. Except as set forth in the following paragraph, the Senior
Preferred Stock will not be redeemable at the Company's option prior to December
15, 2001. Thereafter, the Senior Preferred Stock may be redeemed, in whole or in
part, at the option of the Company at the redemption prices (expressed as a
percent of the Specified Amount) set forth in the table below, plus all accrued
and unpaid Liquidated Damages and dividends (excluding any Accumulated Dividends
but including an amount equal to a prorated dividend from the immediately
preceding Dividend Accrual Date to the redemption date), if any, if redeemed
during the 12-month period beginning on December 15 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------------------- -----------
<S> <C>
2001................................................................... 104.200%
2002................................................................... 102.800%
2003................................................................... 101.400%
2004 and thereafter.................................................... 100.000%
</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 dividends that accrued in dividend accrual periods
ending on or prior to December 15, 1999 and on or prior to such specific date
that have not previously been paid in cash (the dividends described in this
clause (ii) being herein called "Accumulated Dividends"). As of July 3, 1996,
the Specified Amount was $30.97 per share.
On or prior to December 15, 1997, the Company may from time to time redeem
Senior Preferred Stock at a redemption price equal to 113.0% of the Specified
Amount thereof plus all accrued and unpaid Liquidated Damages and dividends
(excluding any Accumulated Dividends but including an amount equal to the
prorated dividend from the immediately preceding Dividend Accrual Date to the
redemption date), if any, with the proceeds of one or more public offerings of
the common stock of Holdings; PROVIDED that at least $50.0 million in aggregate
Specified Amount of Senior Preferred Stock remains outstanding immediately after
the occurrence of such redemption; and PROVIDED FURTHER that such redemption
shall occur within 45 days of the date of the closing of any such public
offering.
74
<PAGE>
MANDATORY. On December 15, 2006, the Company will be required to redeem
(subject to the legal availability of funds therefor) all outstanding shares of
Senior Preferred Stock at a price equal to the Specified Amount thereof plus an
amount in cash equal to all accrued and unpaid Liquidated Damages and dividends
(excluding Accumulated Dividends), if any, to the date of redemption.
EXCHANGE
On any Dividend Payment Date, the Company may, at its option, exchange all
but not less than all shares of Senior Preferred Stock then outstanding for
Exchange Debentures (the date of such exchange being herein called the "Exchange
Date"). See "Description of the Exchange Debentures" for a summary of the terms
of the Exchange Debentures. Notwithstanding anything to the contrary in the
foregoing, the Company will not be entitled to make the exchange if a default
under the Exchange Debenture Indenture would result from the exchange. Holders
of the outstanding shares of the Senior Preferred Stock will be entitled to
receive a principal amount of Exchange Debentures equal to the Specified Amount
of the Senior Preferred Stock held by such holder at the time of exchange plus
cash in an amount equal to all accrued and unpaid Liquidated Damages and
dividends (excluding any Accumulated Dividends), if any, thereon to the Exchange
Date.
The Exchange Debentures will be issuable in denominations of $1,000 and
integral multiples thereof. An amount in cash will be paid to holders for any
principal amount of Exchange Debentures otherwise issuable which is less than
$1,000. Notice of the intention to exchange will be sent by or on behalf of the
Company not more than 60 days nor less than 30 days prior to the Exchange Date,
by first class mail, postage prepaid, to each holder of record of Senior
Preferred Stock at its registered address. In addition to any information
required by law or by the applicable rules of any exchange upon which Senior
Preferred Stock may be listed or admitted to trading, such notice will state:
(i) the Exchange Date; (ii) the place or places where certificates for such
shares are to be surrendered for exchange; and (iii) that dividends on the
shares to be exchanged will cease to accrue on the Exchange Date. If notice of
any exchange has been properly given, and if on or before the Exchange Date the
Exchange Debentures will have been duly executed and authenticated and an amount
in cash equal to all accrued and unpaid Liquidated Damages and dividends
(excluding any Accumulated Dividends), if any, thereon to the Exchange Date has
been deposited with the transfer agent, then on and after the close of business
on the Exchange Date, the shares of Senior Preferred Stock to be exchanged will
no longer be deemed to be outstanding and will not have the status of shares of
Senior Preferred Stock, and all rights of the holders thereof as shareholders of
the Company will cease, except the right of the holder thereof to receive upon
surrender of their certificates the Exchange Debentures and all accrued and
unpaid Liquidated Damages and dividends (excluding any Accumulated Dividends),
if any, thereon to the Exchange Date.
The Credit Agreement and the Indenture will contain limitations with respect
to the Company's ability to issue the Exchange Debentures, and any future credit
agreements or other agreements relating to its indebtedness to which the Company
becomes a party may contain similar limitations.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, holders of Senior Preferred Stock will be entitled to payment out
of the assets of the Company available for distribution the Specified Amount per
share of Senior Preferred Stock held by such holder, plus accrued and unpaid
Liquidated Damages and dividends (excluding Accumulated Dividends), if any, to
the date fixed for liquidation, dissolution or winding up (including an amount
equal to a prorated dividend from the last payment date to the date fixed for
liquidation, dissolution or winding-up), before any distribution is made on any
Junior Securities, including, without limitation, common stock of the Company.
If upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, the application of all amounts available for payments with respect
to the Senior Preferred Stock and all other Parity Securities would not result
in payment in full of the Senior Preferred Stock and such other Parity
Securities, holders of the Senior Preferred Stock and the Parity Securities will
share equally and ratably in any distribution of assets of the Company in
proportion to the full amount payable upon liquidation to which each is
entitled. After payment in full of all amounts to which holders of Senior
Preferred Stock are entitled, such holders will not be entitled
75
<PAGE>
to any further participation in any distribution of assets of the Company.
However, neither the voluntary sale, conveyance, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or substantially all
of the property or assets of the Company nor the consolidation or merger of the
Company with one or more corporations will be deemed to be a voluntary or
involuntary liquidation, dissolution or winding up of the Company, unless such
sale, conveyance, exchange or transfer shall be in connection with a dissolution
or winding up of the business of the Company.
The Certificate of Designations does not contain any provision requiring
funds to be set aside to protect the liquidation preference or Specified Amount
of the Senior Preferred Stock, although such liquidation preference and
Specified Amount will be substantially in excess of the par value of such shares
of the Senior Preferred Stock. In addition, the Company is not aware of any
provision of Pennsylvania law or any controlling decision of the courts of the
State of Pennsylvania that requires a restriction upon the surplus of the
Company solely because the liquidation preference or other amount payable upon
liquidation of the Senior Preferred Stock will exceed the par value.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of shares of Senior
Preferred Stock will have the right to require the Company to repurchase all or
any part of such holder's shares of Senior Preferred Stock pursuant to the offer
described below (the "CHANGE OF CONTROL OFFER") at an offer price in cash equal
to 101% of the Specified Amount of the Senior Preferred Stock plus accrued and
unpaid Liquidated Damages and dividends (excluding any Accumulated Dividends but
including an amount equal to a prorated dividend from the immediately preceding
Dividend Accrual Date to the Change of Control Payment Date (as defined)), if
any, thereon to the date of purchase (the "CHANGE OF CONTROL PAYMENT"). Within
30 days following any Change of Control, the Company will mail a notice to each
holder stating: (1) that the Change of Control Offer is being made pursuant to
the covenant entitled "Change of Control" and that all shares of Senior
Preferred Stock properly tendered will be accepted for payment; (2) the purchase
price and the purchase date, which will be no earlier than 75 days nor later
than 105 days from the date such notice is mailed (the "CHANGE OF CONTROL
PAYMENT DATE"); PROVIDED that the Change of Control Purchase Date will not occur
until at least 15 days after any Change of Control Purchase Date pursuant to the
covenant entitled "Change of Control" in the Indenture relating to any such
Change of Control; (3) that any shares of Senior Preferred Stock not properly
tendered will continue to accrue Liquidated Damages and dividends, if any; (4)
that, unless the Company defaults in the payment of the Change of Control
Payment, all shares of Senior Preferred Stock accepted for payment pursuant to
the Change of Control Offer will cease to accrue Liquidated Damages and
dividends after the Change of Control Payment Date; (5) that holders electing to
have any shares of Senior Preferred Stock purchased pursuant to a Change of
Control Offer will be required to surrender the shares of Senior Preferred Stock
or transfer the shares of Senior Preferred Stock by book-entry, to the Paying
Agent at the address specified in the notice prior to the close of business on
the third Business Day preceding the Change of Control Payment Date; (6) that
holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the second Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the amount of
Senior Preferred Stock delivered for purchase, and a statement that such holder
is withdrawing its election to have such shares of Senior Preferred Stock
purchased; and (7) that holders whose shares of Senior Preferred Stock are being
purchased only in part will be issued new certificates of Senior Preferred Stock
equal in amount to the unpurchased portion of the Senior Preferred Stock
surrendered (or transferred by book-entry).
On the Change of Control Payment Date, the Company will, to the extent
lawful: (1) accept for payment all shares of Senior Preferred Stock or portions
thereof properly tendered pursuant to the Change of Control Offer, (2) deposit
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all shares of Senior Preferred Stock or portions thereof so tendered
and (3) deliver or cause to be delivered to the holders of Senior Preferred
Stock so accepted an Officers' Certificate stating the aggregate amount of
Senior Preferred Stock or portions thereof being purchased by the Company. The
Company will promptly mail to each holder of shares of Senior Preferred Stock so
tendered the Change of Control Payment for such shares of Senior Preferred Stock
and will promptly mail (or cause to be transferred by book-entry) to each
76
<PAGE>
such holder a new share of Senior Preferred Stock equal in amount to any
unpurchased portion of the Senior Preferred Stock surrendered, if any. The
Certificate of Designations provides that, prior to complying with the
provisions of this covenant, but in any event within 90 days following a Change
of Control, the Company will either repay all of its outstanding indebtedness or
obtain the requisite consents, if any, under all agreements governing its
outstanding indebtedness to permit the repurchase of the shares of Senior
Preferred Stock required by this covenant. The Company will publicly announce
the results of the Change of Control Offer on or as soon as practicable after
the Change of Control Payment Date.
The Credit Agreement and the Indenture prohibit the Company from purchasing
any shares of Senior Preferred Stock, except in certain circumstances, and, in
the case of the Credit Agreement, also provide that a Change of Control would
constitute a default thereunder. Any future credit agreements or other
agreements relating to its indebtedness to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing the Senior
Preferred Stock, the Company could seek the consent of its lenders to the
purchase of the Senior Preferred Stock or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing the Senior Preferred Stock. The ability of the Company to purchase
the Senior Preferred Stock upon a Change of Control may also be limited by the
Company's then existing financial resources. See "Risk Factors--Restrictions on
Making a Change of Control Offer; Antitakeover Effects of Change of Control
Provisions".
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rules 13e-4 and 14e-1, in connection
with any offer required to be made by the Company to repurchase the Senior
Preferred Stock as a result of a Change of Control. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
Certificate of Designation, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the Certificate of Designation by virtue thereof.
The provisions relative to the Company's obligation to make an offer to
repurchase the Senior Preferred Stock as a result of a Change of Control may be
waived or modified with the written consent of the holders of a majority in
liquidation preference of the Senior Preferred Stock.
VOTING RIGHTS
Holders of the Senior Preferred Stock will have limited voting rights,
including (i) those required by law, (ii) that holders of a majority of the
outstanding shares of Senior Preferred Stock, voting as a separate class, will
(a) upon the failure of the Company (1) with respect only to dividend accrual
periods ending after December 15, 1999, to pay, in whole or in part, for more
than six consecutive dividend accrual periods, dividends in cash equal to the
dividend that accrued during each such dividend accrual period, (2) to satisfy
any mandatory redemption or repurchase obligation (including, without
limitation, pursuant to any required Change of Control Offer) with respect to
the Senior Preferred Stock, (3) to make a Change of Control Offer within 30 days
following any Change of Control or (4) to comply with the covenants set forth
below under the caption "Certain Covenants", (each of the events described in
clauses (1), (2), (3) and (4) being referred to herein as a "VOTING RIGHTS
TRIGGERING EVENT"), be entitled to elect two members to the Board of Directors
of the Company and (b) have the right to approve each issuance by the Company of
any Senior Securities or Parity Securities (other than Senior Preferred Stock),
except that without the approval of the holders of Senior Preferred Stock, the
Company may issue and have outstanding shares of Parity Securities issued from
time to time in exchange for, or the proceeds of which are used to redeem or
repurchase, any or all of the shares of Senior Preferred Stock or other Parity
Securities and (c) have the right to approve any merger, consolidation or sale
of assets of the Company except as permitted pursuant to the covenant entitled
"Merger, Consolidation and Sale of Assets" as set forth below and (iii) the
holders of a majority of the outstanding shares of Senior Preferred Stock,
voting as a class, will be required for modification to the Exchange Debenture
Indenture. Voting rights arising as a result of a Voting Rights Triggering Event
will continue until such time as all dividends in arrears on the Senior
Preferred Stock are paid in full or such other Voting Rights Triggering Event
has been cured or waived. Under Pennsylvania law, holders of the
77
<PAGE>
Senior Preferred Stock are entitled to vote as a class upon a proposed amendment
to the Articles of Incorporation, whether or not entitled to vote thereon by the
Articles of Incorporation, if the amendment would make any change in the
preferences, limitations or certain special rights of the shares of such class
adverse to such class or authorize, or increase the number of authorized shares
of, any class or series having a preference as to dividends or assets.
