<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q FINANCIAL INFORMATION*
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission file number: 33-88496*
S.D. WARREN COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2366983
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 Franklin Street, Boston, Massachusetts 02110
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 423-7300
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No Not Applicable X*
--- --- ---
*This report is being voluntarily filed with the Securities and Exchange
Commission (the "Commission") pursuant to the registrant's contractual
obligations to file with the Commission all financial information that would be
required to be filed on a Form 10-Q. The registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
Form 10-Q, April 1, 1998
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that this Report on Form 10-Q for S.D.
Warren Company and subsidiaries (the "Company") 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. These and other factors
that might cause differences between actual and anticipated results,
performance, and achievements are discussed in greater detail in this Report on
Form 10-Q. See also "Market Overview" under Part I, Item 2, Management's
Discussion and Analysis of Results of Operations and Financial Condition.
2
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
Form 10-Q, April 1, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations for the three months ended
April 2, 1997 and April 1, 1998 4
Condensed Consolidated Statements of Operations for the six months ended
April 2, 1997 and April 1, 1998 5
Condensed Consolidated Balance Sheets at October 1, 1997 and April 1, 1998 6
Condensed Consolidated Statements of Cash Flows for the six months ended
April 2, 1997 and April 1, 1998 7
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
</TABLE>
3
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
April 2, 1997 April 1, 1998
------------------ ------------------
<S> <C> <C>
Sales $ 345.7 $ 376.1
Cost of goods sold 269.1 291.1
------------ -----------
Gross profit 76.6 85.0
Selling, general and administrative expense 33.7 35.0
------------ -----------
Income from operations 42.9 50.0
Gain on sale of pressure sensitive business -- 30.9
Other income, net 1.1 1.0
Interest expense 26.6 19.2
------------ -----------
Income before income taxes and extraordinary items 17.4 62.7
Income tax expense 6.9 25.8
------------ -----------
Income before extraordinary items 10.5 36.9
Extraordinary items, net of tax 0.9 (0.3)
------------ -----------
Net income 11.4 36.6
Dividends and accretions on Warren Series B preferred stock
3.8 4.2
------------ -----------
Net income applicable to common stockholder $ 7.6 $ 32.4
------------ -----------
------------ -----------
Earnings per common share:
Income before extraordinary items applicable to
common stockholder $ 0.07 $ 0.33
------------ -----------
------------ -----------
Net income applicable to common stockholder $ 0.08 $ 0.32
------------ -----------
------------ -----------
Weighted average number of shares outstanding 100 100
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
April 2, 1997 April 1, 1998
------------------ ------------------
<S> <C> <C>
Sales $ 660.2 $ 719.5
Cost of goods sold 536.3 553.6
-------------- --------------
Gross profit 123.9 165.9
Selling, general and administrative expense 66.3 69.5
Restructuring 10.0 -
-------------- --------------
Income from operations 47.6 96.4
Gain on sale of pressure sensitive business -- 30.9
Other income, net
2.0 2.8
Interest expense 51.8 40.1
-------------- --------------
Income (loss) before income taxes and extraordinary items (2.2) 90.0
Income tax expense (benefit) (1.1) 36.8
-------------- --------------
Income (loss) before extraordinary items (1.1) 53.2
Extraordinary items, net of tax
0.9 (1.5)
-------------- --------------
Net income (loss) (0.2) 51.7
Dividends and accretions on Warren Series B preferred stock 7.4 8.3
-------------- --------------
Net income (loss) applicable to common stockholder $ (7.6) $ 43.4
-------------- --------------
-------------- --------------
Earnings per common share:
Income (loss) before extraordinary items applicable to
common stockholder $ (0.09) $ 0.45
-------------- --------------
-------------- --------------
Net income (loss) applicable to common stockholder $ (0.08) $ 0.43
-------------- --------------
-------------- --------------
Weighted average number of shares outstanding 100 100
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
October 1, April 1,
1997 1998
(unaudited)
----------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 180.7 $ 77.5
Trade accounts receivable, net 40.3 41.5
Other receivables 14.8 20.2
Inventories 163.4 194.0
Deferred income taxes 28.3 28.3
Other current assets 9.8 13.1
----------------- ----------------
Total current assets 437.3 374.6
Plant assets, net 951.1 954.2
Timber resources, net 95.6 95.5
Goodwill, net 90.1 86.3
Deferred financing fees, net 35.4 30.7
Other assets, net 22.5 20.3
----------------- ----------------
Total assets $ 1,632.0 $ 1,561.6
----------------- ----------------
----------------- ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 27.3 $ 47.5
Accounts payable 121.0 118.1
Accrued and other current liabilities 109.1 124.1
----------------- ----------------
Total current liabilities 257.4 289.7
----------------- ----------------
Long-term debt:
Term loans 251.5 145.0
Senior subordinated notes 375.0 375.0
Other 113.3 113.2
