<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q FINANCIAL INFORMATION*
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 29, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission file number: 33-88496*
S.D. WARREN COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2366983
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 Franklin Street, Boston, Massachusetts 02110
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 423-7300
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / / No / / Not Applicable /X*/
- --------------------------------------------------------------------------------
*This report is being voluntarily filed with the Securities and Exchange
Commission (the "Commission") pursuant to the registrant's contractual
obligations to file with the Commission all financial information that would be
required to be filed on a Form 10-Q. The registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that this Report on Form 10-Q for S.D.
Warren Company and subsidiaries (the "Company") contains certain
"forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995. The words "believe," "anticipate,"
"intend," "estimate," "plan," "assume," and other similar expressions which are
predictions of or indicate future events and future trends which do not relate
to historical matters identify forward-looking statements. Reliance should not
be placed on forward-looking statements because they involve known and unknown
risks, uncertainties and other factors which are in some cases beyond the
control of the Company and may cause the actual results, performance or
achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such
forward-looking statements. Certain factors that may cause such differences
include, but are not limited to the following: (a) increased competition from
either domestic or foreign paper producers, including increases in competitive
capacity through construction of new mills or conversion of older facilities to
produce competitive products, (b) variations in demand for the Company's
products, (c) changes in the cost or availability of the raw materials used by
the Company, particularly market pulp and wood, (d) costs of compliance with new
environmental laws and regulations, (e) decisions by the Company to make a
significant acquisition or a significant increase in production capacity, (f)
competitive pricing pressures for the Company's products, (g) unanticipated
manufacturing disruptions, and (h) changes in environmental, tax and other laws
and regulations. These and other factors that might cause differences between
actual and anticipated results, performance, and achievements are discussed in
greater detail in this Report on Form 10-Q. See also "Market Overview" under
Part I, Item 2, Management's Discussion and Analysis of Results of Operations
and Financial Condition.
2
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the three and six
months ended March 31, 1999 and March 29, 2000 ..........................................................4, 5
Condensed Consolidated Balance Sheets at September 29, 1999 and March 29, 2000..............................6
Condensed Consolidated Statements of Cash Flows for the six months ended
March 31, 1999 and March 29, 2000...........................................................................7
Notes to Unaudited Condensed Consolidated Financial Statements..............................................8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.................16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................24
Item 2. Changes in Securities.............................................................................24
Item 3. Default upon Senior Securities....................................................................24
Item 4. Submission of Matters to a Vote of Security Holders...............................................24
Item 5. Other Information.................................................................................24
Item 6. Exhibits and Reports on Form 8-K..................................................................24
SIGNATURE.....................................................................................................25
</TABLE>
3
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 29, 2000
--------------- ---------------
<S> <C> <C>
Net sales ................................................... $ 354.7 $ 387.3
Cost of goods sold .......................................... 284.2 303.3
--------- ------------
Gross profit ................................................ 70.5 84.0
Selling, general and administrative expense ................. 38.0 39.0
--------- --------------
Income from operations ...................................... 32.5 45.0
Other income, net ........................................... 3.0 2.1
Interest expense ............................................ 13.6 15.9
--------- ------------
Income before income taxes and extraordinary items .......... 21.9 31.2
Income tax expense .......................................... 9.1 12.4
--------- ------------
Income before extraordinary items ........................... 12.8 18.8
Extraordinary items, net of tax ............................. (1.4) (10.6)
--------- ------------
Net income .................................................. 11.4 8.2
Dividends and accretion on S.D. Warren Series B
preferred stock ........................................... 4.7 --
--------- ------------
Net income applicable to common stockholder ................. $ 6.7 $ 8.2
========= ============
Earnings per common share:
Income before extraordinary items applicable to
common stockholder .................................. $ 0.08 $ 0.19
========= ============
Net income applicable to common stockholder ............ $ 0.07 $ 0.08
========= ============
Weighted average number of shares outstanding ............... 100 100
========= ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 29, 2000
----------------- ------------------
<S> <C> <C>
Sales ..................................................... $688.1 $749.1
Cost of goods sold ........................................ 544.7 590.5
---------- -----------
Gross profit .............................................. 143.4 158.6
Selling, general and administrative expense ............... 73.1 77.2
Restructuring ............................................. 3.7 --
---------- -----------
Income from operations .................................... 66.6 81.4
Gain on sale of timberlands ............................... 75.4 --
Other income, net ......................................... 5.1 4.0