CERTAIN COVENANTS
MERGER, CONSOLIDATION AND SALE OF ASSETS. Without the consent of holders of
a majority of the outstanding shares of Senior Preferred Stock, voting as a
class, the Company may not consolidate or merge with or into (whether or not the
Company is the surviving corporation), or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions, to another Person unless: (i) the resulting,
surviving or transferee person (the "Successor Company") is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the Senior Preferred Stock shall be converted
into or exchanged for and shall become shares of the Successor Company having in
respect of the Successor Company substantially the same powers, preferences and
relative participating, optional or other special rights, and the
qualifications, limitations or restrictions thereon, that the Senior Preferred
Stock had immediately prior to such transaction; (iii) the Successor Company
will have Consolidated Net Worth (immediately after the transaction on a pro
forma basis but prior to any purchase accounting adjustments resulting from the
transaction) equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction; and (iv) the Company shall deliver to the
transfer agent prior to the consummation of the proposed transaction an
Officers' Certificate and an opinion of counsel to the effect that such sale,
assignment, transfer, lease, conveyance or other disposition complies with the
terms of the Certificate of Designations and that all conditions precedent to
such sale, assignment, transfer, lease, conveyance or other disposition have
been satisfied.
JUNIOR PAYMENTS. So long as any shares of Senior Preferred Stock are
outstanding, the Company will not declare, pay or set apart for payment on any
Junior Securities or Parity Securities any dividends whatsoever, whether in
cash, property or otherwise (other than dividends payable in shares of the class
or series upon which such dividends are declared or paid, or payable in shares
of Common Stock with respect to Junior Securities other than Common Stock,
together with cash in lieu of fractional shares), nor will the Company make any
distribution on any Junior Securities or Parity Securities, nor will any Junior
Security or Parity Security be purchased, redeemed or otherwise acquired or
retired for value by the Company or any of its Restricted Subsidiaries, nor will
any monies be paid or made available for a sinking fund for the purchase or
redemption of any Junior Security or Parity Security (each, a "JUNIOR PAYMENT"),
unless all dividends (other than dividends accruing on or prior to December 15,
1999), redemption payments, Change of Control Payments or other payments and
Liquidated Damages, if any, to which the holders of Senior Preferred Stock will
have been entitled at the time of such Junior Payment will have been paid or
declared and a sum of money sufficient for the payment thereof has been set
apart. Notwithstanding the foregoing, if the Company is unable to meet its
payment obligations with respect to dividends, redemption payments, Change of
Control Payments or other payments and Liquidated Damages, if any, with respect
to the Senior Preferred Stock and other Parity Securities as described herein,
holders of Senior Preferred Stock and Parity Securities will share equally and
ratably in any payments by the Company with respect thereto. The foregoing
provisions will not prohibit: (i) the redemption, repurchase, retirement or
other acquisition of any Junior Securities or Parity Securities of the Company
in exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of Junior Securities of the Company
(other than any Disqualified Stock) or out of the proceeds of a substantially
concurrent cash capital contribution received by the Company; (ii) the
repurchase, redemption or other acquisition or retirement for value of (or
payments to Holdings which are used by Holdings to repurchase, redeem or
otherwise acquire or retire for value) any Equity Interests of Holdings held by
employees of Holdings, the Company or its Subsidiaries pursuant to any employee
equity subscription agreement, stock option agreement or stock ownership
arrangement; PROVIDED that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $5.0 million in
any twelve-month period plus the aggregate cash proceeds
78
<PAGE>
received by the Company during such twelve-month period from any reissuance of
Equity Interests of Holdings to employees of Holdings, the Company and its
Subsidiaries; (iii) the payment of distributions to Holdings pursuant to the Tax
Sharing Agreement; or (iv) upon exercise of the Warrants, a distribution to
Holdings equal to any cash payments made by Holdings in lieu of the issuance of
fractional Warrant Shares.
TRANSACTIONS WITH AFFILIATES. The provision of the Certificate of
Designations relating to transactions with Affiliates are substantially the same
as the provisions of the Indenture relating to such matters. For a description
thereof, see "Description of the Notes--Certain Covenants--Transactions with
Affiliates".
REPORTS. The provisions of the Certificate of Designations relating to the
provision of reports and information by the Company are substantially the same
as the provisions of the Indenture relating to such matters. For a description
thereof, see "Description of the Notes--Certain Covenants--Reports".
TRANSFER AGENT AND REGISTRAR
The Bank of New York is the transfer agent and registrar for the Senior
Preferred Stock.
79
<PAGE>
DESCRIPTION OF THE EXCHANGE DEBENTURES
GENERAL
The Exchange Debentures will, if and when issued, be issued pursuant to an
Indenture (the "EXCHANGE DEBENTURE INDENTURE") between the Company and United
States Trust Company of New York, as trustee (the "EXCHANGE DEBENTURE TRUSTEE")
a copy of which is filed as an exhibit to the Registration Statement of which
this Prospectus constitutes a part. The terms of the Exchange Debentures include
those stated in the Exchange Debenture Indenture and those made part of the
Exchange Debenture Indenture by reference to the Trust Indenture Act). The
Exchange Debentures will be subject to all such terms, and Holders of Exchange
Debentures are referred to the Exchange Debenture Indenture and the Trust
Indenture Act for a statement thereof. The following summary of the material
provisions of the Exchange Debenture Indenture is qualified in its entirety by
reference to the Exchange Debenture Indenture, including the definitions therein
of certain terms used below, and the Trust Indenture Act. The definitions of
certain terms used in the Exchange Debenture Indenture and in the following
summary are substantially the same as those used in the Indenture. For a
description thereof, see "Description of the Notes--Certain Definitions". For a
description of the registration rights with respect to the Exchange Debentures,
see "Registration Rights".
The Exchange Debentures will be general unsecured obligations of the Company
and will be subordinated to all existing and future Senior Debt of the Company
(as defined in the Exchange Debenture Indenture), including the obligations of
the Company under the Credit Agreement and the Notes. See
"--Subordination". In addition, the Exchange Debentures will be effectively
subordinated to all indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of the Company's Subsidiaries.
Any right of the Company to receive assets of any of its Subsidiaries upon the
latter's liquidation or reorganization (and the consequent right of the holders
of the Exchange Debentures to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor of such Subsidiary, in which
case the claims of the Company would still be subordinate to any security in the
assets of such Subsidiary and any indebtedness of such Subsidiary senior to that
held by the Company. The principal amount of Senior Debt of the Company
outstanding as of July 3, 1996 (including the Indebtedness of the Company under
the Notes) was approximately $567.2 million.
MATURITY AND INTEREST
The Exchange Debentures will be limited in aggregate principal amount to the
Specified Amount of the Senior Preferred Stock exchanged therefor, plus such
principal amount of additional Exchange Debentures as may be issued in lieu of
cash interest, and will mature on December 15, 2006. Interest on the Exchange
Debentures will accrue at the rate of 14% per annum and will be payable
semiannually in arrears on June 15 and December 15, commencing with the first
such date to occur after the date of exchange, to Holders of record on the
immediately preceding June 1 and December 1. Interest on the Exchange Debentures
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest and Liquidated Damages on the Exchange
Debentures will be payable at the office or agency of the Company maintained for
such purpose within the City and State of New York or, at the option of the
Company, payment of interest and Liquidated Damages, if any, may be made by
check mailed to the Holders of the Exchange Debentures at their respective
addresses set forth in the register of Holders of Exchange Debentures; PROVIDED
that all payments with respect to Global Notes will be required to be made by
wire transfer of immediately available same day funds to the accounts specified
by the holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Exchange Debenture
Trustee maintained for such purpose. On or prior to December 15, 1999, the
Company may pay all or a portion of any installment of interest on the Exchange
Debentures by issuing additional Exchange Debentures valued at 100% of their
principal amount. See "Certain Federal Income Tax Considerations". After
December 15, 1999, interest may only be paid in cash. The Company does not
expect to pay interest on the Exchange Debentures in cash prior to June 15,
2000. The Exchange Debentures will be issued in denominations of $1,000 and
integral multiples thereof.
80
<PAGE>
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Exchange Debentures will
not be redeemable at the Company's option prior to December 15, 2001.
Thereafter, the Exchange Debentures will be subject to redemption at the option
of the Company, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest and Liquidated Damages
(if applicable) thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------------------- -----------
<S> <C>
2001................................................................... 104.200%
2002................................................................... 102.800%
2003................................................................... 101.400%
2004 and thereafter.................................................... 100.000%
</TABLE>
On or prior to December 15, 1997, the Company may redeem from time to time
Exchange Debentures at a redemption price equal to 113.0% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon
to the redemption date, with the net proceeds of one or more public offerings of
common stock of Holdings; PROVIDED that at least $50.0 million in aggregate
principal amount of Exchange Debentures remain outstanding immediately after
such redemption; and PROVIDED FURTHER that such redemption shall occur within 45
days of the date of the closing of any such public offering.
SUBORDINATION
The provisions of the Exchange Debenture Indenture relating to the
subordination of the Exchange Debentures are substantially the same as the
provisions of the Indenture relating to such matters. For a description thereof,
see "Description of the Notes--Subordination".
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchange
Debentures will have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Exchange
Debentures at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and Liquidated Damages thereon
to the date of purchase. The provisions of the Exchange Debenture Indenture
relating to the procedures, definitions and limitations on the Company's ability
to satisfy its obligations with respect to a Change of Control are substantially
the same as the provisions of the Indenture relating to such matters. For a
description thereof, see "Description of the Notes--Repurchase at the Option of
the Holders--Change of Control".
Except as described above with respect to a Change of Control, the Exchange
Debenture Indenture does not contain provisions that permit the Holders of the
Exchange Debentures to require that the Company repurchase or redeem the
Exchange Debentures in the event of a takeover, recapitalization or similar
restructuring.
The Credit Agreement and the Indenture prohibit the Company from purchasing
any Exchange Debentures, except in certain circumstances and, in the case of the
Credit Agreement, also provide that a Change of Control will constitute a
default thereunder. Any future credit agreements or other agreements relating to
Senior Debt to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing Exchange Debentures, the Company
could seek the consent of its lenders to the purchase of Exchange Debentures or
could attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing Exchange Debentures. In such case, the
Company's failure to purchase tendered Exchange Debentures would constitute an
Event of Default under the Exchange Debenture Indenture which would, in turn,
constitute a default under the Credit Agreement. In such circumstances, the
subordination provisions in the Exchange Debenture Indenture would likely
restrict payments to the Holders of Exchange Debentures. See "Risk
Factors--Restrictions on Making a Change of Control Offer, Antitakeover Effects
of Change of Control Provisions".
81
<PAGE>
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with any offer
required to be made by the Company to repurchase the Exchange Debentures as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the Exchange
Debenture Indenture, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the Exchange Debenture Indenture by virtue thereof.
The provisions relative to the Company's obligation to make an offer to
repurchase the Exchange Debentures as a result of a Change of Control may be
waived or modified with the written consent of the Holders of a majority in
principal amount of the Exchange Debentures.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The provisions of the Exchange Debenture Indenture relating to limitations
on Restricted Payments are substantially the same as the provisions of the
Indenture relating to such matters, except that the Exchange Debenture Indenture
(i) permits the purchase, redemption or other acquisition or retirement for
value of any Indebtedness that is PARI PASSU with the Exchange Debentures and
(ii) does not limit Restricted Investments other than Investments in
Unrestricted Subsidiaries. For a description of the provisions thereof, see
"Description of the Notes--Certain Covenants--Restricted Payments".
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The provisions of the Exchange Debenture Indenture relating to limitations
on the incurrence of Indebtedness and issuance of preferred stock by the Company
and its subsidiaries are substantially the same as the provisions of the
Indenture relating to such matters; PROVIDED, that the Exchange Debenture
Indenture provides that the Company or any Subsidiary may Incur Indebtedness
(including Acquired Debt) or the Company may issue Disqualified Stock if the
Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is Incurred
or such Disqualified Stock is issued would have been at least 1.75 to 1. For a
description thereof, see "Description of the Notes--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock".
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The provisions of the Exchange Debenture Indenture relating to mergers,
consolidations, or sale of assets of the Company are substantially the same as
the provisions of the Indenture relating to such matters except that the
Successor Corporation will not be required to be able to incur an additional
$1.00 of Indebtedness. For a description thereof, see "Description of the
Notes--Certain Covenants--Merger, Consolidation or Sale of Assets".
