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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FINANCIAL INFORMATION*
FOR THE PERIOD SEPTEMBER 28, 1995 THROUGH OCTOBER 2, 1996
(MARK ONE)*
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE PERIOD SEPTEMBER 28, 1995 THROUGH OCTOBER 2, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER--NOT APPLICABLE*
S.D. WARREN COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2366983
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
225 FRANKLIN STREET, BOSTON, MA 02110
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 423-7300
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [_]* No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]*
The number of shares of Common Stock outstanding as of December 27, 1996 was
100 shares.
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* 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 by Section 13 or 15(d) of the Securities Exchange Act
of 1934. 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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PART I
ITEM 1. BUSINESS
Intentionally Omitted.*
ITEM 2. PROPERTIES
Intentionally Omitted.*
ITEM 3. LEGAL PROCEEDINGS
Intentionally Omitted.*
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Intentionally Omitted.*
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Intentionally Omitted.*
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* 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 by Section 13 or
15(d) of the Securities Exchange Act of 1934. The registrant is not required
to file reports pursuant to Section 13 and 15(d) of the Securities Exchange
Act of 1934.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated statement of operations
data, share data and consolidated 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 the twelve
months ended December 25, 1993, the nine months ended September 24, 1994 and
the period from September 25, 1994 through December 20, 1994 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 and the twelve months
ended October 2, 1996 (which includes 53 weeks) are derived from the
consolidated financial statements of the Company which have been audited by
Deloitte & Touche LLP. The selected financial data for the twelve months ended
December 26, 1992 were prepared from unaudited 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
periods less than one year are not necessarily indicative of the results that
may be expected for the full year. Further, data for the Predecessor and
Successor Corporations are not necessarily comparable as a result of a new
basis of accounting for the Successor Corporation and the adoption of certain
accounting policies.
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 21,
TWELVE MONTHS TWELVE MONTHS NINE MONTHS 1994 1994 TWELVE MONTHS
ENDED ENDED ENDED THROUGH THROUGH ENDED
DECEMBER 26, DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1992(1) 1993 1994 1994 1995 1996
---------------- ---------------- ---------------- --------------- ------------- -------------
S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND COMPANY AND COMPANY COMPANY
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED AND AND
AFFILIATES AFFILIATES AFFILIATES AFFILIATES SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
---------------- ---------------- ---------------- --------------- ------------- -------------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales.................. $1,212.8 $1,143.6 $ 828.8 $ 313.6 $1,155.8 $1,441.6
Gross profit........... 182.5 168.1 106.4 49.9 269.8 255.0
Selling, general and
administrative
expense............... 91.0 91.7 72.1 22.2 96.7 134.1
Restructuring.......... -- 66.1 -- -- -- --
Income from
operations............ 91.5 10.3 34.3 27.7 173.1 120.9
Other income (expense),
net................... 0.1 0.1 0.1 (0.5) 3.2 (0.1)
Interest expense....... 9.0 8.5 6.4 2.3 106.0 108.9
Income tax expense..... 32.0 6.5 11.2 9.9 28.2 5.1
Extraordinary item, net
of tax................ -- -- -- -- -- (2.0)
Net income ............ 50.6 (4.6) 16.8 15.0 42.1 4.8
Dividends and accretion
on Series B preferred
stock................. -- -- -- -- 9.1 13.5
Net income (loss)
applicable to common
stockholders.......... 50.6 (4.6) 16.8 15.0 33.0 (8.7)
SHARE DATA:
Net income (loss)
applicable to common
stockholders (in
millions)............. $ -- $ -- $ -- $ -- $ 0.33 ($0.09)
Weighted average common
shares outstanding.... -- -- -- -- 100 100
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash
equivalents........... $ 1.3 $ 2.1 $ 4.7 $ 75.0 $ 62.2 $ 49.0
Working capital........ 67.0 47.1 156.2 233.2 177.6 109.4
Total assets........... 1,696.8 1,711.7 1,676.9 1,737.1 1,887.6 1,725.4
Total debt (including
current maturities)... 125.7 124.3 119.8 119.3 1,127.4 948.9
Series B preferred
stock................. -- -- -- -- 74.5 88.0
Parent's equity........ 1,152.3 1,088.1 1,136.5 1,219.1 -- --
Stockholder's equity... -- -- -- -- 364.8 356.1
</TABLE>
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(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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
S.D. Warren Company (the "Company", "Warren" or the "Successor Corporation")
manufactures printing, publishing and specialty papers and has pulp operations
vertically integrated with certain of its manufacturing facilities. 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 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.
On October 8, 1994, SDW Acquisition Corporation ("SDW Acquisition"), a
direct wholly-owned subsidiary of SDW Holdings Corporation ("Holdings"),
entered into a definitive agreement (the "Stock Purchase Agreement") pursuant
to which, on December 20, 1994, SDW Acquisition acquired (the "Acquisition")
from Scott Paper Company ("Scott") all of the outstanding capital stock of
Warren. Immediately following the Acquisition, SDW Acquisition merged with and
into Warren (the "Merger"), with Warren surviving. See the Notes to Financial
Statements for information regarding the Acquisition and financing thereto.
The Acquisition has resulted in a new basis of accounting, the adoption of
certain accounting policies which differ from the accounting policies of the
Predecessor Corporation, as defined in the Notes to Financial Statements, and
increases to certain manufacturing costs (purchased pulp and energy at the
Company's Mobile, Alabama facility) resulting from obtaining these
manufacturing resources on a third-party versus affiliate basis. As a result,
the Predecessor Corporation's financial statements for periods prior to the
Acquisition are not comparable to the Company's.
The Company wishes to caution readers that this discussion and analysis
contains forward-looking statements which, at the time made, speak about the
future and are based upon management's interpretation of what it believes are
significant factors affecting the Company's business, and there can be no
assurances that management's interpretations and the assumptions on which they
are based will prove to be correct. 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.
MARKET OVERVIEW
The market for coated paper has historically experienced price fluctuations
which are driven by North American supply/demand imbalances and, to a lesser
degree, the availability and relative pricing of imported products. In
contrast to the highs of fiscal year 1995, 1996 was disappointing for the
North American paper market. Coated free paper shipments in the segments in
which the Company competes declined approximately 12%, as customers worked
down inventories built the preceding year in the face of rising prices. With
shipments down and pulp prices falling sharply in the first six months of the
fiscal year, coated paper prices came under extreme pressure. By August 1996,
key lightweight coated free grades had fallen approximately 20% to 30% from
their July 1995 highs. During the final fiscal quarter of 1996, shipments had
begun to rebound and pricing had leveled off.
The uncoated market also experienced inventory destocking, with a year over
year decline in shipments of 2.5% and prices of key grades falling 35% to 40%
from September 1995 to March 1996. The specialty businesses did not experience
this inventory fluctuation, instead having relatively stable market volume and
pricing.
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Despite the unfavorable market, the Company managed to gain share through a
combination of strong customer mix, product quality, end user pull-through
selling and an extensive merchant distribution system. Sales volume,
incorporating all products of the Company, for fiscal year 1996 totaled
approximately 1.3 million tons compared with a figure marginally lower for the
twelve months ended September 1995.
Any failure of the industry to maintain its recovery in the near future, or
any prolonged or severe weakness in the market for any of the Company's
products in the future, may adversely affect the Company's financial position,
results of operations and cash flows. Management anticipates continued
improvement in business conditions for the Company's products. However, new
coated paper capacity scheduled for the end of calendar year 1997 in Europe,
as well as certain machine conversions during 1997 to coated freesheet
manufacture in the United States, will impact market supply/demand balance and
may constrain upward movement of coated prices.
The following discussion and analysis should be read in conjunction with the
Financial Statements and the Notes thereto.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED OCTOBER 2, 1996 ("FISCAL YEAR 1996") COMPARED TO NINE
MONTHS ENDED SEPTEMBER 27, 1995
The following discussion compares the results of operations for the twelve
months ended October 2, 1996 ("fiscal year 1996," which includes 53 weeks)
with the nine months ended September 27, 1995. The nine months ended September
27, 1995 represents the Company's post-Acquisition (December 20, 1994)
results. As previously stated, the Predecessor Corporation's financial
statements for periods prior to the Acquisition are not comparable to the
Company's financial statements. Results (in terms of dollar amounts) for
fiscal year 1996, and the nine-month period ended September 27, 1995 are not
directly comparable due to the differences in periods reported. The additional
week in fiscal year 1996 did not have a significant impact on sales or the
other results as a percentage of sales. Accordingly, management's discussion
and analysis for these periods is generally based upon a comparison of
specified results as a percentage of total sales. The following table
indicates the results of operations as a percent of sales:
<TABLE>
<CAPTION>
NINE MONTHS TWELVE
ENDED MONTHS ENDED
SEPTEMBER 27, OCTOBER 2,
1995 1996
-------------- -------------
% %
-------------- -------------
<S> <C> <C>
Cost of goods sold......................... 76.7 82.3
Selling, general and administrative ex-
pense..................................... 8.4 9.3
Other income (expense)..................... 0.3 --
Interest expense........................... 9.2 7.6
Income tax expense......................... 2.4 0.4
Extraordinary item, net of tax............. -- 0.1
</TABLE>
Sales
The Company's sales for fiscal year 1996 were $1,441.6 million, which was
below the annualized sales for the nine months ended September 27, 1995.
However, sales volume, expressed as tons per day, was approximately 3,500 tons
for fiscal year 1996 which was marginally higher than that for the nine months
ended September 27, 1995. Average net revenue per ton sold for fiscal year
1996 fell to approximately $1,096 compared to $1,173 for the nine months ended
September 27, 1995, a 7% decline.
