<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K
FINANCIAL INFORMATION*
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 1999
(MARK ONE)*
/_/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 1999
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO __________________
COMMISSION FILE NUMBER - NOT APPLICABLE*
S.D. WARREN COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2366983
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
225 FRANKLIN STREET, BOSTON, MA 02110
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 423-7300
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes /_/* No /_/
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes /_/* No /_/
The number of shares of Common Stock outstanding as of December 6, 1999 was 100
shares.
- ----------------------------
* This report is being voluntarily filed with the Securities and Exchange
Commission (the "Commission") pursuant to the registrant's contractual
obligations to file with the Commission all financial information that would be
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934. The registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
Page 1 of 43
<PAGE>
PART I
ITEM 1. BUSINESS
Intentionally Omitted. *
ITEM 2. PROPERTIES
Intentionally Omitted. *
ITEM 3. LEGAL PROCEEDINGS
Intentionally Omitted. *
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Intentionally Omitted. *
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Intentionally Omitted. *
- ---------------------------------
* This report is being voluntarily filed with the Commission pursuant to the
registrant's contractual obligations to file with the Commission all financial
information that would be required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934. The registrant is not required to file reports
pursuant to Section 13 and 15(d) of the Securities Exchange Act of 1934.
Page 2 of 43
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
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 Paper Company ("Scott") all
of the outstanding capital stock of S.D. Warren Company ("Warren" or the
"Company"), 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 "Successor Corporation"). In December 1995, Kimberly-Clark Corporation
("Kimberly-Clark") acquired Scott.
The following table sets forth selected consolidated statements of operations
data, consolidated share data and consolidated balance sheet data for Warren and
its subsidiaries and the Predecessor Corporation. The selected financial data
for the year ended October 2, 1996 (which includes 53 weeks) and the years ended
October 1, 1997, September 30, 1998 and September 29, 1999 are derived from the
audited consolidated financial statements of Warren. 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. The following table should be read in
conjunction with the consolidated financial statements and related footnotes
included in Item 8 of this Form 10-K.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
- ------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 21,
1994 1994 YEAR YEAR YEAR YEAR
THROUGH THROUGH ENDED ENDED ENDED ENDED
DECEMBER 20, SEPTEMBER 27, OCTOBER 2, OCTOBER 1, SEPTEMBER 30, SEPTEMBER 29,
1994 1995 1996 1997 1998 1999
------------- ----------- ----------- ----------- ----------- -----------
S.D. WARREN
COMPANY AND S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
CERTAIN RELATED COMPANY AND COMPANY AND COMPANY AND COMPANY AND COMPANY AND
AFFILIATES SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
------------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Net sales.................$ 313.6 $ 1,155.8 $ 1,441.6 $ 1,405.6 $ 1,458.9 $ 1,424.7
Gross profit.............. 49.9 269.8 255.0 290.2 340.5 294.0
Selling, general and
administrative expense.. 22.2 96.7 134.1 137.6 142.6 151.4
Restructuring............. -- -- -- 10.0 -- 39.6
Income from
operations.............. 27.7 173.1 120.9 142.6 197.9 103.0
Gain on sale of
pressure sensitive
business................ -- -- -- -- 30.9 --
Gain on sale of
timberlands............. -- -- -- -- -- 75.4
Other income
(expense), net.......... (0.5) 3.2 (0.1) 4.1 3.0 7.8
Interest expense.......... 2.3 106.0 108.9 99.0 71.3 55.3
Income tax expense........ 9.9 28.2 5.1 19.3 66.5 54.4
Extraordinary items,
net of tax.............. -- -- (2.0) -- (4.9) (5.3)
Net income................ 15.0 42.1 4.8 28.4 89.1 71.2
</TABLE>
Page 3 of 43
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 21,
1994 1994 YEAR YEAR YEAR YEAR
THROUGH THROUGH ENDED ENDED ENDED ENDED
DECEMBER 20, SEPTEMBER 27, OCTOBER 2, OCTOBER 1, SEPTEMBER 30, SEPTEMBER 29,
1994 1995 1996 1997 1998 1999
------------- ------------ ----------- ------------ ------------ -----------
S.D. WARREN
COMPANY AND S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
CERTAIN RELATED COMPANY AND COMPANY AND COMPANY AND COMPANY AND COMPANY AND
AFFILIATES SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
------------- ------------ ------------ ------------ ------------ ------------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Dividends and
accretion on Warren
Series B preferred
stock................... -- 9.1 13.5 15.2 16.3 13.4
Net income (loss)
applicable to
common stockholder...... 15.0 33.0 (8.7) 13.2 72.8 57.8
CONSOLIDATED SHARE DATA:
Net income (loss)
applicable to
common stockholder......$ -- $ 0.33 $ (0.09) $ 0.13 $ 0.73 $ 0.58
Weighted average
common shares
outstanding............. -- 100 100 100 100 100
CONSOLIDATED BALANCE
SHEET DATA (AT END OF
PERIOD):
Cash and cash
equivalents.............$ 75.0 $ 62.2 $ 49.0 $ 180.7 $ 34.7 $ 73.8
Working capital........... 233.2 177.6 109.4 179.9 67.4 102.1
Total assets.............. 1,737.1 1,887.6 1,725.4 1,632.0 1,507.5 1,483.5
Total debt (including
current maturities)..... 119.3 1,127.4 948.9 767.1 580.2 566.8
Warren Series B
preferred stock......... -- 74.5 88.0 103.2 119.5 --
Parent's equity........... 1,219.1 -- -- -- -- --
Stockholder's equity...... -- 364.8 356.1 369.3 383.3 426.0
</TABLE>
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, and has other sheeting capabilities located at its
Muskegon, Michigan mill (226,000 tons annually) and Mobile, Alabama mill
(144,000 tons annually). The Company also operates several regional distribution
facilities. On November 12,
Page 4 of 43
<PAGE>
1998, the Company sold 905,000 acres of its timberlands in the State of Maine to
Plum Creek Timber Company, L.P. ("Plum Creek"). (See "Other Items Evaluation and
Sale of Noncore Assets.")
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 with Warren surviving. Warren's parent company is an indirect subsidiary
of Sappi Ltd. ("Sappi").
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, Europe and the Far
East; production and pricing levels of pulp and paper; any major disruption in
production at the Company's key facilities; alterations in trade conditions in
the United States and between the United States and other countries where the
Company does business; unanticipated expenses or delays in resolving Year 2000
issues by either the Company or its significant business partners and changes in
environmental, tax and other laws and regulations.
SAPPI REORGANIZATION
On April 27, 1998, Sappi announced the business integration of Warren and its
subsidiaries, doing business as Sappi Fine Paper North America ("SFPNA"), with
Sappi's four international fine paper operations (KNP Leykam, Hannover Papier,
Sappi UK's Blackburn mill and Sappi Fine Paper in South Africa) to create Sappi
Fine Paper plc. The Sappi Fine Paper division has established 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 now being
marketed under the name 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
driven by global supply-demand imbalances, inventory shifts and the
availability and relative pricing of imported paper products. Coated free
sheet industry volume in the United States was up slightly during fiscal year
1999 versus fiscal year 1998. The Company set coated paper volume records
both in the fourth fiscal quarter of 1999 and for the fiscal year 1999.
Increased coated free sheet imports, together with enhanced domestic
production output levels, have over the past few years played a key role in
placing downward pressure on coated free sheet industry pricing. However, as
the supply-demand situation moved closer it was possible in the third fiscal
quarter of 1999 for the Company to announce price increases on sheet-fed
papers, followed by a web price increase during the fourth fiscal quarter.
Uncoated and technical papers experienced strong demand during the first half of
fiscal 1999, although this tapered off slightly during the second half of the
year. The Company continues to target higher margin opportunities in order to
optimize sales mix.
The Company's specialty papers experienced increased sales of its high-end
products in 1999 due to new and improved product offerings as well as the added
production capacity of a new coater installed last year. However, sales of its
low-end commodity products were depressed by worldwide economic conditions and a
continuing market shift to its higher quality products. The net result was a
slight increase in volume over 1998. Excess capacity in the industry has kept
pricing flat in individual product lines, however the improved product mix
resulted in a 9% improvement in average selling prices.
Page 5 of 43
<PAGE>
Any failure of the industry to maintain its current levels of shipments and
pricing 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
consolidated financial position, results of operations and cash flow.
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
NET SALES
Net sales for fiscal year 1999 were $1,424.7 million compared to $1,458.9
million for fiscal year 1998, a decrease of $34.2 million or 2.4%. This
decrease from the previous year was primarily due to a 6.6% decrease in
average net revenue per paper ton, which was partially offset by a 61,800 ton
increase in paper shipment volume, primarily imports, which generally has a
lower margin.
COSTS OF GOODS SOLD
Cost of goods sold for fiscal year 1999 was $1,130.7 million, compared to
$1,118.4 million for fiscal year 1998, an increase of $12.3 million or 1.1%.
Cost of goods sold on a per paper ton basis decreased to $767 per ton from $792
per ton for the prior fiscal year. This $25 per ton decrease was primarily due
to the impact of lower pulp costs and specific efficiency improvements.
RESTRUCTURINGS
In October 1998, the Company announced a restructuring plan at the Westbrook,
Maine mill, which included production and maintenance job consolidations and
eliminations, as well as the decision to shut down one of its paper machines.
This paper machine produced release liner paper and face sheets used for
pressure sensitive papers. The Company recorded a charge of $3.7 million to
cover costs relating to the restructuring which included $2.8 million of costs
associated with the termination of 105 employees, or approximately 14% of the
Westbrook mill workforce in force at that date, and an estimated loss of $0.9
million to dispose of the paper machine. All amounts have been expended as of
September 29, 1999.
On April 13, 1999, the Company announced the closures at its facility in
Westbrook, Maine of both the pulp mill and a paper machine which made coated
base paper. Approximately 315 employees, both salaried and hourly, have been
affected by the closures, or approximately 48% of the then remaining Westbrook
mill workforce. The Company has recorded a pre-tax charge of approximately $35.9
million during the third quarter of fiscal year 1999. The restructuring costs
associated with the above closures include $20.3 million of non-cash expenses
relating to fixed asset write-offs and $15.6 million of accruals of one-time
cash costs, primarily associated with the termination of employees. The closures
are expected to improve future operating income. Of the $35.9 million charged,
$34.8 million has been utilized as of September 29, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense totaled $151.4 million for fiscal
year 1999 compared to $142.6 million for fiscal year 1998, an increase of $8.8
million. The increase is primarily attributable to an increase of $6.3 million
in the management advisory fee charged by Sappi affiliates (see Note 20).