TRANSACTIONS WITH AFFILIATES
The provisions of the Exchange Debenture Indenture relating to transactions
with Affiliates are substantially the same as the provisions of the Indenture
relating to such matters. For a description thereof, see "Description of the
Notes--Certain Covenants--Transactions with Affiliates".
REPORTS
The provisions of the Exchange Debenture Indenture relating to the provision
of reports and information by the Company are substantially the same as the
provisions of the Indenture relating to such matters. For a description thereof,
see "Description of the Notes--Certain Covenants--Reports".
EVENTS OF DEFAULT AND REMEDIES
The provisions of the Exchange Debenture Indenture relating to events of
defaults and remedies are substantially the same as the provisions of the
Indenture relating to such matters. For a description thereof, see "Description
of the Notes--Certain Covenants--Events of Default and Remedies".
82
<PAGE>
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Exchange Debentures and the Exchange Debenture Indenture or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
Holder of Exchange Debentures by accepting an Exchange Debenture waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Exchange Debentures. Such waiver may not be
effective to waive liabilities under the federal securities laws and does not
affect any Holder's right to sue under federal securities laws for violations
thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The provisions of the Exchange Debenture Indenture relating to legal
defeasance and covenant defeasance are substantially the same as the provisions
of the Indenture relating to such matters. For a description thereof, see
"Description of the Notes--Legal Defeasance and Covenant Defeasance".
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Exchange Debentures in accordance with the
Exchange Debenture Indenture. The Registrar and the Exchange Debenture Trustee
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Exchange Debenture Indenture. The
Company is not required to transfer or exchange any Exchange Debenture selected
for redemption. Also, the Company is not required to transfer or exchange any
Exchange Debenture for a period of 15 days before a selection of Exchange
Debentures to be redeemed.
The registered Holder of an Exchange Debenture will be treated as the owner
of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
The provisions of the Exchange Debenture Indenture relating to amendment,
supplement and waiver are substantially the same as the provisions of the
Indenture relating to such matters. For a description thereof, see "Description
of the Notes--Amendment, Supplement and Waiver".
CONCERNING THE EXCHANGE DEBENTURE TRUSTEE
The Exchange Debenture Indenture contains certain limitations on the rights
of the Exchange Debenture Trustee, should it become a creditor of the Company,
to obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Exchange
Debenture Trustee will be permitted to engage in other transactions with the
Company and its Affiliates; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Exchange Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Exchange
Debenture Trustee, subject to certain exceptions. The Exchange Debenture
Indenture provides that in the case an Event of Default shall occur (which shall
not be cured), the Exchange Debenture Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Exchange Debenture Trustee will be
under no obligation to exercise any of its rights or powers under the Exchange
Debenture Indenture at the request of any Holder of Exchange Debentures, unless
such Holder shall have offered to the Exchange Debenture Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
83
<PAGE>
DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK OF THE COMPANY
The following description of the capital stock of the Company and the
description of the Company's Articles of Incorporation and By-laws containing
all material provisions thereof is qualified in its entirety by reference to the
Articles of Incorporation and By-laws of the Company, copies of which are filed
as exhibits to the Registration Statement of which this Prospectus constitutes a
part.
The Company was incorporated in 1985 under the Pennsylvania Business
Corporation Law (the "PBCL"). The authorized capital stock of the Company
currently consists of (i) 1,000 shares of Common Stock, par value $.01 per
share, of which 100 shares are issued and outstanding and held by Holdings and
(ii) 10,000,000 shares of Preferred Stock, par value $.01 per share, of which
3,000,000 shares are issued and outstanding as Senior Preferred Stock.
The Company's Articles of Incorporation and By-laws contain provisions
relating to the limitation of liability of directors and indemnification of
directors and officers. The Company's Articles of Incorporation and By-laws
provide that directors shall not be personally liable, as such, for monetary
damages for any action taken, to the fullest extent permitted by the PBCL. In
addition, the Company's Articles of Incorporation and By-laws provide that the
Company shall indemnify its directors and officers to the fullest extent
authorized by applicable law, including circumstances in which indemnification
is otherwise discretionary.
In addition, in the future, the Board of Directors of the Company may,
solely by action of the Board of Directors, issue shares of preferred stock in
one or more series and determine the designation and fix the number of shares of
each series. The Board of Directors of the Company is further authorized to fix
and determine, solely by action of the Board of Directors, the dividend rate,
premium or redemption rate, conversion rights, voting rights, preferences,
privileges, restrictions and other variations granted to or imposed on any
unissued series of such preferred stock.
DESCRIPTION OF THE CREDIT AGREEMENT AND THE A/R FACILITY
On September 30, 1994, SDW Acquisition, the Investor Group and Chemical Bank
(now known as The Chase Manhattan Bank), and Chemical Securities Inc. (now known
as Chase Securities Inc.) (together "Chase") signed a commitment letter pursuant
to which, on December 20, 1994, the aforementioned parties entered into the
Credit Agreement pursuant to which the Company was entitled to borrow up to an
aggregate principal amount of $1.1 billion. The loan facilities were arranged by
Chase and consist of (i) the Term Loan Facilities, consisting of a seven-year
senior secured term loan facility originally in an aggregate principal amount of
$305.0 million (the "Tranche A Term Loan"), and an eight-year senior secured
term loan facility originally in an aggregate principal amount of $325.0 million
(the "Tranche B Term Loan"), (ii) the Revolving Credit Facility and (iii) the
Letter of Credit Facility. At July 3, 1996, the aggregate principal amount
outstanding of Tranche A Term Loans was $268.7 million, the aggregate principal
amount outstanding of Tranche B Term Loans was $185.0 million and the Letter of
Credit Facility utilization was $170.5 million. The Term Loan Facilities, the
Revolving Credit Facility and the Letter of Credit Facility are collectively
referred to herein as the "Credit Facilities". On April 26, 1996, the Company
amended its Credit Agreement to include changes to certain provisions relating
to restrictive covenants including, among other things, the ability to incur
debt, pay dividends and sell certain assets. In addition, certain provisions
relating to interest rates, fees, collateral, prepayments and affirmative
covenants also have been amended. Concurrently with the above, the Company, a
newly established subsidiary, S.D. Warren Finance Co. ("SDWF"), the Bank of
Montreal ("BOM") and its securities unit, Nesbitt Burns Securities ("Nesbitt"),
as agent, entered into a receivables purchase agreement whereby BOM through
Nesbitt has agreed to provide a five-year, $110.0 million revolving accounts
receivable securitization facility (the "A/R Facility"). Under this facility the
Company sells to SDWF, pursuant to a purchase and contribution agreement between
the Company and SDWF, on a nonrecourse basis, all its rights and interests in
its accounts receivable. SDWF in turn sells certain accounts receivable to an
unrelated financial institution under similar terms. The proceeds from the A/R
Facility were used to prepay $100.0 million of the final installment of the
Tranche B Term Loan under
84
<PAGE>
the Credit Agreement. The following summary containing all the material
provisions of the Credit Agreement and the A/R Facility is qualified in its
entirety by reference to the complete text of the documents entered into in
connection therewith, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus constitutes a part. Certain defined terms
used herein have the meaning ascribed thereto in such documents.
AMOUNT AND MATURITY OF FACILITIES
The Tranche A Term Loan will mature in twelve consecutive semiannual
installments commencing June 30, 1996 with a final maturity in December 2001.
The Tranche B Term Loan will mature in fourteen consecutive semiannual
installments commencing June 30, 1996 with a final maturity in December 2002.
The installments of the Tranche A Term Loan and the Tranche B Term Loan due
in each calendar year will be the following respective aggregate amounts as of
July 3, 1996:
<TABLE>
<CAPTION>
TRANCHE A TERM TRANCHE B TERM
LOAN ANNUAL LOAN ANNUAL
YEAR AMOUNT AMOUNT
- ---------------------------------------------------------- -------------- --------------
<S> <C> <C>
1996...................................................... $ 16,357,777 $ 1,231,647
1997...................................................... 46,736,505 2,643,294
1998...................................................... 51,410,155 2,643,294
1999...................................................... 51,410,155 2,643,294
2000...................................................... 51,410,155 13,216,471
2001...................................................... 51,410,155 35,243,922
2002...................................................... -- 127,323,295
</TABLE>
Loans under the Revolving Credit Facility ("Revolving Credit Loans)" will be
made, and letters of credit ("Letters of Credit") will be issued at any time
during the period from and including the Closing Date until the Revolving Credit
Facility matures in December 2001 (the "Revolving Credit Termination Date"). No
Letter of Credit shall have an expiration date later than the Revolving Credit
Termination Date.
Standby letters of credit ("Facility Letters of Credit") were issued under
the Letter of Credit Facility on the Closing Date to support an existing letter
of credit arranged by Scott and to support the Company's obligations with
respect to certain indebtedness and capital and operating leases existing at the
time of the Acquisition including certain obligations of Scott with respect to
Warren's business that continue after the consummation of the Acquisition. The
amount available under the Letter of Credit Facility will be reduced as the
Company's obligations in respect of such indebtedness and leases reduce until
such Facility matures on the Revolving Credit Termination Date. The Facility
Letters of Credit may be drawn upon from time to time in accordance with their
terms. If any such Facility Letter of Credit is drawn upon as a result of the
bankruptcy or insolvency of Scott, the Company's obligations with respect to
such amount of indebtedness may be shortened as to maturity (from up to 20
years, in the case of certain tax exempt obligations, to the remaining term of
the Letter of Credit Facility) and increased as to interest rate (from a
tax-exempt rate to the rate provided for borrowings under the Credit Agreement).
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
incurrences of indebtedness and (iii) 50% of the net proceeds from issuances of
equity after the Closing Date 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 therein) of the Company
and its subsidiaries for the prior fiscal year; PROVIDED that the Company will
be required to prepay annually an amount equal to only 50% of such Excess Cash
Flow if (a) the aggregate outstanding principal amount of the Term Loan
Facilities is less than $250.0 million and (b) the Consolidated Interest Expense
Ratio (as defined therein) as of the last day of the fiscal quarter immediately
preceding the date of such prepayment (calculated on a rolling four quarter
basis) exceeds 3.00 to 1.00. The Company may also make optional prepayments
without premium or penalty at any time (subject to payment of certain breakage
costs if other than on the last day of an interest period under certain
circumstances). Optional prepayments shall be applied pro rata to the Tranche A
Term Loan and the Tranche B Term Loan based on the respective amounts
outstanding and shall be applied to installments
85
<PAGE>
thereof on a pro rata basis, and may not be reborrowed, except that the amount
of any optional prepayments funded with the portion of Excess Cash Flow which is
not otherwise required to be used to prepay Term Loans and/or the Letter of
Credit Facility Loans may, at the Company's option, be applied to prepay the
Tranche A Term Loan and/or the Tranche B Term Loan in such amounts as the
Company may determine with any such prepayment to be applied first to any
scheduled installment due within six months of the date of prepayment and then
to the remaining installments of the Tranche A Term Loan and/or the Tranche B
Term Loan, as the case may be, on a pro rata basis.
INTEREST RATE
The loans under the Credit Agreement bear interest at a rate equal to, at
the Company's option, (i) the Base Rate plus the Applicable Margin ("Base Rate
Loans") or (ii) the Eurodollar Rate (adjusted for reserves) as determined by
Chase for the respective interest period plus the Applicable Margin ("Eurodollar
Loans"). "Applicable Margin" means a percentage per annum ranging (a) in the
case of Base Rate Loans, from 1.50% to 0.00% (2.00% in the case of Tranche B
Term Loans), and (b) in the case of Eurodollar Loans, from 2.50% to 1.00% (3.00%
in the case of Tranche B Term Loans), in each case based upon the Company's
ability to maintain certain financial ratios determined from the most recent
financial statements of the Company calculated as of the last day of each fiscal
quarter on a rolling four quarter basis. "Base Rate" means the highest of (1)
the rate of interest publicly announced by Chase as its prime rate in effect at
its principal office in New York City, (2) the secondary market rate for three
month certificates of deposit (adjusted for reserves) plus 1% and (3) the
federal funds rate in effect from time to time plus 0.5%.
The loans under the A/R Facility bear interest at a rate equal to the
commercial paper rate (the "CP Rate"). CP Rate is defined as a rate per annum
equal to the rate at which the purchaser of the accounts receivable can issue
commercial paper plus any commissions and charges charged by a placement agent
or commercial paper dealer. If the rate agreed to by such placement agent or
commercial paper dealer is a discount rate then the CP Rate shall mean the rate
resulting from converting such discount rate to an interest-bearing equivalent
rate.
Overdue loans payable under the Credit Agreement bear interest at a rate per
annum equal to the rate which is 2% in excess of the rate then otherwise
applicable to such borrowings. Such interest is payable on demand.
