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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q FINANCIAL INFORMATION *
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1996
Commission file number: 33-88496 *
S. D. WARREN COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2366983
- ------------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(617-423-7300)
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No __
Not Applicable X *
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This report consists of 20 sequentially numbered pages.
- -------------------------------------------------------------------------
* This report is being voluntarily filed with the Securities and
Exchange Commission (the "Commission") pursuant to the registrant's
contractual obligations to file with the Commission all financial
information that would be required to be filed on a Form 10-Q. The
registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
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S. D. WARREN COMPANY
INDEX
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Condensed Statements of Operations for the three months
ended June 28, 1995 and July 3, 1996 3
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 4
Condensed Balance Sheets at September 27, 1995 and
July 3, 1996 5
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 6
Notes to Condensed Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE 20
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S. D. WARREN COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 28, 1995 JULY 3, 1996
------------------ ------------------
S. D. WARREN S. D. WARREN
COMPANY AND COMPANY AND
SUBSIDIARIES SUBSIDIARIES
------------------ ------------------
Sales $ 393.4 $ 346.4
Cost of goods sold 305.9 305.6
------- -------
Gross profit 87.5 40.8
Selling, general and administrative
expense 29.5 27.7
------- -------
Income from operations 58.0 13.1
Other income (expense), net 1.5 (1.8)
Interest expense 30.2 23.0
------- -------
Income (loss) before income taxes and
extraordinary item 29.3 (11.7)
Income tax expense (benefit) 11.3 (4.9)
------- -------
Income (loss) before extraordinary item 18.0 (6.8)
Extraordinary item, net of tax (Note 5) -- (2.0)
------- -------
Net income (loss) 18.0 (8.8)
Dividends and accretion on Series B
preferred stock 2.3 3.4
------- -------
Net income (loss) applicable to common
stockholder $ 15.7 $(12.2)
------- -------
------- -------
Earnings (loss) per common share
(in millions):
Income (loss) before extraordinary
item $ 0.18 $ (0.07)
------- -------
------- -------
Net income (loss) $ 0.18 $ (0.09)
------- -------
------- -------
Net income (loss) applicable to
common stockholder $ 0.16 $ (0.12)
------- -------
------- -------
Weighted average number of shares
outstanding 100 100
------- -------
------- -------
See accompanying notes to condensed financial statements
3
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S. D. WARREN COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD SEPTEMBER 25, PERIOD DECEMBER 21, NINE MONTHS
1994 THROUGH 1994 THROUGH ENDED JULY 3,
DECEMBER 20, 1994 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)
--------------------- ------------------- ------------
<S> <C> <C> <C>
Sales $313.6 $764.3 $1,066.8
Cost of goods sold 258.7 584.7 885.0
------ ------ --------
Gross profit 54.9 179.6 181.8
Selling, general and administrative
expense 22.1 59.7 86.3
------ ------ --------
Income from operations 32.8 119.9 95.5
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 30.0 48.1 9.9
Income tax expense 12.0 19.2 4.0
------ ------ --------
Income before extraordinary item $ 18.0 28.9 5.9
------
------
Extraordinary item, net of tax (Note 5) -- (2.0)
------ --------
Net income 28.9 3.9
Dividends and accretion on Series B
preferred stock 5.7 10.0
------ --------
Net income (loss) applicable to common
stockholder $ 23.2 $ (6.1)
------ --------
------ --------
Earnings (loss) per common share
(in millions):
Income before extraordinary item $ 0.29 $ 0.06
------ --------
------ --------
Net income $ 0.29 $ 0.04
------ --------
------ --------
Net income (loss) applicable to
common stockholder $ 0.23 $ (0.06)
------ --------
------ --------
Weighted average number of shares
outstanding 100 100
------ --------
------ --------
</TABLE>
See accompanying notes to condensed financial statements
4
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S. D. WARREN COMPANY
CONDENSED BALANCE SHEETS
(IN MILLIONS, UNAUDITED)
SEPTEMBER 27, 1995 JULY 3, 1996
------------------ ------------------
S. D. WARREN S. D. WARREN
COMPANY AND COMPANY AND
SUBSIDIARIES SUBSIDIARIES