EXTRAORDINARY ITEMS
The premium of $7.3 million paid in connection with the purchase of $92.3
million face value of the Company's 12% Series B Senior Subordinated Notes due
2004 (the "Notes"), together with the accelerated amortization of
Page 6 of 43
<PAGE>
deferred financing fees relating to the purchased Notes and the repayments of
term loans during fiscal year 1999, resulted in extraordinary losses aggregating
$5.3 million (net of $3.8 million of tax benefits).
OTHER INCOME, NET
Other income, net totaling $7.8 million and $3.0 million includes interest
income of $5.9 million and $4.0 million for fiscal years 1999 and 1998,
respectively.
INTEREST EXPENSE AND TAXES
Interest expense for fiscal year 1999 was $55.3 million compared to $71.3
million for fiscal year 1998. The $16.0 million reduction in interest expense
was primarily due to lower levels of outstanding debt and improved bank margins.
Interest expense for fiscal year 1999 includes $6.0 million of interest related
to the 14% Subordinated Exchange Debentures issued on June 15, 1999. Interest
expense includes the normal amortization of deferred financing fees, but
excludes write-offs due to accelerated reductions in related financing.
For fiscal year 1999, income tax expense, excluding the aggregate $3.8 million
of tax benefits attributable to the extraordinary losses, was $54.4 million
compared to $66.5 million for fiscal year 1998. This reflects the change in the
Company's earnings level including the impact of the $75.4 million gain from the
timberlands sale, offset by the $39.6 million restructuring charge.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
NET SALES
Net sales for fiscal year 1998 were $1,458.9 million compared to $1,405.6
million for fiscal year 1997, an increase of $53.3 million or 3.8%. The increase
was achieved primarily by a 54,000 ton or 4.1% increase in paper shipment volume
during the period. Average net revenue per paper ton for the fiscal year 1998
was 0.3% lower compared to the prior fiscal year.
COST OF GOODS SOLD
Cost of goods sold for fiscal year 1998 was $1,118.4 million and relatively flat
compared to $1,115.4 for fiscal year 1997. Cost of goods sold on a per paper ton
basis decreased to $792 per ton from $820 per ton for the prior fiscal year.
This $28 per ton decrease was accomplished through improvements in productivity,
improved utilization per ton of raw materials and specific efficiency and cost
reduction initiatives.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense totaled $142.6 million for fiscal
year 1998 compared to $137.6 million for fiscal year 1997, an increase of $5.0
million. The increase is primarily attributable to $6.7 million of costs
associated with becoming Year 2000 compliant offset by decreases in other
administrative costs.
EXTRAORDINARY ITEMS
The premium of $5.3 million paid in connection with the purchase of $50.4
million face value of the Company's Notes, together with the accelerated
amortization of deferred financing fees relating to the purchased Notes and the
repayments of term loans during fiscal year 1998, resulted in extraordinary
losses aggregating $4.9 million (net of $3.4 million of tax benefits).
OTHER INCOME, NET
Other income, net includes interest income of $4.0 million and $4.4 million for
fiscal years 1998 and 1997, respectively.
Page 7 of 43
<PAGE>
INTEREST EXPENSE AND TAXES
Interest expense for fiscal year 1998 was $71.3 million compared to $99.0
million for fiscal year 1997. The $27.7 million reduction in interest expense
was primarily due to lower levels 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.
For fiscal year 1998, income tax expense, excluding the aggregate $3.4 million
of tax benefits attributable to the extraordinary losses, was $66.5 million
compared to $19.3 million for fiscal year 1997. This reflects the change in the
Company's earnings level including the impact of the $30.9 million gain on the
sale of the Company's pressure sensitive business.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $154.2 million for fiscal year
1999 as compared to $166.2 million for fiscal year 1998. This decrease of $12.0
million in 1999 resulted primarily from lower net income of $17.9 million and
cash used from changes in working capital of $21.8 million, partially offset by
the net change in the gain/loss on asset disposals of $24.2 million and an
increase in depreciation expense of $3.1 million.
The Company's operating working capital was a deficit of $7.9 million at
September 29, 1999 compared to a surplus of $0.4 million at September 30, 1998.
Operating working capital is defined as trade accounts receivable, other
receivables and inventories less accounts payable and accrued and other current
liabilities.
Cash flows from investing activities provided $54.2 million of cash in fiscal
year 1999 as compared to uses of cash of $60.9 million in fiscal year 1998.
Fiscal years 1999 and 1998 investing activities include proceeds of $156.0
million received in connection with the monetization of a portion of the notes
receivable received on the sale of the timberlands (see Note 4), and $51.5
million received from the sale of the pressure sensitive business, respectively.
Capital expenditures for fiscal year 1999 were $107.3 million, down from $111.0
million for fiscal year 1998. Of the $107.3 million, $10.0 million was related
to the Company's new sheeting and warehouse facility at the Muskegon, Michigan
mill and $11.7 million was related to the dry fiber system at the Mobile,
Alabama mill. Expenditures for fiscal year 1999 also include $33.9 million for
the company-wide integrated application system implementation. Expenditures for
this implementation are expected to aggregate $53.5 million through calendar
year 2000. In addition, the Company believes that future environmental
compliance expenditures, the bulk of which are for cluster rules compliance,
will aggregate approximately $30.0 million to $55.0 million through 2001.
Approximately $20.0 million has already been incurred, primarily for required
improvements at the Somerset mill, which has installed elemental chlorine free
(ECF) technology and is in compliance with the effluent guidelines of the
cluster rules.
The Company believes that cash generated by operations and net proceeds from the
sale of certain noncore assets will be sufficient to meet its ongoing operating
and capital expenditure requirements.
Net cash used in financing activities was $169.3 million for fiscal year 1999
compared to $251.3 million for the previous year. In fiscal year 1999, the
Company made term loan payments of $54.2 million and purchased $92.3 million
face value of the Notes for cash of $99.6 million. In fiscal year 1998, the
Company made aggregate debt repayments of $191.0 million, including the purchase
of $50.4 million face value of the Notes for cash of $55.7 million. The current
maturities of long-term debt balance of $8.4 million at September 29, 1999
consists primarily of the amounts payable in March 2000 and September 2000 under
the Company's term loan facility pursuant to the Credit Agreement (as defined
below). The Company may continue to purchase the Notes subject to opportune
pricing.
During December 1997, the Company paid a dividend (the "Dividend") of $58.2
million to its parent company, Holdings. In turn, Holdings used the proceeds of
the Dividend to redeem the Holdings 15% Senior Exchangeable
Page 8 of 43
<PAGE>
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
the Notes in exchange for their consent to the Dividend transaction.
On March 29, 1999 the Company paid a $15.0 million cash dividend to its parent,
Holdings. In turn, Holdings advanced $15.0 million to an affiliate of Sappi in
the form of a promissory note due April 2002.
The impact of inflation did not have a material effect on the Company's
consolidated financial statements for fiscal years 1999, 1998 and 1997.
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 "Credit
Agreement"). The Credit 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 $136.3 million Letter of Credit Facility.
See Note 11 - Long-Term Debt in the Notes to Consolidated Financial Statements
included in this Form 10-K for further discussion of the Credit Agreement.
At September 29, 1999, long-term debt was $558.4 compared to $573.8 million at
September 30, 1998, a decrease of $15.4 million. This includes the net effect of
the exchange of the Preferred Stock (see below) of $132.9 million. At September
29, 1999, Warren did not have any borrowings outstanding under the Revolving
Credit Facility. At September 29, 1999 and September 30, 1998, $14.9 million and
$16.6 million, respectively, of the Revolving Credit facility was utilized to
guarantee the issuance of letters of credit. At September 29, 1999 and September
30, 1998, availability under the Revolving Credit Facility was $235.1 million
and $233.4 million, respectively. In addition, Warren had approximately $120.2
million and $136.3 million of letters of credit outstanding under its Letter of
Credit Facility at September 29, 1999 and September 30, 1998, respectively.
The Credit Agreement 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 elected to enter into fixed rate interest protection agreements
on a portion of its outstanding debt. Debt covered by such interest rate
protection agreements remained at $25.0 million at September 29, 1999 and
September 30, 1998, respectively, and will expire in January 2000.
On June 15, 1999 (the "Exchange Date"), the Company exchanged its 14% Series
B Senior Exchangeable Preferred Stock due 2006 (the "Preferred Stock") into
14% Series B Subordinated Exchange Debentures due 2006 (the "Exchange
Debentures") pursuant to its option in the Preferred Stock agreement. The
Company exchanged all of the Preferred Stock at the liquidation value of
$139.0 million, representing $25.00 per share plus accrued and unpaid
dividends for Exchange Debentures with a principal amount of $139.0 million.
The difference between the Preferred Stock's liquidation value of $139.0
million and the carrying value of $132.9 million as of the Exchange Date has
been recorded as a discount on the Exchange Debentures and is being amortized
as interest expense, using the effective interest rate method, over the
remaining term of the Exchange Debentures. On the Exchange Date, all rights
with respect to the Preferred Stock were terminated, and dividends on the
Preferred Stock ceased to accrue on and after the Exchange Date.
Page 9 of 43
<PAGE>
FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and debt. The Company has
used interest rate 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
EVALUATION AND SALE OF NONCORE ASSETS
In May 1997, Sappi announced that it was evaluating the sale of noncore
assets throughout the Sappi group. Consistent with this strategy, on March
18, 1998, the Company sold its pressure sensitive business located at the
Westbrook, Maine mill to Spinnaker Industries, Inc. ("Spinnaker"). Proceeds
of the sale consisted of $44.8 million of cash and a subordinated note (the
"Spinnaker Note") for $7.0 million. On March 31, 1998, the Company sold the
Spinnaker 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 Spinnaker Note) of $30.9
million. Sales of the pressure sensitive business unit included in the
accompanying consolidated statements of operations for fiscal 1997 and 1998
were approximately $62.1 million and $27.7 million, respectively.
On November 12, 1998 the Company sold its interests in approximately 905,000
acres of timberlands located in Maine and certain machinery and equipment to
Plum Creek Timber Company, L.P. ("Plum Creek") in exchange for notes
receivable (the "Notes Receivable") with a fair market value of $177.1
million and cash of approximately $3.3 million. The Notes Receivable have an
aggregate face amount of $171.4 million and original maturities ranging from
8.25 years to 12.25 years. Interest rates on the Notes Receivable (originally
ranging from 7.17% to 7.23% per annum) were reset on February 12, 1999 and
now range from 7.62% to 7.83% per annum. To consummate the sale, the Company
transferred all of its timberlands and related machinery and equipment to a
wholly owned limited liability company, all of the membership interest of
which was then sold to Plum Creek. The Company recognized a pre-tax gain from
the sale of the timberlands of $75.4 million. The timberlands and machinery
and equipment sold, with carrying amounts of $96.0 million and $2.9 million,
respectively, are shown in the accompanying consolidated balance sheet at
September 30, 1998 as assets under agreement to sell.