FEES
The Company is required to pay commitment fees from 0.5% to 0.375% per annum
based upon the Company's ability to maintain a certain financial ratio
determined from the most recent financial statements of the Company calculated
as of the last day of each fiscal quarter on a rolling four-quarter basis on the
average daily unused commitments available to be drawn under the Revolving
Credit Facility, as in effect from time to time, to Chase for the account of the
arranged syndicate of lenders (the "Lenders") for the period commencing on the
Closing Date through the maturity date of the Revolving Credit Facility. The
Company is also required to pay letter of credit fees with respect to each
letter of credit equal to the Eurodollar Rate Applicable Margin (as defined
therein) in effect from time to time, plus an issuance fee of between 0.20% and
0.25%, in the case of both such fees, based on the Company's ability to maintain
a certain financial ratio. Chase and the Lenders shall receive such other fees
as have been separately agreed upon with Chase and the Lenders. With respect to
the A/R Facility, S.D. Warren is required to pay certain fees associated with
such facility. Such fees include an annual Program Fee based upon the unused
portion of the A/R Facility and an annual Facility Fee based on the size of the
A/R Facility.
GUARANTEES AND COLLATERAL SECURITY
The Credit Facilities are guaranteed by Holdings and each of the Company's
U.S. subsidiaries. The Credit Facilities and such guarantees are secured by
security interests (subject to other liens permitted by the terms of the Credit
Facilities), to the extent permissible under applicable laws and regulations, in
(a) all of 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 and (b) all assets (subject to certain limitations), except certain
accounts receivable, owned by the Company and its subsidiaries.
86
<PAGE>
COVENANTS
The Credit Agreement contains restrictive covenants which limit Holdings and
the Company and its subsidiaries 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 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.
The A/R Facility contains restrictive covenants which limit SDWF with
respect to certain matters including, among other things, the maintenance of a
certain net worth and its ability to incur liens, extend credit terms beyond
their stated maturity, change its credit policy, create subsidiaries or change
its line of business. The A/R Facility also limits SDWF's ability to pay
dividends, incur indebtedness or amend other agreements related to the A/R
Facility without the consent of the Agent. In addition, the A/R Facility
requires that SDWF maintain certain ratios related to the performance of the
underlying accounts receivable, including a delinquency ratio, a default ratio
and a loss-to-liquidation ratio.
EVENTS OF DEFAULT; TERMINATION EVENTS
The Credit Agreement contains customary Events of Default as well as Events
of Default particular to the ownership of the Company and the Transactions,
including (i) if Sappi or any of its majority owned subsidiaries fails to
beneficially own at least a majority of the issued and outstanding capital stock
of the Company (on a fully diluted basis) and fails to have the right to appoint
a majority of the members of the board of directors of Holdings, (ii) if
Holdings ceases to own all the capital stock of the Company or (iii) the
occurrence of a Change in Control under the Indenture.
The A/R Facility contains certain events ("Termination Events") particular
to SDWF including (1) any event under the Credit Agreement which causes an
acceleration of the maturity of the debt under the Credit Agreement or any
redemption, defeasance, purchase or repayment of debt under the Credit Agreement
other than those required to be made in each case prior to the stated maturity
thereof, (2) any bankruptcy proceeding or declaration by the Company or SDWF
that it is unable to pay its debts generally, (3) the inability, or any action
that would cease, to create a valid and enforceable undivided percentage
ownership interest in any receivable and (4) a violation of any of the
performance ratios set forth above relating to SDWF's accounts receivable.
87
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
NOTES
INTEREST
Interest on the Notes will ordinarily be taxable to a holder as ordinary
income in accordance with a holder's regular method of tax accounting.
SALE, REDEMPTION OR OTHER TAXABLE DISPOSITION OF NOTES
Generally, any sale, redemption or other taxable disposition of Notes by a
holder will result in taxable gain or loss equal to the difference between (1)
the sum of the amount of cash and the fair market value of any property received
with respect to such sale, redemption or other taxable disposition (except to
the extent such cash or other property is attributable to accrued interest) and
(2) the holder's tax basis in such Notes. A holder's tax basis in such Notes
will equal their purchase price. Such gain or loss will be capital gain or loss,
and will be long-term capital gain or loss if the Notes had been held by the
holder for more than one year at the time of the sale, redemption or other
taxable disposition.
SENIOR PREFERRED STOCK
DISTRIBUTIONS IN GENERAL
Dividends on the Senior Preferred Stock will be taxable for Federal income
tax purposes as ordinary dividend income to the extent paid out of the current
or accumulated earnings and profits of the Company as determined for Federal
income tax purposes. To the extent that the amount of such a distribution
exceeds the current and accumulated earnings and profits of the Company, such
excess will be treated as a non-taxable recovery of the holder's basis in the
stock in respect of which the distribution is made (to the extent thereof), with
any remaining excess treated as gain from the sale or exchange of such stock.
Although it is possible that cash dividends will be paid on or prior to
December 15, 1999, it is not expected that the Company will pay any dividends on
the Senior Preferred Stock in cash for any period ending on or prior to December
15, 1999. Any unpaid dividends will accrue and compound and will be payable upon
the optional or mandatory redemption of the Stock or the exchange of Exchange
Debentures for Senior Preferred Stock. The tax treatment of such accruing and
compounding dividends ("Accrued Dividends") is not free from doubt. Under
current law, it would appear that Accrued Dividends would not be treated as
having been received by holders of the Senior Preferred Stock until such Accrued
Dividends were actually paid in cash (and would then be taxable for Federal
income tax purposes as a dividend to the extent of the Company's current and
accumulated earnings and profits at such time). The legislative history to the
1990 amendments to Section 305(c) of the Internal Revenue Code of 1986, as
amended (the "Code"), however, grants the Service authority to issue regulations
(possibly with retroactive effect) which would treat such Accrued Dividends as
part of the redemption price of the stock. If Accrued Dividends were included in
the redemption price of the Senior Preferred Stock, a holder would be required
to take such Accrued Dividends into account in determining the amount that
constitutes an excessive redemption price for purposes of Section 305(c) of the
Code, as described below under "Excessive Redemption Price". The effect of such
treatment would be to treat such holder as having received such Accrued
Dividends as constructive distributions at the time they accrue, rather than at
the time they are paid in cash. Until regulations requiring such treatment with
respect to Accrued Dividends are issued, however, the Company intends to take
the position that Accrued Dividends on the Senior Preferred Stock need not be
treated as received by a holder until such time as such Accrued Dividends are
actually paid to such holder in cash and will report to the Service on that
basis.
Payments of Liquidated Damages with respect to Senior Preferred Stock will
be taxable to holders thereof as ordinary income according to their usual method
of tax accounting. A corporate holder will not be entitled to the
dividends-received deduction (discussed below) with respect to such Liquidated
Damages.
PROSPECTIVE PURCHASERS OF SENIOR PREFERRED STOCK ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE TAX TREATMENT OF ACCRUED DIVIDENDS.
88
<PAGE>
EXCESSIVE REDEMPTION PRICE
Under Section 305 of the Code and Treasury Regulations authorized
thereunder, if the redemption price of preferred stock that is subject to
mandatory redemption, such as the Senior Preferred Stock, exceeds its issue
price (I.E., its fair market value at its date of issue) by more than a DE
MINIMIS amount, such excess will be taxable as a constructive distribution to
the holder (treated as a dividend to the extent of the Company's current and
accumulated earnings and profits and otherwise subject to the treatment
described above for distributions in excess of current and accumulated earnings
and profits). Such excess will be considered DE MINIMIS if it is less than the
product of (x) 0.25%, (y) the number of complete years to maturity of the
preferred stock, and (z) the redemption price of the preferred stock. If such
excess is greater than a DE MINIMIS amount, a holder of such preferred stock
would be required to treat such excess as a constructive distribution received
by the holder over the life of the preferred stock under a constant interest
(economic yield) method that takes into account the compounding of yield.
Because the Senior Preferred Stock was sold with a Warrant as part of a
Unit, the two instruments will likely be treated by the Internal Revenue Service
(the "Service") as constituting an "investment unit" for Federal income tax
purposes. In such case, the offering price of a Unit will be allocated to the
Senior Preferred Stock and associated Warrant comprising such Unit based on
their relative fair market values. The Company has allocated $22.6042 of the
offering price for a Unit to the Senior Preferred Stock and $2.3958 of such
offering price to the associated Warrant. That allocation by the Company will be
binding on each holder, unless the holder explicitly discloses (on a statement
attached to the holder's timely filed Federal income tax return for the year
that includes the acquisition date of the Unit) that his allocation of a Unit's
issue price between the Senior Preferred Stock and the Warrant is different from
the Company's allocation. Accordingly, the mandatory redemption price of the
Senior Preferred Stock will exceed such Stock's issue price by more than a DE
MINIMIS amount and holders will be required to treat such excess as a
constructive distribution received over the life of the Senior Preferred Stock,
as described above.
DIVIDENDS TO CORPORATE SHAREHOLDERS
In general, an actual or constructive distribution that is treated as a
dividend for Federal income tax purposes and that is made to a corporate
shareholder with respect to the Senior Preferred Stock will qualify for the 70%
dividends-received deduction.
Under Section 1059 of the Code, the tax basis of Senior Preferred Stock that
has been held by a corporate shareholder for two years or less (ending on the
earliest of the date on which the Company declares, announces or agrees to the
payment of such actual or constructive dividend) is reduced (but not below zero)
by the non-taxed portion of an "extraordinary dividend" for which a
dividends-received deduction is allowed. To the extent a corporate holder's tax
basis would have been reduced below zero but for the foregoing limitation, such
holder must increase the amount of gain recognized on the ultimate sale or
exchange of such Senior Preferred Stock. Generally, an "extraordinary dividend"
is a dividend that (1) equals or exceeds 5% of the holder's adjusted basis in
the Senior Preferred Stock (treating all dividends having ex-dividend dates
within an 85-day period as a single dividend) or (2) exceeds 20% of the holder's
adjusted basis in the Senior Preferred Stock (treating all dividends having
ex-dividend dates within a 365-day period as a single dividend). If an election
is made by the holder, under certain circumstances the fair market value of the
Senior Preferred Stock as of the day before the ex-dividend date may be
substituted for the holder's basis in applying these tests.
CORPORATE STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE POSSIBLE APPLICATION OF SECTION 1059 TO THEIR OWNERSHIP AND
DISPOSITION OF THE SENIOR PREFERRED STOCK.
A corporate stockholder's liability for alternative minimum tax may be
affected by the portion of dividends received which such corporate stockholder
deducts (pursuant to the dividends-received deduction) in computing taxable
income. This results from the fact that corporate stockholders are required to
increase alternative minimum taxable income by 75% of the excess of current
earnings and profits (with certain adjustments, but determined without regard to
the dividends-received deduction), over alternative minimum taxable income
(determined without regard to this earnings and profits adjustment or the
alternative tax net operating loss deduction, but taking into account the
dividends-received deduction).
89
<PAGE>
SALE, REDEMPTION OR OTHER TAXABLE DISPOSITION
Upon a sale, redemption or other taxable disposition of Senior Preferred
Stock (including an exchange of Exchange Debentures for Senior Preferred Stock),
a holder generally will recognize capital gain or loss for Federal income tax
purposes (except to the extent of cash payments received on the disposition that
are attributable to declared dividends, which will be treated in the same manner
as distributions described above under "Distributions in General") in an amount
equal to the difference between (1) the sum of the amount of cash and the fair
market value of any property received upon such sale, redemption or other
taxable disposition (the "amount realized") and (2) the holder's adjusted tax
basis in the stock being disposed of. Such capital gain or loss will be
long-term capital gain or loss if the stock had been held by the holder for more
than one year at the time of the disposition. Notwithstanding the foregoing, it
is possible that the Service may require a holder to treat amounts received upon
the redemption of Senior Preferred Stock or the exchange of Exchange Debentures
for Senior Preferred Stock that are attributable to Accrued Dividends (and not
previously treated as received by a holder as a constructive distribution as
described above under "Distributions in General") as a constructive
distribution, regardless of whether the Company declares a dividend of such
Accrued Dividends in connection with such redemption or exchange. In such case,
such amounts would be taxable for Federal income tax purposes as ordinary
dividend income to the extent of the Company's current and accumulated earnings
and profits for Federal income tax purposes at such time (and any amounts in
excess thereof would be taxable as described above under "Distributions in
General".)
A holder's initial tax basis in the Senior Preferred Stock will equal the
portion of the offering price of the Unit allocable to the Senior Preferred
Stock, as described above under "Excessive Redemption Price". Thereafter, such
initial tax basis will be (i) increased by the amount (if any) of any
constructive distributions the holder is treated as having received pursuant to
the rules described above under "Distributions in General" and "Excessive
Redemption Price", and (ii) decreased by the portion of any (actual or
constructive) distribution that is treated as a tax-free recovery of basis as
described above under "Distributions in General".
If the Company elects to exchange Exchange Debentures for Senior Preferred
Stock on a dividend date, the amount realized on the exchange will depend on
whether the Exchange Debentures and/or the Senior Preferred Stock is traded on
an established market (as defined in applicable Treasury Regulations) at the
time of the exchange. The amount realized will equal (i) the fair market value
of the Exchange Debentures as of the exchange date if the Exchange Debentures
are traded on an established market at such time or (ii) the fair market value
of the Senior Preferred Stock as of the exchange date if such Senior Preferred
Stock is traded on an established market at such time but the Exchange
Debentures are not. If neither the Senior Preferred Stock nor the Exchange
Debentures are so traded, the amount realized will equal the stated principal
amount of the Exchange Debentures provided that the yield on the Exchange
Debentures is equal to or greater than the relevant "applicable Federal rate".