Interest expense .......................................... 27.9 32.2
---------- -----------
Income before income taxes and extraordinary items ........ 119.2 53.2
Income tax expense ........................................ 49.6 21.2
---------- -----------
Income before extraordinary items ......................... 69.6 32.0
Extraordinary items, net of tax ........................... (3.0) (10.6)
---------- -----------
Net income ................................................ 66.6 21.4
Dividends and accretion on S.D. Warren Series B
preferred stock ......................................... 9.3 --
---------- -----------
Net income applicable to common stockholder ............... $57.3 $21.4
========== ===========
Earnings per common share:
Income before extraordinary items applicable to
common stockholder ................................ $0.60 $0.32
========== ===========
Net income applicable to common stockholder .......... $0.57 $0.21
========== ===========
Weighted average number of shares outstanding ............. 100 100
========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 29, MARCH 29,
1999 2000
(unaudited)
--------------- -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................ $ 73.8 $ 67.3
Trade accounts receivable, net ........................... 59.4 55.1
Other receivables ........................................ 18.0 10.3
Inventories, net ......................................... 173.4 204.9
Deferred income taxes .................................... 20.4 20.4
Other current assets ..................................... 24.2 15.1
------------ -------------
Total current assets ................................ 369.2 373.1
Plant assets, net ................................................. 974.1 956.6
Goodwill, net ..................................................... 79.0 77.0
Deferred financing fees, net ...................................... 22.6 14.1
Other assets, net ................................................. 38.6 34.0
------------ -------------
Total assets ....................................... $ 1,483.5 $ 1,454.8
============ =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt ..................... $ 8.4 $ 8.4
Accounts payable ......................................... 155.8 153.1
Accrued and other current liabilities .................... 102.9 98.5
------------ ------------
Total current liabilities .......................... 267.1 260.0
------------ -------------
Long-term debt:
Term loans ............................................... 82.4 273.2
Senior subordinated notes ................................ 232.4 -
Exchange debentures ...................................... 133.1 133.5
Revenue bonds ............................................ 110.5 110.5
------------ --------------
Total long-term debt ............................... 558.4 517.2
Deferred income taxes ............................................. 113.9 112.6
Other liabilities ................................................. 118.1 117.6
------------ --------------
Total liabilities .................................. 1,057.5 1,007.4
------------ --------------
Commitments and contingencies (Notes 9 and 10) 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 ........................................ 104.6 126.0
------------ --------------
Total stockholder's equity ......................... 426.0 447.4
------------ --------------
Total liabilities and stockholder's equity ......... $ 1,483.5 $ 1,454.8
============ ==============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS, UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------------
MARCH 31, MARCH 29,
1999 2000
-------------------- ---------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ....................................................... $ 66.6 $ 21.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 44.0 48.9
Deferred income taxes ....................................... 23.4 (1.3)
Non-cash extraordinary items ................................ 5.2 6.8
Gain on sale of timberlands ................................. (75.4) --
Other ....................................................... 0.2 --
Changes in assets and liabilities:
Trade and other accounts receivable, net ................. (12.1) 12.0
Inventories, net ......................................... (31.2) (31.6)
Accounts payable, accrued and other current liabilities .. 16.8 (7.1)
Other assets and liabilities ............................. 4.5 12.4
------------ -------------
Net cash provided by operating activities ............. 42.0 61.5
------------ -------------
Cash Flows from Investing Activities:
Investment in plant assets ....................................... (51.7) (27.1)
Proceeds from sale of timberlands ................................ 3.3 --
Other investing activities ....................................... (4.6) --
------------ -------------
Net cash used in investing activities ................. (53.0) (27.1)
------------ -------------
Cash Flows from Financing Activities:
Monetization of note receivable .................................. 156.0 --
Proceeds from short term borrowings .............................. 54.5 --
Proceeds from long term borrowings ............................... -- 213.8
Repayments of long-term debt, including premiums paid ............ (159.5) (254.4)
Dividends paid to parent ......................................... (15.0) --
Other financing activities ....................................... (0.7) (0.3)
------------ -------------
Net cash provided by (used in) financing activities ........ 35.3 (40.9)
------------ -------------
Net change in cash and cash equivalents ................................. 24.3 (6.5)
------------ -------------
Cash and cash equivalents:
Beginning of period .............................................. 34.7 73.8
------------ -------------
End of period .................................................... $ 59.0 $ 67.3
============ =============
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest ................................................... $ 30.8 $ 28.0
============ =============
Income taxes ............................................... $ 23.4 $ 0.3
============ =============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
7
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of S.D. Warren Company and its subsidiaries, doing business as
Sappi Fine Paper North America ("SFPNA" or the "Company"). Intercompany balances
and transactions have been eliminated in the preparation of the accompanying
unaudited condensed consolidated financial statements.