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Cost of Goods Sold
The Company's cost of goods sold for fiscal year 1996 was 82.3% of sales
compared to 76.7% of sales for the nine months ended September 27, 1995. This
increase in cost of goods sold as a percentage of sales was primarily
attributable to reduced sales dollars per ton as well as lower production
volume resulting from a planned curtailment of production at certain of the
Company's manufacturing facilities in the first quarter of fiscal year 1996
and the net effect of a turbine failure at one manufacturing facility which
resulted in the loss of approximately 24 production days during the second
fiscal quarter. These costs were partially offset by reduced manufacturing
costs as a result of cost reduction efforts and decreases in the price of
purchased pulp, the primary raw material.
During the third quarter of fiscal year 1996, pulp prices declined to 50% of
peak levels achieved during the nine months ended September 27, 1995 through
the first quarter of fiscal year 1996. Although the decrease in pulp prices
did have an impact on production cost per ton, it was partially mitigated by
the Company's own pulp production as the Company manufactures approximately
65% of its pulp requirement.
Selling, General and Administrative Expense
Selling, general and administrative expense of $134.1 million was 9.3% of
sales for fiscal year 1996 as compared to 8.4% of sales for the nine months
ended September 27, 1995. This increase was primarily due to the continued
post-Acquisition increase in administrative related expenses. Administrative
expenses increased primarily as a result of costs incurred to obtain the
appropriate level of administrative services that were previously performed by
Scott.
Other Income (Expense), net
Other income (expense), net for fiscal year 1996 was a $0.1 million expense
compared to $3.2 million income for the nine months ended September 27, 1995.
This decrease was primarily due to $2.5 million of fees incurred for the
amendment to the credit agreement in April 1996 and securitization of a large
portion of the Company's trade accounts receivable (see Liquidity and Capital
Resources) as well as a $1.0 million reduction in interest income due to lower
average cash balances available for short-term investment.
Interest Expense and Taxes
The Company's interest expense of $108.9 million was 7.6% of sales for
fiscal year 1996 as compared to 9.2% for the nine months ended September 27,
1995. The decrease represents lower average outstanding borrowings primarily
due to the $100.0 million reduction of long-term debt with cash received from
the sale of a significant portion of the Company's accounts receivable and
repayment of $75.4 million of bank debt pursuant to an excess cash flow
requirement as defined in the Credit Agreement. See the Notes to the Financial
Statements.
The Company's income tax expense decreased to $5.1 million for fiscal year
1996 from $28.2 million for the nine months ended September 27, 1995,
primarily due to lower earnings levels. Conversely, the Company's effective
tax rate for fiscal year 1996 increased to 42.9% from 40.1% for the nine
months ended September 27, 1995 due to the impact of certain permanent
differences.
Extraordinary Item
The Company recorded an extraordinary loss of $2.0 million, net of a $1.3
million deferred tax benefit, resulting from the accelerated amortization of
$3.3 million of deferred finance costs related to the early extinguishment of
debt with the cash proceeds from the accounts receivable securitization.
NINE MONTHS ENDED SEPTEMBER 27, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER
24, 1994
The following discussion compares the results of operations for the
Successor Corporation's nine-month period ended September 27, 1995 with the
Predecessor Corporation's nine-month period ended September 24, 1994. For
purposes of this discussion, the period December 21, 1994 through September
27, 1995 is referred to
6
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as the nine-month period ended September 27, 1995. The "Company" refers to
both the Predecessor and Successor Corporations.
Sales
The Company's sales for the nine months ended September 27, 1995 were
$1,155.8 million compared to $828.8 million for the nine months ended
September 24, 1994, an increase of $327.0 million or 39.5%. Sales volume,
expressed as tons per day, was approximately 3,400 tons for the nine months
ended September 27, 1995 compared to approximately 3,100 tons for the nine
months ended September 24, 1994, a 9.7% increase. Average net revenue per ton
for the nine months ended September 27, 1995 increased to approximately $1,173
compared to $979 for the nine months ended September 24, 1994, a 19.8%
increase. The increased volume was primarily attributable to increased volume
of coated free paper, and the increase in average net sales per ton was 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 as a percentage of sales was 76.7% compared to 87.2% for the nine months
ended September 24, 1994. Cost of goods sold increased $163.6 million to
$886.0 million, or 22.6%, 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 in 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 $24.6 million, or 34.1%. This
increase was 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 expense as a percentage 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.
Other Income (Expense), net
Other income (expense), net for the nine months ended September 27, 1995 was
$3.2 million income compared to $0.1 million income for the nine months ended
September 24, 1994. This increase was primarily due to an increase in interest
income resulting 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
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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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $49.0 million at
October 2, 1996 from $62.2 million at September 27, 1995. The Company
generated cash from operating activities of $216.6 million during fiscal year
1996 which includes $90.0 million of cash proceeds realized on the sale of a
significant portion of the Company's accounts receivable. At October 2, 1996,
the Company had trade accounts receivable of $49.1 million compared to $129.4
million at September 27, 1995. The decrease was primarily due to the above
mentioned sale of $90.0 million of the Company's accounts receivable in April
1996. Inventories at October 2, 1996 declined to $195.7 million from $226.5
million at September 27, 1995 due to the effect of lower inventory levels,
changes in sales mix and reduced raw material costs during fiscal year 1996.
Accounts payable, accrued and other current liabilities decreased $6.8 million
due to a lower accounts payable balance primarily as a result of a decline in
market prices of pulp partially offset by increases in general operating
accruals. Other receivables increased by $9.7 million primarily as a result of
a receivable for income taxes and an outstanding insurance claim paid
subsequent to the end of the fiscal year; partially offset by a reduction in
the receivable for power sales.
The Company used $48.6 million of cash in investing activities during fiscal
year 1996 compared to $1,489.6 million during the nine months ended September
27, 1995 which included $1,455.9 million related to the Acquisition. Capital
spending of $51.3 million for fiscal year 1996 consisted of improvements to
the Company's manufacturing and distribution facilities as well as certain
environmental expenditures (see Environmental and Safety Matters). The Company
anticipates that capital expenditures related to environmental compliance
will, in the aggregate, be approximately $86.0 to $96.0 million through fiscal
year 1999, assuming the cluster rules are adopted (see Other Items). The
Company believes that cash generated by operations and amounts available under
its revolving credit facility will be sufficient to meet its on-going
operating and capital requirements.
The Company used $181.2 million of cash in financing activities in fiscal
year 1996 primarily to reduce long-term debt obligations which were funded
primarily by the sale of accounts receivable and excess cash flow from
operations. For the nine months ended September 27, 1995, financing activities
provided $1,340.8 million of cash primarily attributable to the incurrence of
$1,105.7 million of debt to finance the acquisition, with repayments of long-
term debt of $162.1 million, and proceeds from the issuance of common stock,
$331.8 million, and preferred stock, $65.4 million.
Debt and Preferred Stock
At October 2, 1996, the Company's long-term debt was $902.5 million compared
to $1,048.8 million at September 27, 1995, a decrease of $146.3 million. The
current maturities of long-term debt balance of $46.4 million at October 2,
1996 primarily represents the amounts payable during fiscal year 1997 under
the Company's term loan facilities. The current maturities of long-term debt
at September 27, 1995 primarily reflects payments of $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 Financial Statements. The Company
will not have the excess cash flow prepayment requirement, as defined, in the
first quarter of fiscal year 1997 due to the prepayment of the Tranche B Term
Loan under the Credit Agreement during the third quarter of fiscal year 1996.
The Company had received $90.0 million of proceeds from the A/R Facility (see
Notes to Financial Statements) which, along with $10.0 million of cash on hand
was used to prepay $100.0 million of the Tranche B Term Loan under the Credit
Agreement. As a result of the early extinguishment of a portion of the Tranche
B Term Loan, the Company recorded an extraordinary loss of $2.0 million, net
of a $1.3 million deferred tax benefit, related to the unamortized deferred
financing fees associated with the Tranche B Term Loan.
8
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The Company has a $250.0 million revolving credit facility to finance
working capital needs. The Company did not have any borrowings under this
facility at September 27, 1995 and October 2, 1996. However, the unused
borrowing capacity at the end of fiscal year 1996 and fiscal year 1995 was
lower than the full $250 million facility limit due to certain outstanding
letters of credit, being $249.0 million at October 2, 1996 compared to $229.4
million at September 27, 1995. This unused borrowing capacity could be used to
finance working capital needs should this be necessary.
In addition, the Company has a Letter of Credit Facility (as defined in the
Notes to Financial Statements) to support certain of its obligations. The
Company had $170.5 million of letters of credit outstanding under its Letter
of Credit Facility at September 27, 1995 and October 2, 1996.
The Credit Agreement, which was amended and restated as of April 26, 1996,
as indicated in the Notes to Financial Statements, contains restrictive
covenants which limit the Company with respect to certain matters including,
among other things, the ability to incur debt, pay dividends, make
acquisitions, sell assets, merge, grant or incur liens, guarantee obligations,
make investments or loans, make capital expenditures, create subsidiaries or
change its line of business. The Credit Agreement also restricts the Company
from prepaying certain of its indebtedness. Under the Credit Agreement, the
Company is required to satisfy certain financial covenants which will require
the Company to maintain specified financial ratios, including a minimum
interest coverage ratio, a minimum debt service ratio and a net worth test.
The Company is required by the terms of the Credit Agreement to enter into
fixed rate interest protection agreements on a portion of its outstanding
debt. At September 27, 1995 and October 2, 1996, $205 million of debt was
covered by such interest rate protection agreements.
The Company does not anticipate paying cash dividends on the Series B
Preferred Stock (as defined in the Notes to Financial Statements) for any
period ending on or prior to December 15, 1999. The Company intends to retain
future earnings, if any, for use in its business and does not anticipate
paying any cash dividends on such preferred stock prior to such date. In
addition, the terms of the Credit Agreement and the indenture (the
"Indenture") relating to the Notes (as defined in the Notes to Financial
Statements) limit the amount of cash dividends the Company may pay with
respect to such preferred stock and other equity securities both before and
after that date. See the Notes to Financial Statements.
