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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 1, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-88496
S.D. WARREN COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2366983
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
02110
225 FRANKLIN STREET, BOSTON, MA
(ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 423-7300
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of Common Stock outstanding as of November 7, 1997 was
100 shares.
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PART I
ITEM 1. BUSINESS
S.D. Warren Company ("S.D. Warren", "Warren" or the "Company") manufactures
printing, publishing and specialty papers and has pulp and timberland
operations vertically integrated with certain of its manufacturing facilities.
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 operates a sheeting and distribution facility in Allentown,
Pennsylvania with annual sheeting capacity of approximately 95,000 tons, with
other sheeting capabilities located at its Muskegon, Michigan mill (162,000
tons) and Mobile, Alabama mill (137,000 tons). The Company operates regional
distribution centers in Atlanta, Georgia, Schaumburg, Illinois and Grand
Prairie, Texas. The Company owns approximately 911,000 acres of timberlands in
the State of Maine.
Warren was founded in 1854 and was acquired by Scott Paper Company ("Scott")
in 1967. On December 20, 1994, SDW Acquisition Corporation ("SDW
Acquisition"), a wholly owned subsidiary of SDW Holdings Corporation
("Holdings"), a Delaware corporation, acquired (the "Acquisition") from Scott
all of the outstanding capital stock of Warren, then a wholly owned subsidiary
of Scott, and certain related affiliates of Scott (the "Predecessor
Corporation"). Immediately following the Acquisition, SDW Acquisition merged
with and into Warren, with Warren surviving (the "Acquisition Merger"). In
December 1995, Scott was acquired by Kimberly-Clark Corporation ("Kimberly-
Clark").
Holdings is an indirect, majority owned subsidiary of Sappi Limited
("Sappi"), a South African company. Sappi 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 acquisition of Warren, Sappi became
the largest coated free paper manufacturer in the world. On September 15,
1997, Sappi entered into an agreement to purchase KNP Leykam ("KNP"), the
holding company for the fine paper operations of NV Koninklijke KNP BT (the
"KNP Acquisition"). KNP is comprised of mills in the Netherlands, Austria and
Belgium with total annual capacity of 1.9 million tons of coated woodfree and
light weight coated paper. The KNP Acquisition is expected to be consummated
by the end of 1997.
In May 1997, the chairman of Sappi announced that Sappi was evaluating the
sale of non-core assets throughout the Sappi group. Consequently, Warren is in
the process of investigating the sale or monetization of businesses not within
its main area of focus.
PRINCIPAL PRODUCTS
Warren's principal products include coated, uncoated, specialty and
technical papers. The following table illustrates Warren's major markets,
expressed as a percentage of sales, for the period December 21, 1994 through
September 27, 1995 (the "nine months ended September 27, 1995"), the year
ended October 2, 1996 ("fiscal year 1996") and the year ended October 1, 1997
("fiscal year 1997"):
<TABLE>
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Coated paper................ 70.6% 72.2% 71.3%
Uncoated paper.............. 13.6 12.7 12.7
Specialty paper............. 10.2 11.5 11.8
Technical paper and other... 5.6 3.6 4.2
---- ---- ----
Total..................... 100% 100% 100%
==== ==== ====
</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,
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ranging from #1, which is premium, to #5, the lowest in quality and price.
Warren principally competes in the coated free paper market which is composed
of product grades #1 through #3, and a limited amount of #4. The #4 market
includes both coated free and coated groundwood products. 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, matte, or silk. 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. Specialty 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, inventory levels 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 installation of new
paper machines at paper manufacturing facilities, each of which can take up to
three years to construct.
COMPETITION
The markets for coated free products are highly competitive with a number of
major companies competing in each market. Warren competes mainly with U.S. and
Canadian producers of coated free paper, and, to a lesser degree, European
producers. Warren's principal competitors in the coated free market are
Champion International, Westvaco Corporation, Consolidated Papers Inc., The
Mead Corporation, International Paper Company, Appleton, 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 Warren's competitors have greater financial
resources than Warren, 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 Warren.
Several factors contribute to Warren's competitive strengths in the coated
free paper market, including high product quality, technological innovation,
high brand recognition and a strong distribution network. Warren is the
leading seller of #3 grade of coated free paper in North America and is among
the leaders with respect to #1 and #2 grades based on sales for fiscal year
1997.
DISTRIBUTION
Warren, unlike most of its competition, has made a strategic decision to
sell all of its coated products through the merchant distribution system.
Warren believes this policy increases the focus of the merchant sales force on
the sale of its products. The Company's sales force sells coated paper to
approximately 286 merchant distributing locations. Merchants are authorized to
distribute Warren products by geographic area and handle competitors' lines to
cover all segments of the market. 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.
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Warren sells uncoated paper in North America through a similar network of
merchant distributors that it uses for coated paper, with some exceptions
(approximately 315 merchant locations sell uncoated paper, versus the 286
which sell coated paper). Warren also distributes uncoated paper through
original equipment manufacturers, catalogues and merchant stores and is
beginning to explore additional distribution channels, such as warehouse
clubs, office superstores and telemarketing.
Warren 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. Customers in the specialties market include
label makers and casters of high pressure laminates and synthetic leather
products.
EXPORT SALES
Warren had sales to customers outside of the United States ("Export Sales")
of $83.1 million, $179.1 million and $186.2 million for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997, respectively.
Export Sales are primarily to Canada, Europe, Australia, Latin America and the
Far East. The Company's sales outside North America are handled by divisions
of Sappi.
CUSTOMERS
For fiscal year 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 Unisource Worldwide, Inc.
and certain affiliates of Sappi as a group. Each of these unaffiliated
customers is a merchant that resells the Company's paper products to a wide
range of end users. As indicated in the Notes to Consolidated Financial
Statements, the loss of any of these customers without the comparable
replacement of sales directly or indirectly to end users could have a material
adverse effect on the Company's business and results of operations.
BACKLOG AND SEASONALITY
Backlog as of October 1, 1997 was not significant. The Company had
approximately three to four weeks of backlog depending upon the product and
basis weights.
The Company's operations are not significantly affected by seasonality,
although the second and third quarters of the calendar year tend to be
stronger than the first 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(R), Lustro(R), Strobe(R), Aero(R) and Patina(R).
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(R) 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.
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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 93 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 $10.7 million, $15.6 million and $13.6
million on research and development activities for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 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 fiscal years 1996 and 1997, the Company manufactured approximately 65%
of its pulp requirements. This vertical integration reduces the Company's
exposure to (and ability to benefit from) fluctuations in the market price for
pulp. All three of the Company's northern mills are integrated with respect to
hardwood pulp production, and the Somerset, 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. 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. Kimberly-Clark is 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,
789,000 of which are net forested acres (or acres from which trees may be
harvested). Approximately 373,000 of these acres produce softwood timber, such
as spruce, fir, hemlock and white pine and 416,000 acres produce hardwood
timber, such as beech, birch and maple. The Company believes it can harvest
approximately 15,000 acres per year on a sustainable basis.
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 process, coal, oil, purchased steam from
the Mobile utility complex and natural gas, electricity and other.
The Company's power requirements at its Somerset mill are currently
satisfied through a power purchase agreement whereby the mill cogenerates
electricity and sells the output to Central Maine Power ("CMP") at market
rates. The CMP agreement relating to the Somerset mill also provides that the
mill purchase electricity
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from CMP at the standard industrial tariff rate. The Somerset Agreement
expires in the year 2012. Warren's long-term agreement with CMP relating to
the Westbrook mill expired on October 31, 1997, and has been replaced by a
short-term agreement with CMP in which the mill cogenerates electricity and
sells the excess output not used by the mill to CMP at market rates. The
short-term agreement for the Westbrook mill expires on April 30, 1998 and may
be renewed monthly through October 1998.
The Muskegon, Michigan 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.
EMPLOYEES AND LABOR RELATIONS
As of October 1, 1997, the Company had approximately 3,950 employees.
Approximately 71% of employees are represented by six international unions
under ten different contracts. By early February 1997, the Company had reached
a settlement on a new six-year labor agreement with its three major 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. By
October 1, 1997, the Company had reached settlement with both of its unions at
Westbrook, with the unions in each case ratifying a new five year agreement
with more flexible work rule provisions. The Company is engaged in
negotiations with the two unions at Mobile whose contracts expired on June 1,
1997. Those affected employees are working under contract extensions which can
be terminated upon 10 days notice. The Company's contracts with the two unions
in Muskegon expire in June 1998. 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 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 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 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 hearing the lawsuit 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
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EPA sued the County for failure to implement and enforce its industrial pre-
treatment operations associated with its operation of the wastewater facility.
The Company is uncertain as to the effects, if any, of this action on its
current dispute with the County which has raised the industrial users'
contractual rights as an issue in the EPA lawsuit. Recently, the group of
industrial users and the municipalities filed motions to intervene in the
lawsuit. 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 before the end of calendar year 1997, with
compliance with the rules required beginning in 2000. The Company believes
that environmental compliance expenditures, the bulk of which are for the
cluster rules compliance, will require aggregate capital expenditures of
approximately $70.0 million to $112.0 million through 2000, of which $20.0
million has already been incurred. The ultimate financial impact to the
Company of compliance with the cluster rules will depend upon the cost and
availability of new technology.
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 $13.0
million, of which approximately $4.0 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 the Acquisition, including all
damages and costs related to these seven sites. Since the date of the
Acquisition, Scott, and subsequently Kimberly-Clark, has been performing under
the terms of this environmental indemnity and defense provision and,
therefore, the Company has not expended any funds with respect to these seven
sites.
The Company currently has a demolition project in progress at its Westbrook
facility for health and safety reasons which is expected to be completed in
the year 2001. Total costs of the project are estimated to be approximately
$10.0 million, of which approximately $5.8 million had been spent as of
October 1, 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.
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ITEM 2. PROPERTIES
Warren's principal executive offices are located in Boston, Massachusetts.
The Company believes that its property and equipment are generally well
maintained, in good operating condition and adequate for its present needs.
The inability to renew any short-term leases would not have a material adverse
effect on the Company's financial position or results of operations.
The following table sets forth the location and use of the Company's
principal facilities, which are owned in fee unless otherwise indicated. All
of the Company's principal properties are pledged as collateral under Warren's
Credit Facilities (see the Notes to Consolidated Financial Statements).
<TABLE>
<CAPTION>
LOCATION USE
-------- ---
<S> <C>
Skowhegan, Maine (Somerset Mill). Manufacturing facility for the manufacture of coated
paper, and softwood and hardwood 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
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>
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(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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits, environmental and
administrative proceedings. The relief sought in such lawsuits and proceedings
includes injunctions, damages and penalties. Although the final result in
these suits and proceedings cannot be predicted with certainty, it is the
present opinion of management, after consulting with legal counsel and based
on the Company's financial position and the information available to date that
they will not have a material effect on the Company's financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None during the fourth quarter of fiscal year 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the common stock of the
Company. The common stock of the Company has not been traded or sold publicly,
and accordingly, no information with respect to sales practice or quotations
is available.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated statement of operations
data, consolidated share data and consolidated balance sheet data for Warren
and the Predecessor Corporation. The selected financial data for the year
ended December 25, 1993, the nine months ended September 24, 1994 and the
period 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
December 21, 1994 through September 27, 1995, the year ended October 2, 1996
(which includes 53 weeks) and the year ended October 1, 1997 are derived from
the consolidated financial statements of Warren which have been audited by
Deloitte & Touche LLP. Operating data for any periods less than one year is
not necessarily indicative of the results that may be expected for the full
year. Further, data for the Predecessor and Successor Corporations are not
necessarily comparable as a result of a new basis of accounting for the
Successor Corporation and the adoption of certain accounting policies.
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 21,
YEAR NINE MONTHS 1994 1994 YEAR YEAR
ENDED ENDED THROUGH THROUGH ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1993 1994 1994 1995 1996 1997
--------------- --------------- --------------- ------------- ------------ ------------
S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND S.D. WARREN S.D. WARREN S.D. WARREN
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED COMPANY AND COMPANY AND COMPANY AND
AFFILIATES AFFILIATES AFFILIATES SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
--------------- --------------- --------------- ------------- ------------ ------------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Sales.................. $ 1,143.6 $ 828.8 $ 313.6 $ 1,155.8 $ 1,441.6 $1,405.6
Gross profit........... 168.1 106.4 49.9 269.8 255.0 290.2
Selling, general and
administrative
expense............... 91.7 72.1 22.2 96.7 134.1 137.6
Restructuring.......... 66.1 -- -- -- -- 10.0
Income from
operations............ 10.3 34.3 27.7 173.1 120.9 142.6
Other income (expense),
net................... 0.1 0.1 (0.5) 3.2 (0.1) 4.1
Interest expense....... 8.5 6.4 2.3 106.0 108.9 99.0
Income tax expense..... 6.5 11.2 9.9 28.2 5.1 19.3
Extraordinary item, net
of tax................ -- -- -- -- (2.0) --
Net income (loss)...... (4.6) 16.8 15.0 42.1 4.8 28.4
Dividends and accretion
on Warren Series B
preferred stock....... -- -- -- 9.1 13.5 15.2
Net income (loss)
applicable to common
stockholders.......... (4.6) 16.8 15.0 33.0 (8.7) 13.2
CONSOLIDATED SHARE DATA:
Net income (loss)
applicable to common
stockholders.......... $ -- $ -- $ -- $ 0.33 $ (0.09) $ 0.13
Weighted average common
shares outstanding.... -- -- -- 100 100 100
CONSOLIDATED BALANCE
SHEET DATA (AT END OF
PERIOD):
Cash and cash
equivalents........... $ 2.1 $ 4.7 $ 75.0 $ 62.2 $ 49.0 $ 180.7
Working capital........ 47.1 156.2 233.2 177.6 109.4 179.9
Total assets........... 1,711.7 1,676.9 1,737.1 1,887.6 1,725.4 1,632.0
Total debt (including
current maturities)... 124.3 119.8 119.3 1,127.4 948.9 767.1
Warren Series B
preferred stock....... -- -- -- 74.5 88.0 103.2
Parent's equity........ 1,088.1 1,136.5 1,219.1 -- -- --
Stockholder's equity... -- -- -- 364.8 356.1 369.3
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 95,000 tons, with other sheeting capabilities
located at its Muskegon, Michigan mill (162,000 tons) and Mobile, Alabama mill
(137,000 tons). The Company owns approximately 911,000 acres of timberlands in
the State of Maine and operates several regional distribution facilities.
On December 20, 1994, SDW Acquisition acquired from Scott, which has since
been acquired by Kimberly-Clark, all of the outstanding capital stock of
Warren. Immediately following the Acquisition, SDW Acquisition merged with and
into Warren (the "Acquisition Merger"), with Warren surviving. See the Notes
to Consolidated Financial Statements for information regarding the
Acquisition.
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 future 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.
MARKET OVERVIEW
The market for coated paper has historically experienced price fluctuations
which are driven by North American supply/demand imbalances, inventory shifts
and, to a lesser degree, the availability and relative pricing of imported
products. During fiscal year 1996, the industry built coated free inventory
which peaked at 598,000 tons in May 1996. This producer inventory had,
however, dropped to a level of approximately 413,000 tons by the end of fiscal
year 1997. In addition to the reduction in inventory, mill shipments
increased, indicating a return to more normal demand growth patterns that have
averaged about 5% per year over the past 10 years. The industry has shipped
over 400,000 tons of coated free paper per month for six consecutive months
for the first time in its history, and because of the steady volume increase,
there has been incremental improvement and firming of pricing during the
Company's last fiscal quarter. Coated groundwood shipments have increased by
approximately 18% over 1996 and pricing has firmed. Since coated groundwood
pricing can provide a floor for coated free 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.
The uncoated and technical specialty side of the business experienced a
strong demand in the latter part of the fiscal year with sales volume for
fiscal year 1997 at 108% of fiscal year 1996. The Company continues to push
higher value opportunities in order to optimize sales mix, although average
net selling prices for this area of business ended the year marginally down
from the fiscal year 1996 average. The specialty business, consisting of
pressure sensitive, and release casting papers, experienced consistent demand
for its products during the year.
Any failure of the industry to maintain its recovery in the future, or any
prolonged or severe weakness in the market for any of the Company's products
in the future, may adversely affect the Company's financial position, results
of operations and cash flows. In addition, new coated paper capacity scheduled
for the end of
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<PAGE>
calendar year 1997 in Europe and the Far East, as well as certain machine
conversions during 1997 to coated free sheet manufacture in the United States,
will impact market supply/demand balance and may constrain upward movement of
coated prices.
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto.
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
The following discussion compares the results of operations for fiscal year
1997 with fiscal year 1996 (which included 53 weeks). The additional week in
fiscal year 1996 did not have a significant impact on sales or other operating
results.
Sales
Sales for fiscal year 1997 were $1,405.6 million compared to $1,441.6 million
for fiscal year 1996, a decrease of $36.0 million or 2.5%. This decrease was
primarily due to a 7% decrease in average net sales per paper ton which was
partially offset by a 61,000 ton increase in paper shipment volume over the
previous year. Paper sales volume for fiscal year 1997 totaling 1.336 million
tons was achieved despite a flood-related closure of the Westbrook mill during
the first fiscal quarter of 1997. The volume improvement was driven by strong
marketing efforts, including certain successful new product launches, and
supported by improved levels of productivity.
Cost of Goods Sold
Cost of goods sold for fiscal year 1997 was $1,115.4 million compared to
$1,186.6 million for fiscal year 1996, a decrease of $71.2 million or 6.0%.
Cost of goods sold on a per paper ton basis decreased to $820 per ton from $917
per ton for the prior year. The decrease is primarily due to aggressive cost
reduction initiatives including more efficient maintenance and staffing levels,
decreased chemical and other material procurement costs and lower fiber input
costs. Productivity improvements were achieved in both the pulp and paper
operations which also contributed to the improved cost structure.
Selling, General and Administrative Expense
Selling, general and administrative expense was $137.6 million for fiscal
year 1997 compared to $134.1 million for fiscal year 1996, an increase of $3.5
million. The increase was due primarily to the opening of additional regional
distribution centers, professional services supporting the Company's profit
improvement initiatives, and other administrative expenses.
Restructuring
In October 1996, the Company commenced a restructuring plan which resulted in
a pretax charge of $10.0 million taken during fiscal year 1997 to cover the
costs related to the reduction of approximately 200 salaried positions or
approximately 14% of the Company's salaried work force.
Other Income (Expense), net
Other income (expense), net for fiscal year 1997 was $4.1 million income
compared to $0.1 million expense for fiscal year 1996. This change was largely
due to higher interest income resulting from higher average cash balances on
hand during fiscal year 1997.
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<PAGE>
Interest Expense, Taxes, and Dividends and Accretion on Warren Series B
Preferred Stock
Interest expense for fiscal year 1997 was $99.0 million compared to $108.9
million for fiscal year 1996. The $9.9 million reduction in interest expense
was primarily due to lower levels of outstanding debt. Interest expense
includes the amortization of deferred financing fees.
Income tax expense was $19.3 million for fiscal year 1997 compared to $5.1
million for the prior year, primarily reflecting the change in the Company's
earnings level.
FISCAL YEAR 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 27, 1995
The following discussion compares the results of operations for 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. The Predecessor Corporation's
financial statements for periods prior to the Acquisition are not comparable to
the Company's financial statements. Results (in terms of dollar amounts) for
fiscal year 1996, and the nine months 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 of Results of Operations and Financial Condition for these periods is
generally based upon a comparison of specified results as a percentage of total
sales. The following table indicates the results of operations as a percent of
sales:
<TABLE>
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 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.
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<PAGE>
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 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 costs associated with the 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 Consolidated 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $222.6 million for fiscal year
1997 as compared to $216.6 million for fiscal year 1996. The increase is due
mainly to the improved earnings level in 1997 together with the impact of
increases in accounts payable, accrued and other liabilities and a decrease in
inventories, countered by the effect of the receipt in 1996 of $90.0 million of
proceeds from the sale of the Company's accounts receivable. The increase in
accounts payable, accrued and other liabilities during fiscal year 1997 was
primarily attributable to the timing of payments for certain raw materials and
interest, and increases in short-term retirement plan and restructuring
accruals.
Operating working capital decreased from $79.4 million at October 2, 1996 to
an operating working capital deficit of $11.6 million at October 1, 1997.
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 decreases in trade and
other receivables and inventories.
During fiscal year 1997, the Company received $150.4 million as proceeds from
the sale/leaseback of one of the Company's paper machines at its Somerset
facility. In connection with the transaction, the Company
14
<PAGE>
entered into a 15 year agreement 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 agreement is being accounted for as an
operating lease. The gain on the transaction of approximately $17.4 million was
deferred and is being amortized as an adjustment to future rent payments.
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. In connection with the flood, the Company
spent $44.1 million to refurbish the mill, of which $4.0 million was
capitalized representing improvements to existing plant assets. The Company
received, net of deductibles of $3.5 million, insurance proceeds totaling $52.7
million of which $40.9 million related to the refurbishment and $11.8 million
related to business interruption claims. All claims have been submitted and
finalized as of October 1, 1997.