----------------- ----------------
739.8 633.2
----------------- ----------------
Deferred income taxes 48.7 60.7
----------------- ----------------
Other liabilities 113.6 112.7
----------------- ----------------
Total liabilities 1,159.5 1,096.3
----------------- ----------------
Commitments and contingencies (Notes 9 and 10)
Warren Series B redeemable exchangeable preferred stock (liquidation
value, $110.6 and $118.5, respectively) 103.2 111.5
----------------- ----------------
Stockholder's equity:
Common stock -- --
Capital in excess of par value 331.8 321.4
Retained earnings 37.5 32.4
---------------- -----------------
Total stockholder's equity 369.3 353.8
---------------- -----------------
---------------- -----------------
Total liabilities and stockholder's equity $ 1,632.0 $ 1,561.6
---------------- -----------------
---------------- -----------------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
April 2, 1997 April 1, 1998
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income $(0.2) $51.7
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation, cost of timber harvested and amortization 59.5 45.5
Loss on force majeure event 7.5 --
Deferred income taxes (1.3) 12.0
Extraordinary item (1.5) 2.5
Gain on sale of pressure sensitive business -- (30.9)
Other (0.1) 0.1
Changes in assets and liabilities:
Trade and other accounts receivable, net (8.4) (3.7)
Inventories, net (17.6) (40.2)
Accounts payable, and accrued and other current liabilities 40.2 10.3
Other assets and liabilities (7.5) (2.1)
------------- -------------
Net cash provided by operating activities 70.6 45.2
------------- -------------
Cash Flows from Investing Activities:
Investment in plant assets and timber resources (25.2) (46.4)
Proceeds from disposals of plant assets and timber resources 0.1 0.1
Proceeds from sale of pressure sensitive business -- 44.8
Refurbishment of fixed assets (37.5) --
Insurance proceeds on force majeure events 27.5 --
Other investing activities -- (0.4)
------------- -------------
Net cash used in investing activities (35.1) (1.9)
------------- -------------
Cash Flows from Financing Activities:
Repayments of long-term debt (75.1) (86.4)
Issuance of debt 38.1 --
Dividend paid to Holdings -- (58.2)
Other financing activities (0.7) (1.9)
------------- -------------
Net cash used in financing activities (37.7) (146.5)
------------- -------------
Net change in cash and cash equivalents (2.2) (103.2)
Cash and cash equivalents:
Beginning of period: 49.0 180.7
------------- -------------
End of period $ 46.8 $ 77.5
------------- -------------
------------- -------------
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 40.9 $ 45.7
------------- -------------
------------- -------------
Income taxes $ 0.1 $ 15.9
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
7
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of S.D. Warren Company and its subsidiaries ("Warren" or the
"Company"). Intercompany balances and transactions have been eliminated in the
preparation of the accompanying unaudited condensed consolidated financial
statements.
The Company is a direct wholly owned subsidiary of SDW Holdings Corporation
("Holdings"). Holdings is an indirect subsidiary of Sappi Limited ("Sappi").
Business
The Company manufactures printing, publishing and specialty papers and has pulp
and timberland operations vertically integrated with certain of its
manufacturing facilities. Together these represent the Company's single line of
business. The Company currently operates four paper mills, a sheeting facility
and several distribution facilities. The Company also owns approximately 911,000
acres of timberlands in the State of Maine.
Sappi Reorganization
On April 27, 1998, Sappi announced the integration of Warren and Sappi's
four international fine papers operations (KNP Leykam, Hannover Papier, Sappi
U.K.'s Blackburn mill and Sappi Fine Papers in South Africa) to create Sappi
Fine Paper plc. The Sappi Fine Paper division will have a corporate head
office in London. The purpose of the reorganization is to focus on Sappi's
main business sectors, fine paper and forest products. Warren products are
being marketed under the name of Sappi Fine Paper North America. The legal
entities of Holdings, Warren and Warren's subsidiaries continue to remain in
existence.
Unaudited Interim Condensed Consolidated Financial Statements
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary for the fair presentation of the Company's
financial position and results of operations. The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with
the audited financial statements included in the Company's Annual Report on Form
10-K for the fiscal year ended October 1, 1997. The unaudited condensed
consolidated results of operations for the three and six months ended April 1,
1998 are not necessarily indicative of results that could be expected for a full
year.
Costs of Computer Software Developed for Internal Use
The Company capitalizes direct costs of developing internal-use computer
software, including costs of external materials and services, and payroll and
related costs for employees directly associated with the project to the extent
their time is spent directly on the project. The costs will be amortized over
the useful life of the completed software. As of April 1, 1998, $5.9 million of
costs have been incurred which are directly related to
8
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
the Company's implementation of a company-wide integrated application system.
