<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q FINANCIAL INFORMATION*
--------------------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission file number: 33-88496*
S.D. WARREN COMPANY
-------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2366983
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive offices) (Zip Code)
(617) 423-7300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No Not Applicable X*
-- -- --
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*This report is being voluntarily filed with the Securities and Exchange
Commission (the "Commission") pursuant to the registrant's contractual
obligations to file with the Commission all financial information that would be
required to be filed on a Form 10-Q. The registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
Form 10-Q, April 2, 1997
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q for S.D. Warren Company (the "Company") contains
forward-looking information which, at the time made, reflects about the future
and is based upon management's interpretations of what it believes are
significant factors affecting the Company's business, and there can be no
assurance 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 1997 and beyond, to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company. Such factors
include, but are not limited to: global economic and market conditions,
production and capacity in the United States and Europe; production and pricing
levels of pulp and paper; any major disruption in production at key facilities;
alterations in trade conditions in and between the United States and other
countries where the Company does business; and changes in environmental, tax and
other laws and regulations. See also "Market Overview" under Item 2,
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
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S.D. WARREN COMPANY AND SUBSIDIARIES
Form 10-Q, April 2, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations for the three and six months ended
April 3, 1996 and April 2, 1997 4,5
Condensed Consolidated Balance Sheets at October 2, 1996 and April 2, 1997 6
Condensed Consolidated Statements of Cash Flows for the three and six months ended
April 3, 1996 and April 2, 1997 7
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
</TABLE>
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S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
April 3, 1996 April 2, 1997
(Restated)
---------------------- ----------------------
<S> <C> <C>
Sales $359.2 $345.7
Cost of goods sold 289.6 269.1
----------- -----------
Gross profit 69.6 76.6
Selling, general and administrative expense 31.8 33.7
----------- -----------
Income from operations 37.8 42.9
Other income (expense), net (1.0) 1.1
Interest expense (28.6) (26.6)
----------- -----------
Income before income taxes and extraordinary item 8.2 17.4
Income tax expense 3.2 6.9
----------- -----------
Income before extraordinary item 5.0 10.5
Extraordinary item, net of tax - (0.9)
----------- -----------
Net income 5.0 11.4
Dividends and accretions on Warren Series B preferred stock 3.2 3.8
----------- -----------
Net income applicable to common stockholder $ 1.8 $ 7.6
=========== ===========
Earnings per common share:
Income before extraordinary item $ 0.05 $ 0.11
=========== ===========
Net income $ 0.05 $ 0.11
=========== ===========
Net income applicable to common
stockholder $ 0.02 $ 0.08
=========== ===========
Weighted average number of shares outstanding 100 100
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed, consolidated
financial statements.
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<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
April 3, 1996 April 2, 1997
(Restated)
------------------- ------------------
<S> <C> <C>
Sales $720.5 $660.2
Cost of goods sold 577.4 536.3
-------------- -----------------
Gross profit 143.1 123.9
Selling, general and administrative expense 63.9 66.3
Restructuring - 10.0
-------------- -----------------
Income from operations 79.2 47.6
Other income, net 1.4 2.0
Interest expense (59.1) (51.8)
-------------- -----------------
Income (loss) before income taxes and extraordinary item 21.5 (2.2)
Income tax expense (benefit) 8.6 (1.1)
-------------- -----------------
Income (loss) before extraordinary item 12.9 (1.1)
Extraordinary item, net of tax - (0.9)
-------------- -----------------
Net income (loss) 12.9 (0.2)
Dividends and accretions on Warren Series B preferred stock 6.6 7.4
-------------- -----------------
Net income (loss) applicable to common stockholder $ 6.3 $ (7.6)
============== =================
Earnings per common share:
Income (loss) before extraordinary item $ 0.13 $ (0.01)
============== =================
Net income $ 0.13 $ 0.00
============== =================
Net income (loss) applicable to common
stockholder $ 0.06 $ (0.08)
============== =================
Weighted average number of shares outstanding 100 100
============== =================
</TABLE>
See accompanying notes to unaudited condensed, consolidated
financial statements.