------------------ ------------------
ASSETS
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
Other current assets 11.8 11.1
------- -------
Total current assets 454.4 292.3
Plant assets, net 1,150.7 1,115.7
Timber resources, net 98.4 98.3
Goodwill, net 114.0 110.5
Deferred financing fees, net 53.1 46.3
Other assets, net 24.7 21.8
------- -------
Total assets $1,895.3 $1,684.9
------- -------
------- -------
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 108.2 92.3
------- -------
Total current liabilities 299.0 227.2
------- -------
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
------- -------
Other liabilities 103.8 107.3
------- -------
Total liabilities 1,451.6 1,237.3
------- -------
Commitments and contingencies (Note 7)
Series B 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 37.4 31.3
------- -------
Total stockholder's equity 369.2 363.1
------- -------
Total liabilities and
stockholder's equity $1,895.3 $1,684.9
------- -------
------- -------
See accompanying notes to condensed financial statements
5
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S. D. WARREN COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS, UNAUDITED)
<TABLE>
<CAPTION>
PERIOD SEPTEMBER 25, PERIOD DECEMBER 21, NINE MONTHS
1994 THROUGH 1994 THROUGH ENDED JULY 3,
DECEMBER 20, 1994 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)
--------------------- ------------------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 18.0 $ 28.9 $ 3.9
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, cost of timber harvested and
amortization 28.8 56.6 86.9
Inventory market value adjustments -- -- 10.5
Other 11.6 3.6 2.0
Changes in assets and liabilities:
Trade accounts receivable, net (1.7) (22.0) 91.6
Inventories 3.7 (48.7) (4.6)
Accounts payable, accrued and other
current liabilities 6.0 34.2 (42.6)
Accruals for restructuring programs (12.7) -- --
Other assets and liabilities (15.6) 1.8 (0.3)
-------- -------- -------
Net cash provided by operating
activities 38.1 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 issuance of preferred
stock, net of expenses -- 65.4 --
Bank overdraft -- 13.0 --
Predecessor Corporation's parent
company capital infusions, net 47.2 -- --
-------- -------- -------
Net cash provided by (used in)
financing activities 46.7 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 condensed financial statements
6
S. D. WARREN COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements include the
accounts of S. D. Warren Company and its subsidiaries ("S. D. Warren",
"Warren" or the "Company"). Intercompany balances and transactions have been
eliminated in the preparation of the accompanying unaudited condensed
financial statements.
The Company manufactures printing, publishing and specialty papers and has
pulp and timberland operations vertically integrated with certain of its
manufacturing facilities. The Company currently operates four paper mills, a
sheeting and distribution facility and owns approximately 911,000 acres of
timberlands in the State of Maine.
FORMATION AND ACQUISITION
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
herein after 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
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read in conjunction with the audited financial statements included in the
Company's Annual Report on Form 10-K and the previously issued Quarterly
Reports on Form 10-Q Financial Information for the quarters ended January 3,
1996 and April 3, 1996. The unaudited condensed results of operations for
the three months and 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 three months ended June 28,
1995 and the period December 21, 1994 through June 28, 1995 have been
increased by $3.5 million and $13.2 million, respectively, from amounts
previously reported as a result of the finalization of purchase accounting
adjustments made in the last quarter of fiscal 1995. In addition, certain
prior period amounts have been reclassified to conform to their current
presentation.
NOTE 2. 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 3. RELATED PARTY TRANSACTIONS
During the three and 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 $28.9
million and $71.1 million to affiliates and incurred fees of approximately
$1.6 million and $4.3 million relating to these sales for the three and nine
months ended July 3, 1996, respectively. Trade accounts receivable from
affiliates at July 3, 1996, including amounts sold (see Note 2), were
approximately $24.3 million. The Company expects to finalize the written
agreements for transactions with these affiliates in the near future.