These costs have been included in plant assets.
Note 2. Related Party Transactions
During the three and six months ended April 1, 1998, the Company sold products
to certain subsidiaries of Sappi ("Affiliates"), at market prices, primarily in
U.S. Dollars. These Affiliates then sold the Company's products to external
customers. Proceeds from sales to Affiliates are remitted to the Company net of
sales commissions. Sales, net of commissions, were $32.2 million and $62.2
million for the three and six months ended April 1, 1998. Commissions, relating
to these net sales were $2.2 million and $4.3 million, for the respective
periods. Similar net sales for the corresponding periods in the prior year were
$35.3 million and $66.2 million, respectively. Trade accounts receivable from
Affiliates at April 1, 1998 were approximately $23.6 million compared to $24.5
million at October 1, 1997.
Note 3. Inventories (in millions)
<TABLE>
<CAPTION>
October 1, 1997 April 1, 1998
--------------- -------------
<S> <C> <C>
Finished products $ 76.7 $ 96.6
Work in process 21.4 31.6
Pulp, logs and pulpwood 23.9 26.1
Maintenance parts and other supplies 41.4 39.7
--------------- -------------
$ 163.4 $ 194.0
--------------- -------------
--------------- -------------
</TABLE>
Note 4. Long-Term Debt
Modification of Credit Agreement
On March 6, 1998, Holdings and Warren modified Warren's credit arrangement with
a group of domestic and international lenders by refinancing the $196.3 million
aggregate balance outstanding under Warren's Tranche A and Tranche B term loans,
and entering into the Second Amended and Restated Credit Agreement (the
"Modified Agreement"). The Modified Agreement consists of (1) a seven-year
amortizing Term Loan, originally in an aggregate amount of $185.0 million, (2) a
$250.0 million Revolving Credit Facility and (3) a $150.8 million Letter of
Credit Facility (together collectively referred to herein as the "Credit
Facilities"). The write-off of deferred financing fees relating to the $11.3
million repayment of long-term debt pursuant to the modification resulted in
an extraordinary loss of $0.3 million, net of a tax benefit of $0.2 million,
which was recorded in the three months ended April 1, 1998.
Loans under the Modified Agreement bear interest at a rate equal to, at the
Company's option, (1) the ABR Rate plus the Applicable Margin ("ABR Loans") or
(2) the Eurodollar Rate (adjusted for reserves) for the respective interest
period plus the Applicable Margin ("Eurodollar Loans"). Applicable Margin means
a percentage annum rate until June 30, 1998 of 1.25% in the case of Eurodollar
Loans and 0.25% in the case of ABR Loans. Thereafter, the Applicable Margin
shall range (a) in the case of ABR Loans, from 0% to 1.00% and (b) in the case
of Eurodollar loans, from 0.75% to 2.00%, in each case determined
9
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
by 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 quarters basis. ABR Rate means the highest
of (1) the prime rate, (2) the secondary market rate for three month
certificates of deposit (adjusted for reserves) plus 1.00% and (3) the federal
funds rate in effect from time to time plus 0.5%.
Term Loan
After giving effect to the optional prepayment in April 1998 as discussed below,
the Term Loan is payable in semi-annual installments beginning in September 1999
with a final maturity in March 2005. At April 1, 1998, the Term Loan was a
Eurodollar loan with a weighted average interest rate of 6.95%.
Warren is required to prepay the Term Loan with (1) 50% of the net proceeds of
certain aggregate asset sales in excess of $50.0 million and (2) 100% of the net
proceeds of incurrences of indebtedness. Warren is also required to prepay the
Term Loan annually in an amount equal to 50% of the Excess Cash Flow (as
defined) of Warren and its subsidiaries for the prior fiscal year, provided that
the Company will not be required to make any prepayments if it achieves a
certain financial ratio.
Revolving Credit Facility
Under the Revolving Credit Facility, which expires in March 2005, Warren can
borrow up to $250.0 million. In addition, $75.0 million of the Revolving Credit
Facility is available to Warren for letters of credit. At April 1, 1998, $11.0
million, of the Revolving Credit facility was utilized to guarantee the issuance
of letters of credit. In addition, Warren pays a quarterly commitment fee
between 0.20% and 0.50% per annum on the unused portion of the Revolving Credit
facility based on the achievement of a certain financial ratio. At April 1, 1998
the commitment fee percentage was 0.25%.
Letter of Credit Facility
In addition, Warren had approximately $150.8 million of letters of credit
outstanding under the Letter of Credit Facility at April 1, 1998 and October 1,
1997. Warren pays a commission, which is based on the achievement of a certain
financial ratio, of between 0.75% and 2.00% on outstanding letters of credit and
an issuance fee of between 0.125% per annum on letters of credit issued.