The Company is a direct wholly owned subsidiary of SDW Holdings Corporation
("Holdings"). Holdings is an indirect subsidiary of Sappi Limited ("Sappi").
BUSINESS
The Company manufactures printing, publishing and specialty papers and has pulp
operations vertically integrated with certain of its manufacturing facilities.
Together these represent the Company's single line of business. The Company
currently operates four paper mills, a sheeting facility, and several
distribution facilities. The Company also owned and operated approximately
905,000 acres of timberlands in the State of Maine, which it sold on November
12, 1998 (See Note 6).
SAPPI REORGANIZATION
On April 27, 1998, Sappi announced the business integration of 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. S.D. 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. On March 30, 2000,
Sappi acquired through an indirect wholly-owned subsidiary the 24.93% equity
interest in Holdings previously held by Heritage Springer Limited, a British
Virgin Islands company. Sappi now indirectly owns 100% of the issued and
outstanding common stock of Holdings.
8
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of the Company's financial
position and results of operations. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended September 29, 1999. The unaudited condensed consolidated
results of operations for the three and six months ended March 29, 2000 are not
necessarily indicative of results that could be expected for a full year.
NOTE 2. ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 was required to be implemented
in fiscal year 2000. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133." SFAS No.
137 delayed the original implementation date of SFAS No. 133 by one year. This
will require that the company implement this statement 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.
NOTE 3. RELATED PARTY TRANSACTIONS
SFPNA sells products to certain Sappi subsidiaries (Sappi Europe, Sappi UK,
Sappi South Africa, Specialty Pulp Services, and U.S. Paper). These subsidiaries
then resell SFPNA's products to external customers at market prices and remit
the proceeds from such sales to SFPNA, net of a 5% sales commission. Net of
commissions, SFPNA shipped $33.3 million and $68.0 million to certain Sappi
subsidiaries for the three and six months ended March 29, 2000, respectively.
For the same periods in the prior fiscal year, SFPNA shipped $33.5 million and
$60.0 million net of commissions, to these Sappi subsidiaries, respectively. At
March 29, 2000 and September 29, 1999, approximately 20% and 19%, respectively,
of the Company's gross trade receivables (including those receivables which were
securitized and sold) were due from Sappi affiliates.
SFPNA also purchases products from certain affiliates (Sappi UK, Hannover
Papier, and beginning in the fourth quarter of fiscal 1998, KNP Leykam) for sale
to SFPNA's North American customers. SFPNA resells these products at market
prices and remits the proceeds, net of a 5% sales commission, to the Sappi
affiliates. Net of commissions, SFPNA imported approximately $25.6 million and
$48.9 million of products from these Sappi affiliates for the three and six
months ended March 29, 2000 and $20.6 million and $35.6 million for the three
and six months ended March 31, 1999, respectively. At March 29, 2000 and
September 29, 1999, approximately 18% and 25% respectively, of the Company's
gross trade payables were due from Sappi affiliates.
In addition to the above, the Company has contracted through a management
services agreement with Sappi Fine Paper Plc ("SFP") to provide management
advisory services. The aggregate fee paid by the Company is limited to an annual
amount of $1.0 million. The aggregate fees charged to the Company by SFP were
$2.3 million and $4.6 million for the three and six months ended March 29, 2000,
respectively, and $1.8 million and $3.6 million for the three and six months
ended March 31, 1999, respectively. The
9
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
accompanying balance sheets at March 29, 2000 and September 29, 1999 include
accrued management advisory service fees of $10.3 million and $6.3 million,
respectively.
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. In March 2000, the Sappi affiliate
repaid the promissory note in full.
NOTE 4. INVENTORIES, NET (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 29, 1999 MARCH 29, 2000
------------------ --------------
<S> <C> <C>
Finished products ...................... $81.7 $108.1
Work in process ........................ 27.8 31.6
Pulp, logs and pulpwood ................ 28.1 27.2
Maintenance parts and other supplies ... 35.8 38.0
------ -------
$173.4 $204.9
====== =======
</TABLE>
NOTE 5. LONG-TERM DEBT
The current portion of long-term debt of $8.4 million consists primarily of bank
term loan principal payments scheduled for September 2000.
During the six months ended March 31, 1999, the Company purchased $50.6 million
face value of its 12% Senior Subordinated Notes (the "Notes"). The Note purchase
transactions were settled for $55.0 million of cash. The premium paid of $4.4
million to purchase the Notes, together with the related accelerated
amortization of $0.7 million of deferred financing fees resulted in an
extraordinary loss of $3.0 million (net of a $2.1 million tax benefit). This
extraordinary loss was recorded in the six months ended March 31, 1999.