During the third fiscal quarter, 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.
8
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NOTE 4. INVENTORIES (IN MILLIONS)
SEPTEMBER 27, 1995 JULY 3, 1996
------------------ -------------
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
------ ------
------ ------
NOTE 5. LONG-TERM DEBT
The Company amended its credit agreement in April 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 semi-annual 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 6. 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 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
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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 DNR regarding a
wastewater surge pond adjacent to the Muskegon Lake. The DNR is presently
considering whether the surge pond is in compliance with Michigan Act 245
(Water Resources Commission Act) regarding potential discharges from that
pond. The matter is now subject to the results of a pending engineering
investigation. There is a possibility that, as a result of DNR requirements,
the surge pond may be closed in the future. The Company estimates the cost
of closure would be approximately $2.0 million. In addition, if it is
necessary to replace the functional capacity of the surge pond with
above-grade structures, the Company preliminarily estimates that up to an
additional $8.0 million may be required for such construction costs.
The Company has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for
cleanup of contamination at seven sites. Based upon the Company's
understanding of the total amount of costs at each site, its calculation of
its percentage share in each proceeding, and the number of potentially
responsible parties at each site, the Company presently believes that its
aggregate exposure for these matters will not be material. Moreover, in
accordance with the agreement pursuant to which the Company was acquired, the
Company's former parent, Scott, agreed to indemnify and defend the Company
for and against, among other things, the full amount of any damages or costs
resulting from the off-site disposal of hazardous substances occurring prior
to the date of closing, including all damages and costs related to these
seven sites. Since the date of closing of the acquisition agreement, Scott,
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.
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None of these environmental matters, individually or in the aggregate, are
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 7. COMMITMENTS AND CONTINGENCIES
In November 1997, a ballot initiative in the State of Maine will include a
binding referendum measure that, if approved by voters, will impose
restrictions on the harvesting of timberlands in unincorporated areas in the
State of Maine, which includes all of the Company's timberlands. Although
the outcome of the proposed referendum cannot be predicted with any
certainty, the effect of complying with the provisions of the referendum, if
approved, may have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
The Company's contract, covering approximately 750 employees, at the
Somerset facility expired September 30, 1995. While negotiations are in
process for a new contract, the Somerset employees are continuing to work
under the terms of the expired agreement. The Company anticipates reaching
agreement on a new contract and does not expect a work stoppage to occur.
However, in the event an agreement cannot be reached and a prolonged work
stoppage that results in a curtailment of output ensues, the Company's
financial position, results of operations and cash flows could be adversely
affected.
Discussions are currently in process between the Company and the Securities
and Exchange Commission related to the appropriate accounting treatment of
certain transactions primarily related to prior periods. Although the
outcome of these discussions cannot be predicted with any certainty, the
financial statements of the Company may be amended as a result.
The Company is also involved in various other lawsuits and administrative
proceedings. The relief sought in such lawsuits and proceedings includes
injunctions, damages and penalties. Although the final results in these
suits and proceedings cannot be predicted with certainty, it is the present
opinion of the Company, after consulting with legal counsel, that they will
not have a material effect on the Company's financial position, results of
operations or cash flows.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The Acquisition (as defined in the Notes to Condensed Financial Statements)
has resulted in a new basis of accounting, the adoption of certain accounting
policies which differ from the accounting policies of the Predecessor
Corporation (as defined in the Notes to Condensed Financial Statements) and
increases to certain manufacturing costs (purchased pulp and energy within
the Company's Mobile, Alabama facility) resulting from obtaining these
manufacturing resources on a third party versus affiliate basis. As a
result, the Company's financial statements for periods subsequent to the
Acquisition are not comparable to the Predecessor Corporation's financial
statements for the periods prior to the Acquisition.
The Company wishes to caution readers that this discussion and analysis
contains forward-looking statements which, at the time made, speak about the
future and are based upon management's interpretation of what it believes are
significant factors affecting the Company's business. The Company believes
that various factors, among others, 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 statement 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.