Other Remaining Terms
Other significant terms of the credit arrangement pursuant to the Modified
Agreement, including restrictive covenants and security interests are similar
to the terms of Warren's prior credit arrangement.
Optional Prepayments
In December 1997 and April 1998, Warren made optional prepayments on its Tranche
A and Tranche B term loans and its term loan under the Modified Agreement for
aggregate amounts of $75.0 million and
10
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
$40.0 million, respectively. The write-off of deferred financing fees related to
the early extinguishment of debt in December 1997 resulted in an extraordinary
loss of $1.2 million (net of a tax benefit of $0.8 million), which was recorded
in the three months ended December 31, 1997. The write-off of deferred financing
fees related to the early extinguishment of debt in April 1998 was not
significant.
Revenue Bond Refinancing
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 original bonds, net of taxes
of $0.6 million, was $0.9 million.
Note 5. Dividend to Holdings
On December 15, 1997, the Company paid a dividend of $58.2 million to its parent
company, Holdings. In turn, Holdings used the proceeds of the dividend to redeem
its 15% Senior Exchangeable Preferred Stock, including accrued and unpaid
dividends. In connection with the dividend, the Company paid $0.5 million in
consent fees to the holders of its 12% Senior Subordinated Notes due 2004 in
exchange for their consent to the dividend transaction. The dividend and the
consent fees together resulted in $48.5 million and $10.2 million charged to
retained earnings and capital in excess of par, respectively.
Note 6. Restructuring
In October 1996, the Company commenced a restructuring plan which resulted in a
pretax charge of $10.0 million taken during the quarter ended January 1, 1997 to
cover the costs related to the reduction of approximately 200 salaried
positions, or approximately 14% of the Company's salaried work force.
Substantially all amounts have been expended at April 1, 1998.
Note 7. Sale of Business Unit
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. Consistent with this strategy, on March 18,
1998, the Company sold its pressure sensitive business unit located at the
Westbrook mill to Spinnaker Industries, Inc. ("Spinnaker"). This business
unit manufactures pressure sensitive paper products in roll form which are
sold to label printers that produce products used primarily for informational
labels and product identification. Proceeds of the sale consisted of $44.8
million of cash and a subordinated note (the "Note") from Spinnaker for $7.0
million. On March 31, 1998, the Company sold the Note to a third party for
$6.7 million which was received in cash on May 1, 1998. The Company
recognized a pretax gain from the sale of the business unit (net of the loss
on the sale of the Note) of $30.9 million. Sales of the pressure sensitive
business unit included in the accompanying statements of operations for the
six-month periods ended April 1, 1998 and April 2, 1997 were approximately
$34.0 million and $29.0 million, respectively.
In connection with the sale, the Company and Spinnaker executed a Site Lease
and a Site Separation and Service Agreement. Under the Site Lease, the
Company leases to Spinnaker the portion of the Westbrook mill in which the
pressure sensitive business is located for a term of 99 years for nominal
rent. Under the Site Separation and Service Agreement, the Company will
provide Spinnaker, for a limited time at predetermined costs, shipping,
transportation and storage, maintenance and support, and information and
administrative services, which in the aggregate approximate market rates.
In addition, the agreement requires the Company to supply certain raw
materials primarily bodystock, for up to one year at predetermined amounts on
a per-unit basis.
11
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 8. Force Majeure Events
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 was repaired and normal operating mill conditions
were restored in the quarter ended January 1, 1997. As of April 2, 1997, the
Company had accrued in cost of sales a flood damage loss, net of expected
insurance recoveries, of $7.5 million, based on management's estimate at the
time. By the end of fiscal year 1997, all flood related claims were submitted
and finalized resulting in a final net flood loss of $0.6 million. In addition,
the Company received $11.8 million of cash proceeds related to business
interruption claims. Business interruption claim recoveries of $9.0 million and
$2.8 million were recorded as reductions to cost of sales in the second and
fourth quarters of fiscal year 1997, respectively.
Note 9. 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 the other
parameters (e.g., temperature) and is attempting to revise these other
wastewater permit limits for its facilities. While the permit limitation at
these two facilities are being challenged, the Company continues to operate
under existing EPA permits in accordance with accepted administrative practice.
The Company's 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
pre-treatment 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
12
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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.
The group of industrial users and municipalities intervened 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
December 1997, the County notified the Company and other industrial users of its
intentions to terminate their service agreements on January 1, 2000. The Company
believes that under Michigan contract law, related contracts and county bond
resolutions that the County does not have the authority to unilaterally
terminate the service agreements.