Capital expenditures for fiscal 1997 were $61.0 million, up from $51.3
million for fiscal year 1996. In addition, the Company believes that
environmental compliance expenditures, the bulk of which are for cluster rules
compliance, will aggregate capital expenditures of approximately $70.0 million
to $112.0 million through 2000, of which $20.0 million has already been
incurred. The Company believes that cash generated by operations and amounts
available under its revolving credit facility will be sufficient to meet its
ongoing operating and capital expenditure requirements.
Net cash used in financing activities was $177.3 million for fiscal year 1997
as compared to $181.2 million for the previous fiscal year. Net cash used in
financing activities for fiscal year 1997 is comprised primarily of $38.1
million of proceeds received from the refinancing and issuance of certain new
industrial revenue bonds, which was more than offset by the related redeeming,
refunding and defeasing of an aggregate of $28.1 million of industrial revenue
bonds and $182.5 million of term loan repayments, $100.3 million of which was
obtained from the proceeds of the sale/leaseback transaction. During fiscal
year 1996, the Company repaid $176.3 million of its term loans, $90.0 million
of which was repaid from the proceeds received from the sale of the Company's
accounts receivable.
Debt and Preferred Stock
At October 1, 1997, long-term debt was $739.8 million compared to $902.5
million at October 2, 1996, a decrease of $162.7 million. The current
maturities of long-term debt balance of $27.3 million at October 1, 1997
primarily represents the amounts payable in June 1998 under the Company's term
loan facilities under the Credit Agreement (as defined in the Notes to
Consolidated Financial Statements).
Warren has a $250.0 million revolving credit facility to finance working
capital needs. At October 1, 1997, Warren did not have any borrowings
outstanding under this facility, resulting in an unused borrowing capacity of
approximately $239.0 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.
The Credit Agreement, as presently written, requires an Excess Cash Flow
prepayment of approximately $77.0 million relating to fiscal year 1997 to be
paid on December 30, 1997. However, the Company is in the process of
renegotiating the Credit Agreement, and the terms of the new agreement are
expected to reduce or eliminate this Excess Cash Flow prepayment. In the event
that the new agreement is not in place before December 30, 1997 or that the
Excess Cash Flow prepayment is not entirely eliminated, the Company intends to
fund this prepayment from the Revolving Credit Facility. Accordingly, the
amount of the prepayment is included in long-term debt in the accompanying
consolidated balance sheet at October 1, 1997.
In addition, Warren had approximately $150.8 million and $170.5 million of
letters of credit outstanding under its letter of credit facility at October 1,
1997 and October 2, 1996, respectively. Warren pays a commission,
15
<PAGE>
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.
The Credit Agreement, as amended, contains restrictive covenants which limit
the Company with respect to certain matters including, among other things, the
ability to incur debt, pay dividends, make acquisitions, sell assets, merge,
grant or incur liens, guarantee obligations, make investments or loans, make
capital expenditures, create subsidiaries or change its line of business. The
Credit Agreement also restricts the Company from prepaying certain of its
indebtedness. Under the Credit Agreement, the Company is required to satisfy
certain financial covenants which will require the Company to maintain
specified financial ratios, including a minimum interest coverage ratio, a
maximum leverage ratio and a net worth test. The Company has obtained consent
from the lenders under the Credit Agreement to use a portion of the proceeds
of the sale/leaseback, including the payment from time to time of dividends to
Holdings, on or prior to September 30, 1998 for the purpose of redeeming the
15% Senior Exchangeable Preferred Stock (the "Holdings Preferred Stock") of
Holdings, subject to certain conditions and limitations.
The Company is required by the terms of the Credit Agreement to enter into
fixed rate interest protection agreements on a portion of its outstanding
debt. At October 1, 1997 and October 2, 1996, $205.0 million of debt was
covered by such interest rate protection agreements. These agreements expire
at varying dates between December 1997 and January 2000.
Warren has successfully solicited the consent (the "Consent") of the holders
(the "Note Holders") of the Warren Series B Senior Subordinated Notes
("Notes") to the approval of a waiver under which the Note Holders have (a)
consented to the payment of a dividend (the "Dividend") to Holdings for the
purpose of redeeming (the "Redemption") all of the Holdings Preferred Stock
and (b) agreed that the consummation of each of such Dividend and such
Redemption do not violate the restricted payment covenant of the Indenture
(the "Indenture") governing the Notes. The approved Consent permits Warren to
pay the Dividend for the purpose of effecting the Redemption of all of the
Holdings Preferred Stock. At October 1, 1997, the redemption value of the
Holdings Preferred Stock was $56.9 million.
The Company does not currently anticipate paying any cash dividends on the
Warren Series B Redeemable Exchangeable Preferred Stock ("Warren Series B
Preferred Stock") for any period ending on or prior to December 15, 1999. In
addition, the terms of the Credit Agreement and the Indenture relating to the
Notes (as defined in the Notes to Consolidated Financial Statements) limit the
amount of cash dividends the Company may pay with respect to preferred stock
and other equity securities both before and after that date. See the Notes to
Consolidated Financial Statements.
Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and debt. The Company uses
interest rate caps and swaps to the degree indicated above as a means of
protection against a portion of interest rate risk associated with the current
debt balances.
The Company does not hold derivative financial instruments for trading
purposes.
OTHER ITEMS
Environmental and Safety Matters
The Company is subject to a wide variety of 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.
16
<PAGE>
In addition to conventional pollutants, minute quantities of dioxins and
other chlorinated organic compounds may be contained in the wastewater effluent
of the Company's bleached kraft pulp mills in Somerset and Westbrook, Maine and
Muskegon, Michigan. The most recent National Pollutant Discharge Elimination
System ("NPDES") wastewater permit limits proposed by the EPA would limit
dioxin discharges from the Company's Somerset and Westbrook mills to less than
the level of detectability. The Company is presently meeting the EPA's proposed
dioxin limits but it is not meeting the proposed limits for other parameters
(e.g. temperature), and 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 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
hearing the lawsuit 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 implement and enforce its industrial pre-treatment operations
associated with its operation of the wastewater facility. The Company is
uncertain as to the effects, if any, of this action on its current dispute with
the County which has raised the industrial users' contractual rights as an
issue in the EPA lawsuit. Recently the group of industrial users and the
municipalities filed motions to intervene in the lawsuit. 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 before the end of calendar year 1997, with
compliance with the rules required beginning in 2000. The Company believes that
environmental compliance expenditures, the bulk of which are for the cluster
rules compliance, will require aggregate capital expenditures of approximately
$70.0 million to $112.0 million through 2000 of which $20.0 million has already
been incurred. The ultimate financial impact to the Company of compliance with
the cluster rules will depend upon the cost and availability of new technology.
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 $13.0 million, of
which approximately $4.0 million will be spent prior to the year 2000 with the
remainder being spent subsequent to 2004.
The Muskegon mill has had discussions with the Michigan Department of
Environmental Quality ("DEQ") regarding a wastewater surge pond adjacent to the
Muskegon Lake. The DEQ presently is considering whether the surge pond is in
compliance with Michigan Act 451 (Part 31 of the Natural Resources and
Environmental Protection Act) regarding potential discharges from that pond.
The matter is now subject to the results of a pending engineering
investigation. There is a possibility that, as a result of DEQ requirements,
the surge pond may be closed in the future. The Company estimates the cost of
closure will be approximately $2.0 million. In addition, if it is necessary to
replace the functional capacity of the surge pond with above-grade structures,
the Company preliminarily estimates that up to an additional $8.0 million may
be required for such construction costs.
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
17
<PAGE>
disposal of hazardous substances occurring prior to the date of the
Acquisition, including all damages and costs related to these seven sites.
Since the date of the Acquisition, Scott, and subsequently Kimberly-Clark, has
been performing under the terms of this environmental indemnity and defense
provision and, therefore, the Company has not expended any funds with respect
to these seven sites.
The Company currently has a demolition project in progress at its Westbrook
facility for health and safety reasons which is expected to be completed in the
year 2001. Total costs of the project are estimated to be approximately $10.0
million, of which approximately $5.8 million had been spent as of October 1,
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.
Employees and Labor Relations
As of October 1, 1997, the Company had 3,956 employees. Approximately 71% of
employees are represented by six international unions under ten different
contracts. By early February 1997, the Company had reached a settlement on a
new six-year labor agreement with its three major 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. By October 1, 1997, the
Company had reached settlement with both of its unions at Westbrook, with the
unions in each case ratifying a new five year agreement with more flexible work
rule provisions. The Company is engaged in negotiations with the two unions at
Mobile whose contracts expired on June 1, 1997. Those affected employees are
working under contract extensions which can be terminated upon 10 days notice.
The Company's contracts with the two unions in Muskegon expire in June 1998.
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.
Long-Term Contracts
In connection with the Acquisition, Warren entered into long-term (25 years
initially, subject to mill closures and certain force majeure events)
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 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. Warren has entered into a long-term agreement to
purchase electric power and steam for the Mobile mill at rates generally
comparable to market tariffs, including fuel cost and capital recovery
components. During the nine months ended September 27, 1995, fiscal year 1996
and fiscal year 1997, the Company purchased pulp and utilities under these
agreements aggregating $127.3 million, $148.0 million and $108.0 million,
respectively.
The Company's power requirements at its Somerset mill are currently satisfied
through a power purchase agreement whereby the mill cogenerates electricity and
sells the output to CMP at market rates. The CMP agreement relating to the
Somerset mill also provides that the mill purchase electricity from CMP at the
standard industrial tariff rate. The Somerset Agreement expires in the year
2012. Warren's long-term agreement with CMP relating to the Westbrook mill
expired on October 31, 1997, and has been replaced by a short-term agreement
with CMP in which the mill cogenerates electricity and sells the excess output
not used by the mill to CMP at market rates. The short-term agreement for the
Westbrook mill expires on April 30, 1998 and may be renewed monthly through
October 1998. As of the date of the Acquisition of the Company, the Company
established a deferred asset of approximately $32.3 million to reflect the fair
value of the Somerset and now expired Westbrook agreements. For the nine months
ended September 27, 1995, fiscal year 1996 and fiscal year 1997, amortization
expense related to this asset approximated $10.8 million, $12.0 million, and
$9.5 million, respectively. As of October 1, 1997, the asset was fully
amortized.
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Regulatory Matters
On November 5, 1996, a proposed binding referendum measure to eliminate
clearcutting in unincorporated areas in the State of Maine was defeated. A
competing measure, which could have established new forestry standards stricter
than current law, but which would not have completely banned clearcutting,
received a plurality vote. This competing measure was resubmitted to the voters
under Maine law on November 4, 1997 and was defeated. The consequences of the
vote to the Company are not expected to be material, because such proposed
measure generally reflected sustainable forestry initiatives already
voluntarily adopted by the Company.
The Company is also involved in various other lawsuits and administrative
proceedings. The relief sought in such lawsuits and proceedings includes
injunctions, damages and penalties. Although the final results in these suits
and proceedings cannot be predicted with certainty, it is present opinion of
the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's consolidated financial position, results of
operations or cash flows.
Year 2000
The Company is addressing the millenium computer date ("Year 2000") issue by
contracting with a national consulting group specializing in Year 2000
initiatives. A company-wide systems assessment has identified the systems
requiring modification or replacement to become Year 2000 compliant. This
initiative is expected to be completed by March 31, 1999 and, for those systems
not currently being replaced in terms of an implementation of a company-wide
integrated application system, is estimated to aggregate approximately $6.0
million in expenditures.
Control by Sappi
On May 27, 1997 Western Ventures Limited ("WVL"), an indirect, wholly owned
subsidiary of Sappi, acquired certain minority common equity interests
(including both Common Stock, and Class A Warrants and Class B Warrants (the
"Warrants")) in Holdings (the "Minority Acquisition") for an aggregate price of
$138.0 million, or $17.25 per share of Common Stock or Common Stock equivalent.
WVL exercised, for a price of $0.01 per common share issued, all of the
Warrants acquired in the Minority Acquisition upon the consummation thereof. As
a result of the exercise of the Warrants, Holdings issued 4,252,343 shares of
Common Stock. As part of the financing for the Minority Acquisition, on June
27, 1997, WVL sold the Common Stock acquired in the Minority Acquisition to
Heritage Springer Limited ("HSL"), a British Virgin Island company, and HSL
pledged such Common Stock to certain lenders. The securities acquired by HSL
are subject to an agreement (the "HSL Option agreement"), pursuant to which
Sappi has a right to purchase such securities at any time prior to April 30,
2000, and HSL has a right to require Sappi to purchase such securities upon the
occurrence of certain events and at any time between May 15, 2000 and May 30,
2000. Sappi has been granted an irrevocable proxy to vote all such securities
during the term of the HSL Option Agreement, subject to compliance with its
purchase obligations upon exercise of such rights. Sappi also has been granted
certain rights of first refusal by such lenders in respect to such securities.
CONSIDERATIONS RELATING TO HOLDINGS' CASH OBLIGATIONS
The Company expects that it may make certain cash payments to Holdings or
other affiliates during fiscal 1998 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 Warren Series B Preferred Stock. Such payments
may include, among other things, (i) amounts under a tax sharing agreement to
be entered into between the Company and Holdings necessary to enable Holdings
to pay the Company's taxes, (ii) administrative fees to Holdings and amounts to
cover specified costs and expenses of Holdings and (iii) an annual advisory fee
for management advisory services, limited to $1.0 million, to Sappi and/or its
affiliates. To the extent the Company continues to make such payments, it will
do so only to the extent such payments are permitted under the terms of the
Credit Agreement, the Indenture and the terms of the Holdings Preferred Stock.
19
<PAGE>
Because Holdings has no material assets other than the outstanding common
stock of Warren (all of which is pledged to the lenders under the Company's
credit agreement) and all of the operations of Holdings (other than the
management of its investment in Warren) are currently conducted through Warren
and its subsidiaries, Holdings' ability to meet its cash obligations is
dependent upon the earnings of Warren and its subsidiaries and the distribution
or other provision of those earnings to Holdings. Holdings has no material
indebtedness outstanding (other than advances that may be owed from time to
time to Warren and guarantees in respect of indebtedness of Warren and its
subsidiaries) and preferred stock, which was issued in connection with the
acquisition of the Company from Scott, is not mandatorily redeemable (except
upon the occurrence of certain specified events) and provides that dividends
need not be paid in cash until the year 2000. Holdings does, however, have
various obligations with respect to its equity securities (including in respect
of registration rights granted by Holdings) that have required and are likely
to continue to require cash expenditures by Holdings. The Company believes that
the Credit Agreement, the Indenture and the Warren Series B Preferred Stock
permit Warren to pay a dividend or otherwise provide funds to Holdings to
enable Holdings to meet its known cash obligations for the foreseeable future,
provided that Warren meets certain conditions. Among such conditions are that
Warren maintain specified financial ratios and comply with certain financial
tests.
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 consolidated 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 consolidated financial
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are
found on pages 32 through 59 of this Annual Report on Form 10-K.
20
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
THE COMPANY
Set forth below are the names, ages (at October 1, 1997) and positions of
the directors and executive officers of Warren.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Eugene van As.................... 58 Director, Chairman of the Board of
Directors
Monte R. Haymon.................. 59 Director, President and Chief Executive
Officer
James H. Frick, Jr. ............. 58 Director
O. Harley Wood................... 55 Vice President, Productivity and Quality
William E. Hewitt................ 62 Director
Andries G.J. Vlok................ 61 Director, Vice President and Secretary
Trevor L. Larkan................. 42 Vice President and Chief Financial Officer
E. Dannis Herring................ 45 Vice President, Procurement and
Distribution
Henry L. Mollenhauer............. 53 Vice President and General Manager of
Printing and Publishing
</TABLE>
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 executives 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 has been a Director of Holdings since October 1, 1995. He
was appointed President and Chief Executive Officer of Warren as of 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 Packaging. In addition
to his business experience, Mr. Haymon is a member of the Board of Directors
of Evanston Hospital, and a member of the Board of Trustees of Tufts
University as well as Chairman of the Board of Overseers of the Engineering
School.
James H. Frick, Jr., became Vice President--Sales and Marketing in December
1994 and retired on August 1, 1996. 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.
21
<PAGE>
O. Harley Wood became Vice President, Manufacturing of Warren in March 1991,
Vice President, Productivity and Quality in October 1996 and Vice President,
Technology, and Engineering in October 1997. 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 & Gamble Company since 1964. Mr. Wood is a director of Warren.
William E. Hewitt became Vice President, Treasurer and Assistant Secretary
of Holdings on October 7, 1994 and has been a Director of Holdings since
October 5, 1994. He has been the Executive Director-Finance of Sappi since
1987 and was appointed a non-executive director of Warren at the time of the
Acquisition. 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.
Andries G.J. Vlok became Vice President and Secretary of Holdings on October
7, 1994 and has been a Director of Holdings since October 5, 1994. 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 previously 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 and certified public accountant, he specialized in treasury
management during the early and mid-1980's, 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. Mr. Larkan is a director of Warren.
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.
Henry L. Mollenhauer has served as Vice President and General Manager of
Printing and Publishing since October 1996 and Vice President of Marketing
since August 31, 1992. Prior to that time, he served in various positions with
the Company beginning on June 4, 1969.
22
<PAGE>
ITEM 11. EXECUTIVE 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 fiscal year 1997 (the
"Named Executive Officers"). All references to shares, options and stock
appreciation rights ("SARs") therein refer to shares of Sappi. S.D. Warren has
not granted shares, options or SARs to its employees prior to or during fiscal
year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
AWARDS
------------------------------
ANNUAL COMPENSATION
----------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS/ COMPENSATION
(1) ($) ($) ($) ($)(2) SARS(#)(3) ($)(4)
---- -------- -------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Monte R. Haymon......... 1997 $618,298 $300,000 $35,002(6) 0(7) -- $ 2,762
Chief Executive Officer 1996 600,565 -- -- 0(7) -- --
and President(5)
Henry L. Mollenhauer.... 1997 181,537 25,000 -- 0(8) -- 5,216
Vice President, General 1996 135,588 59,000 -- -- -- --
Manager Printing and 1995 123,593 -- -- -- -- --
Publishing
Trevor L. Larkan........ 1997 182,647 15,000 57,656(9) 0(10) 12,000 4,535
Chief Financial 1996 169,801 90,000 49,826(9) -- -- 4,535
Officer,
Vice President and 1995 116,607 -- 67,076(9) -- -- --
Treasurer
O. Harley Wood.......... 1997 199,014 20,000 -- 0(11) 10,000 4,928
Vice President- 1996 189,843 85,000 -- -- -- --
Technology and 1995 134,601 -- -- -- -- 157,803
Engineering
E. Dannis Herring....... 1997 182,101 17,000 -- 0(12) -- 4,860
Vice President- 1996 172,808 85,000 -- -- -- --
Procurement and 1995 121,745 -- -- -- -- --
Distribution
</TABLE>
- --------
(1) Compensation for 1997, 1996 and 1995 is for the fiscal year ended October
1, 1997, October 2, 1996 and the fiscal period December 21, 1994 through
September 27, 1995.
(2) All restricted stock awards were granted by Sappi under the Sappi Limited
Share Incentive Scheme (the "Sappi Plan"). Under the Sappi Plan, Sappi
offers an executive the right to purchase a certain number of shares of
common stock of Sappi at the market price on the date of the offer, and
the executive is granted a loan to cover the purchase price of the shares.
The shares are then issued and registered in the name of the executive,
but held by the trust that administers the Plan. Interest accrues on the
loan at the lower of 6% or any cash dividends paid on the shares. The
right to repay the loan and acquire possession of the shares vests as
follows: 25% beginning three years from the date of grant and an
additional 25% on each of the fourth, fifth and sixth anniversaries of the
date of grant. The executive must repay the loan in full no later than the
tenth anniversary of the date of grant, or with respect to the portion of
the loan covering the shares that have vested on the date of such
executive's resignation from the Company.
(3) All options were granted by Sappi under the Sappi Plan and represent the
right to acquire shares of common stock of Sappi.
(4) 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
$13,310 in 1995
23
<PAGE>
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 $140,000 paid by Scott to Mr. Wood in 1995 under a supplemental
retirement plan.
(5) Mr. Haymon was appointed President and Chief Executive Officer of Warren
as of October 1, 1995.
(6) The amount shown includes moving expenses for Mr. Haymon.
(7) Mr. Haymon purchased 15,200 shares of restricted stock of Sappi on
November 29, 1995 under the Sappi Plan at a purchase price of R56,75
($12.15, based upon an exchange rate of R4,67 per dollar on October 1,
1997) per share. The shares had no value to Mr. Haymon on the date of
grant, net of the loan by Sappi to Mr. Haymon in an amount equal to the
purchase price of the shares. The shares had no value to Mr. Haymon on
October 1, 1997, net of the loan by Sappi to Mr. Haymon. The loan on the
shares of restricted stock becomes due and payable on the tenth
anniversary of the date of grant. As a result of stock dividends, Mr.
Haymon received an additional (i) 241 shares on July 19, 1996 and (ii) 273
shares on February 12, 1997, each at no additional cost to Mr. Haymon. 25%
of the shares vest beginning on the third anniversary of the date of grant
and an additional 25% vest on each of the fourth, fifth and sixth
anniversaries of the date of grant. Cash dividends will be paid on the
shares of restricted stock as interest on the loan.