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<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, unaudited)
<TABLE>
<CAPTION>
October 2, April 2,
1996 1997
---------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49.0 $ 46.8
Trade accounts receivable, net 49.1 42.9
Other receivables 34.2 58.5
Inventories 195.7 213.3
Deferred income taxes 18.0 18.0
Other current assets 9.4 11.2
---------------- ----------------
Total current assets 355.4 390.7
Plant assets, net 1,114.7 1,093.6
Timber resources, net 95.3 95.1
Goodwill, net 94.1 92.1
Deferred financing fees, net 44.8 41.3
Other assets, net 21.1 19.9
---------------- ----------------
Total assets $1,725.4 $1,732.7
================ ================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 46.4 $ 48.6
Accounts payable 101.6 124.3
Accrued and other current liabilities 98.0 121.7
---------------- ----------------
Total current liabilities 246.0 294.6
---------------- ----------------
Long-term debt:
Term loans 411.4 367.2
Senior subordinated notes 375.0 375.0
Other 116.1 119.5
---------------- ----------------
902.5 861.7
---------------- ----------------
Deferred income taxes 34.6 33.3
---------------- ----------------
Other liabilities 98.2 99.2
---------------- ----------------
Total liabilities 1,281.3 1,288.8
---------------- ----------------
Commitments and contingencies (Notes 7 and 8) -
Warren Series B redeemable exchangeable preferred stock (liquidation
value, $96.2 and $103.2, respectively) 88.0 95.4
---------------- ----------------
Stockholder's equity:
Common stock - -
Capital in excess of par value 331.8 331.8
Retained earnings 24.3 16.7
---------------- ----------------
Total stockholder's equity 356.1 348.5
---------------- ----------------
Total liabilities and stockholder's equity $1,725.4 $1,732.7
================ ================
</TABLE>
See accompanying notes to unaudited condensed, consolidated
financial statements.
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<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
April 3, 1996 April 2, 1997
(Restated)
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 12.9 $ (0.2)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, cost of timber harvested and amortization 56.4 59.5
Loss on force majeure events - 7.5
Deferred income taxes - (1.3)
Other 5.9 (6.5)
Changes in assets and liabilities:
Trade and other accounts receivable, net 1.0 (8.4)
Inventories (11.6) (17.6)
Accounts payable, accrued and other current liabilities (35.8) 40.2
Other assets and liabilities (3.7) (7.5)
----------- ----------------
Net cash provided by operating activities 25.1 65.7
----------- ----------------
Cash Flows from Investing Activities:
Proceeds from disposals of plant assets 2.1 0.1
Investment in plant assets and timber resources (18.3) (25.2)
Refurbishment of plant assets - (37.5)
Insurance proceeds on force majeure events - 27.5
----------- ----------------
Net cash used in investing activities (16.2) (35.1)
----------- ----------------
Cash Flows from Financing Activities:
Issuance of debt - 38.1
Repayments of debt (75.0) (65.8)
Defeasance of debt - (4.4)
Debt issue costs - (0.7)
Bank overdraft 3.9 -
Other -
----------- ----------------
Net cash used in financing activities (71.1) (32.8)
----------- ----------------
Net change in cash and cash equivalents (62.2) (2.2)
Cash and cash equivalents, beginning of period 62.2 49.0
----------- ----------------
Cash and cash equivalents, end of period $ - $ 46.8
============ ===============
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 61.0 $ 40.9
============ ===============
Income Taxes $ 4.4 $ 0.1
============ ===============
</TABLE>
See accompanying notes to unaudited condensed, consolidated
financial statements.
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<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
Basis of Presentation
The accompanying unaudited condensed, consolidated financial statements include
the accounts of S.D. Warren Company and its subsidiaries ("S.D. Warren",
"Warren", or the "Company"). Intercompany balances and transactions have been
eliminated in the preparation of the accompanying unaudited condensed,
consolidated financial statements.
During fiscal 1996, the Company reviewed its accounting policy with respect to
accounting for certain costs relating to compliance with safety and other
governmental law and regulations. These costs were previously accounted for on
an accrual basis and the Company revised its accounting policy to reflect these
costs on an "as incurred" basis. Accordingly, the financial statements for the
three months ended April 3, 1996 have been restated to reflect the effect of
this change in accounting for these costs. The effects of the restatement were
not material to the three month period ended April 3, 1996.
In addition to the aforementioned restatement, certain prior period items have
been reclassified to conform to the current presentation followed by the
Company.
Business
The Company manufactures printing, publishing and specialty papers and has pulp
and timberland operations vertically integrated with certain of its
manufacturing facilities which represent the Company's single line of business.
The Company currently operates four paper mills, a sheeting facility and several
distribution facilities and owns approximately 911,000 acres of timberlands in
the State of Maine.