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"). The cluster rules were signed on
November 14, 1997 and published on April 15, 1998, with compliance with the
rules generally required beginning in 2001. 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 2001, 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 believes that none of these matters, individually or in the
aggregate, is expected to have a material adverse effect on its financial
position, results of operations or cash flows.
Note 10. Commitments and Contingencies
On May 4, 1998, the Company announced an agreement with Kimberly-Clark to
terminate effective September 1, 1999, a long-term pulp supply contract for pulp
produced at Kimberly-Clark's Mobile, Alabama pulp mill and consumed at the
Company's Mobile paper mill. The Company entered into the contract with
Kimberly-Clark's predecessor, Scott Paper Company ("Scott") at the time of
Warren's acquisition by Sappi from Scott. The cancellation of the pulp contract
is expected potentially to benefit the Company's paper making operations by
providing for increased flexibility in procuring fiber from competitive global
market sources. In addition, the Company believes the contract cancellation will
allow for improved paper machine scheduling efficiencies and product mix. The
Company does not expect the cancellation of the pulp contract to impact its
earnings. Warren has in place 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.
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 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 its 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 October 31,
1998.
13
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The Company is also involved in various other lawsuits and administrative
proceedings. The relief sought in such lawsuits and proceedings includes
injunctions, damages and penalties. Although the final results in these suits
and proceedings cannot be predicted with certainty, it is the present opinion of
the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's financial position, results of operations or
cash flows.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion is a summary of the key factors management considers
necessary in reviewing the Company's results of operations, liquidity and
capital resources. 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. 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. This discussion should be read in conjunction with
the financial statements and related notes of the Company included in this Form
10-Q, as well as the Consolidated Financial Statements and related notes
included in the Company's Annual Report on Form 10-K for the fiscal year ended
October 1, 1997. See "Note Regarding Forward - Looking Statements" on Page 2 of
this report.
Sappi Reorganization
On April 27, 1998, Sappi announced the integration of Warren and Sappi's four
international fine papers operations (KNP Leykam, Hannover Papier, Sappi
U.K.'s Blackburn mill and Sappi Fine Papers in South Africa) to create Sappi
Fine Paper plc. The Sappi Fine Paper division will have a corporate head
office in London. The purpose of the reorganization is to focus on Sappi's
main business sectors, fine paper and forest products. Warren products are
being marketed under the name of Sappi Fine Paper North America. The legal
entities of Holdings, Warren and Warren's Subsidiaries continue to remain in
existence.
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
paper. The exceptional increase in shipments that the industry experienced
during the last half of fiscal year 1997 slowed during the first six months of
fiscal year 1998, coinciding with the lower seasonal demand. Industry shipments
for the first six months of fiscal year 1998 increased 3.0% over the previous
year. During these six months, industry inventory of coated woodfree paper
increased by 89,000 tons to 503,000 tons.
During the first six months of fiscal year 1998, Warren's shipments of coated
woodfree paper grew by 11% over the first six months of fiscal year 1997
indicating an increase in Warren's market share. Coated groundwood continued to
ship at or near capacity rates during the first six months of the year, and this
could continue to provide a price floor for coated woodfree. If this continues,
the Company should be able to maintain the improved pricing achieved in the last
half of fiscal year 1997.
The uncoated free sheet market grew a combined 1.6% in the first six months of
fiscal 1998 versus the same time period one year ago. This growth, however, was
driven by a strong fiscal first quarter, and masks a decline in the market of
2.3% in the three months ended April 1, 1998. The high value products for the
Company's uncoated business are virtually flat compared with the same period
in the prior year,
15
<PAGE>
despite the challenges within the market. The business continues to seek out
more opportunities to positively impact product sales mix. Release casting
papers experienced strengthened demand over the quarter ended April 2, 1997
and six months ended April 2, 1997 with a significant increase in sales
volume during the quarter supported by the installation of a new coater.
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 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 supply/demand
balance and may constrain upward movement of coated prices.
Results of Operations
Three Months Ended April 1, 1998 Compared to Three Months Ended April 2, 1997
Sales
Sales for the three months ended April 1, 1998 were $376.1 million compared to
$345.7 million for the three months ended April 2, 1997, an increase of $30.4
million or 8.8%. The increase was primarily due to a 7.4% increase in paper
shipment volume during the period. Average net revenue per paper ton for the
quarter ended April 1, 1998 was 1.3% higher compared to the same period in the
prior fiscal year.
Cost of Goods Sold
Cost of goods sold for the three months ended April 1, 1998 increased $22.0
million, or 8.2% to $291.1 million compared to $269.1 million for the three
months ended April 2, 1997. Cost of goods sold on a per paper ton basis,
adjusted for flood related accruals in the quarter ended April 2, 1997,
decreased to $830 per ton for the three months ended April 1, 1998 from $835 per
ton for the corresponding prior year quarter. The decrease was primarily due to
the impact of higher productivity, lower pulp costs per ton, and other cost
reduction initiatives.