(8) Mr. Mollenhauer purchased 25,000 shares of restricted stock of Sappi on
March 3, 1997 under the Sappi Plan at a purchase price of R34,90 ($7.47
based upon an exchange rate of R4,67 per dollar on October 1, 1997) per
share. The shares had no value to Mr. Mollenhauer on the date of grant,
net of the loan by Sappi to Mr. Mollenhauer in an amount equal to the
purchase price of the shares. The shares had a value of $16,750 on October
1, 1997, net of the loan by Sappi to Mr. Mollenhauer. The loan on the
shares of restricted stock becomes due and payable on the tenth
anniversary of the date of grant. 25% of the shares vest beginning on the
third anniversary of the date of grant and an additional 25% vest on each
of the fourth, fifth and sixth anniversaries of the date of grant. Cash
dividends will be paid on the shares of restricted stock as interest on
the loan.
(9) The amounts shown include $42,000, $42,000 and $31,500 of housing
allowance payments in 1997, 1996 and 1995, respectively, and $27,577 of
relocation payments in 1995 for Mr. Larkan.
(10) Mr. Larkan purchased 5,000 shares of restricted stock of Sappi on March 3,
1997 under the Sappi Plan at a purchase price of R34,90 ($7.47 based upon
an exchange rate of R4,67 per dollar on October 1, 1997) per share. The
shares had no value to Mr. Larkan on the date of grant, net of the loan by
Sappi to Mr. Larkan in an amount equal to the purchase price of the
shares. The shares had a value of $3,350 on October 1, 1997, net of the
loan by Sappi to Mr. Larkan. The loan on the shares of restricted stock
becomes due and payable on the tenth anniversary of the date of grant. 25%
of the shares vest beginning on the third anniversary of the date of grant
and an additional 25% vest on each of the fourth, fifth and sixth
anniversaries of the date of grant. Cash dividends will be paid on the
shares of restricted stock as interest on the loan.
(11) Mr. Wood purchased 16,000 shares of restricted stock of Sappi on March 3,
1997 under the Sappi Plan at a purchase price of R34,90 ($7.47 based upon
an exchange rate of R4,67 per dollar on October 1, 1997) per share. The
shares had no value to Mr. Wood on the date of grant net of the loan by
Sappi to Mr. Wood in an amount equal to the purchase price of the shares.
The shares had a value of $10,720 on October 1, 1997, net of the loan by
Sappi to Mr. Wood. The loan on the shares of restricted stock becomes due
and payable on the tenth anniversary of the date of grant. 25% of the
shares vest beginning on the third anniversary of the date of grant and an
additional 25% vest on each of the fourth, fifth and sixth anniversaries
of the date of grant. Cash dividends will be paid on the shares of
restricted stock as interest on the loan.
(12) Mr. Herring purchased 24,000 shares of restricted stock of Sappi on March
3, 1997 under the Sappi Plan at a purchase price of R34,90 ($7.47 based
upon an exchange rate of R4,67 per dollar on October 1, 1997) per share.
The shares had no value to Mr. Herring on the date of grant net of the
loan by Sappi to Mr. Herring. The shares had a value of $16,080 on October
1, 1997, net of the loan by Sappi to Mr. Herring in an amount equal to the
purchase price of the shares. The loan on the shares of restricted stock
becomes due and payable on the tenth anniversary of the date of grant. 25%
of the shares vest beginning on the third anniversary of the date of grant
and an additional 25% vest on each of the fourth, fifth and sixth
anniversaries of the date of grant. Cash dividends will be paid on the
shares of restricted stock as interest on the loan.
24
<PAGE>
STOCK OPTIONS
The following table provides information concerning the grant of stock
options under the Sappi Limited Share Incentive Scheme to the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
POTENTIAL REALIZED
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION STOCK
OPTIONS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME (#)(1) FISCAL YEAR ($/SH)(2) DATE 5% ($) 10% ($)
---- --------------- ------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Monte R. Haymon......... -- -- -- -- -- --
Henry L. Mollenhauer.... -- -- -- -- -- --
Trevor L. Larkan........ 12,000 5.2 7.47 3/3/07 56,374 142,863
O. Harley Wood.......... 10,000 4.3 7.47 3/3/07 46,978 119,053
E. Dannis Herring....... -- -- -- -- -- --
</TABLE>
- --------
(1) These options become exercisable with respect to 25% of the shares of
Sappi common stock subject to such options on each of the third, fourth,
fifth and sixth anniversaries of the date of grant, and expire on the
tenth anniversary of the date of grant.
(2) Each of these options has an exercise price of R 34,90 which has been
converted to dollars based on an exchange rate of R4,67 per dollar as of
October 1, 1997.
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
25
<PAGE>
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 1, 1997: Messrs. Wood, 8;
and Herring, 23. 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the issued and outstanding common stock of the Company is owned
beneficially and of record by Holdings. Holdings has pledged such stock to the
lenders under the Credit Agreement in support of its guarantee thereunder. In
the event of a default by Holdings in respect of its obligations under such
guarantee, the lenders under the Credit Agreement could exercise their powers
under such pledge and thereby obtain control of the Company. The following
table sets forth certain information with respect to the beneficial ownership
of Common Stock of Holdings as of the date hereof.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------
NAME AND ADDRESS OF NUMBER OF PERCENT OF CLASS
BENEFICIAL OWNER SHARES OUTSTANDING(1)
------------------- --------- ----------------
<S> <C> <C>
Sappi Limited...................................... 100,000(2) 100.00%
48 Ameshoff Street
Braamfontein 2001
Republic of South Africa
Heritage Springer Limited ("HSL").................. 24,935(3) 24.935%
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 and beneficial ownership determined under
Rule 13d-3 under the Securities Exchange Act of 1934 assuming, in the case
of each person or group listed, the exercise of all options owned (which
are exercisable within 60 days following November 7, 1997) by each such
person or group, respectively, but without the exercise of any options
owned by any other person or group.
(2) Includes 75,065 shares of Class A Common Stock of Holdings held through a
subsidiary. Also includes 24,935 shares of Class B Common Stock of
Holdings 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.
(3) Consists of 24,935 shares of Class B Common Stock of Holdings, which 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.
26
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
S.D. WARREN'S MOBILE FACILITY: ARRANGEMENTS WITH SCOTT
S.D. Warren'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, S.D. 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 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 qualities 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 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 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. Scott merged with Kimberly-
Clark in December 1995. The surviving entity, Kimberly-Clark, is bound by the
terms of the above-mentioned agreements.
SHAREHOLDERS AGREEMENT
In connection with the Acquisition, Sappi, an affiliate of Sappi, certain
former investors of Holdings, Holdings and Warren (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 Warren following
the Acquisition. In connection with the Minority Acquisition, the former
investors 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. 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
Securities Act of 1933 (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 exceptions, be
required to enter into an arms' length marketing agreement with the Company,
and if the Company intends to
27
<PAGE>
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.
TRANSACTIONS WITH RELATED PARTIES
Pursuant to the limitations on restricted payments outlined in the Credit
Agreement, the Indenture and the agreement governing the Warren Series B
Preferred Stock, Warren may make cash payments to Holdings, including, among
other things, (i) for amounts under a tax sharing agreement to be entered into
between Warren and Holdings necessary to enable Holdings to pay Warren's taxes
and (ii) for administrative fees to Holdings and amounts to cover various
specified costs and expenses of Holdings. The associated administrative fee
charged by Holdings to Warren for the nine months ended September 27, 1995,
fiscal year 1996, and fiscal year 1997, was approximately $0.8 million, $1.0
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. These agreements, which may be terminated by either party with six
months written notice, are based upon cost reimbursement plus a profit markup
of 10%. For the nine months ended September 27, 1995, fiscal year 1996 and
fiscal year 1997, the Company incurred such a management fee of approximately
$0.8 million, $1.0 million and $1.0 million, respectively.
Warren has also entered into a cross licensing agreement with Sappi
Deutschland, the worldwide holding company for all European and U.S. business
operations of the Sappi group, and Hannover Papier AG ("Hannover"), a
subsidiary of Sappi. Pursuant to this agreement, 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 1, 1997.
Warren 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 Warren's product to external customers and remit the
proceeds from such sales to Warren, net of a sales commission. Warren shipped
$19.2 million, $102.8 million and $126.2 million of products to Sappi
subsidiaries and expensed fees of approximately $1.1 million, $7.2 million and
$8.7 million relating to these sales for the nine months ended September 27,
1995, fiscal year 1996 and fiscal year 1997, respectively. Trade accounts
receivable at October 2, 1996 and October 1, 1997 includes approximately $37.1
million and $24.5 million, respectively, due from subsidiaries of Sappi.
Warren has formalized certain of these agreements and is in the process of
formalizing the remainder.
Warren also imports products from certain Sappi affiliates (Sappi UK, Ltd
and Hannover Papier) for sale to Warren's domestic customers. Warren sells
these products at market prices and remits the proceeds, net of sales
commissions, to the Sappi affiliates. Warren imported approximately $10.6
million and $21.9 million of such products, and earned commissions of $0.2
million and $1.4 million for fiscal years 1996 and 1997, respectively.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation of the
Registrant.*
3.2 By-laws of the Registrant.*
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.**
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
10.13 Transfer Agreement dated as of June 29, 1986 between Scott
Paper Company and S.D. Warren Company, as amended October
25, 1990, as further amended November 1, 1993.**
10.14 Stock Purchase Agreement by and among Scott Paper Company,
Sappi Limited and SDW Acquisition Corporation dated as of
October 8, 1994.**
10.15 Supplemental Agreement to Stock Purchase Agreement dated as
of October 8, 1994 by and among Scott Paper Company, Sappi
Limited and SDW Acquisition Corporation dated as of
December 19, 1994.**
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.***
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
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.***
10.32 Agreement and Plan of Merger dated as of July 30, 1997
between SDW Acquisition II Corporation and SDW Holdings
Corporation.***
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.***
10.34+ Sappi Limited Share Incentive Scheme.
12.1 Statement regarding the computation ratio of earnings to
fixed charges and ratio of earnings to fixed charges and
preferred stock dividends.
21 Subsidiaries of the Registrant.
27 Financial Data Schedules.
</TABLE>
- --------
* Incorporated by Reference to Registration Statement 33-88496 on Form S-4
under the Securities Act of 1933 of S.D. Warren Company.
** Incorporated by Reference to Amendment No. 1 to Registration Statement 33-
88496 on Form S-4 under the Securities Act of 1933 of S.D. Warren Company.
*** 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.
+ Compensation plan or agreement required to be filed or incorporated by
reference as an exhibit pursuant to Item 14(c) of Form 10-K.
31
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. 33
Consolidated Financial Statements:
Consolidated Statements of Operations for the period December 21, 1994
through September 27, 1995 and the years ended October 2, 1996 and
October 1, 1997.......................................................... 34
Consolidated Balance Sheets as of October 2, 1996 and October 1, 1997..... 35
Consolidated Statements of Cash Flows for the period December 21, 1994
through September 27, 1995 and the years ended October 2, 1996 and
October 1, 1997.......................................................... 36
Consolidated Statements of Changes in Stockholder's Equity for the period
December 21, 1994 through September 27, 1995 and the years ended October
2, 1996 and October 1, 1997.............................................. 37
Notes to Consolidated Financial Statements................................ 38
Financial Statement Schedule:
II--Valuation and Qualifying Accounts................................... 59
</TABLE>
32
<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 1, 1997 and October 2, 1996 and the
related consolidated statements of operations, changes in stockholder's
equity, and cash flows for the years then ended, and for the period from
December 21, 1994 through September 27, 1995. 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 the financial
statements and financial statement schedule 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.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of October 1,
1997 and October 2, 1996 and the results of its operations and its cash flows
for the years then ended, and for the period from December 21, 1994 through
September 27, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 22, 1997
33
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PERIOD DECEMBER 21, YEAR YEAR
1994 THROUGH ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------- --------------- ---------------
<S> <C> <C> <C>
Sales...................... $1,155.8 $1,441.6 $1,405.6
Cost of goods sold......... 886.0 1,186.6 1,115.4
-------- -------- --------
Gross profit............... 269.8 255.0 290.2
Selling, general and
administrative expense.... 96.7 134.1 137.6
Restructuring.............. -- -- 10.0
-------- -------- --------
Income from operations..... 173.1 120.9 142.6
Other income (expense),
net....................... 3.2 (0.1) 4.1
Interest expense........... 106.0 108.9 99.0
-------- -------- --------
Income before income taxes
and extraordinary item.... 70.3 11.9 47.7
Income tax expense......... 28.2 5.1 19.3
-------- -------- --------
Income before extraordinary
item...................... 42.1 6.8 28.4
Extraordinary item, net of
tax....................... -- (2.0) --
-------- -------- --------
Net income................. 42.1 4.8 28.4
Dividends and accretion on
Warren Series B redeemable
exchangeable preferred
stock..................... 9.1 13.5 15.2
-------- -------- --------
Net income (loss)
applicable to common
stockholder............... $ 33.0 $ (8.7) $ 13.2
======== ======== ========
Earnings (loss) per common
share:
Income (loss) before
extraordinary item
applicable to common
stockholder............. $ 0.33 $ (0.07) $ 0.13
======== ======== ========
Net income (loss)
applicable to common
stockholder............. $ 0.33 $ (0.09) $ 0.13
======== ======== ========
Weighted average number of
shares outstanding........ 100 100 100
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 2, 1996 OCTOBER 1, 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 49.0 $ 180.7
Trade accounts receivable, net.............. 49.1 40.3
Other receivables........................... 34.2 14.8
Inventories, net............................ 195.7 163.4
Deferred income taxes....................... 18.0 28.3
Other current assets........................ 9.4 9.8
-------- --------
Total current assets...................... 355.4 437.3
Plant assets, net............................. 1,114.7 951.1
Timber resources, net......................... 95.3 95.6
Goodwill, net................................. 94.1 90.1
Deferred financing fees, net.................. 44.8 35.4
Other assets, net............................. 21.1 22.5
-------- --------
Total assets.............................. $1,725.4 $1,632.0
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt........ $ 46.4 $ 27.3
Accounts payable............................ 101.6 121.0
Accrued and other current liabilities....... 98.0 109.1
-------- --------
Total current liabilities................. 246.0 257.4
-------- --------
Long-term debt:
Term loans.................................. 411.4 251.5
Senior subordinated notes................... 375.0 375.0
Other....................................... 116.1 113.3
-------- --------
Total long-term debt...................... 902.5 739.8
-------- --------
Deferred income taxes......................... 34.6 48.7
-------- --------
Other liabilities............................. 98.2 113.6
-------- --------
Total liabilities......................... 1,281.3 1,159.5
-------- --------
Commitments and contingencies (Notes 13, 14
and 15)
Warren Series B redeemable exchangeable
preferred stock (liquidation value, $96.2 and
$110.6, respectively)........................ 88.0 103.2
-------- --------
Stockholder's equity:
Common stock ($.01 par value; 1,000 shares
authorized; 100 shares issued and
outstanding at October 2, 1996 and October
1, 1997)................................... -- --
Capital in excess of par value.............. 331.8 331.8
Retained earnings........................... 24.3 37.5
-------- --------
Total stockholder's equity................ 356.1 369.3
-------- --------
Total liabilities and stockholder's
equity................................... $1,725.4 $1,632.0
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD DECEMBER 21, YEAR YEAR
1994 THROUGH ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------- --------------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income................ $ 42.1 $ 4.8 $ 28.4
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation............. 65.5 86.8 86.6
Cost of timber harvested
and amortization of
logging roads........... 1.3 0.9 2.1
Amortization of
intangibles............. 23.0 27.5 26.6
Loss on force majeure
event................... -- -- 0.6
Deferred income taxes.... 12.3 5.6 3.8
Extraordinary item....... -- 2.0 --
Other ................... -- -- (3.6)
Changes in assets and
liabilities net of the
effect of the
Acquisition:
Trade and other accounts
receivable, net......... (23.0) 80.3 28.2
Inventories, net......... (57.6) 30.8 32.3
Accounts payable,
accrued and other
current liabilities..... 66.3 (6.8) 28.2
Other assets and
liabilities............. 6.1 (15.3) (10.6)
--------- ------- -------
Net cash provided by
operating activities.. 136.0 216.6 222.6
--------- ------- -------
Cash Flows from Investing
Activities:
Acquisition, net of
related costs............ (1,455.9) -- --
Investments in plant
assets and timber
resources................ (33.7) (51.3) (61.0)
Proceeds from disposals of
plant assets and timber
resources................ -- -- 151.0
Refurbishment of plant
assets................... -- -- (40.1)
Insurance proceeds to
refurbish plant assets... -- -- 40.9
Other investing
activities............... -- 2.7 (4.4)
--------- ------- -------
Net cash provided by
(used in) investing
activities............ (1,489.6) (48.6) 86.4
--------- ------- -------
Cash Flows from Financing
Activities:
Proceeds from issuance of
long-term debt........... 1,105.7 -- 38.1
Repayments of long-term
debt..................... (162.1) (178.2) (214.0)
Proceeds from issuance of
common stock............. 331.8 -- --
Proceeds from issuance of
Warren Series B
redeemable exchangeable
preferred stock, net of
expenses................. 65.4 -- --
Other financing
activities............... -- (3.0) (1.4)
--------- ------- -------
Net cash provided by
(used in) financing
activities............ 1,340.8 (181.2) (177.3)
--------- ------- -------
Net change in cash and cash
equivalents............... (12.8) (13.2) 131.7
Cash and cash equivalents:
Beginning of period....... 75.0 62.2 49.0
--------- ------- -------
End of period............. $ 62.2 $ 49.0 $ 180.7
========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONSOLIDATED 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 Warren Series B
redeemable exchangeable preferred
stock.............................. -- -- -- (8.5) (8.5)
Accretion to liquidation preference
value on Warren 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 Warren Series B
redeemable exchangeable preferred
stock.............................. -- -- -- (12.7) (12.7)
Accretion to liquidation preference
value on Warren Series B redeemable
exchangeable preferred stock....... -- -- -- (0.8) (0.8)
--- ---- ------ ----- ------
Balance, October 2, 1996............. 100 -- 331.8 24.3 356.1
--- ---- ------ ----- ------
Net income.......................... -- -- -- 28.4 28.4
Dividends accrued on Warren Series B
redeemable exchangeable preferred
stock.............................. -- -- -- (14.4) (14.4)
Accretion to liquidation preference
value on Warren Series B redeemable
exchangeable preferred stock ...... -- -- -- (0.8) (0.8)
--- ---- ------ ----- ------
Balance, October 1, 1997............. 100 $-- $331.8 $37.5 $369.3
=== ==== ====== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BUSINESS
S.D. Warren Company (the "Company" or "Warren") 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 facility and several distribution
facilities, and owns approximately 911,000 acres of timberlands in the State
of Maine.
NOTE 2--FORMATION AND ACQUISITION
On December 20, 1994, SDW Acquisition Corporation ("SDW Acquisition"), a
direct wholly owned subsidiary of SDW Holdings Corporation ("Holdings"), the
Company's parent, acquired (the "Acquisition") from Scott Paper Company
("Scott") all of the outstanding capital stock of Warren, and certain related
affiliates of Scott. Immediately following the Acquisition, SDW Acquisition
merged with and into Warren (the "Acquisition Merger"), with Warren surviving.
Scott has since been acquired by Kimberly-Clark Corporation. Holdings is an
indirect majority owned subsidiary of Sappi Limited ("Sappi").
The Acquisition was accounted for as a purchase. The total purchase cost of
approximately $1.9 billion, including the effect of liabilities assumed of
$345.4 million, 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>
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.
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.
Fiscal Year
The Company and its subsidiaries' fiscal year ends on the Wednesday closest
to the last day of September. The year ended October 2, 1996 ("fiscal year
1996") included 53 weeks. The period December 21, 1994 through September 27,
1995 (the "nine months ended September 27, 1995") included 40 weeks.
38
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 October 2, 1996 and October 1, 1997, 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 27, 1995, fiscal year 1996 and
fiscal year 1997, the Company capitalized interest of approximately $0.9
million, $1.9 million and $3.7 million, respectively.
Timber Resources
Timber resources are recorded at cost less timber harvested and amortization
of logging roads. Cost of timber resources includes original costs, road
construction costs and reforestation costs such as site preparation and
planting costs. Timber harvested is computed on the units-of-production
method. Property taxes, surveying, fire control and other forest management
expenses are charged to expense as incurred.
Goodwill
Goodwill, which resulted from the Acquisition, is being amortized for
financial statement purposes on a straight-line basis over 25 years. 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 October 2, 1996 and October 1, 1997 was
approximately $94.1 million and $90.1 million, respectively, net of
accumulated amortization of approximately $7.1 million and $11.1 million,
respectively.