Unaudited Interim Condensed, Consolidated Financial Statements
In the opinion of management, the accompanying unaudited condensed, consolidated
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary for the fair presentation of the Company's
financial position and results of operations. The accompanying unaudited
condensed, consolidated financial statements should be read in conjunction with
the audited financial statements included in the S.D. Warren Company Annual
Report on Form 10-K for the fiscal year ended October 2, 1996. The unaudited
condensed, consolidated results of operations for the three and six months ended
April 2, 1997 are not necessarily indicative of results that could be expected
for a full year.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 128, "Earnings per Share." FAS 128,
which will be effective for the Company in the fiscal year 1998, establishes
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common stock. The
implementation of FAS No. 128 is not expected to have a material effect on the
Company's results of operations or financial statement disclosure.
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<PAGE>
Note 2. Related Party Transactions
During the three and six months ended April 2, 1997, the Company sold products
to certain subsidiaries of Sappi ("Affiliates"), at market prices, primarily in
U.S. Dollars. These Affiliates then sold the Company's products to external
customers. Proceeds from sales to Affiliates are remitted to the Company net of
sales commissions. The Company sold approximately $35.3 million and
$75.4 million to Affiliates and incurred fees of approximately $2.0 million and
$4.3 million relating to these sales for the three and six months ended
April 2, 1997, respectively. Similar sales for the corresponding period in the
prior year were $26.6 million and $42.2 million, respectively. Trade accounts
receivable from Affiliates at April 2, 1997 were approximately $29.2 million
compared to $22.8 million at April 3, 1996. The Company has formalized certain
of these agreements and is in the process of formalizing the remainder.
During fiscal year 1996, the Company began purchasing products from certain
Affiliates in U.S. Dollars, primarily for sale to external customers. The
Company receives commissions from the Affiliates on such sales. These
transactions to date have not been material.
Note 3. Inventories (in millions)
<TABLE>
<CAPTION>
October 2, 1996 April 2, 1997
--------------- -------------
<S> <C> <C>
Finished products $ 92.8 $109.4
Work in process 34.5 34.7
Pulp, logs and pulpwood 25.8 29.4
Maintenance parts and other supplies 42.6 39.8
-------- --------
$195.7 $213.3
======== ========
</TABLE>
Note 4. Long-Term Debt
The current maturities of long-term debt balance of $48.6 million at
April 2, 1997 primarily represents the amounts payable in June 1997 and
December 1997 under Warren's term loan facilities.
On February 7, 1997, the Company amended certain provisions of its credit
agreement with a syndicate of banks, including the interest coverage covenant,
the optional prepayment terms and, in order to permit the granting of senior
liens in connection with the refinancing of certain of the Company's industrial
revenue bonds, the covenant restricting certain liens.
On March 5, 1997, pursuant to a loan agreement with the town of Skowhegan,
Maine, the Company expanded and refinanced certain environmental and solid waste
projects at its Somerset, Maine mill by redeeming or refunding revenue bonds
aggregating $23.7 million, defeasing revenue bonds aggregating $4.4 million and
issuing new bonds aggregating $38.1 million. The new bonds are due from 2000 to
2015 and bear interest at rates ranging from 6.65% to 8.00% per annum. The
extraordinary gain resulting from the extinguishment of the original bonds, net
of taxes of $0.6 million, was $0.9 million. In connection with this transaction,
an outstanding letter of credit was reduced by $19.7 million. The agreement
under which the $4.4 million in bonds was defeased required the Company to
purchase U.S. Treasury securities to be held by a trustee in an amount that will
cover the interest payments required to be paid to the holders of these bonds
until the first call date on the bonds, as well as the principal due at that
date. In the event, that the U.S. treasury securities, together with income
earned on these securities, do not cover interest and principle on the defeased
bonds, the Company will be liable for such deficiency.
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<PAGE>
Note 5. Restructuring
In October 1996, the Company commenced a restructuring plan which resulted in a
pretax charge of $10.0 million taken during the quarter ended January 1, 1997
to cover the costs related to the reduction of approximately 200 salaried
positions, or approximately 14% of the Company's salaried workforce.
Note 6. Force Majeure 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. On March 26, 1997, the Company
reached an agreement with its insurance carrier pursuant to which it recovered
substantially all the lost inventory value, excluding the deductible of
$0.5 million.
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 has since been repaired and normal operating mill
conditions have been restored. Total losses are not expected to exceed the
Company's insurance coverage limits, which include both business interruption
and property loss coverage. As of April 2, 1997, the Company had accrued an
estimate of $44.7 million for costs to refurbish plant assets at the Westbrook
facility, of which $27.5 million has been received as insurance proceeds at
April 2, 1997, with the remainder, net of a deductible of $3.5 million, included
in other receivables in the condensed consolidated balance sheet at April 2,
1997. In addition, the Company has accrued $9.0 million during the quarter ended
April 2, 1997, representing a portion of the business interruption claim
submitted for the disruption caused by the Westbrook flood, which primarily took
place during the quarter ended January 1, 1997.