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 to the degree indicated above as a means of
protection against a portion of interest rate risk associated with the current
debt balances.
During the second quarter of fiscal year 1996, the Company commenced
transacting business in currencies other than the U.S. Dollar. The Company
partly 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 related party trade accounts receivable. Realized and
unrealized gains and losses on these contracts for fiscal year 1996 were
insignificant. The Company does not hold derivative financial instruments for
trading purposes.
OTHER ITEMS
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.
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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 current 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 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 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 is expected to occur
by early 1997 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 $16.0
million, of which $7.0 million is expected to be incurred prior to the year
2000 with the remainder being spent subsequent to 2004.
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 could be approximately $2.0 million. In
addition, if it is necessary to replace the functional capacity of the surge
pond with above-grade structures, the Company preliminarily estimates that up
to an additional $8.0 million may be required for such construction costs.
The Company has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for
cleanup of contamination at seven sites. Based upon the Company's
understanding of the total amount of liability at each site, its calculation
of its percentage share in each proceeding, and the number of potentially
responsible parties at each site, the Company presently believes that its
aggregate exposure for these matters will not be material. Moreover, as a
result of the acquisition, 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
10
<PAGE>
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 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 $5.7
million had been spent as of October 2, 1996. 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.
Although no assurances can be provided, management believes that none of
these matters, individually or in the aggregate, will have a material adverse
effect on the Company's financial position, results of operations or cash
flows.
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 Power Purchase Agreements require CMP to purchase such
energy produced by these cogeneration facilities at above market rates which
has reduced the Predecessor Corporation'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 the Notes to Financial Statements. To 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 and
fiscal year 1996, amortization expense related to this asset approximated
$10.8 million and $12.0 million, respectively.
Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
FAS No. 123, "Accounting for Stock-Based Compensation." FAS No. 123 which is
effective for the Company in fiscal year 1997 addresses the financial
accounting and reporting requirements 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 retain the
current accounting and present pro forma disclosure in the Notes to the
Financial Statements. The implementation of FAS No. 123 is not expected to
have a material impact on the Company's financial position, results of
operations, cash flows, or financial statement disclosure as the Company will
retain its current accounting.
In October 1996, FASB issued FAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," which
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.
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 $6.0 million. While the
11
<PAGE>
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 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, it will have, by the end of December 1996,
attained a level of operation close to the pre-flood situation. 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 year 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
already voluntarily adopted by the Company.
CONSIDERATIONS RELATING TO HOLDINGS' CASH OBLIGATIONS
The Company expects that it may make certain cash payments to Holdings or
other affiliates during fiscal 1997 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 Series B Preferred Stock. Such payments may
include, among other things, (i) amounts under a tax sharing agreement to be
entered into between the Company and Holdings necessary to enable Holdings to
pay the Company's taxes, (ii) administrative fees to Holdings and amounts to
cover specified costs and expenses of Holdings and (iii) an annual advisory
fee for management advisory services, limited to $1.0 million, to Sappi and/or
its affiliates. To the extent the Company continues to make such payments, it
will do so only to the extent such payments are permitted under the terms of
the Credit Agreement, the Indenture and the terms of the Senior Preferred
Stock.
Because Holdings has no material assets other than the outstanding common
stock of Warren (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 Warren) are currently conducted through Warren and its
subsidiaries, Holdings' ability to meet its cash obligations is dependent upon
the earnings of Warren 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 Warren
and guarantees in respect of indebtedness of Warren and its subsidiaries) and
Holdings' 15% Senior Redeemable 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 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 Series B Preferred Stock permit Warren 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 Warren meets certain
conditions. Among such conditions are that Warren maintain specified financial
ratios and comply with certain financial tests.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
S.D. WARREN COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. 14
Financial Statements:
Statements of Operations for the nine months ended September 24, 1994,
the period September 25, 1994 through December 20, 1994, the period De-
cember 21, 1994 through September 27, 1995 and the twelve months ended
October 2, 1996......................................................... 15
Balance Sheets as of September 27, 1995 and October 2, 1996.............. 16
Statements of Cash Flows for the nine months ended September 24, 1994,
the period September 25, 1994 through December 20, 1994, the period De-
cember 21, 1994 through September 27, 1995 and the twelve months ended
October 2, 1996......................................................... 17
Statements of Changes in Parent's Equity for the nine months ended Sep-
tember 24, 1994 and the period September 25, 1994 through December 20,
1994.................................................................... 18
Statements of Changes in Stockholder's Equity for the period December 21,
1994 through September 27, 1995 and the twelve months ended October 2,
1996.................................................................... 19
Notes to Financial Statements............................................ 20
Financial Statement Schedule:
II--Valuation and Qualifying Accounts.................................. 44
</TABLE>
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of S.D. Warren Company and subsidiaries:
We have audited the consolidated balance sheets of S.D. Warren Company and
subsidiaries (the "Company") as of October 2, 1996 and September 27, 1995 and
the related consolidated statements of operations, changes in stockholder's
equity, and cash flows for the twelve-month period ended October 2, 1996 and
the period December 21, 1994 (commencing with the acquisition) through
September 27, 1995. We have also audited the combined statements of
operations, changes in parent's equity, and cash flows for the nine-month
period ended September 24, 1994 and for the period September 25, 1994 through
December 20, 1994 of S.D. Warren Company and certain related affiliates (the
"Predecessor Corporation"). 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 2 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 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 October 2,
1996 and September 27, 1995 and the results of their operations and their cash
flows for the twelve-month period ended October 2, 1996 and the period from
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 results of their operations, and
their cash flows for 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
October 28, 1996
(November 5, 1996 as to Note 21)
14
<PAGE>
S.D. WARREN COMPANY
STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS PERIOD SEPTEMBER 25, PERIOD DECEMBER 21, TWELVE MONTHS
ENDED 1994 THROUGH 1994 THROUGH ENDED
SEPTEMBER 24, 1994 DECEMBER 20, 1994 SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ -------------------- ------------------- ---------------
S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND S.D. WARREN
CERTAIN RELATED CERTAIN RELATED S.D. WARREN COMPANY COMPANY AND
AFFILIATES AFFILIATES AND SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
------------------ -------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Sales................... $828.8 $313.6 $1,155.8 $1,441.6
Cost of goods sold...... 722.4 263.7 886.0 1,186.6
------ ------ -------- --------
Gross profit............ 106.4 49.9 269.8 255.0
Selling, general and
administrative
expense................ 72.1 22.2 96.7 134.1
------ ------ -------- --------
Income from operations.. 34.3 27.7 173.1 120.9
Other income (expense),
net.................... 0.1 (0.5) 3.2 (0.1)
Interest expense........ 6.4 2.3 106.0 108.9
------ ------ -------- --------
Income before income
taxes and extraordinary
item................... 28.0 24.9 70.3 11.9
Income tax expense...... 11.2 9.9 28.2 5.1
------ ------ -------- --------
Income before
extraordinary item..... 16.8 15.0 42.1 6.8
Extraordinary item, net
of tax................. -- -- -- (2.0)
------ ------ -------- --------
Net income.............. 16.8 15.0 42.1 4.8
Dividends and accretion
on Series B redeemable
exchangeable preferred
stock.................. -- -- 9.1 13.5
------ ------ -------- --------
Net income (loss)
applicable to common
stockholder............ $ 16.8 $ 15.0 $ 33.0 $ (8.7)
====== ====== ======== ========
Earnings (loss) per com-
mon share:
Income before
extraordinary item... $ 0.42 $ 0.07
======== ========
Net income............ $ 0.42 $ 0.05
======== ========
Net income (loss)
applicable to common
stockholder.......... $ 0.33 $ (0.09)
======== ========
Weighted average number
of shares outstanding.. 100 100
======== ========
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
S.D. WARREN COMPANY
BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 62.2 $ 49.0
Trade accounts receivable, net............ 129.4 49.1
Other receivables......................... 24.5 34.2
Inventories, net.......................... 226.5 195.7
Deferred income taxes..................... 8.9 18.0
Other current assets...................... 11.1 9.4
-------- --------
Total current assets.................... 462.6 355.4
Plant assets, net........................... 1,153.8 1,114.7
Timber resources, at cost less timber har-
vested, net................................ 95.3 95.3
Goodwill, net............................... 98.1 94.1
Deferred financing fees, net................ 53.1 44.8
Other assets, net........................... 24.7 21.1
-------- --------
Total assets............................ $1,887.6 $1,725.4
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt...... $ 78.6 $ 46.4
Accounts payable.......................... 112.2 101.6
Accrued and other current liabilities..... 94.2 98.0
-------- --------
Total current liabilities............... 285.0 246.0
-------- --------
Long-term debt:
Term loans................................ 553.8 411.4
Senior subordinated notes................. 375.0 375.0
Other..................................... 120.0 116.1
-------- --------
Total long-term debt.................... 1,048.8 902.5
-------- --------
Deferred income taxes....................... 21.2 34.6
-------- --------
Other liabilities........................... 93.3 98.2
-------- --------
Total liabilities....................... 1,448.3 1,281.3
-------- --------
Commitments and contingencies (Notes 14 and
15)
Series B redeemable exchangeable preferred
stock (liquidation value, $83.5 and $96.2,
respectively).............................. 74.5 88.0
-------- --------
Stockholder's equity:
Common stock ($.01 par value; 1,000 shares
authorized; 100 shares issued and out-
standing at September 27, 1995 and Octo-
ber 2, 1996)............................. -- --
Capital in excess of par value............ 331.8 331.8
Retained earnings......................... 33.0 24.3
-------- --------
Total stockholder's equity.............. 364.8 356.1
-------- --------
Total liabilities and stockholder's
equity................................. $1,887.6 $1,725.4
======== ========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
S.D. WARREN COMPANY
STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS PERIOD SEPTEMBER 25, PERIOD DECEMBER 21, TWELVE MONTHS
ENDED 1994 THROUGH 1994 THROUGH ENDED
SEPTEMBER 24, 1994 DECEMBER 20, 1994 SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ -------------------- ------------------- ---------------
S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND S.D. WARREN S.D. WARREN
CERTAIN RELATED CERTAIN RELATED COMPANY AND COMPANY AND
AFFILIATES AFFILIATES SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
------------------ -------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income...................................... $ 16.8 $ 15.0 $ 42.1 $ 4.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, cost of timber harvested and
amortization.................................. 71.6 28.8 89.8 115.2
Deferred income taxes.......................... 8.4 15.8 12.3 5.6
Extraordinary item............................. -- -- -- 2.0
Changes in assets and liabilities net of the
effect of the Acquisition:
Trade accounts receivable, net................. (9.8) (1.7) (23.0) 80.3
Inventories, net............................... (13.0) 5.4 (57.6) 30.8
Accounts payable, accrued and other current
liabilities................................... (19.3) 18.6 66.3 (6.8)
Accruals for restructuring programs............ (28.4) (12.7) -- --
Other assets and liabilities................... 1.5 (15.5) 6.1 (15.3)
------ ------ --------- -------
Net cash provided by operating activities........ 27.8 53.7 136.0 216.6
------ ------ --------- -------
Cash Flows from Investing Activities:
Acquisition, net of related costs............... -- -- (1,455.9) --
Investments in plant assets and timber
resources...................................... (32.3) (14.5) (33.7) (51.3)
Other investing activities...................... (14.1) -- -- 2.7
------ ------ --------- -------
Net cash used in investing activities............ (46.4) (14.5) (1,489.6) (48.6)
------ ------ --------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt........ 0.9 -- 1,105.7 --
Repayments of long-term debt.................... (5.4) (0.5) (162.1) (178.2)
Proceeds from equity contribution............... -- -- 331.8 --
Proceeds from issuance of Series B redeemable
exchangeable preferred stock, net of expenses.. -- -- 65.4 --
Predecessor Corporation's parent company capital
infusions, net................................. 25.4 31.6 -- --
Other financing activities...................... 0.3 -- -- (3.0)
------ ------ --------- -------
Net cash provided by (used in) financing
activities...................................... 21.2 31.1 1,340.8 (181.2)
------ ------ --------- -------
Net change in cash and cash equivalents.......... 2.6 70.3 (12.8) (13.2)
Cash and cash equivalents:
Beginning of period............................. 2.1 4.7 75.0 62.2
------ ------ --------- -------
End of period................................... $ 4.7 $ 75.0 $ 62.2 $ 49.0
====== ====== ========= =======
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
S.D. WARREN COMPANY
STATEMENTS OF CHANGES IN PARENT'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
PARENT'S
EQUITY
--------
<S> <C>
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.
18
<PAGE>
S.D. WARREN COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON COMMON EXCESS OF RETAINED
SHARES STOCK PAR VALUE EARNINGS TOTAL
------ ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 21, 1994........... 100 $-- $ -- $ -- $ --
Equity contribution from SDW
Holdings Corporation............... -- -- 331.8 -- 331.8
Net income.......................... -- -- -- 42.1 42.1
Dividends accrued on Series B
redeemable exchangeable preferred
stock.............................. -- -- -- (8.5) (8.5)
Accretion to liquidation preference
value on Series B redeemable
exchangeable preferred stock....... -- -- -- (0.6) (0.6)
--- ---- ------ ----- ------
Balance, September 27, 1995.......... 100 -- 331.8 33.0 364.8
Net income.......................... -- -- -- 4.8 4.8
Dividends accrued on Series B
redeemable exchangeable preferred
stock.............................. -- -- -- (12.7) (12.7)
Accretion to liquidation preference
value on Series B redeemable
exchangeable preferred stock....... -- -- -- (0.8) (0.8)
--- ---- ------ ----- ------
Balance, October 2, 1996............. 100 $-- $331.8 $24.3 $356.1
=== ==== ====== ===== ======
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS
S.D. Warren Company (the "Company," "Warren", or the "Successor
Corporation") manufactures printing, publishing and specialty papers and has
pulp and timberland operations vertically integrated with certain of its
manufacturing facilities which represents the Company's single line of
business. The Company currently operates four paper mills, a sheeting and
several distribution facilities and owns approximately 911,000 acres of
timberlands in the State of Maine.
NOTE 2--FORMATION AND ACQUISITION
As of October 8, 1994, SDW Acquisition Corporation ("SDW Acquisition"), a
direct wholly-owned subsidiary of SDW Holdings Corporation ("Holdings"),
entered into a definitive agreement (the "Stock Purchase Agreement") pursuant
to which, on December 20, 1994, SDW Acquisition acquired (the "Acquisition")
from Scott Paper Company ("Scott") all of the outstanding capital stock of
Warren, then a wholly-owned subsidiary of Scott, and certain related
affiliates of Scott (referred to herein as the "Predecessor Corporation").
Immediately following the Acquisition, SDW Acquisition merged with and into
Warren (the "Merger"), with Warren surviving.
The Acquisition was accounted for as a purchase, applying the provisions of
Accounting Principles Board Opinion ("APB") No. 16. The total 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
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 were 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>
20
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
To effect the Acquisition, SDW Acquisition issued $75.0 million of 14%
Series A Senior Exchangeable Preferred Stock due 2006 (the "Old Senior
Preferred Stock") and $375.0 million of 12% Series A Senior Subordinated Notes
due 2004 (the "Series A Notes") and received $331.8 million from Holdings as a
contribution to capital. Holdings funded the $331.8 million contributed from
the proceeds Holdings received from the issuance of the preferred stock,
common stock and warrants. 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. Indebtedness incurred by SDW Acquisition to finance the
Acquisition was assumed by Warren, including preferred stock issued by SDW
Acquisition which was converted into preferred stock of Warren having
identical terms.
Subsequent to the Acquisition, the Company and Scott jointly elected to
treat the stock purchase as an asset purchase for federal income tax purposes
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 September 25, 1994.
These pro forma results of operations are not necessarily indicative of either
the actual results of operations that would have occurred had the Acquisition
been made on September 25, 1994 or of the results which may occur in the
future.
Unaudited Pro Forma Statements of Operations Data (in millions, except per
share data):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 27, 1995
------------------
<S> <C>
Net sales.............................................. $1,469.4
========
Operating income....................................... $ 202.4
========
Net income............................................. $ 41.0
========
Net income applicable to common stockholders........... $ 28.9
========
Net income per common share............................ $ 0.29
========
</TABLE>
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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 subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain prior period amounts have been
reclassified to conform with the current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates used by management include realization
of certain assets such as trade and other accounts receivable, inventory,
goodwill and deferred tax assets, as well as estimates of exposure and certain
liabilities of the Company. Actual results could differ from those estimates.
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
21
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
periods subsequent to the Acquisition date are not comparable to the
Predecessor Corporation's financial statements for the periods prior to the
Acquisition.
The following presents the significant accounting policies of the Company.
Except as discussed in Note 4, the significant accounting policies of the
Predecessor Corporation are comparable to those of the Company.
Fiscal Year
The Company and its subsidiaries' fiscal year ends on the Wednesday closest
to the last day of September. The twelve months ended October 2, 1996 ("fiscal
year 1996") included 53 weeks.
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 27, 1995 and October 2, 1996, 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, certain outstanding
insurance claims, income taxes receivable and sundry other receivables.
Inventories
Inventories 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 recorded at purchase cost.
Plant Assets
Plant assets are recorded at cost. For financial accounting purposes,
depreciation is principally calculated by the straight-line method over the
estimated useful lives of the assets, which range from three to twenty years.
Expenditures for renewals and improvements 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 and the
related accumulated depreciation are 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, discussed below, to the extent that such timber has not yet
matured. For the nine months ended September 24, 1994, the period December 21,
1994 through September 27, 1995 (the "nine months" ended September 27, 1995),
and fiscal year 1996, the Company capitalized interest of approximately $1.4
million, $0.9 million, and $1.9 million, respectively. No interest was
capitalized for 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. Property taxes, surveying, fire control and other forest
management expenses are charged to expense as incurred.
22
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Goodwill
Goodwill, which resulted from the Acquisition, is being amortized for
financial statement purposes on a straight-line basis over 25 years. On an
ongoing basis, the carrying value of goodwill is evaluated on the basis of
whether anticipated operating cash flows generated by the acquired businesses
are adequate to recover the recorded asset balance over its estimated useful
life. The goodwill balance at September 27, 1995 and October 2, 1996 was
approximately $98.1 million and $94.1 million, respectively, net of
approximately $3.1 million and $7.1 million, respectively, 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 and
$15.2 million at September 27, 1995 and October 2, 1996, respectively. As a
result of the partial early extinguishment of debt during fiscal year 1996,
the Company recorded a $2.0 million extraordinary loss which was comprised of
a $3.3 million write-off of deferred financing fees partially offset by a $1.3
million deferred tax benefit.
Other Assets
Other assets include intangible assets, primarily patents, arising as part
of the purchase price allocation, of $21.5 million and $19.6 million at
September 27, 1995 and October 2, 1996, respectively. 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 and $3.4 million at September 27, 1995 and October 2, 1996,
respectively.
Financial Instruments
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.
During the third quarter of fiscal year 1996, the Company commenced
transacting business in currencies other than the U.S. Dollar. 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 related party trade accounts receivable. Realized and
unrealized gains and losses on these contracts for the fiscal year 1996 were
insignificant.
The Company does not hold derivative financial instruments for trading
purposes.