The Company and Plum Creek executed a fiber supply agreement (the "Supply
Agreement"), with an initial term of 25 years and with three five-year renewal
options. Under the Supply Agreement, the Company will purchase hardwood pulpwood
at an annual minimum of 300,000 to 375,000 tons, or approximately 13% of the
Company's annual requirements, at market prices.
On January 21, 1999, the Notes Receivable were contributed to a wholly owned
bankruptcy remote subsidiary, SDW Timber III ("SDW III"). On February 12,
1999, SDW III issued an aggregate of $156.0 million of SDW III Notes Payable
using the Notes Receivable as a pledge of security. The SDW III Notes Payable
mature in three installments ranging from 8 to 12 years and bear interest
payable semi-annually at rates ranging from 7.16% to 7.36% per annum. The
earnings of SDW III, which consist of interest income earned on the Notes
Receivable, net of interest expense incurred on the SDW III Notes Payable,
are included in other income in the accompanying consolidated statement of
operations for the year ended September 29, 1999. The Company's investment in
the undivided interest in SDW III of approximately $25.2 million is included
in other noncurrent assets in the accompanying consolidated balance sheet as
of September 29, 1999.
FORCE MAJEURE EVENTS
On November 2, 1999, a paper machine malfunction caused a fire at the Muskegon,
Michigan mill. The fire resulted in the temporary closure of the mill, but
within 24 hours normal operating mill conditions were restored to the entire
facility except for the affected paper machine. The Company anticipates
producing paper on the
Page 10 of 43
<PAGE>
affected paper machine during the first week of December 1999. Total losses
are not expected to exceed the Company's insurance coverage limits, which
include both business interruption and property loss coverage.
See Note 5 - Force Majeure Event in the Notes to Consolidated Financial
Statements included in this Form 10-K for a discussion of damages and insurance
recoveries resulting from the flooding of the Westbrook mill in October 1996.
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 14 - Environmental and Safety Matters in the Notes to
Consolidated Financial Statements included in this Form 10-K for a discussion
of these matters.
LABOR RELATIONS
The Company has long-term labor contracts which reflect flexible work rule
provisions at each of its production sites. The current labor contracts for
Somerset, Muskegon, Mobile and Westbrook expire in 2002, 2004, 2003 and 2002,
respectively. The Company has experienced no work stoppage in the U.S. in the
past nine years and believes that its relationship with its employees is
satisfactory.
LONG-TERM CONTRACTS
See Note 15 - Commitments and Contingencies in the Notes to Consolidated
Financial Statements included in this Form 10-K for a discussion of certain
long-term contracts.
YEAR 2000
The statements in this section are "Year 2000 readiness disclosure" within the
meaning of the "Year 2000 Information and Disclosure Act."
The millennium computer date ("Year 2000") issue is the result of computer
programs using a two digit format, as opposed to four digits, to indicate the
year. Such computer systems will be unable to correctly interpret dates beyond
the year 1999, which could cause systems failure or other computer errors,
leading to significant disruption in operations and the potential for short-term
business failure. All of these issues are collectively referred to as the Year
2000 issue.
The Company commenced its Year 2000 remediation project during the fourth
quarter of fiscal year 1996. The enterprise-wide project is intended to
remediate the cross-century date processing problem within the Company's
computer systems including embedded production control systems and data
communications infrastructure. The Company has contracted with a national
consulting firm specializing in Year 2000 initiatives. The consulting firm is
employing its compliance methodology and staff to advise and assist in the
management of the Company's Year 2000 remediation project.
The Company completed the compilation of the enterprise systems inventory and
the assignment of compliance strategies was substantially completed in the third
quarter of fiscal year 1997. The enterprise systems inventory includes the
Company's business applications, manufacturing execution systems, production
control systems and computing environments. The embedded systems inventory was
substantially completed in July 1998.
Compliance strategies employed by the Year 2000 project team include system
remediation (compliance modifications), system retirement, and system
replacement (which includes certain systems being replaced by the
implementation of a company-wide integrated application system ("the
integrated system")). The target date for all systems to be Year 2000 ready
was June 30, 1999. This objective was substantially achieved. All relevant
systems are now fully Year 2000 compliant.
Page 11 of 43
<PAGE>
During the remainder of 1999, focus was shifted from initial remediation of
technologies to "clean management" of the Company's overall Year 2000
readiness and to business contingency planning. These activities will
continue through the end of 1999.
The Company's Year 2000 contingency planning efforts are nearly complete.
Specific plans have been developed to address all potentially affected core
business administrative and manufacturing functions. The centerpiece of the
Company's contingency planning initiative is a "Day Zero" plan, which provides
for an enterprise communications center to be active during the New Year
transition period of December 31, 1999 through January 4, 2000. This center will
facilitate strategic administration of the Company's business contingency plans
during the New Year transition period. The intent of these activities is to
enable Warren to effectively address any internal or external Year 2000 impact
scenarios.
With respect to the Year 2000 assessment of the Company's critical business
partners, the Year 2000 project team is working with Company representatives to
identify critical vendors and customers whose Year 2000 failure would have a
significant adverse effect on Warren's manufacturing or distribution processes.
Assessment of these key business partners and their Year 2000 preparedness has
been conducted through the use of written surveys as well as telephone or onsite
interviews. Contingency plans are under development to address any material
potential for failure of key vendors. These activities are ongoing and will
continue through the remainder of 1999.
For those systems not being replaced by the implementation of the integrated
system, the Year 2000 initiative is estimated to cost a total of $13.9 million,
which includes $12.6 million for remediation services by third party consultants
and $1.3 million for new hardware and software. For fiscal years 1999, 1998 and
1997, $6.3 million, $6.7 million and $0.4 million, respectively, of primarily
consulting costs have been expensed.
Costs to implement the integrated system totaled $52.9 million, which
includes $31.5 million, $7.1 million, $2.8 million and $11.5 million for
consulting, software and hardware, and other internal costs, respectively.
The amounts capitalized and expensed were $33.9 million and $3.3 million,
respectively, in fiscal year 1999 and $15.7 million and $0, respectively, in
fiscal year 1998.
CONTROL BY SAPPI
The Company is a wholly owned subsidiary of Holdings. Sappi 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
The Company expects that it may make certain cash payments to Holdings or
other affiliates during fiscal 2000 to the extent cash is available and to
the extent it is permitted to do so under the terms of the Credit Agreement
and the Indentures relating to the Notes and Exchange Debentures. Such
payments may include, among other things, (i) amounts under a tax sharing
agreement between the Company and Holdings necessary to enable Holdings to
pay the Company's taxes, (ii) an administrative fee to Holdings and amounts
to cover specified costs and expenses of Holdings, (iii) an annual advisory
fee for management advisory services to Sappi and/or its affiliates, the
payment of which is limited to $1.0 million in any one year and (iv) any
dividends that might be paid to Sappi. The accompanying consolidated balance
sheets at September 29, 1999 and September 30, 1998, respectively, include an
accrual of $6.3 million and $0 in relation to the above annual advisory fee,
the payment of which is subject to the above mentioned limitations under the
terms of its current financial instruments.
Because Holdings has no material assets other than the outstanding common stock
of Warren (all of which is
Page 12 of 43
<PAGE>
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
relating to the Notes and the Exchange Debentures 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 maintains
specified financial ratios and complies with certain financial tests.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 - Summary of Significant Accounting Policies in the Notes to
Consolidated Financial Statements in this Form 10-K for a discussion of the
Company's plans for the implementation of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and the Accounting Standards Executive Committee's Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with changes in interest rates.
The Company's objective in managing its exposure to interest rate change is to
limit the impact of interest rate changes on earnings and cash flow and to lower
its overall borrowings costs. Short-term borrowings, if required, are used to
meet working capital requirements and long-term borrowings are generally used to
finance long-term investments. 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 swaps as a means of managing
interest rate risk associated with relevant outstanding debt receivables. The
carrying amounts of cash, cash equivalents, accounts receivable and accounts
payable approximate fair value due to the short-term nature of these
instruments.
The Company's Credit Facility bears interest at rates, which fluctuate with
changes in the Eurodollar rate. The majority of the Company's long-term debt,
approximately $476.0 million at September 29, 1999, is at fixed interest rates.
The Company's interest expense on its Credit Facility and the fair value of its
fixed long-term debt is sensitive to changes in market interest rates. The
effect of a 10% adverse change in market interest rates on the Company's
interest expense and the fair value of its long-term debt would be $0.8 million
and $4.2 million, respectively. The fair value of the Company's interest rate
swap would not be materially affected by a change in interest rates.
During the fiscal year ended September 29, 1999, the Company did not engage in
foreign currency hedging activities. The currency exchange impact from the
Company's transactions with its affiliates was immaterial.