Note 7. Environmental and Safety Matters
The Company is subject to a wide variety of increasingly stringent environmental
laws and regulations relating to, among other matters, air emissions, wastewater
discharges, past and present landfill operations and hazardous waste management.
These laws include the Federal Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act and their respective state counterparts. The
Company will continue to incur significant capital and operating expenditures to
maintain compliance with applicable federal and state environmental laws. These
expenditures include costs of compliance with federal worker safety laws,
landfill expansions and wastewater treatment system upgrades.
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
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<PAGE>
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 in
1997 and compliance with the rules may be required beginning in 2000. 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 2000. 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
Environmental Quality ("DEQ") regarding a wastewater surge pond adjacent to the
Muskegon Lake. The DEQ presently is considering whether the surge pond is in
compliance with Michigan Act 451 (Part 31 of the Natural Resources and
Environmental Protection 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 DEQ requirements, the surge pond may
be closed in the future. The Company estimates the cost of closure will be
approximately $2.0 million. In addition, if it is necessary to replace the
functional capacity of the surge pond with above-grade structures, the Company
preliminarily estimates that up to an additional $8.0 million may be required
for such construction costs.
The Company has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for cleanup
of contamination at seven sites. Based upon the Company's understanding of the
total amount of liability at each site, its calculation of its percentage share
in each proceeding, and the number of potentially responsible parties at each
site, the Company presently believes that its aggregate exposure for these
matters is not material. Moreover, as a result of the Acquisition of the Company
from Scott Paper Company, now Kimberly-Clark ("Scott"), 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 demolition project in progress at its Westbrook
Facility for health and safety reasons which is expected to be completed in the
year 2001. Total costs of the project are
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<PAGE>
estimated to be approximately $9.0 million, of which approximately $5.7 million
had been spent as of April 2, 1997. 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 or that any additional measures
necessary to fund the shortfall will not result in material increases in the
Company's workers compensation premiums.
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 8. 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 is supplied generally at market prices.
Pulp prices are discounted due to the elimination of freight costs associated
with delivering pulp to Warren's Mobile paper mill and pulp quantities are
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
are generally based upon cost. Prior to the Acquisition, Scott sold its energy
facility at Mobile to Mobile Energy Services Corporation ("MESC"). In connection
with the sale of the energy facility, MESC entered into a long-term agreement
with Warren to provide electric power and steam to the paper mill at rates
generally comparable to market tariffs, including fuel cost and capital recovery
components. Scott, MESC and Warren have also entered into a long-term shared
facilities and services agreement (the "Shared Facilities Agreement") with
respect to medical and security services, common roads and parking areas, office
space and similar items and a comprehensive master operating agreement providing
for the coordination of services and integration of operations among the energy
facility, the paper mill, the pulp mill and the tissue mill. Annual fees under
the Shared Facilities Agreement are expected to be approximately $1.5 million
per year through the 25 year term of the agreement. Warren has the option to
cancel certain non-essential services covered by the Shared Services Agreement
at any time prior to the end of the 25 year term.
A substantial portion of the Company's electricity requirements are satisfied
through cogeneration agreements ("Power Purchase Agreements" or "Agreements")
whereby the Somerset, Maine and Westbrook mills each cogenerate electricity and
sell the output to Central Maine Power Company ("CMP"). The Westbrook and
Somerset Agreements require CMP to purchase such energy produced by these
cogeneration facilities at above market rates, which has reduced the Company's
historical cost of electrical energy. The Westbrook Agreement expires
October 31, 1997 and the Somerset Agreement expires in the year 2012. The
favorable pricing element of the Somerset Agreement will end on
November 30, 1997. The agreements also require the mills to purchase electricity
from CMP at the standard industrial tariff rate. To 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 three months and six months ended April 2, 1997,
amortization expense related to this asset approximated $3.0 million and $6.0
million, respectively.
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<PAGE>
The Company is also involved in various other lawsuits and administrative
proceedings. The relief sought in such lawsuits and proceedings include
injunctions, damages and penalties. Although the final results in these suits
and proceedings cannot be predicted with certainty, it is the present opinion of
the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's financial position, results of operations or
cash flows.
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.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion is a summary of the key factors management considers
necessary in reviewing the Company's results of operations, liquidity and
capital resources. Forward-looking statements contained in the following
discussion are expectations only and there can be no assurance that actual
results will not materially differ from these expectations. This discussion
should be read in conjunction with the financial statements and related notes of
the Company included in this Form 10-Q, as well as the Consolidated Financial
Statements and related notes included in the Warren Annual Report on Form 10-K
for the fiscal year ended October 2, 1996. See "Note Regarding Forward - Looking
Statements" on page 2 of this report.