(The applicable Federal rate is a rate announced monthly by the Treasury that is
intended to reflect the average yield of United States government obligations.)
If neither the Exchange Debentures nor the Senior Preferred Stock is so traded
and the yield on the Exchange Debentures is less than the applicable Federal
rate, the amount realized will equal the present value as of the exchange date
of all payments to be made on the Exchange Debentures, discounted at the
applicable Federal rate. It cannot be determined at the present time whether the
Senior Preferred Stock or the Exchange Debentures will be, at the relevant time,
traded on an established market within the meaning of the Treasury Regulations.
Depending upon a holder's particular circumstances, the tax consequences of
holding Exchange Debentures (described below) may be less advantageous than the
tax consequences of holding Senior Preferred Stock because, for example,
payments of interest on the Exchange Debentures will not be eligible for any
dividends-received deduction that may be available to corporate holders and
because, as discussed below, the Exchange Debentures permit the distribution of
Additional Exchange Debentures in lieu of the payment of interest in cash, such
Exchange Debentures will be issued with OID.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE LIKELIHOOD
OF CAPITAL GAIN TREATMENT (IN WHOLE OR PART) ON THE REDEMPTION OF SENIOR
PREFERRED STOCK OR ITS EXCHANGE FOR EXCHANGE DEBENTURES.
90
<PAGE>
EXCHANGE DEBENTURES
CONSEQUENCES OF OWNING EXCHANGE DEBENTURES
The consequences of owning Exchange Debentures will depend in part upon the
facts existing at the time of issuance, as described below. Accordingly, the
ultimate Federal income tax treatment of the ownership of the Exchange
Debentures may differ substantially from that described below. If any Exchange
Debentures are issued, the Company will report to holders on a timely basis the
reportable amount of original issue discount ("OID") and interest income with
respect to the Exchange Debentures, based on its understanding of then
applicable law.
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
CONSEQUENCES OF OWNING EXCHANGE DEBENTURES.
ORIGINAL ISSUE DISCOUNT
Because interest on the Exchange Debentures can, at the option of the
Company, be paid in cash or in additional Exchange Debentures, the Exchange
Debentures will be treated, for Federal income tax purposes, as having been
issued with OID. Under the provisions of the Treasury Regulations dealing with
OID (the "OID Regulations") (i) the distribution of additional Exchange
Debentures in lieu of the payment of interest in cash ("Additional Exchange
Debentures") will not be treated as the payment of interest and accordingly,
(ii) an Exchange Debenture and all Additional Exchange Debentures that could be
issued with respect thereto (if all interest payments that could be satisfied in
Additional Exchange Debentures were satisfied in Additional Exchange Debentures)
will be treated as single OID obligation. Accordingly, under the provisions of
the OID Regulations (i) the stated redemption price at maturity of an Exchange
Debenture will be equal to the sum of all cash payments due on such Exchange
Debentures and on all Additional Exchange Debentures that could be issued with
respect to such Exchange Debenture or Additional Exchange Debentures (if all
interest payments that could be satisfied in Additional Exchange Debentures were
satisfied in Additional Exchange Debentures), (ii) each Exchange Debenture will
be issued with OID in an amount equal to the excess of such stated redemption
price at maturity over the issue price of such Exchange Debenture and (iii) no
interest payment on the Exchange Debentures or on any Additional Exchange
Debentures distributed with respect thereto will be treated as qualified stated
interest and therefore no such interest will be included in income when paid
(because equivalent amounts will be included in income as OID).
The holder of an Exchange Debenture issued with OID will be required to
include such OID in income as interest over the term of the Exchange Debenture,
in advance of the receipt of the cash attributable to such income, under a
constant interest rate method described below that takes account of the
compounding of interest.
The amount of OID accruing with respect to any Exchange Debenture will be
the sum of the "daily portions" of OID with respect to such Exchange Debenture
for each day during the taxable year in which a holder owns an Exchange
Debenture ("accrued OID"). The daily portion is determined by allocating to each
day in any "accrual period" a pro rata portion of the OID allocable to that
accrual period. An accrual period may be of any length and may vary in length
over the term of an Exchange Debenture provided that each accrual period is no
longer than one year and each scheduled payment of principal or interest occurs
either on the final day of an accrual period or on the first day of an accrual
period. The amount of OID accruing during any accrual period with respect to an
Exchange Debenture will be equal to the following amount: (i) the "adjusted
issue price" of such Exchange Debenture at the beginning of that accrual period,
MULTIPLIED BY (ii) the yield to maturity of such Exchange Debenture. OID
allocable to a final accrual period is the difference between the amount payable
at maturity and the adjusted issue price at the beginning of the final accrual
period. If all accrual periods are of equal length, except for an initial short
accrual period, the amount of OID allocable to the initial short accrual period
may be computed under any reasonable method. The adjusted issue price of an
Exchange Debenture at the beginning of its first accrual period will be equal to
its issue price. An Exchange Debenture's issue price will equal the amount
realized upon the exchange of Exchange Debentures for Senior Preferred Stock, as
described above under "Sale or Exchange". The adjusted issue price at the
beginning of any subsequent accrual period will be equal to (i) the adjusted
issue
91
<PAGE>
price at the beginning of the preceding accrual period, PLUS (ii) the amount of
OID allocable to the preceding accrual period, MINUS(iii) any payments
(including payments of cash interest) made during the preceding accrual period
and on the first day of such subsequent accrual period.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
Pursuant to Section 163 of the Code, a portion of the OID accruing on
certain debt instruments will be treated as a dividend eligible for the
dividends-received deduction, and the corporation issuing such debt instrument
will not be entitled to deduct such portion of the OID and will be allowed to
deduct the remainder of the OID only when paid.
This treatment would apply to "applicable high yield discount obligations"
("AHYDO"), that is, debt instruments that have a term of more than five years,
have a yield to maturity that equals or exceeds five percentage points over the
"applicable Federal rate" and have "significant" OID. A debt instrument is
treated as having "significant" OID if the aggregate amount that would be
includible in gross income with respect to such debt instrument for periods
before the close of any accrual period ending after the date five years after
the date of issue exceeds the sum of (i) the aggregate amount of interest to be
paid in cash under the debt instrument before the close of such accrual period
and (ii) the product of the initial issue price of such debt instrument and its
yield to maturity. Because the amount of OID attributable to the Exchange
Debentures will be determined at the time such Exchange Debentures are issued
and the applicable Federal rate at the time the Exchange Debentures are issued
is not predictable, it is impossible to determine at the present time whether
the Exchange Debentures will be treated as an AHYDO.
If the Exchange Debentures are treated as AHYDO's, a holder would be treated
as receiving dividend income (to the extent of the Company's current and
accumulated earnings and profits) solely for purposes of the dividends-received
deduction in an amount equal to the "disqualified portion" of the OID of such
AHYDO. The "disqualified portion" of the OID is equal to the lesser of (i) the
amount of the OID or (ii) the portion of the "total return" (the excess of all
payments to be made with respect to the Exchange Debenture obligation over its
issue price) on the Exchange Debenture that bears the same ratio to the Exchange
Debenture's total return as the "disqualified yield" (the extent to which the
yield exceeds the applicable Federal rate plus 6%) bears to the Exchange
Debenture's yield to maturity. To the extent the Company's earnings and profits
are insufficient, any portion of the OID that otherwise would have been
recharacterized as a dividend for purposes of the dividends-received deduction
will continue to be taxed as ordinary OID income in accordance with the rules
described above. The Company's deduction for OID will be substantially deferred
with respect to an Exchange Debenture that is treated as an AHYDO. In addition,
such deduction will be disallowed to the extent that the yield on such AHYDO
exceeds the applicable Federal rate by more than 6%.
SALE, REDEMPTION OR OTHER TAXABLE DISPOSITION OF EXCHANGE DEBENTURES
Generally, any sale, redemption other taxable disposition of Exchange
Debentures by a holder will result in taxable gain or loss equal to the
difference between (1) the sum of the amount of cash and the fair market value
of any property received upon such sale, redemption or disposition and (2) the
holder's adjusted tax basis in such Exchange Debentures. The adjusted tax basis
of a holder in such Exchange Debentures will equal the issue price of such
Exchange Debentures, increased by any OID on the Exchange Debentures previously
included in such holder's income, and reduced by any payments (including
payments of cash interest) previously made on the Exchange Debentures. Such gain
or loss will be capital gain or loss, and will be long-term capital gain or loss
if the Exchange Debentures had been held by the holder for more than one year at
the time of the sale, redemption or disposition.
BACKUP WITHHOLDING
In general, a noncorporate holder of Securities will be subject to backup
withholding at the rate of 31% with respect to reportable payments of dividends,
interest, or OID accrued with respect to, or the proceeds of a sale, exchange or
redemption of, Securities, as the case may be, if the holder fails to provide a
taxpayer identification number or certification of foreign or other exempt
status or fails to report in full dividend and interest income. Amounts paid as
backup withholding do not constitute an additional tax and will be credited
against the holder's Federal income tax liabilities.
92
<PAGE>
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH HOLDER OF SECURITIES SHOULD CONSULT WITH ITS OWN TAX ADVISOR
AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE OWNERSHIP AND
DISPOSITION OF SUCH SECURITIES, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
PLAN OF DISTRIBUTION
This Prospectus has been prepared for use by DLJSC in connection with offers
and sales of the Securities in market making transactions. DLJSC may act as
principal or agent in such transactions. DLJSC has advised the Company that it
currently makes a market in the Securities, but it is not obligated to do so and
may discontinue any such market making at any time without notice. Accordingly,
there can be no assurance that an active trading market will be maintained for
the Securities.
DLJSC is an affiliate of certain stockholders of Holdings, of which S.D.
Warren is a wholly owned subsidiary. As of the date of this Prospectus, these
affiliates owned an aggregate of 6,593,749 shares of Common Stock (including
3,468,749 shares subject to Class B Warrants) or 18.35% of the outstanding
Common Stock on a fully diluted basis. In addition, John S. Chalsty, the
president and chief executive officer of Donaldson, Lufkin & Jenrette, Inc., an
affiliate of DLJSC, and Peter T. Grauer, Managing Director of DLJMB an affiliate
of DLJSC, are members of the board of directors of Holdings. See "Security
Ownership of Certain Beneficial Owners and Management".
Pursuant to the Shareholders Agreement, certain affiliates of DLJSC are
entitled to designate one of Holdings' directors and have certain other rights.
See "Security Ownership of Certain Beneficial Owners and
Management--Shareholders Agreement". Certain benefits to each party under the
Shareholders Agreement terminate, however, if such party no longer owns
specified minimum amounts of Common Stock.
PRIOR RELATIONSHIPS
In connection with the Acquisition the Company sold to DLJSC $375 million of
the SDW Acquisition Notes, $75 million of SDW Acquisition Senior Preferred Stock
and 898,440 Class A Warrants, less the aggregate discount to DLJSC of
$13,950,000. DLJSC was also reimbursed for certain out-of-pocket expenses
incurred by DLJSC in connection therewith.
Pursuant to a letter agreement dated October 6, 1994, DLJ Bridge Funding
Inc., an affiliate of DLJSC made a commitment to purchase $375 million of senior
subordinated bridge notes in connection with the Acquisition, in the event the
Note Offering did not occur. DLJ Bridge Funding Inc., received customary fees
for making such commitment
The Company also agreed to pay certain fees, reimburse expenses for and
provide indemnification to members of the Investor Group and transferees, which
group includes certain affiliates of DLJSC, in connection with the Acquisition
and related transactions including various registration rights. See "Certain
Relationships and Related Transactions".
EXPERTS
The balance sheet data as of September 24, 1994, and September 27, 1995, the
statements of operations, changes in parent's equity and cash flows for the
twelve months ended December 25, 1993, the nine months ended September 24, 1994
and the three months ended December 20, 1994, and the statements of operations,
changes in stockholder's equity and cash flows for the nine months ended
September 27, 1995 included in this Prospectus and the related Financial
Statement Schedule included elsewhere in this Registration Statement have been
so included herein in reliance upon the report of Deloitte & Touche LLP,
independent accountants, which expresses an unqualified opinion and includes an
explanatory paragraph relating to the comparability of the Predecessor
Corporation's Financial Statements given upon the authority of that firm as
experts in accounting and auditing.