Page 13 of 43
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
S.D. WARREN COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
PAGE
----
<S> <C>
Independent Auditors' Report................................................................................15
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended October 1, 1997, September 30, 1998
and September 29, 1999..................................................................................16
Consolidated Balance Sheets as of September 30, 1998 and September 29, 1999.................................17
Consolidated Statements of Cash Flows for the years ended October 1, 1997, September 30, 1998 and
September 29, 1999......................................................................................18
Consolidated Statements of Changes in Stockholder's Equity for the years ended October 1, 1997,
September 30, 1998 and September 29, 1999...............................................................19
Notes to Consolidated Financial Statements..................................................................20
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts.........................................................42
</TABLE>
Page 14 of 43
<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 September 29, 1999 and September 30, 1998 and
the related consolidated statements of operations, changes in stockholder's
equity, and cash flows for each of the three years in the period ended September
29, 1999. 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 September 29,
1999 and September 30, 1998 and the results of its operations and its cash flows
for each of the three years in the period ended September 29, 1999, 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.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 15, 1999 (December 2, 1999 as to the second paragraph of Note 5)
Page 15 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------
October 1, September 30, September 29,
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Net sales...........................................$ 1,405.6 $ 1,458.9 $ 1,424.7
Cost of goods sold.................................. 1,115.4 1,118.4 1,130.7
---------- ---------- ----------
Gross profit........................................ 290.2 340.5 294.0
Selling, general and administrative expense......... 137.6 142.6 151.4
Restructuring....................................... 10.0 -- 39.6
---------- ---------- ----------
Income from operations.............................. 142.6 197.9 103.0
Gain on sale of pressure sensitive business......... -- 30.9 --
Gain on sale of timberlands......................... -- -- 75.4
Other income, net................................... 4.1 3.0 7.8
Interest expense.................................... 99.0 71.3 55.3
---------- ---------- ----------
Income before income taxes and extraordinary items.. 47.7 160.5 130.9
Income tax expense.................................. 19.3 66.5 54.4
---------- ---------- ----------
Income before extraordinary items................... 28.4 94.0 76.5
Extraordinary items, net of tax..................... -- (4.9) (5.3)
---------- ---------- ----------
Net income.......................................... 28.4 89.1 71.2
Dividends and accretion on Warren Series B
redeemable exchangeable preferred stock.......... 15.2 16.3 13.4
---------- ---------- ----------
Net income applicable to common stockholder.........$ 13.2 $ 72.8 $ 57.8
========== ========== ==========
Earnings per common share:
Income before extraordinary items applicable to
common stockholder.............................$ 0.13 $ 0.78 $ 0.63
========== ========== ==========
Net income applicable to common stockholder......$ 0.13 $ 0.73 $ 0.58
========== ========== ==========
Weighted average number of shares outstanding....... 100 100 100
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
Page 16 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, September 29,
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.....................................$ 34.7 $ 73.8
Trade accounts receivable, net................................ 43.0 59.4
Other receivables............................................. 18.1 18.0
Inventories, net.............................................. 166.8 173.4
Deferred income taxes......................................... 28.5 20.4
Other current assets.......................................... 10.2 24.2
---------- ----------
Total current assets........................................ 301.3 369.2
Plant assets, net............................................... 970.5 974.1
Assets held under agreement to sell............................. 98.9 --
Goodwill, net................................................... 84.4 79.0
Deferred financing fees, net.................................... 28.0 22.6
Other assets, net............................................... 24.4 38.6
---------- ----------
Total assets................................................$ 1,507.5 $ 1,483.5
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt..........................$ 6.4 $ 8.4
Accounts payable.............................................. 129.7 155.8
Accrued and other current liabilities......................... 97.8 102.9
---------- ----------
Total current liabilities................................... 233.9 267.1
---------- ----------
Long-term debt:
Term loans.................................................... 138.6 82.4
Senior subordinated notes..................................... 324.6 232.4
Exchange debentures........................................... -- 133.1
Revenue bonds................................................. 110.6 110.5
---------- ----------
Total long-term debt........................................ 573.8 558.4
Deferred income taxes........................................... 81.7 113.9
Other liabilities............................................... 115.3 118.1
---------- ----------
Total liabilities........................................... 1,004.7 1,057.5
---------- ----------
Commitments and contingencies (Notes 14 and 15)
Warren Series B redeemable exchangeable preferred stock
(liquidation value, $126.1 and $0, respectively).............. 119.5 --
---------- ----------
Stockholder's equity:
Common stock ($.01 par value; 1,000 shares authorized;
100 shares issued and outstanding).......................... -- --
Capital in excess of par value................................ 321.4 321.4
Retained earnings............................................. 61.9 104.6
---------- ----------
Total stockholder's equity.................................. 383.3 426.0
---------- ----------
Total liabilities and stockholder's equity..................$ 1,507.5 $ 1,483.5
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
Page 17 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------
October 1, September 30, September 29,
1997 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................... $ 28.4 $ 89.1 $ 71.2
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation................................ 86.6 80.9 84.0
Cost of timber harvested and amortization
of logging roads........................... 2.1 1.8 0.2
Amortization of intangibles................. 26.6 8.1 7.8
Loss on force majeure event................. 0.6 -- --
Deferred income taxes....................... 3.8 32.8 40.3
Extraordinary items......................... -- 8.3 9.1
Gain on sale of timberlands................. -- -- (75.4)
Gain on sale of pressure sensitive business. -- (30.9) --
Loss on disposal of fixed assets............ -- -- 20.3
Other....................................... (3.6) 1.4 0.2
Changes in assets and liabilities:
Trade and other accounts receivable, net... 28.2 (10.9) (17.3)
Inventories, net........................... 32.3 (13.0) (6.6)
Accounts payable, accrued and other current
liabilities............................... 28.2 (2.0) 28.0
Other assets and liabilities............... (10.6) 0.6 (7.6)
------------- ------------- ----------
Net cash provided by operating
activities.............................. 222.6 166.2 154.2
------------- ------------- ----------
Cash Flows from Investing Activities:
Monetization of note receivable............ -- -- 156.0
Investment in plant assets and timber
resources................................. (61.0) (111.0) (107.3)
Proceeds from disposal of plant assets and
timber resources.......................... 151.0 0.4 3.3
Proceeds from sale of pressure sensitive
business.................................. -- 51.5 --
Refurbishment of plant assets.............. (40.1) -- --
Insurance proceeds to refurbish plant
assets.................................... 40.9 -- --
Other investing activities................. (4.4) (1.8) 2.2
------------- -------------- -----------
Net cash provided by (used in) investing
activities............................ 86.4 (60.9) 54.2
------------- -------------- -----------
Cash Flows from Financing Activities:
Proceeds from short term borrowings....... -- -- 54.5
Procceds from issuance of long-term
debt..................................... 38.1 -- --
Repayments of short term borrowings....... -- -- (54.5)
Repayments of long-term debt, including
premiums paid............................ (214.0) (191.0) (153.8)
Dividends paid to parent.................. -- (58.2) (15.0)
Other financing activities................ (1.4) (2.1) (0.5)
------------- -------------- -----------
Net cash used in financing activities.. (177.3) (251.3) (169.3)
------------- -------------- -----------
Net change in cash and cash equivalents... 131.7 (146.0) 39.1
Cash and Cash equivalents:
Beginning of period.................... 49.0 180.7 34.7
------------- -------------- -----------
End of period.......................... $ 180.7 $ 34.7 $ 73.8
============= ============== ===========
</TABLE>
See accompanying notes to consolidated financial statements
Page 18 of 43
<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, October 2, 1996 100 $ -- $ 331.8 $ 24.3 $ 356.1
Net income -- -- -- 28.4 28.4
Dividends accrued and accretion on Warren
Series B redeemable exchangeable preferred
stock -- -- -- (15.2) (15.2)
----------- ----------- ------------ ----------- ------------
Balance, October 1, 1997 100 331.8 37.5 369.3
Net income -- -- -- 89.1 89.1
Dividends accrued and accretion on Warren
Series B redeemable exchangeable preferred
stock -- -- -- (16.3) (16.3)
Dividend paid to parent -- -- (10.4) (47.8) (58.2)
Consent fees and other charges -- -- -- (0.6) (0.6)
----------- ----------- ------------ ----------- ------------
Balance, September 30, 1998 100 -- 321.4 61.9 383.3
Net income -- -- -- 71.2 71.2
Dividends accrued and accretion on Warren
Series B redeemable exchangeable preferred
stock -- -- -- (13.4) (13.4)
Dividend paid to parent -- -- -- (15.0) (15.0)
Other charges -- -- -- (0.1) (0.1)
----------- ----------- ------------ ----------- ------------
Balance, September 29, 1999 100 $ -- $ 321.4 $ 104.6 $ 426.0
=========== =========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
Page 19 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS
S.D. Warren Company and subsidiaries (the "Company" or "Warren") manufactures
printing, publishing and specialty papers and has pulp 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. Prior
to November 12, 1998, the Company also owned approximately 905,000 acres of
timberlands in the State of Maine. On November 12, 1998, the Company sold its
timberlands (see Note 4).
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, with Warren surviving. Scott has since been acquired by
Kimberly-Clark Corporation ("Kimberly-Clark"). Holdings is an indirect
subsidiary of Sappi Limited ("Sappi").
SAPPI REORGANIZATION
On April 27, 1998, Sappi announced the business integration of Warren and its
subsidiaries, doing business as Sappi Fine Paper North America ("SFPNA"), with
Sappi's four international fine paper operations (KNP Leykam, Hannover Papier,
Sappi UK's Blackburn mill and Sappi Fine Paper in South Africa) to create Sappi
Fine Paper plc. The Sappi Fine Paper Division has established 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 now being
marketed under the name Sappi Fine Paper North America. The legal entities of
Holdings, Warren and Warren's subsidiaries continue to remain in existence.
CONTROL BY SAPPI
The Company is a wholly owned subsidiary of Holdings. Sappi 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.
NOTE 2 - 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.
Page 20 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
FISCAL YEAR
The Company and its subsidiaries' fiscal year ends on the Wednesday closest to
the last day of September.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of highly liquid investments with
insignificant interest rate risk and original maturities of three months or less
at the date of acquisition. Similar investments with original maturities beyond
three months are considered short-term marketable securities. At September 30,
1998 and September 29, 1999, 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. For 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 fiscal years 1997, 1998 and 1999, the Company capitalized interest of
approximately $3.7 million, $4.1 million and $3.9 million, respectively.
On November 12, 1998, the Company sold its interests in the timberlands, located
in Maine. As of September 29, 1999 there are no assets remaining on the balance
sheet related to the timberland investment (see Note 4).
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.
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 are being amortized over
the estimated useful life of the completed software. As of September 30, 1998
and September 29, 1999, $15.7 million and $33.9 million of
Page 21 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
costs have been incurred which are directly related to the Company's
implementation of a company-wide integrated application system. These costs have
been included in plant assets.
GOODWILL
Goodwill, which resulted from Sappi's 1994 acquisition of the Company, is being
amortized for financial statement purposes on a straight-line basis over 25
years. On an ongoing basis, the carrying value of goodwill is evaluated on the
basis of whether anticipated operating cash flows generated by the acquired
businesses are adequate to recover the recorded asset balance over its estimated
useful life. The goodwill balance at September 30, 1998 and September 29, 1999
was approximately $84.4 million and $79.0 million, respectively, net of
accumulated amortization of approximately $15.1 million and $20.0 million,
respectively.
DEFERRED FINANCING FEES
The deferred financing balance at September 30, 1998 and September 29, 1999
was $28.0 million and $22.6 million, respectively, net of accumulated
amortization of $34.5 million and $40.6 million, respectively. Deferred
financing fees are being amortized over the life of the related debt. As a
result of the partial early extinguishment of debt during fiscal years 1998
and 1999, the Company recorded pre-tax extraordinary losses of $3.0 million
and $1.8 million, respectively, related to the write-off of deferred
financing fees which were partially offset by a deferred tax benefit of $1.3
million and $0.7 million in fiscal years 1998 and 1999, respectively. The
Company also extinguished certain debt during fiscal year 1997. The net gain
(loss) on such 1997 extinguishments was not significant (see Note 11).
OTHER ASSETS
Other assets include intangible assets aggregating $14.3 million and $12.5
million at September 30, 1998 and September 29, 1999, respectively. These
intangible assets are being amortized over their average estimated useful lives
of approximately 11 years. Intangibles are stated net of accumulated
amortization of approximately $6.8 million and $8.5 million at September 30,
1998 and September 29, 1999, respectively. The remaining balance of other assets
at September 30, 1998 and September 29, 1999 consisted primarily of deposits and
the Company's investment in SDW III, respectively.
FINANCIAL INSTRUMENTS
The Company uses interest rate swap agreements ("Swaps") 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. Cash flows from Swaps
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.