Market Overview
North American supply/demand imbalances, inventory shifts and, to a lesser
degree, the availability and pricing of imported products have historically
caused price fluctuations in the market for coated paper. Coated free paper
shipments in the segments in which the Company competes showed volume increases
of 16% in the quarter ended April 2, 1997 when compared to the same quarter last
year.
Coated free mill inventories, which peaked at approximately 600,000 tons in May
of 1996, were reduced to 457,000 by the end of March 1997. The combination of
higher industry shipments and the reduction in inventory has brought with it a
stabilization in industry prices at a level about 13% below last year's January
to March level. The Company's coated sales volume was up 6% over the same
quarter last year. That increase is primarily due to new product introductions,
which include Strobe, a new product targeted at the higher margin segment of the
coated free marketplace.
For the first three months of calendar 1997, coated groundwood shipments were up
27.5% over the prior year's shipments. Operating rates in the segment are in the
mid 90% range, and pricing is firming. Since coated groundwood pricing provides
the floor for coated free sheet pricing, the upward trend in coated groundwood
pricing is an indicator for the coated free sheet market.
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 an improvement in business
conditions for the Company's products as the Company exits the seasonally weaker
periods of its fiscal year. 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.
Results of Operations
Three Months Ended April 2, 1997 Compared to Three Months Ended April 3, 1996
Sales
Sales for the three months ended April 2, 1997 were $345.7 million compared to
$359.2 million for the three months ended April 3, 1996, a decrease of
$13.5 million or 3.8%. The decrease was primarily due to a 9.0% decrease in
average net revenue per paper ton, partially offset by a 5.7% increase in paper
shipment volume during such period.
-14-
<PAGE>
Cost of Goods Sold
Cost of goods sold for the three months ended April 2, 1997 decreased
$20.5 million, or 7.1%, to $269.1 million compared to $289.6 million for the
three months ended April 3, 1996. Cost of goods sold on a per paper ton basis,
adjusted for flood related accruals relating to the quarter ended
January 1, 1997, decreased to $864 per ton from $931 per ton for the
corresponding prior year quarter. The decrease was primarily due to lower fiber
input costs and, to a lesser extent, cost cutting efforts which resulted in
lower personnel and maintenance costs and decreased material costs resulting
from cost reduction initiatives.
Selling, General and Administrative Expense
Selling, general and administrative expense increased slightly from
$31.8 million for the quarter ended April 3, 1996 to $33.7 million for the
quarter ended April 2, 1997. This increase of 6.0% is mainly due to the
addition of regional distribution centers.
Interest Expense, Taxes, and Dividends and Accretion on Warren Series B
Preferred Stock
Interest expense for the three months ended April 2, 1997 was $26.6 million
compared to $28.6 million for the three months ended April 3, 1996. The
$2.0 million reduction in interest expense for the comparable period was
primarily due to lower levels of outstanding debt and a reduction in applicable
margins on the Company's term loans. Interest expense includes the amortization
of deferred financing fees.
Income tax expense was $6.9 million for the three months ended April 2, 1997
compared to $3.2 million for the corresponding period in the prior year,
primarily reflecting the change in the Company's earnings level.
Six Months Ended April 2, 1997 Compared to the Six Months Ended April 3, 1996
Sales
Sales for the six months ended April 2, 1997 were $660.2 million compared to
$720.5 million for the six months ended April 3, 1996, a decrease of
$60.3 million or 8.4%. The decrease is primarily due to a 11.4% decrease in
average net revenue per paper ton, partially offset by a 3.5% increase in paper
shipment volume during such period.
Cost of Goods Sold
Cost of goods sold for the six months ended April 2, 1997 was $536.3 million
compared to $577.4 million for the six months ended April 3, 1996, a decrease of
$41.1 million or 7.1%. Cost of goods sold on a per paper ton basis decreased to
$854 per ton from $960 per ton for the corresponding prior year period. The
decrease was primarily due to lower fiber input costs and, to a lesser extent,
cost cutting efforts which resulted in lower personnel and maintenance costs and
decreased material costs resulting from cost reduction initiatives.
Selling, General and Administrative Expense
Selling, general and administrative expense was $66.3 million for the six months
ended April 2, 1997 compared to $63.9 million for the six months ended
April 3, 1996, an increase of $2.4 million. The increase on a per paper ton
basis equates to 0.2% and is insignificant.