Income Taxes
The Company uses an asset and liability approach to computing deferred
income taxes, which 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 income tax bases 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.
23
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 to reflect the passage of several years before the claims related
to a particular year are paid in full. The liability has been determined based
on an actuarial valuation and the timing of payments associated therewith are
reasonably estimable. The present value of such claims was determined using
discount rates of 8.25% for the nine months ended September 24, 1994 and 5.5%
for the three months ended December 20, 1994, the nine months ended September
27, 1995, and fiscal year 1996, respectively. The gross liability was $44.0
million and $46.0 million at September 27, 1995 and October 2, 1996,
respectively.
Research and Development Expenditures
Expenditures for research and development are charged to expense as
incurred. Research and development costs were $9.5 million, $3.0 million,
$10.7 million, and $15.6 million for the nine months ended September 24, 1994,
the three months ended December 20, 1994, the nine months ended September 27,
1995, and fiscal year 1996, respectively.
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, and 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 clean-up is probable and the cost can be reasonably
estimated. All available information is considered including the results of
remedial investigation/feasibility studies ("RI/FS"). In evaluating any
disposal site environmental exposure, an assessment is made of the Company's
potential share of the remediation costs by reference to the known or
estimated volume of the Company's waste that was sent to the site and the
range of costs to treat similar waste at other sites if a RI/FS is not
available.
Other Income (Expense), net
Other income (expense), net, represents interest income on cash and cash
equivalents and other non-operating income and expense items.
Earnings per Common Share
Income 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 and accretion to arrive at net
income (loss) applicable to common stockholder.
Cash Paid for Income Taxes
Cash paid for income taxes for the nine months ended September 27, 1995 and
fiscal year 1996 was $20.6 million and $4.7 million, respectively. In periods
prior to December 21, 1994 the Predecessor Corporation's income taxes were
paid by Scott.
24
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cash Paid for Interest
Cash paid for interest during the nine months ended September 24, 1994, the
three months ended December 20, 1994, the nine months ended September 27, 1995
and fiscal year 1996 was $5.0 million, $2.9 million, $75.6 million and $112.3
million, respectively.
Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
FAS No. 123, "Accounting for Stock-Based Compensation." FAS No. 123 which is
effective for the Company in fiscal year 1997 addresses the financial
accounting and reporting requirements 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 retain the
current accounting and present pro forma disclosure in the Notes to the
Financial Statements. The implementation of FAS No. 123 is not expected to
have a material impact on the Company's financial position, results of
operations, cash flows, or financial statement disclosure as the Company will
retain its current accounting.
In October 1996, FASB issued FAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," which
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.
NOTE 4--BASIS OF PRESENTATION AND ACCOUNTING POLICIES (PREDECESSOR
CORPORATION)
Basis of Presentation
The combined financial statements of the Predecessor Corporation consist of
Scott's wholly-owned subsidiary S.D. Warren Company and its wholly-owned
subsidiaries, as well as the net assets and results of operations of the
printing, publishing, and specialty papers businesses in Bornem, Belgium (the
"Belgian Affiliate") and a mill facility located in Mobile, Alabama that were
owned by Scott. All significant transactions between combined entities have
been eliminated. As previously stated, the Predecessor Corporation's financial
statements for periods prior to the Acquisition are not comparable to the
Company's.
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 have been
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 the former Scott tissue
and pulp operations and a power generation facility. These operations are
currently owned and operated by Kimberly Clark and Mobile Energy Systems
Company ("MESC"), respectively. Historically, the Mobile, Alabama facility
purchased pulp, utilities
and other services from Scott based on shared cost arrangements. The Company
continues to purchase pulp and
utilities from Kimberly Clark and MESC. Amounts purchased were $71.0 million,
$18.4 million, $127.3 million and $148.0 million for the nine months ended
September 24, 1994, the three months ended December 20, 1994, the nine months
ended September 27, 1995 and fiscal year 1996, respectively.
25
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(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 not material and
were included in net income.
NOTE 5--TRADE ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
(IN MILLIONS)
<S> <C> <C>
Trade accounts receivable.............................. $135.0 $54.4
Allowance for doubtful accounts........................ (5.6) (5.3)
------ -----
$129.4 $49.1
====== =====
</TABLE>
Trade accounts receivable includes the Company's undivided interest in its
investment in accounts receivable which were securitized during fiscal year
1996 (Note 11). Securitized trade accounts receivable aggregated $139.1
million at October 2, 1996.
The Company had sales to customers outside of the United States ("Export
Sales") of $60.0 million, $24.7 million, $90.5 million, and $174.3 million for
the nine months ended September 24, 1994, the three months ended December 20,
1994, the nine months ended September 27, 1995 and fiscal year 1996,
respectively. Export sales are primarily to Canada, Europe and the Far East.
Export sales do not exceed 10% for any geographic region. Export sales prior
to the Acquisition were handled primarily by direct sales, sales through
agents and sales through the Company's Belgian Affiliate. During 1995, the
Belgian Affiliate was closed and its property and equipment were sold.
Effective with the closure of the Belgian Affiliate, the Company's sales
outside of the United States and Canada are primarily handled by the Company's
affiliates under the common control of Sappi Limited ("Sappi") (see Note 20).
Sappi, through its indirect ownership in Holdings, is the largest investor in
the Company.
26
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Sales to customers which individually exceed 10% of total sales amounted to
approximately 58.1%, 51.1%, 54.0% and 52.5% of sales for the nine months ended
September 24, 1994, the three months ended December 20, 1994, the nine months
ended September 27, 1995, and fiscal year 1996, respectively. 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
effect on the Company's business and results of operations. Sales to each such
customer are indicated below (in millions):
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
NINE MONTHS ENDED ENDED NINE MONTHS ENDED ENDED
SEPTEMBER 24, 1994 DECEMBER 20, 1994 SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ ----------------- ------------------ ---------------
<S> <C> <C> <C> <C>
1... $160.8 $81.2 $292.4 $355.0
2... 128.5 40.5 163.0 201.9
3... 106.9 38.5 168.7 199.8
4... 85.4 * * *
</TABLE>
- --------
* Less than 10% of total sales.
Aggregate trade receivables from customers which individually exceeded 10%
of total receivables were $57.3 million and $91.1 million as of September 27,
1995 and October 2, 1996, respectively. Included in the computation of
receivables exceeding 10% at October 2, 1996 are a portion of the gross
receivables which were securitized (Note 11) and certain related party
receivables from Sappi and its subsidiaries (Note 20).
NOTE 6--INVENTORIES, NET (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ ---------------
<S> <C> <C>
Finished products........................ $ 89.8 $ 92.8
Work in process.......................... 51.0 34.5
Pulp, logs and pulpwood.................. 33.2 25.8
Maintenance parts and other supplies..... 52.5 42.6
-------- --------
$ 226.5 $ 195.7
======== ========
NOTE 7--PLANT ASSETS (IN MILLIONS)
<CAPTION>
SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ ---------------
<S> <C> <C>
Plant assets, at cost:
Land and buildings..................... $ 171.1 $ 172.7
Plant and equipment.................... 1,048.2 1,095.5
-------- --------
1,219.3 1,268.2
Accumulated depreciation............... (65.5) (153.5)
-------- --------
$1,153.8 $1,114.7
======== ========
</TABLE>
NOTE 8--DEPRECIATION & COST OF TIMBER HARVESTED (IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Depreciation of plant assets....................................... $69.9 $27.3 $65.5 $86.8
Cost of timber harvested and amortization of logging roads......... 0.5 0.2 1.3 0.9
-------------------------------------------------- ----- ----- ----- -----
$70.4 $27.5 $66.8 $87.7
===== ===== ===== =====
</TABLE>
27
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--INCOME TAXES
The domestic and foreign components of income before taxes and extraordinary
item are as follows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Domestic........................................................... $24.8 $22.4 $67.9 $11.9
Foreign............................................................ 3.2 2.5 2.4 --
----- ----- ----- -----
$28.0 $24.9 $70.3 $11.9
===== ===== ===== =====
</TABLE>
The components of the tax provisions before extraordinary item are as
follows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Current:
Federal.......................................................... $ 2.6 $(5.7) $14.9 $(1.1)
Foreign.......................................................... 1.2 1.0 0.1 (1.2)
State and local.................................................. (1.0) (1.2) 0.9 1.8
----- ----- ----- -----
Total current.................................................. 2.8 (5.9) 15.9 (0.5)
----- ----- ----- -----
Deferred:
Federal.......................................................... 5.8 13.0 8.1 5.3
Foreign.......................................................... -- -- -- 1.2
State and local.................................................. 2.6 2.8 4.2 (0.9)
----- ----- ----- -----
Total deferred................................................. 8.4 15.8 12.3 5.6
----- ----- ----- -----
$11.2 $ 9.9 $28.2 $ 5.1
===== ===== ===== =====
</TABLE>
The components of the deferred tax provisions before extraordinary item are
as follows, excluding the $1.3 million deferred tax benefit associated with
the $3.3 million extraordinary loss recorded as a result of the early
retirement of debt (in millions):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Inventory............... $ -- $ 0.1 $ 5.3 $ (0.1)
Plant assets............ 9.3 (17.0) 16.4 93.0
Accrued and other lia-
bilities............... 6.3 38.5 (0.1) (35.5)
AMT credit
carryforwards.......... (2.5) (0.8) (9.3) (3.7)
Tax loss carryforwards.. (4.7) (5.0) -- (41.7)
Other credits........... -- -- -- (6.4)
----- ------ ----- ------
Deferred tax provision.. $ 8.4 $ 15.8 $12.3 $ 5.6
===== ====== ===== ======
</TABLE>
28
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred tax assets and (liabilities) are as follows
(in millions):
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
<S> <C> <C>
Current:
Deferred tax assets:
Restructuring reserves........................... $ 0.3 $ 0.3
Accrued and other liabilities.................... 7.9 18.5
Inventory........................................ 1.3 1.4
------ -------
Total current deferred tax assets.............. 9.5 20.2
Deferred tax liabilities:
Accrued and other liabilities and prepaids....... (0.6) (2.2)
------ -------
Net current deferred tax asset..................... 8.9 18.0
------ -------
Noncurrent:
Deferred tax assets:
Alternative minimum tax credit carryforwards..... 9.3 13.0
Tax loss carryforwards........................... -- 41.7
Accrued and other liabilities.................... 21.3 46.0
Other............................................ -- 7.7
------ -------
Total noncurrent deferred tax assets........... 30.6 108.4
------ -------
Deferred tax liabilities:
Property, plant and equipment.................... (13.4) (106.0)
Other............................................ (38.4) (37.0)
------ -------
Total noncurrent deferred tax liability........ (51.8) (143.0)
------ -------
Net noncurrent deferred tax liability.............. (21.2) (34.6)
------ -------
Net deferred tax liability....................... $(12.3) $ (16.6)
====== =======
</TABLE>
29
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The differences between the U.S. statutory income tax rate and the Company's
effective income tax rate before extraordinary item are:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
U.S. statutory income tax rate........................................ 35.0% 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............................ 3.8 4.2 4.9 5.2
International......................................................... 0.4 0.3 0.1 --
Other factors......................................................... 0.8 0.3 0.1 2.7
---- ---- ---- ----
Effective tax rate.................................................... 40.0% 39.8% 40.1% 42.9%
- --------------------------------------------------
==== ==== ==== ====
</TABLE>
As of October 2, 1996, the Company had available federal and state tax net
operating loss carryforwards of approximately $120 million. For federal tax
purposes, the loss carryforwards will expire in the year 2011. For state tax
purposes, the loss carryforwards will expire between the years 2001 and 2011.