39
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $15.3 million
and $25.5 million at October 2, 1996 and October 1, 1997, respectively. As a
result of the partial early extinguishment of debt during fiscal year 1996,
the Company recorded an extraordinary loss of $3.3 million related to the
write-off of deferred financing fees which was partially offset by a deferred
tax benefit of $1.3 million. The Company also extinguished certain debt during
fiscal year 1997. The net gain/(loss) on such extinguishments was not
significant. (See Note 11).
Other Assets
Other assets include intangible assets, primarily patents, arising as part
of the Acquisition purchase price allocation, of $19.6 million and $17.7
million at October 2, 1996 and October 1, 1997, 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 $3.4 million and $5.3 million at October 2, 1996 and October 1,
1997, 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 Consolidated Statements of Cash Flows in
the same category as the items being hedged or on a basis consistent with the
nature of the investment.
The Company does not hold derivative financial instruments for trading
purposes.
Income Taxes
The Company uses an asset and liability approach to computing deferred
income taxes, which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this approach,
deferred income taxes are determined based on the difference between the
financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Workers' Compensation Insurance
The Company has a combination of self-insured and insured workers'
compensation programs. 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 as the timing of payments
associated therewith are reasonably estimable. The present value of such
claims was determined using a discount rate of 5.5% for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997. The gross liability
was $46.0 million and $39.9 million at October 2, 1996 and October 1, 1997,
respectively.
40
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Research and Development Expenditures
Expenditures for research and development are charged to expense as
incurred. Research and development costs were $10.7 million, $15.6 million,
and $13.6 million for the nine months ended September 27, 1995, fiscal year
1996 and fiscal year 1997, 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
Earnings per common share is computed using the weighted average number of
common shares outstanding during the period. For purposes of computing income
(loss) per share applicable to common stockholders, the Company's net income
(loss) before extraordinary item and net income (loss) have been reduced by
Warren Series B Preferred Stock dividends and accretion (See Note 19).
Cash Paid for Income Taxes
Cash paid for income taxes for the nine months ended September 27, 1995,
fiscal year 1996 and fiscal year 1997 was $20.6 million, $4.7 million and
$10.6 million, respectively. Cash received for income tax refunds in fiscal
year 1997 was $4.9 million.
Cash Paid for Interest
Cash paid for interest during the nine months ended September 27, 1995,
fiscal year 1996 and fiscal year 1997 was $75.6 million, $112.3 million and
$92.0 million, respectively.
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 consolidated financial
statements.
41
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income",
and FAS No. 131, "Disclosure 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 consolidated financial
statements.
NOTE 4--RESTRUCTURING
In October 1996, the Company commenced a restructuring plan which resulted
in a charge of $10.0 million to cover the costs related to the reduction of
approximately 200 salaried positions, or approximately 14% of the Company's
salaried work force.
NOTE 5--FORCE MAJEURE EVENT
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. In connection with the
flood, the Company incurred $45.9 million of costs to refurbish the mill, of
which $4.0 million was capitalized representing improvements to existing plant
assets. The Company received, net of deductibles of $3.5 million, insurance
proceeds totaling $52.7 million of which $40.9 million related to the
refurbishment and $11.8 million related to business interruption claims. All
claims were submitted and finalized as of October 1, 1997.
NOTE 6--TRADE ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Trade accounts receivable.............................. $54.4 $45.3
Allowance for doubtful accounts........................ (5.3) (5.0)
----- -----
$49.1 $40.3
===== =====
</TABLE>
In April 1996, the Company, through a bankruptcy remote subsidiary, S.D.
Warren Finance Co. ("SDWF"), entered into a receivables sales agreement that
provides the Company with a five-year $110 million revolving accounts
receivable securitization facility (the "A/R Facility"). Under this facility
and pursuant to a purchase and contribution agreement between the Company and
SDWF, the Company sells to 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 under similar terms to a third party purchaser.
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 the third party purchaser. 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.
42
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's trade accounts receivable, shown in the table above, are net
of $90.0 million and $93.2 million at October 2, 1996 and October 1, 1997,
respectively, which represent accounts receivable that were securitized and
sold under the A/R Facility.
The Company had sales to customers outside of the United States ("Export
Sales") of $83.1 million, $179.1 million and $186.2 million, for the nine
months ended September 27, 1995, fiscal year 1996 and fiscal year 1997,
respectively. Export sales are primarily to Canada, Europe, Australia, Latin
America and the Far East. Export sales do not exceed 10% of total sales for
any geographic region. Sales outside North America are primarily handled by
the Company's affiliates under the common control of Sappi.
Sales to unaffiliated customers which individually exceed 10% of total sales
amounted to approximately 54.0%, 52.5% and 51.9% of sales for the nine months
ended September 27, 1995, fiscal year 1996, and fiscal year 1997,
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>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
1......................... $292.4 $355.0 $360.3
2......................... 163.0 201.9 169.9
3......................... 168.7 199.8 199.6
</TABLE>
At October 2, 1996 and October 1, 1997, approximately 35% and 42%,
respectively, of the Company's net trade receivables, including those
receivables which are securitized and sold, were concentrated in these three
customers.
NOTE 7--INVENTORIES, NET (IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Finished products...................................... $ 92.8 $ 76.7
Work in process........................................ 34.5 21.4
Pulp, logs and pulpwood................................ 25.8 23.9
Maintenance parts and other supplies................... 42.6 41.4
------ ------
$195.7 $163.4
====== ======
</TABLE>
NOTE 8--PLANT ASSETS (IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Plant assets, at cost:
Land and buildings................................... $ 172.7 $ 174.4
Plant and equipment.................................. 1,095.5 991.3
-------- --------
1,268.2 1,165.7
Accumulated depreciation............................. (153.5) (214.6)
-------- --------
$1,114.7 $ 951.1
======== ========
</TABLE>
43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--INCOME TAXES
The domestic and foreign components of income before taxes, and
extraordinary item are as follows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Domestic................ $ 67.9 $ 11.9 $ 47.7
Foreign................. 2.4 -- --
------ ------ ------
$ 70.3 $ 11.9 $ 47.7
====== ====== ======
The components of the tax provisions before extraordinary item are as
follows (in millions):
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Current:
Federal............... $ 14.9 $ (1.1) $ 13.5
Foreign............... 0.1 (1.2) --
State and local....... 0.9 1.8 2.0
------ ------ ------
Total current....... 15.9 (0.5) 15.5
------ ------ ------
Deferred:
Federal............... 8.1 5.3 1.9
Foreign............... -- 1.2 --
State and local....... 4.2 (0.9) 1.9
------ ------ ------
Total deferred...... 12.3 5.6 3.8
------ ------ ------
$ 28.2 $ 5.1 $ 19.3
====== ====== ======
The components of the deferred tax provisions before extraordinary item are
as follows (in millions):
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Inventory............... $ 5.3 $ (0.1) $ 1.2
Plant assets............ 16.4 93.0 28.3
Accrued and other
liabilities............ (0.1) (35.5) (15.6)
AMT credit
carryforwards.......... (9.3) (3.7) (14.9)
Tax loss carryforwards.. -- (41.7) 4.8
Other credits........... -- (6.4) --
------ ------ ------
Deferred tax provision.. $ 12.3 $ 5.6 $ 3.8
====== ====== ======
</TABLE>
44
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred tax assets and (liabilities) are as follows
(in millions):
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Current:
Deferred tax assets:
Restructuring reserves............................... $ 0.3 $ 1.3
Accrued and other liabilities........................ 18.5 30.5
Inventory............................................ 1.4 0.2
------- -------
Total current deferred tax assets.................. 20.2 32.0
Deferred tax liabilities:
Accrued and other liabilities and prepaids........... (2.2) (3.7)
------- -------
Net current deferred tax asset......................... 18.0 28.3
------- -------
Noncurrent:
Deferred tax assets:
Alternative minimum tax credit carryforwards......... 13.0 27.9
Tax loss carryforwards............................... 41.7 36.9
Accrued and other liabilities........................ 46.0 73.7
Other................................................ 7.7 --
------- -------
Total noncurrent deferred tax assets............... 108.4 138.5
------- -------
Deferred tax liabilities:
Property, plant and equipment........................ (106.0) (134.3)
Other................................................ (37.0) (52.9)
------- -------
Total noncurrent deferred tax liability............ (143.0) (187.2)
------- -------
Net noncurrent deferred tax liability.................. (34.6) (48.7)
------- -------
Net deferred tax liability........................... $ (16.6) $ (20.4)
======= =======
</TABLE>
The differences between the U.S. statutory income tax rate and the Company's
effective income tax rate before extraordinary item are as follows:
<TABLE>
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
U.S. statutory income
tax rate............... 35.0% 35.0% 35.0%
State income taxes, net
of federal benefit..... 4.9 5.2 5.3
Foreign................. 0.1 -- --
Other factors........... 0.1 2.7 0.2
---- ---- ----
Effective tax rate...... 40.1% 42.9% 40.5%
==== ==== ====
</TABLE>
As of October 1, 1997, the Company had available federal and state tax net
operating loss carryforwards of approximately $181.0 million. For federal tax
purposes, the loss carryforwards will begin to 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 federal and state alternative minimum
tax credit carryforwards for tax return purposes of $27.9 million which will
carry forward to future taxable years indefinitely.
45
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--ACCRUED AND OTHER CURRENT LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Accrued salaries, wages and employee benefits.......... $ 47.5 $ 48.0
Accrued interest....................................... 15.2 23.5
Accrued workers' compensation.......................... 7.4 3.6
Accrued restructuring.................................. -- 3.3
Other accrued expenses................................. 27.9 30.7
------ -------
$ 98.0 $ 109.1
====== =======
</TABLE>
NOTE 11--LONG-TERM DEBT
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Credit Agreement:
Term Loan, Tranche A................................. $ 268.7 $ 151.2
Term Loan, Tranche B................................. 185.0 120.1
Warren Series B Senior Subordinated Notes.............. 375.0 375.0
Revenue bonds.......................................... 119.5 119.5
Capital leases......................................... 0.7 1.3
------- -------
948.9 767.1
Current maturities of long-term debt................... 46.4 27.3
------- -------
Long-term debt......................................... $ 902.5 $ 739.8
======= =======
</TABLE>
Credit Agreement
On December 20, 1994, Holdings and Warren entered into an agreement (the
"Credit Agreement") with a group of domestic and international lenders. The
Credit Agreement, as amended, 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").
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) 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 achievement of 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. "Base Rate" means the highest of (1) the prime
rate, (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
46
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 maximum leverage 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 1,
1997, management believes the Company is in compliance with all covenants.
Under the terms of the Credit Agreement, Warren is required to enter into
interest rate protection agreements, primarily interest rate swap and interest
rate cap agreements. At October 2, 1996 and October 1, 1997, 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 $75.0 million of
notional principal amount of debt. Warren also has two interest rate cap
agreements outstanding with respect to $130.0 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 with a final
maturity in December 2001. The Tranche B Term Loan is payable in semi-annual
installments 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 1, 1997, both the Tranche A Term Loan and the Tranche B Term Loan were
Eurodollar loans. At October 2, 1996 and October 1, 1997, the weighted average
interest rate on the Tranche A Term Loan was 7.19% and 8.32%, respectively;
and the interest rate on the Tranche B Term Loan was 7.69% and 8.84%,
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 prepayments relating
to the nine months ended September 27, 1995, during the first quarter of
fiscal year 1996. Excess Cash Flow prepayments relating to fiscal year 1996
were not required. The Credit Agreement, as presently written, requires an
Excess Cash Flow prepayment of approximately $77.0 million relating to fiscal
year 1997 to be paid on December 30, 1997. However, the Company is in the
process of renegotiating the Credit Agreement, and the terms of the new
agreement are expected to reduce or eliminate this Excess Cash Flow
prepayment. In the event that the new agreement is not in place before
December 30, 1997 or that the Excess Cash Flow prepayment is not entirely
eliminated, the Company intends to fund this prepayment from the Revolving
Credit Facility. Accordingly, the amount of the prepayment is included in
long-term debt in the accompanying consolidated balance sheet.
47
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 except that,
at the Company's option such amounts may be applied to Tranche A and Tranche B
term loans as is necessary to pay in whole or in part the next scheduled
principal installment and shall be applied to installments thereof on a pro
rata basis, and may not be reborrowed.
Revolving Credit Facility
Under the Revolving Credit Facility, which expires in April 2003, 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 October 2, 1996 and October 1, 1997, $1.0
million and $11.0 million, respectively, of the Revolving Credit Facility was
utilized to guarantee the issuance of letters of credit. At October 2, 1996
and October 1, 1997, availability under the Revolving Credit Facility was
$249.0 million and $239.0 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 and
October 1, 1997, 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 on Revolving Credit Facility letters of credit. In
addition, Warren pays a quarterly commitment fee between 0.375% and 0.50% per
annum on the unused portion of the Revolving Credit Facility based on the
achievement of a certain financial ratio.
Warren Series B Senior Subordinated Notes
The Warren 12% Series B Senior Subordinated Notes due 2004 ("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
In connection with the Acquisition, Warren assumed from Scott $119.3 million
of revenue bonds comprised of nine separate tax exempt municipal bond issues
(the "Issues"). Warren assumed responsibility for Scott's obligations under
the Issues, but with respect to each Issue (other than bonds aggregating $44.0
million bearing variable interest rates that were re-marketed on August 21,
1995 as fixed interest rate bonds, and the Skowhegan, Maine Issues as
described below), Scott remains either contingently liable as a guarantor or
directly liable as the original obligor.
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, refunding or
defeasing revenue bonds aggregating $28.1 million, and issuing new bonds
aggregating $38.1 million. The extraordinary gain resulting from the
extinguishment of the original bonds was not significant.
At both October 2, 1996 and October 1, 1997, the Company is obligated under
revenue bonds aggregating $119.5 million which are due from 1998 to 2022 and
bear interest from 5.75% to 9.375% per annum.
48
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future Maturities of Long-term Debt
Scheduled maturities of long-term debt, including capital leases and sinking
fund payments, at October 1, 1997 are as follows (in millions):
<TABLE>
<S> <C>
1998............................................ $ 27.3
1999............................................ 40.1
2000............................................ 43.5
2001............................................ 55.7
2002............................................ 73.4
Thereafter...................................... 527.1
------
$767.1
======
</TABLE>
Letter of Credit Facility
The Company has issued letters of credit in an aggregate principal amount of
$170.5 million and $150.8 million at October 2, 1996 and October 1, 1997,
respectively, in support of its ongoing obligations under nine separate tax-
exempt bond financings and certain leases assumed in the Acquisition.
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 are 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, accounts receivable and accounts payable approximate fair
value due to the short-term nature of these instruments. Accordingly, these
items have been excluded from the table below:
<TABLE>
<CAPTION>
OCTOBER 2, 1996 OCTOBER 1, 1997
--------------- ---------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
BALANCE SHEET FINANCIAL INSTRUMENTS (IN
MILLIONS):
Term Loans, Tranche A and B............... $453.7 $453.7 $271.3 $271.3
Notes..................................... 375.0 405.0 375.0 422.1
Revenue bonds and capital leases.......... 120.2 119.2 120.8 126.6
Interest rate caps and swaps.............. 0.9 (2.1) 0.0 (1.1)
</TABLE>
The fair values of the Notes, revenue bonds and capital leases were
estimated by the Company based upon quotations from 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 letters of
credit under both the Revolving Credit Facility and the Letter of Credit
Facility, interest rate caps and swaps, and the A/R Facility. At October 2,
1996, the total carrying amount of the premium associated with the interest
rate caps was $0.9 million. At October 1, 1997, the premium carrying amount
had been fully amortized. Unrealized losses related to the interest rate caps
and swaps approximated $3.0 million and $1.1 million, at these two dates,
respectively. At October 2, 1996 and October 1, 1997, the total carrying
amounts of accounts receivable reflect $90.0 million and $93.2 million,
respectively, of reductions related to the A/R Facility. There are no
unrealized losses on the A/R Facility at October 2, 1996 and October 1, 1997.
49
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of interest rate swaps and caps is the estimated amount that
the Company would pay or receive to terminate the swap agreement at the
balance sheet date, taking into account current interest rates and the current
credit worthiness of the swap counterparties. The fair value of the Revolving
Credit Facility 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 6). 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
On July 29, 1997, the Company entered into a sale/leaseback arrangement
involving the sale of one of the paper machines at its Somerset mill for
$150.4 million. In connection with the transaction, the Company entered into a
15 year agreement 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 is being accounted for as an
operating lease. The gain on the transaction of approximately $17.4 million
was deferred and is being 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 extraordinary loss on the
prepayment was not significant. In addition, Warren obtained consent from the
lenders under the Credit Agreement for the payment of dividends to Holdings
from the proceeds of such sale/leaseback for the purpose of redeeming the
Holdings Preferred Stock, subject to certain conditions and limitations.
The Company also leases office and warehouse space and various office and
other 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 $2.4 million, $3.5 million, and $4.7
million for the nine months ended September 27, 1995, fiscal year 1996, and
fiscal year 1997, 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 in both the nine months ended September 27,
1995 and fiscal year 1996, and $7.5 million for fiscal year 1997.
The future minimum obligations under leases (including the Somerset paper
machine lease) and other commitments as of October 1, 1997 are as follows (in
millions):
<TABLE>
<CAPTION>
OPERATING OTHER
YEAR ENDING SEPTEMBER LEASES COMMITMENTS
--------------------- --------- -----------
<S> <C> <C>
1998................................................... $ 20.4 $ 7.8
1999................................................... 18.7 7.3
2000................................................... 18.0 7.4
2001................................................... 16.7 8.8
2002................................................... 15.4 12.1
Thereafter............................................. 162.6 50.3
------ -----
$251.8 $93.7
====== =====
</TABLE>
50
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 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 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 hearing the lawsuit 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 implement and enforce its
industrial pre-treatment operations associated with its operation of the
wastewater facility. The Company is uncertain as to the effects, if any, of
this action on its current dispute with the County which has raised the
industrial users' contractual rights as an issue in the EPA lawsuit. Recently
the group of industrial users and the municipalities filed motions to
intervene in the lawsuit. 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 before the end of calendar year 1997, with
compliance with the rules required beginning in 2000. The Company believes
that environmental compliance expenditures, the bulk of which are for the
cluster rules compliance, will require aggregate capital expenditures of
approximately $70.0 million to $112.0 million through 2000, of which $20.0
million has already been incurred. The ultimate financial impact to the
Company of compliance with the cluster rules will depend upon the cost and
availability of new technology.
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 $13.0
million, of which approximately $4.0 million will be spent prior to the year
2000 with the remainder being spent subsequent to 2004.
51
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Muskegon mill has had discussions with the Michigan Department of
Environmental Quality ("DEQ") regarding a wastewater surge pond adjacent to
the Muskegon Lake. The DEQ presently is considering whether the surge pond is
in compliance with Michigan Act 451 (Part 31 of the Natural Resources and
Environmental Protection Act) regarding potential discharges from that pond.
The matter is now subject to the results of a pending engineering
investigation. There is a possibility that, as a result of DEQ requirements,
the surge pond may be closed in the future. The Company estimates the cost of
closure will be approximately $2.0 million. In addition, if it is necessary to
replace the functional capacity of the surge pond with above-grade structures,
the Company preliminarily estimates that up to an additional $8.0 million may
be required for such construction costs.
Warren has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensations 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, 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 the Acquisition, including all damages and costs related to
these seven sites. Since the date of the Acquisition, Scott, and subsequently
Kimberly-Clark, has been performing under the terms of this environmental
indemnity and defense provision and, therefore, the Company has not expended
any funds with respect to these seven sites.
The Company currently has a demolition project in progress at its Westbrook
facility for health and safety reasons which is expected to be completed in
the year 2001. Total costs of the project are estimated to be approximately
$10.0 million, of which approximately $5.8 million had been spent as of
October 1, 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, is expected to have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
NOTE 15--COMMITMENTS AND CONTINGENCIES
In connection with the Acquisition, Warren entered into long-term (25 years
initially, subject to mill closures and certain force majeure events)
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 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. Warren has entered into a long-term agreement to
purchase electric power and steam for the Mobile mill at rates generally
comparable to market tariffs, including fuel cost and capital recovery
components. During the nine months ended September 27, 1995, fiscal year 1996
and fiscal year 1997, the Company purchased pulp and utilities under these
agreements aggregating $127.3 million, $148.0 million and $108.0 million,
respectively.
The Company's power requirements at its Somerset mill are currently
satisfied through a power purchase agreement whereby the mill cogenerates
electricity and sells the output to CMP at market rates. The CMP
52
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
agreement relating to the Somerset mill also provides that the mill purchase
electricity from CMP at the standard industrial tariff rate. The Somerset
Agreement expires in the year 2012. Warren's long-term agreement with CMP
relating to the Westbrook mill expired on October 31, 1997, and has been
replaced by a short-term agreement with CMP in which the mill cogenerates
electricity and sells the excess output not used by the mill to CMP at market
rates. The short-term agreement for the Westbrook mill expires on April 30,
1998 and may be renewed monthly through October 1998. As of the date of the
Acquisition of the Company, the Company established a deferred asset of
approximately $32.3 million to reflect the fair value of the Somerset and now
expired Westbrook agreements. For the nine months ended September 27, 1995,
fiscal year 1996 and fiscal year 1997, amortization expense related to this
asset approximated $10.8 million, $12.0 million, and $9.5 million,
respectively. As of October 1, 1997, the asset was fully amortized.