-15-
<PAGE>
Interest Expense, Taxes, and Dividends and Accretion on Warren Series B
Preferred Stock
Interest expense for the six months ended April 2, 1997 was $51.8 million
compared to $59.1 million for the six months ended April 3, 1996. The
$7.3 million reduction in interest expense was primarily due to lower levels
of outstanding debt. Interest expense includes the amortization of deferred
financing fees.
Income tax expense was a benefit of $1.1 million for the six months ended
April 2, 1997 compared to an expense of $8.6 million for the corresponding
period in the prior year, primarily reflecting the change in the Company's
earnings level.
Liquidity and Capital Resources
The Company's net cash provided by operating activities was $65.7 million for
the six months ended April 2, 1997 as compared to $25.1 million for the six
months ended April 3, 1996. The increase is due mainly to a $56.8 million
favorable swing in working capital requirements for the comparable periods, as
inventories declined and accounts payable increased relative to the second
fiscal quarter of the prior year, partially offset by increases in inventory and
trade and other receivables.
The increase in accounts payable, accrued and other liabilities at April 2, 1997
compared to October 2, 1996 was primarily attributable to increased purchasing
activity as a result of the Westbrook flood, accrued restructuring charges, and
higher outstanding interest payable. The increase in other receivables is
primarily attributable to the accrual of the Westbrook property damage insurance
recovery, net of cash received, and increased power sales receivable.
The Company's operating working capital decreased to $68.7 million at
April 2, 1997 compared to $79.8 million at October 2, 1996. Operating working
capital is defined as trade accounts receivable, other receivables and
inventories less accounts payable and accrued and other current liabilities.
This decrease primarily resulted from an increase in accounts payable and
accrued and other current liabilities offset by an increase in other
receivables.
Capital expenditures for the six months ended April 2, 1997 was $25.2 million,
up from $18.3 million for the six months ended April 3, 1996. Capital
expenditures are estimated to approximate $70.0 million during fiscal year 1997.
In addition, due to a wide variety of environmental laws and regulations,
including compliance with the cluster rules, the Company anticipates that
aggregate capital expenditures related to environmental compliance will
approximate $90.0 million through the end of fiscal year 2000, assuming the
cluster rules are adopted. The Company believes that cash generated by
operations and amounts available under its revolving credit facility will be
sufficient to meet its ongoing operating and capital expenditure requirements.
Net cash used in financing activities was lower during the six months ended
April 2, 1997 compared to the corresponding quarter of the previous year,
primarily due to the refinancing and issuance of industrial revenue bonds and
differences in optional and excess cash flow prepayments made with respect to
the Company's term loan facilities. The Company paid optional prepayments of
its term loans equaling $ 24.0 million and $ 74.9 million during the six months
ended April 2, 1997 and April 3, 1996, respectively.
-16-
<PAGE>
Debt and Preferred Stock
At April 2, 1997, the Company's long-term debt was $861.7 million compared to
$902.5 million at October 2, 1996, a decrease of $40.8 million. The current
maturities of long-term debt balance of $48.6 million at April 2, 1997 primarily
represents the amounts payable in June 1997 and December 1997 under the
Company's term loan facilities.
Warren has a $250.0 million revolving credit facility to finance working capital
needs. At April 2, 1997, Warren did not have any borrowings outstanding under
this facility, resulting in an unused borrowing capacity of approximately $249.0
million, after giving effect to outstanding letters of credit, which may be used
to finance working capital needs. Warren is required to pay a commitment fee,
which is based on the achievement of a certain financial ratio, of between
0.375% and 0.5% per annum on the average daily unused commitment available under
the revolving credit facility.
In addition, Warren had approximately $150.8 million of letters of credit
outstanding under its letter of credit facility at each of April 2, 1997 and
October 2, 1996. Warren pays a commission, which is based on the achievement of
a certain financial ratio, of between 1.00% and 2.50% on outstanding letters of
credit and an issuance fee of between 0.125% and 0.25% per annum on letters of
credit issued.
On February 7, 1997, the Company amended certain provisions of the credit
agreement, as discussed in the Notes to Unaudited Condensed Consolidated
Financial Statements, including the interest coverage covenant, the optional
prepayment terms and, in order to permit the granting of senior liens in
connection with the refinancing of certain of the Company's industrial revenue
bonds, the covenant restricting certain liens.