The following discussion and analysis should be read in conjunction with the
accompanying Condensed Financial Statements and the Notes thereto, the
Company's Annual Report on Form 10-K and the previously issued Quarterly
Reports on Form 10-Q Financial Information for the quarters ended January 3,
1996 and April 3, 1996.
MARKET CONDITIONS
Demand for the Company's products decreased 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 apparent 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 exposure to fluctuations in the market price for pulp.
As a result of the weaker market conditions, the Company temporarily reduced
production levels at certain of its manufacturing facilities during the first
quarter of this fiscal year. The reduction of inventory levels by the
Company's customers and the weaker market conditions continued 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
12
<PAGE>
trend does not reverse or becomes more pervasive within the Company's
existing product lines, the Company's sales, gross margins and cash flows
will continue to be adversely effected.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 3, 1996 COMPARED TO THE THREE MONTHS ENDED JUNE 28,
1995
SALES
The Company's sales for the three months ended July 3, 1996 were $346.4
million compared to $393.4 million for the three months ended June 28, 1995,
a decrease of $47.0 million or 11.9%. The decrease is primarily due to a
decrease in average net revenue per ton partially offset by a 1.8% increase
in shipment volume during such period.
COST OF GOODS SOLD
The Company's cost of goods sold for the three months ended July 3, 1996 was
$305.6 million compared to $305.9 million for the three months ended June
28, 1995. A decrease in the cost of purchased pulp was offset primarily by
unplanned maintenance costs and adjustments to the carrying value of certain
inventories to net realizable value.
The decrease in sales of $47.0 million for the three months ended July 3,
1996 as compared to the corresponding period in 1995 resulted in a decrease
in gross profit as a percent of sales to 11.8% during the third fiscal
quarter of 1996 from 22.2% during the same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $27.7 million for the three
months ended July 3, 1996 compared to $29.5 million for the three months
ended June 28, 1995, a decrease of $1.8 million. Selling, general and
administrative expenses as a percent of sales increased to 8.0% for the three
months ended July 3, 1996 compared to 7.5% for the three months ended June
28, 1995.
INTEREST EXPENSE
The Company's interest expense for the three months ended July 3, 1996 was
$23.0 million compared to $30.2 million for the three months ended June 28,
1995. The reduction in interest expense for the three months ended July 3,
1996 as compared to the same period last year is primarily due to lower
levels of outstanding debt and a reduction in applicable interest rates.
Interest expense includes the amortization of deferred financing fees.
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.
13
<PAGE>
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
$885.0 million compared to $843.4 million for the nine months ended June 28,
1995, an increase of $41.6 million or 4.9%. This increase is 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 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 17.0% for the nine months ending July 3, 1996 from 21.8%
for the same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $86.3 million for the nine
months ended July 3, 1996 compared to $81.8 million for the nine months ended
June 28, 1995, an increase of $4.5 million. Selling, general and
administrative expenses as a percent of sales increased to 8.1% for the nine
months ended July 3, 1996 as compared to 7.6% for the nine months ended June
28, 1995. This increase is primarily due to an increase in administrative
expenses primarily resulting from the costs incurred to maintain the
appropriate level of administrative services that were previously performed
by Scott.
INTEREST EXPENSE AND TAXES
Following the Acquisition, the Company's capitalization and tax basis of
accounting changed significantly. As a result, interest and tax expense
prior to the Acquisition are not comparable to results following the
Acquisition.
The Company's interest expense for the 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.
LIQUIDITY AND CAPITAL RESOURCES
Effective with the Acquisition, the Company began managing its own funding
requirements. Prior to the Acquisition, the Predecessor Corporation
participated in Scott's cash management system. Accordingly, cash received
from the Predecessor Corporation's domestic operations was administered
centrally along with the financing of working capital requirements and
capital expenditures.
14
<PAGE>
The Company's net cash provided by operating activities was $147.4 million
for the nine months ended July 3, 1996 as compared to $92.5 million for the
nine months ended June 28, 1995. This increase is 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
semi-annual interest payment made in June 1996.