On March 23, 2000, the Company purchased $232.4 million face value of the
"Notes", the balance of the obligation. The transaction was financed by
increasing the indebtedness under the revolver portion of its credit facility by
$195.0 million, increasing its accounts receivable securitization by $15.0
million, and utilizing $40.0 million of cash. The premium paid of $10.5 million
to purchase the Notes, together with the accelerated amortization of deferred
financing fees and other costs of $7.0 million, resulted in an aggregate
extraordinary loss of $10.6 million (net of $6.9 million tax benefit).
During February 1999, the Company used a portion of the cash proceeds received
in connection with the issuance of the SDW Timber III notes payable (the "SDW
III Notes Payable") (see Note 6 below) to repay $50.0 million of its bank term
loan. The related accelerated amortization of deferred financing fees was not
material.
NOTE 6. SALE OF TIMBERLANDS
On November 12, 1998, the Company sold its interest 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
10
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
Receivable 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 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 LLC ("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 of $0.4 million and $0.8 million 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
unaudited condensed consolidated statements of operations for the three and six
months ended March 29, 2000, respectively. The Company's investment in the
undivided interest in SDW III of approximately $23.6 million and $25.2 million
is included in other noncurrent assets in the accompanying unaudited condensed
consolidated balance sheets as of March 29, 2000 and September 29, 1999,
respectively.
NOTE 7. 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 were utilized 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 recorded a pre-tax charge of approximately $35.9
million during 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 this restructuring charge,
$34.8 million had been utilized as of September 29, 1999 and $1.1 million was
utilized during the three months ended December 29, 1999.
NOTE 8. FORCE MAJEURE EVENT
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
operations were restored at the mill, excluding the affected paper machine,
within 24 hours of the incident. The Company commenced producing paper on the
affected paper machine during the second week of December 1999. Total losses are
not expected to exceed the Company's insurance coverage limits, net of
deductibles, which include both business interruption and property loss
coverage. During the six months ended March 29, 2000, the Company
11
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
recorded a receivable from its insurance company for property damage of
approximately $25.4 million, of which $17.0 million has been collected as of
March 29, 2000. In addition, the Company has recorded a $4.0 million recovery
representing a payment received for a portion of the business interruption claim
submitted for the disruption caused by damages incurred with respect to the
Muskegon fire.
NOTE 9. ENVIRONMENTAL AND SAFETY MATTERS
The Company is subject to a wide variety of environmental laws and regulations
relating to, among other matters, air emissions, wastewater discharges, past and
present landfill operations, and hazardous waste management. These laws include
the Federal Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act and their respective state counterparts. The Company will continue
to incur significant capital and operating expenditures to maintain compliance
with applicable federal and state environmental laws. These expenditures include
costs of compliance with federal worker safety laws, landfill expansions and
wastewater treatment system upgrades.
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 County
continues to provide service under the permit. 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 $55.0 million to $75.0 million through 2001.
Approximately $25.0 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.
12
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
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 10. COMMITMENTS AND CONTINGENCIES
In connection with the acquisition of the Company from Scott Paper ("Scott"),
the Company 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.
Under the pulp supply agreement, wood pulp was supplied generally at market
prices which were discounted due to the elimination of freight costs associated
with delivering pulp to the Company's Mobile mill. 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 three and six
months ended March 29, 2000. Prices for other services to be provided by
Kimberly-Clark are generally based upon cost.
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. On January 24, 2000, the bankruptcy court granted motions filed by
MESC, its bondholders and others to proceed with the development of a new
cogeneration facility at the Mobile, Alabama site. The Company is currently
evaluating the impact on continued MESC operations of both the closure of the
Kimberly-Clark pulp mill and MESC's proposed cogeneration facility. Loss of
biomass and black liquor fuels historically provided to MESC by the pulp mill
could have an adverse impact on the Company's energy rates in Mobile.
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 historically also provided, but did not require, that the mill
purchase electricity from CMP at the same rate. The Somerset agreement expires
in the year 2012. Commencing March 1, 2000, as a result of deregulation of the
Maine power industry, CMP was no longer permitted to sell power to its
customers. Accordingly, SFPNA has entered into a new one-year agreement with a
third party to purchase all of Somerset's power needs through March 23, 2001.
The Company is currently evaluating the impact of deregulation on its energy
rates at Somerset. The Company also has a one year agreement expiring March 21,
2001 with the same third party pursuant to which the Westbrook mill cogenerates
electricity and sells any excess output not used by the mill to the third party.