On March 5, 1997, pursuant to a loan agreement with the town of Skowhegan,
Maine, the Company expanded and refinanced certain environmental and solid waste
projects at its Somerset mill by redeeming or refunding revenue bonds
aggregating $23.7 million, defeasing revenue bonds aggregating $4.4 million and
issuing new bonds aggregating $38.1 million. The new bonds are due from 2000 to
2015 and bear interest at rates ranging from 6.65% to 8.00% per annum. The
extraordinary gain resulting from the extinguishment of the original bonds, net
of taxes of $0.6 million, was $0.9 million. In connection with this
transaction, an outstanding letter of credit was reduced by $19.7 million. The
agreement under which the $4.4 million in bonds was defeased required the
Company to purchase U.S. Treasury securities to be held by a trustee in an
amount that will cover the interest payments required to be paid to the holders
of these bonds until the first call date on the bonds, as well as the principle
due at that date. In the event that the U.S. treasury securities, together with
income earned on these securities, do not cover interest and principle on the
defeased bonds, the Company will be liable for such deficiency.
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.
-17-
<PAGE>
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 in
1997 and compliance with the rules may be required beginning in 2000. 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 2000. 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
Environmental Quality ("DEQ") 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 451 (Part 31 of the Natural Resources and
Environmental Protection 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 DEQ 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.
-18-
<PAGE>
The Company has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for cleanup
of contamination at seven sites. Based upon the Company's understanding of the
total amount of liability at each site, its calculation of its percentage share
in each proceeding, and the number of potentially responsible parties at each
site, the Company presently believes that its aggregate exposure for these
matters is not material. Moreover, as a result of the Acquisition, 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 demolition project in progress at its Westbrook
Facility for health and safety reasons which is expected to be completed in the
year 2001. Total costs of the project are estimated to be approximately $9.0
million, of which approximately $5.7 million had been spent as of April 2, 1997.
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 or that any additional measures
necessary to fund the shortfall will not result in material increases in the
Company's workers compensation premiums.
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.
Labor Relations
On February 6, 1997, the Company reached settlement on a new six-year labor
agreement with its three Somerset, Maine mill unions, concluding sixteen months
of negotiations. The ratified contract, which is effective immediately,
reflects more flexible work rule provisions and a 3% annual wage increase for
the term of the agreement. The Company has experienced improved productivity at
the Somerset facility since mid-December, when the terms of the new work rules
were first implemented prior to ratification.
Force Majeure 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. On March 26, 1997, the Company
reached an agreement with its insurance carrier pursuant to which it recovered
substantially all the lost inventory value, excluding the deductible of $0.5
million.
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 has since been repaired and normal operating mill
conditions have been restored. Total losses are not expected to exceed the
Company's insurance coverage limits, which include both business interruption
and property loss coverage. The Company had as of April 2, 1997, accrued an
estimate of $44.7 million for costs to refurbish plant assets at the Westbrook
facility, of which $27.5 million has been received as insurance proceeds at
April 2, 1997 with the remainder, net of a deductible of $3.5 million, included
in other receivables in the condensed consolidated
-19-
<PAGE>
balance sheet at April 2, 1997. In addition, the Company has accrued $9.0
million during the quarter ended April 2, 1997, representing a portion of the
business interruption claim submitted for the interference caused by the
Westbrook flood, which primarily took place during the quarter ended January 1,
1997.
Long-Term Contracts
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 is supplied generally at market prices.
Pulp prices are discounted due to the elimination of freight costs associated
with delivering pulp to Warren's Mobile paper mill and pulp quantities is
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 are generally be based upon cost. Prior to the Acquisition, Scott sold
its energy facility at Mobile to Mobile Energy Services Corporation ("MESC").
In connection with the sale of the energy facility, MESC entered into a long-
term agreement with Warren to provide electric power and steam to the paper mill
at rates generally comparable to market tariffs, including fuel cost and capital
recovery components. Scott, MESC and Warren have also entered into a long-term
shared facilities and services agreement (the "Shared Facilities Agreement")
with respect to medical and security services, common roads and parking areas,
office space and similar items and a comprehensive master operating agreement
providing for the coordination of services and integration of operations among
the energy facility, the paper mill, the pulp mill and the tissue mill. Annual
fees under the Shared Facilities Agreement are expected to be approximately $1.5
million per year through the 25 year term of the agreement. Warren has the
option to cancel certain non-essential services covered by the Shared Services
Agreement at any time prior to the end of the 25 year term.
A substantial portion of the Company's electricity requirements are satisfied
through cogeneration agreements ("Power Purchase Agreements" or "Agreements")
whereby the Somerset and Westbrook mills each cogenerate electricity and sell
the output to Central Maine Power Company ("CMP"). The Westbrook and Somerset
Agreements require CMP to purchase such energy produced by these cogeneration
facilities at above market rates which has reduced the Company's historical cost
of electrical energy. The Westbrook Agreement expires October 31, 1997 and the
Somerset Agreement expires in the year 2012. The favorable pricing element of
the Somerset Agreement will end on November 30, 1997. The agreements also
require the mills to purchase electricity from CMP at the standard industrial
tariff rate. To 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 three months
and six months ended April 2, 1997 amortization expense related to this asset
approximated $3 million and $6 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, it is the present opinion of
the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's financial position, results of operations or
cash flows.