The Company's operating working capital decreased to $98.8 million at July 3,
1996 compared to $160.0 million at September 27, 1995. Operating working
capital is defined as trade accounts receivable, other receivables and
inventories less accounts payable and accrued and other current liabilities.
This decrease primarily resulted from the sale of the Company's receivables.
The Company's ratio of current assets to current liabilities was 1.3 at July
3, 1996 compared to 1.5 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.
Estimated capital expenditures are expected to approximate $50.0 million
during fiscal year 1996. In addition, due to a wide variety of increasingly
stringent environmental laws and regulations, including compliance with the
cluster rules (see the Notes to Condensed Financial Statements), the Company
anticipates that aggregate capital expenditures related to environmental
compliance will be approximately $85.0 million to $95.0 million through
fiscal year 1999, assuming the cluster rules are adopted. The Company
believes that cash generated by operations and amounts available under its
revolving credit facility will be sufficient to meet its ongoing operating
and capital expenditure requirements.
Net cash used in financing activities for the nine months ended July 3, 1996
was $177.8 million compared to net cash provided of $1,425.3 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 semi-annual 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
Condensed Financial Statements). Cash provided by financing
15
<PAGE>
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 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 $47.2 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 totaling $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 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
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 borrowing capacity of
approximately $249.0 million, after giving effect to outstanding letters of
credit, which may be used to finance working capital needs. The Company is
required to pay a commitment fee, which is based on the achievement of a
certain financial ratio, of between 0.375% and 0.5% per annum on the average
daily unused commitment available under the revolving credit facility.
In addition, the Company has a letter of credit facility to support certain
obligations of the Company. The Company had approximately $170.5 million of
letters of credit outstanding under its letter of credit facility at each of
July 3, 1996 and September 27, 1995. The Company pays a commission, which is
based on the achievement of a certain financial ratio, of between 1.0% and
2.5% on outstanding letters of credit and an issuance fee of between 0.125%
and 0.25% per annum on letters of credit issued.
The Company's credit agreement, which was amended in April 1996 as indicated
in the Notes to Condensed Financial Statements, contains restrictive
covenants which limit the Company with respect to certain matters including,
among other things, the ability to incur debt, pay dividends, make
acquisitions, sell assets, merge, grant or incur liens, guarantee
obligations, make investments or loans, make capital expenditures, create
subsidiaries or change its line of business. The credit agreement also
restricts the Company from prepaying certain of its indebtedness. Under the
credit agreement, the Company is required to satisfy certain financial
covenants which will require the Company to maintain specified financial
ratios, including a minimum interest coverage ratio, a minimum debt service
ratio and a net worth test.
The Company does not anticipate paying cash dividends on its senior preferred
stock for any period ending on or prior to December 15, 1999. The Company
intends to retain future earnings, if any, for use in its business and
16
<PAGE>
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. During the
third fiscal quarter, the Company commenced transacting in Japanese Yen and
entered into foreign currency forward contracts to manage the currency
fluctuation risk associated with such transactions as indicated in the Notes
to Condensed Financial Statements. In addition, the Company uses interest
rate caps and swaps, which are required by the terms of the Credit Agreement,
as a means of managing interest rate risk associated with the current debt
balances. The Company adopted Statement of Financial Accounting Standards
No. 119 ("FAS 119") "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments" in 1995.
OTHER ITEMS
In November 1997, a ballot initiative in the State of Maine will include a
binding referendum measure that, if approved by voters, will impose
restrictions on the harvesting of timberlands in unincorporated areas in the
State of Maine, which includes all of the Company's timberlands. Although
the outcome of the proposed referendum cannot be predicted with any
certainty, the effect of complying with the provisions of the referendum, if
approved, may have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
The Company's contract, covering approximately 750 employees, at the Somerset
facility expired September 30, 1995. While negotiations are in process for a
new contract, the Somerset employees are continuing to work under the terms
of the expired agreement. The Company anticipates reaching agreement on a
new contract and does not expect a work stoppage to occur. However, in the
event an agreement cannot be reached and a prolonged work stoppage that
results in a curtailment of output ensues, the Company's financial position,
results of operations and cash flows could be adversely affected.