93
<PAGE>
S.D. WARREN COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
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.............................................................................. F-3
Balance Sheets as of September 24, 1994 and September 27, 1995........................................... F-4
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.............................................................................. F-5
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.................... F-6
Statement of Changes in Stockholder's Equity for the period December 21, 1994 through September 27,
1995.................................................................................................... F-7
Notes to Financial Statements............................................................................ F-8
Financial Statement Schedule
II--Valuation and Qualifying Accounts.................................................................... F-31
Unaudited Condensed Financial Statements of S.D. Warren Company
Unaudited Condensed Statements of Operations for the period September 25, 1994 through December 20, 1994,
the period December 21, 1994 through June 28, 1995 and the nine months ended July 3, 1996............... F-32
Unaudited Condensed Balance Sheets as of September 27, 1995 and July 3, 1996............................. F-33
Unaudited Condensed Statements of Cash Flows for the period September 25, 1994 through December 20, 1994,
the period December 21, 1994 through June 28, 1995 and the nine months ended July 3, 1996............... F-34
Notes to Unaudited Condensed Financial Statements........................................................ F-35
</TABLE>
F-1
<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 the 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 the 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.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 11, 1996
F-2
<PAGE>
S.D. WARREN COMPANY
STATEMENTS OF OPERATIONS
(in millions, except share data)
<TABLE>
<CAPTION>
PERIOD PERIOD
TWELVE MONTHS SEPTEMBER 25, DECEMBER 21,
ENDED NINE MONTHS ENDED 1994 1994
DECEMBER25, SEPTEMBER 24, THROUGH THROUGH
1993 1994 DECEMBER20, 1994 SEPTEMBER27,
--------------- ----------------- ----------------- 1995
S.D. WARREN S.D. WARREN S.D. WARREN ---------------
COMPANY AND COMPANY AND COMPANY AND S.D. WARREN
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED COMPANY AND
AFFILIATES AFFILIATES AFFILIATES SUBSIDIARIES
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
--------------- ----------------- ----------------- ---------------
Sales............................ $ 1,143.6 $ 828.8 $ 313.6 $ 1,155.8
<S> <C> <C> <C> <C>
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.
F-3
<PAGE>
S.D. WARREN COMPANY
BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 24,
1994 SEPTEMBER 27,
--------------- 1995
S.D. WARREN ---------------
COMPANY AND S.D. WARREN
CERTAIN RELATED COMPANY AND
AFFILIATES SUBSIDIARIES
(PREDECESSOR) (SUCCESSOR)
--------------- ---------------
Current Assets:
<S> <C> <C>
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 15)
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.
F-4
<PAGE>
S.D. WARREN COMPANY
STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD PERIOD
NINE MONTHS SEPTEMBER 25, DECEMBER 21,
TWELVE MONTHS ENDED 1994 1994
ENDED SEPTEMBER 24, THROUGH THROUGH
DECEMBER 25, 1993 1994 DECEMBER 20, 1994 SEPTEMBER 27,
----------------- ----------------- ----------------- 1995
S.D. WARREN S.D. WARREN S.D. WARREN ---------------
COMPANY AND COMPANY AND COMPANY AND S.D. WARREN
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED COMPANY AND
AFFILIATES AFFILIATES AFFILIATES SUBSIDIARIES
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
----------------- ----------------- ----------------- ---------------
Cash Flows from Operating
Activities:
<S> <C> <C> <C> <C>
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 receivable,
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.
F-5
<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............................................................................. $ 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............................................................................. 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............................................................................ 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)...................................................... $ 1,219.1
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
S.D. WARREN COMPANY
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
------------------------ EXCESS OF RETAINED
SHARES PAR VALUE 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 Senior preferred stock............................ -- -- -- (8.5)
Accretion to liquidation preference value on Senior preferred stock.... -- -- -- (0.6)
--- ----- ----------- -----
Balance, September 27, 1995............................................ 100 $ -- $ 331.8 $ 33.0
--- ----- ----------- -----
--- ----- ----------- -----
</TABLE>
See accompanying notes to financial statements.
F-7
<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 October8, 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. Scott has since been acquired by
Kimberly-Clark Corporation.
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 "SDW Acquisition
Senior Preferred Stock") and $375.0 million of 12% Series A Senior Subordinated
Notes due 2004 (the "SDW Acquisition Notes") and received $331.8 million from
Holdings as a contribution to capital. Immediately following the Acquisition,
all indebtedness under the SDW Acquisition Notes was assumed by the Company (the
"Series A Notes") and SDW Acquisition Senior Preferred Stock was converted into
an equivalent amount of the Company's 14% Series A Senior
F-8
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BUSINESS, FORMATION AND ACQUISITION (CONTINUED)
Exchangeable Preferred Stock due 2006 (the "Old Senior Preferred Stock"). The
Old Senior Preferred Stock and the Series A Notes were subject to an exchange
offer discussed in Notes 11 and 19. The remaining purchase price was financed,
in part, through the credit facilities discussed in Note 11.
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
ENDED YEAR ENDED
SEPTEMBER 24, SEPTEMBER27,
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--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 3, 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.
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.
F-9
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
F-10
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 estimable. 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 December25, 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 recoveries. Liabilities are recognized for remedial activities when
the cleanup 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.
F-11
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 3--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. 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.
F-12
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BASIS OF PRESENTATION AND ACCOUNTING POLICIES--PREDECESSOR
CORPORATION (CONTINUED)
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 4--ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
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 20). Sappi is the largest investor in Holdings.
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 (in millions):
F-13
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACCOUNTS RECEIVABLE (CONTINUED)
<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 5--INVENTORY (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 24, SEPTEMBER 27,
1994 1995
------------- -------------
Finished products................................ $ 41.5 $ 89.8
<S> <C> <C>
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>
F-14
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 6--PLANT ASSETS
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
SEPTEMBER 24, SEPTEMBER 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 7--DEPRECIATION AND 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
------------- ------------- ------------- -------------
Depreciation of plant assets.............. $ 91.9 $ 69.9 $ 27.3 $ 65.0
<S> <C> <C> <C> <C>
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 8--INCOME TAXES
The domestic and foreign components of income (loss) before taxes on income
are as follows
<TABLE>
<CAPTION>
(in million):
<S> <C> <C> <C> <C>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
------------- ------------- ------------- -------------
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>
F-15
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
The components of the tax provisions are as follows (in millions):
<S> <C> <C> <C> <C>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
------------- ------------- ------------- -------------
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 provision are comprised of the following
<TABLE>
<CAPTION>
(in millions):
<S> <C> <C> <C> <C>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
------------- ------------- ------------- -------------
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>
F-16
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
The components of the deferred tax assets and liabilities are as follows (in
<TABLE>
<CAPTION>
millions):
<S> <C> <C>
SEPTEMBER SEPTEMBER 27,
24, 1994 1995
----------- -------------
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
<TABLE>
<CAPTION>
effective income tax rate are:
<S> <C> <C> <C> <C>
TWELVE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1993 1994 1994 1995
------------- ------------- ------------- -------------
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.
F-17
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--ACCRUED AND OTHER CURRENT LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 24, SEPTEMBER 27,
1994 1995
------------- -------------
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 10--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 11--LONG-TERM DEBT
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
SEPTEMBER 24, SEPTEMBER 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.
F-18
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--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 $250.0 million and (b) certain financial ratios are achieved.
Subsequent to September 27, 1995, the Company made a payment of approximately
$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.
F-19
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--LONG-TERM DEBT (CONTINUED)
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
million 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.
NOTES AND SENIOR PREFERRED STOCK
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 Series A Notes for an equivalent amount of 12%
Series B Senior Subordinated Notes due 2004 (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 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 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
F-20
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--LONG-TERM DEBT (CONTINUED)
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 12--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)
<S> <C> <C> <C> <C>
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 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
F-21
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 13--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.
F-22
<PAGE>
NOTE 14--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 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.
F-23
<PAGE>
NOTE 14--ENVIRONMENTAL AND SAFETY MATTERS (CONTINUED)
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 Predecessor Corporation
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 15--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
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
F-24
<PAGE>
NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 16--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.
F-25
<PAGE>
NOTE 16--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
------------- -------------
Actuarial present value of benefit obligation:
<S> <C> <C>
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
------------- ------------- ------------- -------------
Service cost-benefits earned during the
period................................... $ 1.5 $ 1.5 $ 0.4 $ 4.5
<S> <C> <C> <C> <C>
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 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.
F-26
<PAGE>
NOTE 17--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
----------- -------------
Accumulated postretirement benefit obligations
(APBO):
<S> <C> <C>
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 THREE MONTHS
YEAR ENDED ENDED ENDED NINE MONTHS
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, ENDED SEPTEMBER
1993 1994 1994 27, 1995
------------- ------------- ------------- ---------------
Service cost.............. $ 3.2 $ 2.7 $ 0.9 $ 2.0
<S> <C> <C> <C> <C>
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.
F-27
<PAGE>
NOTE 18--OTHER LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 24, SEPTEMBER 27,
1994 1995
------------- -------------
Accrued workers' compensation...................... $ 23.3 $ 35.0
<S> <C> <C>
Accrued pension & other postretirement benefits.... 62.3 50.0
Other accrued liabilities.......................... 8.3 8.3
----- -----
$ 93.9 $ 93.3
----- -----
----- -----
</TABLE>
NOTE 19--SENIOR 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 Senior 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.
F-28
<PAGE>
NOTE 19--SENIOR 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 20--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.
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
F-29
<PAGE>
NOTE 20--RELATED PARTY TRANSACTIONS (CONTINUED)
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 to Sappi subsidiaries 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.
F-30
<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:
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>
F-31
<PAGE>
S.D. WARREN COMPANY
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PERIOD RESTATED RESTATED
SEPTEMBER 25, PERIOD NINE MONTHS
1994 THROUGH DECEMBER 21, 1994 ENDED
DECEMBER 20, 1994 THROUGH JULY 3,
----------------- JUNE 28, 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)
----------------- ----------------- -----------
Sales............................................ $ 313.6 $ 764.3 $ 1,066.8
<S> <C> <C> <C>
Cost of goods sold............................... 263.7 590.0 874.1
------ ------ -----------
Gross profit..................................... 49.9 174.3 192.7
Selling, general and administrative expense...... 22.2 59.4 98.1
------ ------ -----------
Income from operations........................... 27.7 114.9 94.6
Other income (expense), net...................... (0.5) 2.2 (1.3)
Interest expense................................. 2.3 74.0 84.3
------ ------ -----------
Income before income taxes and extraordinary
item............................................ 24.9 43.1 9.0
Income tax expense............................... 9.9 17.2 3.6
------ ------ -----------
Income before extraordinary item................. $ 15.0 25.9 5.4
------
------
Extraordinary item, net of tax (Note 6).......... -- (2.0)
------ -----------
Net income....................................... 25.9 3.4
Dividends and accretion on Series B preferred
stock........................................... 5.7 10.0
------ -----------
Net income (loss) applicable to common
stockholder..................................... $ 20.2 $ (6.6)
------ -----------
------ -----------
Earnings (loss) per common share (in millions):
Income before extraordinary item............... $ 0.26 $ 0.05
------ -----------
------ -----------
Net income..................................... $ 0.26 $ 0.03
------ -----------
------ -----------
Net income (loss) applicable to common
stockholder.................................. $ 0.20 $ (0.07)
------ -----------
------ -----------
Weighted average number of shares outstanding.... 100 100
------ -----------
------ -----------
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-32
<PAGE>
S.D. WARREN COMPANY
UNAUDITED CONDENSED BALANCE SHEETS
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
RESTATED RESTATED
SEPTEMBER27, 1995 JULY3, 1996
------------------ ---------------
S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND
SUBSIDIARIES SUBSIDIARIES
(SUCCESSOR) (SUCCESSOR)
------------------ ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 62.2 $ 1.8
Trade accounts receivable, net............................................ 129.4 37.8
Other receivables......................................................... 24.5 21.0
Inventories............................................................... 226.5 220.6
Deferred income taxes..................................................... 8.9 8.9
Other current assets...................................................... 11.1 13.7
-------- ---------------
Total current assets.................................................... 462.6 303.8
Plant assets, net........................................................... 1,150.7 1,115.7
Timber resources, net....................................................... 98.4 98.3
Goodwill, net............................................................... 98.1 95.1
Deferred financing fees, net................................................ 53.1 46.3
Other assets, net........................................................... 24.7 21.8
-------- ---------------
Total assets............................................................ $ 1,887.6 $ 1,681.0
-------- ---------------
-------- ---------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt...................................... $ 78.6 $ 46.6
Accounts payable.......................................................... 112.2 88.3
Accrued and other current liabilities..................................... 94.2 80.2
-------- ---------------
Total current liabilities............................................... 285.0 215.1
-------- ---------------
Long-term debt:
Term loans................................................................ 553.8 411.4
Senior subordinated notes................................................. 375.0 375.0
Other..................................................................... 120.0 116.4
-------- ---------------
1,048.8 902.8
-------- ---------------
Deferred income taxes....................................................... 21.2 22.3
-------- ---------------
Other liabilities........................................................... 93.3 98.1
-------- ---------------
Total liabilities....................................................... 1,448.3 1,238.3
-------- ---------------
Commitments and contingencies (Note7).......................................