Page 22 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
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 is
reasonably estimable. The present value of such claims was determined using a
discount rate of 5.5% for fiscal years 1998 and 1999. The gross liability was
$31.3 million and $25.8 million at September 30, 1998 and September 29, 1999,
respectively.
RESEARCH AND DEVELOPMENT EXPENDITURES
Expenditures for research and development are charged to expense as incurred.
Research and development costs were $13.6 million, $13.5 million and $13.9
million for fiscal years 1997, 1998 and 1999, respectively. These expenditures
are included in selling, general and administrative expense in the accompanying
consolidated statements of operations.
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, NET
Other income, net, represents interest income on cash and cash equivalents and
other non-operating income and expense items.
EARNINGS PER COMMON SHARE
The Company computes its primary and diluted earnings per share in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". Due to the absence of dilutive instruments, the Company's primary and
diluted earnings per share were the same for all periods presented.
Earnings per common share are computed using the weighted average number of
common shares outstanding during the period. For purposes of computing income
per share applicable to common stockholder, the Company's income before
extraordinary items and net income have been reduced by Warren Series B
Preferred Stock dividends and accretion (see Note 19).
Page 23 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
CASH PAID FOR INCOME TAXES
Cash paid for income taxes for fiscal years 1997, 1998 and 1999 was $10.6
million, $35.5 million and $28.0 million, respectively. Cash received for income
tax refunds in fiscal years 1997, 1998 and 1999 was $4.9 million, $0.8 million
and $9.4 million, respectively.
CASH PAID FOR INTEREST
Cash paid for interest during fiscal years 1997, 1998 and 1999 was $86.7
million, $75.8 million and $55.5 million, respectively.
SEGMENT REPORTING
The Company reports segment and other information in accordance with SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". This
statement requires disclosure of segmented information about the Company's
operations based upon how management oversees and evaluates the results of such
operations. The Company's segments have been aggregated into a single reportable
segment, as permitted under SFAS No. 131, since they have similar economic
characteristics, products, production processes, types of customers and
distribution methods.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", and is
effective for the Company in the first quarter of fiscal year 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. The Company is currently evaluating the impact of SFAS No. 133 and
has not yet determined its effect on the Company's consolidated financial
statements.
In fiscal 1999, the Company adopted SFAS Nos. 130, 131, 132 and Statement of
Position ("SOP") No. 98-1 relating to comprehensive income, segment reporting,
pension disclosures and accounting for internal use software costs,
respectively. The adoption of SFAS Nos. 131 and 132 resulted in modified and/or
additional disclosures in the Company's notes to the consolidated financial
statements. The adoption of SFAS No. 130 and SOP No. 98-1 had no effect on the
consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
NOTE 3 - RESTRUCTURINGS
In October 1998, the Company announced a restructuring plan at the Westbrook,
Maine mill, which included production and maintenance job consolidations and
eliminations, as well as the decision to shut down one of its paper machines.
This paper machine produced release liner paper and face sheets used for
pressure sensitive papers. The Company recorded a charge of $3.7 million to
cover costs relating to the restructuring which included $2.8 million of
costs associated with the termination of 105 employees, or approximately 14%
of the Westbrook mill workforce in force at that date, and an estimated loss
of $0.9 million to dispose of the paper machine. All amounts have been
utilized as of September 29, 1999.
Page 24 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
On April 13, 1999, the Company announced the closures at its facility in
Westbrook, Maine of both the pulp mill and a paper machine, which made coated
base paper. Approximately 315 employees, both salaried and hourly, have been
affected by the closures, or approximately 48% of the then remaining
Westbrook mill workforce. The Company has recorded a pre-tax charge of
approximately $35.9 million during the third quarter of fiscal year 1999. The
restructuring costs associated with the above closures include $20.3 million
of non-cash expenses relating to fixed asset write-offs and $15.6 million of
accruals of one-time cash costs, primarily associated with the termination of
employees. Of the $35.9 million charged, $34.8 million has been utilized.
The fiscal 1999 activity relative to the above restructuring charges are as
follows (in millions):
<TABLE>
<CAPTION>
UTILIZED
BEGINNING ----------------------------------- UNUTILIZED AT
BALANCE CASH NONCASH SEPTEMBER 29, 1999
---------------- -------------- ----- -------------- ---------------------
<S> <C> <C> <C> <C>
Write-down of long-lived assets.................... $ 21.2 $ -- $ 20.1 $ 1.1
Employee severance, termination benefits, and
other......................................... 18.4 18.4 -- --
---------------- -------------- -------------- ---------------------
$ 39.6 $ 18.4 $ 20.1 $ 1.1
================ ============== ============== =====================
</TABLE>
NOTE 4 - EVALUATION AND SALE OF NONCORE ASSETS
In May 1997, Sappi announced that it was evaluating the sale of noncore assets
throughout the Sappi group. Consistent with this strategy, on March 18, 1998,
the Company sold its pressure sensitive business located at the Westbrook, Maine
mill to Spinnaker Industries, Inc. ("Spinnaker"). Proceeds of the sale consisted
of $44.8 million of cash and a subordinated note (the "Spinnaker Note") for $7.0
million. On March 31, 1998, the Company sold the Spinnaker 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 Spinnaker Note) of $30.9 million. Sales of the pressure
sensitive business unit included in the accompanying consolidated statements of
operations for fiscal 1997 and 1998 were approximately $62.1 million and $27.7
million, respectively.
On November 12, 1998 the Company sold its interests in approximately 905,000
acres of timberlands located in Maine and certain machinery and equipment to
Plum Creek Timber Company, L.P. ("Plum Creek") in exchange for notes receivable
(the "Notes Receivable") with a fair market value of $177.1 million and cash of
approximately $3.3 million. The Notes Receivable have an aggregate face amount
of $171.4 million and original maturities ranging from 8.25 years to 12.25
years. Interest rates on the Notes Receivable (originally ranging from 7.17% to
7.23% per annum) were reset on February 12, 1999 and now range from 7.62% to
7.83% per annum. To consummate the sale, the Company transferred all of its
timberlands and related machinery and equipment to a wholly-owned limited
liability company, all of the membership interest of which was then sold to Plum
Creek. The Company recognized a pre-tax gain from the sale of the timberlands of
$75.4 million. The timberlands and machinery and equipment sold, with carrying
amounts of $96.0 million and $2.9 million, respectively, were shown in the
accompanying consolidated balance sheet at September 30, 1998 as assets under
agreement to sell and have been classified as long-term consistent with the
long-term nature of the Notes Receivable.
The Company and Plum Creek executed a fiber supply agreement (the "Supply
Agreement"), with an initial term of 25 years and with three five-year renewal
options. Under the Supply Agreement, the Company will purchase hardwood pulpwood
at an annual minimum of 300,000 to 375,000 tons, or approximately 13% of the
Company's annual requirements, at market prices.
On January 21, 1999, the Notes Receivable were contributed to a wholly owned
bankruptcy remote subsidiary, SDW Timber III ("SDW III"). On February 12, 1999,
SDW III issued an aggregate of $156.0 million of SDW III Notes Payable using the
Notes Receivable as a pledge of security. The SDW III Notes Payable mature in
three
Page 25 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
installments ranging from 8 to 12 years and bear interest payable semi-annually
at rates ranging from 7.16% to 7.36% per annum. The earnings of SDW III, which
consist of interest income earned on the Notes Receivable, net of interest
expense incurred on the SDW III Notes Payable, are included in other income in
the accompanying statement of operations for the year ended September 29, 1999.
The Company's investment in the undivided interest in SDW III of approximately
$25.2 million is included in other noncurrent assets in the accompanying balance
sheet as of September 29, 1999.
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
were 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.
On November 2, 1999, a paper machine malfunction caused a fire at the
Muskegon, Michigan mill. The fire resulted in the temporary closure of the
mill, but within 24 hours normal operating mill conditions were restored to
the entire facility except for the affected paper machine. The Company
commenced producing paper on the affected paper machine during the first week
of December 1999. Total losses are not expected to exceed the Company's
insurance coverage limits, which include both business interruption and
property loss coverage.
NOTE 6 - TRADE ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 29,
1998 1999
------------------ -------------------
(IN MILLIONS)
<S> <C> <C>
Trade accounts receivable....................................... $ 48.4 $ 62.9
Allowance for doubtful accounts................................ (5.4) (3.5)
------------------ -------------------
$ 43.0 $ 59.4
================== ===================
</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, securitizes 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.
Page 26 of 43
<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
$72.0 million at both September 30, 1998 and September 29, 1999 which represents
accounts receivable that were securitized and sold under the A/R Facility.
NOTE 7 - INVENTORIES, NET (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 29,
1998 1999
------------------ ------------------
<S> <C> <C>
Finished products............................................... $ 81.6 $ 81.7
Work in progress................................................ 26.3 27.8
Pulp, logs and pulpwood......................................... 24.5 28.1
Maintenance parts and other supplies............................ 34.4 35.8
------------------ ------------------
$ 166.8 $ 173.4
================== ==================
</TABLE>
NOTE 8 - PLANT ASSETS (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 29,
1998 1999
------------------ ------------------
<S> <C> <C>
Plant assets, at cost:
Land and buildings......................................... $ 175.5 $ 184.5
Plant and equipment........................................ 1,085.3 1,153.2
------------------ ------------------
1,260.8 1,337.7
Accumulated depreciation................................... (290.3) (363.6)
------------------ ------------------
$ 970.5 $ 974.1
================== ==================
</TABLE>
NOTE 9 - INCOME TAXES
Income before income taxes and extraordinary items for fiscal years 1997, 1998
and 1999 were from domestic sources.