Selling, General and Administrative Expense
Selling, general and administrative expense increased from $33.7 million for the
three months ended April 2, 1997 to $35.0 million for the three months ended
April 1, 1998. This increase was largely due to costs associated with bringing
computer systems into compliance with year 2000 requirements.
Extraordinary Items
Extraordinary items for the three months ended April 1, 1998 includes the
extraordinary loss resulting from the $0.3 million (net of a tax benefit of $0.2
million) write-off of deferred financing fees related to the $11.3 million
repayment of long-term debt pursuant to the modification of the Company's
credit arrangement.
16
<PAGE>
Interest Expense and Taxes
Interest expense for the three months ended April 1, 1998 was $19.2 million
compared to $26.6 million for the three months ended April 2, 1997. The $7.4
million decrease was primarily due to the impact of lower levels of outstanding
debt and improved bank margins. Interest expense includes the amortization of
deferred financing fees.
Income tax expense, excluding the $0.2 million tax benefit attributable to the
extraordinary item resulting from the write-off of deferred financing fees, was
$25.8 million for the three months ended April 1, 1998 compared to $6.9 million
for the corresponding period in the prior year, primarily reflecting the change
in the Company's earnings level.
Six Months Ended April 1, 1998 Compared to the Six Months Ended April 2, 1997
Sales
Sales for the six months ended April 1, 1998 were $719.5 million compared to
$660.2 million for the six months ended April 2, 1997, an increase of $59.3
million or 9%. The increase was primarily due to a 8.2% increase in paper
shipment volume during the period. Average net revenue per paper ton for the six
months ended April 1, 1998 was virtually flat compared to the same period in the
prior fiscal year.
Cost of Goods Sold
Cost of goods sold for the six months ended April 1, 1998 was $553.6 million
compared to $536.3 million for the six months ended April 2, 1997, an increase
of $17.3 million or 3.2 %. Cost of goods sold on a per paper ton basis decreased
to $821 per ton from $854 per ton for the corresponding prior year period. The
decrease was primarily due to the impact of higher productivity, lower pulp
costs per ton, and other cost reduction initiatives.
Selling, General and Administrative Expense
Selling, general and administrative expense was $69.5 million for the six months
ended April 1, 1998 compared to $66.3 million for the six months ended April 2,
1997, an increase of $3.2 million. The increase of 4.8% is largely due to costs
associated with becoming year 2000 compliant and other administrative costs.
Extraordinary Items
Extraordinary items for the six months ended April 1, 1998 includes the
extraordinary losses resulting from the $0.3 million (net of a tax benefit of
$0.2 million) write-off of deferred financing fees related to the $11.3 million
repayment in long-term debt pursuant to the modification of the Company's credit
arrangement, as well as the $1.2 million (net of a tax benefit of $0.8 million)
write-off of deferred financing fees resulting from optional prepayments the
Company made on its Tranche A and Tranche B term loans for an aggregate amount
of $75.0 million.
Interest Expense and Taxes
Interest expense for the six months ended April 1, 1998 was $40.1 million
compared to $51.8 million for the six months ended April 2, 1997. The $11.7
million reduction in interest expense was primarily due to lower levels of
17
<PAGE>
of outstanding debt and improved bank margins. Interest expense includes the
normal amortization of deferred financing fees, but excludes write-offs due to
accelerated reductions in related financing.
Income tax expense, excluding the aggregate $1.0 million of tax benefits
attributable to the extraordinary items resulting from the write-off of deferred
financing fees, was $36.8 million for the three months ended April 1, 1998
compared to a benefit of $1.1 million for the corresponding period in the prior
year, primarily reflecting the change in the Company's earnings level.
Liquidity and Capital Resources
Net cash provided by operating activities was $45.2 million for the six months
ended April 1, 1998 as compared to $70.6 million for the six months ended April
2, 1997. This lower amount in 1998 largely resulted from the higher inventory
investment during the first half of 1998. The higher net earnings in 1998,
excluding the gain on the sale of the pressure sensitive business unit,
partially offset this use of cash.
The Company's operating working capital was $13.5 million at April 1, 1998
compared to a deficit at October 1, 1997 of $11.6 million. Operating working
capital is defined as trade accounts receivable, other receivables and
inventories less accounts payable and accrued and other current liabilities.
This increase primarily resulted from increases in trade and other accounts
receivables and inventories, and a decrease in accounts payable, offset by an
increase in accrued and other current liabilities.