SeriesB redeemable exchangeable preferred stock (liquidation value, $83.5
and $92.9, respectively)................................................... 74.5 84.5
-------- ---------------
Stockholder's equity:
Common stock.............................................................. -- --
Capital in excess of par value............................................ 331.8 331.8
Retained earnings......................................................... 33.0 26.4
-------- ---------------
Total stockholder's equity.............................................. 364.8 358.2
-------- ---------------
Total liabilities and stockholder's equity.............................. $ 1,887.6 $ 1,681.0
-------- ---------------
-------- ---------------
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-33
<PAGE>
S.D. WARREN COMPANY
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
RESTATED
PERIOD PERIOD RESTATED
SEPTEMBER25, 1994 DECEMBER 21, NINE MONTHS
THROUGH 1994 ENDED
DECEMBER20, 1994 THROUGH JULY 3,
----------------- JUNE 28, 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)
----------------- -------------- -----------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net income................................... $ 15.0 $ 25.9 $ 3.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, cost of timber harvested and
amortization.............................. 28.8 56.3 86.4
Inventory market value adjustments......... -- -- 10.5
Deferred income taxes...................... 15.8 -- --
Other...................................... -- 3.6 2.0
Changes in assets and liabilities:
Trade accounts receivable, net............. (1.7) (22.0) 91.6
Inventories................................ 5.4 (48.7) (4.6)
Accounts payable, accrued and other
current liabilities....................... 18.6 37.5 (41.6)
Accruals for restructuring programs........ (12.7) -- --
Other assets and liabilities............... (15.5) 1.8 (0.3)
------ -------------- -----------
Net cash provided by operating
activities.............................. 53.7 54.4 147.4
------ -------------- -----------
Cash Flows from Investing Activities:
Acquisition, net of related costs............ -- (1,493.7) --
Proceeds from disposals of plant assets...... -- 0.6 2.2
Investments in plant assets and timber
resources................................... (14.5) (14.9) (32.2)
------ -------------- -----------
Net cash used in investing activities.... (14.5) (1,508.0) (30.0)
------ -------------- -----------
Cash Flows from Financing Activities:
Proceeds from debt........................... -- 1,130.1 --
Repayments of debt........................... (0.5) (161.7) (177.8)
Proceeds from equity contribution............ -- 331.8 --
Proceeds from issuances of preferred stock,
net of expenses............................. -- 65.4 --
Bank overdraft............................... -- 13.0 --
Predecessor Corporation's parent company
capital infusions, net...................... 31.6 -- --
------ -------------- -----------
Net cash provided by (used in) financing
activities.............................. 31.1 1,378.6 (177.8)
------ -------------- -----------
Net change in cash and cash equivalents........ 70.3 (75.0) (60.4)
Cash and cash equivalents, at beginning of
period........................................ 4.7 75.0 62.2
------ -------------- -----------
Cash and cash equivalents, at end of period.... $ 75.0 $ -- $ 1.8
------ -------------- -----------
------ -------------- -----------
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-34
<PAGE>
S.D. WARREN COMPANY
NOTES TO UNAUDITED 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
On 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 interim condensed combined 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 Corporation should be read in conjunction with the audited
financial statements included in the Company's Annual Report on Form 10-K/A. The
unaudited condensed results of operations for the nine months ended July 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 June 28, 1995 has been increased by $8.2 million from the amount
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.
F-35
<PAGE>
S.D. WARREN COMPANY
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RESTATEMENTS
For purposes of the following discussion, the nine months ended June 28,
1995 refers to the Predecessor Corporation for the period September 25, 1994
through December 20, 1994 combined with the Successor Corporation for the period
December 21, 1994 through June 28, 1995. The "Company" refers to both the
Predecessor and Successor Corporations.
Subsequent to discussions with the staff of the Securities and Exchange
Commission, the Company 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. Accordingly, the financial statements for
the nine months ended June 28, 1995 and July 3, 1996 have been restated to
reflect the effect of this change in accounting for these costs. The effects of
the restatements were as follows (in millions):
<TABLE>
<CAPTION>
PERIOD NINE
DECEMBER 21, 1994 MONTHS
THROUGH ENDED
JUNE 28, 1995 JULY 3, 1996
------------------- -------------
<S> <C> <C>
Income (loss) before income taxes
As previously recorded in the Company's Form 10-Q.......... $ 48.1 $ 9.9
As restated................................................ 43.1 9.0
Net income (loss)
As previously recorded in the Company's Form 10-Q.......... 28.9 3.9
As restated................................................ 25.9 3.4
Stockholder's equity
As previously recorded in the Company's Form 10-Q.......... 363.1
As restated................................................ 358.2
</TABLE>
In addition to the aforementioned restatements, certain prior period amounts
have been reclassified to conform to their current presentation.
NOTE 3--ACCOUNTS RECEIVABLE
On April 23, 1996, in conjunction with an amendment to the Company's credit
facility, 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. As of July 3, 1996, $130.9
million of trade accounts receivable had been sold to the unrelated financial
institution and the Company's subsidiary retained an undivided interest in $37.8
million of trade accounts receivable, net. The sale is reflected as a reduction
in accounts receivable in the accompanying Condensed Balance Sheet and as
operating cash flows in the accompanying Condensed Statement of Cash Flows. Fees
associated with this transaction are recorded in other income (expense) in the
Company's Condensed Statement of Operations.
NOTE 4--RELATED PARTY TRANSACTIONS
During the nine months ended July 3, 1996, the Company sold products to
certain subsidiaries of Sappi ("affiliates") at market prices primarily 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 $71.1 million to affiliates and
incurred fees of approximately $4.3 million relating to these sales for the nine
months ended July 3, 1996, respectively. Trade accounts receivable from
affiliates at July 3, 1996, including amounts sold (see Note 3), were
approximately $24.3 million. The Company expects to finalize the written
agreements for transactions with these affiliates in the near future.
F-36
<PAGE>
S.D. WARREN COMPANY
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--RELATED PARTY TRANSACTIONS (CONTINUED)
During the third quarter of fiscal 1996, the Company commenced transacting
business in currencies other than the U.S. Dollar, primarily the Japanese Yen.
The Company manages the potential exposure associated with transacting in
foreign currencies through the use of foreign currency forward contracts. These
contracts are used to offset the effects of exchange rate fluctuations on a
portion of the underlying Yen denominated exposure. These exposures include firm
intercompany trade accounts receivable. Realized and unrealized gains and losses
on these contracts at July 3, 1996 were immaterial.
During fiscal year 1996, the Company began purchasing products from certain
affiliates in U.S. Dollars primarily for sale to external customers. The Company
receives commissions from the affiliates on such sales. These transactions to
date have not been material.
NOTE 5--INVENTORIES (IN MILLIONS)
<TABLE>
<CAPTION>
JULY 3,
SEPTEMBER 27, 1995 1996
------------------- -----------
<S> <C> <C>
Finished products................................................................ $ 89.8 $ 111.3
Work in process.................................................................. 51.0 38.4
Pulp, logs and pulpwood.......................................................... 33.2 20.8
Maintenance parts and other supplies............................................. 52.5 50.1
------ -----------
$ 226.5 $ 220.6
------ -----------
------ -----------
</TABLE>
NOTE 6--LONG-TERM DEBT
The Company amended its credit agreement on April 26, 1996 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 also amended.
In April 1996, 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 credit agreement. Approximately $3.3 million of financing fees that
had previously been deferred were written off as a result of this prepayment and
recorded as an extraordinary item in the accompanying Condensed Statement of
Operations net of a $1.3 million tax effect. In addition, during the nine months
ended July 3, 1996, payments totaling approximately $74.9 million were made
pursuant to an excess cash flow requirement, as defined. Amounts paid pursuant
to the excess cash flow requirement during the nine months ended July 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 semiannual installments on a
pro rata basis. The current maturities of long-term debt balance of $46.6
million at July 3, 1996 primarily represents the amounts payable in December
1996 and June 1997 under the Company's term loan facilities.
NOTE 7--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. None of these expenditures, individually or in the aggregate, are
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
F-37
<PAGE>
S.D. WARREN COMPANY
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--ENVIRONMENTAL AND SAFETY MATTERS (CONTINUED)
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 County's
1994 ordinance governing its industrial wastewater pretreatment program. The
lawsuit challenges, among other things, the treatment capacity availability and
local effluent limit provisions of the ordinance. In July 1996, the Court
rendered a decision substantially in favor of the Company and the other
plaintiffs, but the County is expected to appeal the Court's decision. If the
Company and the other plaintiffs do not prevail in that appeal, the Company may
not be able to obtain additional treatment capacity for future expansions and
the County could impose stricter permit limits. In the meantime, the County has
issued a permit with effluent limits that the Company is able to meet without
additional pretreatment. The imposition of currently proposed permit limits or
the failure of the Muskegon lawsuit 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 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 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 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
F-38
<PAGE>
S.D. WARREN COMPANY
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--ENVIRONMENTAL AND SAFETY MATTERS (CONTINUED)
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, or its
successor, 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 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.
NOTE 8--SUBSEQUENT EVENTS
On October 17, 1996, a fire occurred at an outside warehouse location in
Muskegon, Michigan, which resulted in the loss of approximately 8,000 tons of
inventory valued in excess of $5.5 million. While the Company cannot reasonably
estimate at this time the total loss experienced, or the amount to be recovered
under its insurance policies, it does not expect that total losses will exceed
its insurance coverage limits.
Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. Damage to mill equipment is being repaired and normal
operating mill conditions are being restored. While the mill is not yet
operating at full production, the Company anticipates that it will be in the
near future. While the Company cannot reasonably estimate at this time the total
loss experienced, or the amount to be recovered under its insurance policies,
early indications suggest that such amounts may be significant. However, total
losses are not expected to exceed the Company's insurance coverage limits.
On October 24, 1996 the Company announced a restructuring plan that will
likely result in a pretax charge of approximately $10.0 million in the first
quarter of fiscal 1997. The charge will be taken to cover the one-time costs
related to the reduction of up to approximately 200 salaried positions, or
approximately 14% of the Company's salaried workforce.
On November 5, 1996, a proposed binding referendum measure to eliminate
clearcutting in unincorporated areas in the State of Maine was defeated. A
competing measure, which could establish new forestry standards stricter than
current law, but which would not completely ban clearcutting, received a
plurality vote. This competing measure was supported by the Company, other major
timber interests in Maine, several environmental groups as well as the Governor
of Maine. Under Maine law, this competing measure will not automatically become
law unless it receives a simple majority of the votes cast in a special election
to be held in 1997. If this competing measure does become law, the consequence
to the Company is not expected to be material, because such measure generally
reflects sustainable forestry initiatives voluntarily adopted by the Company.
See "Risk Factors--Stringent Environmental Regulation; Potential Timber
Regulation".
F-39
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Additional Information......................... 2
Prospectus Summary............................. 3
Forward-Looking Statements..................... 9
Risk Factors................................... 9
Use of Proceeds................................ 15
Dividend Policy................................ 15
Capitalization................................. 16
Selected Historical Financial Data............. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 18
Business....................................... 28
Management..................................... 36
The Acquisition................................ 41
Security Ownership of Certain Beneficial Owners
and Management............................... 42
Certain Relationships and Related
Transactions................................. 46
Description of the Notes....................... 48
Description of the Senior Preferred Stock...... 73
Description of the Exchange Debentures......... 80
Description of Capital Stock................... 84
Description of the Credit Agreement and the A/R
Facility..................................... 84
Certain Federal Income Tax Considerations...... 88
Plan of Distribution........................... 93
Experts........................................ 93
Index to Financial Statements.................. F-1
</TABLE>
S.D. WARREN COMPANY
12% SERIES B SENIOR
SUBORDINATED
NOTES DUE 2004
AND
14% SERIES B SENIOR
EXCHANGEABLE
PREFERRED STOCK DUE 2006
-----------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NOVEMBER , 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Pennsylvania Business Corporation Law of 1988, as amended (the "PBCL")
provides that the Company, unless otherwise restricted by its by-laws, may
indemnify a person that is or was a party to any threatened, pending or
completed action or proceeding (an "Action") because that person is or was a
representative of the Company, or is or was serving at the request of the
Company as a representative of another domestic or foreign corporation for
profit or not-for-profit, partnership, joint venture, trust or other enterprise
(a "Company Representative") under the circumstances set forth herein. Section
1741 of PBCL permits the Company to indemnify any Company Representative who was
or is a party to an Action whether civil, criminal, administrative or
investigative (other than an Action by or in the right of the Company), against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by that Company Representative in
connection with the Action if that Company Representative acted in good faith
and in a manner that Company Representative reasonably believed to be in, or not
opposed to, the best interests of the Company and, with respect to any criminal
Action, had no reason to believe was unlawful. Section 1742 of the PBCL permits
the Company to indemnify any Company Representative who was or is a party to an
Action by or in the right of the Company to procure a judgment in its favor
against expenses (including attorney's fees) actually and reasonably incurred by
that Company Representative in connection with the defense or settlement of the
Action if that Company Representative acted in good faith and in a manner that
Company Representative reasonably believed to be in, or not opposed to, the best
interests of the Company. However, if a Company Representative is or was a party
to an Action by or in the right of the Company and is adjudged to be liable to
the Company, then that Company Representative is not entitled to indemnification
unless, but only to the extent that, the court of common pleas of the judicial
district in the county in which the registered office of the Company is located,
or the court in which the action was brought, determines upon application, that
despite the adjudication of liability but in view of all the circumstances of
the case, the Company Representative is fairly and reasonably entitled to
indemnity for the expenses that such court deems proper. Finally, Section 1743
of the PBCL provides that to the extent that a Company Representative has been
successful on the merits or otherwise in defense of any Action referred to above
or in defense of any claim, issue or matter therein, that Company Representative
shall be indemnified against expenses (including attorney fees) actually and
reasonably incurred.