In connection with the acquisition of the Company from Scott, 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. The deferred asset became fully amortized as
of fiscal year 1997. The deferred liability is being amortized over eleven years
with amortization beginning in fiscal year 1998. Accordingly, $0.3 million and
$0.7 million of the deferred liability was amortized during the three and six
months ended March 29, 2000, respectively. For the same periods the prior year,
$0.3 million and $0.7million of the deferred liability was amortized,
respectively. The unamortized deferred liability of approximately $10.9 million
and $10.2 million (net of current portions of $1.4 million) at September 29,
1999 and March 29, 2000, 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.
13
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
The Company has a 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.
In April 2000, the Lemelson Medical, Educational and Research Foundation,
Limited Partnership ("Lemelson") filed a lawsuit against Sappi and over 70
other companies in the United States Court for the District of Arizona. The
lawsuite alleges that the defendants have infringed upon various machine
vision and automatic identification patents held by Lemelson. Lemelson seeks
to enjoin the defendants from further alleged acts of infringement and to
collect unspecified damages. As of the date of this filing, Sappi has not
been served with a summons with respect to this lawsuit. Lemelson has offered
to license the patents alleged to be infringed to the defendants, and based
on the Company's understanding of the terms that Lemelson has made available
to other licensees, the Company believes that obtaining the same or similar
terms would not haave a material adverse effect upon the Company's operating
results or financial condition. Sappi has not yet determined whether, if a
summons is served, it would defend the claim or whether it would seek such a
license. However there can be no assurance either that, if sought, Sappi
would be offered similar terms to those made available to other licensees, or
that, if defended, this matter will not have a material adverse effect on the
Company's operating results or financial position.
In April 2000, 18 individuals filed a lawsuit against the Company,
Kimberly-Clark and several other defendants in Somerset County Court, Maine.
The plaintiffs allege that they suffered personal injury as a result of
hazardous waste from various sources which was allegedly transported to and
stored at a local landfill during the period from 1976 through 1986. In terms
of Sappi's purchase of the Company from Scott Paper Company in 1994, the
Company is indemnified for monitoring, clean-up and any other costs relating
to or arising out of the affected landfill. While the Company does not
believe that the lawsuit will have a material adverse effect on its operating
results or financial position, including because of the possibility that the
company is indemnified for this matter, there can be no assurance that this
will be the case.
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.
14
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
NOTE 11. SEGMENTS AND OTHER RELATED INFORMATION
The Company reports segment and other information in accordance with SFAS No.
131, "Disclosures about Segment of an Enterprise and Related Information", which
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.
Net sales information by the Company's product groups is as follows (in
millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------------- ----------------------------------------
MARCH 31, MARCH 29, MARCH 31, MARCH 29,
1999 2000 1999 2000
-------------------- -------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Coated Papers .......... $ 258.5 $ 276.8 $ 502.1 $ 545.2
Uncoated Papers ........ 63.8 68.5 121.3 126.3
Specialty Papers and
Other ................ 32.4 42.0 64.7 77.6
==================== ==================== ================= ==================
Total ............. $ 354.7 $ 387.3 $ 688.1 $ 749.1
==================== ==================== ================= ==================
</TABLE>
15
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
SAPPI REORGANIZATION
On April 27, 1998, Sappi Limited ("Sappi") announced the business integration of
S.D. Warren and its subsidiaries, doing business as Sappi Fine Paper North
America ("SFPNA") and 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.
S.D. Warren products are now being marketed under the name Sappi Fine Paper
North America. The legal entities of Holdings, S.D. Warren and S.D. 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 products. Coated freesheet industry volume in
the United States increased during the first half of the fiscal year versus the
same period in the prior year. In line with the industry, the company volume for
the six months ended March 29, 2000, increased by 26% compared to the prior
year. Increased coated wood free imports, together with enhanced domestic
production output levels have over the past one to two years played a key role
in placing downward pressure on coated wood free industry pricing. Overall
Company pricing has generally followed industry pricing. Based on increased
demand from the magazine publishing, catalogue publishing, and commercial
printing markets, the Company announced price increases on most coated wood free
grades in December 1999.
Uncoated and technical papers experienced a 5% decline in volume over the prior
year. After adjusting for the business exited, due to the restructuring at the
Westbrook mill, this segment reported a decrease of 2% in volume while still
showing improvements in sales mix of higher margin products. The Company has
realized an increase in prices due to improved market conditions and product
mix.
The Company's specialty papers experienced modest volume growth during the three
months ended March 29, 2000. Economic improvements in Europe and South America
contributed to a 5% volume gain over last quarter in both our high end and
commodity product lines.
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
unaudited Condensed Consolidated Financial Statements and the Notes thereto.