Capital expenditures for the six months ended April 1, 1998 were $46.4 million,
up from $25.2 million for the six months ended April 2, 1997. Of the $46.4
million, $8.2 million was related to construction in progress on the Company's
new sheeting facility at the Muskegon, Michigan mill. Expenditures for the six
months ended April 1, 1998 also include $5.9 million for the company-wide
integrated application system in progress. Capital expenditures are estimated to
be approximately $100.0 million during fiscal year 1998. In addition, the
Company believes that environmental compliance expenditures, the bulk of which
are for cluster rules compliance, will aggregate approximately $70.0 million to
$112.0 million through 2001, 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 $146.5 million for the six months
ended April 1, 1998 as compared to $37.7 million for the corresponding period of
the previous year. The Company made optional prepayments of its term loans
aggregating $75.0 million during the six months ended April 1, 1998 compared
with an optional prepayment of $24.0 million made in the same period of the
prior fiscal year. In addition, as part of the modification of its credit
arrangement, Warren repaid $11.3 million of its term loans in March 1998.
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.
During December 1997, the Company paid a dividend of $58.2 million to the its
parent, Holdings. In turn, Holdings used the proceeds of the dividend to redeem
the Holdings 15% Senior Exchangeable Preferred Stock, including accrued and
unpaid dividends. In connection with the dividend transaction, the Company paid
$0.5 million of fees to the holders of its 12% Senior Subordinated Notes due
2004 in exchange for their consent to the dividend transaction.
18
<PAGE>
Long-term Debt
On March 6, 1998, Holdings and Warren modified Warren's credit arrangement with
a group of domestic and international lenders by refinancing the $196.3 million
aggregate balance outstanding under Warren's Tranche A and Tranche B term loans,
and entering into the Second Amended and Restated Credit Agreement (the
"Modified Agreement"). The Modified Agreement consists of (1) a seven-year
amortizing Term Loan, originally in an aggregate amount of $185.0 million, (2) a
$250.0 million Revolving Credit Facility and (3) a $150.8 million Letter of
Credit Facility. See Note 4 - Long-Term Debt to the Condensed Consolidated
Financial Statements included in this Form 10-Q for further discussion of the
Modified Agreement.
At April 1, 1998, long-term debt was $633.2 million compared to $739.8 million
at October 1, 1997, a decrease of $106.6 million. The current maturities of
long-term debt balance of $47.5 million at April 1, 1998 includes an optional
term loan prepayment of $40.0 million made in April 1998.
At April 1, 1998, Warren did not have any borrowings outstanding under the
Revolving Credit 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.
In addition, Warren had approximately $150.8 million of letters of credit
outstanding under its Letter of Credit Facility at April 1, 1998 and October 1,
1997.
Sale of Business Unit
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. Consistent with this strategy, on March 18,
1998, the Company sold its pressure sensitive business unit located at the
Westbrook mill to Spinnaker Industries, Inc. ("Spinnaker"). This business
unit manufactures pressure sensitive paper products in roll form which are
sold to label printers that produce products used primarily for informational
labels and product identification. Proceeds of the sale consisted of $44.8
million of cash and a subordinated note (the "Note") from Spinnaker for $7.0
million. On March 31, 1998, the Company sold the Note to a third party for
$6.7 million which was received in cash on May 1, 1998. The Company recognized
a pretax gain from the sale of the business unit (net of the loss on the sale
of the Note) of $30.9 million. Sales of the pressure sensitive business unit
included in the accompanying statements of operations for the six-month periods
ended April 1, 1998 and April 2, 1997 were approximately $34.0 million and
$29.0 million, respectively.
In connection with the sale, the Company and Spinnaker executed a Site Lease and
a Site Separation and Service Agreement. Under the Site Lease, the Company
leases to Spinnaker the portion of the Westbrook mill in which the pressure
sensitive business is located for a term of 99 years for nominal rent. Under the
Site Separation and Service Agreement, the Company will provide Spinnaker, for a
limited time at predetermined costs, shipping, transportation and storage,
maintenance and support, and information and administrative services, which in
the aggregate approximate market rates. In addition, the agreement requires the
Company to supply certain raw materials, primarily bodystock, for up to one year
at predetermined amounts on a per-unit basis.
19
<PAGE>
Force Majeure Events
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 was repaired and normal operating mill conditions
were restored in the quarter ending January 1, 1997. As of April 2, 1997, the
Company had accrued a flood damage loss, net of expected insurance recoveries,
of $7.5 million based on management's estimate at the time. As of April 2, 1997,
the Company had accrued an estimate of $44.7 million for costs to refurbish
plant assets at the Westbrook facility, of which $27.5 million had been received
as insurance proceeds with the remainder, net of a deductible of $3.5 million,
included in other receivables in the condensed consolidated balance sheet at
April 2, 1997. By the end of fiscal year 1997, all flood related claims were
submitted and finalized resulting in a final net flood loss of $0.6 million. In
addition, subsequent to the quarter ended April 2, 1997, the Company received
$11.8 million in cash proceeds related to business interruption claims. Business
interruption claim recoveries of $9.0 million and $2.8 million were recorded as
reductions to cost of sales in the second and fourth quarters of fiscal year
1997, respectively.
