<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1997
REGISTRATION NUMBER 33-88496
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 4
TO
REGISTRATION STATEMENT 33-88496 ON FORM S-1
UNDER THE SECURITIES ACT OF 1933
---------------
S.D. WARREN COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 2621 23-2366983
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>
------------------------
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
(617) 423-7300
(Address, including ZIP Code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
TREVOR L. LARKAN
S.D. WARREN COMPANY
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
(617) 423-7300
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
SARAH MANCHESTER
S.D. WARREN COMPANY
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
617-423-7300
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 27, 1997
S.D. WARREN COMPANY
[LOGO]
$375,000,000
12% SERIES B SENIOR SUBORDINATED NOTES DUE 2004
AND
$75,000,000
14% SERIES B SENIOR EXCHANGEABLE
PREFERRED STOCK DUE 2006
The 12% Series B Senior Subordinated Notes due 2004 (the "Notes") of S.D.
Warren Company (the "Company") bear interest at the rate of 12% per annum,
payable semi-annually on June 15 and December 15 of each year, commencing June
15, 1995 and are redeemable at the option of the Company, in whole or in part,
at any time on or after December 15, 1999 at the redemption prices set forth
herein. See "Description of the Notes--Optional Redemption". The Notes are
unsecured, subordinated obligations of the Company and rank junior in right of
payment to all existing and future Senior Debt (as defined) of the Company,
including the obligations of the Company under the Credit Agreement (as
defined). At July 2, 1997, the aggregate principal amount of such Senior Debt
was $522.7 million. As of the date hereof, the Company has no subordinated
Indebtedness (as defined) other than the Notes. The Notes will rank senior in
right of payment to or PARI PASSU to any subordinated Indebtedness of the
Company issued hereafter. See "Description of the Notes-- Subordination".
Each share of the Company's 14% Series B Senior Exchangeable Preferred Stock
due 2006 (the "Senior Preferred Stock") has a liquidation preference of $25.00
per share and will rank senior to any Junior Securities (as defined) of the
Company issued hereafter. As of the date hereof, the Company has no Junior
Securities outstanding, other than its common stock. Dividends on the Senior
Preferred Stock will accrue and be cumulative from the date of issuance and will
accrue in each period ending on March 15, June 15, September 15 and December 15
of each year at a rate of 14% per annum of (i) the liquidation preference plus
(ii) the amount of accrued but unpaid dividends from prior periods ending on or
prior to December 15, 1999. The Company does not expect to pay dividends on the
Senior Preferred Stock in cash for any period ending on or prior to December 15,
1999. See "Description of the Senior Preferred Stock--Dividends". The Senior
Preferred Stock will be redeemable at the option of the Company, in whole or in
part, at any time on or after December 15, 2001 at the redemption prices set
forth herein. See "Description of the Senior Preferred Stock--Redemption of
Senior Preferred Stock--Optional". The Company is required to redeem the Senior
Preferred Stock on December 15, 2006 at the Specified Amount (as defined). On
any scheduled dividend payment date, the Company may, at its option, exchange
all but not less than all of the shares of Senior Preferred Stock then
outstanding for the Company's 14% Subordinated Exchange Debentures due 2006 (the
"Exchange Debentures"). See "Description of the Senior Preferred
Stock--Exchange" and "Description of the Exchange Debentures".
The Notes, the Senior Preferred Stock and the Exchange Debentures are
referred to collectively herein as the "Securities".
SEE "RISK FACTORS" ON PAGE 11 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is to be used by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJSC") in connection with offers and sales of the Securities in
market making transactions in the over-the-counter market at negotiated prices
related to prevailing market prices at the time of sale. DLJSC may act as
principal or agent in such transactions. The Company will not receive any of the
proceeds from the sale of the Securities.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
The date of this Prospectus is August , 1997
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Securities being offered by this Prospectus. This Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, to which reference is hereby made.
The Registration Statement and the exhibits and schedules thereto may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and at Northwestern Center, 500 West Madison Street (Suite 1400),
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Company files electronic
versions of these filings with the Commission through the Commission's
Electronic Gathering and Retrieval (EDGAR) System, and such electronic filings
are available to the public at the Commission's World Wide Web site at http://
www.sec.gov. As a result of the filing of the Registration Statement with the
Commission, the Company was subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith was required to file periodic reports and other information
with the Commission. The Company is no longer to be subject to the reporting
requirements of the Exchange Act; however the Company has agreed that, for so
long as any of the Securities remain outstanding, it will furnish to the
applicable trustee or transfer agent and the holders of the Securities, as
applicable, and file with the Commission (unless the Commission will not accept
such a filing) (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if the Company was required to file such forms, including a "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all reports that would be required to
be filed with the Commission on Form 8-K if the Company was required to file
such reports.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES,
THE "COMPANY", "S.D. WARREN" OR "WARREN" REFERS TO S.D. WARREN COMPANY. ALL
REFERENCES TO SHIPMENTS REFER TO U.S. DOMESTIC SHIPMENTS OF PAPER, UNLESS
OTHERWISE NOTED. ALL REFERENCES TO FISCAL YEARS IN THIS PROSPECTUS REFER TO THE
COMPANY'S FISCAL YEARS ENDING ON THE LAST SATURDAY IN DECEMBER, EXCEPT FOR
FISCAL 1995 WHICH REFERS TO THE PERIOD FROM DECEMBER 21, 1994 THROUGH SEPTEMBER
27, 1995 (THE "NINE MONTHS ENDED SEPTEMBER 27, 1995"). THIS CHANGE REFLECTS
THAT, EFFECTIVE DECEMBER 20, 1994, THE COMPANY CHANGED ITS FISCAL YEAR TO FISCAL
YEARS ENDING ON THE WEDNESDAY CLOSEST TO SEPTEMBER 30 UNTIL OTHERWISE DETERMINED
BY THE COMPANY'S BOARD OF DIRECTORS.
RISK FACTORS
Before making an investment in the Securities, prospective investors should
consider carefully the factors described in "Risk Factors", including the
consequences of the Company's substantial leverage, the risk that the Company
would be unable to service its debt, the cyclical industry conditions and strong
competiton which the Company faces, the restrictions imposed on the Company by
the Credit Agreement, the dependence of the Company on certain customers, the
subordination of the Securities to Senior Debt of the Company, stringent
regulations faced by the Company and control of the Company by Sappi Limited
("Sappi").
MARKET MAKING PROSPECTUS
This Prospectus will be used by DLJSC in connection with offers and sales of
the Securities in market-making transactions in the over-the-counter market at
negotiated prices related to prevailing market prices at the time of sale. DLJSC
may act as principal or agent in such transactions.
THE COMPANY
The Company manufactures printing, publishing and specialty papers and has
pulp and timberland operations vertically integrated with some of its
manufacturing facilities. The Company is the largest producer of coated free
paper (free of groundwood pulp) in the United States. The Company currently
operates four paper mills with total annual production capacity of approximately
1.5 million tons of paper. The Company also owns a sheeting and distribution
facility in Allentown, Pennsylvania, with annual sheeting capacity of
approximately 90,000 tons, and owns approximately 911,000 acres of timberlands
in the State of Maine.
S.D. Warren is widely recognized for its product quality and technological
innovation in the development and manufacture of coated free paper, which has
allowed Warren to sustain the franchise value of its name-brand products such as
SOMERSET-REGISTERED TRADEMARK-, LUSTRO-REGISTERED TRADEMARK-,
WARRENFLO-REGISTERED TRADEMARK- and PATINA-REGISTERED TRADEMARK-. The Company
has strong customer relationships and a distribution network for coated paper
which includes over 288 merchant distributing locations.
For the nine months ended July 2, 1997, S.D. Warren's sales of domestic
paper products consisted of coated paper (71.8%), uncoated paper (12.6%),
specialty paper (11.7%) and technical and other paper products (3.9%). Coated
paper is used in corporate communications, advertising, brochures, magazine
covers and upscale magazines, catalogues, direct mail promotions and educational
text books. Uncoated paper is used by commercial printers, quick printers, large
in-house copy/printing end-users and small business and home applications.
Specialty and technical papers are used in business from printing, coated fabric
converters, pressure-sensitive laminators, label printers and other niche market
applications.
The Company is a wholly owned subsidiary of SDW Holdings Corporation
("Holdings") which is an indirect wholly-owned subsidiary of Sappi. Holdings'
principal executive offices are located at 2700 Westchester Avenue, Purchase, NY
10577. The telephone number is (914) 696-0021.
3
<PAGE>
On May 27, 1997, Sappi acquired through an indirect wholly-owned subsidiary
all of the common equity interests (including both common stock and common stock
purchase warrants) of Holdings (the "Minority Acquisition") 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. (collectively,
"DLJMB") and UBS Capital L.L.C. ( "UBS") (collectively with DLJMB, the
"Sellers") for an aggregate purchase price of $138.0 million, or $17.25 per
share. Sappi then caused all of the Holdings common stock purchase warrants
acquired in the Minority Acquisition to be exercised. In connection with the
Minority Acquisition, Sappi and the Sellers terminated most of the provisions of
their shareholders agreement (the "Shareholders Agreement"), and the Sellers
have ceased to have any rights or obligations under the remaining provisions.
See "Certain Relationships and Related Transactions--Shareholders Agreement". In
connection with the financing of the Minority Acquisition, Sappi caused the
shares of Holdings common Stock to be sold to Heritage Springer Limited ("HSL"),
which in turn pledged the Holdings common stock to certain lenders. The Holdings
common stock held by HSL is subject to an option for Sappi to reacquire such
securities at any time prior to April 30, 2000, and a right for HSL to require
Sappi to purchase such securities on the occurrence of certain events and at any
time between May 15 and May 30, 2000 (the "HSL Option Agreement"). In addition,
such shares are subject to an irrevocable proxy for Sappi to vote the shares of
Holdings common stock during the term of the HSL Option Agreement. As a result
of the Minority Acquisition and the related financing transaction, Sappi
indirectly owns approximately 75.07%, and controls the voting of approximately
97.34%, of the common equity of Holdings on a fully diluted basis. See "Risk
Factors--Control by Sappi" and "Certain Relationships and Related Transactions--
Minority Acquisition and Merger".
On July 30, 1997, Holdings entered into a merger agreement (the "Merger
Agreement") with SDW Acquisition II Corporation, an indirect subsidiary of Sappi
("Acquisition II"), pursuant to which each issued and outstanding share of
common stock of Holdings held by any party other than Sappi and its affiliates
or HSL will be converted into the right to receive $17.60 per share in cash,
subject to the exercise of appraisal rights. Each outstanding Class A Warrant of
Holdings will become exercisable solely for $5.2708 in cash, each outstanding
Class B Warrant of Holdings will become exercisable solely for $17.60 in cash,
in each case upon payment of the applicable exercise price and satisfaction of
the other terms and conditions of the related warrant agreement, and shares of
Senior Preferred Stock of Holdings (the "Holdings Senior Preferred Stock") will
remain outstanding without amendment, subject to the exercise of appraisal
rights. The Class B common stock of Holdings received by HSL as a result of the
Merger, and any Class A common stock of Holdings received on conversion will be
subject to the HSL Option Agreement and the irrevocable proxy in favor of Sappi.
The Merger Agreement is expected to become effective on or about September 5,
1997, but the Merger Agreement is subject to certain important conditions, and
there can be no assurance that the conditions to the Merger will be satisfied or
waived. If the Merger becomes effective, Sappi will own 100% of the issued and
outstanding voting common stock, and 75.07% of the common equity of Holdings in
the form of new Class A common stock, and HSL will own 24.93% of the common
equity of Holdings in the form of new non-voting Class B common stock of
Holdings. See "Risk Factors--Control by Sappi" and "Certain Relationships and
Related Transactions-- Minority Acquisition and Merger". Neither the Minority
Acquisition nor the Merger will affect the terms or ownership of the outstanding
securities of Warren.
The Company's principal executive offices are located at 225 Franklin
Street, Boston, Massachusetts. The telephone number is (617) 423-7300.
4
<PAGE>
SUMMARY DESCRIPTION OF THE SECURITIES
NOTES:
<TABLE>
<S> <C>
Securities............. $375.0 million aggregate principal amount of 12% Series B Senior
Subordinated Notes due 2004.
Maturity............... December 15, 2004.
Interest............... The Notes bear interest at the rate of 12% per annum, payable
semiannually on June 15 and December 15.
Ranking................ The Notes are general unsecured obligations of the Company and rank
(i) junior in right of payment to all existing and future Senior
Debt (as defined in the indenture pursuant to which the Notes were
issued, the "Indenture") of the Company and (ii) senior in right of
payment to or PARI PASSU in right of payment with all existing and
future subordinated Indebtedness of the Company. At July 2, 1997,
the aggregate principal amount of such Senior Debt was $522.7
million. As of the date hereof, the Company has no subordinated
Indebtedness other than the Notes.
Optional Redemption.... The Notes may be redeemed at the option of the Company, in whole or
in part, on or after December 15, 1999 at a premium declining to
par in 2002, plus accrued and unpaid interest, if any, through the
redemption date. In the event that Holdings consummates one or more
public offerings of its common stock on or before December 15,
1997, the Company may, at its option, redeem up to $130.0 million
in aggregate principal amount of Notes with the net proceeds
therefrom at 111.0% of the aggregate principal amount thereof, plus
accrued and unpaid interest through the redemption date; PROVIDED,
that at least $245.0 million in aggregate principal amount of Notes
remains outstanding following such redemption. See "Description of
the Notes-- Optional Redemption".
Change of Control...... In the event of a Change of Control, the holders of the Notes will
have the right to require the Company to purchase their Notes at a
price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the date of purchase. See
"Description of the Notes--Repurchase at the Option of
Holders--Change of Control".
Covenants.............. The Indenture contains certain covenants that, among other things,
limit the ability of the Company and its subsidiaries to incur
additional Indebtedness and issue preferred stock, pay dividends or
make other distributions, repurchase Equity Interests (as defined)
or PARI PASSU or subordinated Indebtedness, make Restricted
Investments (as defined), engage in sale and leaseback
transactions, create certain liens, enter into certain transactions
with affiliates, sell assets, issue or sell Equity Interests of the
Company's subsidiaries or enter into certain mergers and
consolidations. In addition, under certain circumstances, the
Company will be required to offer to purchase Notes at a price
equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase, with the proceeds of
certain Asset Sales (as defined). See "Description of the
Notes--Certain Covenants;--Repurchase at the Option of
Holders--Asset Sales".
</TABLE>
SENIOR PREFERRED STOCK:
<TABLE>
<S> <C>
Securities............. 3,000,000 shares of 14% Series B Senior Exchangeable Preferred
Stock due 2006 of the Company.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Dividends.............. The Company may elect not to pay dividends in cash on or prior to
December 15, 1999, in which case such unpaid dividends shall accrue
and become part of the Specified Amount of the Senior Preferred
Stock upon which dividends must be paid. Dividends on each share
will accrue in each period ending on March 15, June 15, September
15 and December 15 of each year (each a "Dividend Accrual Date"),
in an amount equal to 14% per annum of the Specified Amount
thereof, defined as the sum of (A) such share's liquidation
preference of $25.00 and (B) the amount of dividends with respect
to such share that accrued in prior dividend accrual periods ending
on or prior to December 15, 1999 and were not previously paid in
cash (the "Accumulated Dividends"). It is not anticipated that the
Company will pay any dividends in cash for any period ending on or
prior to December 15, 1999.
Liquidity of Market.... In addition, the terms of the Credit Agreement and the Indenture
limit the amount of cash dividends the Company may pay with respect
to the Senior Preferred Stock and other equity securities both
before and after December 15, 1999.
Liquidation
Preference............ $25.00 per share.
Specified Amount....... The Specified Amount of the Senior Preferred Stock consists of the
Liquidation Preference plus the Accumulated Dividends. As of July
2, 1997, the Specified Amount was $35.64 per share.
Ranking................ The Senior Preferred Stock ranks senior in right of payment with
respect to all Junior Securities (as defined) and PARI PASSU in
right of payment with respect to all Parity Securities (as
defined).
Optional Redemption.... The Senior Preferred Stock is redeemable at the option of the
Company, in whole or in part, at any time on or after December 15,
2001 at a premium declining to par in 2004, plus all accrued and
unpaid dividends, if any. In the event that Holdings consummates
one or more public offerings of its common stock on or before
December 15, 1997, the Company may, at its option, redeem the
Senior Preferred Stock with the proceeds therefrom at a redemption
price equal to 113.0% of the Specified Amount, plus all accrued and
unpaid dividends (other than Accumulated Dividends), if any,
through the redemption date; PROVIDED, that at least $50.0 million
in aggregate Specified Amount of Senior Preferred Stock remains
outstanding immediately following such redemption. See "Description
of the Senior Preferred Stock-- Redemption of Senior Preferred
Stock--Optional".
Mandatory Redemption... The Company is required to redeem the Senior Preferred Stock on
December 15, 2006 at a redemption price equal to the Specified
Amount thereof plus all accrued and unpaid dividends (other than
Accumulated Dividends), if any, through the date of redemption.
Change of Control...... In the event of a Change of Control (as defined), holders of Senior
Preferred Stock will have the right to require the Company to
redeem their Senior Preferred Stock, in whole or in part, at a
price equal to 101% of the Specified Amount thereof, plus accrued
and unpaid dividends (other than Accumulated Dividends), if any, to
the date of purchase. See "Description of the Senior Preferred
Stock--Change of Control".
Voting Rights.......... Holders of Senior Preferred Stock will have limited voting rights,
including (i) those required by law and (ii) that holders of a
majority of the outstanding shares of Senior Preferred Stock,
voting as a separate class, will (a) upon the failure of the
Company (1) with respect to dividend accrual periods ending on
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
and after March 15, 2000, to pay for more than six consecutive
dividend accrual periods dividends in cash equal to the dividend
that accrued during such dividend accrual period, (2) to satisfy
any mandatory redemption obligation with respect to the Senior
Preferred Stock, (3) to make a Change of Control Offer within 30
days following any Change of Control or (4) to comply with the
covenants set forth in the Certificate of Designations, be entitled
to elect two members to the Board of Directors of the Company, (b)
have the right to approve each issuance by the Company of any
Senior Securities or Parity Securities (other than Senior Preferred
Stock), except that without the approval of the holders of Senior
Preferred Stock, the Company may issue and have outstanding shares
of Parity Securities issued from time to time in exchange for, or
the proceeds of which are used to redeem or repurchase, any or all
of the shares of Senior Preferred Stock or other Parity Securities
and (c) have the right to approve certain mergers, consolidations
and sales of assets. See "Description of the Senior Preferred
Stock--Voting Rights".
Covenants.............. The Certificate of Designations for the Senior Preferred Stock (the
"Certificate of Designations") contains customary covenants that:
(i) limit the ability of the Company to redeem or repurchase Junior
Securities or Parity Securities and pay dividends thereon, (ii)
prohibit, under certain circumstances, certain mergers and
consolidations of and sales of assets by the Company, (iii)
restrict transactions with affiliates and (iv) require the Company
to deliver certain reports and information to the holders.
Exchange Feature....... On any scheduled dividend payment date, the Company may, at its
option, exchange all but not less than all of the shares of Senior
Preferred Stock then outstanding for Exchange Debentures in a
principal amount equal to the Specified Amount of Senior Preferred
Stock held by such holder at the time of such exchange.
</TABLE>
EXCHANGE DEBENTURES:
<TABLE>
<S> <C>
Securities............. 14% Subordinated Exchange Debentures due 2006, limited in principal
amount to the Specified Amount of the Senior Preferred Stock
outstanding on the Exchange Date (as defined), plus such principal
amount of additional Exchange Debentures as may be issued in lieu
of cash interest.
Maturity............... December 15, 2006
Interest............... The Exchange Debentures will bear interest at the rate of 14% per
annum, payable semiannually on June 15 and December 15, commencing
with the first of such dates to occur after the Exchange Date. On
or prior to December 15, 1999, interest may, at the option of the
Company, be paid in cash or by issuing additional Exchange
Debentures with a principal amount equal to such interest. After
December 15, 1999, interest on the Exchange Debentures may be paid
only in cash.
Ranking................ The Exchange Debentures will be unsecured obligations of the
Company, subordinate to all existing and future Senior Debt (as
defined in the indenture pursuant to which the Exchange Debentures
will be issued, the "Exchange Debenture Indenture") of the Company,
including the obligations of the Company under the Credit Agreement
and the Notes. At July 2, 1997, the aggregate amount of such Senior
Debt was $522.7 million.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Optional Redemption.... The Exchange Debentures may be redeemed at the option of the
Company, in whole or in part, on or after December 15, 2001 at a
premium declining to par in 2004, plus accrued and unpaid interest
and Liquidated Damages, if any, through the redemption date. In the
event that Holdings consummates one or more public offerings of its
common stock on or before December 15, 1997, the Company may, at
its option, redeem Exchange Debentures with the net proceeds
therefrom at a redemption price equal to 113.0% of the aggregate
principal amount thereof, plus accrued and unpaid interest through
the redemption date; PROVIDED, that at least $50.0 million in
aggregate principal amount of Exchange Debentures remains
outstanding immediately following such redemption. See "Description
of the Exchange Debentures--Optional Redemption".
Change of Control...... In the event of a Change of Control, the holders of the Exchange
Debentures will have the right to require the Company to purchase
their Exchange Debentures at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest to the
date of purchase. See "Description of the Exchange
Debentures--Change of Control".
Certain Covenants...... The Exchange Debenture Indenture will contain covenants similar to
the covenants with respect to the Senior Preferred Stock and will
also limit the ability of the Company and its subsidiaries to incur
additional Indebtedness and issue preferred stock, pay dividends or
make other distributions, repurchase Equity Interests or
subordinated Indebtedness or make certain Restricted Investments.
</TABLE>
8
<PAGE>
SUMMARY FINANCIAL DATA (1)
The following table sets forth selected consolidated operating data, share
data, consolidated balance sheet data and other financial data for S.D. Warren
and the Predecessor Corporation (as defined in the Notes to Financial Statements
appearing elsewhere in this Prospectus). The selected financial data for the
twelve months ended December 25, 1993 have been obtained from audited financial
statements. The selected financial data for 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 are derived from the consolidated financial
statements of Warren 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 Warren by the
Predecessor Corporation's parent, Scott Paper Company, in connection with the
Acquisition. The selected financial data for the nine months ended July 2, 1997
and July 3, 1996 are derived from the unaudited financial statements 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 Corporation and Warren are not necessarily comparable as a result of
a new basis of accounting for Warren and the adoption of certain accounting
policies. This data should be read in conjunction with Warren's Financial
Statements and the Notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
PERIOD PERIOD TWELVE
TWELVE TWELVE SEPTEMBER 25, DECEMBER 21, MONTHS
MONTHS ENDED MONTHS ENDED NINE MONTHS 1994 THROUGH 1994 THROUGH ENDED
DECEMBER 26, DECEMBER 25, ENDED SEPTEMBER DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1992(2) 1993 24, 1994 1994 1995 1996
------------ ------------ --------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
(DOLLARS IN MILLIONS)
<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 charges............. -- 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 (loss)................. 50.6 (4.6) 16.8 15.0 42.1 4.8
Cash Flow Data:
Net cash provided by operating
activities...................... $ 141.9 $ 130.3 $ 27.8 $ 53.7 $ 136.0 $ 216.6
Net cash used in investing
activities...................... (56.3) (73.7) (46.4) (14.5) (1,489.6) (48.6)
Net cash provided by (used in)
financing activities............ (85.4) (55.8) 21.2 31.1 1,340.8 (181.2)
OTHER FINANCIAL DATA:
Adjusted EBITDA (3)............... $ 183.1 $ 169.5 $ 105.9 $ 56.5 $ 255.3 $ 227.7
Capital expenditures.............. 70.1 68.9 32.3 14.5 33.7 51.3
Depreciation, cost of timber
harvested and amortization...... 91.6 93.1 71.6 28.8 89.8 115.2
Ratio of earnings to fixed charges
(4)............................. 5.8x 1.1x 3.1x 8.3x 1.4x (5)
<CAPTION>
<S> <C> <C>
NINE NINE
MONTHS MONTHS
ENDED ENDED
JULY 3, JULY 2,
1996 1997
--------- ---------
<S> <C> <C>
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................. $ 1,066.7 $ 1,009.3
Gross profit...................... 191.9 189.9
Selling, general and
administrative expense.......... 98.0 100.6
Restructuring charges............. -- 10.0
Income from operations............ 93.9 79.3
Other income (expense), net....... (0.6) 3.4
Interest expense.................. 84.3 77.8
Income tax expense................ 3.6 1.8
Extraordinary item, net of tax.... (2.0) 0.9
Net income (loss)................. 3.4 4.0
Cash Flow Data:
Net cash provided by operating
activities...................... $ 147.4 $ 108.6
Net cash used in investing
activities...................... (30.0) (54.0)
Net cash provided by (used in)
financing activities............ (177.8) (45.4)
OTHER FINANCIAL DATA:
Adjusted EBITDA (3)............... $ 173.5 $ 171.0
Capital expenditures.............. 32.2 38.8
Depreciation, cost of timber
harvested and amortization...... 85.9 88.6
Ratio of earnings to fixed charges
(4)............................. (5) (5)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AT JULY 2, 1997
------------------
<S> <C>
(DOLLARS IN
MILLIONS)
BALANCE SHEET DATA:
Working capital............................................................................................. $ 96.9
Plant assets (net).......................................................................................... 1,082.8
Total assets................................................................................................ 1,696.4
Total debt (including current maturities)................................................................... 897.7
Senior preferred stock (6).................................................................................. 99.2
Stockholder's equity........................................................................................ 348.9
</TABLE>
- ------------------------
(1) For a more detailed presentation of the Company's financial statements, see
"Selected Historical Financial Data" and the Company's Financial Statements
included herein.
(2) Includes the revision in the estimated useful lives used to compute
depreciation for certain equipment which increased net income by
approximately $26.2 million as well as the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" which reduced net income by
approximately $6.1 million.
(3) Adjusted EBITDA is defined as income from operations before restructuring
expense (as shown above) plus depreciation, cost of timber harvested and
amortization (excluding amortization of deferred financing fees). Based on
its experience in the paper industry, the Company's management believes that
Adjusted EBITDA and related measures of cash flow serve as important tools
for measuring paper companies in several areas such as liquidity, operating
performance, and leverage, and for assessing the ability to service and
incur debt. Management interprets the trend in Adjusted EBITDA on an
annualized basis over the periods shown to indicate a general improvement in
these measures and improved ability to service and incur debt, with the
exception of the first nine months of fiscal 1997 which reflects lower gross
profit. Adjusted EBITDA should not be considered by an investor as an
alternative to GAAP operating income, as an indicator of the Company's
operating performance, as an alternative to the Company's cash flow from
operating activities or as a measure of liquidity. Investors should be
cautioned that Adjusted EBITDA as shown above may not be comparable to
similarly titled measures presented by other companies, and comparisons
could be misleading unless all companies and analysts calculate these
measures in the same fashion.
(4) For purposes of computing the ratio of earnings to fixed charges, fixed
charges consist of interest expense on long-term debt, amortization of
deferred financing costs, accrued dividends on the Senior Preferred Stock on
a pre-tax basis, and that portion (one-third) of rentals deemed to be
representative of interest. Earnings consist of income before income taxes,
plus fixed charges.
(5) For the periods ended October 2, 1996, July 3, 1996, and July 2, 1997, the
Company's earnings were insufficient to cover fixed charges by $13.0
million, $9.5 million and $15.1 million, respectively.
(6) Liquidation value was $106.9 million at July 2, 1997.
10
<PAGE>
FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that this discussion and analysis
contains certain "forward-looking statements" as that term is defined under the
Private Securities Litigation Reform Act of 1995. The words "believe,"
"anticipate," "intend," "estimate," "plan," "assume" and other similar
expressions which are predictions of or indicate events and future trends which
do not relate to historical matters identify forward-looking statements.
Reliance should not be placed on forward-looking statements because they involve
known and unknown risks, uncertainties and other factors which are in some cases
beyond the control of the Company and may cause the actual results, performance
or achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such
forward-looking statements. Certain factors that may cause such differences
include, but are not limited to the following: 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 the
Company's 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. These and other factors
that might cause differences between actual and anticipated results, performance
and achievements are discussed in greater detail below.
RISK FACTORS
Prospective investors should consider carefully the following summary of
material risk factors in addition to other information included in this
Prospectus before making an investment in the Securities.
CONSEQUENCES OF SUBSTANTIAL LEVERAGE FOR THE COMPANY AND SECURITY HOLDERS
In connection with the Acquisition, the Company incurred substantial
indebtedness. Consequently, the Company has significant debt service
obligations. As of July 2, 1997, the Company had total outstanding long-term
indebtedness (including the current portion thereof) of $897.7 million and
redeemable preferred stock plus stockholder's equity of $448.1 million,
resulting in a debt to equity and preferred stock ratio of 2.0 to 1. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
The degree to which the Company is leveraged could have important
consequences to holders of the Securities, including the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) certain of the Company's borrowings are and will continue to be
at variable rates of interest, which exposes the Company to the risk of
increased interest rates; (iv) the indebtedness outstanding under the Bank
Financing is secured by substantially all the assets of the Company and matures
prior to the maturity of the Notes and the Exchange Debentures, if issued, and
prior to the date on which the Senior Preferred Stock is required to be
redeemed; (v) the Company may be substantially more leveraged than certain of
its competitors, which may place the Company at a competitive disadvantage; and
(vi) the Company's substantial degree of leverage may hinder its ability to
adjust rapidly to changing market conditions and could make it more vulnerable
in the event of a downturn in general economic conditions or its business. See
"Description of the Credit Agreement and the A/R Facility"; "Description of the
Notes"; and "Description of the Senior Preferred Stock".
RISK OF INABILITY TO SERVICE DEBT AND PREFERRED STOCK
The ability of the Company to make scheduled payments or to refinance its
obligations with respect to its indebtedness depends on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control.
There can be no assurance that its operating results will be sufficient for
payment of its indebtedness in the future.
11
<PAGE>
The Company's operating results will need to be of sufficient magnitude to
meet its debt service obligations, including with respect to the Notes and, if
issued, the Exchange Debentures, and to make mandatory redemption payments with
respect to the Senior Preferred Stock. The Company's operating results have been
negatively affected by market conditions in recent periods and accordingly there
can be no assurance that the Company's operating results will be of sufficient
magnitude to enable the Company to meet its debt service obligations. In the
absence of such operating results, the Company could face substantial liquidity
problems and might be required to dispose of material assets or operations to
meet its debt service and other obligations, and there can be no assurance as to
the timing of such sales or the proceeds which the Company could realize
therefrom. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
CYCLICAL INDUSTRY CONDITIONS; STRONG COMPETITION
The markets for the Company's products are highly cyclical, characterized by
periods of supply and demand imbalance. Between 1988 and 1993, the rate of
growth of demand slowed as a result of the world-wide recession. Conversely,
coated paper capacity increased significantly in North America over such period.
In addition, in 1992, North American imports from Europe increased as a result
of excess capacity in Europe and a devaluation in certain European currencies in
relation to the U.S. dollar, causing North American prices to deteriorate.
The large supply-demand imbalance as a result of significant capacity
additions and, to a lesser degree, imports from Europe caused operating margins
of the Company and its competitors to decline over the period from 1988 through
early 1994. Beginning in mid-1994, however, the industry rebounded from this
decline, with several price increases announced throughout the industry.
However, since the third quarter of 1995, demand for the Company's products
decreased. Accordingly, demand was lower during fiscal year 1996 as compared to
demand levels during the second half of fiscal 1995. This decrease is due to a
softening in orders experienced by the industry across certain product lines
primarily resulting from merchants, printers and other converters reducing their
inventory levels which had increased above normal levels. The decline in demand
resulted in reduced prices, with discounting occurring on certain paper product
grades. Accordingly, the Company realized lower net selling prices per ton
during fiscal year 1996 as compared to prices realized during the second half of
fiscal year 1995. However, because the impact of the increase in prices in 1995
was not realized until the latter half of fiscal year 1995, net selling prices
realized during fiscal year 1996 remained relatively flat as compared to those
prices realized during the twelve month period ended September 27, 1995. In
addition, the cost of raw materials decreased during fiscal year 1996 as
compared to prices at the end of fiscal year 1995 due to the decrease in the
market price of pulp. However, the Company manufactures approximately 65% of its
pulp requirements which reduces its ability to benefit from (and its exposure
to) fluctuations in the market price for pulp.
As a result of the weaker market conditions, the Company temporarily reduced
production levels at certain of its manufacturing facilities during the first
quarter of fiscal year 1996. The reduction of inventory levels by the Company's
customers and the weaker market conditions continued into the summer months
which are typically strong due to increased demand from catalog printers. In
addition, new coated paper capacity scheduled for the end of calendar year 1997
in Europe as well as certain machine conversions during 1997 to coated free
sheet manufacture in the United States is expected to increase competition for
market share and may delay any improvement in market conditions. The paper
market is highly cyclical and to the extent that the weaker market trend does
not reverse or becomes more pervasive within the Company's existing product
lines, the Company's sales, gross margins and cash flows will continue to be
adversely affected.
In addition, the North American coated paper industry is highly competitive.
The Company competes mainly with U.S. and Canadian producers of coated free
paper, and, to a lesser degree, European producers. Manufacturers of coated free
paper compete primarily on the basis of quality, service, price and breadth of
product line, as well as product innovation and sales and distribution support.
Certain of the Company's competitors have greater financial resources than the
Company and certain of the mills
12
<PAGE>
operated by its competitors may be lower cost producers of pulp and coated paper
than certain of the mills operated by the Company. See "Business--Competition".
RESTRICTIONS IMPOSED BY THE CREDIT AGREEMENT
The Company's credit agreement with respect to the Bank Financing (the
"Credit Agreement") contains a number of significant covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
assets, incur debt, pay dividends, create liens, make capital expenditures and
make certain investments or acquisitions and otherwise restrict corporate
activities. In addition, under the Credit Agreement, the Company is required to
maintain a minimum level of net worth and specified financial ratios, including
maximum leverage and minimum interest coverage ratios. The ability of the
Company to comply with such provisions may be affected by events beyond the
Company's control. In order to comply with some of these covenants, the Company
will be required to achieve financial and operating results which are similar to
those achieved last year. There can be no assurance that such results will be
achieved.
The breach of any of the covenants could result in a default under the
Credit Agreement. In the event of any such default, depending on the actions
taken by the lenders thereunder (the "Lenders"), the Company could be prohibited
from making any payments of principal or interest on the Notes and, if issued,
the Exchange Debentures and from paying dividends on the Senior Preferred Stock.
In addition, the Lenders could elect to declare all amounts borrowed under the
Credit Agreement, together with accrued interest, to be due and payable. If the
Company were unable to repay such borrowings, the Lenders could proceed against
their collateral. If the indebtedness under the Credit Agreement were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay such indebtedness and any of the Securities in full. See
"Description of the Credit Agreement and the Accounts Receivable Facility";
"Description of the Notes--Subordination"; "Description of the Senior Preferred
Stock--Dividends"; and "Description of the Exchange Debentures--Subordination".
DEPENDENCE ON PRINCIPAL CUSTOMERS
For the year ended October 2, 1996 and for the nine months ended July 2,
1997, the Company's customers that individually accounted for greater than 10%
of sales were divisions or subsidiaries of International Paper Company, Central
National-Gottesman Inc. and Alco Standard Corporation. Each of these customers
is a merchant that resells the Company's paper products to a wide range of
end-users. As indicated in the Notes to Financial Statements, the loss of any
one of these customers could have a material adverse effect on the Company's
business and results of operations. See "Business--Customers" and the Notes to
Financial Statements.
SUBORDINATION OF NOTES TO SIGNIFICANT SENIOR DEBT
The Notes are unsecured obligations of the Company and are subordinated in
right of payment to all existing and future Senior Debt (as defined in the
Indenture) of the Company. At July 2, 1997, the aggregate principal amount of
such Senior Debt was $522.7 million. As of the date hereof, the Company has no
subordinated Indebtedness other than the Notes. In the event of the bankruptcy,
liquidation or reorganization of the Company, the assets of the Company will be
available to pay obligations on the Notes only after all such Senior Debt of the
Company has been paid in full, and there may not be sufficient assets remaining
to pay amounts due on any or all of the Notes then outstanding. Additional
indebtedness, including Senior Debt, may be incurred by the Company and its
Subsidiaries from time to time, subject to the terms of the Indenture. In
addition, although the Notes may be guaranteed in the future by certain of the
Company's subsidiaries of a certain size, the Notes will be structurally
subordinated to any liabilities or obligations of any subsidiary of the Company
which is not a Guarantor (as defined) and, in any event, will be contractually
subordinated, in accordance with the terms of the Indenture, to such Senior Debt
of each subsidiary which is a Guarantor. See "Description of the
Notes--Subordination".
13
<PAGE>
JUNIOR RANKING OF SENIOR PREFERRED STOCK AND SUBORDINATION OF
EXCHANGE DEBENTURES TO SIGNIFICANT SENIOR DEBT
The Senior Preferred Stock ranks junior in right of payment to all existing
and future liabilities and obligations (whether or not for borrowed money) of
the Company, PARI PASSU with each other class of capital stock or series of
preferred stock issued by the Company that specifically provides that such
series will rank on a parity with Senior Preferred Stock and senior in right of
payment to all common stock and each other class of capital stock or series of
preferred stock issued by the Company that specifically provides that such
series will rank junior to the Senior Preferred Stock or which do not specify
their rank. The holders of the Senior Preferred Stock will have limited voting
rights. See "Description of the Senior Preferred Stock--Rank--Voting Rights".
The Exchange Debentures will be unsecured obligations of the Company and
will be subordinated in right of payment to all existing and future Senior Debt
(as defined in the Exchange Debenture Indenture) of the Company, including the
obligations of the Company under the Credit Agreement, the A/R Facility and the
Notes. At July 2, 1997, the aggregate principal amount of such Senior Debt was
$522.7 million. In the event of bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be available to pay obligations on the
Exchange Debentures only after all such Senior Debt of the Company has been paid
in full, and there may not be sufficient assets remaining to pay amounts due on
any or all of the Exchange Debentures then outstanding. Additional indebtedness,
including Senior Debt, may be incurred by the Company and its subsidiaries from
time to time, subject to the terms of the Exchange Debenture Indenture. In
addition, the Exchange Debentures will be structurally subordinated to any
liabilities or obligations of the Company's subsidiaries. See "Description of
the Exchange Debentures-- Subordination".