16
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
THREE MONTHS ENDED MARCH 29, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET SALES
Net Sales for the three months ended March 29, 2000 were $387.3 million compared
to $354.7 million for the three months ended March 31, 1999, an increase of
$32.6 million or 9.2%. The increase was primarily due to a 12,000 ton or a 3.5%
increase in paper shipment volume, attributable to improved productivity and
additional import sales, as well as a price increase put into effect in December
1999 on most coated wood free products.
COST OF GOODS SOLD
Cost of goods sold for the three months ended March 29, 2000 was $303.3 million
compared to $284.2 million for the three months ended March 31, 1999. Cost of
goods sold on a per paper ton basis increased to $798 per ton for the three
months ended March 29, 2000 from $791 per ton for the corresponding prior year
quarter. The increase was primarily due to higher pulp and energy costs.
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 were utilized 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 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 this restructuring charge,
$34.8 million has been utilized as of September 29, 1999 and $1.1 million was
utilized during the three months ended December 29, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense totaled $39.0 million for the three
months ended March 29, 2000 compared to $38.0 million for the three months ended
March 31, 1999. The increase over the prior years quarter results from
depreciation associated with the recently installed integrated information
system.
OTHER INCOME, NET
Other income, net includes interest income of $1.6 million and $2.2 million for
the three months ended March 29, 2000 and March 31, 1999, respectively. Of the
$2.1 million for the three months ended March 29, 2000, $0.4 million represented
interest earned on the Notes Receivable received in exchange for the
17
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
sale of the Company's timberlands (net of interest expense accrued on the SDW
Timber III Notes Payable).
EXTRAORDINARY ITEM
The premium paid of $10.5 million in connection with the purchase of $232.4
million face value of the Company's Senior Subordinated Notes (the "Notes"),
together with the related $7.0 million of accelerated amortization of deferred
financing fees and other costs resulted in an extraordinary loss of $10.6
million (net of $6.9 million of tax benefits) in the three months ended March
29, 2000.
INTEREST EXPENSE AND TAXES
Interest expense for the three months ended March 29, 2000 was $15.9 million
compared to $13.6 million for the three months ended March 31, 1999. Interest
expense adjusted for $5.0 million of interest related to the 14% Subordinated
Exchange Debentures issued on June 15, 1999, was approximately $10.9 million for
the three months ended March 29, 2000, compared to $13.6 million for the three
months ended March 31, 1999, primarily due to lower levels of outstanding debt
in the current year. Interest expense includes the amortization of deferred
financing fees, but excludes write-offs due to accelerated reductions in related
financing.
For the three months ended March 29, 2000, income tax expense was $12.4 million,
compared to $9.1 million for the three months ended March 31, 1999. The current
quarter's tax expense is shown net of a $6.9 million tax benefit relating to the
extraordinary loss on the early redemption of the Notes, as compared with a
benefit of $1.4 million relating to the comparative quarter's early redemption
of Notes.
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO THE SIX MONTHS ENDED APRIL 1, 1998
NET SALES
Net Sales for the six months ended March 29, 2000 were $749.1 million
compared to $688.1 million for the six months ended March 31, 1999, an
increase of $61.0 million or 8.9%. The increase was primarily due to a 46,000
ton or a 7% increase in paper shipment volume, attributable to improved
productivity and additional import sales, as well as a price increase in
December 1999 on most coated wood free products.
COST OF GOODS SOLD
Cost of goods sold for the six months ended March 29, 2000 was $590.5 million
compared to $544.7 million for the six months ended March 31, 1999. Cost of
goods sold for the six months ended March 29, 2000 is net of a $4.0 million
business interruption insurance claim recovery (see Note 8 ). Including this
insurance recovery, cost of goods sold on a per paper ton basis increased to
$790 per ton for the six months ended March 29, 2000 from $787 per ton for the
corresponding prior year period. The increase was primarily due to higher pulp
and energy costs.
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
18
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
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 were utilized 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 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 this restructuring charge,
$34.8 million had been utilized as of September 29, 1999 and $1.1 million was
utilized during the three months ended December 29, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense totaled $77.2 million for the six
months ended March 29, 2000 compared to $73.1 million for the six months ended
March 31, 1999. The increase over the prior years quarter results from
depreciation associated with the recently installed integrated information
system.
OTHER INCOME, NET
Other income, net includes interest income of $3.1 million and $4.3 million for
the six months ended March 29, 2000 and March 31, 1999, respectively. Of the
$4.0 million for the six months ended March 29, 2000, $0.8 million represented
interest earned on the Notes Receivable received in exchange for the sale of the
Company's timberlands (net of interest expense accrued on the SDW Timber III
Notes Payable).