The components of the tax provisions before extraordinary items are as follows
(in millions):
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------
OCTOBER 1, SEPTEMBER 30, SEPTEMBER 29,
1997 1998 1999
------------------- ------------------ ------------------
<S> <C> <C> <C>
Current:
Federal............................... $ 13.5 $ 27.1 $ 11.7
State and local....................... 2.0 4.8 1.1
------------------- ------------------ ------------------
Total current..................... 15.5 31.9 12.8
------------------- ------------------ ------------------
Deferred:
Federal............................... 1.9 24.9 36.1
State and local....................... 1.9 9.7 5.5
------------------- ------------------ ------------------
Total deferred 3.8 34.6 41.6
------------------- ------------------ ------------------
$ 19.3 $ 66.5 $ 54.4
=================== ================== ==================
</TABLE>
Page 27 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The components of the deferred tax provisions before extraordinary items are as
follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------
OCTOBER 1, SEPTEMBER 30, SEPTEMBER 29,
1997 1998 1999
------------------- ------------------- ------------------
<S> <C> <C> <C>
Inventory........................................ $ 1.2 $ (0.8) $ 5.3
Plant assets..................................... 28.3 0.5 17.9
Accrued and other liabilities.................... (15.6) 28.6 34.9
AMT credit carryforwards......................... (14.9) (28.1) (16.7)
Tax loss carryforwards........................... 4.8 34.4 0.2
------------------- ------------------- ------------------
Deferred tax provision........................... $ 3.8 $ 34.6 $ 41.6
=================== =================== ==================
</TABLE>
The components of the deferred tax assets and (liabilities) are as follows (in
millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 29,
1998 1999
------------------ ------------------
<S> <C> <C>
Current:
Deferred tax assets:
Restructuring reserves........................................... $ 0.3 $ 0.3
Accrued and other liabilities.................................... 24.9 28.0
Inventory........................................................ 7.1 1.9
------------------ ------------------
Total current deferred tax assets............................ 32.3 30.2
Deferred tax liabilities:
Accrued and other liabilities and prepaids...................... (3.8) (9.8)
------------------ ------------------
Net current deferred tax asset...................................... 28.5 20.4
------------------ ------------------
Noncurrent:
Deferred tax assets:
Alternative minimum tax credit carryforward..................... 56.0 72.7
Tax loss carryforwards.......................................... 2.5 2.3
Accrued and other liabilities................................... 40.7 46.2
------------------ ------------------
Total noncurrent deferred tax assets......................... 99.2 121.2
------------------ ------------------
Deferred tax liabilities:
Plant assets.................................................... (134.8) (152.8)
Other........................................................... (46.1) (82.3)
------------------ ------------------
Total noncurrent deferred tax liability...................... (180.9) (235.1)
------------------ ------------------
Net noncurrent tax liability........................................ (81.7) (113.9)
------------------ ------------------
Net deferred tax liability.......................................... $ (53.2) $ (93.5)
================== ==================
</TABLE>
The differences between the U.S. statutory income tax rate and the Company's
effective income tax rate before extraordinary items are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------
OCTOBER 1, SEPTEMBER 30, SEPTEMBER 29,
1997 1998 1999
------------------ ------------------- ------------------
<S> <C> <C> <C>
U.S. statutory income tax rate...................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.......... 5.3 5.9 3.4
Other factors....................................... 0.2 0.5 3.1
------------------ ------------------- ------------------
Effective tax rate.................................. 40.5% 41.4% 41.5%
================== =================== ==================
</TABLE>
Page 28 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
As of September 29, 1999, the Company had available federal and state tax net
operating loss carryforwards of approximately $5.2 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 $72.7 million, which will
carry forward to future taxable years indefinitely.
NOTE 10 - ACCRUED AND OTHER CURRENT LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 29,
1998 1999
-------------------- --------------------
<S> <C> <C>
Accrued salaries, wages and employee benefits................... $ 44.4 $ 32.6
Accrued interest................................................ 18.8 19.9
Accrued workers' compensation................................... 5.0 1.4
Other accrued expenses.......................................... 29.6 49.0
-------------------- --------------------
$ 97.8 $ 102.9
==================== ====================
</TABLE>
NOTE 11 - LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 29,
1998 1999
-------------------- --------------------
(IN MILLIONS)
<S> <C> <C>
Bank term loans under Credit Agreement.......................... $ 145.0 $ 90.8
Warren Series B Senior Subordinated Notes....................... 324.6 232.4
Revenue bonds................................................... 110.6 110.5
Exchange Debentures............................................. - 133.1
-------------------- --------------------
580.2 566.8
Current maturities of long-term debt............................ 6.4 8.4
-------------------- --------------------
Long-term debt.................................................. $ 573.8 $ 558.4
==================== ====================
</TABLE>
CREDIT AGREEMENT
On March 6, 1998 Holdings and Warren entered into the Second Amended and
Restated Credit Agreement (the "Credit Agreement"), with a group of domestic and
international lenders. The Credit 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 $136.3 million Letter of
Credit Facility (together collectively referred to herein as the "Credit
Facilities").
Loans under the Credit 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 ranging (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 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%.
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),
Page 29 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
to the extent permissible under the applicable laws and regulations, in (a) all
of the capital stock of Warren and each of its U.S. subsidiaries and 65% of the
common stock and 100% of the preferred stock of each foreign subsidiary and (b)
all assets (subject to certain limitations), except certain trade accounts
receivable, owned by Warren and its subsidiaries.
The Credit Agreement contains restrictive covenants which limit Holdings, Warren
and their subsidiaries with respect to certain matters including, among other
things, the ability to incur debt, pay dividends, make acquisitions, sell
assets, merge, grant or incur liens, guarantee obligations, make investments or
loans, make capital expenditures, create subsidiaries or change its line of
business. The Credit Agreement also restricts Warren from prepaying certain of
its indebtedness. Under the Credit Agreement, Warren is required to satisfy
certain financial covenants which require Warren to maintain specified financial
ratios and comply with certain financial tests, including a minimum interest
coverage ratio, a 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 September 29, 1999, management believes the
Company is in compliance with all covenants.
TERM LOAN
Pursuant to the Credit Agreement as originally written, the Term Loan was
payable in semi-annual installments beginning in September 1998 with a final
maturity in March 2005. Subsequent to the $40.0 million prepayment in fiscal
1998, the payment schedule was revised to commence semi-annual installments in
September 1999. At September 29, 1999, the Term Loan was a Eurodollar loan with
a weighted-average interest rate of 6.06%. Warren is required to prepay the Term
Loan with (1) 50% of the net cash proceeds of certain aggregate asset sales in
excess of $50.0 million and (2) 100% of the net proceeds of incurrences of
indebtedness, to the extent that the aggregate exceeds $20.0 million. Unless the
Company achieves a certain financial ratio, as defined, Warren will be 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.
Excess Cash Flow prepayments relating to fiscal years 1997, 1998 and 1999 were
not required.
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).
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 September 30, 1998 and
September 29, 1999, $16.6 million and $14.9 million, respectively, of the
Revolving Credit Facility was utilized to guarantee the issuance of letters of
credit. At September 30, 1998 and September 29, 1999, availability under the
Revolving Credit Facility was $233.4 million and $235.1 million, respectively.
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 September 30, 1998 and September
29, 1999, the Company had no loans outstanding under the Revolving Credit
Facility.
LETTER OF CREDIT FACILITY
Warren had approximately $136.3 million and $120.2 million of letters of credit
outstanding under the Letter of Credit Facility at September 30, 1998 and
September 29, 1999, respectively, in support of its ongoing obligations under
tax-exempt bond financing and certain leases. 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 0.125% per annum
on letters of credit issued.
Page 30 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
WARREN SERIES B SENIOR SUBORDINATED NOTES
The Warren 12% Series B Senior Subordinated Notes due 2004 (the "Notes") are
unsecured, subordinated obligations of Warren. The Notes 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.
WARREN SERIES B SUBORDINATED EXCHANGE DEBENTURES
The Warren 14% Series B Subordinated Exchange Debentures due 2006 (the "Exchange
Debentures") (see Note 19), are unsecured, subordinated obligations of Warren.
The Exchange Debentures 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
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 September 29, 1999 the Company is obligated under revenue bonds aggregating
$110.5 million which are due from 2002 to 2022 and bear interest from 5.90% to
7.375%.
LONG-TERM DEBT PREPAYMENTS
During fiscal year 1998, Warren made prepayments on its term loans under the
Credit Agreement for aggregate amounts of $86.3 million (including amounts
repaid pursuant to the modification of the credit arrangement) and $40.0
million. Also in fiscal year 1998, the Company purchased $50.4 million face
value of the Notes for $55.7 million of cash. The premium paid of $5.3 million
to purchase the Notes, together with the accelerated amortization of deferred
financing fees of $3.0 million (discussed in Note 2) relating to the purchased
Notes and the repayments of term loans, resulted in an aggregate extraordinary
loss of $4.9 million (net of a $3.4 million tax benefit).
During fiscal year 1999, Warren made prepayments on its term loans under the
Credit Agreement for aggregate amounts of $50.0 million (including amounts
repaid pursuant to the modification of the credit arrangement). Also in fiscal
year 1999, the Company purchased $92.3 million face value of the Notes for $99.6
million of cash. The premium paid of $7.3 million to purchase the Notes,
together with the accelerated amortization of deferred financing fees of $1.8
million (as discussed in Note 2) relating to the purchased Notes and the
repayments of term loans, resulted in an aggregate extraordinary loss of $5.3
million (net of a $3.8 million tax benefit).
Page 31 of 43
<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 sinking fund payments, at
September 29, 1999 are as follows (in millions):
<TABLE>
<S> <C>
2000............................................................ $ 8.4
2001............................................................ 11.2
2002............................................................ 15.3
2003............................................................ 18.1
2004............................................................ 24.4
Thereafter...................................................... 489.4
----------------------
$ 566.8
======================
</TABLE>
NOTE 12 - FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments consist mainly of cash and cash equivalents,
accounts receivable, accounts payable and debt. In addition, the Company uses
interest rate swaps 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 and 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>
SEPTEMBER 30, 1998 SEPTEMBER 29, 1999
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENTS (IN MILLIONS):
Term loans...................................................$ 145.0 $ 145.0 $ 90.8 $ 90.8
Notes........................................................ 324.6 353.8 232.4 245.1
Exchange Debentures.......................................... -- -- 133.1 149.1
Revenue bonds and other...................................... 110.6 120.8 110.5 115.1
Interest rate swaps.......................................... -- (0.9) -- (0.2)
</TABLE>
The fair values of the Notes, Exchange Debentures and revenue bonds were
estimated by the Company based upon quotations provided by a nationally
recognized pricing service. The principal amounts of the Term Loans approximate
market value since they are variable rate instruments, which reprice as often as
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 swaps, and the A/R Facility. At September 30, 1998, the
carrying amount of the premium associated with the interest rate swaps had been
fully amortized. Unrealized losses related to the interest rate swaps
approximated $0.9 million and $0.2 million at September 30, 1998 and September
29, 1999, respectively. At these two dates, respectively, the total carrying
amounts of accounts receivable reflect $72.0 million of reductions related to
the A/R Facility. There are no unrealized losses on the A/R Facility at
September 30, 1998 or September 29, 1999.
The fair value of interest rate swaps is the estimated amount that the Company
would pay 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.
Page 32 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
A significant portion of the Company's sales and accounts receivable are from
major customers (see Note 21). 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, Maine 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 are 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 in July 1997. Rental expense relating to
this lease, net of amortization of deferred gain, was $2.3 million, $14.0
million, and $14.1 million for fiscal years 1997, 1998 and 1999, respectively.
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 $4.7 million, $6.6 million and $9.3 million
for fiscal years 1997, 1998 and 1999, 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 $7.5 million, $7.7 million and $7.3 million for fiscal years 1997,
1998 and 1999, respectively.