The Company's By-laws and Articles of Incorporation provide that the Company
shall indemnify to the fullest extent permitted by law any person who was or is
a party or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), by reason of the
fact that such person is or was a Director or Officer of the Company, or is or
was serving at the request of the Company as a Director or Officer of another
corporation or of a partnership, joint venture, trust or other enterprise or
entity, whether or not for profit, whether domestic or foreign, including
service with respect to an employee benefit plan, its participants or
beneficiaries, against all liability, loss and expense (including attorneys'
fees and amounts paid in settlement) actually and reasonably incurred by such
person in connection with such Proceeding, whether or not the indemnified
liability arises or arose from any Proceeding by or in the right of the Company.
The Company has obtained directors' and officers' liability insurance that
covers certain liabilities and expenses of the Company's directors and officers.
The Company intends to enter into indemnification agreements with each of its
directors and certain of its officers.
Sappi carries directors' and officers' liability insurance that covers
certain liabilities and expenses of directors and officers of subsidiaries of
Sappi. Directors and officers of the Company who are employees of Sappi have the
benefit of the coverage, subject to the limitations of such insurance.
Directors of the Company who are also employees of Sappi may be entitled to
indemnification from Sappi for certain liabilities and expenses incurred as a
result of serving as directors of the Company.
II-1
<PAGE>
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Purchase Agreement dated as of December 13, 1994, among SDW Holdings Corporation, SDW Acquisition
Corporation, Sappi Limited, DLJ Merchant Banking, Inc. and certain of its affiliates, UBS Capital
Corporation and Donaldson, Lufkin & Jenrette Securities Corporation (the "Purchase Agreement").*
1.2 Amendment Number 1 to the Purchase Agreement, dated as of December 19, 1994, among SDW Holdings
Corporation, SDW Acquisition Corporation, Sappi Limited, DLJ Merchant Banking, Inc. and certain of
its affiliates, UBS Capital Corporation and Donaldson, Lufkin & Jenrette Securities Corporation.*
1.3 Amendment Number 2 to the Purchase Agreement, dated as of December 20, 1994, among SDW Holdings
Corporation, S.D. Warren Company and Donaldson, Lufkin & Jenrette Securities Corporation.*
1.4 Registration Rights Agreement, dated as of December 20, 1994 by and between SDW Acquisition
Corporation and Donaldson, Lufkin & Jenrette Securities Corporation (the "Registration Agreement").*
1.5 Amendment Number 1 to the Registration Agreement, dated as of December 20, 1994, by and between S.D.
Warren Company and Donaldson, Lufkin & Jenrette Securities Corporation.*
1.6 Registration Rights Agreement, dated as of December 20, 1994 by and between SDW Acquisition
Corporation and UBS Capital Corporation (the "UBSC Registration Agreement").*
1.7 Amendment Number 1 to the UBSC Registration Agreement, dated as of December 20, 1994, by and between
S.D. Warren Company and UBS Capital Corporation.*
1.8 Lock-up Agreement, dated as of December 12, 1994, between Donaldson, Lufkin & Jenrette Securities
Corporation and UBS Capital Corporation.*
1.9 Side Letter, dated as of December 19, 1994, between Donaldson, Lufkin & Jenrette Securities
Corporation and UBS Capital Corporation.*
3.1 Amended and Restated Articles of Incorporation of the Registrant.*
3.2 By-laws of the Registrant.*
4.1 Indenture, dated as of December 20, 1994, between SDW Acquisition Corporation and the Bank of New
York, as trustee, relating to the 12% Series A Senior Subordinated Notes due 2004 and the 12% Series
B Senior Subordinated Notes due 2004.*
4.2 First Supplemental Indenture, dated as of December 20, 1994 between S.D. Warren Company and Bank of
New York, as trustee, relating to the 12% Series A Senior Subordinated Notes due 2004 and the 12%
Series B Senior Subordinated Notes due 2004.*
4.3 Certificate of Designations, Preferences and Relative, Participating, Optional and other Special
Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of 14% Series A
Senior Exchangeable Preferred Stock due 2006 and 14% Series B Senior Exchangeable Preferred Stock due
2006 of S.D. Warren Company, dated as of December 20, 1994.*
4.4 Form of the Exchange Debenture Indenture between S.D. Warren Company and the United States Trust
Company of New York relating to S.D. Warren Company's 14% Series A Subordinated Exchange Debentures
due 2006 and 14% Series B Subordinated Exchange Debentures due 2006.*
5.1 Opinions of Cravath, Swaine & Moore and Dechert Price & Rhoads, regarding the legality of the New
Securities.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
10.1 Credit and Guarantee Agreement dated as of December 20, 1994, as amended and restated as of April 26,
1996, among SDW Holdings Corporation, S.D. Warren Company, the Lenders (as defined therein) and
Chemical Bank, as Agent.*
<C> <S>
10.2 Receivables Purchase Agreement dated as of April 19, 1996, among S.D. Warren Finance Co., S.D. Warren
Company, Bank of Montreal and Nesbitt Burns Securities Inc.*
10.2(a) Purchase and Contribution Agreement dated as of April 19, 1996, between S.D. Warren Company and S.D.
Warren Finance Co.*
10.3 Securities Subscription Agreement, dated as of December 20, 1994, among SDW Holdings Corporation, SDW
Acquisition Corporation (and following the merger, S.D. Warren Company as successor thereto), and
each of Sappi Limited, Sappi Deutschland GmbH, DLJ Merchant Banking Partner, L.P. and certain of its
affiliates and UBS Capital Corporation.*
10.4 Second Amended and Restated Shareholders Agreement dated as of December 20, 1994, among Sappi
Limited, Sappi Deutschland GmbH, DLJ Merchant Banking Partners, L.P. and certain of its affiliates,
UBS Capital Corporation, SDW Holdings Corporation and S.D. Warren Company as successor to SDW
Acquisition Corporation.*
10.5 Participation Agreement dated as of January 1, 1982 among Scott Paper Company, as Purchaser, General
Electric Credit Corporation, as Owner Participant and The Connecticut Bank and Trust Company, as
Owner Trustee.*
10.6 Refinancing Participation Agreement dated as of December 15, 1986, among Scott Paper Company, as
Purchaser, General Electric Credit Corporation, as Owner Participant, and The Connecticut Bank and
Trust Company National Association, as Owner Trustee.*
10.7 Power Sales Agreement dated as of January 1, 1982, between The Connecticut Bank and Trust Company,
Owner Trustee, as Seller, and Scott Paper Company, as Purchaser, as amended by the First Amendment
dated as of December 15, 1986.*
10.8 Ground Lease Agreement dated as of January 1, 1982 between Scott Paper Company, as Lessor, and The
Connecticut Bank and Trust Company, Owner Trustee, as Lessee, as amended by First Amendment dated as
of December 15, 1986.*
10.9 Operating Agreement dated as of January 1, 1982 between The Connecticut Bank and Trust Company, as
Owner Trustee, and Scott Paper Company, as Operator, as amended by First Amendment dated as of
December 15, 1986.*
10.10 Tax Indemnification Agreement dated as of January 1, 1982, among General Electric Credit Corporation,
Owner Participant, The Connecticut Bank and Trust Company, as Owner Trustee, and Scott Paper Company,
Purchaser, as amended by the Amendment dated as of November 25, 1986.*
10.11 Facilities Agreement dated as of January 1, 1982 between Scott Paper Company and The Connecticut Bank
and Trust Company, as Owner Trustee, as amended by First Amendment dated as of December 15, 1986.*
10.12 Indenture and Security Agreement dated as of December 15, 1986, among The Connecticut Bank and Trust
Company, National Association, as Westbrook Owner Trustee and Winslow Owner Trustee, Scott Paper
Company, and The Bank of New York, as Indenture Trustee.*
10.13 Transfer Agreement dated as of June 29, 1986 between Scott Paper Company and S.D. Warren Company, as
amended October 25, 1990, as further amended November 1, 1993.*
10.14 Stock Purchase Agreement by and among Scott Paper Company, Sappi Limited and SDW Acquisition
Corporation dated as of October 8, 1994.*
10.15 Supplemental Agreement to Stock Purchase Agreement dated as of October 8, 1994 by and among Scott
Paper Company, Sappi Limited and SDW Acquisition Corporation dated as of December 19, 1994.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
10.15(a) Extension of Time Period specified in Section 1.6(e) of the Stock Purchase Agreement dated as of
October 8, 1994 by and among Scott Paper Company, Sappi Limited and SDW Acquisition Corporation.*
<C> <S>
10.16 Assignment and Assumption Agreement (relating to Westbrook Biomass Financing) dated as of December
20, 1994 between Scott Paper Company and S.D. Warren Company.*
10.17 General Assignment and Assumption Agreement dated as of December 20, 1994 by and between Scott Paper
Company, Scott Continental N.V. and S.D. Warren Company.*
10.18 Contract dated as of August 1, 1978 between Central Maine Power Company ("CMP") and S.D. Warren
Company, as amended by Amendment dated as of May 15, 1982, as further amended by Amendment dated as
of October 27, 1982.*
10.19 Westbrook Long-term Contract for the Sale of Electricity to CMP, dated October 27, 1982 between CMP
and Scott Paper Company, S.D. Warren Division.*
10.20 Agreement for Electric Service for the Westbrook Mill of S.D. Warren Company dated as of August 1,
1983 between CMP and S.D. Warren Company.*
10.21 Agreement for Electric Service for Scott Paper Company, S.D. Warren Division, Somerset County, dated
as of December 1, 1982 between CMP and S.D. Warren, as amended by Amendment dated as of July 9,
1990.*
10.22 Power Purchase Agreement between Scott Paper Company, S.D. Warren Division (Somerset) and CMP dated
as of December 1, 1982, as amended by Amendment dated April 11, 1983, as further amended by Amendment
dated July 9, 1990.*
10.23 Pulp Supply Agreement between Scott Paper Company and S.D. Warren Company dated as of December 20,
1994.*
10.24 Paper Mill Energy Services Agreement between S.D. Warren Company and Mobile Energy Services Company,
Inc. dated as of December 12, 1994.*
10.25 Master Operating Agreement among Scott Paper Company, S.D. Warren Company and Mobile Energy Services
Company, Inc. dated as of December 12, 1994.*
12.1 Statements regarding the computation of ratio of earnings to fixed charges and ratio of earnings to
fixed charges and preferred stock dividends for the Registrant.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Deloitte & Touche LLP, independent accountants.*
23.2 Consents of Cravath, Swaine & Moore and Dechert Price & Rhoads, included in Exhibit 5.1.*
24.1 Powers of Attorney.*
24.2 Certified copy of a Resolution adopted by the Company's Board of Directors authorizing execution of
the Registration Statement by Power of Attorney.*
25.1 Statement of Eligibility and Qualification on Form T-1 of the Bank of New York, as Trustee under the
Indenture relating to the New Notes.*
</TABLE>
- ------------------------
* Previously filed.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) under the Securities Act of 1933, as amended (the
II-4
<PAGE>
"Securities Act"), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the applicable
form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415 under the Securities Act, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceedings) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Post-Effective Amendment No. 3 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, on November 15,
1996.
S.D. Warren Company
By: /s/ TREVOR L. LARKAN
-----------------------------------
Trevor L. Larkan
DIRECTOR, CHIEF FINANCIAL OFFICER,
VICE PRESIDENT,
TREASURER AND SECRETARY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 3 has been signed by the following persons in the
capacities indicated on the dates indicated below.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
* Director
-------------------------------------------
(Eugene van As)
* Director, President, Chief
------------------------------------------- Executive Officer
(Monte R. Haymon) (principal executive officer)
* Director and Vice President
-------------------------------------------
(E. Dannis Herring)
* Director and Vice President
-------------------------------------------
(James H. Frick, Jr.)
* Director and Vice President
-------------------------------------------
(O. Harley Wood)
* Director and Vice President
-------------------------------------------
(William E. Hewitt)
* Director, Chief Financial
------------------------------------------- Officer, Vice President,
(Trevor L. Larkan) Treasurer and Secretary
(principal financial and
accounting officer)
*By: /s/TREVOR L. LARKAN Attorney-in-Fact November 15, 1996
(Trevor L. Larkan)
</TABLE>
II-6