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 have established new forestry standards
stricter than current law, but which would not have completely banned
clearcutting, received a plurality vote. This competing measure was
resubmitted to the voters under Maine law on November 4, 1997 and was
defeated. The consequences of the vote to the Company are not expected to be
material, because such proposed measure generally reflected sustainable
forestry initiatives already voluntarily adopted by the Company.
The Company is also involved in various other lawsuits and administrative
proceedings. The relief sought in such lawsuits and proceedings includes
injunctions, damages and penalties. Although the final results in these suits
and proceedings cannot be predicted with certainty, it is the present opinion
of the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's consolidated financial position, results of
operations or cash flows.
NOTE 16--RETIREMENT BENEFITS
Pension Plans
The Company has four defined-benefit, trusteed pension plans that provide
retirement benefits for substantially all employees. Benefits provided are
primarily based on employees' years of service and compensation. The Company's
funding policy complies with the requirements of Federal law and regulations.
Plan assets consist of equity securities, bonds and short-term investments.
The current portion of the net pension liability, detailed below, was $3.0
million and $9.8 million at October 2, 1996 and October 1, 1997, respectively.
The funded status of the pension plans is shown below (in millions):
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested............................................. $ 82.4 $102.9
Nonvested.......................................... 16.5 20.1
------ ------
Accumulated benefit obligation..................... 98.9 123.0
Additional obligation for future salary increases.... 21.0 34.6
------ ------
Projected benefit obligation......................... 119.9 157.6
Plan assets at fair value............................ 116.2 147.5
------ ------
Projected benefit obligation in excess of plan assets
.................................................... (3.7) (10.1)
Unrecognized components.............................. (27.7) (19.3)
------ ------
Accrued pension cost................................. (31.4) (29.4)
Contributions........................................ 7.1 3.5
------ ------
Net pension liability................................ $(24.3) $(25.9)
====== ======
</TABLE>
53
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net pension cost for the plans includes the following components (in
millions):
<TABLE>
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Service cost-benefits
earned during the
period................. $ 4.5 $ 6.3 $ 6.0
Interest cost on
projected benefit
obligation............. 6.9 9.8 10.5
Actual return on plan
assets................. (10.4) (14.1) (13.4)
Net deferral............ 4.2 4.9 2.0
------ ------ ------
Net pension cost........ $ 5.2 $ 6.9 $ 5.1
====== ====== ======
</TABLE>
The projected benefit obligation at October 2, 1996 and October 1, 1997 was
determined using assumed discount rates of 8.25% and 7.75%, respectively, and
assumed long-term rates of compensation increases of 4.75% and 4.5%,
respectively. The assumed rate of return on plan assets (on an annualized
basis) was 9.0% for both fiscal years 1996 and 1997.
Savings Plans
Warren currently sponsors two 401(k) deferred contribution plans covering
substantially all Warren employees pursuant to which Warren is obligated to
match employee contributions, up to specified amounts. Warren contributions to
these plans totaled $3.8 million, $5.3 million and $5.5 million for the nine
months ended September 27, 1995, fiscal year 1996 and fiscal year 1997,
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 and $0.2 million at October 2,
1996 and October 1, 1997, respectively.
The following schedule provides the plan's funded status and obligations (in
millions):
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Accumulated postretirement
benefit obligation
(APBO):
Retirees................ $ 0.6 $ 3.4
Active participants..... 30.6 30.8
------- ------
Total APBO.............. 31.2 34.2
Plan assets at fair
value.................... -- --
------- ------
APBO in excess of plan
assets .................. (31.2) (34.2)
Unrecognized prior service
cost..................... -- (0.9)
Unrecognized net actuarial
gain..................... (1.1) (1.8)
------- ------
Net postretirement
liability................ $ (32.3) $(36.9)
======= ======
</TABLE>
54
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Components of the net periodic postretirement benefit expense are as follows
(in millions):
<TABLE>
<CAPTION>
YEAR YEAR
NINE MONTHS ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Service cost............ $ 2.0 $ 2.6 $ 2.5
Interest cost on APBO... 1.6 2.3 2.4
----- ----- -----
Net postretirement
benefit cost........... $ 3.6 $ 4.9 $ 4.9
===== ===== =====
</TABLE>
The discount rates used to estimate the accumulated benefit obligations as
of October 2, 1996 and October 1, 1997 were 8.25% and 7.75%, respectively. The
initial health care cost trend rates used to value the APBO were 9.0%, 9.0%
and 6.75% at September 27, 1995, October 2, 1996 and October 1, 1997,
respectively, decreasing gradually to an ultimate rate of 5.0%, 5.25%, and
4.75% 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
8.4% at October 1, 1997 and would increase the sum of the benefits earned and
interest cost components of net postretirement benefit cost for 1997 by
approximately 10.8%.
NOTE 18--OTHER LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Accrued workers' compensation......................... $29.7 $ 29.6
Accrued pension and other postretirement benefits..... 53.5 52.8
Deferred gain on sale/leaseback....................... -- 15.9
Other accrued liabilities............................. 15.0 15.3
----- ------
$98.2 $113.6
===== ======
</TABLE>
NOTE 19--WARREN SERIES B REDEEMABLE EXCHANGEABLE PREFERRED STOCK
Warren has authorized 10.0 million shares of Series B redeemable
exchangeable preferred stock (the "Warren Series B Preferred Stock"), of which
3.0 million shares were previously issued and exchanged for currently
outstanding shares. The Warren Series B Preferred Stock has a liquidation
preference of $25.00 per share (aggregate liquidation preference is $75.0
million, plus accumulated dividends). The Warren Series B Preferred Stock is
recorded net of issuance costs and excludes approximately $6.9 million related
to Class A warrants of Holdings issued in connection with such 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.
55
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Warren Series B Preferred Stock upon which
dividends must be paid. 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"). In
addition, the terms of the Credit Agreement and the Indenture relating to the
Notes limit the amount of cash dividends the Company may pay with respect to
the Warren Series B Preferred Stock both before and after that date.
Cumulative dividends on Warren Series B Preferred Stock that have not been
paid at October 2, 1996 and October 1, 1997 are $21.2 million and $35.6
million, respectively, and are included in the carrying amount of the Warren
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 Warren Series B Preferred Stock...................... 8.5
------
Balance, September 27, 1995........................................ 74.5
Accretion to redemption value..................................... 0.8
Dividends on Warren Series B Preferred Stock...................... 12.7
------
Balance, October 2, 1996........................................... 88.0
Accretion to redemption value..................................... 0.8
Dividends on Warren Series B Preferred Stock...................... 14.4
------
Balance, October 1, 1997........................................... $103.2
======
</TABLE>
Redemption
The Warren 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 redemption
prices (expressed as a percentage of the Specified Amount) set forth below
plus all accrued and unpaid liquidated damages and dividends (excluding any
Accumulated Dividends), if any, if redeemed during the year ended 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 Warren
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 Warren 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),
if any, through the redemption date; provided that at least $50.0 million in
aggregate Specified Amount of Warren Series B Preferred Stock remains
outstanding immediately following such redemption.
Warren is required to redeem the Warren Series B Preferred Stock on December
15, 2006 at the Specified Amount plus all accrued and unpaid damages and
dividends (excluding any Accumulated Dividends).
At any scheduled dividend payment date, Warren may, at its option and
subject to the approval of the lenders under the Credit Agreement, exchange
all of the shares of the Warren Series B Preferred Stock then outstanding for
Warren's 14% Series B Subordinated Exchange Debentures due 2006.
56
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the event of a Change of Control, as defined, the holders of Warren
Series B Preferred Stock will have the right to require Warren to repurchase
such Warren 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).
Holders of the Warren 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.
Proposed Redemption
Warren has successfully solicited the consent (the "Consent") of the holders
(the "Note Holders") of the Notes to the approval of a waiver under which the
Note Holders have (a) consented to the payment of a dividend (the "Dividend")
to Holdings for the purpose of redeeming (the "Redemption") all of the
Holdings 15% Senior Exchangeable Preferred Stock ("Holdings Preferred Stock")
and (b) agreed that the consummation of each of such Dividend and such
Redemption does not violate the restricted payment covenant of the Indenture
governing the Notes. The approved Consent permits Warren to pay the Dividend
for the purpose of effecting the Redemption of all of the Holdings Preferred
Stock. At October 1, 1997, the redemption value of the Holdings Preferred
Stock was $56.9 million.
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 Warren Series B
Preferred Stock, the Company may make cash payments to Holdings, including,
among other things, (i) amounts under a tax sharing agreement to be entered
into between the Company and Holdings necessary to enable Holdings to pay the
Company's taxes and (ii) administrative fees to Holdings and amounts to cover
various specified costs and expenses of Holdings. The associated
administrative fee expensed during the nine months ended September 27, 1995,
fiscal year 1996 and fiscal year 1997 was approximately $0.8 million, $1.0
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. These agreements, which may be terminated by either party with six
months written notice, are based upon cost reimbursement plus a profit markup
of 10%. For the nine months ended September 27, 1995, fiscal year 1996, and
fiscal year 1997, Warren incurred such a management fee of approximately $0.8
million, $1.0 million, and $1.0 million, respectively.
Warren has also entered into a cross licensing agreement with Sappi
Deutschland, the worldwide holding company for all European and U.S. business
operations of the Sappi group, and Hannover Papier AG ("Hannover"), a
subsidiary of Sappi. Pursuant to this agreement, 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 1, 1997.
57
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Warren ships products to certain Sappi subsidiaries (Sappi Europe, SA,
Specialty Pulp Services and U.S. Paper). These subsidiaries then sell Warren's
products to external customers at market prices and remit the proceeds from
such sales to Warren, net of a sales commission. Warren shipped $19.2 million,
$102.8 million and $126.2 million of products to Sappi subsidiaries and
expensed fees of approximately $1.1 million, $7.2 million and $8.7 million
relating to these sales for the nine months ended September 27, 1995, fiscal
1996 and fiscal 1997, respectively. Trade accounts receivable at October 2,
1996 and October 1, 1997 included approximately $37.1 million and $24.5
million, respectively, due from subsidiaries of Sappi. Amounts as of October
2, 1996 and October 1, 1997 are included in the pool of receivables
securitized under the A/R Facility (Note 6). The Company has formalized
certain of these agreements and is in the process of formalizing the
remainder.
Warren also imports products from certain Sappi affiliates (Sappi UK, Ltd.
and Hannover Papier) for sale to Warren's domestic customers. Warren sells
these products at market prices and remits the proceeds, net of sales
commissions, to the Sappi affiliates. Warren imported approximately $10.6
million and $21.9 million of products from certain Sappi affiliates, and
earned commissions of $0.2 million and $1.4 million for fiscal years 1996 and
1997, respectively.
58
<PAGE>
SCHEDULE II
S.D. WARREN COMPANY AND SUBSIDIARIES
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:
Year ended October 1, 1997....... $5.3 $ 1.3 $ 1.6 $5.0
Year ended October 2, 1996....... 5.6 -- 0.3 5.3
Nine months ended September 27,
1995............................ 5.4 0.2 -- 5.6
</TABLE>
59
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
S.D. Warren Company
/s/ Monte R. Haymon
By: _________________________________
MONTE R. HAYMON PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: November 10, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
/s/ Monte R. Haymon President, Chief November 10,
- ------------------------------------- Executive Officer 1997
MONTE R. HAYMON and Director
(Principal
Executive Officer)
/s/ Trevor L. Larkan Chief Financial November 10,
- ------------------------------------- Officer, Vice 1997
TREVOR L. LARKAN President,
Treasurer,
Assistant Secretary
and Director
(Principal
Financial and
Accounting Officer)
/s/ E. Dannis Herring Vice President and November 10,
- ------------------------------------- Director 1997
E. DANNIS HERRING
/s/ O. Harley Wood Vice President and November 10,
- ------------------------------------- Director 1997
O. HARLEY WOOD
/s/ James Frick Director November 10,
- ------------------------------------- 1997
JAMES FRICK
/s/ Eugene Van As Director November 10,
- ------------------------------------- 1997
EUGENE VAN AS
/s/ William E. Hewitt Director November 10,
- ------------------------------------- 1997
WILLIAM E. HEWITT
/s/ Andries J.G. Vlok Director November 10,
- ------------------------------------- 1997
ANDRIES J.G. VLOK
60
<PAGE>
Exhibit 10.34
WERKSMANS
---------
ATTORNEYS
THE SAPPI LIMITED SHARE INCENTIVE SCHEME
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1 INTERPRETATION 1
PART 1 -THE TRUST 7
2 CONSTITUTION OF TRUST AND TRUSTEES 7
3 POWERS OF TRUSTEES 8
4 SECURITY 9
5 REMUNERATION OF TRUSTEES 9
6 DUTIES OF TRUSTEES 10
7 INDEMNITY AND LEGAL PROCEEDINGS 10
8 PURCHASE OF OR SUBSCRIPTION FOR SHARES 11
9 FUNDING OF THE TRUST 12
PART 2 - THE CREDIT SALE SCHEME 13
10 ACQUISITION OF SCHEME SHARES 13
11 PAYMENT FOR SCHEME SHARES AND INTEREST 14
12 TRANSFER, LISTING AND PLEDGE OF SHARES 17
13 DIVIDENDS 19
PART 3 - THE SHARE OPTION SCHEME 20
14 ACQUISITION OF SHARE OPTIONS 20
15 SHARE OPTIONS 20
16 EXERCISE OF SHARE OPTIONS 21
17 ALLOTMENT 22
PART 4 - GENERAL PROVISIONS RELATING TO THE CREDIT SALE
SCHEME AND THE SHARE OPTION SCHEME 22
18 TERMINATION OF EMPLOYMENT 22
19 RIGHTS AND CAPITALIZATION ISSUES, CONSOLIDATIONS,
SUB-DIVISIONS, REORGANISATION AND TAKEOVER AND
SCRIP DIVIDENDS 26
</TABLE>
<PAGE>
<TABLE>
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PART 5 - THE COMBINED OPTION/DEFERRED SALE SCHEME 31
20 THE SCHEME 31
PART 6 - SWITCHING MECHANISMS 37
21 SHARE OPTIONS - CREDIT SALE 37
22 CREDIT SALE - SHARE OPTIONS 38
23 CREDIT SALE - COMBINED OPTION/DEFERRED SALE 39
24 SHARE OPTION - COMBINED OPTION/DEFERRED SALE 41
25 COMBINED OPTION/DEFERRED SALE - CREDIT SALE OR
SHARE OPTIONS 42
PART 7 - GENERAL 45
26 ASSIGNMENT OF RIGHTS OR OBLIGATIONS 45
27 TRANSFERS FROM THE EXISTING SCHEME 46
28 CERTIFICATES 47
29 AGREEMENT BINDING ON PARTICIPANTS 47
30 AMENDMENT 47
31 DISPUTES 48
32 ANNUAL FINANCIAL STATEMENTS 51
33 PROFITS AND LOSSES 51
34 TERMINATION 52
</TABLE>
<PAGE>
THE SAPPI LIMITED SHARE INCENTIVE SCHEME
The purpose of the scheme is to provide employees of the group with the
opportunity to acquire an interest in the equity of the company, thereby
providing such employees with a further incentive to advance the group's
interests and promoting an identity of interests between such employees and the
shareholders of the company.
1 INTERPRETATION
1.1 In this deed, unless the context clearly indicates a contrary
intention, the following words and expressions shall bear the
following meanings and cognate words and expressions shall bear
corresponding meanings -
1.1.1 "acceptance date" - the date of acceptance by a participant of an
offer for the acquisition of scheme shares, share options or
rights and options in terms of 10, 14 or 20, as the case may be;
1.1.2 "allocation price " - the price per share payable by a participant
for allocation shares, which price shall be the closing price at
which shares are traded on the JSE on the trading day immediately
preceding the date upon which the board will have resolved to
offer to grant, or direct the trustees to offer to grant, the
relevant right and option to that participant; provided that such
price shall, if the date on which it is to be determined falls
between the date on which the company declared an interim or final
dividend on such shares and the last day for registration by
shareholders to participate in such dividend, be reduced by the
amount of such dividend;
1.1.3 "allocation shares" - shares acquired by a participant pursuant to
the exercise of a right and option in terms of 20;
1.1.4 "Act the Companies Act 1 973, as amended;
<PAGE>
1.1.5 "board " - the board of directors of the company acting either
itself or through any committee constituted from time to time and
appointed by it for the purpose of administering this scheme;
1.1.6 "company" - Sappi Limited (Registration number 05/08963/06);
1.1.7 "early retirement" - retirement at or after the age of fifty-five
years but prior to normal retirement age referred to in 1.1 .19;
1.1.8 "eligible applicant" - a person eligible for participation in
this scheme, namely an officer or other employee of any company
or other entity or association of persons forming part of the
group, which person shall be determined from time to time by the
board in its discretion;
1.1.9 "existing scheme" - the Sappi Limited Share Purchase Scheme
adopted at a general meeting of the company on 26 June 19791;
1.1.10 "family company" - any company or close corporation, the entire
issued share capital or member's interests of which is held and
beneficially owned by all or any of an eligible applicant or
participant, his lawful spouse, his lawful issue (including
adopted children) and/or his family trust;
1.1.11 "family trust" - a trust constituted solely for the benefit of
all or any of an eligible applicant or a participant, his lawful
---
spouse and/or his lawful issue (including adopted children);
1.1.12 "group" - the company, the company's subsidiaries for the time
being and any company, partnership, trust or other entity or
association of persons which is controlled or jointly controlled
by the company, whether directly or indirectly, for which purpose
the word 'controlled' includes the right to direct or otherwise
control the votes attaching to the majority (or one-half in the
case of joint control) of the voting shares or other voting
instruments or voting rights in that company, partnership, trust
or other entity or association of persons;
<PAGE>
1.1.13 "JSE Johannesburg Stock Exchange;
1.1.14 "maximum period"- the period from the acceptance date to the
tenth anniversary date thereof;
1.1.15 "option period"- the period from the acceptance date to the date
Of completion of ten subsequent years continuous service in the
group;
1.1.16 "option price " - the price per share payable by a participant
upon the exercise of a share option in respect thereof, which
price shall be the closing price at which shares are traded on
the JSE on the trading day immediately preceding the date upon
which the board will have resolved to offer to grant, or direct
the trustees to offer to grant, the relevant option to that
participant; provided that such price shall, if the date on which
it is to be determined falls between the date on which the
company declared an interim or final dividend on such shares and
the last day for registration by shareholders to participate in
such dividend, be reduced by the amount of such dividend;
1.1.17 "option shares" - in respect of which options have been granted
in terms of 14, for as long as such options have not been
exercised and have not lapsed;
1.1.18 "participant" - an eligible applicant (or his nominated family
trust or family company) who has accepted an offer to acquire
share options, scheme shares or rights and options in terms of
10, 14 or 20 (as the case may be) including his heirs, executors
or administrators"
1.1.19 "retirement" - retirement at normal retirement age (and not at
early retirement age, whether or not such early retirement is
voluntary) in accordance with any pension or similar scheme of
the company or other entity in the group from time to time in
force of which the participant in question is a member or
participant, it being recorded that such normal retirement age is
currently either sixty or sixty-three years;
<PAGE>
1.1.20 "right and option" - the right and option granted to a
participant in terms of 20 to enter into an agreement with the
company or the trust to acquire allocation shares;
1.1.21 "scheme" - the scheme to enable employees of the group to
acquire and/or fund the acquisition of shares, the terms of
which are embodied in this document;
1.1.22 "scheme capitalization shares" - shares or other securities in
the company allotted and issued to a Participant by way of a
Capitalization of profits, share premium or reserves in respect
of his holding of scheme shares;
1.1.23 "scheme rights shares" - shares or other securities subscribed
for in terms or as a consequence of a rights issue and acquired
by or on behalf of a participant in terms of 19.2;
1.1.24 "scheme shares" - shares acquired by a participant in terms of
10, including -
1.1.24.1 shares acquired by a participant who held share options
and who accepted an offer by the trustees to subscribe
for or purchase on his behalf the shares represented by
such options in terms of 21;
1.1.24.2 scheme capitalization shares;
1.1.24.3 scheme rights shares; and
1.1.24.4 shares or other securities in the company or in any other
company allotted, issued or transferred by way of
exchange for scheme shares pursuant to any conversion or
redemption of shares in accordance with the company's
articles of association and/or pursuant to any takeover
of the company or any scheme of arrangement or other
proposal having as its object the passing of control or
the reconstruction of the capital of the company and/or
pursuant to a reduction of capital or deregistration of
<PAGE>
the company, for so long as those shares or other
securities remain the subject to the pledge referred to
in 12;
1.1.25 "shares" - ordinary shares of a nominal value of Rl each in the
capital of the company;
1.1.26 "share debt"- the amount for the time being owing by a
participant to the trust in respect of scheme shares, which
amount may be increased from time to time in regard to any
participant in accordance with the directions of the board, in
its discretion, by such amount/s which may become payable by the
participant in question -
1.1.26.1 in respect of any interest liability incurred from time
to time by a participant on any amount owing to the trust
in terms of this scheme; and/or
1.1.26.2 pursuant to any provision of the Income Tax Act 1962 as
amended (or any amendment or substitution thereof)
arising out of or pursuant to his participation in the
scheme;
1.1.27 "share option" - the right and option granted to a participant
in terms of 1 4 to acquire option shares;
1.1.28 "share price" - the price per share payable by a participant for
scheme shares, which price shall be the closing price at which
shares are traded on the JSE on the trading day immediately
preceding the date upon which the board will have resolved to
direct the trustees to offer the relevant scheme shares to that
participant; provided that such price shall, if the date on
which it is to be determined falls between the date on which the
company declared an interim or final dividend on such shares and
the last day for registration by shareholders to participate in
such dividend, be reduced by the amount of such dividend;
<PAGE>
1.1.29 "trust" - The Sappi Limited Share Incentive Trust constituted in
terms of 2.1;
l.1.30 "trustees" - the trustees of the trust for the time being, the
first trustees being the persons referred to in 2.3
1.2 In this deed -
1.2.1 clause headings are used for convenience only and shall be
ignored in its interpretation;
1.2.2 unless the context clearly indicates a contrary intention, an
expression which denotes -
1.2.2.1 any one gender includes the other genders;
1.2.2.2 a natural person includes an artificial person (whether
corporate or unincorporated and vice versa;
1.2.2.3 the singular includes the plural and vice versa;
1.2.3 unless the context clearly indicates a contrary intention, words
and expressions defined in the Act shall bear the meanings
therein assigned to them.