-20-
<PAGE>
Regulatory Matters
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.
Control by Sappi
On November 27, 1996, Sappi Limited ("Sappi") agreed to acquire (the "Minority
Acquisition"), subject to certain customary conditions, the minority common
equity interests in the Company's parent SDW Holdings Corporation ("Holdings"),
held by DLJ Merchant Banking Partners, L.P.; DLJ International Partners, C.V.;
DLJ Offshore Partners, C.V.; DLJ Merchant Banking Funding, Inc.; DLJ First ESC
L.L.C.; and UBS Capital L.L.C. (the "Sellers"). Jointly, the sellers own
approximately 22% of the common equity of Holdings on a fully-diluted basis.
Under the terms of the agreement, Sappi has agreed to purchase the Sellers'
interests at a price of $138.0 million, or $17.25 per share of common stock
within 180 days of the date of execution of the agreement. Following the
Minority Acquisition, Sappi will own in excess of 97% of the common equity of
Holdings on a fully diluted basis. Sappi has agreed to use reasonable efforts
to acquire the remaining common equity interests in Holdings within 120 days of
the closing of the Minority Acquisition.
Considerations Relating to Holdings' Cash Obligations
Because Holdings has no material assets other than the outstanding common stock
of Warren (all of which is pledged to the lenders under the Company's 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
preferred stock, which was issued in connection with the Acquisition, is not
mandatorily redeemable (except upon the occurrence of certain specified events)
and provides that dividends need not be paid in cash until the year 2000.
Holdings does, however, have various obligations with respect to its equity
securities (including in respect of registration rights granted by Holdings)
that have required and are likely to continue to require cash expenditures by
Holdings. The Company believes that the credit agreement, the Indenture and the
Warren 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.
-21-
<PAGE>
New Accounting Pronouncement
In February 1997, the FASB issued FAS No. 128, "Earnings per Share." FAS 128,
which is effective for the Company in the fiscal year 1998, establishes
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common stock. The
implementation of FAS No. 128 is not expected to have a material effect on the
Company's results of operations or financial statement disclosure.
-22-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Intentionally omitted. *
Item 2. Changes in Securities
Intentionally omitted. *
Item 3. Defaults Upon Senior Securities
Intentionally omitted. *
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. *
Item 5. Other Information
Intentionally omitted. *
Item 6. Exhibits and Reports on Form 8-K
Intentionally omitted. *
- --------------------------------------------------------------------------------
* This report is being voluntarily filed with the Commission pursuant to the
registrant's contractual obligations to file with the Commission all financial
information that would be required to be filed on a Form 10-Q. The registrant
is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
-23-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
S.D. Warren Company
Date: May 16, 1997 By: /s/TREVOR LARKAN
- ------------------ --------------------------------------------
Trevor Larkan
Vice President (Principal Financial Officer)
-24-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORMS 10-Q
FOR THE QUARTERS ENDED APRIL 2, 1997 AND JANUARY 1, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> OCT-01-1997 OCT-01-1997
<PERIOD-START> OCT-02-1996 JAN-02-1997
<PERIOD-END> JAN-01-1997 APR-02-1997
<CASH> 67,400 46,800
<SECURITIES> 0 0
<RECEIVABLES> 33,965 42,900
<ALLOWANCES> (6,165) 0
<INVENTORY> 191,700 213,300
<CURRENT-ASSETS> 380,500 390,700
<PP&E> 1,277,000 1,093,600
<DEPRECIATION> (174,600) 0
<TOTAL-ASSETS> 1,734,600 1,732,700
<CURRENT-LIABILITIES> 312,300 294,600
<BONDS> 853,600 0
91,500 95,400
0 0
<COMMON> 0 0
<OTHER-SE> 340,900 348,500
<TOTAL-LIABILITY-AND-EQUITY> 1,734,600 1,732,700
<SALES> 314,500 345,700
<TOTAL-REVENUES> 314,500 345,700
<CGS> 267,200 269,100
<TOTAL-COSTS> 309,800 302,800
<OTHER-EXPENSES> 900 (1,100)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 25,200 26,600
<INCOME-PRETAX> (19,600) 17,400
<INCOME-TAX> (8,000) 6,900
<INCOME-CONTINUING> (11,600) 10,500
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 900
<CHANGES> 0 0
<NET-INCOME> (11,600) 11,400
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