STRINGENT ENVIRONMENTAL REGULATION; PROPOSED TIMBER REGULATION
The Company and its operations are subject to a wide range of environmental
laws and regulations relating to, among other matters, air emissions, wastewater
discharges, landfill operations and hazardous waste management. Compliance with
these laws and regulations is an increasingly important factor in the Company's
business. The Company will continue to incur capital and operating expenditures
to maintain compliance with applicable federal and state environmental laws and
to meet new regulatory requirements. Such new requirements include the proposed
regulations announced in November 1993 by the United States Environmental
Protection Agency (the "EPA") that would require more stringent controls on air
and water discharges from pulp and paper mills (generally referred to as the
"cluster rules"). Final promulgation of portions of the cluster rules is
expected to occur in late 1997 with compliance with the rules required beginning
in 2000. It is expected that the cluster rules, if adopted as currently
proposed, will require the Company to incur approximately $70.0 million to $90.0
million of capital expenditures through 2000. The Company also anticipates that
through 2000, it will incur an additional $10.0 million to $20.0 million of
capital expenditures related to environmental compliance, other than as a result
of the cluster rules. The ultimate financial impact of the proposed cluster
rules on the Company will depend upon the nature of the final regulations, the
timing of required implementation and the cost and availability of new
technology. Expenditures to comply with proposed and future environmental laws
and regulations could have a material adverse effect on the Company's business
and financial condition. See "Business-- Environmental and Safety Matters".
In addition to conventional pollutants, minute quantities of dioxins and
other chlorinated organic compounds may be contained in the wastewater effluent
of the Company's bleached kraft pulp mills in Somerset and Westbrook, Maine and
Muskegon, Michigan. The most recent National Pollutant Discharge Elimination
System ("NPDES") wastewater permit limits proposed by the EPA would limit dioxin
discharges from the Company's Somerset and Westbrook mills to less than the
level of detectability. The Company is presently meeting the EPA's proposed
dioxin limits but it is not meeting the proposed limits for other parameters
(E.G., temperature and color) and is attempting to revise these other wastewater
permit limits for its facilities. While the permit limitations at these two
facilities are being challenged, the Company continues to operate under existing
EPA permits, which have technically expired, in accordance
14
<PAGE>
with accepted administrative practice. In addition, the Muskegon mill is
involved, as one of various industrial plaintiffs, in litigation with the County
of Muskegon (the "County") regarding a 1994 ordinance governing the County's
industrial wastewater pretreatment program. The lawsuit challenges, among other
things, the treatment capacity availability and the local effluent limit
provisions of the ordinance. In July 1996, the Court rendered a decision
substantially in favor of the Company and the other plaintiffs, but the County
has appealed the Court's decision. If the Company and the other plaintiffs do
not prevail in that appeal or are not successful in ongoing negotiations with
the County, the Company may not be able to obtain additional treatment capacity
for future expansions and the County could impose stricter permit limits. In
June 1997, the EPA sued the County for failure to enforce permit limits
associated with its operation of the wastewater facility. The Company is
uncertain as to the effect, if any, of this action on its current dispute with
the County. The imposition of currently proposed permit limits or the failure of
the Muskegon lawsuit could require substantial additional expenditures,
including short-term expenditures, and may lead to substantial fines for any
noncompliance. See "Business--Environmental and Safety Matters".
The Company owns approximately 911,000 gross acres of timberlands in Maine,
789,400 of which are net forested acres. The Company believes that it can
harvest approximately 13,100 acres per year on a sustainable basis. On November
5, 1996, a proposed binding referendum measure to eliminate clearcutting in
unincorporated areas in the State of Maine was defeated. A competing measure,
which could establish new forestry standards stricter than current law, but
which would not completely ban clearcutting, received a plurality vote. This
competing measure was supported by the Company, other major timber interests in
Maine, several environmental groups as well as the Governor of Maine. Under
Maine law, this competing measure will not automatically become law unless it
receives a simple majority of the votes cast in a special election to be held in
1997. If this competing measure does become law, the consequence to the Company
is not expected to be material because such measure generally reflects
sustainable forestry initiatives that have already been voluntarily adopted by
the Company. See "Business--Timberlands".
CONTROL BY SAPPI
As of the date of this Prospectus, Holdings owned 100% of the Company's
voting stock. At June 1, 1997, as a result of the Minority Acquisition, Sappi
controlled the voting of 100% of the outstanding voting stock of Holdings
(approximately 97.34% of Holdings' voting stock on a fully diluted basis). In
addition, the Minority Acquisition resulted in termination of the contractual
rights of DLJMB and UBS to designate representatives to the board of directors
of Holdings and to approve certain actions by Holdings and Warren. Accordingly,
Sappi has the ability to control election of the entire board of directors of
Holdings and to approve any matter requiring a vote of holders of common stock
of Holdings. Upon the consummation of the Merger, Sappi will control the voting
of 100% of the outstanding common equity of Holdings (including on a fully
diluted basis). As a result, Sappi has the ability to exercise a controlling
influence over the business and operations of each of Holdings and S.D. Warren
and may therefore be deemed to control Holdings and S.D. Warren. See "Certain
Relationships and Related Transactions-- Minority Acquisition and Merger" and
"--Shareholders Agreement".
REQUIREMENT TO DO BUSINESS WITH SAPPI AFFILIATES
Pursuant to a Shareholders Agreement among Sappi, an affiliate of Sappi,
Holdings and the Company (the "Shareholders Agreement"), if the Company sells
products outside of the United States and Canada, it is, subject to certain
exceptions, required to enter into arms' length marketing agreements with
affiliates of Sappi relating to such sales. For the nine months ended July 2,
1997 and the year ended October 2, 1996, the Company had gross sales to
customers outside of the United States of $193.7 million and $240.9 million,
respectively, of which $137.0 million and $151.4 million, respectively, were
subject to marketing agreements, and in respect of which Warren expensed fees of
approximately $6.4 million and $7.2 million, respectively. See "Certain
Relationships and Related Transactions--Transactions With Related Parties".
15
<PAGE>
During fiscal year 1996, the Company began purchasing products from certain
affiliates in U.S. Dollars primarily for sale to external customers. The Company
receives commissions from the affiliates on such sales. To date, these
transactions have not been material.
RESTRICTIONS ON MAKING A CHANGE OF CONTROL OFFER; ANTITAKEOVER EFFECTS
OF CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control, as defined in the Indenture, the
Certificate of Designations or the Exchange Debenture Indenture, as the case may
be, each holder of Notes, Senior Preferred Stock or, if issued, Exchange
Debentures, will have the right to require the Company to purchase all or part
of such holder's Notes, Senior Preferred Stock or, if issued, Exchange
Debentures, at a repurchase price equal to 101% of the aggregate principal
amount or Specified Amount thereof, as the case may be, plus accrued and unpaid
interest or dividends (other than Accumulated Dividends) or interest, as the
case may be. See "Description of the Notes--Repurchase at the Option of
Holders-- Change of Control"; "Description of the Senior Preferred Stock--Change
of Control"; and "Description of the Exchange Debentures--Change of Control".
The Credit Agreement and the A/R Facility each contain, and other
indebtedness may contain, prohibitions of certain events which would constitute
a Change of Control. In addition, the exercise by the holders of the Notes, the
Senior Preferred Stock or, if issued, the Exchange Debentures of their right to
require the Company to repurchase the Notes, the Senior Preferred Stock or, if
issued, the Exchange Debentures could cause a default under the Credit Agreement
or such other indebtedness, even if the Change of Control itself does not.
Finally, the Company's ability to pay cash to the holders of the Notes, the
Senior Preferred Stock or, if issued, the Exchange Debentures, upon a repurchase
may be limited by the Company's then existing financing resources. See
"Description of the Credit Agreement and the A/R Facility".
The Change of Control purchase feature of the Notes, the Senior Preferred
Stock or, if issued, the Exchange Debentures and the Change of Control
prohibitions in each of the Credit Agreement and the A/R Facility may in certain
circumstances discourage or make more difficult a sale or takeover of the
Company and, thus, the removal of incumbent management.
TAX CONSEQUENCES OF DISTRIBUTIONS WITH RESPECT TO THE SENIOR PREFERRED STOCK
AND EXCHANGE OF EXCHANGE DEBENTURES
The redemption price of the Senior Preferred Stock substantially exceeds its
issue price. As a result, a holder will be required to treat such excess as a
series of constructive distributions on the Senior Preferred Stock occurring
over the life of such stock. To the extent of the Company's current and
accumulated earnings and profits (as calculated for Federal income tax
purposes), the amount of each such constructive distribution will be includible
in a holder's income as ordinary dividend income (subject to the applicable
dividends received deduction) at the time such distribution is deemed to occur,
notwithstanding that the cash attributable to such income will not be received
by the holder until a subsequent period.
The Company may, at its option and under certain circumstances, exchange
Exchange Debentures for the Senior Preferred Stock. Any such exchange will be a
taxable event to holders of the Senior Preferred Stock. Furthermore, the
Exchange Debentures will be treated as having been issued with original issue
discount ("OID") for Federal income tax purposes. Holders of Exchange Debentures
will be required to include such OID (as ordinary income) in income over the
life of the Exchange Debentures, in advance of the receipt of the cash
attributable to such income. See "Certain Federal Income Tax Considerations".
LIMITATION ON CASH DIVIDENDS; OBLIGATIONS WITH RESPECT TO HOLDINGS PREFERRED
STOCK
The Company is not required to pay cash dividends on the Senior Preferred
Stock until March 15, 2000. The Company intends to retain future earnings, if
any, for use in its business and does not anticipate paying any cash dividends
on the Senior Preferred Stock for any period ending on or prior to December 15,
1999. In addition, the terms of the Credit Agreement and the Indenture limit the
amount of cash dividends
16
<PAGE>
the Company may pay with respect to the Senior Preferred Stock and other equity
securities both before and after that date. See "Description of the Credit
Agreement and the A/R Facility"; "Description of the Notes--Certain Covenants";
and "Description of the Senior Preferred Stock--Dividends". In addition, the
Company would have to fund any cash dividends payable with respect to the 15%
Senior Exchangeable Preferred Stock of Holdings ("Holdings Preferred Stock").
Holdings is not required to pay cash dividends on the Holdings Preferred Stock
until March 15, 2000. See "The Acquisition".
RISK THAT NOTE OFFERING DETERMINED A FRAUDULENT CONVEYANCE
Various laws enacted for the protection of creditors may apply to the Notes
and, if issued, the Exchange Debentures. If a court in a lawsuit by a creditor
or a representative of creditors (such as a trustee in bankruptcy or the Company
itself as debtor-in-possession) were to determine that SDW Acquisition or the
Company did not receive fair consideration or reasonably equivalent value for
incurring the indebtedness evidenced by the Notes and, if issued, the Exchange
Debentures, and at the time of such incurrence SDW Acquisition or the Company
(i) was insolvent or was rendered insolvent by such incurrence, (ii) had
unreasonably small capital with which to carry on its business and all
businesses in which it intended to engage or (iii) intended to incur, or
believed it would incur, debts beyond its ability to repay as such debts
matured, then such court could invalidate, in whole or in part, such
indebtedness as a fraudulent conveyance. The obligations of the Company under
the Notes and, if issued, the Exchange Debentures, could then be avoided, in
which case a court may direct the return of all payments made thereunder to the
Company or to a fund for the benefit of its creditors. Alternatively, a court
could subordinate the Notes and, if issued, the Exchange Debentures, to all
existing and future indebtedness of the Company.
The measure of insolvency for purposes of the foregoing will vary depending
upon which jurisdiction's law is being applied. Generally, however, an entity
would be considered insolvent if (i) the amount of its debts (including certain
contingent liabilities) is greater than all of its assets at a fair valuation or
(ii) the present fair saleable value of its assets is less than the amount that
will be required to pay its probable liabilities on its existing debts as they
become absolute and mature.
In rendering opinions with respect to the validity of the Notes and, if
issued, the Exchange Debentures, counsel did not express any opinion as to
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, including federal and state statutes dealing with
fraudulent conveyances.
LIQUIDITY OF MARKET
Although DLJSC has advised the Company that it currently makes a market in
the Securities, it is not obligated to do so and may discontinue such market
making at any time without notice. The Securities are not listed on any national
securities exchange or admitted to trading in the National Association of
Securities Dealers Automated Quotation System. Accordingly, no assurance can be
given as to the liquidity of the trading market for any of the Securities. If a
trading market is not maintained, holders of the Securities may experience
difficulty in reselling such Securities or may be unable to sell them at all.
Future trading prices of the Securities will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities. Depending on prevailing
interest rates, the market for similar securities and other factors, including
the financial condition of the Company, the Securities may trade at a discount
from their principal amount or liquidation preference, as the case may be.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of any Securities in
any market making transaction in connection with which this Prospectus may be
delivered.
17
<PAGE>
DIVIDEND POLICY
The Company is not required to pay cash dividends on the Senior Preferred
Stock until March 15, 2000. The Company intends to retain future earnings, if
any, for use in its business and does not anticipate paying any cash dividends
on the Senior Preferred Stock for any period ending on or prior to December 15,
1999. In addition, the terms of the Credit Agreement and the Indenture limit the
amount of cash dividends the Company may pay with respect to the Senior
Preferred Stock and other equity securities both before and after that date. See
"Description of the Credit Agreement and the A/R Facility"; "Description of the
Notes--Certain Covenants"; and "Description of the Senior Preferred
Stock--Dividends".
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company at July 2, 1997. This table should be read in conjunction with the
Company's Financial Statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(IN
MILLIONS)
-----------
<S> <C>
Current portion of long-term debt.................................................................... $ 59.2
-----------
Long-term debt:
Revolving Credit Facility (1)...................................................................... --
Term Loan Facility (1)............................................................................. 344.0
Notes.............................................................................................. 375.0
Other (2).......................................................................................... 119.5
-----------
Total long-term debt............................................................................. 838.5
-----------
Senior Preferred Stock (3)........................................................................... 99.2
-----------
Stockholder's equity:
Common Stock and paid-in capital................................................................... 331.8
Retained earnings.................................................................................. 17.1
-----------
Total stockholder's equity....................................................................... 348.9
-----------
Total capitalization........................................................................... $ 1,345.8
-----------
-----------
</TABLE>
- ------------------------
(1) SDW Acquisition financed the Acquisition in part through borrowings of
$630.0 million under senior secured term loan facilities (the "Term Loan
Facilities") and initial borrowings of $160.2 million under a $250.0 million
revolving credit facility (the "Revolving Credit Facility" and, together
with the Term Loan Facilities, the "Bank Financing"). The Company and SDWF
(as defined) obtained the five-year A/R Facility, the proceeds of which were
used to prepay, in an aggregate principal amount, $100.0 million of the
final installments of the Tranche A Term Loans (as defined) and Tranche B
Term Loans (as defined). See "Description of the Credit Agreement and the
A/R Facility".
(2) Consists principally of tax-exempt industrial revenue and pollution control
bonds.
(3) Liquidation value, including unpaid dividends, was $106.9 million at July 2,
1997.
19
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated operating data, share
data, consolidated balance sheet data, cash flow data and other financial 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 twelve months ended December 25, 1993 have been obtained from
audited financial statements. The selected financial data for 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 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. The selected financial data for the nine months ended July 2,
1997 and July 3, 1996 are derived from the unaudited financial statements of
Warren. Operating data for any periods less than a year are not necessarily
indicative of the results that may be expected for the full year. Further, data
for the Predecessor Corporation and Warren are not necessarily comparable as a
result of a new basis of accounting for Warren and the adoption of certain
accounting policies. This data should be read in conjunction with the Company's
Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE SEPTEMBER 25, DECEMBER 21, TWELVE
TWELVE MONTHS TWELVE MONTHS MONTHS 1994 1994 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> <C> <C> <C> <C> <C> <C>
<CAPTION>
S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY COMPANY COMPANY COMPANY
AND AND AND AND S.D. WARREN S.D. WARREN
CERTAIN CERTAIN CERTAIN CERTAIN COMPANY COMPANY
RELATED RELATED RELATED 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 charges.................... -- 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 (loss)........................ 50.6 (4.6) 16.8 15.0 42.1 4.8
Dividends and accretion on Senior
Preferred Stock........................ -- -- -- -- 9.1 13.5
Net income (loss) applicable to common
stockholder............................ 50.6 (4.6) 16.8 15.0 33.0 (8.7)
SHARE DATA:
Net earnings (loss) per common share .... $ -- $ -- $ -- $ -- $ 0.33 $ (0.09)
Weighted average common shares
outstanding............................ -- -- -- -- 100 100
CASH FLOW DATA:
Net cash provided by operating
activities............................. $ 141.9 $ 130.3 $ 27.8 $ 53.7 $ 136.0 $ 216.6
Net cash used in investing activities.... (56.3) (73.7) (46.4) (14.5) (1,489.6) (48.6)
Net cash provided by (used in) financing
activities............................. (85.4) (55.8) 21.2 31.1 1,340.8 (181.2)
<CAPTION>
NINE NINE
MONTHS MONTHS
ENDED ENDED
JULY 3, JULY 2,
1996 1997
------------- -------------
<S> <C> <C>
S.D. WARREN S.D. WARREN
COMPANY COMPANY
AND AND
SUBSIDIARIES SUBSIDIARIES
(SUCCESSOR) (SUCCESSOR)
------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.................................... $ 1,066.7 $ 1,009.3
Gross profit............................. 191.9 189.9
Selling, general and administrative
expense................................ 98.0 100.6
Restructuring charges.................... -- 10.0
Income from operations................... 93.9 79.3
Other income (expense), net.............. (0.6) 3.4
Interest expense......................... 84.3 77.8
Income tax expense....................... 3.6 1.8
Extraordinary item, net of tax........... (2.0) 0.9
Net income (loss)........................ 3.4 4.0
Dividends and accretion on Senior
Preferred Stock........................ 10.0 11.2
Net income (loss) applicable to common
stockholder............................ (6.6) (7.2)
SHARE DATA:
Net earnings (loss) per common share .... $ (0.07) $ (0.07)
Weighted average common shares
outstanding............................ 100 100
CASH FLOW DATA:
Net cash provided by operating
activities............................. $ 147.4 $ 108.6
Net cash used in investing activities.... (30.0) (54.0)
Net cash provided by (used in) financing
activities............................. (177.8) (45.4)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
NINE SEPTEMBER 25, DECEMBER 21, TWELVE
TWELVE MONTHS TWELVE MONTHS MONTHS 1994 1994 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> <C> <C> <C> <C> <C> <C>
<CAPTION>
S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY COMPANY COMPANY COMPANY
AND AND AND AND S.D. WARREN S.D. WARREN
CERTAIN CERTAIN CERTAIN CERTAIN COMPANY COMPANY
RELATED RELATED RELATED 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>
OTHER FINANCIAL DATA:
Adjusted EBITDA (2)...................... $ 183.1 $ 169.5 $ 105.9 $ 56.5 $ 255.3 $ 227.7
Capital expenditures..................... 70.1 68.9 32.3 14.5 33.7
Depreciation, cost of timber harvested
and amortization....................... 91.6 93.1 71.6 28.8 89.8 115.2
Ratio of earnings to fixed charges (3)... 5.8x 1.1x 3.1x 8.3x 1.4x (4)
BALANCE SHEET DATA (AT END OF PERIOD):
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
Senior 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
<CAPTION>
NINE NINE
MONTHS MONTHS
ENDED ENDED
JULY 3, JULY 2,
1996 1997
------------- -------------
<S> <C> <C>
S.D. WARREN S.D. WARREN
COMPANY COMPANY
AND AND
SUBSIDIARIES SUBSIDIARIES
(SUCCESSOR) (SUCCESSOR)
------------- -------------
<S> <C> <C>
OTHER FINANCIAL DATA:
Adjusted EBITDA (2)...................... $ 173.5 $ 171.0
Capital expenditures..................... 32.2 38.8
Depreciation, cost of timber harvested
and amortization....................... 85.9 88.6
Ratio of earnings to fixed charges (3)... (4) (4)
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.......................... $ 88.7 $ 96.9
Total assets............................. 1,681.0 1,696.4
Total debt (including current
maturities)............................ 949.4 897.7
Senior Preferred Stock................... 84.5 99.2
Parent's equity.......................... -- --
Stockholder's equity..................... 358.2 348.9
</TABLE>
- ------------------------
(1) Includes the revision in the estimated useful lives used to compute
depreciation for certain equipment which increased net income by
approximately $26.2 million as well as the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" which reduced net income by
approximately $6.1 million.
(2) Adjusted EBITDA is defined as income from operations before restructuring
expense (as shown above) plus depreciation, cost of timber harvested and
amortization (excluding amortization of deferred financing fees). Based on
its experience in the paper industry, the Company's management believes that
Adjusted EBITDA and related measures of cash flow serve as important tools
for measuring paper companies in several areas such as liquidity, operating
performance, and leverage, and for assessing the ability to service and
incur debt. Management interprets the trend in Adjusted EBITDA on an
annualized basis over the periods shown to indicate a general improvement in
these measures and improved ability to service and incur debt, with the
exception of the first nine months of fiscal 1997 which reflects lower gross
profit. Adjusted EBITDA should not be considered by an investor as an
alternative to GAAP operating income, as an indicator of the Company's
operating performance, as an alternative to the Company's cash flow from
operating activities or as a measure of liquidity. Investors should be
cautioned that Adjusted EBITDA as shown above may not be comparable to
similarly titled measures presented by other companies, and comparisons
could be misleading unless all companies and analysts calculate these
measures in the same fashion.
(3) For purposes of computing the ratio of earnings to fixed charges, fixed
charges consist of interest expense on long-term debt, amortization of
deferred financing costs, accrued dividends on Senior Preferred Stock on a
pretax basis, and that portion (one third) of rentals deemed to be
representative of interest. Earnings consist of income before income taxes,
plus fixed charges.
(4) For the periods ended October 2, 1996, July 3, 1996 and July 2, 1997, the
Company's earnings were insufficient to cover fixed charges by $13.0
million, $9.5 million and $15.1 million, respectively.
(5) Liquidation value was $106.9 million at July 2, 1997.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company 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, owns approximately 911,000 acres of
timberlands in the State of Maine, and operates several regional distribution
facilities.
On October 8, 1994, SDW Acquisition Corporation ("SDW Acquisition"), a
direct wholly-owned subsidiary of Holdings, entered into a definitive agreement
(the "Stock Purchase Agreement") pursuant to which, on December 20, 1994, SDW
Acquisition acquired all of the outstanding capital stock of Warren (the
"Acquisition") from Scott Paper Company ("Scott") which has since been acquired
by Kimberly-Clark Corporation. Immediately following the Acquisition, SDW
Acquisition merged with and into Warren (the "Merger"), with Warren (the
"Successor Corporation") 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 certain "forward-looking statements" as that term is defined under the
Private Securities Litigation Reform Act of 1995. The words "believe,"
"anticipate," "intend," "estimate," "plan," "assume" and other similar
expressions which are predictions of or indicate events and future trends which
do not relate to historical matters identify forward-looking statements.
Reliance should not be placed on forward-looking statements because they involve
known and unknown risks, uncertainties and other factors which are in some cases
beyond the control of the Company and may cause the actual results, performance
or achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such
forward-looking statements. Certain factors that may cause such differences
include, but are not limited to the following: 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 the
Company's 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. These and other factors
that might cause differences between actual and anticipated results, performance
and achievements are discussed in greater detail below.
MARKET OVERVIEW
Coated free market demand increased over the prior year and mill
inventories, which peaked at approximately 600,000 tons in May of 1996, were
reduced to 456,000 by the end of June 1997. The Company's coated sales volume
was up over 8% compared with the same three months of last year. The increase
has been assisted by new product introductions, which include Strobe, a new
product targeted at the higher margin segment of the coated free marketplace.
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. In the quarter ended
July 2, 1997, coated groundwood shipments were up significantly over 1996
shipments, and pricing firmed. Since coated groundwood pricing can provide a
floor for coated free sheet pricing, the upward trend in coated groundwood
shipments and pricing, as well as the increase in coated free paper shipments
over the prior year, supported a firming in the coated free sheet price. During
the
22
<PAGE>
quarter ended July 2, 1997, the Company announced a price increase for all its
coated web and #3 sheet fed products which was also adopted by the majority of
coated free sheet producers.
As the Company operates within a cyclical industry, a weakening 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. The new
coated paper capacity scheduled for the end of calendar year 1997 in Europe, as
well as certain machine conversions during 1997 to coated free sheet manufacture
in the United States, will impact this market supply/demand balance and may
constrain upward movement of coated prices which could have an adverse effect
upon the Company.
The following discussion and analysis should be read in conjunction with the
Financial Statements of the Company appearing elsewhere in this Prospectus.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JULY 2, 1997 COMPARED TO THE NINE MONTHS ENDED JULY 3, 1996
SALES
Sales for the nine months ended July 2, 1997 were $1,009.3 million compared
to $1,066.7 million for the nine months ended July 3, 1996, a decrease of $57.4
million or 5.4%. The decrease is primarily due to a 9.6% decrease in average net
revenue per paper ton, partially offset by a 4.7% increase in paper shipment
volume during such period.
COST OF GOODS SOLD
Cost of goods sold for the nine months ended July 2, 1997 was $819.4 million
compared to $874.8 million for the nine months ended July 3, 1996, a decrease of
$55.4 million or 6.3%. Cost of goods sold on a per paper ton basis decreased to
$842 per ton from $945 per ton for the corresponding prior year period. The
decrease was primarily due to lower fiber input costs and, to a lesser extent,
the impact of cost reduction initiatives including more efficient maintenance
and staffing levels, and decreased chemical and other material procurement
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense was $100.6 million for the nine
months ended July 2, 1997 compared to $98.0 million for the nine months ended
July 3, 1996, an increase of $2.6 million. The increase is due primarily to the
opening of additional regional distribution centers, professional services
supporting the Company's profit improvement initiatives, and other
administrative expenses.
INTEREST EXPENSE AND TAXES
Interest expense for the nine months ended July 2, 1997 was $77.8 million
compared to $84.3 million for the nine months ended July 3, 1996. The $6.5
million reduction in interest expense was primarily due to lower levels of
outstanding debt, partially offset by the impact of higher interest rates.
Interest expense includes the amortization of deferred financing fees.
Income tax expense was $1.8 million for the nine months ended July 2, 1997
compared to $3.6 million for the corresponding period in the prior year,
primarily reflecting the change in the Company's earnings level.
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
23
<PAGE>
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 TWELVE
MONTHS MONTHS
ENDED ENDED
SEPTEMBER 27, OCTOBER 2,
1995 1996
% %
----------------- -------------
<S> <C> <C>
Cost of goods sold..................................................................... 76.7 82.3
Selling, general and administrative expense............................................ 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.
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
24
<PAGE>
fees incurred for the amendment to the credit agreement in April 1996 and
securitization of a large portion of the Company's trade receivables (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 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
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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 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
NINE MONTHS ENDED JULY 2, 1997 COMPARED TO NINE MONTHS ENDED JULY 3, 1996
Net cash provided by operating activities was $108.6 million for the nine
months ended July 2, 1997 as compared to $147.4 million for the nine months
ended July 3, 1996. The decrease is due mainly to $90.0 million of proceeds
received in the quarter ended July 3, 1996 resulting from the sale of the
Company's accounts receivable. This decrease was partially offset by the impact
of increases in accounts payable, accrued and other liabilities, net of
increases in inventory and other assets and liabilities. The increase in
accounts payable, accrued and other liabilities at July 2, 1997 compared to
October 2, 1996 was primarily attributable to increased purchasing activity at
the mills and accrued and unpaid restructuring charges.
The Company's operating working capital decreased to $71.6 million at July
2, 1997 compared to $79.4 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 and a decrease in trade receivables, offset by an increase
in inventory.
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Capital expenditures for the nine months ended July 2, 1997 were $38.8
million, up from $32.2 million for the nine months ended July 3, 1996. Capital
expenditures are estimated to approximate $65.0 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 could amount
to approximately $90.0 million to $110.0 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. (See also Force Majeure Events.)
Net cash used in financing activities was $45.4 million for the nine months
ended July 2, 1997 as compared to $177.8 million for the corresponding period 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. One of these previous
optional prepayments was made in April 1996 when the Company utilized the
proceeds received from the sale of its accounts receivable to make an optional
prepayment of its term loans equaling $100.0 million, with another repayment of
$74.9 million being made in December 1995 due to an excess cash flow requirement
under its bank credit agreement. During the nine months ended July 2, 1997, the
Company made an optional prepayment of $24.0 million.
DEBT AND PREFERRED STOCK
At July 2, 1997, long-term debt was $838.5 million compared to $902.5
million at October 2, 1996, a decrease of $64.0 million. The current maturities
of long-term debt balance of $59.2 million at July 2, 1997 primarily represents
the amounts payable in December 1997 and June 1998 under the Company's term loan
facilities.
Warren has a $250.0 million revolving credit facility to finance working
capital needs. At July 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 and $170.5 million of
letters of credit outstanding under its letter of credit facility at July 2,
1997 and October 2, 1996, respectively. 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 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 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 principal on the defeased
bonds, the Company will be liable for such deficiency.
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TWELVE MONTHS ENDED OCTOBER 2, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
27, 1995
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. 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.
The Company does not anticipate paying cash dividends on the Preferred Stock
or Holdings 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 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.
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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.
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 (the
"County") 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. In June 1997, the EPA sued the
County for failure to enforce permit limits associated with its operation of the
wastewater facility. The Company is uncertain as to the effect, if any, of this
action on its current dispute with the County. 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"). Final promulgation of the
cluster rules is expected to occur in late 1997, with compliance with the rules
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 $70.0 million to $90.0 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
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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 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 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 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 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
In February 1997, the Company reached settlement on a new six-year labor
agreement with its three Somerset, Maine mill unions. The ratified contract
reflects more flexible work rule provisions and a 3% annual wage increase for
the term of the agreement. The Company's labor agreements at its Westbrook,
Maine and Mobile, Alabama sites expired on June 1, 1997. All but one of the
Westbrook unions ratified a new five year agreement in May 1997 with more
flexible work rule provisions. The Company is engaged in negotiations with the
remaining union at Westbrook and the unions at Mobile. Those affected employees
are working under contract extensions which can be terminated upon 10 days
notice.
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 July 2, 1997,
accrued an estimate of $44.7 million for costs to refurbish
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plant assets at the Westbrook facility, of which $27.5 million has been received
as insurance proceeds at July 2, 1997 with the remainder, net of a deductible of
$3.5 million, included in other receivables in the condensed consolidated
balance sheet at July 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. At July 2,
1997, the Company had received $7.5 million as business interruption insurance
proceeds.
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 will be 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.
The Company's power requirements at its Somerset and Westbrook mills have
historically been satisfied through cogeneration agreements ("Power Purchase
Agreements" or "Agreements") whereby the mills each cogenerate electricity and
sell the output to Central Maine Power Company ("CMP") at above market rates.
The Agreements also provide that the mills purchase electricity from CMP at the
standard industrial tariff rate. The effect of these Agreements has been to
reduce the Company's historical cost of power. However, the Westbrook Agreement
expires on October 31, 1997, and the Somerset Agreement expires in the year
2012, with the favorable pricing element of the Somerset Agreement ending on
November 30, 1997. The impact from the change in the Somerset Agreement is not
material; however, the expiration of the Westbrook Agreement could have a
material adverse impact if a replacement market for excess power generated at
the Westbrook mill is not found. The Company is currently soliciting bids for
such excess power and anticipates that given current capacity constraints in
Northeast power markets, any material adverse impact should be mitigated. 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 being
amortized over the remaining life of the favorable Power Purchase Agreements.
For the nine months ended September 27, 1995, fiscal year 1996, and the nine
months ended July 2, 1997 amortization expense related to this asset
approximated $10.8 million, $12.0 million and $9.0 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, it is the present opinion of
the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's financial position, results of operations or
cash flows.
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REGULATORY MATTERS
On November 5, 1996, a proposed binding referendum measure to eliminate
clear cutting 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 clear cutting, received a
plurality vote. This competing measure was supported by the Company, other major
timber interests in Maine, and 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.
CREDIT AGREEMENT AMENDMENT
On July 25, 1997, Warren amended certain provisions of its Credit Agreement
with a syndicate of banks, including the prepayment provisions and the
limitation on indebtedness clause. The lenders also waived certain provisions of
the credit agreement, thereby allowing the Company to enter into a sale/
leaseback arrangement with General Electric Capital Corporation ("GECC")
pertaining to one of the Company's paper machines at its Somerset facility and
allowing Holdings to consummate a merger with Acquisition II. In addition,
Warren obtained consent from the lenders for the utilization of a portion of the
proceeds of the sale/leaseback other than as required by the credit agreement,
including the payment from time to time of dividends to Holdings on or prior to
September 30, 1998 for the purpose of redeeming the Holdings Senior Preferred
Stock, subject to certain conditions and limitations.
SALE/LEASEBACK TRANSACTION
On July 29, 1997, the Company entered into a sale/leaseback arrangement with
GECC. The transaction involved the sale of one of the paper machines at its
Somerset mill for $150.4 million to State Street Bank and Trust Company of
Connecticut, National Association (the "Trustee"), as Trustee for GECC. In
connection with the transaction, the Company entered into a 15 year lease with
the Trustee to lease back the paper machine. Rental payments of approximately
$7.6 million will be made semi-annually in arrears in January and July of each
year. The sale/leaseback arrangement will be accounted for as an operating
lease. The gain on the transaction of approximately $20.8 million will be
deferred and amortized as an adjustment to future rental payments over the lease
term. The Company used approximately $100.3 million of the proceeds from the
sale to make a mandatory prepayment on its term loans. The write off of deferred
financing fees related to the early extinguishment of this debt resulted in an
extraordinary loss of $1.0 million, net of a related tax benefit of $0.6 million
and will be recorded in the fourth quarter of fiscal year 1997.
CONTROL BY SAPPI
On May 27, 1997, Sappi consummated the Minority Acquisition and thereby
acquired through an indirect wholly-owned subsidiary all of the common equity
interests of Holdings held by the Sellers for an aggregate purchase price of
$138.0 million, or $17.25 per share. Sappi then caused all of the Holdings
common stock purchase warrants acquired in the Minority Acquisition to be
exercised. In connection with the Minority Acquisition, Sappi and the Sellers
terminated most of the provisions of the Shareholders Agreement, and the Sellers
have ceased to have any rights or obligations under the remaining provisions.
See "Certain Relationships and Related Transactions--Shareholders Agreement". In
connection with the financing of the Minority Acquisition, Sappi caused the
shares to Holdings common stock to be sold to HSL, which in turn pledged the
stock to certain lenders. The Holdings common stock held by HSL is subject to an
option for Sappi to reacquire such securities at any time prior to April 30,
2000, and a right for HSL to require Sappi to purchase such securities on the
occurrence of certain events and at any time between May 15 and May 30, 2000
(the "HSL Option Agreement"). In addition, such shares are subject to an
irrevocable proxy for Sappi to vote the shares of Holdings common stock during
the term of the HSL Option Agreement. As a result of the Minority Acquisition
and the related financing transaction, Sappi
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indirectly owns approximately 75.07%, and controls the voting of approximately
97.34%, of the common equity of Holdings on a fully diluted basis. See "Risk
Factors--Control by Sappi" and "Certain Relationships and Related
Transactions--Minority Acquisition and Merger".
On July 30, 1997, Holdings entered into the Merger Agreement with
Acquisition II, pursuant to which each issued and outstanding share of common
stock of Holdings held by any party other than Sappi and its affiliates or HSL
will be converted into the right to receive $17.60 per share in cash, subject to
the exercise of appraisal rights. Each outstanding Class A Warrant of Holdings
will become exercisable solely for $5.2708 in cash, each outstanding Class B
Warrant of Holdings will become exercisable solely for $17.60 in cash, in each
case upon payment of the applicable exercise price and satisfaction of the other
terms and conditions of the related warrant agreement, and shares of Holdings
Senior Preferred Stock will remain outstanding without amendment, subject to the
exercise of appraisal rights. The Class B common stock of Holdings received by
HSL as a result of the Merger and any Class A common stock of Holdings received
on conversion will be subject to the HSL Option Agreement and the irrevocable
proxy in favor of Sappi. The Merger Agreement is expected to become effective on
or about September 5, 1997, but the Merger Agreement is subject to certain
important conditions, and there can be no assurance that the conditions to the
Merger will be satisfied or waived. If the Merger becomes effective, Sappi will
own 100% of the issued and outstanding voting common stock, and 75.07% of the
common equity of Holdings in the form of new Class A common stock, and HSL will
own 24.93% of the common equity of Holdings in the form of new non-voting Class
B common stock of Holdings. See "Risk Factors--Control by Sappi" and "Certain
Relationships and Related Transactions--Minority Acquisition and Merger".
Neither the Minority Acquisition nor the Merger will affect the terms or
ownership of the outstanding securities of Warren.
ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("FAS") No. 123, "Accounting for
Stock-Based Compensation". FAS No. 123, which is effective for the Company in
fiscal 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 current accounting and present pro-forma disclosures in the
notes to the financial statements. The implementation of FAS No. 123 did not
have a material impact on the Company's financial statements.
In June 1996, the 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 did not have a material
impact on the Company's financial statements.
In February 1997, the FASB issued FAS No. 128, "Earnings per Share", and FAS
No. 129, "Disclosure of Information about Capital Structure", both of which will
be effective for the Company in fiscal year 1998. FAS No. 128 replaces the
presentation of primary earnings per share with basic earnings per share, which
excludes dilution, and requires the dual presentation of basic and diluted
earnings per share. FAS No. 129 establishes standards for disclosing information
about an entity's capital structure and applies to all entities. The
implementation of FAS No. 128 and FAS No. 129 will not have a material effect on
the Company's earnings per share or financial statements.
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income",
and FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", both of which will be effective for the Company in fiscal year
1999. FAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. FAS No. 131 establishes
standards for the way that public business enterprises report selected
information about operating segments. FAS No. 131 also establishes standards for
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related disclosures about products and services, geographic areas, and major
customers. The implementation of FAS No. 130 and FAS No. 131 are not expected to
have a material effect on the Company's financial statements.
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 Senior Preferred Stock. Such payments may
include, among other things, (i) amounts under a tax sharing agreement to be
entered into between the Company and Holdings necessary to enable Holdings to
pay the Company's taxes, (ii) administrative fees to Holdings and amounts to
cover specified costs and expenses of Holdings and (iii) an annual advisory fee
for management advisory services, limited to $1.0 million, to Sappi and/or its
affiliates. To the extent the Company continues to make such payments, it will
do so only to the extent such payments are permitted under the terms of the
Credit Agreement, the Indenture and the terms of the Senior Preferred Stock.