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. See Note 9 -
Environmental and Safety Matters to the Condensed Consolidated Financial
Statements included in this Form 10-Q for a discussion of these matters.
Labor Relations
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 and by November 20,
1997, the Company had reached settlements with both of its unions at Westbrook
and both of its unions at the Mobile mill, respectively, with the unions in each
case ratifying new five and six year agreements with more flexible work rule
provisions. On April 17, 1998, the Company reached a settlement on a new three-
year agreement with its Allentown, Pennsylvania facility union providing for a
2% annual wage increase for the term of the agreement. The Company's contracts
with the two unions at the Muskegon mill 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
See Note 10 - Commitments and Contingencies to the Condensed Consolidated
Financial Statements included in this Form 10-Q for a discussion of certain
long-term contracts.
Year 2000
The Company is addressing the millenium computer date ("Year 2000") issue with a
concerted project effort, which includes 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 $7.5 million in expenditures.
20
<PAGE>
Control by Sappi
The Company is a wholly owned subsidiary of Holdings. Sappi Limited owns 100% of
the issued and outstanding voting common stock and 75.07% of the common equity
of Holdings in the form of Holdings Class A Common Stock. Heritage Springer
Limited, a British Virgin Islands company, owns the remaining 24.93% of the
common equity of Holdings in the form of Holdings non-voting, convertible Class
B Common Stock.
Considerations Relating to Holdings' Cash Obligations
Because Holdings has no material assets other than the outstanding common stock
of Warren (all of which is pledged to the lenders under the Company's credit
agreement) and all of the operations of Holdings (other than the management of
its investment in Warren) are currently conducted through Warren and its
subsidiaries, Holdings' ability to meet its cash obligations is dependent upon
the earnings of Warren and its subsidiaries and the distribution or other
provision of those earnings to Holdings. Holdings has no material indebtedness
outstanding (other than advances that may be owed from time to time to Warren
and guarantees in respect of indebtedness of Warren and its subsidiaries).
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
governing the Notes and the Warren Series B Preferred Stock permit Warren to pay
a dividend or otherwise provide funds to Holdings to enable Holdings to meet its
known cash obligations for the foreseeable future, provided that Warren meets
certain conditions. Among such conditions are that Warren maintain specified
financial ratios and comply with certain financial tests.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Intentionally omitted. *
Item 2. Changes in Securities
Intentionally omitted. *
Item 3. Defaults Upon Senior Securities
Intentionally omitted. *
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. *
Item 5. Other Information
Intentionally omitted. *
Item 6. Exhibits and Reports on Form 8-K
Intentionally omitted. *
- ------------------------------------------------------------------------------
* This report is being voluntarily filed with the Commission pursuant to the
registrant's contractual obligations to file with the Commission all financial
information that would be required to be filed on a Form 10-Q. The registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
S.D. Warren Company
Date: May 11, 1998 By: /s/ TREVOR LARKAN
- ------------------- ----------------------------------------------
Trevor Larkan
Vice President (Principal Financial Officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
S.D. WARREN COMPANY'S (THE "COMPANY") CONDENSED STATEMENTS OF OPERATIONS FOR THE
QUARTER ENDED APRIL 1, 1998 AND BALANCE SHEET AS OF APRIL 1, 1998 FOUND
IN PAGE 5 AND 6, RESPECTIVELY, OF THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q
FINANCIAL INFORMATION FOR THE QUARTER ENDED APRIL 1, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> APR-02-1998
<CASH> 77,500
<SECURITIES> 0
<RECEIVABLES> 46,900
<ALLOWANCES> 5,400
<INVENTORY> 194,000
<CURRENT-ASSETS> 374,600
<PP&E> 1,208,100
<DEPRECIATION> 253,900
<TOTAL-ASSETS> 1,561,600
<CURRENT-LIABILITIES> 289,700
<BONDS> 633,200
111,500
0
<COMMON> 0
<OTHER-SE> 321,400
<TOTAL-LIABILITY-AND-EQUITY> 1,561,600
<SALES> 719,500
<TOTAL-REVENUES> 719,500
<CGS> 553,600
<TOTAL-COSTS> 623,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,100
<INCOME-PRETAX> 90,000
<INCOME-TAX> 36,800
<INCOME-CONTINUING> 51,700
<DISCONTINUED> 0
<EXTRAORDINARY> 1,500
<CHANGES> 0
<NET-INCOME> 51,700
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