1.3 If any provision in 1.1 is a substantive provision conferring any
right or imposing any obligation on anyone, effect shall be given to
it as if it were a substantive provision in the body of this deed,
1.4 When any number of days is prescribed in this deed, same shall be
reckoned exclusively of the first and inclusively of the last day
unless the last day falls on a Saturday, Sunday or official public
holiday, in which case the last day shall be the next succeeding day
which is not a Saturday, Sunday or official public holiday.
<PAGE>
PART 1-THE TRUST
2. CONSTITUTION OF TRUST AND TRUSTEES
2.1 There is hereby constituted a trust for the benefit of participants,
to be known as the 'The Sappi Limited Share Incentive Trust, upon the
terms and conditions of this deed.
2.2 There shall at all times be a minimum of two trustees in office,
2.3 David Charles Brink and Thomas Louw De Beer are appointed to be, and
by their signatures hereto accept appointment as, the first trustees
of the trust.
2.4 If any trustee shall cease to hold office for any reason, the board
shall appoint a person who is willing to act as trustee in his place.
2.5 The board shall have the right to appoint any person qualified for
appointment as a trustee as an additional trustee or as an alternate
trustee and shall, if it appoints any person as an alternate trustee,
designate the trustee to whom he shall act as alternate. An alternate
trustee shall be entitled to act as trustee in the place of and
during any temporary absence or incapacity of his principal.
2.6 No trustee or alternate trustee shall be entitled to participate
under this scheme for as long as he holds office as a trustee or as
an alternate trustee.
2.7 A trustee or alternate trustee shall cease to hold office as
such if he -
2.7.1 is removed by resolution of the board; or
2.7.2 resigns upon giving the company and his co-trustees not less
than one calendar month's written notice to that effect; or
<PAGE>
2.7.3 becomes disqualified from holding an appointment as a director
of a company.
2.8 All decisions of the trustees shall be taken by a simple majority
vote.
2.9 A quorum for any meeting of trustees shall be two trustees.
3 POWERS OF TRUSTEES
The trustees shall have plenary powers to enable them to carry out and
give effect to the intent, purposes and provisions of this scheme,
including the powers set out in Schedule 2 of the Act and such powers as
may from time to time be expressly conferred on them by the board.
Without derogating from the generality of the aforegoing, the trustees
shall have the power, inter alia, to -
3.1 borrow moneys, with or without security, either from the group in
terms of 9 or from third parties for the purpose of giving effect to
this scheme;
3.2 lend moneys, with or without security, to participants to enable such
participants to acquire shares pursuant to this scheme;
3.3 open and operate banking accounts or other accounts appropriate to
the business of the trust, to draw and issue cheques and to receive
cheques, promissory notes and/or bills of exchange, and to endorse
any of the same for collection by the bank and/or other financial
institution at which the said account was opened;
3.4 invest any surplus moneys of the trust in shares or other securities
of the company or in such other manner as the board may from time to
time approve;
3.5 employ and act on the advice of, and pay out of the funds of the
trust, the reasonable fees and disbursements of the company,
auditors, attorneys, counsel and other professional consultants in
connection with the affairs of the trust;
<PAGE>
<TABLE>
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3.6 delegate any of their powers and functions to any one or more of their
number,
3.7 subject to 8,2 and 8.3, repurchase and resell scheme shares and
allocation shares; and
3.8 exercise such further rights, powers and authorities as may from time
to time be conferred upon them under this scheme or by resolution of
the board.
4 SECURITY
No trustee, alternate trustee or successor trustee shall be required to
furnish any security of any nature to the Master of the Supreme Court or
to any other official or officer, nor shall any security be required for
the due performance of any duty under the Trust Property Control Act 1988
or under any other statutory provision of the Republic of South Africa or
elsewhere.
5 REMUNERATION OF TRUSTEES
5.1 The trustees and alternate trustees shall be entitled to -
5.1.1 such remuneration (if any) as may from time to time be agreed
between them and the board, and
5.1.2 reimbursement from the trust of all expenses properly incurred by
them in and about the execution of their duties as trustees.
Such remuneration and expenditure shall be borne and paid by the
company if the trust is unable to pay these amounts from its own
resources.
5.2 The holding of office of a trustee or alternate trustee shall not
preclude him or any firm or company of which he is a member from
rendering and recovering reasonable remuneration for professional
services on behalf of the trust.
</TABLE>
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<TABLE>
<S> <C>
6 DUTIES OF TRUSTEES
The duties of the trustees in relation to the trust shall be those
prescribed by this deed. in this regard, the day to day administration of
the business of the trust may be delegated to any person, including any
officer of the company, who shall perform all his duties in accordance
with the instructions of the trustees. The duties of the trustees shall
include, without limitation, the duty to -
6.1 subscribe for or purchase shares in accordance with the provisions of
this deed;
6.2 offer eligible applicants the opportunity to acquire shares purchased
or subscribed for by the trustees in terms of 8.1 or options in
respect thereof,-
6.3 invest the funds of the trust in such form as is permitted by the
provisions of this deed;
6.4 administer the scheme in order to achieve and maintain its
objectives;
6.5 cause proper records and books of account to be kept of the affairs
of the trust and their administration thereof and to cause financial
statements to be prepared to accord with the financial year end of
the company or such other date as may be determined by the board; and
6.6 carry out such other duties as may, consistent with their off ices as
trustees, be delegated to them from time to time by resolution of the
board.
7 INDEMNITY AND LEGAL PROCEEDINGS
7.1 None of the trustees, alternate trustees, successor trustees or
officers of the trust shall be liable for, and the company
indemnities each of them against, any loss sustained by the trust or
by any participant out of whatever cause arising, save and except
loss sustained as a result of the gross negligence, willful
misconduct
</TABLE>
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<TABLE>
<S> <C>
or dishonesty of the trustee, alternate trustee, successor trustee or
officer in question.
7.2 Legal proceedings instituted by or against the trust may be
instituted in its name.
8 PURCHASE OF OR SUBSCRIPTION FOR SHARES
8.1 Subject to the provisions of the Act, the trustees shall, for the
purposes of the scheme, from time to time -
8.1.1 purchase or subscribe; or
8.1.2 be given options to purchase or subscribe; or
8.1.3 be given rights and options to purchase or subscribe,
for such numbers of shares at such prices as may be agreed upon by
the trustees and the board from time to time.
8.2 Subject to 8.4, without the prior authority of the company in general
meeting and the approval of the JSE, the aggregate number of shares
which may be acquired under or pursuant to this scheme shall be a
multiple of 100 riot exceeding 10 000 000 shares,, provided that the
said number shall be increased or reduced in direct proportion to the
increase or reduction in the number of ordinary shares in the
company's issued share capital arising from any conversion,
redemption, consolidation, sub-division, issue for cash, vendor
placing, rights or capitalisation issue of shares in the capital of
the company.
8.3 Subject to 8.4, the aggregate number of shares that may be acquired
by any one participant in terms of or pursuant to this scheme shall
not exceed 1,000,000 shares; provided that the said number shall be
increased or reduced in direct proportion to the increase or
reduction of ordinary shares in the company's
</TABLE>
<PAGE>
<TABLE>
<S> <C>
issued share capital arising from any conversion, redemption,
consolidation, sub-division, issue for cash, vendor placing, rights
or capitalisation issue of shares in the capital of the company.
8.4 In the determination of the number of scheme shares, option shares or
allocation shares which may be acquired by participants in terms of
8.2 or 8.3, the board shall be entitled to direct the trustees to
refrain from taking into account shares which have been or are
capable of being released to a participant in terms of this scheme-,
provided that the board shall only be entitled to give such direction
in respect of -shares, the acceptance date in respect of which was
more than ten years prior to the date of such direction.
9. FUNDING OF THE TRUST
The purchase or subscription price of shares acquired by the trust in
terms of 8 or otherwise under this scheme, the costs incurred in the
acquisition thereof, any administration or other expenses or
administration fees properly incurred by or on behalf of the trustees
in the performance of their duties in terms of or to give effect to
the scheme, the amounts referred to in 11 .1 , any duties payable
upon the issue or transfer of shares to participants and any moneys
required to affect loans under this deed or repayment of any previous
borrowings by the trustees shall be funded, as the board from time to
time may direct, out of -
9.1 the trust's own resources, if any; and/or
9.2 loans to be made to the trust by companies forming part of the
group in accordance with section 38(2)(b) of the Act; and/or
9.3 loans by third par-ties to the trust to be procured by the
company upon such terms as the company is able to arrange; and/or
</TABLE>
<PAGE>
<TABLE>
<S> <C>
9.4 any other resource which is available to the trust from time to
time.
The company undertakes to ensure that the trust shall at all times be
in a position to fund the acquisition of shares under the scheme.
PART 2 - THE CREDIT SALE SCHEME
10 ACQUISITION OF SCHEME SHARES
10.1 The trustees shall, if the board so directs and subject to 10.2,
offer eligible applicants the opportunity to acquire scheme
shares at the share price, which price may be higher or lower
than the price at which the shares in question were or are to be
acquired by the trust.
10.2 An offer made in terms of 10. 1
10.2.1 shall be in writing;
10.2.2 may only be accepted by the eligible applicant to whom it is
addressed (or by his family trust or family company in terms,
of 26);
10.2.3 shall specify the maximum number of shares (being a multiple
of 100) in respect of which the offer may be accepted);
10.2.4 shall be in the form from time to time prescribed by the
trustees;
10.2.5 may be accepted for the whole or such lesser number (being a
multiple of 100) of the number of shares to which the offer
relates, as the eligible applicant may elect.
10.3 Acceptance by an eligible applicant of an offer made to him to
acquire scheme shares shall -
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10.3.1 be communicated to the trustees in writing by not later than
twenty days after the date upon which the offer giving rise
thereto is made;
10.3.2 be accompanied by payment of such amount per share (if any)
as may be stipulated by the board from time to time.
11 PAYMENT FOR SCHEME SHARES AND INTEREST
11.1 Save for the amount per share (if any) referred to in 10.3.2, the
trust shall fund the acquisition of scheme shares by a
participant and, to the extent not covered by any dividends
accruing to the participant and, if the board so directs in its
discretion, any taxation liability of a participant specified in
1.1.26.2.
11.2 Subject to 11.5, any amount paid on the acquisition of scheme
shares, the portion of dividends referred to in 13.1.2 and any
payment made in terms of 11.3 shall be applied rateably toward
payment of the share price of all of the scheme shares which such
participant holds unless the participant allocates in writing, at
the time that he makes such payment, the payment to specific
scheme shares (in multiples of 100 scheme shares). The balance of
the share debt of a participant shall be paid by not later than
the tenth anniversary of the acceptance date.
11.3 Unless the board otherwise resolves at any time in its
discretion, notwithstanding that any scheme shares are paid for
in wh.Qle or in part at any time by the participant concerned, no
scheme shares shall be released from the scheme or from the
pledge under 12 until a period, calculated from the acceptance
date, of -
11.3.1 more than three years shall have elapsed, in which event not
more than 25%;
11.3.2 more than four years shall have elapsed, in which event not
more than 50%, cumulatively;
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11.3.3 more than five years shall have elapsed, in which event not
more than 75%, cumulatively;
11.3.4 more than six years shall have elapsed, in which event all,
of the relevant scheme shares may, if the share debt in respect of
them is fully discharged, be released from pledge under the scheme.
11.4 A participant shall, on application to and on subsequent approval
by the trustees, be entitled to pay the whole of his share debt or any
portion thereof prior to the due date for payment thereof; provided
that --
11.4.1 in the event of such an early payment --
11.4.1.1 the certificates in respect of the relevant scheme shares
shall nevertheless continue to be held by the trust; and
11.4.1.2 the relevant scheme shares shall only be released from the
restrictions imposed by this deed on the dates or the
remaining date and in the proportions stipulated in 11.3;
11.4.2 in the event of the termination of such participant's
employment --
11.4.2.1 the participant's entitlement to scheme shares shall be
determined by reference to the principles set out in 18;
11.4.2.2 any amounts standing to the credit of any loan by the
participant to the trust in terms of 11.5, and not applied in
terms of 1 1.2, shall be refunded to the participant.
11.5 Notwithstanding 11. 2 and 11 .4, any payment made by a participant
which would otherwise have the effect of releasing any scheme
shares from the scheme and the pledge referred to in 1 2 prior to
the due dates for such release under
<PAGE>
11.3 shall, to the extent to which such payment would otherwise result
in such release, be deemed to be an interest free loan by the
participant to the trust until such due dates and no reduction of the
share debt shall result from such payment until those due dates save
to the extent otherwise provided under this scheme or determined by
the board in its discretion.
11.6 The outstanding balance from time to time of a participant's
share debt shall bear interest at such rate (if any) as the board
determines, in its discretion. The board may determine such rate in
its discretion and may alter such rate from time by giving not less
than thirty days' prior written notice of such alteration to
participants; provided that --
11.6.1 such rate of interest shall not exceed the lower of the maximum
annual rate which may lawfully be charged from time to time and
the publicly quoted rate of interest (nominal annual compounded
monthly) at which the company's main commercial bankers in the
Republic of South Africa lend on overdraft to their prime
corporate customers in the private sector at the appropriate time,
reckoned from the due date for payment until the date of actual
payment thereof,
11.6.2 the amount of such interest shall be calculated from a date which
is not less than thirty days after the date of such-determination
or alteration (as the case may be) until the last day of the
company's financial year in which such date falls, and thereafter
annually, and shall be paid on dates coinciding with the dates of
payment by the company of dividends payable on scheme shares for
each such annual period in respect of which such interest is
payable;
11.6.3 any deficit between dividends accruing to any participant on his
scheme shares and the interest payable by him shall, at the
discretion of the board, be accumulated to and form part of the
capital amount of his share debt, and such interest shall be
compounded annually on the last day of each of the company's
financial years.
<PAGE>
11.7 If the full amount of any share debt is not paid on the due date
for payment thereof, the trustees shall request the participant
(or, in the event of the participant's death or sequestration, the
executor, administrator or trustee of his estate) in writing to do
so. If such request is not complied with within twenty- one days
of the date thereof, the sale of all of such participant's scheme
shares for which payment has not been made in full shall be deemed
to have been canceled on the basis that --
-------
11.7.1 subject to 11.7.2, the participant or his estate shall, in
consequence of such cancellation, be refunded the amounts actually
paid by that participant or his estate on account of his scheme
shares;
11.7.2 the trust shall not, by reason of any cancellation in terms of
this 11 .7, be precluded from recovering from the participant or
his estate all costs, damages and losses sustained by the trust as
a result thereof and shall be entitled to retain any amounts
payable to the participant or his estate at the date of such
cancellation and apply them in discharge of such costs, damages
and/or losses.
12 TRANSFER, LISTING AND PLEDGE OF SHARES
12.1 The issue of share certificates pursuant to the issue or sale of
any scheme shares to a participant shall be subject to the
following conditions --
12.1.1 the scheme shares shall be registered in the name of the
participant and the trust shall be obliged to pay any stamp
duty payable on the e allotment and issue or transfer of
scheme shares to him;
12.1.2 the participant shall execute a pledge of his scheme shares
in favour of the trust in such form and upon such terms and
conditions as are determined by the trustees and upon the
terms and conditions contained in 12.2; and
<PAGE>
12.1.3 the trust shall be entitled irrevocably and in rem suam to
----
recover possession, from the company's transfer secretaries,
of the certificates relating to the relevant scheme shares,
including any scheme capitalization shares and scheme rights
shares related thereto, as well as share certificates in
respect of shares in any other company acquired pursuant to
1.1 .24.4.
12.2 The pledge of scheme shares by the participant to the trust shall
be upon the terms that --
12.2.1 such pledge shall include the pledge of any scheme
capitalization shares, scheme rights shares and shares issued
to a participant in lieu of a cash dividend on account of his
scheme shares;
12.2.2 those scheme shares shall serve as security for the due
payment by the participant of his share debt (including his
liability in respect of scheme rights shares);
12.2.3 if a participant's estate is surrendered or sequestrated,
whether provisionally or finally, the provisions of 18.1.1.2
shall apply, mutatis mutandis; provided that --
12.2.3.1 any amounts due to the participant shall be paid by the
trustees to the participant; and
12.2.3.2 the board may, in its discretion, include any other
amounts in the net amount due to a participant under
18.1.1.2, thereby releasing the participant from his
obligation to pay the share debt;
12.2.4 subject to 11.3, 11.4 and 11.5, upon payment in full being
received by the trust for any scheme shares, those scheme
shares shall be released from the operation of that pledge;
<PAGE>
12.2.5 any of the trustees, nominated by them, shall be
irrevocably and in rem suam empowered to execute any
instrument of transfer in respect of scheme shares to
give effect to the implementation by the trust it of the
powers conferred upon it in terms of this 12.2;
12.2.6 the trust shall have the power to pledge any scheme
shares pledged to it in terms of this 12.2 for the
purpose of raising any moneys required for the purchase
of or subscription for shares and/or the discharge of
any loan owed by the trust, whether to the company or
otherwise.
12.3 By not later than sixty days after the date on which payment
in full Is received by the trust for any scheme shares which
are capable of being released to a participant in terms of
11.3 and the aforegoing provisions of this 1 2, the trustees
shall deliver to the relevant participant the certificate in
respect of those scheme shares, registered in the name of the
participant. If such scheme shares are not already listed,
the company shall apply for the listing of those shares on
the JSE and any other stock exchange on which the shares of
the company may be listed by not later than such delivery
date.
13 DIVIDENDS
13.1 Dividends declared in respect of scheme shares shall be
paid --
13.1.1 firstly to the trustees, pro tanto in satisfaction of
interest accrued in terms of 11 .6 in respect of the
participant's share debt--,
13.1.2 secondly, as to any amount determined by the board, in
its discretion, not exceeding the balance of the
participant's share debt for the tim-e being, to the
trust by way of reduction pro tanto of the participant's
share debt; and
13.1.3 as to the balance (if any), to the relevant participant.
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13.2 Simultaneously with his acceptance of an offer for scheme shares,
each participant shall execute a dividend, mandate (which shall
be in a form determined by the trustees) in respect of his scheme
shares authorising the payment of dividends accruing in respect
thereof to the trustees, which mandate shall be canceled in
respect of each tranche of scheme shares referred to in 11.3.1,
11.3.2, 11.3.3 and 11.3.4 respectively when, the f full share debt
in respect thereof will have been paid, whereafter such dividends
shall accrue and be paid to the participant.
13.3 Notwithstanding 13.1 and 13.2, the trustees shall, if the board
so determines in its discretion, pay to any participant selected
by the board, all or any part of any dividend declared in respect
of his scheme shares.
PART 3 - THE SHARE OPTION SCHEME
14 ACQUISITION OF SHARE OPTIONS
14.1 The trustees shall, in respect of share options to be granted in
terms of the scheme, if the board so directs and subject to 14.2,
offer eligible applicants the opportunity to acquire share
options, it being agreed that the option price may be higher or
lower than the price at which the shares which are the subject
matter of the share options in question were or are to be
acquired by the trust.
14.2 An offer in terms of 14.1 shall be made and accepted in
accordance with 10.2 and 10.3, which shall apply, mutatis
mutandis.
15 SHARE OPTIONS
15.1 Each share option shall confer the right on the holder thereof to
subscribe for or purchase one share at the option price.
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15.2 The company shall at all times reserve and keep available, out of
its authorised but unissued share capital, such number of shares
as shall become issuable upon the exercise of all the share
options then outstanding, less the number of shares held by the
trust and set aside by the trustees for the purpose of satisfying
the exercise of any share options.