The future minimum obligations under leases (including the Somerset paper
machine lease) and other commitments as of September 29, 1999 are as follows (in
millions):
<TABLE>
<CAPTION>
OPERATING OTHER
YEAR ENDING SEPTEMBER LEASES COMMITMENTS
- --------------------- -------------------- --------------------
<S> <C> <C>
2000............................................................ $ 24.6 $ 7.4
2001............................................................ 22.5 8.8
2002............................................................ 19.7 12.1
2003............................................................ 17.3 8.9
2004............................................................ 17.1 10.3
Thereafter...................................................... 135.1 31.1
-------------------- --------------------
$ 236.3 $ 78.6
==================== ====================
</TABLE>
Certain lease obligations and the Cogeneration Obligation contain scheduled
payment increases. The Company is recognizing expenses associated with these
contracts on a straight-line basis over the terms of the related contracts.
Page 33 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
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.
The Company's Muskegon mill is involved, as one of various industrial
plaintiffs, in litigation with the County of Muskegon (the "County") regarding
an 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 1998, the appeals
court affirmed the lower court's decision substantially in favor of the Company
and other plaintiffs. However, in February 1999, the County passed a similar
ordinance in connection with a federal consent decree. If the Company and other
plaintiffs do not prevail in any future appeal regarding the consent decree or
are not successful in ongoing negotiations with government authorities, 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 United States and Environmental Protection Agency ("EPA") sued
the County for failure to (a) meet its discharge permit limits for the
wastewater facility and (b) to develop and enforce an industrial pretreatment
program. A group of industrial users, including the Company and a group of
municipalities filed motions to intervene in the EPA lawsuit. In December 1998,
the federal court approved a motion filed by the County to terminate the
industrial users' rights to discharge certain pollutant loadings, but not the
right to discharge certain volumes of wastewater to the system. The industrial
users believe they have a meritorious basis for further legal action and are
evaluating their alternatives. A final adverse decision in either of these
lawsuits 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, the County does not have the authority to unilaterally terminate
the service agreements.
In April 1998, the EPA issued final regulations that 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"). Compliance with the cluster rules will be required
beginning in 2001 for the Somerset, Maine and Muskegon, Michigan mills. The
Company believes that future environmental compliance expenditures, the bulk of
which are for the cluster rules compliance, will require aggregate capital
expenditures of approximately $30.0 million to $55.0 million through 2001.
Approximately $20.0 million has already been incurred, primarily for required
improvements at the Somerset mill, which has installed elemental chlorine free
(ECF) technology and is in compliance with the effluent guidelines of the
cluster rules.
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 (now Kimberly-Clark) 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
Page 34 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
pulp quantities are subject to minimum (162,000 tons per year) and maximum
(208,000 tons per year) limits. Prices for other services to be provided by
Kimberly-Clark are generally based upon cost. During fiscal years 1997, 1998
and 1999 the Company purchased pulp and utilities under these agreements
aggregating $108.0 million, $109.3 million and $93.5 million, respectively.
On May 4, 1998, the Company announced an agreement with Kimberly-Clark to
terminate the long-term pulp supply contract effective September 1, 1999. The
cancellation of the pulp contract did not materially impact the Company's
earnings for the year ended September 29, 1999. The Company has a long-term
agreement (the "Energy Agreement") with Mobile Energy Services Corporation
("MESC") to buy electric power and steam for the Mobile paper mill at rates
generally comparable to market tariffs, including fuel cost and capital
recovery components. Kimberly-Clark has closed their pulp mill at the Mobile
site effective September 1999. The closure of the Kimberly-Clark pulp mill
may result in a MESC default under certain bond indentures. The Company is
currently evaluating the impact on continued MESC operations of the closure
of the Kimberly-Clark pulp mill. Loss of biomass and black liquor fuels
currently provided to MESC by the pulp mill could have an adverse impact on
the Company's energy rates.
A substantial majority of the Company's electricity requirements are satisfied
through its own generation or cogeneration agreements. The Company's power
requirements at its Somerset mill are currently satisfied through a cogeneration
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, but does not require, that the mill purchase
electricity from CMP at the standard industrial tariff rate. The Somerset
agreement expires in the year 2012. The Company also has a short-term agreement
with CMP pursuant to which the Westbrook mill cogenerates electricity and sells
any excess output not used by the mill to CMP at market rates. The short-term
agreement for the Westbrook mill will expire on February 29, 2000. As of the
date of Acquisition (see Note 1), the Company established a deferred asset and
deferred liability of approximately $32.3 million and $15.0 million,
respectively, to reflect the fair value of the CMP agreements in place at such
date. Amortization expense of $9.5 million relating to the deferred asset was
recorded in fiscal year 1997, upon which the deferred asset became fully
amortized. The deferred liability is being amortized over eleven years with
amortization beginning in fiscal year 1998. Accordingly, $1.4 million of the
deferred liability was amortized during both fiscal years 1998 and 1999. The
unamortized deferred liability of approximately $12.2 million and $10.9 million
(net of current portions of $1.4 million) at September 30, 1998 and September
29, 1999, respectively, is included in other liabilities in the accompanying
consolidated balance sheets. Power sales revenue is recognized by the Company at
the time that power is provided to or used by CMP based on fixed rates per
kilowatt-hour in the case of the Westbrook agreement and variable rates per
kilowatt-hour in the case of the Somerset agreement.
The Company has the Supply Agreement with Plum Creek, with an initial term of 25
years and with three five-year renewal options. Under the supply agreement, the
Company will purchase hardwood pulpwood at an annual minimum of 300,000 to
375,000 tons, or approximately 13% of the Company's annual requirements, at
market prices.
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.
The Company received a notice of infringement from the Lemelson Medical,
Educational and Research Foundation, Limited Partnership ("Lemelson") asserting
that the Company has infringed upon various patents owned by Lemelson. In
connection with this assertion, Lemelson is seeking a royalty-based license for
the
Page 35 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
Company's past and future use of those patents. The Company, along with its
legal counsel, is currently reviewing this matter and cannot make a
determination as to the legitimacy of the claim or the financial liability,
if any, that may result.
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 $12.9 million
and $10.6 million at September 30, 1998 and September 29, 1999, respectively.
The following schedule provides the funded status and amounts recognized for the
Company's defined benefit pension plans (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 29, 1999
-------------------- --------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year........................... $ 157.7 $ 197.7
Service cost.................................................... 7.1 7.6
Interest cost................................................... 12.3 13.3
Amendments...................................................... 6.3 --
Curtailments.................................................... -- 1.5
Special termination benefits.................................... 0.2 6.4
Actuarial (gains) losses........................................ 17.2 (20.5)
Benefits paid................................................... (3.1) (5.2)
-------------------- --------------------
Benefit obligation, end of year................................. 197.7 200.8
-------------------- --------------------
Change in plan assets:
Fair value of plan assets, beginning of year.................... 147.5 174.1
Return on plan assets........................................... 26.2 17.6
Employer contributions.......................................... 3.5 5.6
Benefits paid................................................... (3.1) (5.2)
-------------------- --------------------
Fair value of plan assets, end of year.......................... 174.1 192.1
-------------------- --------------------
Funded status................................................... (23.6) (8.7)
Unrecognized net actuarial gain................................. (18.0) (37.9)
Unrecognized prior service cost................................. 9.7 8.0
Contributions................................................... 5.6 10.6
Additional minimum liability.................................... (3.4) --
-------------------- --------------------
Net amount recognized........................................... $ (29.7) $ (28.0)
==================== ====================
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost............................................ $ 2.3 $ 6.3
Accrued benefit liability....................................... (35.4) (34.3)
Intangible asset................................................ 3.4 --
-------------------- --------------------
$ (29.7) $ (28.0)
==================== ====================
</TABLE>
Page 36 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The projected benefit obligation at September 30, 1998 and September 29, 1999
was determined using assumed discount rates of 7.0% and 7.5%, respectively, and
assumed long-term rates of compensation increases of 3.75% and 4.0%,
respectively. The assumed rate of return on plan assets (on an annualized basis)
was 9.25% for fiscal years 1998 and 1999, respectively.
The projected benefit obligations and fair value of plan assets for pension
plans with benefit obligations in excess of plan assets were $176.0 million and
$150.7 million, respectively, as of September 30, 1998 and $135.2 million and
$121.7 million, respectively, as of September 29, 1999.
The components of the net pension cost are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------------
OCTOBER 1, SEPTEMBER 30, SEPTEMBER 29,
1997 1998 1999
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Service cost............................... $ 6.0 $ 7.1 $ 7.6
Interest cost.............................. 10.5 12.3 13.3
Expected return on plan assets............. (10.7) (13.5) (15.9)
Amortization of prior service cost......... -- 0.4 0.7
Recognized net actuarial gain.............. (0.7) (0.5) (0.6)
--------------------- --------------------- ---------------------
Total...................................... 5.1 5.8 5.1
Curtailment loss........................... -- -- 0.8
--------------------- --------------------- ---------------------
Net pension cost........................... $ 5.1 $ 5.8 $ 5.9
===================== ===================== =====================
</TABLE>
SAVINGS PLANS
Warren currently sponsors two 401(k) defined 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 $5.5 million, $5.3 million and $5.2 million for fiscal years
1997, 1998 and 1999, respectively.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Warren has a Supplemental Executive Retirement Plan for which key executives
are eligible to participate provided such individuals meet specified criteria
upon retirement. Payments pursuant 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 and expenses
incurred pursuant to the plan have not been material to Warren's consolidated
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 $0.7 million and $1.3 million at September 30,
1998 and September 29, 1999, respectively.
Page 37 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The following schedule provides the plan's funded status and net accrued
postretirement benefit cost recognized in the Company's consolidated balance
sheets at year end (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------
OCTOBER 1, 1997 SEPTEMBER 30, 1998 SEPTEMBER 29, 1999
------------------- ------------------- -------------------
<S> <C> <C> <C>
Net postretirement benefit cost:
Service cost................................................ $ 2.5 $ 2.5 $ 2.6
Interest cost............................................... 2.4 2.7 2.9
Amortization of unrecognized prior service cost............. -- (0.1) (0.1)
Curtailment loss............................................ -- -- 2.4
------------------- ------------------- -------------------
Net postretirement benefit cost............................. $ 4.9 $ 5.1 $ 7.8
=================== =================== ===================
Change in benefit obligation:
Benefit obligation, beginning of year...................... $ 34.2 $ 39.9
Service cost............................................... 2.5 2.6
Interest cost.............................................. 2.7 2.9
Curtailment loss........................................... -- 2.4
Special termination benefits............................... -- 1.0
Actuarial losses........................................... 1.1 2.4
Benefits paid.............................................. (0.6) (1.3)
------------------- -------------------
Benefit obligation, end of year............................ 39.9 49.9
Fair value of plan assets.................................. -- --
------------------- -------------------
Funded status.............................................. (39.9) (49.9)
Unrecognized net actuarial (gain) loss..................... (0.7) 1.7
Unrecognized prior service cost............................ (0.8) (0.8)
------------------- -------------------
Net amount recognized...................................... $ (41.4) $ (49.0)
=================== ===================
</TABLE>
The discount rates used to estimate the benefit obligations as of September 30,
1998 and September 29, 1999 were 7.0% and 7.5%, respectively. The initial health
care cost trend rates used to value the benefit obligation were 6.75%, 6.0% and
6.5% at October 1, 1997, September 30, 1998 and September 29, 1999,
respectively, decreasing gradually to an ultimate rate of 4.75%, 4.0% and 4.5%
in the year 2008. A one-percentage point increase in the assumed health care
trend rate for each future year would increase the APBO by approximately 6.9% at
September 29, 1999 and would increase the sum of the benefits earned and
interest cost components of net postretirement benefit cost for 1999 by
approximately 9.6%.