Discussions are currently in process between the Company and the Securities
and Exchange Commission related to the appropriate accounting treatment of
certain transactions primarily related to prior periods. Although the
outcome of these discussions cannot be predicted with any certainty, the
financial statements of the Company may be amended as a result.
CONSIDERATIONS RELATING TO HOLDINGS' CASH OBLIGATIONS
The Company expects that it may make certain cash payments to Holdings or
other affiliates during fiscal 1996 to the extent that cash is available and
to the extent it is permitted to do so under the terms of the credit
agreement, the Indenture and the terms of the senior preferred stock. Such
payments may include, among other things, (i) amounts under a tax sharing
agreement to be entered into between the Company and Holdings necessary to
enable Holdings to pay the Company's taxes, (ii) administrative fees to
Holdings and amounts to cover specified costs and expenses of Holdings and
(iii) an annual advisory fee for management advisory services, limited to
$1.0 million, to Sappi and/or its affiliates. To the extent the Company
continues to make such payments, it will do so only to the extent such
payments are permitted under the terms of the credit agreement, the Indenture
and the terms of the senior preferred stock.
17
<PAGE>
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, 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 have required and are likely to continue to require cash
expenditures by Holdings. The Company believes that the credit agreement,
the Indenture and the senior preferred stock permit the Company to pay a
dividend or otherwise provide funds to Holdings to enable Holdings to meet
its known cash obligations for the foreseeable future, provided that the
Company meets certain conditions. Among such conditions are that the Company
maintain specified financial ratios and comply with certain financial tests.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Intentionally omitted. *
ITEM 2. CHANGES IN SECURITIES
Intentionally omitted. *
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Intentionally omitted. *
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Intentionally omitted. *
ITEM 5. OTHER INFORMATION
Intentionally omitted. *
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Intentionally omitted. *
- -----------------------------------------------------------------------------
* This report is being voluntarily filed with the Commission pursuant to the
registrant's contractual obligations to file with the Commission all
financial information that would be required to be filed on a Form 10-Q. The
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
19
<PAGE>
SIGNATURE
The registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
S. D. Warren Company
DATE: AUGUST 16, 1996 By: /s/ TREVOR L. LARKAN
---------------------- -------------------------
Trevor L. Larkan
Vice President (Principal Financial Officer)
20
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM S.D.
WARREN COMPANY'S (THE "COMPANY") CONDENSED STATEMENT OF OPERATIONS FOR THE
9 MONTHS ENDED JULY 3, 1996 & BALANCE SHEET AS OF JULY 3, 1996 FOUND ON
PAGE 4 & 5, RESPECTIVELY, OF THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JULY 3, 1996 & IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-02-1996
<PERIOD-START> SEP-28-1995
<PERIOD-END> JUL-03-1996
<CASH> 1,800
<SECURITIES> 0
<RECEIVABLES> 37,800
<ALLOWANCES> 0
<INVENTORY> 220,600
<CURRENT-ASSETS> 292,300
<PP&E> 1,115,700
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,684,900
<CURRENT-LIABILITIES> 227,200
<BONDS> 902,800
84,500
0
<COMMON> 0
<OTHER-SE> 363,100
<TOTAL-LIABILITY-AND-EQUITY> 1,684,900
<SALES> 1,066,800
<TOTAL-REVENUES> 1,066,800
<CGS> 885,000
<TOTAL-COSTS> 885,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84,300
<INCOME-PRETAX> 9,900
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 5,900
<DISCONTINUED> 0
<EXTRAORDINARY> 2,000
<CHANGES> 0
<NET-INCOME> 3,900
<EPS-PRIMARY> 39
<EPS-DILUTED> 39
</TABLE>