EXTRAORDINARY ITEM
The premium paid of $10.5 million in connection with the purchase of $232.4
million face value of the Company's Senior Subordinated Notes (the "Notes"),
together with the related $7.0 million of accelerated amortization of deferred
financing fees and other costs, resulted in an extraordinary loss of $10.6
million (net of $6.9 million of tax benefits) in the six months ended March 29,
2000.
INTEREST EXPENSE AND TAXES
Interest expense for the six months ended March 29, 2000 was $32.2 million
compared to $27.9 million for the six months ended March 31, 1999. Interest
expense adjusted for $10.1 million of interest related to the 14% Subordinated
Exchange Debentures issued on June 15, 1999, was approximately $22.1 million for
the six months ended March 29, 2000, compared to $27.9 million for the six
months ended March 31, 1999. The decrease was primarily due to lower levels of
outstanding debt in the current year. Interest expense includes the amortization
of deferred financing fees, but excludes write-offs due to accelerated
reductions in related financing.
For the six months ended March 29, 2000, income tax expense was $21.2 million,
compared to $49.6 million for the six months ended March 31, 1999. The current
period's tax expense is shown net of a $6.9 million tax benefit relating to the
extraordinary loss on the early redemption of the Notes, as compared with a
benefit of $2.1 million relating to the comparative period's early redemption of
Notes.
19
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $61.5 million for the six months
ended March 29, 2000 compared to $42.0 million for the six months ended March
31, 1999. This increase of $19.5 million is due mainly to an increase in net
income, after adjusting for the gain in the sale of the Timberlands in the
comparative period.
The Company's operating working capital was $18.7 million at March 29, 2000
compared to a deficit of $7.9 million at September 29, 1999. Operating working
capital is defined as trade accounts receivable, other receivables and
inventories less accounts payable and accrued and other current liabilities.
This increase resulted primarily from an increase in inventories during the six
months ended March 29, 2000.
Capital expenditures for the six months ended March 29, 2000 were $27.1 million,
down from $51.7 million for the six months ended March 31, 1999. The reduction
from last year is due to completion of the Company's new sheeting and warehouse
facility at the Muskegon, Michigan mill and completion of the first phase of the
company-wide integrated application system implementation. Capital expenditures
are projected to be approximately $110.0 million during fiscal year 2000. In
addition, the Company believes that environmental compliance expenditures, the
bulk of which are for cluster rules compliance, will approximate $55.0 million
to $75.0 million through 2001, of which $25.0 million has already been incurred.
The Company believes that cash generated by operations and amounts available
under its revolving credit facility will be sufficient to meet its ongoing
operating and capital expenditure requirements for the remainder of the fiscal
year.
Net cash used in financing activities for the six months ended March 29, 2000
was $40.9 million compared to $35.3 million cash provided for the corresponding
period of the previous year. This decrease of $76.2 million is primarily
associated with the redemption of the 12% Senior Subordinated Notes and the
associated increase in other long-term debt.
LONG-TERM DEBT
At March 29, 2000, long-term debt, excluding current maturities, was $517.2
million compared to $558.4 million at September 29, 1999. At March 29, 2000,
SFPNA had borrowings of $195.0 million outstanding under its revolving credit
facility, resulting in an unused borrowing capacity of approximately $39.8
million, after giving effect to outstanding letters of credit of $15.2 million,
which may be used to finance working capital needs. In addition, SFPNA had
approximately $120.2 million of letters of credit outstanding under its letter
of credit facility at March 29, 2000.
OTHER ITEMS
SALE OF TIMBERLANDS
See Note 6 to the Unaudited Condensed Consolidated Financial Statements - Sale
of Timberlands
FORCE MAJEURE EVENT
See Note 8 to the Unaudited Condensed Consolidated Financial Statements - Force
Majeure Event
20
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
ENVIRONMENTAL AND SAFETY MATTERS
The Company is subject to a wide variety of environmental laws and regulations
relating to, among other matters, air emissions, wastewater discharges, past and
present landfill operations and hazardous waste management. See Note 9 -
Environmental and Safety Matters in the Notes to Unaudited Condensed
Consolidated Financial Statements included in this Form 10-Q for a discussion of
these matters.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Unaudited Condensed Consolidated Financial Statements - New
Accounting Pronouncements
LONG-TERM CONTRACTS
See Note 10 to the Unaudited Condensed Consolidated Financial Statements -
Commitments and Contingencies
YEAR 2000
In fiscal year 1996 the Company commenced its Year 2000 project to remediate the
cross-century date processing problem within the Company's computer systems
including business information systems, manufacturing execution systems,
production control systems, and data communications infrastructure. The Company
contracted with a national consulting firm specializing in Year 2000
initiatives. This consulting firm employed its Year 2000 compliance methodology
as well as specialized project management and technical staff to advise and
assist in the conduct of the Company's Year 2000 project.