The Company also has available an alternative minimum tax credit carryforward
for tax return purposes of $13 million which will carry forward to future
taxable years indefinitely.
NOTE 10--ACCRUED AND OTHER CURRENT LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
<S> <C> <C>
Accrued salaries, wages and employee benefits..... $49.9 $47.5
Accrued interest.................................. 23.8 15.2
Accrued workers' compensation..................... 5.6 7.4
Other accrued expenses............................ 14.9 27.9
----- -----
$94.2 $98.0
===== =====
</TABLE>
NOTE 11--LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
(IN MILLIONS)
<S> <C> <C>
Credit Agreement:
Term Loan, Tranche A.............................. $ 305.0 $268.7
Term Loan, Tranche B.............................. 325.0 185.0
Series B Senior Subordinated Notes.................. 375.0 375.0
Revenue Bonds....................................... 121.3 119.5
Capital Leases...................................... 1.1 0.7
-------- ------
1,127.4 948.9
Current maturities of long-term debt................ 78.6 46.4
-------- ------
Long-term debt...................................... $1,048.8 $902.5
======== ======
</TABLE>
Credit Agreement
Holdings and Warren entered into an agreement (the "Credit Agreement") with
Chemical Bank (now known as The Chase Manhattan Bank, "Chase") and 43 other
domestic and international lenders on December 20, 1994, which consists of (i)
the Term Loan Facilities, comprised of a seven-year senior secured
30
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 (together 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 bankruptcy
remote 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 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 non-recourse basis, all rights and
interests in its accounts receivable. Pursuant to the receivables purchase
agreement, SDWF, in turn, sells certain interests in the accounts receivable
pool owned by SDWF to Nesbitt under similar terms. Proceeds of $90.0 million
from the A/R Facility, along with $10.0 million cash on hand, were used to
prepay $100.0 million of the final installment of the Tranche B Term Loan
under the Credit Agreement. As a result of the early extinguishment of a
portion of the Tranche B Term Loan, the Company recorded an extraordinary loss
of $2.0 million, net of a $1.3 million deferred tax benefit, related to the
unamortized deferred financing fees associated with the Tranche B Term Loan.
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 the three month certificates of deposit (adjusted for
reserves) plus 1.0% and (3) the federal funds rate in effect from time to time
plus 0.5%.
The Credit Facilities are guaranteed by Holdings and each of its 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 the applicable laws and
regulations, in (a) all of the capital stock of Warren 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 trade accounts receivable, owned by Warren and its
subsidiaries.
The Credit Agreement contains restrictive covenants which limit Holdings,
Warren and their 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 Warren from
prepaying certain of its indebtedness. Under the Credit Agreement, Warren is
required to satisfy certain financial covenants which require Warren 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 of October 2,
1996, management believes the Company is in compliance with all covenants.
31
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The A/R Facility also contains restrictive covenants which limit SDWF with
respect to certain matters including, among other things, the maintenance of a
certain net worth, and the 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 Nesbitt, as 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.
Under the terms of the Credit Agreement, Warren was required to enter into
interest rate protection agreements, primarily interest rate swap and interest
rate cap agreements. At September 27, 1995 and October 2, 1996, Warren had two
interest rate swap agreements outstanding under which the interest rates have
been fixed at rates between 7.43% and 9.95% with respect to $75 million of
notional principal amount of debt. Warren also had two interest rate cap
agreements outstanding with respect to $130 million of notional principal
amount of debt under which the interest rate has been capped at rates between
8.00% and 9.50%. 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.
Term Loans
The Tranche A Term Loan is payable in semi-annual installments commencing
June 30, 1996 with a final maturity in December 2001. The Tranche B Term Loan
is payable in semi-annual installments commencing on June 30, 1996 with a
final maturity in December 2002. Interest rates on the term loans are set, at
the Company's option, at either the Base Rate or the Eurodollar Rate, both
plus an Applicable Margin (as described above). At October 2, 1996, both the
Tranche A Term Loan and the Tranche B Term Loan were Eurodollar loans. At
September 27, 1995 and October 2, 1996 the interest rate on the Tranche A Term
Loan was 8.38% and 7.19%, respectively; and the interest rate on the Tranche B
Term Loan was 8.82% and 7.69%, respectively.
Warren is required to prepay the Term Loan Facility with (i) 100% of the net
proceeds of certain asset sales, (ii) 100% of the net proceeds of incurrences
of certain indebtedness and (iii) 50% of the net proceeds from issuances of
equity by Holdings or any of its subsidiaries. Warren 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 Warren 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) Consolidated Interest Expense Ratio (as defined
therein) as of the last day of the fiscal quarter immediately preceding the
date such payment (calculated on a rolling four quarter basis) exceeds 3.00 to
1.00. The Company made $74.9 million of Excess Cash Flow payments, relating to
fiscal year 1995, during the first quarter of fiscal year 1996. The Company
will not have the excess cash flow prepayment requirement, as defined, in the
first quarter of fiscal year 1997 due to the prepayment of the Tranche B Term
Loan under the Credit Agreement during the third quarter of fiscal year 1996.
The Company may also make optional prepayments without premium or penalty at
any time (subject to payments of certain termination 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 thereof on a pro rata basis, and may not be
reborrowed. 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.
32
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revolving Credit Facility
Under the Revolving Credit Facility, Warren can borrow up to $250.0 million
to fund working capital needs. In addition, a portion of the Revolving Credit
Facility is available to Warren for letters of credit up to $75.0 million. At
September 27, 1995 and October 2, 1996, $20.6 million and $1.0 million,
respectively, of the Revolving Credit Facility was utilized to guarantee the
issuance of letters of credit. At September 27, 1995 and October 2, 1996,
availability under the Revolving Credit Facility was $229.4 million and $249.0
million, respectively.
The interest rate on loans under the Revolving Credit Facility are set, at
Warren's option, at either the Base Rate or the Eurodollar Rate, both plus an
Applicable Margin (see Credit Agreement section). At October 2, 1996, the
Company had no loans outstanding under the Revolving Credit Facility. Letters
of credit issued through the Revolving Credit Facility are charged an annual
commission equal to the Applicable Margin in effect from time to time (see
Credit Agreement section). Warren also pays an annual fronting fee to Chase on
Revolving Credit Facility letters of credit. In addition, Warren pays a
quarterly commitment fee between 0.375% and 0.50% per annum, based on the
achievement of a certain financial ratio, on the unused portion of the
Revolving Credit Facility.
Letter of Credit Facility
In accordance with the Agreement to which the Acquisition was effected,
letters of credit in an aggregate principal amount of $220.0 million were
issued in favor of Scott to support its ongoing obligations under nine
separate tax-exempt bond financings and the financing of the Biomass
Cogeneration Facility at the Company's Westbrook, Maine facility assumed by
Warren. At September 27, 1995 and October 2, 1996, such letters of credit
outstanding aggregated approximately $170.5 million.
Series B Senior Subordinated Notes
On May 31, 1995, Warren consummated an exchange offer pursuant to which it
offered to (1) exchange the existing Series A Notes for an equivalent amount
of 12% Series B Senior Subordinated Notes due 2004 (the "Series B Notes" and
together with the Series A Notes, the "Notes") having substantially identical
terms and (2) exchange the existing Old Senior Preferred Stock for an
equivalent amount of its 14% Series B Senior Redeemable Exchangeable Preferred
Stock due 2006 (the "Series B 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").