Because Holdings has no material assets other than the outstanding common
stock of the Company (all of which is pledged to the lenders under the Credit
Agreement) and all of the operations of Holdings (other than the management of
its investment in the Company) are currently conducted through the Company and
its subsidiaries, Holdings' ability to meet its cash obligations is dependent
upon the earnings of the Company and its subsidiaries and the distribution or
other provision of those earnings to Holdings. Holdings has no material
indebtedness outstanding (other than advances that may be owed from time to time
to the Company and guarantees in respect of indebtedness of the Company and its
subsidiaries) and Holdings' 15% Senior Exchangeable Preferred Stock (the
"Holdings Preferred Stock"), which was issued in connection with the
Acquisition, is not mandatorily redeemable (except upon the occurrence of
certain specified events) and provides that dividends need not be paid in cash
until the year 2000. Holdings does, however, have various obligations with
respect to its equity securities (including in respect of registration rights
granted by Holdings) that are likely to require cash expenditures by Holdings.
The Company believes that the Credit Agreement, the Indenture and the Senior
Preferred Stock permit the Company to pay a dividend or otherwise provide funds
to Holdings to enable Holdings to meet its known cash obligations for the
foreseeable future, provided that the Company meets certain conditions. Among
such conditions are that the Company maintain specified financial ratios and
comply with certain financial tests.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Deloitte & Touche LLP were appointed independent auditors to Holdings, the
parent of the Company, prior to the Acquisition. Coopers & Lybrand L.L.P. served
as independent accountants of the Predecessor Corporation prior to the
Acquisition and, upon completion of the Acquisition, Deloitte & Touche LLP
replaced Coopers & Lybrand L.L.P. as independent auditors of the Predecessor
Corporation. There were no disagreements between the Predecessor Corporation and
Coopers & Lybrand L.L.P. on matters of accounting and financial disclosure in
the two years and subsequent interim period preceding their replacement by
Deloitte & Touche LLP.
During 1995, Coopers & Lybrand L.L.P. informed the Company that they would
not consent to the use of their report on the Predecessor Corporation's
financial statements in certain anticipated registration statements to be filed
with the Commission. As a result, the Company engaged Deloitte & Touche LLP to
reaudit the Predecessor Corporation's financial statements included in this
Prospectus.
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BUSINESS
GENERAL
S.D. Warren Company ("S.D. Warren", "Warren", the "Company" or the
"Successor Corporation") manufactures printing, publishing and specialty papers
and has pulp and timberland operations vertically integrated with some of its
manufacturing facilities. Warren is the largest producer of coated free paper
(free of groundwood pulp) in the United States. The Company currently operates
four paper mills with total annual production capacity of approximately 1.5
million tons of paper. The Company also owns a sheeting and distribution
facility in Allentown, Pennsylvania, with annual sheeting capacity of
approximately 90,000 tons, and owns approximately 911,000 acres of timberlands
in the State of Maine.
The Company was founded in 1854 and grew through internal growth and
acquisitions until it was acquired by Scott in 1967. Scott invested significant
resources in S.D. Warren, including approximately $1.0 billion from 1988 through
1994, to upgrade, expand and rebuild many of the Warren facilities. As of
October 8, 1994, SDW Acquisition entered into the Stock Purchase Agreement
pursuant to which, on December 20, 1994, SDW Acquisition acquired from Scott all
of the outstanding capital stock of Warren, then a wholly owned subsidiary of
Scott, and certain related affiliates of Scott. Immediately following the
Acquisition, SDW Acquisition merged with and into Warren (the "Merger"), with
Warren surviving.
SDW Holdings Corporation owns all the outstanding Common Stock of Warren.
The largest investor in Holdings is Sappi. Sappi, a South African company, is
the largest forest products company in Africa, the third largest producer of
coated free paper in Europe and one of the world's leading pulp, paper and
timber exporters. Sappi owns and operates a number of timber processing plants
and eight mills in Southern Africa. Outside Africa, Sappi's operations include
four fine paper mills in the United Kingdom and two mills in Germany which
produce coated and uncoated free paper and specialty paper. Following the
Acquisition, Sappi became the largest coated free paper manufacturer in the
world. On July 30, 1997, Holdings entered into the Merger Agreement with
Acquisition II, pursuant to which each issued and outstanding share of common
stock of Holdings held by any party other than Sappi and its affiliates or HSL
will be converted into the right to receive $17.60 per share in cash, subject to
the exercise of appraisal rights. Each outstanding Class A Warrant of Holdings
will become exercisable solely for $5.2708 in cash, each outstanding Class B
Warrant of Holdings will become exercisable solely for $17.60 in cash, in each
case upon payment of the applicable exercise price and satisfaction of the other
terms and conditions of the related warrant agreement, and shares of Holdings
Senior Preferred Stock will remain outstanding without amendment, subject to the
exercise of appraisal rights. The Class B common stock of Holdings received by
HSL as a result of the Merger and any Class A common stock of Holdings received
on conversion will be subject to the HSL Option Agreement and the irrevocable
proxy in favor of Sappi. The Merger Agreement is expected to become effective on
or about September 5, 1997, but the Merger Agreement is subject to certain
important conditions, and there can be no assurance that the conditions to the
Merger will be satisfied or waived. If the Merger becomes effective, Sappi will
own 100% of the issued and outstanding voting common stock, and 75.07% of the
common equity of Holdings in the form of new Class A common stock, and HSL will
own 24.93% of the common equity of Holdings in the form of new non-voting Class
B common stock of Holdings. See "Risk Factors--Control by Sappi" and "Certain
Relationships and Related Transacations--Minority Acquisition and Merger". The
Merger will not affect the terms or ownership of the outstanding securities of
Warren.
PRINCIPAL PRODUCTS
The paper industry is generally divided into the printing and writing market
segment and the packaging market segment. The printing and writing market
segment is divided into newsprint and fine paper, which includes coated and
uncoated paper. The Company's principal products include coated, uncoated,
specialty and technical papers. The following table illustrates the Company's
major markets, expressed as a percentage of sales, for the nine months ended
September 24, 1994, the period September 25, 1994 through December 20, 1994 (the
"three months ended December 20, 1994"), and the nine
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months ended September 27, 1995, the twelve months ended October 2, 1996 and the
nine months ended July 3, 1996 and July 2, 1997:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2, JULY 3, JULY 2,
1994 1994 1995 1996 1996 1997
--------------- --------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Coated paper.................... 70.9% 73.9% 70.6% 72.2% 71.9% 71.8%
Uncoated paper.................. 17.9 18.5 13.6 12.7 12.6 12.6
Specialty paper................. 5.0 4.8 10.2 11.5 11.7 11.7
Technical paper and other....... 6.2 2.8 5.6 3.6 3.8 3.9
----- ----- ----- ----- ----- -----
Total....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
The coated paper market is divided into two types of products: coated free
paper and coated groundwood paper. Coated papers are primarily differentiated
into five product grades of decreasing quality and brightness, ranging from #1,
which is premium, to #5, the lowest in quality and price. The Company
principally competes in the coated free paper market which is composed of
product grades #1 through #3, and a limited amount of #4 and #5. The coated
groundwood market is composed of the #4 and #5 product grades. Each grade is
manufactured in a range of basis weights, which is the measurement of a paper's
weight for a given sheet size, as well as differentiated by finish which can be
either gloss, dull or matte. The appearance of coated paper can also be
significantly altered by finishing techniques, such as varnishing, which can
impart a dull or shiny property to a sheet. The coated paper market, in addition
to being segmented by product grade, is divided into products which are coated
on one side and products which are coated on both sides. Paper which is coated
on one side is used in special applications such as consumer product and mailing
label applications. The majority of coated paper production is two-sided which
permits quality printing on both sides of the paper.
Coated paper is used in corporate communications, advertising, brochures,
magazine covers and upscale magazines, catalogues, direct mail promotions and
educational text books. Uncoated paper is used by commercial printers, quick
printers, large in-house copy/printing end-users and small business and home
applications. Speciality and technical papers are used in business form
printing, coated fabric converters, pressure-sensitive laminators, label
printers and other niche market applications.
The market for coated paper has historically experienced price fluctuations
which are driven by production supply, end-user demand and, to a lesser degree,
the availability and relative price of imported products. The growth in the
supply of coated paper is driven by the opening of new coated paper
manufacturing facilities, each of which can take up to three years to construct.
See "Risk Factors--Cyclical Industry Conditions; Strong Competition" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for information regarding recent market trends.
COMPETITION
The markets for coated free products are highly competitive with a number of
major companies competing in each market. The Company competes mainly with U.S.
and Canadian producers of coated free paper, and, to a lesser degree, European
producers. The Company's principal competitors in the coated free market are
Champion International Corporation, Westvaco Corporation, Consolidated Papers
Inc., The Mead Corporation, Simpson Paper Co., Repap Wisconsin, Inc. and
Potlatch Corporation. Competition is primarily on the basis of quality, service,
price and breadth of product line, as well as product innovation and sales and
distribution support. Certain of the Company's competitors have greater
financial resources than the Company and certain of the mills operated by its
competitors may be lower cost producers of pulp and coated paper than certain of
the mills operated by the Company. See "Risk Factors--Cyclical Industry
Conditions; Strong Competition".
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Several factors contribute to the Company's competitive strengths in the
coated free paper market, including high product quality, technological
innovation, high brand recognition and a strong distribution network. The
Company is the leading seller of #1 and #3 grades of coated free paper in North
America and is among the leaders with respect to the #2 grade based on sales for
the nine months ended July 3, 1996.
DISTRIBUTION
The Company, unlike most of its competition, has made a strategic decision
to sell all of its coated products through the merchant distribution system. The
Company believes this policy increases the focus of the merchant sales force on
the sale of the Company's products. Warren was the first to develop merchant
distribution for branded coated paper. In 1917, Warren formed an association of
paper merchants that became the Warren Merchant's Association. Today, the
Company's sales force sells coated paper to approximately 288 merchant
distributing locations. Merchants are authorized to distribute Warren products
by geographic area and handle competitors' lines to cover all segments of the
market. The Company believes it has created a loyal group of merchant customers
because Warren's sales force focuses on generating end-user demand, which is
then serviced by the merchant distributors, and does not compete with the
merchants to make sales.
Merchants perform numerous functions, including sales, credit, warehousing,
local distribution and promotional activities. They purchase the paper from
Warren and resell it, marking up their purchase price from Warren to a
competitive market price. The product is delivered to the customer either
directly from the mill, a Warren distribution center or from the merchant's
warehouse. The merchant handles credit review and payment collection and pays
Warren's invoice without regard to final collection from the end-user customer.
The Company sells uncoated paper in North America through the same network
of merchant distributors that it uses for coated paper, with some exceptions
(approximately 225 merchant locations sell uncoated paper, versus the 288 which
sell coated paper). The Company also distributes uncoated paper through original
equipment manufacturers, catalogues and merchant stores and is beginning to
develop additional distribution channels, such as warehouse clubs, office
superstores and telemarketing.
The Company sells both specialty and technical paper in North America
directly to the customer base through the relevant sales force and ships
products directly from the mill to the customer.
EXPORT SALES
The Company had sales to customers outside of the United States ("Export
Sales") of $60.0 million, $24.7 million, $90.5 million, $174.3 million and
$129.7 million for the nine months ended September 24, 1994, the three months
ended December 20, 1994 the nine months ended September 27, 1995, the twelve
months ended October 2, 1996 and the nine months ended July 2, 1997
respectively. Export Sales are primarily to Canada, Europe and the Far East. The
Company's sales outside North America are handled by divisions of Sappi. See
"Certain Relationships and Related Transactions--Transactions with Related
Parties" and "Risk Factors--Requirement to Do Business with Sappi Affiliates".
CUSTOMERS
For the year ended October 2, 1996, the Company's customers that
individually accounted for greater than 10% of sales were divisions or
subsidiaries of International Paper Company, Central National-Gottesman Inc.,
and Alco Standard Corporation. Each of these customers is a merchant that
resells the Company's paper products to a wide range of end users. As indicated
in the Notes to Financial Statements, the loss of any of these customers could
have a material adverse effect on the Company's business and results of
operations. See "Risk Factors--Dependence on Principal Customers" and the Notes
to Financial Statements.
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BACKLOG AND SEASONALITY
Backlog as of October 2, 1996 and July 2, 1997 was not significant. The
Company had approximately one to four weeks of backlog depending upon the
product and basis weights.
The Company's operations are not significantly affected by seasonality. The
first and third quarters of the calendar year tend to be stronger than the
second and fourth quarters.
PATENTS, TRADEMARKS AND LICENSES
S.D. Warren is widely recognized for its product quality and technological
innovation in the development and manufacture of coated free paper, which has
allowed Warren to sustain the franchise value of its name brand products such as
SOMERSET-REGISTERED TRADEMARK-, LUSTRO-REGISTERED TRADEMARK-,
WARRENFLO-REGISTERED TRADEMARK- and PATINA-REGISTERED TRADEMARK-.
Although the Company owns or licenses a number of patents and patent
applications that are important to its business, they are not material to the
conduct of the Company's business as a whole. The Company believes that its
position in each of its markets depends primarily on such factors as customer
service, prompt and accurate delivery and diversity of products rather than on
patent protection.
The Company has a long history of product innovations. It was the first
paper company to develop both one and two-sided coated paper, the first to
develop dull and matte coated paper, the first to develop high bulk-to-weight
coated paper and the first to develop lightweight coated free web. In addition,
the Company has a number of proprietary technologies, including the on-line
finishing technology and its ULTRACAST-Registered Trademark- electronbeam
technology. The Company's on-line finishing technology is used in its production
of coated paper as well as in its production of specialty papers. The Company's
ULTRACAST-Registered Trademark- technology is utilized in specialty papers and
the Company plans to extend this technology into a broader line of unique
products and new market segments.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts continue to focus on creating
new and improved products as well as developing more efficient processes for
producing them. The Company's research facility is located in Westbrook, Maine
and employs approximately 100 people who work closely with marketing, sales and
manufacturing personnel as well as the Company's customers to respond to needs
for technological improvements and to meet market opportunities.
The Company spent approximately $9.5 million, $3.0 million, $10.7 million,
$15.6 million and $10.2 million on research and development activities for the
nine months ended September 24, 1994, the three months ended December 20, 1994,
the nine months ended September 27, 1995, the twelve months ended October 2,
1996 and the nine months ended July 2, 1997, respectively.
SUPPLY REQUIREMENTS
The principal supply requirements for the manufacture of the Company's
products are wood, pulp, energy and other supplies. The Company believes that it
has adequate sources of these and other raw materials and supplies necessary for
the manufacture of pulp and coated paper for the foreseeable future. In the
event that any of the Company's suppliers is unable to meet its demands, the
Company believes that adequate alternative suppliers or substitute materials
would be available at comparable prices.
WOOD AND PULP
For the nine months ended July 2, 1997 and the year ended October 2, 1996,
the Company manufactured approximately 63% and 65%, respectively of its pulp
requirements. This vertical integration reduces the Company's exposure to (and
ability to benefit from) fluctuations in the market price for pulp. All three of
the Company's northern mills are integrated with respect to hardwood pulp
production and the Somerset, Maine mill also has softwood pulping capability. In
addition, the Mobile, Alabama facility receives most of its pulp requirements
from an adjacent pulp mill owned by Kimberly-Clark Corporation.
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In connection with the Acquisition, the Company entered into a long-term pulp
supply agreement with Scott to supply the Company's Mobile paper mill with its
wood pulp requirements (subject to minimum and maximum amounts) at prices
generally based upon market prices, less a discount to reflect transportation
and other cost savings. Scott had previously announced its intention to sell the
Mobile pulp mill, but this announcement was retracted on the merger between
Scott and Kimberly-Clark Corporation. If sold, the buyer of this facility would
be bound by the terms of the above-mentioned agreement. Additional pulp
requirements for the remaining mills are purchased in the open market. In the
event that any of the Company's pulp suppliers are unable to meet its demands,
the Company believes it could obtain adequate supplies to meet its future pulp
requirements.
The Company owns approximately 911,000 gross acres of timberlands in Maine,
789,400 of which are net forested acres. Approximately 433,700 of these acres
produce softwood timber, such as spruce, fir, hemlock and white pine and 355,700
acres produce hardwood timber, such as beech, birch and maple. The Company
believes it can harvest approximately 13,100 acres per year on a sustainable
basis. See "Risk Factors--Stringent Environmental Regulation; Proposed Timber
Regulation" and "Business-- Timberlands".
The Company currently offers recycled products in all coated and some
uncoated grade lines. The Company uses reprocessed fibers produced from its
existing operations and purchases post consumer waste from several suppliers to
meet market requirements for recycled products.
ENERGY REQUIREMENTS
The Company's energy requirements are satisfied through wood and by-products
derived from the Company's pulping processs (approximately 54% of the total
units of energy), coal (approximately 16%), oil (approximately 16%), purchased
steam from the Mobile utility complex (approximately 7%) and natural gas,
electricity and other (approximately 7%).
The Company's power requirements at its Somerset and Westbrook mills have
historically been satisfied through Power Purchase Agreements whereby the mills
each cogenerate electricity and sell the output to CMP at above market rates.
The Agreements also provide that the mills purchase electricity from CMP at the
standard industrial tariff rate. The effect of these Agreements has been to
reduce the Company's historical cost of power. However, the Westbrook Agreement
expires on October 31, 1997, and the Somerset Agreement expires in the year
2012, with the favorable pricing element of the Somerset Agreement ending on
November 30, 1997. The impact from the change in the Somerset Agreement is not
material; however, the expiration of the Westbrook Agreement could have a
material adverse impact if a replacement market for excess power generated at
the Westbrook mill is not found. The Company is currently soliciting bids for
such excess power and anticipates that given current capacity constraints in
Northeast power markets, any material adverse impact should be mitigated.
The Muskegon mill cogenerates electricity, uses the total output in its
operations, and purchases standby power service from Consumers Power Company at
state regulated rates.
In the past, Scott operated the Mobile facility (including the Warren paper
mill, a pulp mill, a tissue mill and an energy facility) on an integrated basis.
Prior to the Acquisition, Scott sold its energy facility at Mobile and the buyer
entered into a long-term agreement with Warren to provide electric power and
steam to the paper mill.
OTHER SUPPLIES
The Company also requires substantial quantities of other supplies such as
coating clay, latex, starch and TiO(2). All of these materials are supplied by
various suppliers.
EMPLOYEES AND LABOR RELATIONS
As of July 2, 1997, the Company had 3,978 employees. Approximately 71% of
employees are represented by six international unions under ten different
contracts. In February 1997, the Company
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<PAGE>
reached settlement on a new six-year labor agreement with its three Somerset,
Maine mill unions. The ratified contract reflects more flexible work rule
provisions and a 3.0% annual wage increase for the term of the agreement. The
Company's labor agreements at its Westbrook, Maine and Mobile, Alabama sites
expired on June 1, 1997. All but one of the three Westbrook unions ratified a
new five year agreement in May 1997 with more flexible work rule provisions. The
Company is engaged in negotiations with the remaining union at Westbrook and the
unions at Mobile. Those affected employees are working under contract extensions
which can be terminated upon 10 days notice. The Company has experienced no work
stoppage in the U.S. in the past eight years and believes that its relationship
with its employees is satisfactory.
ENVIRONMENTAL AND SAFETY MATTERS
The Company is subject to a wide variety of increasingly stringent
environmental laws and regulations relating to, among other matters, air
emissions, wastewater discharges, past and present landfill operations and
hazardous waste management. These laws include the Federal Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act and their respective
state counterparts. The Company will continue to incur significant capital and
operating expenditures to maintain compliance with applicable federal and state
environmental laws. These expenditures include costs of compliance with federal
worker safety laws, landfill expansions and wastewater treatment system
upgrades. See "Risk Factors--Stringent Environmental Regulation; Proposed Timber
Regulation".
In addition to conventional pollutants, minute quantities of dioxins and
other chlorinated organic compounds may be contained in the wastewater effluent
of the Company's bleached kraft pulp mills in Somerset and Westbrook, Maine and
Muskegon, Michigan. The most recent National Pollutant Discharge Elimination
System ("NPDES") wastewater permit limits proposed by the EPA would limit dioxin
discharges from the Company's Somerset and Westbrook mills to less than the
level of detectability. The Company is presently meeting the EPA's proposed
dioxin limits but it is not meeting the proposed limits for other parameters
(E.G., temperature and color) and is attempting to revise these other wastewater
permit limits for its facilities. While the permit limitations at these two
facilities are being challenged, the Company continues to operate under existing
EPA permits, which have technically expired, in accordance with accepted
administrative practice. In addition, the Muskegon mill is involved, as one of
various industrial plaintiffs, in litigation with the County of Muskegon
regarding a 1994 ordinance governing the County's industrial wastewater
pretreatment program. The lawsuit challenges, among other things, the treatment
capacity availability and local effluent limit provisions of the ordinance. In
July 1996, the Court rendered a decision substantially in favor of the Company
and the other plaintiffs, but the County has appealed the Court's decision. If
the Company and the other plaintiffs do not prevail in that appeal or are not
successful in ongoing negotiations with the County, the Company may not be able
to obtain additional treatment capacity for future expansions and the County
could impose stricter permit limits. In June 1997, the EPA sued the County for
failure to enforce permit limits associated with its operation of the wastewater
facility. The Company is uncertain as to the effect, if any, of this action on
its current dispute with the County. 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"). Final promulgation of portions
of the cluster rules is expected to occur in late 1997, with compliance with the
rules 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 $70.0 million to $90.0 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
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$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 approximately $7.0 million will be spent prior to 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 Resource 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.
Warren has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for cleanup
of contamination at seven sites. Based upon the Company's understanding of the
total amount of liability at each site, its calculation of its percentage share
in each proceeding, and the number of potentially responsible parties at each
site, the Company presently believes that its aggregate exposure for these
matters will not be material. Moreover, as a result of the Acquisition, Warren's
former parent, Scott, agreed to indemnify and defend the Company for and
against, among other things, the full amount of any damages or costs resulting
from the off-site disposal of hazardous substances occurring prior to the date
of closing, including all damages and costs related to these seven sites. Since
the date of closing of the acquisition agreement, Scott has been performing
under the terms of this environmental indemnity and defense provision and,
therefore, the Company has not expended any funds with respect to these seven
sites.
The Company currently has a five-year demolition project in progress at its
Westbrook facility for health and safety reasons which is expected to be
completed in the year 2000. Total costs of the project are estimated to be
approximately $9.0 million, of which approximately $5.7 million had been spent
as of July 2, 1997. The Company recognizes these costs as they are incurred.
The Company does not believe that it will have any liability under emergency
legislation enacted by the State of Maine to cover a significant shortfall in
the Maine workers' compensation system through assessments of employers and
insurers; however, there can be no assurance that the existing legislation will
fully address the shortfall.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position,
results of operations or cash flows.
PROPERTIES
Warren's principal executive offices are located in Boston, Massachusetts.
The Company believes that its property and equipment are generally well
maintained, in good operating condition and adequate for its present needs. The
inability to renew any short-term leases would not have a material adverse
effect on the Company's financial position or results of operations.
41
<PAGE>
The following table sets forth the location and use of the Company's
principal facilities, which are owned in fee unless otherwise indicated. All of
the Company's properties are pledged as collateral under Warren's Credit
Facilities (see the Notes to Financial Statements).
<TABLE>
<CAPTION>
LOCATION USE
- --------------------------- -------------------------------------------------------------------------------------
<S> <C>
Skowhegan, Maine Manufacturing facility for the manufacture of coated paper and softwood and hardwood
(Somerset Mill) pulp.
Muskegon, Michigan Manufacturing facility for the manufacture of coated paper and hardwood pulp and a
warehouse (a).
Mobile, Alabama Manufacturing facility for the manufacture of uncoated paper and specialty paper, a
warehouse, a warehouse/distribution center (b) and offices (c).
Westbrook, Maine Manufacturing facility for the manufacture of specialty paper, high bulk coated paper
and hardwood pulp. A research and development facility is also located at this site.
Allentown, Pennsylvania Coated paper sheeting facility and distribution center (d).
Atlanta, Georgia Distribution center (e).
Schaumburg, Illinois Distribution center (f).
Grand Prairie, Texas Distribution center (g).
</TABLE>
- ------------------------
(a) Subject to a lease that operates on a month to month basis.
(b) Subject to a lease expiring in December 2014.
(c) Subject to a lease expiring in December 2019.
(d) Subject to a lease expiring in May 2001.
(e) Subject to a lease expiring in February 2001.
(f) Subject to a lease renewable annually.
(g) Subject to a lease expiring in September 1999.
TIMBERLANDS
The Company owns approximately 911,000 gross acres of timberlands in Maine,
789,400 of which are net forested acres. Approximately 433,700 of these acres
produce softwood timber, such as spruce, fir, hemlock and white pine, and
355,700 acres produce hardwood timber such as beech, birch and maple. The
Company believes that it can harvest approximately 13,100 acres per year on a
sustainable basis.
On November 5, 1996, a proposed binding referendum measure to eliminate
clearcutting in unincorporated areas in the State of Maine was defeated. A
competing measure, which could establish new forestry standards stricter than
current law, but which would not completely ban clearcutting, received a
plurality 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 late 1997. If this measure does become law, the consequence to the
Company is not expected to be material because such measure generally reflects
sustainable forestry initiatives that have already been voluntarily adopted by
the Company. See "Risk Factors--Stringent Environmental Regulation; Proposed
Timber Regulation".
CAPACITY
The Company currently operates four mills and a sheeting facility with total
annual production capacity of approximately 1.5 million tons of paper. The
Company's manufacturing facilities were fully utilized during the nine months
ended September 27, 1995. As a result of weaker market conditions, the Company
temporarily reduced production levels at certain of its manufacturing facilities
during the first quarter of the fiscal year ended October 2, 1996. During the
second quarter of the fiscal year ended October 2, 1996, the Company resumed
full utilization. See "Risk Factors--Cyclical Industry Conditions; Strong
Competition"; "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
42
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
THE COMPANY
Set forth below are the names, ages (at July 2, 1997) and positions of the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- ------------------------------------------------------
<S> <C> <C>
Eugene van As 58 Director, Chairman of the Board
Monte R. Haymon 59 Director, President, Chief Executive Officer
James H. Frick, Jr. 58 Director, Vice President(1)
O. Harley Wood 55 Director, Vice President
William E. Hewitt 62 Director, Vice President, Assistant Secretary
Andries G.J. Vlok 61 Director
Trevor L. Larkan 42 Director, Chief Financial Officer, Vice President,
Treasurer, Assistant Secretary
E. Dannis Herring 44 Director, Vice President
Pablo P. Zamora 55 Vice President, Research and Development
Lewis W. Mohler 60 Vice President, General Manager, Specialties Business
Henry L. Mollenhauer 53 Vice President, General Manager, Printing and
Publishing Business
</TABLE>
- ------------------------
(1)Mr. Frick retired as Vice President--Sales and Marketing effective August 1,
1996. Mr. Frick continues to serve as a Director of the Company and has
entered into a consulting agreement with the Company for the period August
1, 1996 through July 31, 1999. The fee for such consulting services to be
paid to Mr. Frick under such agreement is not considered significant.
Messrs. van As, Hewitt and Larkan have been Directors since December 20,
1994. Mr. Frick has been a Director since March 21, 1989. Messrs. Herring and
Wood have been Directors since March 17, 1992. Mr. Haymon has been a Director
since October 1, 1995. Mr. Vlok has been a director since February 5, 1996.
Directors of the Company are elected annually to serve until the next annual
meeting of stockholders of the Company and until their successors have been
elected or appointed and qualified. Executive officers are appointed by, and
serve at the direction of the Board of Directors of the Company.
Set forth below is a brief account of the business experience of each of the
directors and executive officers of the Company.
EUGENE VAN AS served as President and Chief Executive Officer of the
Company from April 30, 1995 through September 30, 1995. Mr. van As has been
Executive Chairman of Sappi since 1991. He joined Sappi in 1977 as the Managing
Director. He is also a director of Malbak Limited, Olivetti Africa Limited, the
Council for Scientific and Industrial Research and the South African Foreign
Trade Organization.
MONTE R. HAYMON was appointed President and Chief Executive Officer of
Warren on October 1, 1995. Previously he had been President and Chief Operating
Officer of Ply-Gem Industries, and for thirteen years, President and Chief
Executive Officer of Packaging Corporation of America, a division of Tenneco. In
addition to his business experience, Mr. Haymon is a member of the Board of
Directors of Evanston Hospital, a member of the Board of Trustees of Tufts
University as well as Chairman of the Board of Overseers of the Engineering
School. Mr. Haymon is a former member of the Board of Directors
43
<PAGE>
of the National Association of Manufacturers. He is also a former Trustee of
both the Institute of Paper & Science and American Forest Products Association.
JAMES H. FRICK, JR., became Vice President--Sales and Marketing in December
1994. Prior to assuming such a position, Mr. Frick held various positions with
the Company since joining the Company in 1961, including Vice President--Coated
Printing and Publishing from January 1984 through December 1994 and Vice
President/Division Manager Printing and Publishing beginning in 1975.
O. HARLEY WOOD became Vice President--Manufacturing of Warren in March
1991. Mr. Wood joined Scott in January 1989 as Vice President of Manufacturing
Development for its U.S. tissue businesses. Prior to joining Scott, Mr. Wood had
held various positions with Procter and Gamble since 1964.
WILLIAM E. HEWITT was appointed a non-executive director of S.D. Warren at
the time of the Acquisition. He has been the Executive Director--Finance of
Sappi since 1987. He qualified as a chartered accountant in 1957. He has held
executive financial positions in the motor, steel, transportation and retailing
sectors and was Group Financial Director, Toyota (South Africa) until 1987. Mr.
Hewitt is a director of Sappi, Limited.
ANDRIES G.J. VLOK became a director of the Company on February 5, 1996. He
has been Technical Director of Sappi since 1988. He joined Sappi as a Technical
Assistant in 1962 and progressed through various positions within the Sappi
group of companies including Mill Manager and Managing Director of subsidiary
companies. Mr. Vlok has been a director of Sappi since 1983.
TREVOR L. LARKAN, having most recently been Financial Director for Sappi
Southern Africa, a division of Sappi Limited, transferred to Warren as Vice
President and Treasurer with effect from January 1, 1995. In May 1995, Mr.
Larkan was also appointed Chief Financial Officer of the Company. A chartered
accountant, he specialized in treasury management during the early and
mid-1980s, joining Saiccor, the dissolving pulp subsidiary of Courtaulds Plc in
1986. Soon after the acquisition of Saiccor by Sappi in 1988, he was appointed
Financial and Commercial Director of that division.
E. DANNIS HERRING became Vice President--Procurement and Distribution in
May of 1995. Prior to such time, Mr. Herring held various positions with the
Company, including serving as Controller from 1992 to 1994 and as Chief
Financial Officer from March 1994 to May 1995. Mr. Herring began his career with
Scott in 1974 in Warren's Mobile, Alabama mill.
PABLO P. ZAMORA became Vice President--Research and Development for the
Company in February 1995. Prior to such time, Mr. Zamora had been with the James
River Corporation as Vice President-- Research and Development and Chief
Technology Officer. From 1984 to 1990 he held the title of Vice
President--Product Development for Tambrands, Incorporated. Mr. Zamora also held
several technical management positions during a 16-year of period of employment
with Procter and Gamble.
LEWIS W. MOHLER has been Vice President and General Manager of the
Specialties business since July 1992. Prior to such time, Mr. Mohler has held
various positions with Warren since he joined the Company in 1966, including as
General Manager of the Pressure Sensitive business from 1988 to 1992.
HENRY L. MOLLENHAUER has served as Vice President and General Manager of
Printing and Publishing since August 31, 1992. Prior to that time, he served in
various positions with the Company beginning on June 4, 1969.
44
<PAGE>
COMPENSATION
The following tables set forth information with respect to the compensation
of the Chief Executive Officer and the four other most highly compensated
individuals who served as officers of S.D. Warren during 1996. All references to
shares, options and stock appreciation rights ("SARs") therein refer to shares
of Scott. S.D. Warren has not granted shares, options or SARs to its employees
prior to or during the fiscal year ended October 2, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- -------------------------- -----------
<CAPTION>
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP
YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS/ PAYOUTS
(1)(2) ($) ($) ($) ($) SARS(#)(4) ($)
----------- --------- --------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Monte R. Haymon................. 1996 $ 600,565 $ -- $ -- $ -- $ -- $ --
Chief Executive Officer and
President (5)
James H. Frick, Jr. ............ 1996 187,514 125,000 17,195 -- -- --
Vice President--Coated 1995 152,744 -- -- -- -- --
Printing and Publishing (6) 1994 183,967
Trevor L. Larkan................ 1996 169,801 90,000 54,361(7) -- -- --
Chief Financial Officer, Vice 1995 116,607 -- 67,076(7) -- -- --
President and Treasurer
O. Harley Wood.................. 1996 189,843 85,000 -- -- -- --
Vice President--Manufacturing 1995 134,601 -- -- -- -- --
1994 173,025 -- -- -- 6,000 --
E. Dannis Herring............... 1996 172,808 85,000 -- -- -- --
Vice President--Procurement 1995 121,745 -- -- -- -- --
and Distribution 1994 150,222 -- -- -- 4,500 --
<CAPTION>
<S> <C>
ALL OTHER
COMPENSATION
($)(3)
-------------
<S> <C>
Monte R. Haymon................. $ --
Chief Executive Officer and
President (5)
James H. Frick, Jr. ............ 20,644
Vice President--Coated 37,017
Printing and Publishing (6)
Trevor L. Larkan................ --
Chief Financial Officer, Vice --
President and Treasurer
O. Harley Wood.................. --
Vice President--Manufacturing 157,803
54,493
E. Dannis Herring............... --
Vice President--Procurement --
and Distribution --
</TABLE>
- ------------------------
(1) Information with respect to years prior to 1995 is being provided only for
Messrs. Frick, Wood and Herring to the extent that information with respect
to their compensation has previously been required to be filed with the
Securities and Exchange Commission.
(2) Compensation for 1996, 1995 and 1994 is for the fiscal year ended October 2,
1996, the fiscal period December 21, 1994 through September 27, 1995 and the
nine months ended September 24, 1994 combined with the period September 25,
1994 through December 20, 1994, respectively.
(3) The amounts shown under "All Other Compensation" consist of matching
contributions under the Salaried Investment Plan, imputed income for life
insurance premiums for each year shown and educational assistance payouts
plus payments made upon withdrawals of vacation accrued consisting of
$18,219 in 1996 and $7,460 both in 1995 and 1994 for Mr. Frick, and $13,310
in 1995 for Mr. Wood. In addition, the amounts shown under "All Other
Compensation" consist of bonuses associated with the sale of S.D. Warren by
Scott in the amount of $150,000 for Mr. Frick and $50,000 for Mr. Wood paid
in 1994 and $140,000 paid by Scott to Mr. Wood in 1995 under a supplemental
retirement plan.
(4) All options granted by Scott in 1994 were forfeited prior to the end of 1994
in connection with the sale of S.D. Warren by Scott.
(5) Mr. Haymon was appointed President and Chief Executive Officer of Warren as
of October 1, 1995.
(6) Mr. Frick retired as Vice President--Sales and Marketing effective August 1,
1996. Mr. Frick continues to serve as a Director of the Company and has
entered into a consulting agreement with the Company for the period August
1, 1996 through July 31, 1999. The fee for such consulting services to be
paid to Mr. Frick under such agreement is not considered significant.
(7) The amounts shown include $42,000 and $31,500 of housing allowance payments
in 1996 and 1995, respectively, and $27,577 of relocation payments in 1995
for Mr. Larkan.
45
<PAGE>
PENSION BENEFITS
As of October 31, 1994, the Company assumed sponsorship of the portion of
the Scott qualified plans which covered employees who would continue to be
employed by the Company after the closing of the Acquisition (the "Closing
Date"). The defined benefit plan which covers the executive officers (the
"Salaried Plan") provides benefits based on a participant's years of service and
highest compensation during the final years of employment. Generally, the hourly
defined benefit plan provides covered employees with a stated amount of
retirement benefit for each year of service. The Company maintains a
Supplemental Executive Retirement Program for certain key executives. This plan
is a non-qualified deferred compensation plan.
The following table shows the estimated annual retirement benefits payable
to participants with specified amounts of compensation and years of credited
service at normal retirement age under the Salaried Plan. The estimated
retirement benefits are the amounts payable in the form of a single life annuity
and do not take into account the reduction with respect to years of credited
service after 1978 equal to a percentage (up to a maximum of 50%) of the
participant's Social Security benefit.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE (2)
AVERAGE FINAL ----------------------------------------------------------------
COMPENSATION (1) 15 20 25 30 35 40
- ---------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
$100,000.................... $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500 $ 60,000
125,000.................... 28,125 37,500 46,875 56,250 65,625 75,000
150,000.................... 33,750 45,000 56,250 67,500 78,750 90,000
200,000.................... 45,000 60,000 75,000 90,000 105,000 120,000
</TABLE>
- ------------------------
(1) A participant's "Average Final Compensation" is the average of the
participant's annual compensation in the four calendar years (whether or not
consecutive), out of the last ten years of the participant's employment, in
which the participant's annual compensation was highest. "Annual
compensation" includes salary and bonuses paid in such year. For this
purpose, years of employment with, and compensation paid by, Scott prior to
the Acquisition are taken into account. To comply with tax qualification
requirements under the Internal Revenue Code, annual compensation taken into
account for any participant under the Salaried Plan may not exceed $150,000.
However, effective January 1, 1995, the Company adopted a plan (the "SERP")
to provide supplementary retirement benefits where benefits are lost under
the qualified plans as a result of the statutory limitations and the
benefits are reflected in the table. Accordingly, the covered compensation
of each executive officer for 1995 was equal to the amounts of salary and
bonus shown on the Summary Compensation Table above. There also is a
statutory limitation on the amount of annual benefit which may be paid under
the Salaried Plan. Benefits which accrued under the Plan in excess of the
statutory limitations are also protected under the SERP.
(2) The named executive officers had the following full years of credited
service under the Salaried Plan as of October 2, 1996: Messrs. Frick, 35;
Wood, 7; and Herring, 22. Mr. van As does not participate in the salaried
plan. The Company also adopted, effective January 1, 1995, the Plan for
Individual Deferred Compensation Arrangements in which Mr. Wood
participated. Mr. Wood will receive a benefit under this Plan based upon an
additional 10 years of credited service if he is employed by the Company for
five years from February 1, 1994.