16 EXERCISE OF SHARE OPTIONS
16.1 Share options may not be exercised until after a period,
calculated from the acceptance date, of -
16.1.1 more than three years shall have elapsed, in which event not
more than 25%;
16.1.2 more than four years shall have elapsed, in which event not
more than 50%, cumulatively;
16.1.3 more than five years shall have elapsed, in which event not
more than 75%, cumulatively;
16.1.4 more than six years shall have elapsed, in which event all,
or any lesser number, being a multiple of 100, of the relevant
share options may be exercised; provided that the board may,
subfect to 1 6.2, permit all or any of the aforesaid exercise
dates to be anticipated or postponed to such other date/s and to
the extent determined by the board in its discretion.
16.2 A share option shall lapse -
16.2.1 upon the day following the expiry of the option period, or
16.2.2 upon the participant making application for the voluntary
surrender of his estate or his estate being otherwise
sequestrated or upon any
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attachment of any interest of a
participant under the scheme, unless the board passes a
resolution to the contrary.
16.3 If the company is placed in final liquidation, the secretary of
the company shall notify the participant thereof in writing and
he shall be entitled to exercise all or any share options held by
him within twenty-one days of such notification, failing which
the share options concerned shall lapse.
16.4 Every exercise of a share option shall - .
16.4.1 be exercised by written notice given by the participant and
delivered to the Secretary of the company at the company's
registered office;
16.4.2 specify the number of shares in respect of which the share
option is exercised;
16.4.3 be accompanied by payment of the full amount of the option
price in respect of the share options exercised unless a
participant has accepted an offer in terms of 21 for the
trustees to subscribe for or purchase shares on his behalf;
and
16.4.4 be regarded as complete only when payment in terms of 16.4.3
has been received by the trustees.
17 ALLOTMENT
The company shall issue share certificates, where applicable, for the
shares allotted and issued as a result of the exercise of any share
options by not later than sixty days after the exercise thereof and
shall apply for a listing of the shares in question on the JSE (and
on any other stock exchange on which shares may be listed), prior to
or as soon as possible after such data. Shares allotted and issued
pursuant to the exercise of share options will rank pari passu with
the then issued shares as from their respective dates of allotment.
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<PAGE>
PART 4 - GENERAL PROVISIONS RELATING TO THE CREDIT SALE SCHEME AND THE
SHARE OPTION SCHEME
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18 TERMINATION OF EMPLOYMENT
18.1 If the employment by any company in the group of any
participant who holds scheme shares terminates -
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18.1.1 prior to the expiry of the maximum period for any reason other
than any of the reasons referred to in 18.1.2, 18.1.3 and
18.1.4 -
18.1.1.1 he shall, within Sixty days after the termination of his
employment, make payment of the liability attributable to the
number of scheme shares, if any, which are capable of being
released to him in terms of 11.3 at the date of termination
of his employment;
18.1.1.2 the sale of those scheme shares which are not capable
released to him in terms of 1 1.3, at the date of termination
of his employment and the sale of any other shares, the
liability of the participant attributable to which is not
paid to the trustees within the period of sixty days referred
to in 18 1.1.1, shall be deemed to have been cancelled on the
date of termination of his employment or upon the expiry of
such sixty day period (as the case may - be); provided that
if the participant will, prior thereto, have paid any amount
on account of his share debt in respect of such scheme
shares, such amount, other than those payments retained by
the trustees and applied the participant's interest liability
in terms 13.1.1 will be refunded to him; provided further
that the board shall be entitled, in its discretion, to apply
other terms or conditions which are more favourable to the
participate than the aforegoing provisions of this 18.1.1.2
including the payment to the participant of a maximum amount-
equal to the share price at the date of termination of his
employment minus his share debt at that date;
18.1.2 by reason of his summary dismissal or on the grounds of his
proven dishonest, fraudulent or grossly negligent conduct
(whether such termination occurs as a result of notice given to
or by him or otherwise), the sale of all such participant's
scheme shares which are not capable of being released in terms of
11 .3 at the date of termination of his
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employment and all of his scheme shares for which full payment
has not been received by the trustees as at that date shall be
deemed to have been cancelled on the basis that such participant
shall be refunded any amount actually paid by him in reduction of
the liability attributable to his scheme shares other than those
amounts retained by the trustees and applied in reduction of the
participant's interest liability in terms of 13.1.1;
18.1.3 as a result of his death or retirement or for any other reason
approved by the board, he or the executors of his estate shall be
entitled to make payment of his liability in respect of 11 of his
scheme shares (whether or not they are capable of being released
in terms of 11.3 at the date of termination of his employment)
within twelve months after the date of termination of his
employment, failing which the provisions of 18.1.1,2 shall apply,
mutatis mutandis;
18.1.4 as a result of his early retirement, he shall be entitled to make
payment of his liability in respect of all of his scheme shares
---
within twelve months after the date of such termination of
employment, failing which the provisions of 1 8.1.1.2 shall
apply, mutatis mutandis; provided that if the date of his early
retirement falls on a date which is more than twelve months prior
--
to the date which would have been his normal retirement date,
then notwithstanding such payment, h . s scheme shares shall only
be capable of being released to him on the dates on which they
would have been capable of being released in terms of 11.3 has
his employment not terminated; provided further that the board
shall be entitled, in its discretion, to apply other terms or
conditions which are more favourable to the participant than the
aforegoing provisions of this 18.1.4;
18.2 If the employment by any company in the group of any participant who
holds share options terminates -
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<PAGE>
18.2.1 prior to the expiry of the option period for any reason other
than those referred to in 18.2.2, 18.2.3, 18.2.4 and 18.2.5,
the participant shall be entitled to exercise all or a multiple
of 100 of that number of his share options which he was
entitled to exercise in terms of 16.1 immediately prior to the
termination of his employment by not later than sixty days
after the date of termination of his employment, failing which
the said share options shall automatically lapse. Those share
options which the - participant is not entitled to exercise in
terms of 1 6.1 on the date on which his employment terminates
shall automatically lapse, unless the board otherwise resolves
in its discretion;
18.2.2 by reason of his summary dismissal or on the grounds of his
proven dishonest, fraudulent or grossly negligent conduct
(whether such termination occurs as a result of notice given to
or by him or otherwise), all of his share options shall
automatically lapse;
18.2.3 as a result of his death, the executors or administrators of
his estate of his share options (whether or not they are
capable of being exercised in terms of 16.1 at the date of
termination of his employment) by not later than twelve months
after-the date on which his employment terminates, failing
which his share options shall automatically lapse;
18.2.4 as a result of his retirement or for any other reason approved
by the board, he may, by not later than twelve months after the
date of termination of his employment, exercise all or any
multiple of 100 of his share options (whether or not they are
capable of being exercised in terms of 16.1 at the date of
termination of his employment), failing which his share options
shall automatically lapse. If such participant dies prior to
having exercised all or any of his share options in terms of
this 18.2.4, then the provisions of 18.2.3 shall apply with
effect from the date of his death, mutatis mutandis;
<PAGE>
18.2.5 as a result of his early retirement, he may, by not later than
twelve months after the date of termination of his employment,
exercise all or any multiple of 100 of his share options
(whether or not they are capable of being exercised in terms of
16.1 at the date of termination of his employment), failing
which his share options shall automatically lapse; provided
that if the date of his early retirement is more than twelve
months prior to the date which would have been his normal
retirement date, then notwithstanding such payment, shares
subscribed for or purchased by him as a result of the exercise
of such share options shall only be capable of being released
to him on the dates on which he would have been entitled to
exercise such share options in terms of 16.1 had his employment
not terminated. If such participant dies prior to having
exercised all or any of his share options in terms of this 1
8.2.5, then the provisions of 18.2.3 shall apply with effect
from the date of his death, mutatis mutandis.
19 RIGHTS AND CAPITALIZATION ISSUES, CONSOLIDATIONS, SUB-DIVISIONS,
REORGANISATION AND TAKSOVER AND SCRIP DIVIDENDS
19.1 Share options shall not entitle the participant concerned ("option
holder") to participate in rights offers by the company. If, however,
the company undertakes a rights offer, it shall grant to the option
holder options to acquire the same number of shares or other
securities to which he would have been entitled in terms of the
rights offer had he been the holder of the same number of shares as
the number of share options held by him. The additional options shall
be granted to the option holder on the following terms and
conditions -
19.1.1 the board shall furnish full details of the rights offer to the
option holder;
19.1.2 the option holder shall not be entitled to renounce, transfer,
cede, pledge, alienate or encumber the additional options thus
granted;
<PAGE>
19.1.3 the option holder shall be granted the option to subscribe for
all or such lesser number of the shares or other securities
referred to in 19.1 at an option price which is the same as the
subscription price of those shares or other securities, on the
basis that -
19.1.3.1 if the securities concerned are shares, the option price
shall be payable by the option holder, mutatis mutandis,
in accordance with 16 and 18, upon the basis that the
acceptance date in relation to those additional share
options shall be deemed to be the acceptance date
relating to the share options from which the opportunity
to subscribe for the underlying shares arose;
19.1.3.2 if the securities concerned are not shares, the option
price shall be payable on, and the acceptance date in
relation to the additional options shall be, a date or
dates determined by the board in its discretion;
provided that in all other respects the provisions of this
scheme relating to share options shall apply to all options
issued in terms of this sub- clause, mutatis mutandis.
19.2 Scheme shares shall rank pari passu with the other issued shares for
participation in all rights offers of shares or other securities by
the company. Rights accruing on scheme shares in respect of rights
offers by the company shall, unless the board in its discretion
otherwise directs, be followed participants. If a participant is not
required to follow his rights, then such rights shall be renounced in
favour of the trust or its nominee/s, in which event the purchase
price per right shall be the closing market price at which the rights
are traded on the JSE on the trading day immediately preceding the
date of such renunciation. Rights followed by a participant shall be
subscribed for by the trust subject to the following terms and
conditions -
19.2.1 the shares or other securities subscribed for in this manner
shall be scheme rights shares;
<PAGE>
19.2.2 the relevant company in the group shall lend to the trust the
amount required for the purpose of subscribing for the
appropriate number of that participant's entitlement to scheme
rights shares, and the trust shall subscribe for those scheme
rights shares on behalf of the participant concerned. The
scheme rights shares shall be allotted and issued by the
company to the participant concerned;
19.2.3 certificates in respect of scheme rights shares shall be
delivered to and retained by the trust pursuant to the pledge
thereof in terms of 12.2;
19.2.4 the subscription price of scheme rights shares subscribed for
by the trust on behalf of a participant in terms of 19.2.2
shall be payable by the participant to the trust, mutatis
mutandis, in accordance with the provisions of 11, upon the
basis that the acceptance date in relation to those scheme
rights shares shall be deemed to be the acceptance date
relating to the scheme shares from which the entitlement to
those scheme rights shares arose.
19.3 Scheme shares shall in all other respects rank pari passu with the
existing issued shares, including in respect of participation in
capitalization issues; provided that scheme capitalization shares
shall be subject to all the restrictions and conditions of the
scheme.
19.4 In the event of any capitalisation issue or any sub-division or
consolidation of ordinary shares or any reduction of the ordinary
share capital of the company ("adjustment event"), the number of
option shares and/or the option price shall be adjusted by the board
in such manner as it may deem appropriate with the objective that
such adjustment should give a participant an option to the same
proportion of the equity capital as that to which he was entitled
prior to the adjustment event; provided that the auditors of the
company, acting as experts and not as arbitrators, shall have
confirmed in writing that in their opinion such adjustments are fair
and reasonable.
<PAGE>
19.5 If the company at any time before the share debt owing on any
scheme shares has been paid in full -
19.5.1 is placed in liquidation for purposes of reorganisation; or
19.5.2 is party to a scheme of arrangement affecting the structuring
of share capital; or
19.5.3 reduces its share capital; or
19.5.4 sub-divides or consolidates its shares,
such adjustments shall be made to the purchase price in respect of
those scheme shares as have not been fully paid as a partner or
director of the company's auditors for the time being (acting as an
expert) in his discretion may confirm in writing to the board as
being fair and reasonable in the circumstances, subject (where
necessary) to the sanction of the Court.
19.6 The provisions of 1 9.5 shall apply, mutatis mutandis, to
participants holding share options; provided that the board shall
have an overriding discretion to determine the rights of such
participants in the circumstances outlined in 19.5, Notwithstanding
the aforegoing, any decision by the board under this 1 9.6 shall be
fair and equitable to the participant concerned.
19.7 If the company becomes an immediate subsidiary of any company (other
than its immediate holding company, if any, at the acceptance date)
as a result of a takeover, reconstruction or amalgamation which make
ion for the participant to receive shares in such other company in
exchange for his scheme shares on terms which a partner of the
company's auditors for the time being (acting as an expert)
determines in his discretion are not less favourable than those to
which the participants are entitled in terms of this deed, the
participant shall be obliged to accept such shares in that other
company upon those terms and conditions,
<PAGE>
then the trustees and the participants shall be obliged to sell,
exchange or otherwise dispose of the scheme shares at the same price
and upon the same terms and conditions and in the same proportion as
the majority shareholders sell or dispose of their shares if those
majority shareholders so require and the board so resolves.
19.8 Should the provisions of 19.7 become applicable then --
19.8.1 the trustees shall immediately notify each holder of share
options (option holder') that the provisions of 19.7 have become
applicable;
19.8.2 within five business days after the receipt of the notice
referred to in 19.8.1, an option holder shall be entitled to
exercise all or any share options then granted to him;
19.8.3 to the extent that any option holder does not exercise any share
option in terms of 19.8.2, that share option shall be deemed to
have lapsed;
19.8.4 to the extent that any option holder exercises any share option
in terms of 19.8.2, the shares to be allotted and issued pursuant
to the exercise of such option shall be subject, mutatis
mutandis, to the provisions of 19.7.
19.9 Notwithstanding any other provision of this deed, if any participant
and the trustees so agree in writing and the board passes a resol@on
approving that agreement --
19.9. 1 any transaction under which that participant purchased or
otherwise acquired shares under this scheme may be cancelled--,
19.9.2 the trust may purchase from that participant any shares purchased
or otherwise acquired by him under this scheme at a price not
exceeding the selling or acquisition price of those shares to
him, provided that the participant shall not receive or become
entitled, in consequence of such
<PAGE>
cancellation or acquisition, to receive any compensation or
consideration other than the repayment of any portion of the
purchase or acquisition price actually paid by him.
19.10 If, in declaring a dividend to its members at any time, the
company grants to its members the right to elect to receive either a
cash amount or shares in lieu of a cash dividend, participants holding
scheme shares may elect to receive either cash or shares; provided
that the provisions of 1 3 shall apply, mutatis mutandis, in respect
of such dividend should the participant elect to receive the cash
amount.
19.11 Holders of share options and/or allocation shares shall not be
entitled to any form of participation in or to any rights in respect
of the issue of shares by the company in lieu of a cash dividend.
PART 5 - THE COMBINED OPTION/DEFERRED SALE SCHEME
20 THE SCHEME
20.1 Notwithstanding any other provision of this scheme, the board and
the trustees may give effect to the scheme by the company itself,
without the intervention of the trust or the trustees, offering
eligible applicants the opportunity to acquire rights and options. Any
such offer and acceptance thereof shall be made in accordance with
10.2 and 10.3, which shall apply, mutatis mutandis.
20.2 Each right and option shall confer on the holders thereof the right
and option to enter into an agreement with the company to acquire one
allocation share, which agreement shall be upon the following terms
and conditions --
20.2.1 allocation shares shall be acquired by participants at the
allocation price;
20.2.2 subject to 20.2.4 --
<PAGE>
20.2.2.1 the company shall allot and issue or transfer the allocation
shares and deliver the share certificates in respect of the
allocation shares to the participant; and
20.2.2.2 the participant shall take delivery of the allocation shares;
and
20.2.2.3 ownership of the allocation shares shall vest in the participant
and the allocation shares shall be registered in the name of the
participant,
at the times and in the numbers stipulated in 20.2-3. For the sake of
clarity, it is recorded that, until such times, the participant shall
not be entitled to exercise any of the votes attaching to the relevant
allocation shares nor to dividends declared on those allocation
shares;
20.2.3 unless the board otherwise resolves in its discretion, no allocation
shares shall be paid for or delivered as contemplated in 20.2.2 until
a period, calculated from the acceptance date, of --
20.2.3.1 more than three years shall have elapsed, in which event not more
than 25 %;
20.2.3.2 more than four years shall have elapsed, in which event not more
than 50% cumulatively,
20.2.3.3 more than five years shall have elapsed, in which event not more
than 75% cumulatively;
20.2.3.4 more than six years shall have elapsed, in which event all, of
the relevant allocation shares shall be delivered to the
participant in accordance with 20.2.2 against payment by the
participant of the full allocation price in respect thereof;
<PAGE>
20.2.4 if the employment by any company in the group of any participant who
has exercised a right and option terminates prior to the expiry of ten
years from the date of grant of the right and option--
20.2.4.1 for any reason other than those stated in 20.2.4.2, 20.2.4.3 and
20.2.4.4, then --
20.2.4.1.1 he shall, within sixty days after the date of termination of his
employment, make payment of the allocation price attributable to
the number of allocation shares, if any, for which he is entitled
to make payment and take delivery in terms of 20,2.3 at the date
of termination of his employment;
20.2.4.1.2 the agreement shall be deemed to be automatically cancelled in
respect of those allocation shares in respect of which the
payment by and delivery to that participant was not competent in
terms of 20.2.3 at the date of termination of his employment and
in respect of any other allocation shares, the allocation price
of which is not paid to the company within the period of sixty
days referred to in 20.2.4.1.1, and the participant shall receive
no compensation whatsoever in consequence of the cancellation of
the agreement; provided that the board shall be entitled, in its
discretion, to apply other terms or conditions which are morp-
favourable to the participant than the aforegoing provisions of
this 20.2.4.1.2 including the payment to the participant of a
maximum amount equal to the share price at the date of
termination of his employment minus the allocation price in
respect of such allocation shares;
<PAGE>
20.2.4.2 by reason of his summary dismissal or on the grounds of his
proven dishonest, fraudulent or grossly negligent conduct
(whether such termination occurs as a result of notice given to
or by him or otherwise), the agreement shall be deemed to be
automatically cancelled at the date of termination of his
employment in respect of all of that participant's allocation
shares, and the participant shall receive no compensation
whatsoever in consequence of the cancellation of the agreement;
20.2.4.3 as a result of his death or retirement or for any other reason
considered and approved by the board, he or the executors of his
estate shall be entitled to make payment of the purchase price of
all or any multiple of 100 of his allocation shares within a
period of twelve months after the date of termination of his
employment, failing which the provisions of 20.2.4.1.2 shall
apply, mutatis mutandis;
20.2.4.4 as a result of his early retirement, he shall payment of the
allocation price of all or any multiple of 100 of his allocation
shares within a period of twelve months after the date of such
termination of employment, failing which the provisions of
20.2.4.1.2 shall apply, mutatis mulandis; provided that if the
date of his early retirement falls on a date which is more than
twelve months prior to the date which would have been his normal
retirement date, then notwithstanding such payment, such
allocation shares shall only be delivered to him on the dates on
which they would have been capable of being delivered to him in
terms terms of 20.2.3 had his employment not terminated; provided
further that the board shall be entitled, in its discretion, to
apply other terms or conditions which are more
<PAGE>
favourable to the participant than the aforegoing provisions
of this 20.2.4.4;
20.2.5 subject to the provisions of this 20, the provisions of 19 shall
---
apply to rights and to allocation shares, mutatis mutandis;
20.2.6 notwithstanding any other provision of this 20.2, all allocation
shares shall be delivered to and paid for in full by the
participant concerned by not later than the tenth anniversary of
the acceptance date thereof.
20.3 A right and option shall be exercised by the participant concerned at
any time within twelve months after the date of grant of the right and
option, failing which the right and option shall automatically lapse.
If the employment with titled to make the group of any participant who
has not exercised a right and option terminates--
20.3.1 for any reason other than those stated in 20.2.4.3 and 20.2.4.4,
then such right and option shall automatically lapse;
20.3.2 for any of the reasons stated in 20.2.4.3 and 20.2.4.4, then the
provisions of 18-2.3, 18.2.4 or 18.2.5 (as the case may be) shall
apply, mutatis mutandis, on the basis that the provisions of
20.2.4.3 or 20.2.4.4 (as the case may be) shall thereafter apply,
mutatis mutandis, in respect of those rights and options which
are exercised.
20.4 Every exercise of a right and option --
20.4.1 shall be effected by written notice given by the participant and
delivered to the secretary of the company at the company's
registered office;
20.4.2 shall specify the number of allocation shares (being a multiple
of 100) in respect of which the right and option is exercised;
<PAGE>
20.4.3 shall be accompanied by a deposit ("deposit") of such amount per
share (if any) as may be determined by the board from time to
time in its discretion; provided that such amount shall not
exceed 5% of the allocation price. The deposit shall --
20.4.4 be held by the trustees as security for the fulfilment by the
participant of his obligations under this deed and the trustees
shall at any time be entitled to appropriate and apply the
deposit or any part thereof to any amount owed by the participant
to the trust,
20.4.5 unless the board otherwise resolves in its discretion, be
forfeited by the participant to the trust should the agreement
pursuant to the exercise of a right and option be cancelled for
any reason other than in terms of 25, in which event it shall be
held by the trustees as security for the repayment of the share
price or option price, as the case may be;
20.4.6 only be refunded to the participant by the trustees once he has
fulfilled all of his obligations in terms of this deed.