NOTE 18 - OTHER LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 29,
1998 1999
-------------------- --------------------
<S> <C> <C>
Accrued workers' compensation.................................. $ 20.2 $ 22.6
Accrued pension and other postretirement benefits.............. 57.5 65.1
Deferred gain on sale\leaseback................................ 14.8 13.6
Other accrued liabilities...................................... 22.8 16.8
-------------------- --------------------
$ 115.3 $ 118.1
==================== ====================
</TABLE>
Page 38 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
NOTE 19 - WARREN SERIES B REDEEMABLE EXCHANGEABLE PREFERRED STOCK
Warren has 10.0 million authorized shares of 14% Series B redeemable
exchangeable preferred stock ("Preferred Stock"), of which 3.0 million shares
were issued and outstanding through June 14, 1999. On June 15, 1999 (the
"Exchange Date"), the Company exchanged, pursuant to its optioon in the
Preferred Stock Agreement, all of the issued and outstanding Preferred Stock
at the liquidation value of $139.0 million, representing $25.00 per share
plus accrued and unpaid dividends, for 14% Series B Subordinated Exchange
Debentures due 2006 (the "Exchange Debentures") with a principal amount of
$139.0 million. The difference between the Preferred Stock's liquidation
value of $139.0 million and the carrying value of $132.9 million as of the
Exchange Date has been recorded as a discount on the Exchange Debentures and
is being amortized as interest expense, using the effective interest rate
method, over the remaining term of the Exchange Debentures. On the Exchange
Date, all rights with respect to the Preferred Stock were terminated, and
dividends on the Preferred Stock ceased to accrue on and after the Exchange
Date.
The following table indicates the dividend, accretion and redemption activity on
the Preferred Stock for fiscal years 1997, 1998 and 1999 (in millions):
<TABLE>
<S> <C> <C>
Balance, October 2, 1996....................................................................................... $ 88.0
Dividends and accretion.................................................................................. 15.2
----------
Balance, October 1, 1997....................................................................................... 103.2
Dividends and accretion.................................................................................. 16.3
----------
Balance, September 30, 1998.................................................................................... 119.5
Dividends and accretion.................................................................................. 13.4
Redemption of Preferred Stock............................................................................ (132.9)
----------
Balance, September 29, 1999.................................................................................... $ --
==========
</TABLE>
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 Exchange Debentures, 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 was $1.0
million for each of the fiscal years 1997, 1998 and 1999, respectively.
In addition to the above, Warren has contracted through a management services
agreement with Sappi Fine Paper Plc ("SFP") to provide management advisory
services. The aggregate fee paid by Warren to SFP is limited to an annual amount
of $1.0 million. The aggregate fees charged to Warren by SFP were $1.0 million
in both fiscal years 1997 and 1998 and $7.3 million in fiscal year 1999, of
which $6.3 million is accrued as a liability in the accompanying balance sheet
at September 29, 1999.
Warren sells products to certain Sappi subsidiaries (Sappi Europe, Sappi UK,
Sappi South Africa, Specialty Pulp Services and U.S. Paper). These subsidiaries
then resell Warren products to external customers at market prices and remit the
proceeds from such sales to Warren, net of a 5% sales commission. Net of
commissions, Warren shipped $126.2 million, $114.9 million and $118.1 million of
products to Sappi subsidiaries for fiscal years 1997, 1998 and 1999,
respectively. Trade accounts receivable at September 30, 1998 and September 29,
1999 included approximately $18.1 million and $24.9 million, respectively, due
from subsidiaries of Sappi. Amounts as of September 30, 1998 and September 29,
1999 are included in the pool of receivables securitized under the A/R Facility
(see Note 6).
Page 39 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
Warren also imports products from certain Sappi affiliates (Sappi UK, Hannover
Papier, and beginning in the fourth quarter of fiscal 1998, KNP Leykam) for sale
to its North American customers. Warren resells these products at market prices
and remits the proceeds, net of a 5% sales commission, to the Sappi affiliates.
Net of commissions, Warren imported approximately $21.9 million, $26.8 million
and $74.6 million of products from certain Sappi affiliates for fiscal years
1997, 1998 and 1999, respectively. Accounts payable at September 30, 1998 and
September 29, 1999 included $7.5 million and $16.8 million, respectively, due to
subsidiaries of Sappi.
During December 1997, the Company paid a dividend (the "Dividend") of $58.2
million to its parent company, 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 the Notes
in exchange for their consent to the Dividend transaction.
On March 29, 1999, the Company paid a $15.0 million cash dividend to its parent,
Holdings. In turn, Holdings advanced $15.0 million to an affiliate of Sappi in
the form of a promissory note due April 2002.
NOTE 21 - SEGMENTS AND OTHER RELATED INFORMATION
As discussed in Note 2, the Company's operations have been aggregated into a
single reportable segment, as permitted under SFAS No. 131, since they have
similar economic characteristics, products, production processes, types of
customers and distribution methods.
Net sales information by the Company's product groups are as follows (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------
OCTOBER 1, SEPTEMBER 30, SEPTEMBER 29,
1997 1998 1999
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Coated Papers.................... $ 963.8 $ 1,037.8 $ 1,048.9
Uncoated Papers.................. 228.7 242.0 237.0
Specialty Papers and Other....... 213.1 179.1 138.8
--------------------- --------------------- ---------------------
Total....................... $ 1,405.6 $ 1,458.9 $ 1,424.7
===================== ===================== =====================
</TABLE>
Net sales to unaffiliated customers which individually exceed 10% of total net
sales amounted to approximately 51.9%, 53.8% and 57.1% of net sales for fiscal
years 1997, 1998 and 1999, respectively. Each of these customers is a merchant
that resells the Company's paper products to a wide range of users. The loss of
any of these customers could have a material effect on the Company's business
and consolidated results of operations. Net sales to each customer are indicated
below (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------------
OCTOBER 1, SEPTEMBER 30, SEPTEMBER 29,
1997 1998 1999
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
1............................. $ 360.3 $ 353.0 $ 404.7
2............................. 169.9 202.9 183.5
3............................. 199.6 228.6 225.4
</TABLE>
At September 30, 1998 and September 29, 1999, approximately 45.2% and 44.2%,
respectively, of the Company's net trade receivables, including those
receivables which are securitized and sold, were concentrated in these three
customers.
Page 40 of 43
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The Company had net sales to customers outside the United States ("Export
Sales") of $186.2 million, $185.0 million and $181.3 million for fiscal years
1997, 1998 and 1999, respectively. Export Sales are primarily to Canada, Europe,
Australia, Latin America, and the Far East. Export Sales do not exceed 10% of
total net sales for any geographic region. Net sales outside North America are
primarily handled by the Company's affiliates under the common control of Sappi.
Page 41 of 43
<PAGE>
SCHEDULE II
S.D. WARREN COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT COST AND DEDUCTIONS BALANCE AT END
BEGINNING OF EXPENSES (PRINCIPALLY OF PERIOD
PERIOD WRITE-OFFS)
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended September 29, 1999 $ 5.4 $ -- $ 1.9 $ 3.5
Year ended September 30, 1998 5.0 2.7 2.3 5.4
Year ended October 1, 1997 5.3 1.3 1.6 5.0
</TABLE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Intentionally Omitted. *
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Intentionally Omitted.*
ITEM 11. EXECUTIVE COMPENSATION
Intentionally Omitted.*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Intentionally Omitted.*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Intentionally Omitted.*
- ------------------------
* This report is being voluntarily filed with the Securities and Exchange
Commission (the "Commission") pursuant to the registrant's contractual
obligations to file with the Commission all financial information that would be
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934. The registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Intentionally Omitted.**
Page 42 of 43
<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
By: /s/ MONTE R. HAYMON
-------------------
Monte R. Haymon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: December 6, 1999
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Monte R. Haymon President, Chief Executive Officer and December 6, 1999
- ----------------------------- Director (Principal Executive Officer)
Monte R. Haymon
/s/ Trevor L. Larkan Chief Financial Officer, Vice December 6, 1999
- ----------------------------- President, Treasurer, Assistant
Trevor L. Larkan Secretary and Director (Principal
Financial and Accounting Officer)
/s/ O. Harley Wood Vice President and Director December 6, 1999
- -----------------------------
O. Harley Wood
/s/ James Frick Director December 6, 1999
- -----------------------------
James Frick
/s/ Eugene Van As Director December 6, 1999
- -----------------------------
Eugene Van As
/s/ Donald Wilson Director December 6, 1999
- -----------------------------
Donald Wilson
/s/ D'oeko Bosscher Director December 3, 1999
- -----------------------------
D'oeko Bosscher
</TABLE>
Page 43 of 43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM S.D. WARREN
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 29, 1999 FOUND ON
PG 16, 17, 18, OF THE COMPANY'S YEAR ENDED REPORT ON FORM 10-K FINANCIAL INFO
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-29-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-29-1999
<CASH> 73,800
<SECURITIES> 0
<RECEIVABLES> 62,900
<ALLOWANCES> 3,500
<INVENTORY> 173,400
<CURRENT-ASSETS> 369,200
<PP&E> 1,337,704
<DEPRECIATION> 363,590
<TOTAL-ASSETS> 1,483,500
<CURRENT-LIABILITIES> 267,100
<BONDS> 558,400
0
0
<COMMON> 0
<OTHER-SE> 321,400
<TOTAL-LIABILITY-AND-EQUITY> 1,483,500
<SALES> 1,424,700
<TOTAL-REVENUES> 1,424,700
<CGS> 1,130,700
<TOTAL-COSTS> 1,282,100
<OTHER-EXPENSES> 39,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,300
<INCOME-PRETAX> 130,900
<INCOME-TAX> 54,400
<INCOME-CONTINUING> 76,500
<DISCONTINUED> 0
<EXTRAORDINARY> 5,300
<CHANGES> 0
<NET-INCOME> 71,200
<EPS-BASIC> 0.58
<EPS-DILUTED> 0.58
</TABLE>