In addition to the foregoing plans, the Company sponsors two collectively
bargained pension plans in the U.S. and one salaried plan in Belgium. The
collectively bargained plans provide benefits of stated amounts for each year of
credited service and the international plan provides benefits based on years of
service and compensation. No executive officer is covered by any of these other
plans.
46
<PAGE>
THE ACQUISITION
As of October 8, 1994, SDW Acquisition, a direct wholly owned subsidiary of
Holdings, entered into a definitive agreement (the "Stock Purchase Agreement")
pursuant to which, on December 20, 1994, SDW Acquisition acquired from Scott all
of the outstanding capital stock of Warren for a net cash purchase price of
approximately $1.5 billion, plus the assumption of various liabilities,
including approximately $121.9 million of outstanding indebtedness (including
capital leases) of the Company, subject to there being a Net Assets (as defined
therein) value of $1.6 billion at closing. Pursuant to the provisions of the
Stock Purchase Agreement, $75.0 million of cash was required to be on Warren's
balance sheet on the Closing Date, effectively reducing the cash purchase price
by such amount. Based on a closing Net Assets calculation delivered to the
Company by Scott pursuant to the Stock Purchase Agreement (the "Seller's Net
Assets Calculation"), the purchase price was reduced by approximately $43.6
million pursuant to a post-closing adjustment mechanism. The Company and Scott
have resolved a dispute regarding the Seller's Net Assets Calculation pursuant
to dispute procedures established in the Stock Purchase Agreement. The actual
amount of the purchase price adjustment was $48.0 million. Scott has since been
acquired by Kimberly-Clark Corporation.
The largest investor in Holdings is Sappi, which is the largest forest
products company in Africa, the third largest producer of coated free paper in
Europe and one of the world's leading pulp, paper and timber exporters. Sappi
owns and operates a number of timber processing plants and eight mills in
Southern Africa. Outside Africa, Sappi's operations include four fine paper
mills in the United Kingdom and two mills in Germany which produce coated and
uncoated free paper and specialty paper. With the S.D. Warren Acquisition, Sappi
became the largest coated free paper manufacturer in the world. Sappi is based
in Johannesburg, South Africa and employs approximately 23,000 people worldwide.
SDW Acquisition financed the Acquisition (including approximately $87.7
million of transaction expenses) with the following sources of funds: (i)
borrowings of $630.0 million under the Term Loan Facilities and initial
borrowings of $160.2 million under the $250.0 million Revolving Credit Facility,
of which $75.0 million was available for repayment following the Acquisition
with cash required to be on Warren's balance sheet at closing, (ii) the issuance
of $375.0 million of SDW Acquisition 12% Senior Subordinated Notes due 2004 (the
"SDW Acquisition Notes" and the offering thereof the "Note Offering"), (iii) the
issuance of $75.0 million in liquidation preference of SDW Acquisition 14%
Senior Exchangeable Preferred Stock due 2006 (the "SDW Acquisition Senior
Preferred Stock") as part of Units (the "Units" and the Offering thereof, the
"Unit Offering" and, together with the Note Offering, the "Offerings")
consisting of SDW Acquisition Senior Preferred Stock and Class A Warrants and
(iv) a net common equity contribution of $331.8 million from Holdings. Holdings'
common equity contribution was financed through the purchase of common equity
and Class B warrants of Holdings ("Class B Warrants") by the Investor Group, the
purchase of $37.5 million in liquidation preference of Holdings Preferred Stock
by DLJMB and UBSC and the issuance of Class A warrants of Holdings (the "Class A
Warrants") as part of the Unit Offering. The Bank Financing also included a
$220.0 million Letter of Credit Facility, pursuant to which letters of credit
were issued to support an existing letter of credit arranged by Scott and to
support the Company's obligations with respect to certain indebtedness and
capital and operating leases.
Immediately following the Acquisition, SDW Acquisition merged with and into
S.D. Warren and (i) the indebtedness outstanding under the Bank Financing and
the SDW Acquisition Notes was assumed by the Company (the "Series A Notes") and
(ii) the SDW Acquisition Senior Preferred Stock was converted into an equivalent
amount of the Company's 14% Series A Senior Exchangeable Preferred Stock due
2006 (the "Old Senior Preferred Stock").
Pursuant to an exchange offer consummated on May 31, 1995 (the "Exchange
Offer"), the Notes were issued by the Company for the Series A Notes and the
Senior Preferred Stock was issued by the Company in exchange for the Old Senior
Preferred Stock.
47
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is a wholly owned subsidiary of Holdings. Pursuant to the Credit
Agreement, certain guarantees and the Facilities (as defined) are secured by
security interests in all of the common stock of Warren. See "Description of the
Credit Agreement--Guarantees and Collateral Security". The following table sets
forth certain information with respect to the beneficial ownership of Holdings
Common Stock as of the date of this Prospectus. See "Risk Factors--Significant
Influence by Majority Stockholder".
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-----------------------------------
PERCENT OF
NAME AND ADDRESS OF NUMBER OF CLASS
BENEFICIAL OWNER SHARES OUTSTANDING(1)
- -------------------------------------------------------------------------- ------------------ ---------------
<S> <C> <C>
Sappi Limited............................................................. 34,978,904(2)(3) 100.00%
48 Ameshoff Street
Braamfontein 2001
Republic of South Africa
Heritage Springer Limited................................................. 8,002,343(3)(4) 22.88%
c/o Royal Bank of Canada Trust Company (Jersey) Limited
P.O. Box 194/St. Helier
Jersey JE48RR
Channel Islands
</TABLE>
- ------------------------
(1) Percentages have been calculated assuming, in the case of each person or
group listed, the exercise of all warrants and options owned (which are
exercisable within 60 days following July 15, 1997) by each such person or
group, respectively, but without the exercise of any warrants or options
owned by any other person or group.
(2) Includes 26,976,561 shares held through a subsidiary. Also includes
8,002,343 shares held by HSL that are subject to the HSL Option Agreement,
pursuant to which Sappi has a right to purchase such shares at any time
prior to April 30, 2000. HSL has also granted Sappi an irrevocable proxy to
vote such shares during the term of such agreement, subject to compliance by
Sappi with its purchase obligations upon exercise of its purchase rights or
certain rights of HSL to require Sappi to purchase such shares. See 'Certain
Relationships and Related Transactions--Minority Acquisition".
(3) If the Merger becomes effective, Sappi will own 75,065 shares (100%) of
Holdings' new Class A Common Stock, and HSL will own 24,935 shares (100%) of
Holdings new non-voting convertible Class B Common Stock. See 'Certain
Relationships and Related Transactions--Minority Acquisition".
(4) The shares and any shares acquired upon consummation of the Merger are
subject to the HSL Option Agreement, pursuant to which Sappi has a right to
purchase such shares at any time prior to April 30, 2000 and an irrevocable
proxy pursuant to which Sappi is entitled to vote all of such shares. See
'Certain Relationships and Related Transactions--Minority Acquisition and
Merger".
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. Sappi has proposed and is making efforts to consummate the Merger
in fulfillment of this obligation. See 'Certain Relationships and Related
Transactions--Minority Acquisition and Merger".
48
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE COMPANY'S MOBILE FACILITY: ARRANGEMENTS WITH SCOTT
The Company's Mobile, Alabama paper mill was historically operated by Scott
as part of an integrated facility (including a tissue mill, a pulp mill and
energy facility). In connection with the Acquisition, the Company entered into
long-term (25 years initially, subject to mill closures and certain FORCE
MAJEURE events) supply agreements with Scott for the supply of pulp and water
and the treatment of effluent at the Mobile facility. Wood pulp is supplied
generally at market prices. Pulp prices are 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
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 nonessential services covered by the Shared Services
Agreement at any time prior to the end of the 25-year term. Scott recently
merged with Kimberly-Clark Corporation. The surviving entity, Kimberly-Clark
Corporation is bound by the terms of the above-mentioned agreements.
SHAREHOLDERS AGREEMENT
In connection with the Acquisition, Sappi, and affiliate of Sappi, DLJMB,
UBSC, Holdings and the Company (as successor by merger to SDW Acquisition)
entered into a shareholders agreement, as amended (the 'Shareholders
Agreement"), which contained certain agreements with respect to the capital
stock and corporate governance of Holdings and the Company following the
Acquisition. In connection with the Minority Acquisition, DLJMB and UBS ceased
to be parties to the Shareholders Agreement, and the parties to the Shareholders
Agreement agreed to the termination of most of the provisions therein. See 'Risk
Factors--Control by Sappi". The following is a summary of the surviving terms of
the Shareholders Agreement. Capitalized terms used below and not otherwise
defined have the meanings assigned thereto in the Shareholders Agreement.
REGISTRATION RIGHTS
Sappi and its permitted transferees (the "Sappi Group") have the right,
subject to certain limitations, to require Holdings to register all or a portion
of their Registrable Stock (as defined) under the Act by giving written notice
to Holdings of such demand (a "Demand Registration"). Subject to certain
limitations, the Sappi Group has the right to make up to three Demand
Registrations.
PIGGYBACK RIGHTS
Under certain circumstances, if Holdings registers Common Stock under the
Act, each member of the Sappi Group has the right, subject to certain
limitations, to require Holdings to include such member's (or transferee's)
Registrable Stock in such registration.
MISCELLANEOUS PROVISIONS
If certain of Sappi's foreign operations intend to sell products into the
United States that are the same as or substantially similar to, or compete with,
the Company's products, they will, subject to certain
49
<PAGE>
exceptions, be required to enter into an arms' length marketing agreement with
the Company, and if the Company intends to sell products outside of the United
States and Canada, it will, subject to certain exceptions, be required to enter
into arms' length marketing agreements with affiliates of Sappi.
INVESTOR GROUP AGREEMENTS
The Company paid certain sponsor fees, reimbursed expenses for and provided
indemnification to, members of the Investor Group in connection with the
Acquisition and the financing thereof. Sappi received a sponsor fee in the
amount of $3,752,543 and UBSC received a sponsor fee in the amount of $553,753.
In addition, DLJSC, an affiliate of DLJMB, received a sponsors fee in the amount
of $2,768,766. The Company pays a yearly advisory fee to Sappi and/or its
Affiliates of up to $1.0 million. As a result of this fee, Sappi and its
Affiliates generally will not charge the Company for time spent on Company
matters by the senior executive officers of Sappi and its Affiliates or for
related travel and out-of-pocket expenses.
TRANSACTIONS WITH RELATED PARTIES
Pursuant to the limitations on restricted payments outlined in the Credit
Agreement, the Indenture and the Senior Preferred Stock, the Company may make
cash payments to Holdings, including, among other things, (i) amounts under a
tax sharing agreement to be entered into between the Company and Holdings
necessary to enable Holdings to pay the Company's taxes and (ii) administrative
fees to Holdings and amounts to cover various specified costs and expenses of
Holdings. The associated administrative fee incurred by the Company during the
year ended October 2, 1996 was approximately $1.0 million.
The Company has contracted through a management services agreement (the
"Management Services Agreement") and central cost allocation agreement (the
"Central Cost Allocation Agreement") with two subsidiaries of Sappi, Sappi
International Management AG ("SIM") and Sappi Management Services Limited
("SMS"), to provide management advisory services. The aggregate fee to be
charged to the Company by SIM and SMS is limited to an annual amount of $1.0
million. For the year ended October 2, 1996, the Company incurred a related
management fee expense of approximately $1.0 million.
The Management Services Agreement with SIM establishes an agreement whereby
SIM provides strategic and corporate planning advice, financial and legal
services and services relating to public affairs and human resources. The
Company agrees to pay a service fee to SIM which is determined based upon the
Company's proportionate share in the aggregate amount of costs which SIM incurs
in providing services to the entire number of group companies which have entered
into agreements of this nature with SIM, plus a profit mark-up of 10%. The
Company's proportionate share is based upon the time spent on Company services
divided by total time spent by SIM on total group company services. This
agreement commenced on January 1, 1995 and is effective until terminated by
either party with six months' written notice.
The Central Cost Allocation Agreement with SMS provides for general
technical and administrative support services to supplement the services
provided by SIM. The Company has agreed to pay a service fee to SMS which is
determined based upon the Company's proportionate share in the aggregate amount
of costs which SMS incurs in providing services to the entire number of group
companies which have entered into agreements of this nature with SMS, plus a
profit mark-up of 10%. The Company's proportionate share is based upon the
Company's inventory turnover divided by total inventory turnover of SMS group
companies. This agreement commenced on January 1, 1995 and is effective until
terminated by either party with six months written notice.
Warren has also entered into a cross licensing agreement with Sappi
Deutschland, the worldwide holding company for all European and U.S. business
operations of the Sappi group and the entity through which Sappi holds its
interest in Holdings, and Hannover Papier AG ("Hannover"), a subsidiary of
Sappi. Pursuant to this agreement, the Company and Hannover have agreed to enter
into specific written agreements to share paper processing techniques and have
also agreed to enter into specific distribution agreements whereby the Company
has agreed to use its distribution network in the United States to facilitate
and increase Hannover's exports. Sappi Deutschland will facilitate the licensing
process. No
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specific agreements have been entered into in connection with this cross
licensing agreement as of July 2, 1997.
The Company sells products to certain Sappi subsidiaries (primarily Sappi
Europe, SA, Specialty Pulp Services and U.S. Paper Corporation) at market rates.
These subsidiaries then sell the Company's products to external customers and
remitted the proceeds from such sales to Warren, net of a sales commission. For
the year ended October 2, 1996 and the nine months ended July 2, 1997,
respectively, the Company sold $151.4 million and $107.5 million of products to
Sappi subsidiaries and incurred fees of approximately $7.2 million and $6.4
million relating to such sales. Trade accounts receivable at October 2, 1996 and
July 2, 1997 include approximately $37.1 million and $25.3 million,
respectively, due from subsidiaries of Sappi. The Company has formalized certain
of agreements and is in the process of formalizing written agreements for the
remainder. See "Risk Factors--Control by Sappi".
MINORITY ACQUISITION AND MERGER
On May 27, 1997, Sappi consummated the Minority Acquisition and thereby
acquired through an indirect wholly-owned subsidiary all of the common equity
interests of Holdings held by the Sellers for an aggregate purchase price of
$138.0 million, or $17.25 per share. Sappi then caused all of the Holdings
common stock purchase warrants acquired in the Minority Acquisition to be
exercised. In connection with the Minority Acquisition, Sappi and the Sellers
terminated most of the provisions of the Shareholders Agreement, and the Sellers
have ceased to have any rights or obligations under the remaining provisions.
See "Certain Relationships and Related Transactions--Shareholders Agreement". In
connection with the financing of the Minority Acquisition, Sappi caused the
shares of Holdings common stock to be sold to HSL, which in turn pledged the
shares to certain lenders. The common stock of Holdings held by HSL is subject
to an option for Sappi to reacquire such securities at any time prior to April
30, 2000, and a right for HSL to require Sappi to purchase such securities on
the occurrence of certain events and at any time between May 15 and May 30, 2000
(the "HSL Option Agreement"). In addition, such shares are subject to an
irrevocable proxy for Sappi to vote the shares of Holdings common stock during
the term of the HSL Option Agreement. As a result of the Minority Acquisition
and the related financing transaction, Sappi indirectly owns approximately
75.07%, and controls the voting of approximately 97.34%, of the common equity of
Holdings on a fully diluted basis. See "Risk Factors--Control by Sappi".
On July 30, 1997, Holdings entered into the Merger Agreement with
Acquisition II, pursuant to which each issued and outstanding share of common
stock of Holdings held by any party other than Sappi and its affiliates or HSL
will be converted into the right to receive $17.60 per share in cash, subject to
the exercise of appraisal rights. Each outstanding Class A Warrant of Holdings
will become exercisable solely for $5.2708 in cash, each outstanding Class B
Warrant of Holdings will become exercisable solely for $17.60 in cash, in each
case upon payment of the applicable exercise price and satisfaction of the other
terms and conditions of the related warrant agreement, and shares of Holdings
Senior Preferred Stock will remain outstanding without amendment, subject to the
exercise of appraisal rights. The Class B common stock of Holdings received by
HSL as a result of the Merger and any Class A common stock of Holdings received
on conversion will be subject to the HSL Option Agreement and the irrevocable
proxy in favor of Sappi. The Merger Agreement is expected to become effective on
or about September 5, 1997, but the Merger Agreement is subject to certain
important conditions, and there can be no assurance that the conditions to the
Merger will be satisfied or waived. If the Merger becomes effective, Sappi will
own 100% of the issued and outstanding voting common stock, and 75.07% of the
common equity of Holdings in the form of new Class A common stock, and HSL will
own 24.93% of the common equity of Holdings in the form of new non-voting Class
B common stock of Holdings. See "Risk Factors--Control by Sappi". Neither the
Minority Acquisition nor the Merger will affect the terms or ownership of the
outstanding securities of Warren.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes were issued pursuant to an indenture between SDW Acquisition and
The Bank of New York, as trustee (the "Trustee") dated as of December 20, 1994
(the "SDW Acquisition Indenture") as amended by the supplemental indenture
between the Company and the Trustee dated as of December 20, 1994 (the
"Supplemental Indenture" and, with the SDW Acquisition Indenture, the
"Indenture"), a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus constitutes a part. The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Notes are subject to all such terms, and Holders of Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of the material provisions of the Indenture is qualified
in its entirety by reference to the Indenture, including the definitions therein
of certain terms used below, and the Trust Indenture Act. The definitions of
certain terms used in the following summary are set forth below under "--Certain
Definitions".
The Notes are general unsecured obligations of the Company, rank senior in
right of payment to or PARI PASSU in right of payment with all future
subordinated Indebtedness of the Company (including the Exchange Debentures, if
issued) and rank junior in right of payment to all existing and future Senior
Debt of the Company. See "--Subordination".
As of the date of this Prospectus, all of the Company's Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on December 15, 2004. Interest on the Notes will
accrue at the rate of 12% per annum and will be payable semi-annually in arrears
on each June 15 and December 15, to Holders of record on the immediately
preceding June 1 and December 1. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. Principal, premium, if any, and
interest, if any, on the Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or, at
the option of the Company, payment of interest may be made by check mailed to
the Holders of the Notes at their respective addresses set forth in the register
of Holders of Notes. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Notes were issued in denominations of $1,000 and integral
multiples thereof.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the Company's option prior to December 15, 1999. Thereafter, the
Notes will be subject to redemption at the option of the Company, in whole or in
part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on December 15 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------------ -----------
<S> <C>
1999.................................................................... 104.500%
2000.................................................................... 103.000%
2001.................................................................... 101.500%
2002 and thereafter..................................................... 100.000%
</TABLE>
On or prior to December 15, 1997, the Company may redeem from time to time
up to $130.0 million in aggregate principal amount of Notes at a redemption
price of 111.0% of the principal amount thereof,
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<PAGE>
plus accrued and unpaid interest thereon to the redemption date, with the net
proceeds of one or more public offerings of common stock of Holdings; PROVIDED
that at least $245.0 million in aggregate principal amount of Notes remain
outstanding immediately after such redemption; and PROVIDED FURTHER that such
redemption shall occur within 45 days of the date of the closing of any such
public offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; PROVIDED
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
SUBORDINATION
The payment of principal, premium, if any, and interest on the Notes is
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full of all Senior Debt, whether outstanding on the Issue Date or
thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
winding up, receivership or similar proceeding relating to the Company or its
property, an assignment for the benefit of creditors or any marshalling of the
Company's assets and liabilities, in each such case whether voluntary or
involuntary, domestic or foreign, the holders of Senior Debt of the Company will
be entitled to receive payment in full of all Obligations due in respect of such
Senior Debt (including interest after the commencement of any such proceeding in
accordance with the terms of the applicable Senior Debt, whether or not such
interest is an allowed claim enforceable against the debtor in a bankruptcy case
under Title 11 of the United States Code) before the Holders of Notes will be
entitled to receive any payment (including any payment or other distribution
that may be payable by reason of the payment of any other Indebtedness of the
Company (including, without limitation, the Exchange Debentures) being
subordinated to the payment of the Notes) with respect to the Notes, and until
all Obligations with respect to Senior Debt of the Company are paid in full, any
such distribution to which the Holders of Notes would be entitled shall be made
to the holders of such Senior Debt (except that so long as the Notes are not
treated in any case or proceeding or other event described above as part of the
same class of claims as the Senior Debt or any class of claim on a parity with
or senior to the Senior Debt for any payment or distribution, Holders of Notes
may receive securities that are
subordinated at least to the same extent as the Notes to Senior Debt of the
Company and any securities issued in exchange for such Senior Debt and that are
authorized by an order or decree of a court of competent jurisdiction in a
reorganization proceeding under any applicable bankruptcy, insolvency or similar
law which gives effect to the subordination of the Notes to Senior Debt in a
manner and with an effect which would be required if this parenthetical clause
were not included in this paragraph; PROVIDED that the Senior Debt is assumed by
the new corporation, if any, resulting from any such reorganization or
readjustment and issuing such securities.).
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The Company also may not make any payment upon or in respect of the Notes
whether on account of principal, interest, premiums or otherwise (except in such
subordinated securities) if: (i) a default in the payment of the principal of,
premium, if any, or interest on any Senior Debt occurs and is continuing beyond
any applicable period of grace or (ii) any other default occurs and is
continuing with respect to Designated Senior Debt or would occur as a
consequence of such payment that permits holders of the Designated Senior Debt
as to which such default relates to accelerate its maturity without further
notice (except such notice as may be required to effect such acceleration) or
lapse of time and the Trustee receives a notice of such default (a "Payment
Blockage Notice") from the Company or any representative of the holders of any
such Designated Senior Debt (including the administrative agent under the Credit
Agreement). Payments on the Notes may and shall be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived and (b)
in case of a non-payment default, the earlier of the date on which such
non-payment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated and not paid. No new period of
payment blockage may be commenced within 365 days after the receipt by the
Trustee of any prior Payment Blockage Notice. No nonpayment default that existed
or was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
The Indenture further requires that the Company promptly notify holders of
Senior Debt of the Company if payment of the Notes is accelerated because of an
Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. At July 2, 1997, the
aggregate principal amount of Senior Debt of the Company was $522.7 million. The
Indenture limits, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Debt, that the Company and its Restricted
Subsidiaries can incur. See "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock".
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase (the "Change of Control Payment").
Within 30 days following any Change of Control, the Company will mail a notice
to each Holder stating: (1) that the Change of Control Offer is being made
pursuant to the covenant entitled "Change of Control" and that all Notes
properly tendered will be accepted for payment; (2) the purchase price and the
purchase date, which will be no earlier than 30 days nor later than 60 days from
the date such notice is mailed (the "Change of Control Payment Date"); (3) that
any Note not properly tendered will continue to accrue interest; (4) that,
unless the Company defaults in the payment of the Change of Control Payment, all
Notes accepted for payment pursuant to the Change of Control Offer will cease to
accrue interest after the Change of Control Payment Date; (5) that Holders
electing to have any Notes purchased pursuant to a Change of Control Offer will
be required to surrender the Notes, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Notes completed, or transfer the Notes by
book-entry, to the Paying Agent at the address specified in the notice prior to
the close of business on the third Business Day preceding the Change of Control
Payment Date; (6) that Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of Notes delivered for purchase, and a statement that such
Holder is withdrawing his election to have such Notes purchased; and (7) that
Holders whose Notes are being purchased only in part will be issued new Notes
equal in principal amount to the unpurchased portion of the Notes surrendered
(or transferred by book-
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entry), which unpurchased portion must be equal to $1,000 in principal amount or
an integral multiple thereof.
On the Change of Control Payment Date, the Company will, to the extent
lawful: (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book-entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; PROVIDED that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture provides that,
prior to complying with the provisions of this covenant, but in any event within
90 days following a Change of Control, the Company will either repay all
outstanding Senior Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of Notes
required by this covenant. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
The Credit Agreement prohibits the Company from purchasing any Notes and
also provides that a Change of Control will constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Credit Agreement. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of Notes.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1 and Rule 13e-4, in connection
with any offer required to be made by the Company to repurchase the Notes as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the Indenture, the
Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the Indenture by
virtue thereof.
The provisions relative to the Company's obligation to make an offer to
repurchase the Notes as a result of a Change of Control may be waived or
modified with the written consent of the Holders of a majority in principal
amount of the Notes.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, engage in an Asset Sale unless: (i) the Company
(or such Restricted Subsidiary, as the case may be) receives consideration at
the time of such Asset Sale at least equal to the fair market value (as
determined by the Board of Directors) of the assets sold or otherwise disposed
of and (ii) at least 85% of the consideration therefor received by the Company
or such Restricted Subsidiary is in the form of Cash Equivalents; PROVIDED that
the amount of (x) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet or in the notes thereto) of the Company
or any Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Notes or any guarantee thereof) that are assumed by the
transferee of any such assets and (y) any notes or other obligations
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<PAGE>
received by the Company or any such Restricted Subsidiary from such transferee
that are promptly converted by the Company or such Restricted Subsidiary into
cash (to the extent of the cash received) shall be deemed to be Cash Equivalents
for purposes of this provision.
Within one year after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option: (a) to permanently
reduce borrowings under the Credit Agreement or repay, prepay or purchase any
other Senior Debt of the Company or any Guarantor (and, in the case of revolving
credit borrowings, to correspondingly permanently reduce commitments with
respect thereto) or (b) to an Investment in another business, the making of a
capital expenditure or the acquisition of long-term/tangible assets, in each
case, in a Permitted Business. Pending the final application of any such Net
Proceeds, the Company may temporarily reduce revolving credit borrowings under
the Credit Agreement or otherwise invest such Net Proceeds in any manner that is
not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds". When the aggregate amount of Excess
Proceeds exceeds $25.0 million, the Company will be required to make an offer to
all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 101% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the date
of purchase, in accordance with the procedures set forth in the Indenture. To
the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
Notes surrendered by holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1 and Rule 13e-4, in connection
with any offer required to be made by the Company to repurchase the Notes as a
result of an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the Indenture, the
Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the Indenture by
virtue thereof.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution (or payment of fees or other amounts in lieu
thereof) on account of the Company's or any of its Restricted Subsidiaries'
Equity Interests (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable (A) to the Company or any Wholly Owned Restricted
Subsidiary of the Company that is a Guarantor or (B) pro rata to all holders of
Capital Stock of a Restricted Subsidiary of the Company); (ii) purchase, redeem
or otherwise acquire or retire for value any Equity Interests of the Company or
any Restricted Subsidiary or other Affiliate of the Company (other than any such
Equity Interests owned by the Company or any Wholly Owned Restricted Subsidiary
of the Company that is a Guarantor); (iii) purchase, redeem or otherwise acquire
or retire for value any Indebtedness that is PARI PASSU with or subordinated to
the Notes (other than Notes), except at final maturity or in accordance with the
mandatory redemption or repurchase provisions set forth in the original
documentation governing such Indebtedness; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments"), unless, at
the time of such Restricted Payment:
(a) no Default shall have occurred and be continuing or would occur as a
consequence thereof; and
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(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the Issue Date (including Restricted Payments permitted by clauses
(i), (ii) and (xvi) of the next succeeding paragraph but excluding
Restricted Payments permitted by clauses (iii) through (xv), (xvii) and
(xviii) of the next succeeding paragraph), is less than the sum (without
duplication) of:
(A) 50% of the Consolidated Net Income of the Company (determined by
excluding amounts included in clause (D)) for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the Issue Date to the end of the Company's most recently
ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit);
(B) 100% of the aggregate net cash proceeds received by the Company
from the issue or sale after the Issue Date of Equity Interests of the
Company or of debt securities of the Company that have been converted
into such Equity Interests (other than Equity Interests (or convertible
debt securities) sold to a Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock);
(C) the aggregate cash received by the Company after the Issue Date
as capital contributions to the Company; and
(D) the amount of the net reduction in Investments in Unrestricted
Subsidiaries resulting from (1) the payment of cash dividends or the
repayment in cash of the principal of loans or the cash return on any
Investment, in each case to the extent received by the Company or any
Wholly Owned Restricted Subsidiary of the Company from Unrestricted
Subsidiaries, (2) to the extent that any Restricted Investment that was
made after the Issue Date is sold for cash or otherwise liquidated or
repaid for cash, the after-tax cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any) and (3)
the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued as provided in the definition of "Investment"), such aggregate
amount of the net reduction in Investments not to exceed in the case of
any Unrestricted Subsidiary, the amount of Restricted Investments
previously made by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary, which amount was included in the calculation of
the amount of Restricted Payments.
The foregoing provisions will not prohibit: (i) the making of any Restricted
Payment within 60 days after the date of declaration thereof or the making of
any binding commitment in respect thereof, if at said date of declaration or
commitment such Restricted Payment would have complied with the provisions of
the Indenture; (ii) the redemption, repurchase, retirement or other acquisition
of any Equity Interests of the Company, or the defeasance, redemption or
repurchase of PARI PASSU or subordinated Indebtedness in exchange for, or out of
the proceeds of, the substantially concurrent sale (other than to a Subsidiary
of the Company) of Equity Interests of the Company (other than any Disqualified
Stock) or out of the proceeds of a substantially concurrent cash capital
contribution received by the Company; (iii) the defeasance, redemption or
repurchase of PARI PASSU or subordinated Indebtedness with the net proceeds from
an Incurrence of Indebtedness permitted by the covenant described under
"--Incurrence of Indebtedness and Issuance of Preferred Stock"; (iv) the
repurchase, redemption or other acquisition or retirement for value of (or
payments to Holdings which are used by Holdings to repurchase, redeem or
otherwise acquire or retire for value) any Equity Interests of Holdings held by
employees of Holdings, the Company or its Subsidiaries pursuant to any employee
equity subscription agreement, stock incentive agreement or stock ownership
arrangement; PROVIDED that (A) the aggregate price paid for all such
repurchased, redeemed,
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acquired or retired Equity Interests shall not exceed $5.0 million in any
twelve-month period plus the aggregate cash proceeds received by the Company
during such twelve-month period from any reissuance of Equity Interests of
Holdings to employees of Holdings, the Company and its Subsidiaries and (B) no
Default shall have occurred and be continuing immediately after such
transaction; (v) the defeasance, redemption or repurchase of PARI PASSU or
subordinated Indebtedness with Excess Proceeds to the extent such Excess
Proceeds may be used for general corporate purposes as described under
"Repurchase at the Option of Holders--Asset Sales"; (vi) the issuance of the
Exchange Debentures in exchange for the Senior Preferred Stock; (vii) the
payment of (A) a Restricted Payment to Holdings promptly following the Merger to
be used by Holdings to pay Transaction Costs, (B) an administrative fee to
Holdings in an amount not to exceed $2.0 million in any calendar year and (C) a
yearly advisory fee to Sappi and/or its Affiliates of $1.0 million in lieu of
charges to the Company for time spent on Company matters by the senior executive
officers of Sappi and its Affiliates or for related travel and out-of-pocket
expenses; PROVIDED that no such payments in clause (B) above shall be paid to
Affiliates of Holdings; (viii) Restricted Investments in an aggregate amount
outstanding not to exceed $10.0 million; (ix) the payment of distributions to
Holdings pursuant to the Tax Sharing Agreement; (x) in the event that the
Company elects to issue the Exchange Debentures in exchange for the Senior
Preferred Stock, any cash payments made in lieu of the issuance of Exchange
Debentures having a face amount less than $1,000 and any cash payments
representing accrued and unpaid Liquidated Damages and dividends and, in the
event that Holdings elects to issue Holdings Debentures in exchange for the
Holdings Preferred Stock, a Restricted Payment to Holdings in an amount equal to
any cash payments by Holdings made in lieu of the issuance of Holdings
Debentures having a face amount less than $1,000 and any cash payments by
Holdings representing accrued and unpaid Liquidated Damages and dividends; (xi)
in the event that the Company pays any interest in kind with respect to the
Exchange Debentures, any cash payments made in lieu of fractional Exchange
Debentures with respect thereto and, in the event that Holdings pays any
interest in kind with respect to the Holdings Debentures, a Restricted Payment
to Holdings in an amount equal to any cash payments by Holdings in lieu of
fractional Holdings Debentures with respect thereto; (xii) upon exercise of the
Warrants, a Restricted Payment to Holdings equal to any cash payments made by
Holdings in lieu of the issuance of fractional Warrant Shares; (xiii) the
repurchase of the Senior Preferred Stock in accordance with the terms thereof
upon the occurrence of a Change of Control and a Restricted Payment to Holdings
equal to the amount required to be paid by Holdings to repurchase the Holdings
Preferred Stock in accordance with the terms thereof upon the occurrence of a
Change of Control; (xiv) the purchase, repurchase or other acquisition of PARI
PASSU or subordinated Indebtedness purchased in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in each case
due within 12 months of the date of acquisition; (xv) payments permitted by
clauses (v) and (ix) of the covenant described under the caption "--Transactions
with Affiliates"; (xvi) an Investment in a joint venture at least 50% owned by
the Company where the consideration for such Investment consists of existing
coating, laminating or finishing machines at the Company's Westbrook, Maine and
Mobile, Alabama facilities; provided that such joint venture does not Incur or
at any time have outstanding any Indebtedness (other than Indebtedness
consisting of a Lien on such machines to secure Indebtedness under the Credit
Agreement); (xvii) an Investment in an amount up to $15.0 million for the
development of a de-inked fiber facility and businesses related thereto being
sponsored by the Bronx Community Paper Company; and (xviii) a Restricted Payment
to Holdings equal to any cash payments made by Holdings representing liquidated
damages under the Warrant Agreement.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, Incur any Indebtedness
(including Acquired Debt) and that the Company will not issue any Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
Preferred Stock; PROVIDED that the Company or any Guarantor may Incur
Indebtedness (including
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Acquired Debt) or the Company may issue Disqualified Stock if the Fixed Charge
Coverage Ratio for the Company's most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is Incurred or such Disqualified
Stock is issued would have been at least (a) 1.75 to 1 if such Indebtedness is
Incurred or such Disqualified Stock is issued on or prior to December 15, 1997
and (b) 2.0 to 1 thereafter.
The foregoing provisions will not apply to:
(i) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness under the revolving credit facility contained in the Credit
Agreement or any other revolving credit facility; PROVIDED that the
aggregate principal amount of such Indebtedness outstanding at any time
shall not exceed $250.0 million;
(ii) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness under the term loan facility contained in the Credit
Agreement in an aggregate principal amount at any time outstanding not to
exceed $630.0 million, less the aggregate amount of all repayments of
principal, optional or mandatory, with respect to such Indebtedness that
have been made since the Issue Date;
(iii) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness under the letter of credit facility contained in the Credit
Agreement in an aggregate principal amount (with letters of credit being
deemed to have a principal amount equal to the maximum potential liability
of the Company and its Restricted Subsidiaries thereunder) at any time
outstanding not to exceed the lesser of (A) $220.0 million, less the
aggregate amount of all commitment reductions, optional or mandatory, with
respect to such Indebtedness that have been made since the Issue Date and
(B) the outstanding amount of the Obligations supported by such letter of
credit facility;
(iv) the Incurrence by the Company or any of its Restricted Subsidiaries
of the Existing Indebtedness;
(v) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by the Notes or any Guarantee of the Notes,
respectively;
(vi) the Incurrence by the Company or any Guarantor of Indebtedness
represented by Capital Lease Obligations, mortgage financings or purchase
money obligations, including obligations with respect to industrial revenue
bonds to construct new facilities, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in the business of the Company or such
Guarantor, in an aggregate principal amount not to exceed $50.0 million at
any time outstanding;
(vii) the Incurrence by the Company or any Guarantor of Indebtedness
consisting of Attributable Debt in an aggregate amount not to exceed $50.0
million at any time outstanding;
(viii) the Incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Debt in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be Incurred;
(ix) the Incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Wholly Owned Restricted Subsidiaries that is a Guarantor;
(x) the Incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations with respect to Indebtedness of such entity permitted
by the terms of the Indenture to be outstanding; and
(xi) the Incurrence by the Company or any Guarantor of Indebtedness (in
addition to Indebtedness permitted by any other clause of this paragraph or
by the first paragraph of this covenant) in an aggregate principal amount at
any time outstanding not to exceed $75.0 million.
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For purposes of determining any particular amount of Indebtedness under the
foregoing covenant, Guarantees, liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included. For purposes of determining compliance
with the foregoing covenant, (A) in the event that an item of Indebtedness meets
the criteria of more than one of the types of Indebtedness described above, the
Company, in its sole discretion, will classify such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one of
the above clauses, (B) an item of Indebtedness may be split between more than
one of the types of Indebtedness described above and Indebtedness under the
Credit Agreement, in excess of the amounts permitted under clauses (i), (ii) and
(iii) above, may be Incurred under any of the other categories of permitted
Indebtedness and (C) the amount of Indebtedness issued at a price that is less
than or greater than the principal amount thereof will be equal to the amount of
the liability in respect thereof determined in conformity with GAAP.