20.5 The company shall at all times reserve and keep available out of its
authorised but unissued share capital, such number of shares as shall
become issuable upon the date of issue of allocation shares, less the
number of shares held by the trust and set aside by the trustees for
the purposes of this 20.
20.6 The company shall issue share certificates for the shares allotted
pursuant to this 20 within sixty days after payment of the allocation
price of the allocation shares in question is made by the participant
and shall apply for a listing of the shares in question as soon as
possible after such date on the JSE (and on any other stock exchange
on which shares are listed). The shares so issued shall rank pari
passu with the then issued shares of the same class in the company as
from their respective dates of issue.
20.7 Notwithstanding any other provision of this 20, the board and trustees
may give effect to this 20 --
<PAGE>
20.7.1 by the trustees, upon being directed to do so by the board,
causing the trust to grant to participants the right and option
to enter into an agreement with the trust to purchase shares from
the trust or causing the trust to enter into an agreement with
participants, mutatis mutandis, in accordance with the provisions
of 20.1 to 20.6 inclusive. If the trustees grant to a participant
a right and option as aforesaid, it shall be so granted on the
basis that if such right and option is exercised by the
participant, the resultant agreement shall be in accordance with
those provisions;
20.7.2 by any variation of the method referred to in 20.1 to 20.6
inclusive or 20.7.1 or any other method which will not prejudice
any eligible applicant or participant or the company.
PART 6 - SWITCHING MECHANISMS
21 SHARE OPTIONS - CREDIT SALE
21.1 The trustees, on the authority of a resolution of the board, may at
any time by written notice offer to subscribe for or purchase, on
behalf of a participant who is permitted to exercise his share options
under 16, in lieu of such share options, the shares represented by his
share options.
21.2 A participant to whom an offer has been made in terms of 21.1 may, by
written notice given to the trustees within 21 days of the date of the
offer, accept such offer. Such notice shall --
21.2.1 specify the name of the participant, the number of share options
to be exercised and the option price;
21.2.2 be accompanied by payment of the amount, if any, specified in
terms of 10.3.
<PAGE>
21.3 The trustees shall, forthwith on receiving the notice referred to in
21.2 subscribe for or purchase, on behalf of the participant
concerned, the number of shares specified in 21.2.2. Such subscription
shall be made subject to the provisions of 12 and the participant
shall, ipso facto, in respect of the shares concerned, be bound by the
provisions of the scheme relating to scheme shares; provided that the
original acceptance date shall, unless the board otherwise resolves,
remain unaltered.
21.4 Any taxes and/or duties payable as a result of any transaction in
terms of the provisions of this 21 shall, unless the board otherwise
resolves, be borne and paid by the participant.
22 CREDIT SALE - SHARE OPTIONS
22.1 The trustees, on the authority of a resolution of the board, may at
any time prior to the expiry of the maximum period, by written notice
offer to purchase on behalf of the trust all or any of a participant's
scheme shares which are not yet capable of release from the scheme in
accordance with 11.3 at a price per scheme share equal to the original
share price of such scheme shares on the basis that the trustees
shall, simultaneously with such purchase, grant to such participant
the option to purchase or subscribe for the same number of shares at a
price per share ("offer price") equal to such original share price.
22.2 A participant to whom an offer has been made in terms of 22.1
may, by written notice given to the trustees within 21 days of the
date of the offer, accept such offer. Such notice shall specify, inter
alia --
22.2.1 the name of the participant;
22.2.2 the number of scheme shares concerned, and
<PAGE>
22.2.3 the original share price.
22.3 Forthwith on receiving the notice referred to in 22.2 --
22.3.1 the trustees shall apply the purchase price payable by the trust
to the participant (being the original share price) in discharge
of the outstanding balance of the participant's share debt and
the balance, if any, shall be paid to the participant,
22.3.2 the participant shall, ipso facto, in respect of the share
options, concerned, be bound by the provisions of the scheme
relating to share options; provided that the original acceptance
date of the participant's application for the relevant scheme
shares shall, unless the board otherwise resolves in its
discretion, be deemed to be the acceptance date of such share
options.
22.4 Any taxes and/or duties payable as a result of any transaction in
terms of the provisions of this 22 shall, unless the board otherwise
resolves, be borne and paid by the participant.
23 CREDIT SALE - COMBINED OPTION/DEFERRED SALE
23.1 The trustees, on the authority of a resolution of the board, may
at any time prior to the expiry of the maximum period, by written
notice offer to purchase all or any multiple of 100 of a participant's
scheme shares on the basis that --
23.1.1 if the closing market price of a share on the JSE on the trading
day immediately preceding the date of such request ("current
price") exceeds the original share price payable by the
participant for the scheme shares, then --
23.1.1.1 the purchase price per scheme share payable by the trust to
the participant shall be not less than the current price;
<PAGE>
23.1.1.2 the trustees shall, simultaneously with such purchase, grant
such participant the right and option to enter into an
agreement with the trust to acquire the same number of
allocation shares;
23.1.1.3 the price payable by the participant in consideration for the
grant of such right and option to him ("grant price") shall
be an amount equal to the current price less the original
share price payable by him to the trust for the scheme shares
in question;
23.1.1.4 the allocation price per allocation share payable by the
participant shall be the original share price payable by the
participant for the scheme shares purchased by the trust from
him;
23.1.2 if the current price is equal to or less than the original share
price payable by the participant for the scheme shares in
question, then --
23.1.2.1 the price per scheme share payable by the trust shall be the
original share price payable by the participant for those
scheme shares;
23.1.2.2 the provisions of 23.1.1.2 and 23.1.1.4 shall apply, mutatis
mutandis.
23.2 A participant to whom an offer has been made in terms of 23.1 may, by
written notice given to the trustees within 21 days of the date of the
offer, accept such offer. Such notice shall specify --
23.2.1 the name of the participant;
<PAGE>
23.2.2 the number of scheme shares concerned;
23.2.3 the share price payable by the participant for such scheme
shares.
23.3 Forthwith on receiving the notice referred to in 23.2 -
23.3.1 if 23.1.1 is applicable, the trustees shall apply the current
price payable to the participant in reduction of the
participant's share debt and the grant price;
23.3.2 if 23.1.2 is applicable, the trustees shall apply the original
share price payable to the participant in reduction of the
participant's share debt;
23.3.3 the provisions of 20 shall apply, mutatis mutandis, to such
allocation shares, save that -
23.3.3.1 the date of grant of the right and option, unless the
board otherwise resolves in its discretion, be deemed to
be the original acceptance date for the relevant scheme
shares;
23.3.3.2 if more than twelve months has elapsed since the original
acceptance date of the relevant scheme shares, then the
right and option shall be exercised within sixty days
after the date on which the trustees receive the
participant's notice in terms of 23.2, failing which such
right and option shall lapse.
23.4 Any taxes and/or duties payable as a result of any transaction in
terms of the provisions of this 23 shall, unless the board otherwise
resolves, be borne and paid by the participant.
<PAGE>
24 SHARE OPTION - COMBINED OPTION/DEFERRED SALE
24.1 The trustees, on the authority of a resolution of the board may at
any time prior to the exercise of any share option in terms of 16, by
written notice offer to cancel all or any multiple of 100 of a
participant's share options on the basis that, simultaneously with
such cancellation -
24.1.1 the trustees shall grant to such participant the right and
option to enter into an agreement with the trust to acquire
the, same number of allocation shares;
24.1.2 the allocation price payable by such participant for such
allocation shares shall be an amount equal to the original
option price of the share options so cancelled.
24.2 A participant to whom an offer has been made in terms of 24.1 may, by
written notice given to the to the trustees within 21 days of the
date of the offer, accept such offer. Such notice shall specify -
24.2.1 the name of the participant;
24.2.2 the number of share options concerned;
24.2.3 the option price payable in respect of such share options.
24.3 Forthwith on receiving the notice referred to in 24.2, the trustees
shall grant to such participant the right and option to enter into an
agreement with the trust to acquire allocation shares. The Provisions
of 20 shall apply, mutatis mutandis, to such allocation shares, save
that -
24.3.1 the date of grant of the right and option shall, unless the
board otherwise resolves in its discretion, be deemed to be the
original acceptance date by the participant of the share option
in question;
<PAGE>
24.3.2 if more than twelve months has elapsed since the original
acceptance date of the participant's share option, then the
right and option shall be exercised within sixty days after the
date on which the trustees received the participant's notice in
terms of 24,2, failing which such right and
24.4 Any taxes and/or duties payable as a result of any transaction in
terms of the provisions of this 24 shall, unless the board otherwise
resolves, be borne and paid by the participant.
25 COMBINED OPTION/DEFERRED SALE - CREDIT SALE OR SHARE OPTIONS
25.1 The trustees, on the authority of a resolution of the board, may by
written not ice offer to a participant who has exercised a right and
option granted to him pursuant to 20, at any time prior to delivery
to and payment by the participant for the allocation shares in
question to either -
25.1.1 cancel the agreement referred to in 20 on the basis that,
simultaneously with such cancellation, the trust shall sell to
the participant or advance moneys to the participant to enable
the participant to subscribe for the same number of scheme
shares upon the following terms and conditions
25.1.1.1 the share or subscription price of such scheme shares
shall be the original allocation price in respect of the
allocation shares forming the subject matter of the
agreement so cancelled;
25.1.1.2 subject to the aforegoing, the provisions of this scheme
relating to scheme shares shall apply, mutatis mutandis,
in respect of such shares;
<PAGE>
25.1.1.3 the original date of grant of the right and option shall,
unless the board otherwise resolves, be deemed to be the
acceptance date of his application for those scheme
shares; or
25.1.2 purchase all or any of such participant's allocation shares in
respect of which delivery is not competent in terms of 20.2.3
at that time on The basis that, the trustees shall,
simultaneously with such purchase, grant such participant the
option to acquire the same number of share options upon the
following terms and conditions -
25.1.2.1 if the closing market price of a share on the JSE on the
trading day immediately preceding the date of such
request ("current price") exceeds the original allocation
price in respect of the allocation shares forming the
subject matter of such purchase, then -
25.1.2.1.1 the purchase price per allocation share payable by
the trust to the participant shall be not less than
the current price;
25.1.2.1.2 the price payable by the participant in
consideration for the grant of such option shall be
an amount equal to the current price less the
original allocation price of the allocation shares
forming the subject matter of such purchase;
25.1.2.1.3 the option price per option share payable by the
participant shall be the original allocation price
of the allocation shares forming the subject matter
of such purchase-,
<PAGE>
25.1.2.1.4 the original date of grant of the right and option
shall, unless the board otherwise resolves, be
deemed to be the acceptance date of such share
option;
25.1.2.1.5 subject to the aforegoing, the provisions of this
scheme relating to the share options shall apply,
mutatis mutandis, in respect of such shares;
25.1.2.2 if the current price is equal to or less than the
original allocation price in respect of the allocation
shares forming the subject matter of such purchase -
25.1.2.2.1 the price per allocation share payable by the trust
shall be not less than the allocation price;
25.1.2.2.2 the provisions of 25.1.2.1.3, 25.1.2.1.4 and 25-
1.2.1.5 shall apply, mutatis mutandis.
25.2 A participant to whom an offer has been made in terms of 25.1 may, by
written notice given to the trustees within 21 days of the date of
the offer, accept such offer. Such notice shall specify -
25.2.1 the name of the participant;
25.2.2 the number of allocation shares concerned;
25.2.3 the allocation price payable in respect of such allocation
shares.
25.3 The trustees, on the authority of a resolution of the board, may by
written notice offer to cancel a right and option granted to a
participant to acquire allocation shares pursuant to 20 or 23 at any
time prior to the exercise of such right and option on the basis
that, simultaneously with such cancellation, the trust shall either
sell to him the same number of scheme shares or grant him the same
<PAGE>
number of share options to acquire the same number of shares, on the
same bases, mutatis mutandis, set out in 25.l. A participant who
accepts such offer shall do so in accordance with 25.2.
25.4 Any taxes and/or duties payable as a result of any transaction in
terms of the provisions of this 25 shall, unless the board otherwise
resolves, be borne and paid by the participant,
PART 7 - GENERAL
26 ASSIGNMENT OF RIGHTS OR OBLIGATIONS
26.1 Save as is provided in 26.3, it shall not be competent for any
participant to cede any of his rights or delegate any of his
obligations pursuant to the acquisition of share options, scheme
shares, rights and options or allocation shares by him except to the
trust or, in the case of the participant's death, to such
participant's estate.
26.2 Save as otherwise expressly provided in this deed -
26.2.1 share options and rights and options may not be exercised by
any person other than the participant; and
26.2.2 no participant may alienate or encumber any of his share
options, scheme shares, rights and options or allocation
shares.
26.3 Eligible applicants and participants shall have the following rights -
26.3.1 an eligible applicant may, with the prior approval of the
trustees, nominate a family trust or a family company to
accept an offer in terms of 10.1, 14.1, 20.1 or 20.3 on his
behalf on the basis that such family trust or family company
may accept all (and not part only) of the rights in relation
thereto. All obligations in relation thereto shall be assumed
<PAGE>
and accepted in writing by the eligible applicant concerned,
failing which acceptance of the rights by such eligible
applicant's family trust or family company shall be invalid
and unenforceable,
26.3.2 a participant who did not avail himself of his rights in terms
of 26-3.1 may, with the prior approval of the trustees, at any
later date cede all (and not part only) of his rights (but not
assign any of his obligations) in terms of this scheme to a
family trust or a family company, in which event the
provisions of 26.3,1 shall apply, mutatis mutandis,
In either event, the nominee or assignee in question shall bind itself
in writing to abide by the terms of the scheme and the provisions of
the scheme relating to participants shall be construed as referring to
the participant and/or the family trust and/or the family company
and/or all or any of them, as the context may require.
26.4 Notwithstanding 26.3, the trustees may permit a participant to
discharge the whole or any portion of the share price, the option
price or the allocation price (as the case may be) by the allotment
and issue of preference shares in the share capital of a family
company to the trustees, which preference shares shall be subject to
such rights, privileges and conditions as may be acceptable to the
trustees, in their discretion.
27 TRANSFERS FROM THE EXISTING SCHEME
All rights and obligations under the existing scheme of the Sappi Limited
Share Purchase Trust, the trustees thereof, the company and participants
shall be deemed to have been cancelled on the date of registration of this
dead and be substituted by the respective rights and obligations of the
trust, the trustees, the company and participants respectively under this
deed on the basis that -
<PAGE>
27.1 shares held by participants under the existing scheme shall become
"scheme shares" and their indebtedness under the existing scheme shall
become their share debt";
27.2 the share price of such scheme shares shall be equal to the share
price payable by the participant under the existing scheme;
27.3 the date on which an application to acquire shares under the
existing scheme was accepted shall be deemed to be the acceptance date
of such scheme shares; and
27.4 such cancellation and substitution of the rights of participants shall
not affect any of their vested rights under the existing scheme which
shall remain of force and effect.
28 CERTIFICATES
Certificates in respect of shares sold to or subscribed for by participants
in terms of this scheme shall be retained by the trustees until such time
as the shares are paid for and are capable of being released in terms of
this scheme.
29 AGREEMENT BINDING ON PARTICIPANTS
No share options, scheme shares, rights and options or allocation shares
which it is proposed will be granted, sold or issued to any participant
will be granted, sold or issued otherwise than --
29.1 in writing; and
29.2 on the terms set out in this scheme and in terms of which the
participant irrevocably and unconditionally undertakes to adhere to
and be bound by all the terms of this scheme.
30 AMENDMENT
<PAGE>
It shall be competent for the board and the trustees to amend any of the
provisions of this scheme subject to the prior approval (if required) of
the JSE and of any other competent authority; provided that --
30.1 no such amendment shall affect the vested rights of any participant;
and
<PAGE>
34 TERMINATION
The trust shall terminate as soon as there are no longer any participants
who hold or have acquired scheme shares, share options, rights and options
or allocation shares and the board so resolves. Upon such termination, the
assets (if any) of the trust shall be realised and any surplus remaining
after the discharge of the trust's liabilities shall be paid over to the
company. Any deficit arising from the winding-up of the trust shall be
borne by the company.
Signed at Johannesburg on _____ March 1997
for Sappi Limited
-----------------------------
who warrants that he is duly
authorised hereto
We, the undersigned, David Charles Brink and Thomas Louw De Beer do hereby
accept our appointment as trustees of The Sappi Limited Share Incentive Trust.
Signed at Johannesburg on _____ March 1997
-----------------------------
David Charles Brink
Signed at Johannesburg one March 1997
-----------------------------
Thomas Louw De Beer
This scheme was duly adopted at a general meeting at Sappi Limited held at
Johannesburg on ____ March 1997.
Signed at Johannesburg on _____March 1997
-----------------------------
Chairman of the meeting
<PAGE>
Exhibit 12.1
SD WARREN COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR
SEPTEMBER 25, DECEMBER 21,
YEAR NINE MONTHS 1994 1994 YEAR YEAR
ENDED ENDED THROUGH THROUGH ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1993 1994 1994 1995 1996 1997
--------------- --------------- --------------- ------------- ------------- -------------
S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND COMPANY AND S.D. WARREN S.D. WARREN
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED SUBSIDIARIES COMPANY AND COMPANY AND
AFFILIATES AFFILIATES AFFILIATES CORPORATION SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
--------------- --------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income before
taxes and other
items.......... $ 1.9 $28.0 $24.9 $ 70.3 $ 11.9 $ 47.7
Adjustments:
Capitalized
interest...... -- (1.4) -- (0.9) (1.3) (3.7)
Dividends and
accretion on
preferred
stock......... -- -- -- (15.2) (23.6) (25.5)
Total fixed
charges, net.. 15.8 12.5 3.4 125.2 137.6 131.6
----- ----- ----- ------ ------------- -------------
Excess of
earnings to
cover fixed
charges and
preferred stock
dividends...... $17.7 $39.1 $28.3 $179.4 $124.6 $150.1
===== ===== ===== ====== ============= =============
Ratio of
earnings to
cover fixed
charges and
preferred stock
dividends...... 1.1x 3.1x 8.3x 1.4x * 1.1x
===== ===== ===== ====== ============= =============
Fixed charges
and preferred
stock
dividends:
Interest
expense....... $ 8.5 $ 6.4 $ 2.3 $106.0 $108.9 $ 99.0
Interest
portion of
Biomass
contract...... 4.6 3.2 0.9 2.4 2.7 2.0
Interest
portion of
rent(1)....... 2.7 1.5 0.2 0.7 1.1 1.4
Dividends and
accretion on
preferred
stock......... -- -- -- 15.2 23.6 25.5
Capitalized
interest...... -- 1.4 -- 0.9 1.3 3.7
----- ----- ----- ------ ------------- -------------
Total fixed
charges and
preferred stock
dividends...... $15.8 $12.5 $ 3.4 $125.2 $137.6 $131.6
===== ===== ===== ====== ============= =============
</TABLE>
- ------------
* Ratio is less than 1 to 1 for period presented.
(1) Interest expense component of rent is 30% of rental expense.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
S.D. Warren Company was incorporated under the laws of the Commonwealth of
Pennsylvania and owns or controls the following corporation by means of owning
the indicated percents of their voting securities:
Percent
Voting Securities State or Province
Owned by S.D. Warren Subsidiary of Incorporation
- -------------------- ---------- -----------------
100% Skylark, Inc. Maine
100% Presumpscott Water Maine
Power Company
100% S.D. Warren Finance Co. Delaware
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
S.D. WARREN COMPANY'S (THE "COMPANY") CONDENSED STATEMENTS OF OPERATIONS FOR THE
YEAR ENDED OCTOBER 1, 1997 AND BALANCE SHEET AS OF OCTOBER 1, 1997 FOUND IN PAGE
16 AND 17, RESPECTIVELY, OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FINANCIAL
INFORMATION FOR THE YEAR ENDED OCTOBER 1, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-01-1997
<PERIOD-START> OCT-03-1996
<PERIOD-END> OCT-01-1997
<CASH> 180,700
<SECURITIES> 0
<RECEIVABLES> 45,300
<ALLOWANCES> 5,000
<INVENTORY> 163,400
<CURRENT-ASSETS> 437,300
<PP&E> 1,165,700
<DEPRECIATION> 214,600
<TOTAL-ASSETS> 1,632,000
<CURRENT-LIABILITIES> 257,400
<BONDS> 739,800
103,200
0
<COMMON> 0
<OTHER-SE> 369,300
<TOTAL-LIABILITY-AND-EQUITY> 1,632,000
<SALES> 1,405,600
<TOTAL-REVENUES> 1,405,600
<CGS> 1,115,400
<TOTAL-COSTS> 1,263,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99,000
<INCOME-PRETAX> 47,700
<INCOME-TAX> 19,300
<INCOME-CONTINUING> 28,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,400
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