Compliance strategies employed by the Year 2000 project team included: system
remediation (Year 2000 readiness modifications), system retirement, and system
replacement. This included the replacement of a significant number of legacy
business systems with the implementation of a company-wide integrated
application system ("the integrated system"). Compliance strategies also
included assessing the Year 2000 readiness of critical vendors and customers.
The Company utilized a "Day Zero" contingency plan, which provided for an
enterprise communications center to be active during the New Year transition
period of December 31, 1999 through January 4, 2000. The purpose of this center
was to enable the Company to address effectively any internal or external Year
2000 impact scenarios.
The Company's business information systems, manufacturing execution systems,
production control systems, and data communications infrastructure were not
adversely effected on the January 1, 2000 transition and continue to operate as
intended. The Company has also not experienced any significant delays in
conducting business with its critical vendors or customers. The Company is aware
that certain problems may arise periodically throughout the year relating to the
Year 2000, but it is expected that they would be inconsequential.
For those systems not replaced by the implementation of the integrated system,
the cost of the Year 2000 project aggregated approximately $13.9 million which
included $12.6 million for remediation services by third party consultants and
$1.3 million for new hardware and software. Future costs with respect to Year
2000 are not expected to be material.
21
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
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
Indenture relating to the 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 cash 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 condensed consolidated balance sheets at March 29, 2000 and
September 29, 1999, respectively, include an accrual of $10.3 million and $6.3
million relating to the 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 SFPNA (all of which is pledged to the lenders under the Company's Credit
Agreement) and all of the operations of Holdings (other than the management of
its investment in SFPNA) are currently conducted through SFPNA and its
subsidiaries, Holdings' ability to meet its cash obligations is dependent upon
the earnings of SFPNA 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 SFPNA and
guarantees in respect of indebtedness of SFPNA 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 and the Indenture relating to the
Exchange Debentures permit SFPNA 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 SFPNA meets certain conditions. Among such
conditions are that SFPNA maintain specified financial ratios and comply with
certain financial tests.
22
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
ITEM 3. 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 in 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 $249.9 million at March 29, 2000, 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 and interest rate swap
would not be materially different than that disclosed in the Company's Annual
Report on Form 10-K for the year ended September 29, 1999.
During the three and six months ended March 29, 2000, the Company did not engage
in foreign currency hedging activities. The currency exchange impact from the
Company's transactions with its affiliates was immaterial.
23
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Intentionally omitted.*
ITEM 2. CHANGES IN SECURITIES
Intentionally omitted.*
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Intentionally omitted.*
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Intentionally omitted.*
ITEM 5. OTHER INFORMATION
Intentionally omitted.*
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Intentionally omitted.*
- --------------------------------------------------------------------------------
* This report is being voluntarily filed with the Commission pursuant to the
registrant's contractual obligations to file with the Commission all
financial information that would be required to be filed on a Form 10-Q. The
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
24
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
FORM 10-Q, MARCH 29, 2000
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
S.D. Warren Company
Date: May 11, 2000 By: /s/ MARK BECKER
------------------------------------------
Mark Becker
Vice President and Chief Financial Officer
(Principal Financial Officer)
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
S.D. Warren Company's (the "Company") condensed consolidated statements of
operations for the quarter ended March 29, 2000 and Balance sheet as of March
29, 2000 found on pages 5 and 6 respectively, of the Company's Quarterly Report
on Form 10 Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-27-2000
<PERIOD-START> DEC-30-1999
<PERIOD-END> MAR-29-2000
<CASH> 67,300
<SECURITIES> 0
<RECEIVABLES> 57,600
<ALLOWANCES> 2,500
<INVENTORY> 204,900
<CURRENT-ASSETS> 373,100
<PP&E> 1,364,500
<DEPRECIATION> 407,900
<TOTAL-ASSETS> 1,454,800
<CURRENT-LIABILITIES> 260,000
<BONDS> 517,200
0
0
<COMMON> 0
<OTHER-SE> 321,400
<TOTAL-LIABILITY-AND-EQUITY> 1,454,800
<SALES> 749,100
<TOTAL-REVENUES> 749,100
<CGS> 590,500
<TOTAL-COSTS> 667,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,200
<INCOME-PRETAX> 53,200
<INCOME-TAX> 21,200
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (10,600)
<CHANGES> 0
<NET-INCOME> 21,400
<EPS-BASIC> 0.32
<EPS-DILUTED> 0.23
</TABLE>