LIENS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, create, incur, assume or suffer to exist any
Liens upon any of their respective assets to secure, directly or indirectly, any
Indebtedness of the Company or any Restricted Subsidiary that is subordinated
(pursuant to its terms) in right and priority of payment to any other
Indebtedness of the Company or such Restricted Subsidiary, unless the Notes are
equally and ratably secured for as long as such secured Indebtedness is so
secured; PROVIDED that if such subordinated Indebtedness is subordinated
(pursuant to its terms) in right and priority of payment to the Notes or any
Restricted Subsidiary's obligation under its Guarantee of the Notes, as the case
may be, the Lien securing such subordinated Indebtedness shall be subordinate to
the Lien securing the Notes or such Restricted Subsidiary's obligation under its
Guarantee, as the case may be, with the same relative priority as such
subordinated Indebtedness shall have with respect to the Notes or such
Restricted Subsidiary's obligation under its Guarantee, as the case may be;
PROVIDED FURTHER that this clause shall not be applicable to any Liens arising
from any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which Lien is not
applicable to the Company or any of its Restricted Subsidiaries, or the
properties or assets of the Company or any of its Restricted Subsidiaries, other
than the Person, or the property or assets of the Person, so acquired, and any
amendments, modifications, restatements or renewals thereof; PROVIDED that such
amendments, modifications, restatements or renewals do not give rise to Liens on
any assets other than assets encumbered by Liens arising under agreements as in
effect at the time of such acquisition.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to: (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the Issue Date and any amendments, modifications,
restatements or renewals thereof; PROVIDED that such amendments, modifications,
restatements or renewals are no more restrictive with respect to such dividend
and other payment restrictions than those contained in the applicable agreements
as in effect on the Issue Date, (b) the Credit Agreement and related collateral
documents as in effect on the Issue Date, and any amendments, modifications,
restatements, refundings, replacements restructurings or refinancings thereof;
PROVIDED that such amendments, modifications, restatements, refundings,
replacements, restructurings or refinancings are no more restrictive with
respect to such dividend and other payment restrictions than those contained in
the Credit Agreement and related
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collateral documents as in effect on the Issue Date, (c) the Indenture and the
Notes and any amendments, modifications, restatements or renewals thereof, (d)
applicable law, (e) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, and any amendments, modifications, restatements or renewals
thereof; PROVIDED that such amendments, modifications, restatements or renewals
are no more restrictive with respect to such dividend and other payment
restrictions than those contained in the applicable agreements as in effect at
the time of such acquisition, (f) by reason of customary non-assignment
provisions in leases entered into in the ordinary course of business, (g)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii) above
on the property so acquired, (h) Permitted Refinancing Debt; PROVIDED that the
restrictions with respect to such dividend and other payment restrictions
contained in the agreements governing such Permitted Refinancing Debt are no
more restrictive than those contained in the agreements governing the
Indebtedness being refinanced, (i) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the capital stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition; PROVIDED
that such sale would not violate the Indenture, or (j) in the case of clause
(iii), restrictions contained in the security agreements securing Indebtedness
of a Restricted Subsidiary to the extent such restrictions restrict the transfer
of the property subject to such agreements.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions to, another Person
unless: (i) the resulting, surviving or transferee person (the "Successor
Company") is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the Successor
Company (if other than the Company) assumes all the obligations of the Company
under the Notes, and the Indenture and the Registration Rights Agreements
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) immediately after such transaction no Default exists; and (iv)
the Successor Company (A) will have Consolidated Net Worth (immediately after
the transaction on a pro forma basis but prior to any purchase accounting
adjustments resulting from the transaction) equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction and
(B) will, at the time of such transaction but after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "--Incurrence
of Indebtedness and Issuance of Preferred Stock".
Notwithstanding clauses (iii) and (iv) in the immediately preceding
paragraph, any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Company.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture with the same
effect as if such Successor Company had been named as the Company in the
Indenture; PROVIDED that the predecessor Company shall not be relieved from the
obligation to pay the principal of and interest on the Notes, except in the case
of a sale of all of the Company's assets that meets the requirements of the
first paragraph of this covenant.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into or make any contract, agreement, understanding, loan, advance
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or guarantee with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless: (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable transaction by the
Company or such Restricted Subsidiary with an unrelated Person and (ii)(a) with
respect to any Affiliate Transaction involving aggregate consideration in excess
of $5.0 million, the Board of Directors determines that such Affiliate
Transaction complies with clause (i) above and such Affiliate Transaction has
been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $10.0 million, the Company delivers to the Trustee an
opinion from an investment banking firm of national standing with non-investment
grade debt underwriting experience and with total assets in excess of $5.0
billion to the effect that the terms of such Affiliate Transaction are fair to
the Company or such Restricted Subsidiary, as the case may be, from a financial
point of view or an opinion from a third party appraiser of national standing to
the effect that the terms of such Affiliate Transaction are at least as
favorable to the Company or such Restricted Subsidiary as might reasonably have
been obtained in a comparable arm's length transaction with an unaffiliated
third party. Notwithstanding the foregoing, nothing in this covenant will
prohibit any of the following: (i) any employment agreement entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business; (ii) transactions between or among the Company and/or its Restricted
Subsidiaries; (iii) transactions permitted by the provisions of the Indenture
described above under the caption "--Restricted Payments"; (iv) the payment of
reasonable fees to directors of the Company or its Restricted Subsidiaries; (v)
Investments in employees in the ordinary course of business; (vi) any Tax
Sharing Agreement; PROVIDED that the aggregate amount payable by the Company
pursuant thereto shall not exceed the sum of (A) the amount of taxes which the
Company would have been liable for on a stand-alone basis plus (B) the amount of
any state net worth tax applicable to Holdings; (vii) arrangements between (x)
the Company and its Restricted Subsidiaries and (y) Sappi Limited and its
Affiliates providing for the sales of such other's products; PROVIDED that, in
each case, the amount of any sales commissions, fees or other amounts in
connection therewith shall be in accordance with standard industry practice;
(viii) any issuance of securities or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment arrangements,
stock options and stock ownership plans of the Company entered into in the
ordinary course of business and approved by the Board of Directors and (ix)
Affiliate Transactions pursuant to agreements existing at the time of the
Merger.
SALE/LEASEBACK TRANSACTIONS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any Sale/Leaseback Transaction;
PROVIDED that the Company may enter into a Sale/Leaseback Transaction if: (i)
the Company could have (a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such Sale/Leaseback Transaction pursuant to the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock" and (b) incurred a Lien to secure such Indebtedness
pursuant to the covenant described above under the caption "--Liens", (ii) the
gross cash proceeds of such Sale/Leaseback Transaction are at least equal to the
fair market value (as determined in good faith by the Board of Directors) of the
property that is the subject of such Sale/ Leaseback Transaction and (iii) the
transfer of assets in such Sale/Leaseback Transaction is permitted by, and the
Company applies the proceeds of such transaction in compliance with, the
covenant described above under the caption "--Repurchase at the Option of
Holders--Asset Sales".
NO SENIOR SUBORDINATED DEBT
The Indenture provides that (i) the Company will not Incur any Indebtedness
that is subordinate or junior in right of payment to any Senior Debt of the
Company and senior in any respect in right of payment to the Notes and (ii) no
Guarantor will Incur any Indebtedness that is subordinate or junior in right of
payment to any Senior Debt of such Guarantor and senior in any respect in right
of payment to the Guarantee by such Guarantor of the Notes.
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GUARANTEE OF THE NOTES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, transfer any assets, businesses, divisions, real
property or equipment to any Restricted Subsidiary or acquire a new Restricted
Subsidiary unless (i) such transferee or acquired Restricted Subsidiary enters
into or has entered into a Guarantee of the Notes in accordance with the terms
of the Indenture or (ii) the aggregate fair market value (as determined in good
faith by the Board of Directors) at the time of such transfer or acquisition of
the assets, businesses, divisions, real property or equipment proposed to be
transferred or the Capital Stock proposed to be acquired, together with the
aggregate fair market value of all assets, businesses, divisions, real property
or equipment previously transferred pursuant to this clause (ii) and Capital
Stock previously acquired pursuant to this clause (ii) (in each case as valued
at the time of transfer or acquisition), does not exceed $40.0 million; PROVIDED
that, in the case of clause (ii), if the Restricted Subsidiary to which such
transfer was made or whose Capital Stock was acquired subsequently enters into a
Guarantee of the Notes, such transfer or acquisition thereafter shall be treated
as having been made pursuant to clause (i).
Any such Guarantee of the Notes by a Restricted Subsidiary will be
subordinated to all Senior Debt of such Restricted Subsidiary, including any
guarantee by such Restricted Subsidiary of the Company's obligations under the
Credit Agreement, on substantially the same terms as the Notes are subordinated
to Senior Debt of the Company. Any such Guarantee by a Restricted Subsidiary
will be limited in amount to an amount not to exceed the maximum amount that can
be guaranteed by that Restricted Subsidiary without rendering such Guarantee
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally. With such
limitations, such Guarantee could be effectively subordinated to all other
Indebtedness (including guarantees and other contingent liabilities) of such
Restricted Subsidiary and, depending on the amount of such Indebtedness, such
Restricted Subsidiary's liability on its Guarantee could be reduced to zero.
Upon the sale or other disposition of a Restricted Subsidiary that is a
Guarantor (other than to the Company or an Affiliate of the Company) permitted
by the Indenture, such Restricted Subsidiary will be released and relieved from
all of its obligations under its Guarantee.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Subsidiary to, engage in any
business other than a Permitted Business.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture, the Registration Rights Agreement or the Notes, unless such
consideration is offered to be paid or agreed to be paid to all Holders of the
Notes that so consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Trustee and the Holders of Notes (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports. In
addition, whether or not required by the
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rules and regulations of the Commission, the Company will file a copy of all
such information and reports with the Commission for public availability (unless
the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, the Company has agreed that, for so long as any Notes remain
outstanding, it will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED
SUBSIDIARIES
The Indenture provides that the Company (i) will not, and will not permit
any Restricted Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Capital Stock of any Wholly Owned Restricted Subsidiary
of the Company to any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company), unless (a) such transfer, conveyance,
sale, lease or other disposition is of all the Capital Stock of such Wholly
Owned Restricted Subsidiary and (b) the cash Net Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with the
covenant described above under the caption "--Repurchase at the Option of
Holders--Asset Sales", and (ii) will not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Restricted
Subsidiary of the Company.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due of the principal of or premium, if
any, on the Notes (whether or not prohibited by the subordination provisions of
the Indenture); (iii) failure by the Company to comply with the provisions
described above under the caption "--Change of Control"; (iv) failure by the
Company for 30 days after notice from the Trustee or holders of 25% of the
aggregate principal amount of the Notes then outstanding to comply with the
covenants described under "--Restricted Payments", "--Incurrence of Indebtedness
and Issuance of Preferred Stock" or "--Merger, Consolidation or Sale of Assets"
above; (v) failure of the Company for 60 days after notice from the Trustee or
Holders of 25% of the aggregate principal amount of the Notes then outstanding
to comply with any of its other agreements in the Indenture, (other than any
agreement for the benefit of holders of the Senior Preferred Stock) or the
Notes; (vi) default under any mortgage, indenture or instrument under which
there may be issued, or by which there may be secured or evidenced, any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or
is created after the Issue Date, which default (a) is caused by a failure to pay
principal of or premium, if any, on such Indebtedness when due after giving
effect to any applicable grace periods provided in such Indebtedness on the date
of such default (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness (which Indebtedness has not been repaid and as
to which such default has not been cured or such acceleration has not been
rescinded), together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated (which Indebtedness has not been repaid and as to which such
default has not been cured or such acceleration has not been rescinded),
aggregates $20.0 million or more; (vii) failure by the Company or any Restricted
Subsidiary which is a Significant Subsidiary to pay final judgments aggregating
in excess of $20.0 million, which judgments are not paid, discharged, bonded or
stayed for a period of 60 days; (viii) except as permitted in the Indenture, any
Guarantee of the Notes is held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or any
Guarantor, or Person acting on behalf of any Guarantor, shall deny or disaffirm
its obligations under its Guarantee of the Notes; and (ix) certain events of
bankruptcy or insolvency with respect to the Company or any Restricted
Subsidiary which is a Significant Subsidiary.
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If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to the Company, all outstanding Notes will become due
and payable without further action or notice. Holders of the Notes may not
enforce the Indenture or the Notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the Notes notice of any continuing
Default (except a Default relating to the payment of principal or interest), if
it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
December 15, 1999 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to December 15, 1999, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default and its consequences under the Indenture except
a continuing Default in the payment of interest on, or the principal of, the
Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default, to deliver to the Trustee a statement specifying
such Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes and the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and does not affect any
Holder's right to sue under federal securities laws for violations thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"), except for: (i) the rights of Holders of outstanding Notes to
receive payments from the trust described below in respect of the principal of,
premium, if any, and interest on such Notes when such payments are due, (ii) the
Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment, and
bankruptcy, receivership, rehabilitation and insolvency events with respect to
the Company) described under "Events of Default" will no longer constitute an
Event of Default with respect to the Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the Issue Date, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default shall have occurred and be continuing on the
date of such deposit (other than a Default resulting from the borrowing of funds
to be applied to make such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a default
under any material agreement or instrument (other than the Indenture) to which
the Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound; (vi) the Company must have delivered to the
Trustee an opinion of counsel to the effect that after the 91st day following
the deposit, the trust funds are not subject to any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Notes over the other creditors of the Company with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (viii) the Company must deliver to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed. The
registered Holder of a Note will be treated as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of a
majority in principal amount of the Notes then outstanding (including consents
obtained in connection with a tender offer or exchange offer for Notes), and any
existing default or compliance with any provision of the Indenture or the Notes
may be waived with the consent of the Holders of a majority in principal amount
of the then outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for Notes).
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Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes, (iii)
reduce the rate of or change the time for payment of interest on any Note, (iv)
waive a Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders of
at least a majority in aggregate principal amount of the Notes and a waiver of
the payment default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the Notes, (vi) make any change in
the provisions of the Indenture relating to waivers of past Defaults or the
rights of Holders of Notes to receive payments of principal of or premium, if
any, or interest on the Notes, (vii) waive a redemption payment with respect to
any Note, (viii) except as otherwise permitted in the Indenture, release any
Guarantor from its obligations under its Guarantee of the Notes, or change any
Guarantee of the Notes in any manner that would adversely affect Holders of
Notes, or (ix) make any change in the foregoing amendment and waiver provisions.
In addition, without affecting the right of any third party beneficiary to
consent to such amendment, any amendment to the provisions of Article 10 of the
Indenture (which relate to subordination) will require the consent of the
Holders of at least 75% in aggregate principal amount of the Notes then
outstanding, if such amendment would adversely affect the rights of Holders of
Notes.
Notwithstanding the foregoing, without notice to or the consent of any
Holder of Notes, the Company and the Trustee may amend or supplement the
Indenture or the Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
Notes in the case of a merger or consolidation, to secure the Notes, to add
Guarantees with respect to the Notes, to make any change that would provide any
additional rights or benefits to the Holders of Notes or that does not adversely
affect the legal rights under the Indenture of any such Holder, or to comply
with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions with the Company and its Affiliates; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in the case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person
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merging with or into or becoming a Subsidiary of such specified Person, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such specified
Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to constitute control of such Person. In no event shall the Initial
Purchaser, UBSC or any of their Affiliates be deemed Affiliates of the Company
for purposes of the covenants contained in the Indenture.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition
(collectively, "dispositions") of any assets (including by way of a
Sale/Leaseback Transaction) other than dispositions of inventory or timber (but
not timberland) in the ordinary course of business, (ii) the issuance by any
Restricted Subsidiary of Equity Interests of such Restricted Subsidiary and
(iii) the disposition by the Company or any of its Restricted Subsidiaries of
Equity Interests of any Restricted Subsidiary of the Company, in the case of
either clause (i), (ii) or (iii), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $1.0 million
or (b) for net proceeds in excess of $1.0 million. Notwithstanding the
foregoing, the following will not be deemed to be Asset Sales: (i) a disposition
of assets by the Company to a Wholly Owned Restricted Subsidiary or by a Wholly
Owned Restricted Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary,
(iii) a disposition consisting of a Restricted Payment permitted by the covenant
described above under the caption "--Restricted Payments" and (iv) the
disposition of all or substantially all of the assets of the Company and its
Subsidiaries taken as a whole permitted by the covenant described above under
the caption "--Merger, Consolidation or Sale of Assets".
"ATTRIBUTABLE DEBT" in respect of a Sale/Leaseback Transaction means, at the
time of determination, the present value (discounted at the rate of interest
implicit in such transaction, determined in accordance with GAAP or, in the
event that such rate of interest is not reasonably determinable, discounted at
the rate of interest borne by the Notes) of the obligation of the lessee for net
rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended or may, at the option of the lessor, be extended).
"BOARD OF DIRECTORS" means, unless otherwise specified, the Board of
Directors of the Company or any authorized committee thereof.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" of any person means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) in the case of any Person, any
other interest or participation that confers the right to receive a share of the
profits and losses of, or distributions of assets of, such Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States Government, or
any agency or instrumentality thereof, having maturities of not more than one
year from the date of acquisition, (iii) marketable general obligations issued
by any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing within one year from
the date of acquisition thereof and, at the time of acquisition, having a credit
rating of A or better from either Standard & Poor's Corporation or Moody's
Investors Service, Inc., (iv) certificates of deposit, time deposits, eurodollar
time deposits,
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overnight bank deposits, bankers' acceptances and repurchase agreements having
maturities of not more than one year from the date of the acquisition of any
domestic commercial bank the long-term debt of which is rated at the date of
acquisition thereof at least A or the equivalent thereof by Standard & Poor's
Corporation, or A or the equivalent thereof by Moody's Investors Service, Inc.,
and having capital and surplus in excess of $500 million, (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii), (iii) and (iv) entered into with any bank
meeting the qualifications specified in clause (iv) above and (vi) commercial
paper rated at the date of acquisition thereof at least A-2 or the equivalent
thereof by Standard & Poor's Corporation or P-2 or the equivalent thereof by
Moody's Investors Service, Inc., or carrying an equivalent rating by a
nationally recognized rating agency, if both of the two named rating agencies
cease publishing ratings of investments, and in either case maturing within 270
days after the date of acquisition.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of Holdings or
the Company to any Person or group (as such term is used in Sections 13(d)(3)
and 14(d)(2) of the Exchange Act) other than the Principals or their Related
Parties, (ii) the adoption of a plan relating to the liquidation or dissolution
of Holdings or the Company, (iii) any Person or group (as defined above), other
than the Principals or their Related Parties, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a Person shall be deemed to have "beneficial ownership" of all shares that any
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 40% of the total voting power of the Voting Stock of the Company, including
by way of merger, consolidation or otherwise; PROVIDED that the Principals or
their Related Parties "beneficially own" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Voting Stock of the Company than
such other Person (for the purposes of this clause (iii), any Person shall be
deemed to beneficially own any Voting Stock of a corporation (the "specified
corporation"), held by any other corporation (the "parent corporation"), if such
Person "beneficially owns" (with respect to any Person or group other than the
Principals or their Related Parties, as defined in clause (iii) above or, with
respect to the Principals or their Related Parties, as defined in the proviso to
clause (iii) above, directly or indirectly, more than 50% of the voting power of
the Voting Stock of such parent corporation) and (iv) the first day on which a
majority of the members of the Board of Directors of Holdings or the Company are
not Continuing Directors.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period plus (i) provision for taxes based on income or profits of such
Person and its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was included in computing such Consolidated Net Income, plus
(ii) the sum of (A) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued, to the extent
that such expense was deducted in computing Consolidated Net Income (including
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financing, and
net payments (if any) pursuant to Hedging Obligations but excluding amortization
of deferred financing fees) and (B) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such period,
and (C) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a
Lien on assets of such Person or one of its Restricted Subsidiaries (whether or
not such Guarantee or Lien is called upon), plus (iii) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other non-cash charges (including non-cash charges created by the
application of Statement of Financial Accounting Standards, No. 106 but
excluding any other such non-cash charge to the extent that it represents an
accrual of or reserve for cash charges in any future period) of such Person and
its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash charges were deducted in computing
such Consolidated Net
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Income, in each case, on a consolidated basis and determined in accordance with
GAAP. Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash charges
of, a Restricted Subsidiary of the referent Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent
(and in the same proportion) that the Net Income of such Subsidiary was included
in calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Subsidiary without prior approval (that has
not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that (i) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Restricted Subsidiary, (ii) the Net Income of
any Restricted Subsidiary shall be excluded to the extent that the declaration
or payment of dividends or similar distributions by that Restricted Subsidiary
of that Net Income is not at the date of determination permitted without any
prior governmental approval (which has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders, (iii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of Preferred Stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such Preferred Stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the Issue Date in the book value of any asset
owned by such Person or a consolidated Subsidiary of such Person, (y) all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of Holdings or the Company who (i) was a member of such
Board of Directors on the Issue Date or (ii) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election or with the written approval of Sappi Limited.
"CREDIT AGREEMENT" means that certain Credit Agreement, dated as of December
20, 1994, as amended and restated as of April 26, 1996, by and among the
Company, Chemical Bank (now known as The Chase Manhattan Bank), as
administrative agent, and the several lenders party thereto, providing for (i)
up to $630.0 million of term loan borrowings, (ii) up to $250.0 million of
revolving credit borrowings (including letters of credit), and (iii) up to
$220.0 million of additional letters of credit, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, extended, modified, renewed,
refunded, replaced, restructured or refinanced from time to time.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
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"DESIGNATED SENIOR DEBT" means (i) so long as the Senior Bank Debt is
outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior Debt
permitted under the Indenture the principal amount of which (or as to which the
commitment to lend) is $50.0 million or more and that has been designated by the
Company as "Designated Senior Debt".
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is one year and one day after the date on which the Notes mature; PROVIDED
that "Disqualified Stock" will not include the Senior Preferred Stock or any
other Preferred Stock of the Company which is issued in exchange for or the
proceeds of which are used to redeem or repurchase the Senior Preferred Stock so
long as such other Preferred Stock does not require the Company to pay dividends
with respect to such Preferred Stock, to make a redemption payment or to
repurchase such Preferred Stock in any amount in excess of the amounts thereof
required in the Senior Preferred Stock or at a time earlier than required in the
Senior Preferred Stock.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE DEBENTURES" means the Company's 14% Series A Subordinated Exchange
Debentures due 2006 and the Company's 14% Series B Subordinated Exchange
Debentures due 2006 exchangeable for the Company's Senior Preferred Stock.
"EXCHANGE OFFER" means the exchange offer to be filed with the Commission
relating to the Series B Securities pursuant to the Registration Rights
Agreement with the Initial Purchaser.
"EXISTING INDEBTEDNESS" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Agreement or the Notes)
in existence on the Issue Date.
"FIXED CHARGES" means, with respect to any Person for any period, the sum
(without duplication) of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued, to the
extent that such expense was deducted in computing Consolidated Net Income
(including amortization of original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations, imputed
interest with respect to Attributable Debt, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers' acceptance
financings and net payments (if any) pursuant to Hedging Obligations but
excluding amortization of deferred financing fees), (ii) the consolidated
interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period, (iii) any interest expense on Indebtedness of
another Person that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon)
and (iv) the product of (a) all cash dividend payments (and non-cash dividend
payments in the case of a Person that is a Restricted Subsidiary) on any series
of Preferred Stock of such Person other than payments to the Company or any of
its Restricted Subsidiaries, times (b) a fraction, the numerator of which is one
and the denominator of which is one minus the then current combined effective
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, Guarantees or repays,
repurchases or redeems any Indebtedness (other than revolving credit borrowings)
or issues, repurchases or redeems Preferred Stock subsequent to the commencement
of the period for which the Fixed Charge Coverage Ratio is being calculated but
prior to the date on which the event for which the calculation of the Fixed
Charge Coverage
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Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio
shall be calculated giving pro forma effect to such incurrence, assumption,
Guarantee, repayment, repurchase or redemption of such Indebtedness and such
issuance, repurchase or redemption of Preferred Stock, as if the same had
occurred at the beginning of the applicable four-quarter reference period. For
purposes of making the computation referred to above, all calculations shall
give effect to pro forma adjustments as follows: (i) acquisitions that have been
made by the Company or any of its Restricted Subsidiaries, including through
mergers or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have occurred on the
first day of the four-quarter reference period, (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, and (iii) the Fixed Charges attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Restricted Subsidiaries following the Calculation
Date. For purposes of this definition, whenever pro forma effect is to be given
to an acquisition, discontinued operations or operations of businesses disposed
of, the amount of Consolidated Cash Flow relating thereto or the amount of Fixed
Charges associated with any Indebtedness issued in connection therewith, the pro
forma calculations shall be determined in good faith by a responsible financing
or accounting Officer of the Company. If any Indebtedness bears a floating rate
of interest and is being given pro forma effect, the interest on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any interest rate protection agreement applicable to such Indebtedness
if such interest rate protection agreement has a remaining term in excess of
twelve months).
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including letters of credit and reimbursement
agreements in respect thereof), of all or any part of any Indebtedness.
"GUARANTOR" means any Subsidiary of the Company that guarantees the Notes
pursuant to the covenant described under "--Certain Covenants--Guarantee of the
Notes".
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other similar agreements
or arrangements.
"HOLDINGS" means SDW Holdings Corporation and its successors.
"HOLDINGS DEBENTURES" means Holdings' 15% Subordinated Exchange Debentures
due 2011 exchangeable for the Holdings Preferred Stock.
"HOLDINGS PREFERRED STOCK" means Holdings' 15% Senior Exchangeable Preferred
Stock.
"INCUR" means, with respect to any Indebtedness, to incur, create, issue,
assume, guarantee or otherwise become liable for or with respect to the payment
of, contingently or otherwise, such Indebtedness; PROVIDED that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"INDEBTEDNESS" means, with respect to any Person, without duplication, (i)
any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or
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representing any Hedging Obligations, except any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
indebtedness (other than letters of credit and Hedging Obligations) would appear
as a liability upon a balance sheet of such Person prepared in accordance with
GAAP, (ii) all Indebtedness of others secured by a Lien on any asset of such
Person whether or not such Indebtedness is assumed by such Person (the amount of
such Indebtedness with respect to such Person being deemed to be the lesser of
the value of such asset or the amount of the Indebtedness of others so secured),
(iii) the Guarantee by such Person of any Indebtedness of any other Person and
(iv) Attributable Debt associated with Sale/Leaseback Transactions.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans (including
guarantees of Indebtedness or other obligations), advances or capital
contributions, purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities and all other items that are
or would be classified as investments on a balance sheet prepared in accordance
with GAAP. For purposes of the covenant described above under "--Certain
Covenants--Restricted Payments", (i) "Investment" in a Subsidiary shall include
the portion (proportionate to the Company's Equity Interest in such Subsidiary)
of the fair market value (as determined in good faith by the Board of Directors)
of such Subsidiary at the time that such Subsidiary is designated an
Unrestricted Subsidiary; PROVIDED that upon a redesignation of such Subsidiary
as a Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's Equity
Interest in such Subsidiary) of the fair market value (as determined in good
faith by the Board of Directors) of the net assets of such Subsidiary at the
time of such redesignation; and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer, in each case as determined in good faith by the Board of
Directors.
"ISSUE DATE" means the date on which the Old Notes were originally issued.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement and any lease in the
nature thereof).
"LIQUIDATED DAMAGES" means all liquidated damages then owing pursuant to the
Registration Rights Agreements. When used with respect to the Notes or the
Senior Preferred Stock, "Liquidated Damages" means such liquidated damages
related to the Notes or the Senior Preferred Stock, respectively.
"MERGER" means the merger of SDW Acquisition and S.D. Warren.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however, (i) any gain (or
loss), together with any related provision for taxes on such gain (or loss),
realized in connection with (a) any Asset Sale or (b) the disposition of any
securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries, (ii) any extraordinary gain (or loss), together with any related
provision for taxes on such extraordinary gain (or loss), (iii) any non-cash
product costs resulting from the write-up (if any) of the assigned value of the
Company's inventory at the time of the Merger over the first-in first-out
valuation of such inventory and (iv) any write-off of the fees for the unused
subordinated bridge financing arranged by the Company in anticipation of the
Merger.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including any
cash received upon the sale or other disposition of any non-cash consideration
received in any Asset Sale), net of the direct costs relating to such Asset Sale
(including legal, accounting and investment banking fees, and sales commissions)
and any relocation expenses incurred as a result thereof, taxes paid or payable
as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
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to the repayment of Indebtedness secured by a Lien on the assets that were the
subject of such Asset Sale, any reserve for adjustment in respect of the sale
price of such asset or assets established in accordance with GAAP and any other
reserve against liabilities associated with such assets and retained by the
Company or any of its Restricted Subsidiaries established in accordance with
GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Notes being offered hereby) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFERING" means the offering of the Notes and the Units pursuant to the
Offering Memorandum dated December 13, 1994.
"PERMITTED BUSINESS" means the business in which the Company and its
Restricted Subsidiaries were engaged in on the date of the Merger (after giving
effect thereto) and businesses incidental, ancillary or related thereto.
"PERMITTED INVESTMENTS" means (i) any Investments in the Company or in a
Restricted Subsidiary of the Company; (ii) any Investments in Cash Equivalents;
(iii) Investments by the Company or any Restricted Subsidiary of the Company in
a Person, if as a result of such Investment (a) such Person becomes a Restricted
Subsidiary of the Company or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary of the
Company that is a Guarantor; (iv) Investments consisting of consideration
received by the Company or a Restricted Subsidiary in an Asset Sale which
consideration is not and is not required to be in the form of Cash Equivalents
pursuant to the covenant described above under "--Repurchase at the Option of
Holders--Asset Sales"; (v) receivables owing to the Company or any Restricted
Subsidiary if created or acquired in the ordinary course of business; (vi)
stock, obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; (vii) endorsements of negotiable
instruments and other similar negotiable documents; and (viii) notes from
employees, officers, directors and their transferees issued to the Company
representing payment of the exercise price of options or other purchase rights
to purchase common stock of the Company.
"PERMITTED REFINANCING DEBT" means any Indebtedness of the Company or any of
its Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, restructure, renew, replace, defease or refund
other Indebtedness of the Company or any of its Restricted Subsidiaries;
PROVIDED that: (i) the principal amount of such Permitted Refinancing Debt does
not exceed the principal amount of the Indebtedness so extended, refinanced,
renewed, replaced, restructured, defeased or refunded (plus the amount of
premiums and reasonable fees and expenses incurred in connection therewith);
(ii) such Permitted Refinancing Debt has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; PROVIDED that
this clause (ii) will not be applicable to any Permitted Refinancing Debt with
respect to Indebtedness under the Credit Agreement; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing Debt
is subordinated in right of payment to, the Notes on terms at least as favorable
to the Holders of Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the
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Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"PREFERRED STOCK", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"PRINCIPALS" means Sappi Limited, DLJ Merchant Banking Partners, L.P., DLJ
Merchant Banking, Inc., DLJ International Partners, C.V., DLJ Offshore Partners,
C.V., DLJ Merchant Banking Funding, Inc. and UBS Capital LLC.
"REGISTRATION RIGHTS AGREEMENTS" means (i) that certain Registration Rights
Agreement dated the Closing Date between the Company and the Initial Purchaser
and (ii) that certain Registration Rights Agreement dated the Closing Date
between the Company and UBSC.
"RELATED PARTY" with respect to any Principal means (i) any controlling
stockholder, majority owned Subsidiary, or spouse or immediate family member (in
the case of an individual) of such Principal or (ii) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons beneficially holding a majority interest of which consist of such
Principal and/or such other Persons referred to in the immediately preceding
clause (i).
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"SALE/LEASEBACK TRANSACTION" means an arrangement relating to property owned
on the Issue Date or thereafter acquired whereby the Company or a Restricted
Subsidiary transfers such property to a Person and leases it back from such
Person, other than (i) any such arrangement (a) the term of which is for not
more than one year and (b) the Attributable Debt associated with which is less
than $1.0 million (aggregating any series of related transactions), and (ii) any
such arrangement between the Company and a Wholly Owned Restricted Subsidiary or
between Wholly Owned Restricted Subsidiaries.
"SENIOR BANK DEBT" means the Indebtedness outstanding under the Credit
Agreement or any Hedging Obligation entered into with any Senior Bank Lender as
such agreements may be restated, further amended, supplemented or otherwise
modified from time to time.
"SENIOR BANK LENDER" means any of the banks or other financial institutions
from time to time parties to the Credit Agreement.
"SENIOR DEBT" means with respect to the Company or any Guarantor, any
Indebtedness Incurred by the Company or such Guarantor, unless the instrument
under which such Indebtedness is Incurred expressly provides that it is on a
parity with or subordinated in right of payment to the Notes or, in the case of
a Guarantor, the Guarantee of the Notes by such Guarantor; PROVIDED that Senior
Debt will not include (a) any liability for federal, state, local or other taxes
owed or owing, (b) any Indebtedness owing to any Subsidiaries of the Company,
(c) any trade payables or (d) any Indebtedness that is incurred in violation of
the Indenture. The Senior Bank Debt shall be treated as Senior Debt of the
Company.
"SENIOR PREFERRED STOCK" means the Company's 14% Series A Senior
Exchangeable Preferred Stock due 2006 and the Series B Exchangeable Preferred
Stock.
"SERIES B EXCHANGEABLE PREFERRED STOCK" means the Company's 14% Series B
Senior Exchangeable Preferred Stock due 2006.
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"SERIES B EXCHANGE DEBENTURES" means the Company's 14% Series B Subordinated
Exchange Debentures due 2006.
"SERIES B NOTES" means the Company's 12% Series B Senior Subordinated Notes
due 2004 issued pursuant to the Indenture.
"SERIES B SECURITIES" means the Series B Notes and the Series B Exchangeable
Preferred Stock or the Series B Exchange Debentures, as applicable.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date
hereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"TAX SHARING AGREEMENT" means any tax sharing agreement between the Company
and Holdings or any other person with which the Company is required to, or is
permitted to, file a consolidated tax return or with which the Company is or
could be part of a consolidated group for tax purposes.
"TRANSACTION COSTS" means the aggregate transaction costs of the Company and
Holdings incurred in connection with the Merger or related financings and in an
aggregate amount not to exceed $87.7 million.
"UNITS" means 3,000,000 units, each consisting of one share of Senior
Preferred Stock and one Warrant.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution
and (ii) any Subsidiary of an Unrestricted Subsidiary; but, in each case, only
to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Debt; PROVIDED that the Company or any of its Restricted
Subsidiaries may Guarantee, endorse, agree to provide funds for the payment or
maintenance of, or otherwise become directly or indirectly liable with respect
to, Indebtedness of an Unrestricted Subsidiary but only to the extent that the
Company or such Restricted Subsidiary could make an Investment in such
Unrestricted Subsidiary pursuant to the covenant described above under "Certain
Covenants--Restricted Payments" and any such arrangement shall be deemed an
Incurrence of Indebtedness by the Company or such Restricted Subsidiary for
purposes of the covenant described above under "Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock"; (b) subject to clause (a) above,
is a Person with respect to which neither the Company nor any of its Restricted
Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results; and (c) has at least one director on its board of directors
that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption "Certain
Covenants--Restricted Payments". If, at any time, any Unrestricted Subsidiary
would fail to meet the requirements of an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture
and any Indebtedness of such Subsidiary shall be deemed to be Incurred by a
Restricted Subsidiary of the Company as of such date (and, if such Indebtedness
is not permitted to be Incurred as of such date under the covenant described
under the caption "Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock", the Company shall be in default of such covenant). The Board
of Directors of the
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Company may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; PROVIDED that such designation shall be deemed to be an Incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock", and (ii) no Default would be in existence following such
designation. To the extent applicable, such newly designated Restricted
Subsidiary shall comply with the covenant described under the caption "Certain
Covenants-- Guarantee of the Notes".
"VOTING STOCK" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"WARRANTS" means the warrants to purchase 898,440 shares of Common Stock of
Holdings to be issued as part of the Units and Class B Warrants to purchase
6,289,060 shares of Common Stock of Holdings to be issued contemporaneously
therewith.
"WARRANT AGREEMENT" means the Warrant Agreement dated as of the Closing Date
between Holdings and The Bank of New York pursuant to which the Warrants to be
issued as part of the Units are issued.
"WARRANT SHARES" means the Common Stock of Holdings issuable upon the
exercise of the Warrants.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the sum of all such payments.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
DESCRIPTION OF THE SENIOR PREFERRED STOCK
The Senior Preferred Stock was issued pursuant to a Certificate of
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (the "CERTIFICATE OF DESIGNATIONS"), a copy of which is
filed as an exhibit to the Registration Statement of which this Prospectus
constitutes a part. The following summary of the material provisions of the
Senior Preferred Stock is qualified in its entirety by reference to the
provisions of the Certificate of Designations relating thereto. The definitions
of certain terms used in the Certificate of Designations and in the following
summary are substantially the same as those used in the Indenture. For a
description thereof, see "Description of the Notes--Certain Definitions".
GENERAL
Pursuant to the Certificate of Designations, 3,000,000 shares of the Senior
Preferred Stock with a liquidation preference of $25.00 per share were
authorized for issuance. The Senior Preferred Stock is fully paid and
nonassessable and holders thereof will have no preemptive rights in connection
therewith.
The Old Senior Preferred Stock was initially issued as part of the Unit
Offering. Each Unit offered thereby consisted of one share of Old Senior
Preferred Stock of the Company and one Warrant to purchase 0.29948 shares of
Common Stock of Holdings. As of March 29, 1995, the Old Senior Preferred Stock
and the Warrants became separately transferable. Effective upon consummation of
the Exchange Offer on May 31, 1995, the Senior Preferred Stock was issued by the
Company in exchange for the Old Senior Preferred Stock.
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The liquidation preference or Specified Amount of the Senior Preferred Stock
is not necessarily indicative of the price at which shares of the Senior
Preferred Stock will actually trade at or after the time of their issuance, and
the Senior Preferred Stock may trade at prices below its liquidation preference
or Specified Amount. The market price of the Senior Preferred Stock can be
expected to fluctuate with changes in the financial markets and economic
conditions, the financial condition and prospects of the Company and other
factors that generally influence the market prices of securities.
All "distributions" with respect to the Senior Preferred Stock, including
the payment of dividends, the accrual of Accumulated Dividends, the exchange of
the Senior Preferred Stock for Exchange Debentures, redemptions, repurchases and
distributions upon a liquidation, dissolution or winding up of the Company, are
subject to the provisions of the Pennsylvania Business Corporation Law,
including provisions which prohibit any "distributions" if, after giving effect
thereto, the Company would be unable to pay its debts as they become due in the
usual course of its business or the total assets of the Company would be less
than its total liabilities.
RANK
The Senior Preferred Stock, with respect to dividend rights and rights on
liquidation, winding up and dissolution, ranks: (i) senior to all classes of
common stock of the Company and each other class of capital stock or series of
preferred stock issued by the Company after the Offerings the terms of which
provide that such series will rank junior to the Senior Preferred Stock or which
do not specify their rank (collectively referred to with the common stock of the
Company as "JUNIOR SECURITIES"); (ii) on a parity with each other class of
capital stock or series of preferred stock issued by the Company after the
Offerings that specifically provides that such series will rank on a parity with
the Senior Preferred Stock (collectively referred to as "PARITY SECURITIES");
and (iii) junior to each other class of capital stock or series of preferred
stock issued by the Company after the Offering that specifically provides that
such series will rank senior to the Senior Preferred Stock (collectively
referred to as "SENIOR SECURITIES"). In addition, creditors and stockholders of
the Company's subsidiaries will have priority over the Senior Preferred Stock
with respect to claims on the assets of such subsidiaries. The Company may not
issue any Parity Securities or Senior Securities or any obligation or security
convertible into or evidencing the right to purchase Parity Securities or Senior
Securities without the approval of the holders of a majority of the outstanding
shares of Senior Preferred Stock then outstanding, voting as a separate class,
except that without the approval of the holders of Senior Preferred Stock, the
Company may issue or have outstanding shares of Parity Securities issued from
time to time in exchange for, or the proceeds of which are used to redeem or
repurchase, any or all of the shares of Senior Preferred Stock or any other
Parity Securities. See "--Voting Rights".