The Series B Notes are unsecured, subordinated obligations of Warren 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 Warren 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
Warren 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 1997 through 2022. Warren assumed
responsibility for Scott's obligations under the Issues but with respect to
each Issue (other than the Issue which was re-marketed 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 27, 1995 and October 2, 1996 ranged from 5.75% to 9.375%. Bonds in
an amount of $44.0 million bearing variable interest rates were re-marketed on
August 21, 1995 as fixed interest rate bonds. Warren became the sole obligor
under the bonds and a $49.5 million letter of
33
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
credit issued in favor of Scott was canceled. The trustee for each Issue has
been granted or assigned the issuer's rights under a sale, lease purchase or
loan agreement, as the case may be, between the relevant issuer and Warren
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 October 2, 1996 are as follows (in millions):
<TABLE>
<S> <C>
1997............................................ $ 46.4
1998............................................ 59.5
1999............................................ 54.5
2000............................................ 59.8
2001............................................ 77.6
Thereafter...................................... 651.1
------
$948.9
======
</TABLE>
NOTE 12--FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, 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 (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 27, 1995 OCTOBER 2, 1996
-------------------- ---------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- -------- ------
<S> <C> <C> <C> <C>
BALANCE SHEET FINANCIAL INSTRUMENT:
Term Loans, Tranche A and B......... $ 630.0 $ 630.0 $453.7 $453.7
Notes............................... 375.0 414.9 375.0 405.0
Revenue Bonds and Capital Leases.... 122.4 119.1 120.2 119.2
Interest rate caps and swaps........ 1.6 (3.0) 0.9 (2.1)
</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 amounts 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 letters of credit, the Letter of Credit Facility letters of
credit and interest rate caps and swaps. At September 27, 1995 and October 2,
1996, the total carrying amount of the premium associated with the interest
rate caps was $1.6 million and $0.9 million, respectively. Unrealized losses
related to the interest rate caps and swaps approximated $4.6 million and $3.0
million, at these two dates, respectively. Additionally, at October 2, 1996,
the Company's off-balance sheet financing included the A/R Facility; the total
carrying amount of accounts receivable reflects a $90.0 million reduction
related to the A/R Facility. There are no unrealized losses on the A/R
Facility.
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
balance sheet date, taking into account current interest rates and the current
credit-worthiness of the swap counterparties. The fair value of the Revolving
Credit Facility
34
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
A significant portion of the Company's sales and accounts receivable are
from major customers (Note 5). 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 $4.9 million, $0.8 million, $2.4 million
and $3.5 million for the nine months ended September 24, 1994, the three
months ended December 20, 1994, the nine months ended September 27, 1995 and
fiscal year 1996, 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 nine months ended September 24,
1994, the nine months ended September 27, 1995 and fiscal year 1996. 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 October 2,
1996 are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDING OPERATING OTHER
SEPTEMBER, LEASES COMMITMENTS
----------- --------- ------------
<S> <C> <C>
1997................................................ $2.6 $ 7.5
1998................................................ 2.0 7.8
1999................................................ 1.8 7.3
2000................................................ 1.3 7.4
2001................................................ 0.4 8.8
Thereafter.......................................... -- 62.4
---- ------
$8.1 $101.2
==== ======
</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.
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.
35
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 local
effluent limit provisions of the ordinance. In July 1996, the Court rendered a
decision substantially in favor of the Company and 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 the cluster rules is expected to occur
by early 1997 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 $16.0
million, of which $7.0 million is expected to be incurred prior to the year
2000 with the remainder being spent subsequent to 2004.
The Muskegon mill has had discussions with the Michigan Department of
Natural Resources ("DNR") regarding a wastewater surge pond adjacent to the
Muskegon Lake. The DNR presently is considering whether the surge pond is in
compliance with Michigan Act 245 (Water Resources Commission Act) regarding
potential discharges from that pond. The matter is now subject to the results
of a pending engineering investigation. There is a possibility that, as a
result of DNR requirements, the surge pond may be closed in the future. The
Company estimates the cost of closure will be approximately $2.0 million. In
addition, if it is necessary to replace the functional capacity of the surge
pond with above-grade structures, the Company preliminarily estimates that up
to an additional $8.0 million may be required for such construction costs.
The Company has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for
cleanup of contamination at seven sites. Based upon the Company's
understanding of the total amount of liability at each site, its calculation
of its percentage share in each proceeding, and the number
36
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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, 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, 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 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 $5.7
million had been spent as of October 2, 1996. 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.
The Company believes that none of these matters, individually or in the
aggregate, is expected to have a material adverse effect on its 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, Warren entered into long-term
(25 years initially, subject to mill closures and certain force majeure
events) supply agreements with Scott for the supply of pulp and water and the
treatment of effluent at the Mobile 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 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 MESC. In connection with the sale of the
energy facility, MESC entered into a long-term agreement with Warren to
provide electric power and steam to the paper mill at rates generally
comparable to market tariffs, including fuel cost and capital recovery
components. Scott, MESC and Warren have also entered into a long-term shared
facilities and services agreement (the "Shared Facilities Agreement") with
respect to medical and security services, common roads and parking areas,
office space and similar items and a comprehensive master operating agreement
providing for the coordination of services and integration of operations among
the energy facility, the paper mill, the pulp mill and the tissue mill. Annual
fees under the Shared Facilities Agreement are expected to be approximately
$1.5 million per year through the 25 year term of the agreement. Warren has
the option to cancel certain non-essential services covered by the Shared
Services Agreement at any time prior to the end of the 25 year term.
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 Power Purchase Agreements require CMP to purchase such
energy produced by these cogeneration facilities at above market rates which
has reduced the Predecessor Corporation'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
37
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
agreements also require the mills to purchase electricity from CMP at the
standard industrial tariff rate. To reflect the fair market value of the
acquired Power Purchase Agreements in accordance with APB No. 16, as of the
Acquisition date, the Company established a deferred asset of approximately
$32.3 million. 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 and fiscal year 1996,
amortization expense related to this asset approximated $10.8 million and
$12.0 million, respectively.
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, the Company believes 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 Warren sponsored
hourly pension plans and a salaried pension plan and two Scott sponsored
hourly pension plans. During 1994, the assets and obligations relating to
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. Warren's funding policy complies
with the requirements of Federal law and regulations. Plan assets consist of
equity securities, bonds and short-term investments. The current portion of
the net pension liability, detailed below, was $3.0 million at October 2,
1996. The net pension liability at September 27, 1995 was all long-term.
The funded status of the Warren sponsored pension plans is shown below (in
millions):
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested.......................................... $ 71.3 $ 82.4
Nonvested....................................... 18.0 16.5
------ ------
Accumulated benefit obligation................ 89.3 98.9
Additional obligation for future salary increas-
es............................................... 27.2 21.0
------ ------
Projected benefit obligation...................... 116.5 119.9
Plan assets at fair value......................... 102.5 116.2
------ ------
Projected benefit obligation in excess of plan as-
sets............................................. (14.0) (3.7)
Unrecognized net gain............................. (8.5) (27.7)
------ ------
Accrued pension cost.............................. (22.5) (31.4)
Contributions..................................... -- 7.1
------ ------
Net pension liability............................. $(22.5) $(24.3)
====== ======
</TABLE>
38
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The net pension cost for the Warren sponsored plans include the following
components (in millions):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE
ENDED ENDED ENDED MONTHS ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Service cost-benefits earned during the period...................... $ 1.5 $0.4 $ 4.5 $ 6.3
Interest cost on projected benefit obligation....................... 6.5 2.1 6.9 9.8
Actual return on plan assets........................................ (0.8) 2.7 (10.4) (14.1)
Net deferral........................................................ (5.4) (4.7) 4.2 4.9
----- ---- ------ ------
Net pension cost.................................................... $ 1.8 $0.5 $ 5.2 $ 6.9
===== ==== ====== ======
</TABLE>
Pension expense allocated to the Predecessor Corporation relating to its
participation in the Scott plans was $5.7 million and $1.9 million for the
nine months ended September 24, 1994 and the three months ended December 20,
1994, respectively.
The projected benefit obligation at September 27, 1995 and October 2, 1996
was determined using an assumed discount rate of 8.0% and 8.25%, respectively,
and an assumed long-term rate of compensation increase of 5.25% and 4.75%,
respectively. The assumed rate of return on plan assets (on an annualized
basis) was 10.5%, 10.5%, 9.0% and 9.0% for the nine months ended September 24,
1994, the three months ended December 20, 1994, the nine months ended
September 27, 1995 and fiscal year 1996, respectively.
Savings Plan
The Predecessor Corporation's contributions to various savings plans were
based on employee contributions and compensation and totaled $3.8 million and
$0.6 million for the nine months ended September 24, 1994 and the three months
ended December 20, 1994, respectively. Warren currently sponsors two 401(k)
deferred contribution plans covering substantially all Warren employees
pursuant to which Warren is obligated to match, up to specified amounts,
employee contributions. Warren contributions to these plans totaled $3.8
million and $5.3 million for the nine months ended September 27, 1995 and
fiscal year 1996, respectively.
Supplemental Executive Retirement Plan
Effective in fiscal year 1996, Warren approved a Supplemental Executive
Retirement Plan ("SERP"). Key executives are eligible to participate in the
SERP provided such individuals meet specified criteria upon retirement.
Payments to the plan are made at the time key executives retire. The related
expense is recorded in each fiscal year based on actuarially determined
amounts. To date, payments made pursuant to the plan and the related expense
have not been material to Warren's results of operations or cash flows.
NOTE 17--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Warren 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. The current portion of Warren's net postretirement
liability, detailed below, was $0.1 million at October 2, 1996. The net
postretirement liability at September 27, 1995 was all long-term.
39
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following schedule provides the plan's funded status and obligations (in
millions):
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligations
(APBO):
Retirees....................................... $ -- $ 0.6
Active Participants............................ 25.7 30.6
------ ------
Total APBO..................................... 25.7 31.2
Plan assets at fair value........................ -- --
------ ------
APBO in excess of plan assets.................... (25.7) (31.2)
Unrecognized transition obligation............. -- --
Unrecognized net actuarial gain................ (1.8) (1.1)
------ ------
Net postretirement liability..................... $(27.5) $(32.3)
====== ======
</TABLE>
Components of the net periodic postretirement benefit expense are as follows
(in millions):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE
ENDED ENDED ENDED MONTHS ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Service cost.................................................... $ 2.7 $0.9 $2.0 $2.6
Interest cost on APBO........................................... 5.0 1.7 1.6 2.3
Net amortization and deferral................................... 4.0 1.3 -- --
----- ---- ---- ----
Net postretirement benefit cost................................. $11.7 $3.9 $3.6 $4.9
===== ==== ==== ====
</TABLE>
The discount rates used to estimate the accumulated benefit obligations as
of September 27, 1995 and October 2, 1996 were 8.0% and 8.25%, respectively.