DIVIDENDS
Holders of Senior Preferred Stock will be entitled to receive, when, as and
if declared by the board of directors of the Company, out of funds legally
available therefor, dividends on the Senior Preferred Stock, at the rate of 14%
per annum of the Specified Amount (as defined below). Dividend accrual periods
will end on March 15, June 15, September 15 and December 15 of each year (each,
a "Dividend Accrual Date"). It is not expected that the Company will pay any
dividends in cash for any period ending on or prior to December 15, 1999, and in
any event, the Company will be restricted from paying such dividends in cash by
the terms of its debt instruments. See "Risk Factors--Restrictions Imposed by
Credit Agreement;--Limitation on Cash Dividends; Obligations with Respect to
Holdings Preferred Stock". Cash dividends paid by the Company from time to time
will be applied to unpaid dividends in the order in which such dividends
accrued; PROVIDED, that to the extent cash dividends are not paid currently on
the Senior Preferred Stock for a dividend accrual period ending on or prior to
December 15, 1999, the Company may pay such dividends thereafter only insofar as
the Company repurchases or redeems such Senior Preferred Stock. Dividends
payable for any period less than a full dividend period will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Accrued and unpaid
dividends, if any, will not bear interest or, except to the extent included in
clause (ii) of the first sentence of this paragraph, bear dividends thereon.
Dividends will cease to accrue in respect of shares of the Senior Preferred
Stock on the
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Exchange Date (as defined below) or on the date of their earlier redemption or
repurchase by the Company. See "Certain Federal Income Tax Considerations".
REDEMPTION OF SENIOR PREFERRED STOCK
OPTIONAL. Except as set forth in the following paragraph, the Senior
Preferred Stock will not be redeemable at the Company's option prior to December
15, 2001. Thereafter, the Senior Preferred Stock may be redeemed, in whole or in
part, at the option of the Company at the redemption prices (expressed as a
percent of the Specified Amount) set forth in the table below, plus all accrued
and unpaid Liquidated Damages and dividends (excluding any Accumulated Dividends
but including an amount equal to a prorated dividend from the immediately
preceding Dividend Accrual Date to the redemption date), if any, if redeemed
during the 12-month period beginning on December 15 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------------------- -----------
<S> <C>
2001................................................................... 104.200%
2002................................................................... 102.800%
2003................................................................... 101.400%
2004 and thereafter.................................................... 100.000%
</TABLE>
"Specified Amount" on any specific date with respect to any share of Senior
Preferred Stock means the sum of (i) the liquidation preference with respect to
such share and (ii) the dividends that accrued in dividend accrual periods
ending on or prior to December 15, 1999 and on or prior to such specific date
that have not previously been paid in cash (the dividends described in this
clause (ii) being herein called "Accumulated Dividends"). As of July 3, 1996,
the Specified Amount was $30.97 per share.
On or prior to December 15, 1997, the Company may from time to time redeem
Senior Preferred Stock at a redemption price equal to 113.0% of the Specified
Amount thereof plus all accrued and unpaid Liquidated Damages and dividends
(excluding any Accumulated Dividends but including an amount equal to the
prorated dividend from the immediately preceding Dividend Accrual Date to the
redemption date), if any, with the proceeds of one or more public offerings of
the common stock of Holdings; PROVIDED that at least $50.0 million in aggregate
Specified Amount of Senior Preferred Stock remains outstanding immediately after
the occurrence of such redemption; and PROVIDED FURTHER that such redemption
shall occur within 45 days of the date of the closing of any such public
offering.
MANDATORY. On December 15, 2006, the Company will be required to redeem
(subject to the legal availability of funds therefor) all outstanding shares of
Senior Preferred Stock at a price equal to the Specified Amount thereof plus an
amount in cash equal to all accrued and unpaid Liquidated Damages and dividends
(excluding Accumulated Dividends), if any, to the date of redemption.
EXCHANGE
On any Dividend Payment Date, the Company may, at its option, exchange all
but not less than all shares of Senior Preferred Stock then outstanding for
Exchange Debentures (the date of such exchange being herein called the "Exchange
Date"). See "Description of the Exchange Debentures" for a summary of the terms
of the Exchange Debentures. Notwithstanding anything to the contrary in the
foregoing, the Company will not be entitled to make the exchange if a default
under the Exchange Debenture Indenture would result from the exchange. Holders
of the outstanding shares of the Senior Preferred Stock will be entitled to
receive a principal amount of Exchange Debentures equal to the Specified Amount
of the Senior Preferred Stock held by such holder at the time of exchange plus
cash in an amount equal to all accrued and unpaid Liquidated Damages and
dividends (excluding any Accumulated Dividends), if any, thereon to the Exchange
Date.
The Exchange Debentures will be issuable in denominations of $1,000 and
integral multiples thereof. An amount in cash will be paid to holders for any
principal amount of Exchange Debentures otherwise issuable which is less than
$1,000. Notice of the intention to exchange will be sent by or on behalf of the
Company not more than 60 days nor less than 30 days prior to the Exchange Date,
by first class mail, postage prepaid, to each holder of record of Senior
Preferred Stock at its registered address. In addition to
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<PAGE>
any information required by law or by the applicable rules of any exchange upon
which Senior Preferred Stock may be listed or admitted to trading, such notice
will state: (i) the Exchange Date; (ii) the place or places where certificates
for such shares are to be surrendered for exchange; and (iii) that dividends on
the shares to be exchanged will cease to accrue on the Exchange Date. If notice
of any exchange has been properly given, and if on or before the Exchange Date
the Exchange Debentures will have been duly executed and authenticated and an
amount in cash equal to all accrued and unpaid Liquidated Damages and dividends
(excluding any Accumulated Dividends), if any, thereon to the Exchange Date has
been deposited with the transfer agent, then on and after the close of business
on the Exchange Date, the shares of Senior Preferred Stock to be exchanged will
no longer be deemed to be outstanding and will not have the status of shares of
Senior Preferred Stock, and all rights of the holders thereof as shareholders of
the Company will cease, except the right of the holder thereof to receive upon
surrender of their certificates the Exchange Debentures and all accrued and
unpaid Liquidated Damages and dividends (excluding any Accumulated Dividends),
if any, thereon to the Exchange Date.
The Credit Agreement and the Indenture will contain limitations with respect
to the Company's ability to issue the Exchange Debentures, and any future credit
agreements or other agreements relating to its indebtedness to which the Company
becomes a party may contain similar limitations.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, holders of Senior Preferred Stock will be entitled to payment out
of the assets of the Company available for distribution the Specified Amount per
share of Senior Preferred Stock held by such holder, plus accrued and unpaid
Liquidated Damages and dividends (excluding Accumulated Dividends), if any, to
the date fixed for liquidation, dissolution or winding up (including an amount
equal to a prorated dividend from the last payment date to the date fixed for
liquidation, dissolution or winding-up), before any distribution is made on any
Junior Securities, including, without limitation, common stock of the Company.
If upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, the application of all amounts available for payments with respect
to the Senior Preferred Stock and all other Parity Securities would not result
in payment in full of the Senior Preferred Stock and such other Parity
Securities, holders of the Senior Preferred Stock and the Parity Securities will
share equally and ratably in any distribution of assets of the Company in
proportion to the full amount payable upon liquidation to which each is
entitled. After payment in full of all amounts to which holders of Senior
Preferred Stock are entitled, such holders will not be entitled to any further
participation in any distribution of assets of the Company. However, neither the
voluntary sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Company nor the consolidation or merger of the Company with one
or more corporations will be deemed to be a voluntary or involuntary
liquidation, dissolution or winding up of the Company, unless such sale,
conveyance, exchange or transfer shall be in connection with a dissolution or
winding up of the business of the Company.
The Certificate of Designations does not contain any provision requiring
funds to be set aside to protect the liquidation preference or Specified Amount
of the Senior Preferred Stock, although such liquidation preference and
Specified Amount will be substantially in excess of the par value of such shares
of the Senior Preferred Stock. In addition, the Company is not aware of any
provision of Pennsylvania law or any controlling decision of the courts of the
State of Pennsylvania that requires a restriction upon the surplus of the
Company solely because the liquidation preference or other amount payable upon
liquidation of the Senior Preferred Stock will exceed the par value.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of shares of Senior
Preferred Stock will have the right to require the Company to repurchase all or
any part of such holder's shares of Senior Preferred Stock pursuant to the offer
described below (the "CHANGE OF CONTROL OFFER") at an offer price in cash equal
to 101% of the Specified Amount of the Senior Preferred Stock plus accrued and
unpaid Liquidated Damages and dividends (excluding any Accumulated Dividends but
including an amount equal to a prorated dividend from the immediately preceding
Dividend Accrual Date to the Change of Control
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<PAGE>
Payment Date (as defined)), if any, thereon to the date of purchase (the "CHANGE
OF CONTROL PAYMENT"). Within 30 days following any Change of Control, the
Company will mail a notice to each holder stating: (1) that the Change of
Control Offer is being made pursuant to the covenant entitled "Change of
Control" and that all shares of Senior Preferred Stock properly tendered will be
accepted for payment; (2) the purchase price and the purchase date, which will
be no earlier than 75 days nor later than 105 days from the date such notice is
mailed (the "CHANGE OF CONTROL PAYMENT DATE"); PROVIDED that the Change of
Control Purchase Date will not occur until at least 15 days after any Change of
Control Purchase Date pursuant to the covenant entitled "Change of Control" in
the Indenture relating to any such Change of Control; (3) that any shares of
Senior Preferred Stock not properly tendered will continue to accrue Liquidated
Damages and dividends, if any; (4) that, unless the Company defaults in the
payment of the Change of Control Payment, all shares of Senior Preferred Stock
accepted for payment pursuant to the Change of Control Offer will cease to
accrue Liquidated Damages and dividends after the Change of Control Payment
Date; (5) that holders electing to have any shares of Senior Preferred Stock
purchased pursuant to a Change of Control Offer will be required to surrender
the shares of Senior Preferred Stock or transfer the shares of Senior Preferred
Stock by book-entry, to the Paying Agent at the address specified in the notice
prior to the close of business on the third Business Day preceding the Change of
Control Payment Date; (6) that holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business on
the second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the name of the
holder, the amount of Senior Preferred Stock delivered for purchase, and a
statement that such holder is withdrawing its election to have such shares of
Senior Preferred Stock purchased; and (7) that holders whose shares of Senior
Preferred Stock are being purchased only in part will be issued new certificates
of Senior Preferred Stock equal in amount to the unpurchased portion of the
Senior Preferred Stock surrendered (or transferred by book-entry).
On the Change of Control Payment Date, the Company will, to the extent
lawful: (1) accept for payment all shares of Senior Preferred Stock or portions
thereof properly tendered pursuant to the Change of Control Offer, (2) deposit
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all shares of Senior Preferred Stock or portions thereof so tendered
and (3) deliver or cause to be delivered to the holders of Senior Preferred
Stock so accepted an Officers' Certificate stating the aggregate amount of
Senior Preferred Stock or portions thereof being purchased by the Company. The
Company will promptly mail to each holder of shares of Senior Preferred Stock so
tendered the Change of Control Payment for such shares of Senior Preferred Stock
and will promptly mail (or cause to be transferred by book-entry) to each such
holder a new share of Senior Preferred Stock equal in amount to any unpurchased
portion of the Senior Preferred Stock surrendered, if any. The Certificate of
Designations provides that, prior to complying with the provisions of this
covenant, but in any event within 90 days following a Change of Control, the
Company will either repay all of its outstanding indebtedness or obtain the
requisite consents, if any, under all agreements governing its outstanding
indebtedness to permit the repurchase of the shares of Senior Preferred Stock
required by this covenant. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Credit Agreement and the Indenture prohibit the Company from purchasing
any shares of Senior Preferred Stock, except in certain circumstances, and, in
the case of the Credit Agreement, also provide that a Change of Control would
constitute a default thereunder. Any future credit agreements or other
agreements relating to its indebtedness to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing the Senior
Preferred Stock, the Company could seek the consent of its lenders to the
purchase of the Senior Preferred Stock or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing the Senior Preferred Stock. The ability of the Company to purchase
the Senior Preferred Stock upon a Change of Control may also be limited by the
Company's then existing financial resources. See "Risk Factors--Restrictions on
Making a Change of Control Offer; Antitakeover Effects of Change of Control
Provisions".
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<PAGE>
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rules 13e-4 and 14e-1, in connection
with any offer required to be made by the Company to repurchase the Senior
Preferred Stock as a result of a Change of Control. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
Certificate of Designation, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the Certificate of Designation by virtue thereof.
The provisions relative to the Company's obligation to make an offer to
repurchase the Senior Preferred Stock as a result of a Change of Control may be
waived or modified with the written consent of the holders of a majority in
liquidation preference of the Senior Preferred Stock.
VOTING RIGHTS
Holders of the Senior Preferred Stock will have limited voting rights,
including (i) those required by law, (ii) that holders of a majority of the
outstanding shares of Senior Preferred Stock, voting as a separate class, will
(a) upon the failure of the Company (1) with respect only to dividend accrual
periods ending after December 15, 1999, to pay, in whole or in part, for more
than six consecutive dividend accrual periods, dividends in cash equal to the
dividend that accrued during each such dividend accrual period, (2) to satisfy
any mandatory redemption or repurchase obligation (including, without
limitation, pursuant to any required Change of Control Offer) with respect to
the Senior Preferred Stock, (3) to make a Change of Control Offer within 30 days
following any Change of Control or (4) to comply with the covenants set forth
below under the caption "Certain Covenants", (each of the events described in
clauses (1), (2), (3) and (4) being referred to herein as a "VOTING RIGHTS
TRIGGERING EVENT"), be entitled to elect two members to the Board of Directors
of the Company and (b) have the right to approve each issuance by the Company of
any Senior Securities or Parity Securities (other than Senior Preferred Stock),
except that without the approval of the holders of Senior Preferred Stock, the
Company may issue and have outstanding shares of Parity Securities issued from
time to time in exchange for, or the proceeds of which are used to redeem or
repurchase, any or all of the shares of Senior Preferred Stock or other Parity
Securities and (c) have the right to approve any merger, consolidation or sale
of assets of the Company except as permitted pursuant to the covenant entitled
"Merger, Consolidation and Sale of Assets" as set forth below and (iii) the
holders of a majority of the outstanding shares of Senior Preferred Stock,
voting as a class, will be required for modification to the Exchange Debenture
Indenture. Voting rights arising as a result of a Voting Rights Triggering Event
will continue until such time as all dividends in arrears on the Senior
Preferred Stock are paid in full or such other Voting Rights Triggering Event
has been cured or waived. Under Pennsylvania law, holders of the Senior
Preferred Stock are entitled to vote as a class upon a proposed amendment to the
Articles of Incorporation, whether or not entitled to vote thereon by the
Articles of Incorporation, if the amendment would make any change in the
preferences, limitations or certain special rights of the shares of such class
adverse to such class or authorize, or increase the number of authorized shares
of, any class or series having a preference as to dividends or assets.
CERTAIN COVENANTS
MERGER, CONSOLIDATION AND SALE OF ASSETS. Without the consent of holders of
a majority of the outstanding shares of Senior Preferred Stock, voting as a
class, the Company may not consolidate or merge with or into (whether or not the
Company is the surviving corporation), or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions, to another Person unless: (i) the resulting,
surviving or transferee person (the "Successor Company") is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the Senior Preferred Stock shall be converted
into or exchanged for and shall become shares of the Successor Company having in
respect of the Successor Company substantially the same powers, preferences and
relative participating, optional or other special rights, and the
qualifications, limitations or restrictions thereon, that the Senior Preferred
Stock had immediately prior to such transaction; (iii) the Successor Company
will have Consolidated Net Worth (immediately after the transaction on a pro
forma basis but prior to any purchase accounting adjustments resulting from the
transaction) equal to or greater than the Consolidated Net Worth of the Company
immediately preceding
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<PAGE>
the transaction; and (iv) the Company shall deliver to the transfer agent prior
to the consummation of the proposed transaction an Officers' Certificate and an
opinion of counsel to the effect that such sale, assignment, transfer, lease,
conveyance or other disposition complies with the terms of the Certificate of
Designations and that all conditions precedent to such sale, assignment,
transfer, lease, conveyance or other disposition have been satisfied.
JUNIOR PAYMENTS. So long as any shares of Senior Preferred Stock are
outstanding, the Company will not declare, pay or set apart for payment on any
Junior Securities or Parity Securities any dividends whatsoever, whether in
cash, property or otherwise (other than dividends payable in shares of the class
or series upon which such dividends are declared or paid, or payable in shares
of Common Stock with respect to Junior Securities other than Common Stock,
together with cash in lieu of fractional shares), nor will the Company make any
distribution on any Junior Securities or Parity Securities, nor will any Junior
Security or Parity Security be purchased, redeemed or otherwise acquired or
retired for value by the Company or any of its Restricted Subsidiaries, nor will
any monies be paid or made available for a sinking fund for the purchase or
redemption of any Junior Security or Parity Security (each, a "JUNIOR PAYMENT"),
unless all dividends (other than dividends accruing on or prior to December 15,
1999), redemption payments, Change of Control Payments or other payments and
Liquidated Damages, if any, to which the holders of Senior Preferred Stock will
have been entitled at the time of such Junior Payment will have been paid or
declared and a sum of money sufficient for the payment thereof has been set
apart. Notwithstanding the foregoing, if the Company is unable to meet its
payment obligations with respect to dividends, redemption payments, Change of
Control Payments or other payments and Liquidated Damages, if any, with respect
to the Senior Preferred Stock and other Parity Securities as described herein,
holders of Senior Preferred Stock and Parity Securities will share equally and
ratably in any payments by the Company with respect thereto. The foregoing
provisions will not prohibit: (i) the redemption, repurchase, retirement or
other acquisition of any Junior Securities or Parity Securities of the Company
in exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of Junior Securities of the Company
(other than any Disqualified Stock) or out of the proceeds of a substantially
concurrent cash capital contribution received by the Company; (ii) the
repurchase, redemption or other acquisition or retirement for value of (or
payments to Holdings which are used by Holdings to repurchase, redeem or
otherwise acquire or retire for value) any Equity Interests of Holdings held by
employees of Holdings, the Company or its Subsidiaries pursuant to any employee
equity subscription agreement, stock option agreement or stock ownership
arrangement; PROVIDED that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $5.0 million in
any twelve-month period plus the aggregate cash proceeds received by the Company
during such twelve-month period from any reissuance of Equity Interests of
Holdings to employees of Holdings, the Company and its Subsidiaries; (iii) the
payment of distributions to Holdings pursuant to the Tax Sharing Agreement; or
(iv) upon exercise of the Warrants, a distribution to Holdings equal to any cash
payments made by Holdings in lieu of the issuance of fractional Warrant Shares.
TRANSACTIONS WITH AFFILIATES. The provision of the Certificate of
Designations relating to transactions with Affiliates are substantially the same
as the provisions of the Indenture relating to such matters. For a description
thereof, see "Description of the Notes--Certain Covenants--Transactions with
Affiliates".
REPORTS. The provisions of the Certificate of Designations relating to the
provision of reports and information by the Company are substantially the same
as the provisions of the Indenture relating to such matters. For a description
thereof, see "Description of the Notes--Certain Covenants--Reports".
TRANSFER AGENT AND REGISTRAR
The Bank of New York is the transfer agent and registrar for the Senior
Preferred Stock.
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<PAGE>
DESCRIPTION OF THE EXCHANGE DEBENTURES
GENERAL
The Exchange Debentures will, if and when issued, be issued pursuant to an
Indenture (the "EXCHANGE DEBENTURE INDENTURE") between the Company and United
States Trust Company of New York, as trustee (the "EXCHANGE DEBENTURE TRUSTEE")
a copy of which is filed as an exhibit to the Registration Statement of which
this Prospectus constitutes a part. The terms of the Exchange Debentures include
those stated in the Exchange Debenture Indenture and those made part of the
Exchange Debenture Indenture by reference to the Trust Indenture Act). The
Exchange Debentures will be subject to all such terms, and Holders of Exchange
Debentures are referred to the Exchange Debenture Indenture and the Trust
Indenture Act for a statement thereof. The following summary of the material
provisions of the Exchange Debenture Indenture is qualified in its entirety by
reference to the Exchange Debenture Indenture, including the definitions therein
of certain terms used below, and the Trust Indenture Act. The definitions of
certain terms used in the Exchange Debenture Indenture and in the following
summary are substantially the same as those used in the Indenture. For a
description thereof, see "Description of the Notes--Certain Definitions". For a
description of the registration rights with respect to the Exchange Debentures,
see "Registration Rights".
The Exchange Debentures will be general unsecured obligations of the Company
and will be subordinated to all existing and future Senior Debt of the Company
(as defined in the Exchange Debenture Indenture), including the obligations of
the Company under the Credit Agreement and the Notes. See "--Subordination". In
addition, the Exchange Debentures will be effectively subordinated to all
indebtedness and other liabilities and commitments (including trade payables and
lease obligations) of the Company's Subsidiaries. Any right of the Company to
receive assets of any of its Subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the holders of the Exchange
Debentures to participate in those assets) will be effectively subordinated to
the claims of that Subsidiary's creditors, except to the extent that the Company
is itself recognized as a creditor of such Subsidiary, in which case the claims
of the Company would still be subordinate to any security in the assets of such
Subsidiary and any indebtedness of such Subsidiary senior to that held by the
Company. The principal amount of Senior Debt of the Company outstanding as of
July 3, 1996 (including the Indebtedness of the Company under the Notes) was
approximately $567.2 million.
MATURITY AND INTEREST
The Exchange Debentures will be limited in aggregate principal amount to the
Specified Amount of the Senior Preferred Stock exchanged therefor, plus such
principal amount of additional Exchange Debentures as may be issued in lieu of
cash interest, and will mature on December 15, 2006. Interest on the Exchange
Debentures will accrue at the rate of 14% per annum and will be payable
semiannually in arrears on June 15 and December 15, commencing with the first
such date to occur after the date of exchange, to Holders of record on the
immediately preceding June 1 and December 1. Interest on the Exchange Debentures
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest and Liquidated Damages on the Exchange
Debentures will be payable at the office or agency of the Company maintained for
such purpose within the City and State of New York or, at the option of the
Company, payment of interest and Liquidated Damages, if any, may be made by
check mailed to the Holders of the Exchange Debentures at their respective
addresses set forth in the register of Holders of Exchange Debentures; PROVIDED
that all payments with respect to Global Notes will be required to be made by
wire transfer of immediately available same day funds to the accounts specified
by the holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Exchange Debenture
Trustee maintained for such purpose. On or prior to December 15, 1999, the
Company may pay all or a portion of any installment of interest on the Exchange
Debentures by issuing additional Exchange Debentures valued at 100% of their
principal amount. See "Certain Federal Income Tax Considerations". After
December 15, 1999, interest may only be paid in cash. The Company does not
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<PAGE>
expect to pay interest on the Exchange Debentures in cash prior to June 15,
2000. The Exchange Debentures will be issued in denominations of $1,000 and
integral multiples thereof.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Exchange Debentures will
not be redeemable at the Company's option prior to December 15, 2001.
Thereafter, the Exchange Debentures will be subject to redemption at the option
of the Company, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest and Liquidated Damages
(if applicable) thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------------------- -----------
<S> <C>
2001................................................................... 104.200%
2002................................................................... 102.800%
2003................................................................... 101.400%
2004 and thereafter.................................................... 100.000%
</TABLE>
On or prior to December 15, 1997, the Company may redeem from time to time
Exchange Debentures at a redemption price equal to 113.0% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon
to the redemption date, with the net proceeds of one or more public offerings of
common stock of Holdings; PROVIDED that at least $50.0 million in aggregate
principal amount of Exchange Debentures remain outstanding immediately after
such redemption; and PROVIDED FURTHER that such redemption shall occur within 45
days of the date of the closing of any such public offering.
SUBORDINATION
The provisions of the Exchange Debenture Indenture relating to the
subordination of the Exchange Debentures are substantially the same as the
provisions of the Indenture relating to such matters. For a description thereof,
see "Description of the Notes--Subordination".
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchange
Debentures will have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Exchange
Debentures at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and Liquidated Damages thereon
to the date of purchase. The provisions of the Exchange Debenture Indenture
relating to the procedures, definitions and limitations on the Company's ability
to satisfy its obligations with respect to a Change of Control are substantially
the same as the provisions of the Indenture relating to such matters. For a
description thereof, see "Description of the Notes--Repurchase at the Option of
the Holders--Change of Control".
Except as described above with respect to a Change of Control, the Exchange
Debenture Indenture does not contain provisions that permit the Holders of the
Exchange Debentures to require that the Company repurchase or redeem the
Exchange Debentures in the event of a takeover, recapitalization or similar
restructuring.
The Credit Agreement and the Indenture prohibit the Company from purchasing
any Exchange Debentures, except in certain circumstances and, in the case of the
Credit Agreement, also provide that a Change of Control will constitute a
default thereunder. Any future credit agreements or other agreements relating to
Senior Debt to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing Exchange Debentures, the Company
could seek the consent of its lenders to the purchase of Exchange Debentures or
could attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited
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<PAGE>
from purchasing Exchange Debentures. In such case, the Company's failure to
purchase tendered Exchange Debentures would constitute an Event of Default under
the Exchange Debenture Indenture which would, in turn, constitute a default
under the Credit Agreement. In such circumstances, the subordination provisions
in the Exchange Debenture Indenture would likely restrict payments to the
Holders of Exchange Debentures. See "Risk Factors--Restrictions on Making a
Change of Control Offer, Antitakeover Effects of Change of Control Provisions".
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with any offer
required to be made by the Company to repurchase the Exchange Debentures as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the Exchange
Debenture Indenture, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the Exchange Debenture Indenture by virtue thereof.
The provisions relative to the Company's obligation to make an offer to
repurchase the Exchange Debentures as a result of a Change of Control may be
waived or modified with the written consent of the Holders of a majority in
principal amount of the Exchange Debentures.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The provisions of the Exchange Debenture Indenture relating to limitations
on Restricted Payments are substantially the same as the provisions of the
Indenture relating to such matters, except that the Exchange Debenture Indenture
(i) permits the purchase, redemption or other acquisition or retirement for
value of any Indebtedness that is PARI PASSU with the Exchange Debentures and
(ii) does not limit Restricted Investments other than Investments in
Unrestricted Subsidiaries. For a description of the provisions thereof, see
"Description of the Notes--Certain Covenants--Restricted Payments".
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The provisions of the Exchange Debenture Indenture relating to limitations
on the incurrence of Indebtedness and issuance of preferred stock by the Company
and its subsidiaries are substantially the same as the provisions of the
Indenture relating to such matters; PROVIDED, that the Exchange Debenture
Indenture provides that the Company or any Subsidiary may Incur Indebtedness
(including Acquired Debt) or the Company may issue Disqualified Stock if the
Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is Incurred
or such Disqualified Stock is issued would have been at least 1.75 to 1. For a
description thereof, see "Description of the Notes--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock".
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The provisions of the Exchange Debenture Indenture relating to mergers,
consolidations, or sale of assets of the Company are substantially the same as
the provisions of the Indenture relating to such matters except that the
Successor Corporation will not be required to be able to incur an additional
$1.00 of Indebtedness. For a description thereof, see "Description of the
Notes--Certain Covenants--Merger, Consolidation or Sale of Assets".
TRANSACTIONS WITH AFFILIATES
The provisions of the Exchange Debenture Indenture relating to transactions
with Affiliates are substantially the same as the provisions of the Indenture
relating to such matters. For a description thereof, see "Description of the
Notes--Certain Covenants--Transactions with Affiliates".
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REPORTS
The provisions of the Exchange Debenture Indenture relating to the provision
of reports and information by the Company are substantially the same as the
provisions of the Indenture relating to such matters. For a description thereof,
see "Description of the Notes--Certain Covenants--Reports".
EVENTS OF DEFAULT AND REMEDIES
The provisions of the Exchange Debenture Indenture relating to events of
defaults and remedies are substantially the same as the provisions of the
Indenture relating to such matters. For a description thereof, see "Description
of the Notes--Certain Covenants--Events of Default and Remedies".
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Exchange Debentures and the Exchange Debenture Indenture or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
Holder of Exchange Debentures by accepting an Exchange Debenture waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Exchange Debentures. Such waiver may not be
effective to waive liabilities under the federal securities laws and does not
affect any Holder's right to sue under federal securities laws for violations
thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The provisions of the Exchange Debenture Indenture relating to legal
defeasance and covenant defeasance are substantially the same as the provisions
of the Indenture relating to such matters. For a description thereof, see
"Description of the Notes--Legal Defeasance and Covenant Defeasance".
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Exchange Debentures in accordance with the
Exchange Debenture Indenture. The Registrar and the Exchange Debenture Trustee
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Exchange Debenture Indenture. The
Company is not required to transfer or exchange any Exchange Debenture selected
for redemption. Also, the Company is not required to transfer or exchange any
Exchange Debenture for a period of 15 days before a selection of Exchange
Debentures to be redeemed.
The registered Holder of an Exchange Debenture will be treated as the owner
of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
The provisions of the Exchange Debenture Indenture relating to amendment,
supplement and waiver are substantially the same as the provisions of the
Indenture relating to such matters. For a description thereof, see "Description
of the Notes--Amendment, Supplement and Waiver".
CONCERNING THE EXCHANGE DEBENTURE TRUSTEE
The Exchange Debenture Indenture contains certain limitations on the rights
of the Exchange Debenture Trustee, should it become a creditor of the Company,
to obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Exchange
Debenture Trustee will be permitted to engage in other transactions with the
Company and its Affiliates; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Exchange Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy
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available to the Exchange Debenture Trustee, subject to certain exceptions. The
Exchange Debenture Indenture provides that in the case an Event of Default shall
occur (which shall not be cured), the Exchange Debenture Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Exchange
Debenture Trustee will be under no obligation to exercise any of its rights or
powers under the Exchange Debenture Indenture at the request of any Holder of
Exchange Debentures, unless such Holder shall have offered to the Exchange
Debenture Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK OF THE COMPANY
The following description of the capital stock of the Company and the
description of the Company's Articles of Incorporation and By-laws containing
all material provisions thereof is qualified in its entirety by reference to the
Articles of Incorporation and By-laws of the Company, copies of which are filed
as exhibits to the Registration Statement of which this Prospectus constitutes a
part.
The Company was incorporated in 1985 under the Pennsylvania Business
Corporation Law (the "PBCL"). The authorized capital stock of the Company
currently consists of (i) 1,000 shares of Common Stock, par value $.01 per
share, of which 100 shares are issued and outstanding and held by Holdings and
(ii) 10,000,000 shares of Preferred Stock, par value $.01 per share, of which
3,000,000 shares are issued and outstanding as Senior Preferred Stock.
The Company's Articles of Incorporation and By-laws contain provisions
relating to the limitation of liability of directors and indemnification of
directors and officers. The Company's Articles of Incorporation and By-laws
provide that directors shall not be personally liable, as such, for monetary
damages for any action taken, to the fullest extent permitted by the PBCL. In
addition, the Company's Articles of Incorporation and By-laws provide that the
Company shall indemnify its directors and officers to the fullest extent
authorized by applicable law, including circumstances in which indemnification
is otherwise discretionary.
In addition, in the future, the Board of Directors of the Company may,
solely by action of the Board of Directors, issue shares of preferred stock in
one or more series and determine the designation and fix the number of shares of
each series. The Board of Directors of the Company is further authorized to fix
and determine, solely by action of the Board of Directors, the dividend rate,
premium or redemption rate, conversion rights, voting rights, preferences,
privileges, restrictions and other variations granted to or imposed on any
unissued series of such preferred stock.
DESCRIPTION OF THE CREDIT AGREEMENT AND THE A/R FACILITY
On September 30, 1994, SDW Acquisition, the Investor Group and Chemical Bank
(now known as The Chase Manhattan Bank), and Chemical Securities Inc. (now known
as Chase Securities Inc.) (together "Chase") signed a commitment letter pursuant
to which, on December 20, 1994, the aforementioned parties entered into the
Credit Agreement pursuant to which the Company was entitled to borrow up to an
aggregate principal amount of $1.1 billion. The loan facilities were arranged by
Chase and consist of (i) the Term Loan Facilities, consisting of a seven-year
senior secured term loan facility originally in an aggregate principal amount of
$305.0 million (the "Tranche A Term Loan"), and an eight-year senior secured
term loan facility originally in an aggregate principal amount of $325.0 million
(the "Tranche B Term Loan"), (ii) the Revolving Credit Facility and (iii) the
Letter of Credit Facility. At July 2, 1997, the aggregate principal amount
outstanding of Tranche A Term Loans was $229.0 million, the aggregate principal
amount outstanding of Tranche B Term Loans was $173.6 million and the Letter of
Credit Facility utilization was $150.8 million. The Term Loan Facilities, the
Revolving Credit Facility and the Letter of Credit Facility are collectively
referred to herein as the "Credit Facilities". On April 26, 1996, the Company
amended its Credit Agreement to include changes to certain provisions relating
to restrictive covenants including, among other things, the ability to incur
debt, pay dividends and sell certain assets. In
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addition, certain provisions relating to interest rates, fees, collateral,
prepayments and affirmative covenants also have been amended. Concurrently with
the above, the Company, a newly established subsidiary, S.D. Warren Finance Co.
("SDWF"), the Bank of Montreal ("BOM") and its securities unit, Nesbitt Burns
Securities ("Nesbitt"), as agent, entered into a receivables purchase agreement
whereby BOM through Nesbitt has agreed to provide a five-year, $110.0 million
revolving accounts receivable securitization facility (the "A/R Facility").
Under this facility the Company sells to SDWF, pursuant to a purchase and
contribution agreement between the Company and SDWF, on a nonrecourse basis, all
its rights and interests in its accounts receivable. SDWF in turn sells certain
accounts receivable to an unrelated financial institution under similar terms.
The proceeds from the A/R Facility were used to prepay $100.0 million of the
final installment of the Tranche B Term Loan under the Credit Agreement. The
following summary containing all the material provisions of the Credit Agreement
and the A/R Facility is qualified in its entirety by reference to the complete
text of the documents entered into in connection therewith, copies of which are
filed as exhibits to the Registration Statement of which this Prospectus
constitutes a part. Certain defined terms used herein have the meaning ascribed
thereto in such documents.
AMOUNT AND MATURITY OF FACILITIES
The Tranche A Term Loan matures in twelve consecutive semiannual
installments commencing June 30, 1996 with a final maturity in December 2001.
The Tranche B Term Loan matures in fourteen consecutive semiannual installments
commencing June 30, 1996 with a final maturity in December 2002.
The installments of the Tranche A Term Loan and the Tranche B Term Loan due
in each fiscal year will be the following respective aggregate amounts as of
July 2, 1997:
<TABLE>
<CAPTION>
TRANCHE A TERM TRANCHE B TERM
LOAN ANNUAL LOAN ANNUAL
FISCAL YEAR AMOUNT AMOUNT
- ---------------------------------------------------------- -------------- --------------
<S> <C> <C>
1998...................................................... 49,073,330 2,515,922
1999...................................................... 51,410,155 2,515,922
2000...................................................... 51,410,155 7,547,765
2001...................................................... 51,410,155 23,062,615
2002...................................................... 25,705,078 77,366,793
2003...................................................... -- 60,593,982
</TABLE>
Loans under the Revolving Credit Facility ("Revolving Credit Loans") will be
made, and letters of credit ("Letters of Credit") will be issued at any time
during the period from and including the Closing Date until the Revolving Credit
Facility matures in December 2001 (the "Revolving Credit Termination Date"). No
Letter of Credit shall have an expiration date later than the Revolving Credit
Termination Date.
Standby letters of credit ("Facility Letters of Credit") were issued under
the Letter of Credit Facility on the Closing Date to support an existing letter
of credit arranged by Scott and to support the Company's obligations with
respect to certain indebtedness and capital and operating leases existing at the
time of the Acquisition including certain obligations of Scott with respect to
Warren's business that continue after the consummation of the Acquisition. The
amount available under the Letter of Credit Facility will be reduced as the
Company's obligations in respect of such indebtedness and leases reduce until
such Facility matures on the Revolving Credit Termination Date. The Facility
Letters of Credit may be drawn upon from time to time in accordance with their
terms. If any such Facility Letter of Credit is drawn upon as a result of the
bankruptcy or insolvency of Scott, the Company's obligations with respect to
such amount of indebtedness may be shortened as to maturity (from up to 20
years, in the case of certain tax exempt obligations, to the remaining term of
the Letter of Credit Facility) and increased as to interest rate (from a
tax-exempt rate to the rate provided for borrowings under the Credit Agreement).
The Company is required to prepay the Term Loan Facilities with (i) 100% of
the net proceeds of certain asset sales, (ii) 100% of the net proceeds of
incurrences of indebtedness and (iii) 50% of the net proceeds from issuances of
equity after the Closing Date by Holdings or any of its subsidiaries. The
Company is also required to prepay the Term Loan Facilities annually in an
amount equal to 75% of the
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Excess Cash Flow (as defined therein) of the Company and its subsidiaries for
the prior fiscal year; PROVIDED that the Company will be required to prepay
annually an amount equal to only 50% of such Excess Cash Flow if (a) the
aggregate outstanding principal amount of the Term Loan Facilities is less than
$250.0 million and (b) the Consolidated Interest Expense Ratio (as defined
therein) as of the last day of the fiscal quarter immediately preceding the date
of such prepayment (calculated on a rolling four quarter basis) exceeds 3.00 to
1.00. The Company may also make optional prepayments without premium or penalty
at any time (subject to payment of certain breakage costs if other than on the
last day of an interest period under certain circumstances). Optional
prepayments shall be applied pro rata to the Tranche A Term Loan and the Tranche
B Term Loan based on the respective amounts outstanding and shall be applied to
installments thereof on a pro rata basis, and may not be reborrowed, except that
the amount of any optional prepayments funded with the portion of Excess Cash
Flow which is not otherwise required to be used to prepay Term Loans and/or the
Letter of Credit Facility Loans may, at the Company's option, be applied to
prepay the Tranche A Term Loan and/or the Tranche B Term Loan in such amounts as
the Company may determine with any such prepayment to be applied first to any
scheduled installment due within six months of the date of prepayment and then
to the remaining installments of the Tranche A Term Loan and/or the Tranche B
Term Loan, as the case may be, on a pro rata basis.
INTEREST RATE
The loans under the Credit Agreement bear interest at a rate equal to, at
the Company's option, (i) the Base Rate plus the Applicable Margin ("Base Rate
Loans") or (ii) the Eurodollar Rate (adjusted for reserves) as determined by
Chase for the respective interest period plus the Applicable Margin ("Eurodollar
Loans"). "Applicable Margin" means a percentage per annum ranging (a) in the
case of Base Rate Loans, from 1.50% to 0.00% (2.00% in the case of Tranche B
Term Loans), and (b) in the case of Eurodollar Loans, from 2.50% to 1.00% (3.00%
in the case of Tranche B Term Loans), in each case based upon the Company's
ability to maintain certain financial ratios determined from the most recent
financial statements of the Company calculated as of the last day of each fiscal
quarter on a rolling four quarter basis. "Base Rate" means the highest of (1)
the rate of interest publicly announced by Chase as its prime rate in effect at
its principal office in New York City, (2) the secondary market rate for three
month certificates of deposit (adjusted for reserves) plus 1% and (3) the
federal funds rate in effect from time to time plus 0.5%.
The loans under the A/R Facility bear interest at a rate equal to the
commercial paper rate (the "CP Rate"). CP Rate is defined as a rate per annum
equal to the rate at which the purchaser of the accounts receivable can issue
commercial paper plus any commissions and charges charged by a placement agent
or commercial paper dealer. If the rate agreed to by such placement agent or
commercial paper dealer is a discount rate then the CP Rate shall mean the rate
resulting from converting such discount rate to an interest-bearing equivalent
rate.
Overdue loans payable under the Credit Agreement bear interest at a rate per
annum equal to the rate which is 2% in excess of the rate then otherwise
applicable to such borrowings. Such interest is payable on demand.
FEES
The Company is required to pay commitment fees from 0.5% to 0.375% per annum
based upon the Company's ability to maintain a certain financial ratio
determined from the most recent financial statements of the Company calculated
as of the last day of each fiscal quarter on a rolling four-quarter basis on the
average daily unused commitments available to be drawn under the Revolving
Credit Facility, as in effect from time to time, to Chase for the account of the
arranged syndicate of lenders (the "Lenders") for the period commencing on the
Closing Date through the maturity date of the Revolving Credit Facility. The
Company is also required to pay letter of credit fees with respect to each
letter of credit equal to the Eurodollar Rate Applicable Margin (as defined
therein) in effect from time to time, plus an issuance fee of between 0.20% and
0.25%, in the case of both such fees, based on the Company's ability to maintain
a certain financial ratio. Chase and the Lenders shall receive such other fees
as have
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been separately agreed upon with Chase and the Lenders. With respect to the A/R
Facility, S.D. Warren is required to pay certain fees associated with such
facility. Such fees include an annual Program Fee based upon the unused portion
of the A/R Facility and an annual Facility Fee based on the size of the A/R
Facility.
GUARANTEES AND COLLATERAL SECURITY
The Credit Facilities are guaranteed by Holdings and each of the Company's
U.S. subsidiaries. The Credit Facilities and such guarantees are secured by
security interests (subject to other liens permitted by the terms of the Credit
Facilities), to the extent permissible under applicable laws and regulations, in
(a) all of the capital stock of the Company and each of its U.S. subsidiaries
and 65% of the common stock and 100% of the preferred stock of each foreign
subsidiary and (b) all assets (subject to certain limitations), except certain
accounts receivable, owned by the Company and its subsidiaries.
COVENANTS
The Credit Agreement contains restrictive covenants which limit Holdings and
the Company and its subsidiaries with respect to certain matters including,
among other things, the ability to incur debt, pay dividends, make acquisitions,
sell assets, merge, grant or incur liens, guarantee obligations, make
investments or loans, make capital expenditures, create subsidiaries or change
its line of business. The Credit Agreement also restricts the Company from
prepaying certain of its indebtedness. Under the Credit Agreement, the Company
is required to satisfy certain financial covenants which require the Company to
maintain specified financial ratios and comply with certain financial tests,
including a minimum interest coverage ratio, a maximum leverage ratio and a net
worth test.
The A/R Facility contains restrictive covenants which limit SDWF with
respect to certain matters including, among other things, the maintenance of a
certain net worth and its ability to incur liens, extend credit terms beyond
their stated maturity, change its credit policy, create subsidiaries or change
its line of business. The A/R Facility also limits SDWF's ability to pay
dividends, incur indebtedness or amend other agreements related to the A/R
Facility without the consent of the Agent. In addition, the A/R Facility
requires that SDWF maintain certain ratios related to the performance of the
underlying accounts receivable, including a delinquency ratio, a default ratio
and a loss-to-liquidation ratio.
EVENTS OF DEFAULT; TERMINATION EVENTS
The Credit Agreement contains customary Events of Default as well as Events
of Default particular to the ownership of the Company and the Transactions,
including (i) if Sappi or any of its majority owned subsidiaries fails to
beneficially own at least a majority of the issued and outstanding capital stock
of the Company (on a fully diluted basis) and fails to have the right to appoint
a majority of the members of the board of directors of Holdings, (ii) if
Holdings ceases to own all the capital stock of the Company or (iii) the
occurrence of a Change in Control under the Indenture.
The A/R Facility contains certain events ("Termination Events") particular
to SDWF including (1) any event under the Credit Agreement which causes an
acceleration of the maturity of the debt under the Credit Agreement or any
redemption, defeasance, purchase or repayment of debt under the Credit Agreement
other than those required to be made in each case prior to the stated maturity
thereof, (2) any bankruptcy proceeding or declaration by the Company or SDWF
that it is unable to pay its debts generally, (3) the inability, or any action
that would cease, to create a valid and enforceable undivided percentage
ownership interest in any receivable and (4) a violation of any of the
performance ratios set forth above relating to SDWF's accounts receivable.
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.
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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 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 principal on the defeased
bonds, the Company will be liable for such deficiency.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
NOTES
INTEREST
Interest on the Notes will ordinarily be taxable to a holder as ordinary
income in accordance with a holder's regular method of tax accounting.
SALE, REDEMPTION OR OTHER TAXABLE DISPOSITION OF NOTES
Generally, any sale, redemption or other taxable disposition of Notes by a
holder will result in taxable gain or loss equal to the difference between (1)
the sum of the amount of cash and the fair market value of any property received
with respect to such sale, redemption or other taxable disposition (except to
the extent such cash or other property is attributable to accrued interest) and
(2) the holder's tax basis in such Notes. A holder's tax basis in such Notes
will equal their purchase price. Such gain or loss will be capital gain or loss,
and will be long-term capital gain or loss if the Notes had been held by the
holder for more than one year at the time of the sale, redemption or other
taxable disposition.
SENIOR PREFERRED STOCK
DISTRIBUTIONS IN GENERAL
Dividends on the Senior Preferred Stock will be taxable for Federal income
tax purposes as ordinary dividend income to the extent paid out of the current
or accumulated earnings and profits of the Company as determined for Federal
income tax purposes. To the extent that the amount of such a distribution
exceeds the current and accumulated earnings and profits of the Company, such
excess will be treated as a non-taxable recovery of the holder's basis in the
stock in respect of which the distribution is made (to the extent thereof), with
any remaining excess treated as gain from the sale or exchange of such stock.
Although it is possible that cash dividends will be paid on or prior to
December 15, 1999, it is not expected that the Company will pay any dividends on
the Senior Preferred Stock in cash for any period ending on or prior to December
15, 1999. Any unpaid dividends will accrue and compound and will be payable upon
the optional or mandatory redemption of the Stock or the exchange of Exchange
Debentures for Senior Preferred Stock. The tax treatment of such accruing and
compounding dividends ("Accrued Dividends") is not free from doubt. Under
current law, it would appear that Accrued Dividends would not be treated as
having been received by holders of the Senior Preferred Stock until such Accrued
Dividends were actually paid in cash (and would then be taxable for Federal
income tax purposes as a dividend to the extent of the Company's current and
accumulated earnings and profits at such time). The legislative history to the
1990 amendments to Section 305(c) of the Internal Revenue Code of 1986, as
amended (the "Code"), however, grants the Service authority to issue regulations
(possibly with retroactive effect) which would treat such Accrued Dividends as
part of the redemption price of the stock. If Accrued Dividends were included in
the redemption price of the Senior Preferred Stock, a holder would be required
to take such Accrued Dividends into account in determining the amount that
constitutes an excessive redemption price for purposes of Section 305(c) of the
Code, as described below under "Excessive Redemption Price". The effect of such
treatment would be to treat such holder as having received such Accrued
Dividends as constructive distributions at the time they accrue, rather than at
the time they are paid in cash. Until regulations requiring such treatment with
respect to Accrued Dividends are issued, however, the Company intends to take
the position that Accrued Dividends on the Senior Preferred Stock need not be
treated as received by a holder until such time as such Accrued Dividends are
actually paid to such holder in cash and will report to the Service on that
basis.
Payments of Liquidated Damages with respect to Senior Preferred Stock will
be taxable to holders thereof as ordinary income according to their usual method
of tax accounting. A corporate holder will not be entitled to the
dividends-received deduction (discussed below) with respect to such Liquidated
Damages.
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PROSPECTIVE PURCHASERS OF SENIOR PREFERRED STOCK ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE TAX TREATMENT OF ACCRUED DIVIDENDS.
EXCESSIVE REDEMPTION PRICE
Under Section 305 of the Code and Treasury Regulations authorized
thereunder, if the redemption price of preferred stock that is subject to
mandatory redemption, such as the Senior Preferred Stock, exceeds its issue
price (I.E., its fair market value at its date of issue) by more than a DE
MINIMIS amount, such excess will be taxable as a constructive distribution to
the holder (treated as a dividend to the extent of the Company's current and
accumulated earnings and profits and otherwise subject to the treatment
described above for distributions in excess of current and accumulated earnings
and profits). Such excess will be considered DE MINIMIS if it is less than the
product of (x) 0.25%, (y) the number of complete years to maturity of the
preferred stock, and (z) the redemption price of the preferred stock. If such
excess is greater than a DE MINIMIS amount, a holder of such preferred stock
would be required to treat such excess as a constructive distribution received
by the holder over the life of the preferred stock under a constant interest
(economic yield) method that takes into account the compounding of yield.
Because the Senior Preferred Stock was sold with a Warrant as part of a
Unit, the two instruments will likely be treated by the Internal Revenue Service
(the "Service") as constituting an "investment unit" for Federal income tax
purposes. In such case, the offering price of a Unit will be allocated to the
Senior Preferred Stock and associated Warrant comprising such Unit based on
their relative fair market values. The Company has allocated $22.6042 of the
offering price for a Unit to the Senior Preferred Stock and $2.3958 of such
offering price to the associated Warrant. That allocation by the Company will be
binding on each holder, unless the holder explicitly discloses (on a statement
attached to the holder's timely filed Federal income tax return for the year
that includes the acquisition date of the Unit) that his allocation of a Unit's
issue price between the Senior Preferred Stock and the Warrant is different from
the Company's allocation. Accordingly, the mandatory redemption price of the
Senior Preferred Stock will exceed such Stock's issue price by more than a DE
MINIMIS amount and holders will be required to treat such excess as a
constructive distribution received over the life of the Senior Preferred Stock,
as described above.
DIVIDENDS TO CORPORATE SHAREHOLDERS
In general, an actual or constructive distribution that is treated as a
dividend for Federal income tax purposes and that is made to a corporate
shareholder with respect to the Senior Preferred Stock will qualify for the 70%
dividends-received deduction.
Under Section 1059 of the Code, the tax basis of Senior Preferred Stock that
has been held by a corporate shareholder for two years or less (ending on the
earliest of the date on which the Company declares, announces or agrees to the
payment of such actual or constructive dividend) is reduced (but not below zero)
by the non-taxed portion of an "extraordinary dividend" for which a
dividends-received deduction is allowed. To the extent a corporate holder's tax
basis would have been reduced below zero but for the foregoing limitation, such
holder must increase the amount of gain recognized on the ultimate sale or
exchange of such Senior Preferred Stock. Generally, an "extraordinary dividend"
is a dividend that (1) equals or exceeds 5% of the holder's adjusted basis in
the Senior Preferred Stock (treating all dividends having ex-dividend dates
within an 85-day period as a single dividend) or (2) exceeds 20% of the holder's
adjusted basis in the Senior Preferred Stock (treating all dividends having
ex-dividend dates within a 365-day period as a single dividend). If an election
is made by the holder, under certain circumstances the fair market value of the
Senior Preferred Stock as of the day before the ex-dividend date may be
substituted for the holder's basis in applying these tests.
CORPORATE STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE POSSIBLE APPLICATION OF SECTION 1059 TO THEIR OWNERSHIP AND
DISPOSITION OF THE SENIOR PREFERRED STOCK.
A corporate stockholder's liability for alternative minimum tax may be
affected by the portion of dividends received which such corporate stockholder
deducts (pursuant to the dividends-received deduction) in computing taxable
income. This results from the fact that corporate stockholders are required to
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increase alternative minimum taxable income by 75% of the excess of current
earnings and profits (with certain adjustments, but determined without regard to
the dividends-received deduction), over alternative minimum taxable income
(determined without regard to this earnings and profits adjustment or the
alternative tax net operating loss deduction, but taking into account the
dividends-received deduction).
SALE, REDEMPTION OR OTHER TAXABLE DISPOSITION
Upon a sale, redemption or other taxable disposition of Senior Preferred
Stock (including an exchange of Exchange Debentures for Senior Preferred Stock),
a holder generally will recognize capital gain or loss for Federal income tax
purposes (except to the extent of cash payments received on the disposition that
are attributable to declared dividends, which will be treated in the same manner
as distributions described above under "Distributions in General") in an amount
equal to the difference between (1) the sum of the amount of cash and the fair
market value of any property received upon such sale, redemption or other
taxable disposition (the "amount realized") and (2) the holder's adjusted tax
basis in the stock being disposed of. Such capital gain or loss will be
long-term capital gain or loss if the stock had been held by the holder for more
than one year at the time of the disposition. Notwithstanding the foregoing, it
is possible that the Service may require a holder to treat amounts received upon
the redemption of Senior Preferred Stock or the exchange of Exchange Debentures
for Senior Preferred Stock that are attributable to Accrued Dividends (and not
previously treated as received by a holder as a constructive distribution as
described above under "Distributions in General") as a constructive
distribution, regardless of whether the Company declares a dividend of such
Accrued Dividends in connection with such redemption or exchange. In such case,
such amounts would be taxable for Federal income tax purposes as ordinary
dividend income to the extent of the Company's current and accumulated earnings
and profits for Federal income tax purposes at such time (and any amounts in
excess thereof would be taxable as described above under "Distributions in
General".)
A holder's initial tax basis in the Senior Preferred Stock will equal the
portion of the offering price of the Unit allocable to the Senior Preferred
Stock, as described above under "Excessive Redemption Price". Thereafter, such
initial tax basis will be (i) increased by the amount (if any) of any
constructive distributions the holder is treated as having received pursuant to
the rules described above under "Distributions in General" and "Excessive
Redemption Price", and (ii) decreased by the portion of any (actual or
constructive) distribution that is treated as a tax-free recovery of basis as
described above under "Distributions in General".
If the Company elects to exchange Exchange Debentures for Senior Preferred
Stock on a dividend date, the amount realized on the exchange will depend on
whether the Exchange Debentures and/or the Senior Preferred Stock is traded on
an established market (as defined in applicable Treasury Regulations) at the
time of the exchange. The amount realized will equal (i) the fair market value
of the Exchange Debentures as of the exchange date if the Exchange Debentures
are traded on an established market at such time or (ii) the fair market value
of the Senior Preferred Stock as of the exchange date if such Senior Preferred
Stock is traded on an established market at such time but the Exchange
Debentures are not. If neither the Senior Preferred Stock nor the Exchange
Debentures are so traded, the amount realized will equal the stated principal
amount of the Exchange Debentures provided that the yield on the Exchange
Debentures is equal to or greater than the relevant "applicable Federal rate".
(The applicable Federal rate is a rate announced monthly by the Treasury that is
intended to reflect the average yield of United States government obligations.)
If neither the Exchange Debentures nor the Senior Preferred Stock is so traded
and the yield on the Exchange Debentures is less than the applicable Federal
rate, the amount realized will equal the present value as of the exchange date
of all payments to be made on the Exchange Debentures, discounted at the
applicable Federal rate. It cannot be determined at the present time whether the
Senior Preferred Stock or the Exchange Debentures will be, at the relevant time,
traded on an established market within the meaning of the Treasury Regulations.
Depending upon a holder's particular circumstances, the tax consequences of
holding Exchange Debentures (described below) may be less advantageous than the
tax consequences of holding Senior Preferred Stock because, for example,
payments of interest on the Exchange Debentures will not be
95
<PAGE>
eligible for any dividends-received deduction that may be available to corporate
holders and because, as discussed below, the Exchange Debentures permit the
distribution of Additional Exchange Debentures in lieu of the payment of
interest in cash, such Exchange Debentures will be issued with OID.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE LIKELIHOOD
OF CAPITAL GAIN TREATMENT (IN WHOLE OR PART) ON THE REDEMPTION OF SENIOR
PREFERRED STOCK OR ITS EXCHANGE FOR EXCHANGE DEBENTURES.
EXCHANGE DEBENTURES
CONSEQUENCES OF OWNING EXCHANGE DEBENTURES
The consequences of owning Exchange Debentures will depend in part upon the
facts existing at the time of issuance, as described below. Accordingly, the
ultimate Federal income tax treatment of the ownership of the Exchange
Debentures may differ substantially from that described below. If any Exchange
Debentures are issued, the Company will report to holders on a timely basis the
reportable amount of original issue discount ("OID") and interest income with
respect to the Exchange Debentures, based on its understanding of then
applicable law.
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
CONSEQUENCES OF OWNING EXCHANGE DEBENTURES.
ORIGINAL ISSUE DISCOUNT
Because interest on the Exchange Debentures can, at the option of the
Company, be paid in cash or in additional Exchange Debentures, the Exchange
Debentures will be treated, for Federal income tax purposes, as having been
issued with OID. Under the provisions of the Treasury Regulations dealing with
OID (the "OID Regulations") (i) the distribution of additional Exchange
Debentures in lieu of the payment of interest in cash ("Additional Exchange
Debentures") will not be treated as the payment of interest and accordingly,
(ii) an Exchange Debenture and all Additional Exchange Debentures that could be
issued with respect thereto (if all interest payments that could be satisfied in
Additional Exchange Debentures were satisfied in Additional Exchange Debentures)
will be treated as single OID obligation. Accordingly, under the provisions of
the OID Regulations (i) the stated redemption price at maturity of an Exchange
Debenture will be equal to the sum of all cash payments due on such Exchange
Debentures and on all Additional Exchange Debentures that could be issued with
respect to such Exchange Debenture or Additional Exchange Debentures (if all
interest payments that could be satisfied in Additional Exchange Debentures were
satisfied in Additional Exchange Debentures), (ii) each Exchange Debenture will
be issued with OID in an amount equal to the excess of such stated redemption
price at maturity over the issue price of such Exchange Debenture and (iii) no
interest payment on the Exchange Debentures or on any Additional Exchange
Debentures distributed with respect thereto will be treated as qualified stated
interest and therefore no such interest will be included in income when paid
(because equivalent amounts will be included in income as OID).
The holder of an Exchange Debenture issued with OID will be required to
include such OID in income as interest over the term of the Exchange Debenture,
in advance of the receipt of the cash attributable to such income, under a
constant interest rate method described below that takes account of the
compounding of interest.
The amount of OID accruing with respect to any Exchange Debenture will be
the sum of the "daily portions" of OID with respect to such Exchange Debenture
for each day during the taxable year in which a holder owns an Exchange
Debenture ("accrued OID"). The daily portion is determined by allocating to each
day in any "accrual period" a pro rata portion of the OID allocable to that
accrual period. An accrual period may be of any length and may vary in length
over the term of an Exchange Debenture provided that each accrual period is no
longer than one year and each scheduled payment of principal or interest occurs
either on the final day of an accrual period or on the first day of an accrual
period. The amount of OID accruing during any accrual period with respect to an
Exchange Debenture will be equal to the following amount: (i) the "adjusted
issue price" of such Exchange Debenture at the beginning of that accrual period,
96
<PAGE>
MULTIPLIED BY (ii) the yield to maturity of such Exchange Debenture. OID
allocable to a final accrual period is the difference between the amount payable
at maturity and the adjusted issue price at the beginning of the final accrual
period. If all accrual periods are of equal length, except for an initial short
accrual period, the amount of OID allocable to the initial short accrual period
may be computed under any reasonable method. The adjusted issue price of an
Exchange Debenture at the beginning of its first accrual period will be equal to
its issue price. An Exchange Debenture's issue price will equal the amount
realized upon the exchange of Exchange Debentures for Senior Preferred Stock, as
described above under "Sale or Exchange". The adjusted issue price at the
beginning of any subsequent accrual period will be equal to (i) the adjusted
issue price at the beginning of the preceding accrual period, PLUS (ii) the
amount of OID allocable to the preceding accrual period, MINUS(iii) any payments
(including payments of cash interest) made during the preceding accrual period
and on the first day of such subsequent accrual period.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
Pursuant to Section 163 of the Code, a portion of the OID accruing on
certain debt instruments will be treated as a dividend eligible for the
dividends-received deduction, and the corporation issuing such debt instrument
will not be entitled to deduct such portion of the OID and will be allowed to
deduct the remainder of the OID only when paid.
This treatment would apply to "applicable high yield discount obligations"
("AHYDO"), that is, debt instruments that have a term of more than five years,
have a yield to maturity that equals or exceeds five percentage points over the
"applicable Federal rate" and have "significant" OID. A debt instrument is
treated as having "significant" OID if the aggregate amount that would be
includible in gross income with respect to such debt instrument for periods
before the close of any accrual period ending after the date five years after
the date of issue exceeds the sum of (i) the aggregate amount of interest to be
paid in cash under the debt instrument before the close of such accrual period
and (ii) the product of the initial issue price of such debt instrument and its
yield to maturity. Because the amount of OID attributable to the Exchange
Debentures will be determined at the time such Exchange Debentures are issued
and the applicable Federal rate at the time the Exchange Debentures are issued
is not predictable, it is impossible to determine at the present time whether
the Exchange Debentures will be treated as an AHYDO.
If the Exchange Debentures are treated as AHYDO's, a holder would be treated
as receiving dividend income (to the extent of the Company's current and
accumulated earnings and profits) solely for purposes of the dividends-received
deduction in an amount equal to the "disqualified portion" of the OID of such
AHYDO. The "disqualified portion" of the OID is equal to the lesser of (i) the
amount of the OID or (ii) the portion of the "total return" (the excess of all
payments to be made with respect to the Exchange Debenture obligation over its
issue price) on the Exchange Debenture that bears the same ratio to the Exchange
Debenture's total return as the "disqualified yield" (the extent to which the
yield exceeds the applicable Federal rate plus 6%) bears to the Exchange
Debenture's yield to maturity. To the extent the Company's earnings and profits
are insufficient, any portion of the OID that otherwise would have been
recharacterized as a dividend for purposes of the dividends-received deduction
will continue to be taxed as ordinary OID income in accordance with the rules
described above. The Company's deduction for OID will be substantially deferred
with respect to an Exchange Debenture that is treated as an AHYDO. In addition,
such deduction will be disallowed to the extent that the yield on such AHYDO
exceeds the applicable Federal rate by more than 6%.
SALE, REDEMPTION OR OTHER TAXABLE DISPOSITION OF EXCHANGE DEBENTURES
Generally, any sale, redemption other taxable disposition of Exchange
Debentures by a holder will result in taxable gain or loss equal to the
difference between (1) the sum of the amount of cash and the fair market value
of any property received upon such sale, redemption or disposition and (2) the
holder's adjusted tax basis in such Exchange Debentures. The adjusted tax basis
of a holder in such Exchange Debentures will equal the issue price of such
Exchange Debentures, increased by any OID on the Exchange Debentures previously
included in such holder's income, and reduced by any payments (including
payments of cash interest) previously made on the Exchange Debentures. Such gain
or loss will be
97
<PAGE>
capital gain or loss, and will be long-term capital gain or loss if the Exchange
Debentures had been held by the holder for more than eighteen months at the time
of the sale, redemption or disposition.
BACKUP WITHHOLDING
In general, a noncorporate holder of Securities will be subject to backup
withholding at the rate of 31% with respect to reportable payments of dividends,
interest, or OID accrued with respect to, or the proceeds of a sale, exchange or
redemption of, Securities, as the case may be, if the holder fails to provide a
taxpayer identification number or certification of foreign or other exempt
status or fails to report in full dividend and interest income. Amounts paid as
backup withholding do not constitute an additional tax and will be credited
against the holder's Federal income tax liabilities.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH HOLDER OF SECURITIES SHOULD CONSULT WITH ITS OWN TAX ADVISOR
AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE OWNERSHIP AND
DISPOSITION OF SUCH SECURITIES, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
PLAN OF DISTRIBUTION
This Prospectus has been prepared for use by DLJSC in connection with offers
and sales of the Securities in market making transactions. DLJSC may act as
principal or agent in such transactions. DLJSC has advised the Company that it
currently makes a market in the Securities, but it is not obligated to do so and
may discontinue any such market making at any time without notice. Accordingly,
there can be no assurance that an active trading market will be maintained for
the Securities.
PRIOR RELATIONSHIPS
Prior to the Minority Acquisition, DLJSC was an affiliate of certain
stockholders of Holdings, of which S.D. Warren is a wholly owned subsidiary. See
"Certain Relationships and Related Transactions-- Minority Acquisition and
Merger."
In connection with the Acquisition the Company sold to DLJSC $375 million of
the SDW Acquisition Notes, $75 million of SDW Acquisition Senior Preferred Stock
and 898,440 Class A Warrants, less the aggregate discount to DLJSC of
$13,950,000. DLJSC was also reimbursed for certain out-of-pocket expenses
incurred by DLJSC in connection therewith.
The Company also agreed to pay certain fees, reimburse expenses for and
provide indemnification to members of the Investor Group and transferees, which
group includes certain affiliates of DLJSC, in connection with the Acquisition
and related transactions including various registration rights. See "Certain
Relationships and Related Transactions".
EXPERTS
The 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 from
December 21, 1994 through September 27, 1995; and the combined statements of
operations, changes in parent's equity, and cash flows of S.D. Warren Company
and certain related affiliates (the "Predecessor Corporation") for the
nine-month period ended September 24, 1994 and the period September 25, 1994
through December 20, 1994 included in this prospectus and the related financial
statement schedule also included herein have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein (which
report expresses an unqualified opinion and includes an explanatory paragraph
referring to the lack of comparability between the financial statements of the
Company and the Predecessor Corporation), and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
98
<PAGE>
S.D. WARREN COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Statements of Operations for the nine months ended July 3, 1996 and July 2, 1997.... F-2
Condensed Consolidated Balance Sheets at October 2, 1996 and July 2, 1997.................................. F-3
Condensed Consolidated Statements of Cash Flows for the nine months ended July 3, 1996 and July 2, 1997.... F-4
Notes to Unaudited Condensed Consolidated Financial Statements............................................. F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES:
Independent Auditors' Report............................................................................... F-11
Financial Statements:
Statements of Operations for the nine months ended September 24, 1994, the period September 25, 1994
through December 20, 1994, the period December 21, 1994 through September 27, 1995 and the twelve months
ended October 2, 1996.................................................................................... F-12
Balance Sheets as of September 27, 1995 and October 2, 1996................................................ F-13
Statements of Cash Flows for the nine months ended September 24, 1994, the period September 25, 1994
through December 20, 1994, the period December 21, 1994 through September 27, 1995 and the twelve months
ended October 2, 1996.................................................................................... F-14
Statements of Changes in Parent's Equity for the nine months ended September 24, 1994 and the period
September 25, 1994 through December 20, 1994............................................................. F-15
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.............................................................. F-16
Notes to Financial Statements.............................................................................. F-17
Financial Statement Schedules:
II--Valuation and Qualifying Accounts.................................................................... F-43
</TABLE>
F-1
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS
JULY 3, 1996 ENDED JULY 2, 1997
------------------ ------------------
<S> <C> <C>
Sales.................................................................... $ 1,066.7 $ 1,009.3
Cost of goods sold....................................................... 874.8 819.4
---------- ----------
Gross profit............................................................. 191.9 189.9
Selling, general and administrative expense.............................. 98.0 100.6
Restructuring............................................................ -- 10.0
---------- ----------
Income from operations................................................... 93.9 79.3
Other income (expense), net.............................................. (0.6) 3.4
Interest expense......................................................... 84.3 77.8
---------- ----------
Income before income taxes and extraordinary item........................ 9.0 4.9
Income tax expense....................................................... 3.6 1.8
---------- ----------
Income before extraordinary item......................................... 5.4 3.1
Extraordinary item, net of tax........................................... (2.0) 0.9
---------- ----------
Net income............................................................... 3.4 4.0
Dividends and accretions on Warren Series B preferred stock.............. 10.0 11.2
---------- ----------
Net loss applicable to common stockholder................................ $ (6.6) $ (7.2)
---------- ----------
---------- ----------
Earnings per common share:
Income before extraordinary item....................................... $ 0.05 $ 0.03
---------- ----------
---------- ----------
Net income............................................................. $ 0.03 $ 0.04
---------- ----------
---------- ----------
Net loss applicable to common stockholder.............................. $ (0.07) $ (0.07)
---------- ----------
---------- ----------
Weighted average number of shares outstanding............................ 100 100
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to unaudited condensed, consolidated financial
statements.
F-2
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
JULY 2,
OCTOBER 2, 1997
1996 (UNAUDITED)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 49.0 $ 58.2
Trade accounts receivable, net......................................................... 49.1 37.9
Other receivables...................................................................... 34.2 38.2
Inventories............................................................................ 195.7 208.0
Deferred income taxes.................................................................. 18.0 17.3
Other current assets................................................................... 9.4 9.0
----------- -----------
Total current assets................................................................. 355.4 368.6
Plant assets, net........................................................................ 1,114.7 1,082.8
Timber resources, net.................................................................... 95.3 95.3
Goodwill, net............................................................................ 94.1 91.1
Deferred financing fees, net............................................................. 44.8 39.2
Other assets, net........................................................................ 21.1 19.4
----------- -----------
Total assets......................................................................... $ 1,725.4 $ 1,696.4
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt................................................... $ 46.4 $ 59.2
Accounts payable....................................................................... 101.6 111.7
Accrued and other current liabilities.................................................. 98.0 100.8
----------- -----------
Total current liabilities............................................................ 246.0 271.7
----------- -----------
Long-term debt:
Term loans............................................................................. 411.4 344.0
Senior subordinated notes.............................................................. 375.0 375.0
Other.................................................................................. 116.1 119.5
----------- -----------
902.5 838.5
----------- -----------
Deferred income taxes.................................................................... 34.6 37.0
----------- -----------
Other liabilities........................................................................ 98.2 101.1
----------- -----------
Total liabilities.................................................................... 1,281.3 1,248.3
----------- -----------
Commitments and contingencies (Notes 7 and 8)
Warren Series B redeemable exchangeable preferred stock (liquidation value, $96.2 and
$106.9, respectively).................................................................. 88.0 99.2
----------- -----------
Stockholder's equity:
Common stock........................................................................... -- --
Capital in excess of par value......................................................... 331.8 331.8
Retained earnings...................................................................... 24.3 17.1
----------- -----------
Total stockholder's equity........................................................... 356.1 348.9
----------- -----------
Total liabilities and stockholder's equity........................................... $ 1,725.4 $ 1,696.4
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited condensed, consolidated financial
statements.
F-3
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS, UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED NINE MONTHS
JULY 3, ENDED
1996 JULY 2,
(RESTATED) 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income............................................................................ $ 3.4 $ 4.0
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, cost of timber harvested and amortization............................. 85.9 88.6
Loss on force majeure events........................................................ -- 7.5
Deferred income taxes............................................................... -- 3.1
Inventory market value adjustments.................................................. 10.5 --
Other............................................................................... 2.0 (4.6)
Changes in assets and liabilities:
Trade and other accounts receivable, net............................................ 91.6 16.9
Inventories......................................................................... (4.6) (12.3)
Accounts payable, accrued and other current liabilities............................. (42.6) 11.5
Other assets and liabilities........................................................ 1.2 (6.1)
----------- -----------
Net cash provided by operating activities......................................... 147.4 108.6
----------- -----------
Cash Flows from Investing Activities:
Proceeds from disposals of plant assets............................................... 2.2 0.1
Investment in plant assets and timber resources....................................... (32.2) (38.8)
Refurbishment of plant assets......................................................... -- (42.8)
Insurance proceeds to refurbish plant assets.......................................... -- 27.5
----------- -----------
Net cash used in investing activities............................................. (30.0) (54.0)
----------- -----------
Cash Flows from Financing Activities:
Issuance of debt...................................................................... -- 38.1
Repayments of debt.................................................................... (177.8) (78.4)
Defeasance of debt.................................................................... -- (4.4)
Debt issue costs...................................................................... -- (0.7)
----------- -----------
Net cash used in financing activities............................................. (177.8) (45.4)
----------- -----------
Net change in cash and cash equivalents................................................. (60.4) 9.2
Cash and cash equivalents, beginning of period.......................................... 62.2 49.0
----------- -----------
Cash and cash equivalents, end of period................................................ $ 1.8 $ 58.2
----------- -----------
----------- -----------
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest............................................................................ $ 98.6 $ 80.3
----------- -----------
----------- -----------
Income Taxes........................................................................ $ 4.5 $ 1.2
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited condensed, consolidated financial
statements.
F-4
<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.
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 Company's Annual
Report on Form 10-K for the fiscal year ended October 2, 1996. The unaudited
condensed, consolidated results of operations for the nine months ended July 2,
1997 are not necessarily indicative of results that could be expected for a full
year.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings per
Share", and FAS No. 129, "Disclosure of Information about Capital Structure",
both of which will be effective for the Company in fiscal year 1998. FAS No. 128
replaces the presentation of primary earnings per share with basic earnings per
share, which excludes dilution, and requires the dual presentation of basic and
diluted earnings per share. FAS No. 129 establishes standards for disclosing
information about an entity's capital structure and applies to all entities. The
implementation of FAS No. 128 and FAS No. 129 will not have a material effect on
the Company's earnings per share or financial statements.
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income",
and FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", both of which will be effective for the Company in fiscal year
1999. FAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. FAS No. 131 establishes
standards for the way that public business enterprises report selected
information about operating segments. FAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The implementation of FAS No. 130 and FAS No. 131 is not expected to
have a material effect on the Company's financial statements.
F-5
<PAGE>
S. D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. RELATED PARTY TRANSACTIONS
During the nine months ended July 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 $107.5 million to Affiliates
and incurred fees of approximately $6.4 million relating to these sales for the
nine months ended July 2, 1997. Similar sales for the corresponding period in
the prior year were $71.1 million. Related fees were $4.3 million for the nine
months ended July 3, 1996. Trade accounts receivable from Affiliates at July 2,
1997 were approximately $25.3 million compared to $24.3 million at July 3, 1996.
The Company has formalized substantially all 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>
JULY 2,
OCTOBER 2, 1996 1997
--------------- -----------
<S> <C> <C>
Finished products................................................................... $ 92.8 $ 107.4
Work in process..................................................................... 34.5 37.3
Pulp, logs and pulpwood............................................................. 25.8 23.7
Maintenance parts and other supplies................................................ 42.6 39.6
------ -----------
$ 195.7 $ 208.0
------ -----------
------ -----------
</TABLE>
NOTE 4. LONG-TERM DEBT
The current maturities of long-term debt balance of $59.2 million at July 2,
1997 primarily represents the principal payments due in December 1997 and June
1998 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 principal on the defeased
bonds, the Company will be liable for such deficiency.
F-6
<PAGE>
S. D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 work force.
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 will not exceed the
Company's insurance coverage limits, which include both business interruption
and property loss coverage. As of July 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 July
2, 1997, with the remainder, net of a deductible of $3.5 million, included in
other receivables in the condensed consolidated balance sheet at July 2, 1997.
In addition, the Company 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. At July 2, 1997, the Company had received
$7.5 million as business interruption insurance proceeds.
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 (the
"County") 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
F-7
<PAGE>
S. D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. ENVIRONMENTAL AND SAFETY MATTERS (CONTINUED)
additional treatment capacity for future expansions and the County could impose
stricter permit limits. In June 1997, the EPA sued the County for failure to
enforce permit limits associated with its operation of the wastewater facility.
The Company is uncertain as to the effect, if any, of this action on its current
dispute with the County. 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"). Final promulgation of the
cluster rules is expected to occur in late 1997, with compliance with the rules
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 $70.0 million to $90.0 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
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
by Sappi from Scott Paper Company ("Scott"), now Kimberly-Clark, 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.
F-8
<PAGE>
S. D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. ENVIRONMENTAL AND SAFETY MATTERS (CONTINUED)
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 July 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 of the Company from Scott, 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 of
the Company by Sappi from Scott, 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.
The Company's power requirements at Somerset and Westbrook have historically
been satisfied through cogeneration agreements ("Power Purchase Agreements" or
"Agreements") whereby the mills each cogenerate electricity and sell the output
to Central Maine Power Company ("CMP") at above market rates. The Agreements
also provide that the mills purchase electricity from CMP at the standard
industrial tariff rate. The effect of these Agreements has been to reduce the
Company's historical cost of power. However, the Westbrook Agreement expires on
October 31, 1997, and the Somerset Agreement expires in the year 2012, with the
favorable pricing element of the Somerset Agreement ending on November 30, 1997.
The impact from the change in the Somerset Agreement is not material; however,
the expiration of the Westbrook Agreement could have a material adverse impact
if a replacement market for excess power generated at the Westbrook mill is not
found. The Company is currently soliciting bids for such excess power and
anticipates that given current capacity constraints in Northeast power markets,
any material adverse impact should be mitigated. To reflect the fair market
value of the acquired Power
F-9
<PAGE>
S. D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Purchase Agreements in accordance with APB No. 16, as of the date of the
acquisition of the Company by Sappi from Scott, the Company established a
deferred asset of approximately $32.3 million. For the nine months ended July 2,
1997, amortization expense related to this asset approximated $9.0 million.
The Company is also involved in various other lawsuits and administrative
proceedings. The relief sought in such lawsuits and proceedings include
injunctions, damages and penalties. Although the final results in these suits
and proceedings cannot be predicted with certainty, it is the present opinion of
the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's financial position, results of operations or
cash flows.
On November 5, 1996, a proposed binding referendum measure to eliminate
clear cutting 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 clear cutting, 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.