The health care cost trend rates used to value APBO were 10.5%, 10.5%, 9.0%
and 9.0% at September 24, 1994, December 20, 1994, September 27, 1995 and
October 2, 1996, respectively, decreasing gradually to an ultimate rate of
5.25% 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 October 2, 1996 and would increase the sum of the benefits earned and
interest cost components of net postretirement benefit cost for 1996 by
approximately 14.6%.
NOTE 18--OTHER LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
<S> <C> <C>
Accrued workers' compen-
sation................. $35.0 $29.7
Accrued pension and
other postretirement
benefits............... 50.0 53.5
Other accrued liabili-
ties................... 8.3 15.0
----- -----
$93.3 $98.2
===== =====
</TABLE>
NOTE 19--SERIES B REDEEMABLE EXCHANGEABLE PREFERRED STOCK
Warren has authorized 10.0 million shares of Series B redeemable
exchangeable preferred stock (the "Series B Preferred Stock") from which the
Warren'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 Series B Preferred Stock on May 31, 1995.
40
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Series B Preferred Stock has a liquidation preference of $25.00 per
share (aggregate liquidation preference is $75.0 million, plus accumulated
dividends). The Series B Preferred Stock was recorded at the net proceeds of
$65.4 million received from the issuance after deducting stock issuance costs
and excluding approximately $6.9 million paid by the purchaser 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"). Warren does not expect to pay dividends on
the Series B Preferred Stock in cash for any period ending on or prior to
December 15, 1999. Cumulative dividends on Series B Preferred Stock that have
not been paid at September 27, 1995 and October 2, 1996 are $8.5 million and
$21.2 million, respectively, and are included in the carrying amount of the
Series B Preferred Stock as indicated below (in millions):
<TABLE>
<S> <C>
Issuance on December 21, 1994 for cash (at fair value on date of is-
suance)............................................................ $65.4
Accretion to redemption value...................................... 0.6
Dividends on Series B Preferred Stock.............................. 8.5
-----
Balance, September 27, 1995......................................... 74.5
Accretion to redemption value...................................... 0.8
Dividends on Series B Preferred Stock.............................. 12.7
-----
Balance, October 2, 1996............................................ $88.0
=====
</TABLE>
Redemption
The Series B Preferred Stock is redeemable at the option of Warren, 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 Series
B Preferred Stock set forth below plus all accrued and unpaid liquidated
damages and dividends (excluding any Accumulated Dividends), 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 Series
B 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.
In the event that Holdings consummates one or more public offerings of its
common stock on or before December 15, 1997, Warren may, at its option, redeem
the Series B 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 rata 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 Series
B Preferred Stock remains outstanding immediately following such redemption.
41
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Warren is required to redeem the Series B 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
rata dividend from the immediately preceding dividend accrual date to the
redemption date).
At any scheduled dividend payment date, Warren may, at its option, exchange
all of the shares of the Series B Preferred Stock then outstanding for
Warren's 14% Series B Subordinated Exchange Debentures due 2006.
In the event of a Change of Control, as defined, the holders of Series B
Preferred Stock will have the right to require Warren to repurchase such
Series B 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 rata dividend from the immediately preceding dividend accrual date to
the redemption date).
Holders of the Series B Preferred Stock have limited voting rights,
customary for preferred stock, including the right to elect two additional
directors upon certain events such as Warren 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 Series B 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 and the fiscal year
1996 was approximately $0.8 million and $1.0 million, respectively.
Warren 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 Warren by SIM and SMS is limited to an annual amount of $1.0
million. For the nine months ended September 27, 1995 and fiscal year 1996,
Warren incurred such a management fee of approximately $0.8 million and $1.0
million, respectively.
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. Warren
agrees to pay a service fee to SIM which is determined based upon Warren's
proportionate share in the aggregate amount of costs which SIM incurs in
providing services to the entire number of Sappi group companies which have
entered into agreements of this nature with SIM, plus a profit mark-up of 10%.
Warren's proportionate share is based upon the time spent on Warren services
divided by total time spent by SIM on total Sappi 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. Warren has agreed to pay a service fee to SMS which is
determined based upon Warren's proportionate share in the aggregate amount of
costs which SMS incurs in providing services to the entire number of Sappi
group companies which have entered into agreements of this nature with SMS,
plus a profit mark-up of 10%. Warren's proportionate share is based upon
Warren'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.
42
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 Sappi, and Hannover Papier AG ("Hannover"), a subsidiary of
Sappi. Pursuant to this agreement, Warren 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 Warren 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 October 2, 1996.
During fiscal 1996, Warren shipped products to certain Sappi subsidiaries
(Sappi Europe, SA, Specialty Pulp Services and U.S. Paper). These subsidiaries
then sold Warren's product to external customers at market prices and remitted
the proceeds from such sales to Warren, net of a sales commission. Warren
shipped $33.0 million and $151.4 million of products to subsidiaries of Sappi
and expensed fees of approximately $1.1 million and $7.2 million relating to
these sales for the nine months ended September 27, 1995 and fiscal year 1996,
respectively. Trade accounts receivable at September 27, 1995 and October 2,
1996 included approximately $12.4 million and $37.1 million due from
subsidiaries of Sappi, respectively. Amounts as of October 2, 1996, are
included in the pool of receivables securitized under the A/R Facility (Note
11). The Company has formalized certain of these agreements and is in the
process of formalizing the remainder.
NOTE 21--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 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, it will have, by the end of December 1996,
attained a level of operation close to the pre-flood situation. 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.
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 become law
unless it receives a simple majority of the votes cast in a special election
scheduled 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 already
voluntarily adopted by the Company.
43
<PAGE>
SCHEDULE II
S.D. WARREN COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT DEDUCTIONS BALANCE AT
BEGINNING COSTS AND (PRINCIPALLY END OF
OF PERIOD EXPENSES WRITE-OFFS) PERIOD
---------- --------- ------------ ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Twelve months ended October 2,
1996............................ $ 5.6 $ -- $ 0.3 $ 5.3
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
ALLOWANCE FOR INVENTORY OBSOLES-
CENCE:
Twelve months ended October 2,
1996............................ $ 4.1 $ -- $ 2.7 $ 1.4
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
RESERVE FOR RESTRUCTURING:
Twelve months ended October 2,
1996............................ $ -- $ -- $ -- $ --
Nine months ended September 27,
1995............................ -- -- -- --
Three months ended December 20,
1994............................ 12.7 -- 12.7 --
Nine months ended September 24,
1994............................ 91.7 -- 79.0 12.7
</TABLE>
44
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Intentionally Omitted. *
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Intentionally Omitted. *
ITEM 11. EXECUTIVE COMPENSATION
Intentionally Omitted. *
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Intentionally Omitted. *
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Intentionally Omitted. *
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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 by Section 13 or
15(d) of the Securities Exchange Act of 1934. The registrant is not required
to file reports pursuant to Section 13 and 15(d) of the Securities Exchange
Act of 1934.
45
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
S.D. Warren Company
/s/ Monte R. Haymon
By: _________________________________
Monte R. Haymon
President and Chief Executive
Officer
Date: December 27, 1996
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURES TITLE DATE
/s/ Monte R. Haymon President, Chief December 27,
- ------------------------------------- Executive Officer 1996
MONTE R. HAYMON and Director
(Principal
Executive Officer)
/s/ Trevor L. Larkan Chief Financial December 27,
- ------------------------------------- Officer, Vice 1996
TREVOR L. LARKAN President,
Treasurer,
Assistant Secretary
and Director
(Principal
Financial and
Accounting Officer)
/s/ James H. Frick, Jr. Director December 27,
- ------------------------------------- 1996
JAMES H. FRICK, JR.
/s/ E. Dannis Herring Vice President and December 27,
- ------------------------------------- Director 1996
E. DANNIS HERRING
/s/ O. Harley Wood Vice President and December 27,
- ------------------------------------- Director 1996
O. HARLEY WOOD
46
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
S.D. WARREN COMPANY'S (THE "COMPANY") CONDENSED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED OCTOBER 2, 1996 AND BALANCE SHEET AS OF OCTOBER 2, 1996 FOUND ON
PAGES 15 AND 16, RESPECTIVELY, OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FINANCIAL INFORMATION FOR THE YEAR ENDED OCTOBER 2, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-02-1996
<PERIOD-START> SEP-28-1995
<PERIOD-END> OCT-02-1996
<CASH> 49,000
<SECURITIES> 0
<RECEIVABLES> 54,400
<ALLOWANCES> 5,300
<INVENTORY> 195,700
<CURRENT-ASSETS> 355,400
<PP&E> 1,268,200
<DEPRECIATION> 153,500
<TOTAL-ASSETS> 1,725,400
<CURRENT-LIABILITIES> 246,000
<BONDS> 902,500
88,000
0
<COMMON> 0
<OTHER-SE> 356,100
<TOTAL-LIABILITY-AND-EQUITY> 1,725,400
<SALES> 1,441,600
<TOTAL-REVENUES> 1,441,600
<CGS> 1,186,600
<TOTAL-COSTS> 1,320,700
<OTHER-EXPENSES> 100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,900
<INCOME-PRETAX> 11,900
<INCOME-TAX> 5,100
<INCOME-CONTINUING> 6,800
<DISCONTINUED> 0
<EXTRAORDINARY> (2,000)
<CHANGES> 0
<NET-INCOME> 4,800
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