NOTE 9. SUBSEQUENT EVENTS
On July 25, 1997, the Company amended certain provisions of its credit
agreement with a syndicate of banks, including the prepayment provisions and the
limitation on indebtedness clause. At this time the lenders waived certain
provisions of the credit agreement thereby allowing the Company to enter into a
sale/leaseback arrangement with General Electric Capital Corporation ("GECC")
pertaining to one of the Company's paper machines at its Somerset facility. In
addition, Warren obtained consent from the lenders for utilization of a portion
of the proceeds of such sale/leaseback other than as required by the credit
agreement, including the payment from time to time of dividends to its parent,
SDW Holdings Corporation ("Holdings"), on or prior to September 30, 1998 for the
purpose of redeeming Holdings preferred stock, subject to certain conditions and
limitations.
On July 29, 1997, the Company entered into a sale/leaseback arrangement with
GECC. The transaction involved the sale of one of the paper machines at the
Company's Somerset mill for $150.4 million to State Street Bank and Trust
Company of Connecticut, National Association (the "Trustee"), as Trustee for
GECC. In connection with the transaction, the Company entered into a 15 year
lease with the Trustee to lease back the paper machine. Rental payments of
approximately $7.6 million will be made semi-annually in arrears in January and
July. The sale/leaseback arrangement will be accounted for as an operating
lease. The gain on the transaction of approximately $20.8 million will be
deferred and amortized as an adjustment to future rent payments. The Company
used approximately $100.3 million of the proceeds from the sale to make a
mandatory prepayment on its term loans. The write off of deferred financing fees
related to the early extinguishment of this debt resulted in an extraordinary
loss of $1.0 million, net of a related tax benefit of $0.6 million, and will be
recorded in the fourth quarter of fiscal year 1997.
F-10
<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)
F-11
<PAGE>
S.D. WARREN COMPANY
STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PERIOD SEPTEMBER TWELVE MONTHS
NINE MONTHS 25, PERIOD DECEMBER 21, ENDED
ENDED 1994 THROUGH 1994 THROUGH OCTOBER 2,
SEPTEMBER 24, 1994 DECEMBER 20, 1994 SEPTEMBER 27, 1995 1996
------------------- ------------------- ------------------- --------------
<S> <C> <C> <C> <C>
<CAPTION>
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>
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 pre-
ferred stock..................... -- 9.1 13.5
------ ------ -------- --------------
Net income (loss) applicable to
common stockholder............... $ 16.8 $ 15.0 $ 33.0 $ (8.7)
------ ------ -------- --------------
------ ------ -------- --------------
Earnings (loss) per common 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.
F-12
<PAGE>
S.D. WARREN COMPANY
BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 2,
SEPTEMBER 27, 1995 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 harvested, 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
outstanding at September 27, 1995 and October 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.
F-13
<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> <C> <C> <C> <C>
<CAPTION>
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.
F-14
<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.
F-15
<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.
F-16
<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>
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.
F-17
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FORMATION AND ACQUISITION (CONTINUED)
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 periods
subsequent to the Acquisition date are not comparable to the Predecessor
Corporation's financial statements for the periods prior to the Acquisition.
F-18
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
F-19
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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
F-20
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
WORKERS' COMPENSATION INSURANCE
The Company is primarily self-insured for workers' compensation insurance.
The self-insurance claim liability for workers' compensation is based on claims
reported and actuarial estimates of adverse developments and claims incurred but
not reported. The Company's workers' compensation liability is discounted 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.
F-21
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 June 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.
F-22
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--BASIS OF PRESENTATION AND ACCOUNTING POLICIES (PREDECESSOR CORPORATION)
(CONTINUED)
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.
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
------------- -----------
<S> <C> <C>
(IN MILLIONS)
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.
F-23
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--TRADE ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION (CONTINUED)
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.
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>
<S> <C> <C> <C> <C>
NINE MONTHS NINE MONTHS TWELVE MONTHS
ENDED THREE MONTHS ENDED ENDED
SEPTEMBER 24, ENDED SEPTEMBER 27, OCTOBER 2,
1994 DECEMBER 20, 1994 1995 1996
----------------- ----------------- ----------------- -------------
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
------ ------
------ ------
</TABLE>
F-24
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PLANT ASSETS (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 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>
<S> <C> <C> <C> <C>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------- ------------- -------------
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>
NOTE 9--INCOME TAXES
The domestic and foreign components of income before taxes and extraordinary
item are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------- ------------- -------------
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>
F-25
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--INCOME TAXES (CONTINUED)
The components of the tax provisions before extraordinary item are as
follows (in millions):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------- ------------- ---------------
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>
<S> <C> <C> <C> <C>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------- ------------- -------------
Inventory................................. $ -- $ 0.1 $ 5.3 $ (0.1)
Plant assets.............................. 9.3 (17.0) 16.4 93.0
Accrued and other liabilities............. 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>
F-26
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--INCOME TAXES (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>
The differences between the U.S. statutory income tax rate and the Company's
effective income tax rate before extraordinary item are:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
--------------- --------------- --------------- ---------------
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.
F-27
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
------------- -----------
<S> <C> <C>
(IN MILLIONS)
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 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
F-28
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--LONG-TERM DEBT (CONTINUED)
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.
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
F-29
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--LONG-TERM DEBT (CONTINUED)
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.
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,
F-30
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--LONG-TERM DEBT (CONTINUED)
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 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.
F-31
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--LONG-TERM DEBT (CONTINUED)
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
---------------------- ----------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
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
F-32
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
Facility and the Letter of Credit Facility are based upon fees currently charged
for similar agreements or on the estimated cost to terminate the obligation at
the reporting date.
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
F-33
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--ENVIRONMENTAL AND SAFETY MATTERS (CONTINUED)
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 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
F-34
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--ENVIRONMENTAL AND SAFETY MATTERS (CONTINUED)
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, 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
F-35
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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.
F-36
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--RETIREMENT BENEFITS (CONTINUED)
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 increases...................................... 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 assets.................................. (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>
The net pension cost for the Warren sponsored plans include the following
components (in millions):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
--------------- --------------- ------------- ---------------
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
F-37
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--RETIREMENT BENEFITS (CONTINUED)
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.
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>
<S> <C> <C> <C> <C>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- --------------- --------------- ---------------
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
F-38
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
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' compensation.......................................................... $ 35.0 $ 29.7
Accrued pension and other postretirement benefits...................................... 50.0 53.5
Other accrued liabilities.............................................................. 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
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.
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 issuance)........... $ 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>
F-39
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--SERIES B REDEEMABLE EXCHANGEABLE PREFERRED STOCK (CONTINUED)
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.
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
F-40
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--RELATED PARTY TRANSACTIONS (CONTINUED)
(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.
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.
F-41
<PAGE>
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
F-42
<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 obsolescence:
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>
F-43
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Additional Information......................... 2
Prospectus Summary............................. 3
Forward-Looking Statements..................... 11
Risk Factors................................... 11
Use of Proceeds................................ 17
Dividend Policy................................ 18
Capitalization................................. 19
Selected Historical Financial Data............. 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
Business....................................... 35
Management..................................... 43
The Acquisition................................ 47
Security Ownership of Certain Beneficial Owners
and Management............................... 48
Certain Relationships and Related
Transactions................................. 49
Description of the Notes....................... 52
Description of the Senior Preferred Stock...... 77
Description of the Exchange Debentures......... 84
Description of Capital Stock................... 88
Description of the Credit Agreement and the A/R
Facility..................................... 88
Certain Federal Income Tax Considerations...... 93
Plan of Distribution........................... 98
Experts........................................ 98
Index to Financial Statements.................. F-1
</TABLE>
S.D. WARREN COMPANY
12% SERIES B SENIOR
SUBORDINATED
NOTES DUE 2004
AND
14% SERIES B SENIOR
EXCHANGEABLE
PREFERRED STOCK DUE 2006
-----------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
AUGUST , 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Pennsylvania Business Corporation Law of 1988, as amended (the "PBCL")
provides that the Company, unless otherwise restricted by its by-laws, may
indemnify a person that is or was a party to any threatened, pending or
completed action or proceeding (an "Action") because that person is or was a
representative of the Company, or is or was serving at the request of the
Company as a representative of another domestic or foreign corporation for
profit or not-for-profit, partnership, joint venture, trust or other enterprise
(a "Company Representative") under the circumstances set forth herein. Section
1741 of PBCL permits the Company to indemnify any Company Representative who was
or is a party to an Action whether civil, criminal, administrative or
investigative (other than an Action by or in the right of the Company), against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by that Company Representative in
connection with the Action if that Company Representative acted in good faith
and in a manner that Company Representative reasonably believed to be in, or not
opposed to, the best interests of the Company and, with respect to any criminal
Action, had no reason to believe was unlawful. Section 1742 of the PBCL permits
the Company to indemnify any Company Representative who was or is a party to an
Action by or in the right of the Company to procure a judgment in its favor
against expenses (including attorney's fees) actually and reasonably incurred by
that Company Representative in connection with the defense or settlement of the
Action if that Company Representative acted in good faith and in a manner that
Company Representative reasonably believed to be in, or not opposed to, the best
interests of the Company. However, if a Company Representative is or was a party
to an Action by or in the right of the Company and is adjudged to be liable to
the Company, then that Company Representative is not entitled to indemnification
unless, but only to the extent that, the court of common pleas of the judicial
district in the county in which the registered office of the Company is located,
or the court in which the action was brought, determines upon application, that
despite the adjudication of liability but in view of all the circumstances of
the case, the Company Representative is fairly and reasonably entitled to
indemnity for the expenses that such court deems proper. Finally, Section 1743
of the PBCL provides that to the extent that a Company Representative has been
successful on the merits or otherwise in defense of any Action referred to above
or in defense of any claim, issue or matter therein, that Company Representative
shall be indemnified against expenses (including attorney fees) actually and
reasonably incurred.
The Company's By-laws and Articles of Incorporation provide that the Company
shall indemnify to the fullest extent permitted by law any person who was or is
a party or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), by reason of the
fact that such person is or was a Director or Officer of the Company, or is or
was serving at the request of the Company as a Director or Officer of another
corporation or of a partnership, joint venture, trust or other enterprise or
entity, whether or not for profit, whether domestic or foreign, including
service with respect to an employee benefit plan, its participants or
beneficiaries, against all liability, loss and expense (including attorneys'
fees and amounts paid in settlement) actually and reasonably incurred by such
person in connection with such Proceeding, whether or not the indemnified
liability arises or arose from any Proceeding by or in the right of the Company.
The Company has obtained directors' and officers' liability insurance that
covers certain liabilities and expenses of the Company's directors and officers.
The Company intends to enter into indemnification agreements with each of its
directors and certain of its officers.
Sappi carries directors' and officers' liability insurance that covers
certain liabilities and expenses of directors and officers of subsidiaries of
Sappi. Directors and officers of the Company who are employees of Sappi have the
benefit of the coverage, subject to the limitations of such insurance.
II-1
<PAGE>
Directors of the Company who are also employees of Sappi may be entitled to
indemnification from Sappi for certain liabilities and expenses incurred as a
result of serving as directors of the Company.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Purchase Agreement dated as of December 13, 1994, among SDW Holdings Corporation, SDW Acquisition
Corporation, Sappi Limited, DLJ Merchant Banking, Inc. and certain of its affiliates, UBS Capital
Corporation and Donaldson, Lufkin & Jenrette Securities Corporation (the "Purchase Agreement").*
1.2 Amendment Number 1 to the Purchase Agreement, dated as of December 19, 1994, among SDW Holdings
Corporation, SDW Acquisition Corporation, Sappi Limited, DLJ Merchant Banking, Inc. and certain of
its affiliates, UBS Capital Corporation and Donaldson, Lufkin & Jenrette Securities Corporation.*
1.3 Amendment Number 2 to the Purchase Agreement, dated as of December 20, 1994, among SDW Holdings
Corporation, S.D. Warren Company and Donaldson, Lufkin & Jenrette Securities Corporation.*
1.4 Registration Rights Agreement, dated as of December 20, 1994 by and between SDW Acquisition
Corporation and Donaldson, Lufkin & Jenrette Securities Corporation (the "Registration Agreement").*
1.5 Amendment Number 1 to the Registration Agreement, dated as of December 20, 1994, by and between S.D.
Warren Company and Donaldson, Lufkin & Jenrette Securities Corporation.*
1.6 Registration Rights Agreement, dated as of December 20, 1994 by and between SDW Acquisition
Corporation and UBS Capital Corporation (the "UBSC Registration Agreement").*
1.7 Amendment Number 1 to the UBSC Registration Agreement, dated as of December 20, 1994, by and between
S.D. Warren Company and UBS Capital Corporation.*
1.8 Lock-up Agreement, dated as of December 12, 1994, between Donaldson, Lufkin & Jenrette Securities
Corporation and UBS Capital Corporation.*
1.9 Side Letter, dated as of December 19, 1994, between Donaldson, Lufkin & Jenrette Securities
Corporation and UBS Capital Corporation.*
3.1 Amended and Restated Articles of Incorporation of the Registrant.*
3.2 By-laws of the Registrant.*
4.1 Indenture, dated as of December 20, 1994, between SDW Acquisition Corporation and the Bank of New
York, as trustee, relating to the 12% Series A Senior Subordinated Notes due 2004 and the 12% Series
B Senior Subordinated Notes due 2004.*
4.2 First Supplemental Indenture, dated as of December 20, 1994 between S.D. Warren Company and Bank of
New York, as trustee, relating to the 12% Series A Senior Subordinated Notes due 2004 and the 12%
Series B Senior Subordinated Notes due 2004.*
4.3 Certificate of Designations, Preferences and Relative, Participating, Optional and other Special
Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of 14% Series A
Senior Exchangeable Preferred Stock due 2006 and 14% Series B Senior Exchangeable Preferred Stock due
2006 of S.D. Warren Company, dated as of December 20, 1994.*
4.4 Form of the Exchange Debenture Indenture between S.D. Warren Company and the United States Trust
Company of New York relating to S.D. Warren Company's 14% Series A Subordinated Exchange Debentures
due 2006 and 14% Series B Subordinated Exchange Debentures due 2006.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
5.1 Opinions of Cravath, Swaine & Moore and Dechert Price & Rhoads, regarding the legality of the New
Securities.*
<C> <S>
10.1 Credit and Guarantee Agreement dated as of December 20, 1994, as amended and restated as of April 26,
1996, among SDW Holdings Corporation, S.D. Warren Company, the Lenders (as defined therein) and
Chemical Bank, as Agent.*
10.2 Receivables Purchase Agreement dated as of April 19, 1996, among S.D. Warren Finance Co., S.D. Warren
Company, Bank of Montreal and Nesbitt Burns Securities Inc.*
10.2(a) Purchase and Contribution Agreement dated as of April 19, 1996, between S.D. Warren Company and S.D.
Warren Finance Co.*
10.3 Securities Subscription Agreement, dated as of December 20, 1994, among SDW Holdings Corporation, SDW
Acquisition Corporation (and following the merger, S.D. Warren Company as successor thereto), and
each of Sappi Limited, Sappi Deutschland GmbH, DLJ Merchant Banking Partner, L.P. and certain of its
affiliates and UBS Capital Corporation.*
10.4 Second Amended and Restated Shareholders Agreement dated as of December 20, 1994, among Sappi
Limited, Sappi Deutschland GmbH, DLJ Merchant Banking Partners, L.P. and certain of its affiliates,
UBS Capital Corporation, SDW Holdings Corporation and S.D. Warren Company as successor to SDW
Acquisition Corporation.*
10.5 Participation Agreement dated as of January 1, 1982 among Scott Paper Company, as Purchaser, General
Electric Credit Corporation, as Owner Participant and The Connecticut Bank and Trust Company, as
Owner Trustee.*
10.6 Refinancing Participation Agreement dated as of December 15, 1986, among Scott Paper Company, as
Purchaser, General Electric Credit Corporation, as Owner Participant, and The Connecticut Bank and
Trust Company National Association, as Owner Trustee.*
10.7 Power Sales Agreement dated as of January 1, 1982, between The Connecticut Bank and Trust Company,
Owner Trustee, as Seller, and Scott Paper Company, as Purchaser, as amended by the First Amendment
dated as of December 15, 1986.*
10.8 Ground Lease Agreement dated as of January 1, 1982 between Scott Paper Company, as Lessor, and The
Connecticut Bank and Trust Company, Owner Trustee, as Lessee, as amended by First Amendment dated as
of December 15, 1986.*
10.9 Operating Agreement dated as of January 1, 1982 between The Connecticut Bank and Trust Company, as
Owner Trustee, and Scott Paper Company, as Operator, as amended by First Amendment dated as of
December 15, 1986.*
10.10 Tax Indemnification Agreement dated as of January 1, 1982, among General Electric Credit Corporation,
Owner Participant, The Connecticut Bank and Trust Company, as Owner Trustee, and Scott Paper Company,
Purchaser, as amended by the Amendment dated as of November 25, 1986.*
10.11 Facilities Agreement dated as of January 1, 1982 between Scott Paper Company and The Connecticut Bank
and Trust Company, as Owner Trustee, as amended by First Amendment dated as of December 15, 1986.*
10.12 Indenture and Security Agreement dated as of December 15, 1986, among The Connecticut Bank and Trust
Company, National Association, as Westbrook Owner Trustee and Winslow Owner Trustee, Scott Paper
Company, and The Bank of New York, as Indenture Trustee.*
10.13 Transfer Agreement dated as of June 29, 1986 between Scott Paper Company and S.D. Warren Company, as
amended October 25, 1990, as further amended November 1, 1993.*
10.14 Stock Purchase Agreement by and among Scott Paper Company, Sappi Limited and SDW Acquisition
Corporation dated as of October 8, 1994.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
10.15 Supplemental Agreement to Stock Purchase Agreement dated as of October 8, 1994 by and among Scott
Paper Company, Sappi Limited and SDW Acquisition Corporation dated as of December 19, 1994.*
<C> <S>
10.15(a) Extension of Time Period specified in Section 1.6(e) of the Stock Purchase Agreement dated as of
October 8, 1994 by and among Scott Paper Company, Sappi Limited and SDW Acquisition Corporation.*
10.16 Assignment and Assumption Agreement (relating to Westbrook Biomass Financing) dated as of December
20, 1994 between Scott Paper Company and S.D. Warren Company.*
10.17 General Assignment and Assumption Agreement dated as of December 20, 1994 by and between Scott Paper
Company, Scott Continental N.V. and S.D. Warren Company.*
10.18 Contract dated as of August 1, 1978 between Central Maine Power Company ("CMP") and S.D. Warren
Company, as amended by Amendment dated as of May 15, 1982, as further amended by Amendment dated as
of October 27, 1982.*
10.19 Westbrook Long-term Contract for the Sale of Electricity to CMP, dated October 27, 1982 between CMP
and Scott Paper Company, S.D. Warren Division.*
10.20 Agreement for Electric Service for the Westbrook Mill of S.D. Warren Company dated as of August 1,
1983 between CMP and S.D. Warren Company.*
10.21 Agreement for Electric Service for Scott Paper Company, S.D. Warren Division, Somerset County, dated
as of December 1, 1982 between CMP and S.D. Warren, as amended by Amendment dated as of July 9,
1990.*
10.22 Power Purchase Agreement between Scott Paper Company, S.D. Warren Division (Somerset) and CMP dated
as of December 1, 1982, as amended by Amendment dated April 11, 1983, as further amended by Amendment
dated July 9, 1990.*
10.23 Pulp Supply Agreement between Scott Paper Company and S.D. Warren Company dated as of December 20,
1994.*
10.24 Paper Mill Energy Services Agreement between S.D. Warren Company and Mobile Energy Services Company,
Inc. dated as of December 12, 1994.*
10.25 Master Operating Agreement among Scott Paper Company, S.D. Warren Company and Mobile Energy Services
Company, Inc. dated as of December 12, 1994.*
10.26 Stock Purchase Agreement, dated as of November 27, 1996, among SDW Holdings Corporation, Sappi
Limited, 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 LLC.**
10.27 Agreement among S.D. Warren Company, SDW Holdings Corporation, Sappi Limited and Monte R. Haymon
dated September 1, 1995.**
10.28 First Amendment to Amended and Restated Credit and Guarantee Agreement among SDW Holdings
Corporation, S.D. Warren Company, certain Lenders and The Chase Manhattan Bank as Agent, dated
February 7, 1997.**
10.29 Termination Agreement dated May 27, 1997, among SDW Holdings Corporation, Sappi Limited, 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 LLC.**
10.30 Participation Agreement dated July 29, 1997 among S.D. Warren Company, General Electric Capital
Corporation and State Street Bank and Trust Company of Connecticut, National Association.**
10.31 Lease Agreement dated July 29, 1997 between S.D. Warren Company and State Street Bank and Trust
Company of Connecticut, National Association.**
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
10.32 Agreement and Plan of Merger dated as of July 30, 1997 between SDW Acquisition II Corporation and SDW
Holdings Corporation.**
<C> <S>
10.33 Second Amendment and Consent, dated as of July 25, 1997 to the Amended and Restated Credit and
Guarantee Agreement, dated as April 26, 1996.**
12.1 Statements regarding the computation of ratio of earnings to fixed charges and ratio of earnings to
fixed charges and preferred stock dividends for the Registrant.
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consents of Cravath, Swaine & Moore and Dechert Price & Rhoads, included in Exhibit 5.1.*
24.1 Powers of Attorney.*
24.2 Certified copy of a Resolution adopted by the Company's Board of Directors authorizing execution of
the Registration Statement by Power of Attorney.*
25.1 Statement of Eligibility and Qualification on Form T-1 of the Bank of New York, as Trustee under the
Indenture relating to the New Notes.*
</TABLE>
- ------------------------
* Previously filed.
** Incorporated by Reference to Post-Effective Amendment No. 1 to Registration
Statement 333-834 on Form S-1 under the Securities Act of 1933 of SDW
Holdings Corporation.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) under the Securities Act of 1933, as amended (the
"Securities Act"), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the applicable
form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415 under the Securities Act, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceedings) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction
II-5
<PAGE>
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Post-Effective Amendment No. 4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, on August 27,
1997.
S.D. Warren Company
By: /s/ TREVOR L. LARKAN
-----------------------------------
Trevor L. Larkan
DIRECTOR, CHIEF FINANCIAL OFFICER,
VICE PRESIDENT,
TREASURER AND SECRETARY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 4 has been signed by the following persons in the
capacities indicated on the dates indicated below.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
* Director
-------------------------------------------
(Eugene van As)
* Director, President, Chief
------------------------------------------- Executive Officer
(Monte R. Haymon) (principal executive officer)
* Director and Vice President
-------------------------------------------
(E. Dannis Herring)
* Director and Vice President
-------------------------------------------
(James H. Frick, Jr.)
* Director and Vice President
-------------------------------------------
(O. Harley Wood)
* Director and Vice President
-------------------------------------------
(William E. Hewitt)
* Director, Chief Financial
------------------------------------------- Officer, Vice President,
(Trevor L. Larkan) Treasurer and Secretary
(principal financial and
accounting officer)
*By: /s/TREVOR L. LARKAN Attorney-in-Fact August 27, 1997
(Trevor L. Larkan)
</TABLE>
II-7
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
1.1 Purchase Agreement dated as of December 13, 1994, among SDW Holdings Corporation, SDW
Acquisition Corporation, Sappi Limited, DLJ Merchant Banking, Inc. and certain of its
affiliates, UBS Capital Corporation and Donaldson, Lufkin & Jenrette Securities Corporation
(the "Purchase Agreement").*
1.2 Amendment Number 1 to the Purchase Agreement, dated as of December 19, 1994, among SDW
Holdings Corporation, SDW Acquisition Corporation, Sappi Limited, DLJ Merchant Banking, Inc.
and certain of its affiliates, UBS Capital Corporation and Donaldson, Lufkin & Jenrette
Securities Corporation.*
1.3 Amendment Number 2 to the Purchase Agreement, dated as of December 20, 1994, among SDW
Holdings Corporation, S.D. Warren Company and Donaldson, Lufkin & Jenrette Securities
Corporation.*
1.4 Registration Rights Agreement, dated as of December 20, 1994 by and between SDW Acquisition
Corporation and Donaldson, Lufkin & Jenrette Securities Corporation (the "Registration
Agreement").*
1.5 Amendment Number 1 to the Registration Agreement, dated as of December 20, 1994, by and
between S.D. Warren Company and Donaldson, Lufkin & Jenrette Securities Corporation.*
1.6 Registration Rights Agreement, dated as of December 20, 1994 by and between SDW Acquisition
Corporation and UBS Capital Corporation (the "UBSC Registration Agreement").*
1.7 Amendment Number 1 to the UBSC Registration Agreement, dated as of December 20, 1994, by and
between S.D. Warren Company and UBS Capital Corporation.*
1.8 Lock-up Agreement, dated as of December 12, 1994, between Donaldson, Lufkin & Jenrette
Securities Corporation and UBS Capital Corporation.*
1.9 Side Letter, dated as of December 19, 1994, between Donaldson, Lufkin & Jenrette Securities
Corporation and UBS Capital Corporation.*
3.1 Amended and Restated Articles of Incorporation of the Registrant.*
3.2 By-laws of the Registrant.*
4.1 Indenture, dated as of December 20, 1994, between SDW Acquisition Corporation and the Bank of
New York, as trustee, relating to the 12% Series A Senior Subordinated Notes due 2004 and the
12% Series B Senior Subordinated Notes due 2004.*
4.2 First Supplemental Indenture, dated as of December 20, 1994 between S.D. Warren Company and
Bank of New York, as trustee, relating to the 12% Series A Senior Subordinated Notes due 2004
and the 12% Series B Senior Subordinated Notes due 2004.*
4.3 Certificate of Designations, Preferences and Relative, Participating, Optional and other
Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of
14% Series A Senior Exchangeable Preferred Stock due 2006 and 14% Series B Senior Exchangeable
Preferred Stock due 2006 of S.D. Warren Company, dated as of December 20, 1994.*
4.4 Form of the Exchange Debenture Indenture between S.D. Warren Company and the United States
Trust Company of New York relating to S.D. Warren Company's 14% Series A Subordinated Exchange
Debentures due 2006 and 14% Series B Subordinated Exchange Debentures due 2006.*
5.1 Opinions of Cravath, Swaine & Moore and Dechert Price & Rhoads, regarding the legality of the
New Securities.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- -----------
10.1 Credit and Guarantee Agreement dated as of December 20, 1994, as amended and restated as of
April 26, 1996, among SDW Holdings Corporation, S.D. Warren Company, the Lenders (as defined
therein) and Chemical Bank, as Agent.*
<C> <S> <C>
10.2 Receivables Purchase Agreement dated as of April 19, 1996, among S.D. Warren Finance Co., S.D.
Warren Company, Bank of Montreal and Nesbitt Burns Securities Inc.*
10.2(a) Purchase and Contribution Agreement dated as of April 19, 1996, between S.D. Warren Company
and S.D. Warren Finance Co.*
10.3 Securities Subscription Agreement, dated as of December 20, 1994, among SDW Holdings
Corporation, SDW Acquisition Corporation (and following the merger, S.D. Warren Company as
successor thereto), and each of Sappi Limited, Sappi Deutschland GmbH, DLJ Merchant Banking
Partner, L.P. and certain of its affiliates and UBS Capital Corporation.*
10.4 Second Amended and Restated Shareholders Agreement dated as of December 20, 1994, among Sappi
Limited, Sappi Deutschland GmbH, DLJ Merchant Banking Partners, L.P. and certain of its
affiliates, UBS Capital Corporation, SDW Holdings Corporation and S.D. Warren Company as
successor to SDW Acquisition Corporation.*
10.5 Participation Agreement dated as of January 1, 1982 among Scott Paper Company, as Purchaser,
General Electric Credit Corporation, as Owner Participant and The Connecticut Bank and Trust
Company, as Owner Trustee.*
10.6 Refinancing Participation Agreement dated as of December 15, 1986, among Scott Paper Company,
as Purchaser, General Electric Credit Corporation, as Owner Participant, and The Connecticut
Bank and Trust Company National Association, as Owner Trustee.*
10.7 Power Sales Agreement dated as of January 1, 1982, between The Connecticut Bank and Trust
Company, Owner Trustee, as Seller, and Scott Paper Company, as Purchaser, as amended by the
First Amendment dated as of December 15, 1986.*
10.8 Ground Lease Agreement dated as of January 1, 1982 between Scott Paper Company, as Lessor, and
The Connecticut Bank and Trust Company, Owner Trustee, as Lessee, as amended by First
Amendment dated as of December 15, 1986.*
10.9 Operating Agreement dated as of January 1, 1982 between The Connecticut Bank and Trust
Company, as Owner Trustee, and Scott Paper Company, as Operator, as amended by First Amendment
dated as of December 15, 1986.*
10.10 Tax Indemnification Agreement dated as of January 1, 1982, among General Electric Credit
Corporation, Owner Participant, The Connecticut Bank and Trust Company, as Owner Trustee, and
Scott Paper Company, Purchaser, as amended by the Amendment dated as of November 25, 1986.*
10.11 Facilities Agreement dated as of January 1, 1982 between Scott Paper Company and The
Connecticut Bank and Trust Company, as Owner Trustee, as amended by First Amendment dated as
of December 15, 1986.*
10.12 Indenture and Security Agreement dated as of December 15, 1986, among The Connecticut Bank and
Trust Company, National Association, as Westbrook Owner Trustee and Winslow Owner Trustee,
Scott Paper Company, and The Bank of New York, as Indenture Trustee.*
10.13 Transfer Agreement dated as of June 29, 1986 between Scott Paper Company and S.D. Warren
Company, as amended October 25, 1990, as further amended November 1, 1993.*
10.14 Stock Purchase Agreement by and among Scott Paper Company, Sappi Limited and SDW Acquisition
Corporation dated as of October 8, 1994.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- -----------
10.15 Supplemental Agreement to Stock Purchase Agreement dated as of October 8, 1994 by and among
Scott Paper Company, Sappi Limited and SDW Acquisition Corporation dated as of December 19,
1994.*
<C> <S> <C>
10.15(a) Extension of Time Period specified in Section 1.6(e) of the Stock Purchase Agreement dated as
of October 8, 1994 by and among Scott Paper Company, Sappi Limited and SDW Acquisition
Corporation.*
10.16 Assignment and Assumption Agreement (relating to Westbrook Biomass Financing) dated as of
December 20, 1994 between Scott Paper Company and S.D. Warren Company.*
10.17 General Assignment and Assumption Agreement dated as of December 20, 1994 by and between Scott
Paper Company, Scott Continental N.V. and S.D. Warren Company.*
10.18 Contract dated as of August 1, 1978 between Central Maine Power Company ("CMP") and S.D.
Warren Company, as amended by Amendment dated as of May 15, 1982, as further amended by
Amendment dated as of October 27, 1982.*
10.19 Westbrook Long-term Contract for the Sale of Electricity to CMP, dated October 27, 1982
between CMP and Scott Paper Company, S.D. Warren Division.*
10.20 Agreement for Electric Service for the Westbrook Mill of S.D. Warren Company dated as of
August 1, 1983 between CMP and S.D. Warren Company.*
10.21 Agreement for Electric Service for Scott Paper Company, S.D. Warren Division, Somerset County,
dated as of December 1, 1982 between CMP and S.D. Warren, as amended by Amendment dated as of
July 9, 1990.*
10.22 Power Purchase Agreement between Scott Paper Company, S.D. Warren Division (Somerset) and CMP
dated as of December 1, 1982, as amended by Amendment dated April 11, 1983, as further amended
by Amendment dated July 9, 1990.*
10.23 Pulp Supply Agreement between Scott Paper Company and S.D. Warren Company dated as of December
20, 1994.*
10.24 Paper Mill Energy Services Agreement between S.D. Warren Company and Mobile Energy Services
Company, Inc. dated as of December 12, 1994.*
10.25 Master Operating Agreement among Scott Paper Company, S.D. Warren Company and Mobile Energy
Services Company, Inc. dated as of December 12, 1994.*
10.26 Stock Purchase Agreement, dated as of November 27, 1996, among SDW Holdings Corporation, Sappi
Limited, 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
LLC.**
10.27 Agreement among S.D. Warren Company, SDW Holdings Corporation, Sappi Limited and Monte R.
Haymon dated September 1, 1995.**
10.28 First Amendment to Amended and Restated Credit and Guarantee Agreement among SDW Holdings
Corporation, S.D. Warren Company, certain Lenders and The Chase Manhattan Bank as Agent, dated
February 7, 1997.**
10.29 Termination Agreement dated May 27, 1997, among SDW Holdings Corporation, Sappi Limited, 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 LLC.**
10.30 Participation Agreement dated July 29, 1997 among S.D. Warren Company, General Electric
Capital Corporation and State Street Bank and Trust Company of Connecticut, National
Association.**
10.31 Lease Agreement dated July 29, 1997 between S.D. Warren Company and State Street Bank and
Trust Company of Connecticut, National Association.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- -----------
10.32 Agreement and Plan of Merger dated as of July 30, 1997 between SDW Acquisition II Corporation
and SDW Holdings Corporation.**
<C> <S> <C>
10.33 Second Amendment and Consent, dated as of July 25, 1997 to the Amended and Restated Credit and
Guarantee Agreement, dated as April 26, 1996.**
12.1 Statements regarding the computation of ratio of earnings to fixed charges and ratio of
earnings to fixed charges and preferred stock dividends for the Registrant. 1
21.1 Subsidiaries of the Registrant.* 3
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consents of Cravath, Swaine & Moore and Dechert Price & Rhoads, included in Exhibit 5.1.*
24.1 Powers of Attorney.*
24.2 Certified copy of a Resolution adopted by the Company's Board of Directors authorizing
execution of the Registration Statement by Power of Attorney.*
25.1 Statement of Eligibility and Qualification on Form T-1 of the Bank of New York, as Trustee
under the Indenture relating to the New Notes.*
</TABLE>
- ------------------------
* Previously filed.
** Incorporated by Reference to Post-Effective Amendment No. 1 to Registration
Statement 333-834 on Form S-1 under the Securities Act of 1933 of SDW
Holdings Corporation.
<PAGE>
Exhibit 12.1
S.D. WARREN COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD
DECEMBER 21,
TWELVE MONTHS TWELVE MONTHS NINE MONTHS TWELVE MONTHS 1994
ENDED ENDED ENDED ENDED THROUGH
DECEMBER 26, DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1992 1993 1994 1994 1995
--------------- --------------- --------------- -------------- --------------
S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND COMPANY AND COMPANY AND
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED SUBSIDIARIES
AFFILIATES AFFILIATES AFFFILIATES AFFILIATES CORPORATION
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCESSOR)
--------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Income before taxes
and other taxes and other
items........................... $82.6 $ 1.9 $28.0 $24.9 $ 70.3
Adjustments:
Capitalized interest............ (0.8) -- (1.4) -- (0.9)
Dividends and accretion on
preferred stock............. -- -- -- -- (15.2)
Total fixed charges, net........ 17.1 15.8 12.5 3.4 125.2
--------------- --------------- --------------- -------------- --------------
Excess of earnings to cover fixed
charges and preferred stock
dividends....................... $98.9 $17.7 $39.1 $28.3 $179.4
--------------- --------------- --------------- -------------- --------------
--------------- --------------- --------------- -------------- --------------
Ratio of earnings to cover fixed
charges and preferred stock
dividends....................... 5.8x 1.1x 3.1x 8.3x 1.4x
--------------- --------------- --------------- -------------- --------------
--------------- --------------- --------------- -------------- --------------
Fixed charges and preferred stock
dividends:
Interest expense................ $ 9.0 $ 8.5 $ 6.4 $ 2.3 $106.0
Interest portion of Biomass
contract...................... 5.1 4.6 3.2 0.9 2.4
Interest portion of rent(1)..... 2.2 2.7 1.5 0.2 0.7
Dividends and accretion on
preferred stock............... -- -- -- -- 15.2
Capitalized interest............ 0.8 -- 1.4 -- 0.9
--------------- --------------- --------------- -------------- --------------
Total fixed charges and preferred
stock dividends................. $17.1 $15.8 $12.5 $ 3.4 $125.2
--------------- --------------- --------------- -------------- --------------
--------------- --------------- --------------- -------------- --------------
<CAPTION>
TWELVE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
OCTOBER 2, JULY 3, JULY 2,
1996 1996 1997
--------------- --------------- --------------
S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND
SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES
(SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
--------------- --------------- ---------------
<S> <C> <C> <C>
Income before taxes
and other taxes and other
items........................... $ 11.9 $ 9.0 $ 4.9
Adjustments:
Capitalized interest............ (1.3) (0.9) (1.2)
Dividends and accretion on
preferred stock............... (23.6) (17.6) (18.8)
Total fixed charges, net........ 137.6 105.8 100.1
--------------- --------------- ---------------
Excess of earnings to cover fixed
charges and preferred stock
dividends....................... $124.6 $ 96.3 $ 85.0
--------------- --------------- ---------------
--------------- --------------- ---------------
Ratio of earnings to cover fixed
charges and preferred stock
dividends....................... * * *
--------------- --------------- ---------------
--------------- --------------- ---------------
Fixed charges and preferred stock
dividends:
Interest expense............... $108.9 $ 84.3 $ 77.8
Interest portion of Biomass
contract...................... 2.7 2.2 1.5
Interest portion of rent(1)..... 1.1 0.8 0.8
Dividends and accretion on
preferred stock............... 23.6 17.6 18.8
Capitalized interest............ 1.3 0.9 1.2
--------------- --------------- ---------------
Total fixed charges and preferred
stock dividends................. $137.6 $105.8 $100.1
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
- ------------
* Ratio is less than 1 to 1 for period presented.
(1) Interest expense component of rent is 30% of rental expense.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
S.D. Warren Company
We consent to the use in this Post-Effective Amendment No. 4 to Registration
Statement No. 33-88496 of S.D. Warren Company on Form S-1 of our report dated
October 28, 1996 (November 5, 1996 as to Note 21) relating to the financial
statements of S.D. Warren Company and its Predecessor and the related
financial statement schedule included herein (which expresses an unqualified
opinion and included an explanatory paragraph referring to the comparability
of the post-acquisition financial statements of S.D. Warren Company and
certain related affiliates to those of the Predecessor Corporation
(pre-acquisition)), appearing in the Prospectus, which is part of this
Registration Statement and to the reference to us under the headings "Summary
Financial Data", "Selected Historical Financial Data", "Changes and
Disagreements with Accountants on Accounting and Financial Disclosure" and
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
- ---------------------------
Boston, Massachusetts
August 27, 1997
