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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FINANCIAL INFORMATION*
FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 2000
(MARK ONE)*
|_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 2000
|_| 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 Identification
incorporation or organization) 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 8, 2000 was 100
shares.
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* 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.
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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. *
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* 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.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth-selected consolidated statements of operations
data, consolidated share data and consolidated balance sheet data for
S.D.Warren and its subsidiaries (the "Company" or "Warren"). 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, September 29, 1999
and September 27, 2000 are derived from the audited consolidated financial
statements of Warren. 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>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 2, OCTOBER 1, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 27,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN MILLIONS)
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales........... $ 1,441.6 $ 1,405.6 $ 1,458.9 $ 1,424.7 $ 1,557.7
Gross profit........ 255.0 290.2 340.5 294.0 330.4
Selling, general and
administrative
expense........... 134.1 137.6 142.6 151.4 155.5
Restructuring....... -- 10.0 -- 39.6 --
Income from
operations........ 120.9 142.6 197.9 103.0 174.9
Gain on sale of
pressure sensitive
business.......... -- -- 30.9 -- --
Gain on sale of
timberlands....... -- -- -- 75.4 --
Other income
(expense), net.... (0.1) 4.1 3.0 7.8 7.7
Interest expense.... 108.9 99.0 71.3 55.3 57.6
Income tax expense 5.1 19.3 66.5 54.4 49.6
Extraordinary items,
net of tax........ (2.0) -- (4.9) (5.3) (10.6)
Net income.......... 4.8 28.4 89.1 71.2 64.8
Dividends and
accretion on Warren
Series B preferred
stock............. 13.5 15.2 16.3 13.4 --
Net income (loss)
applicable to
common stockholder (8.7) 13.2 72.8 57.8 64.8
</TABLE>
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<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 2, OCTOBER 1, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 27,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN MILLIONS)
CONSOLIDATED BALANCE
SHEET DATA (AT END OF
PERIOD):
<S> <C> <C> <C> <C> <C>
Cash and cash
equivalents........ $ 49.0 $ 180.7 $ 34.7 $ 73.8 $ 39.5
Working capital...... 109.4 179.9 67.4 102.1 80.8
Total assets......... 1,725.4 1,632.0 1,507.5 1,483.5 1,472.4
Total debt (including
current maturities) 948.9 767.1 580.2 566.8 466.9
Warren Series B
preferred stock.... 88.0 103.2 119.5 -- --
Stockholder's
equity............. 356.1 369.3 383.3 426.0 490.8
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The S.D. Warren Company is an indirect subsidiary of Sappi Ltd. ("Sappi")
through S.D.W. Holdings ("Holdings"). 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, 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 Corporation ("SDW Acquisition")
acquired from Scott Paper Company ("Scott"), which has since been acquired by
Kimberly-Clark, all of the outstanding capital stock of Warren. 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 and changes in environmental, tax and other laws and
regulations.
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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 ("Sappi Fine Paper"). Sappi Fine Paper 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
shipments from U.S. producers declined during fiscal year 2000 versus fiscal
year 1999. The Company set coated paper volume records in the fiscal year 2000.
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. During the first three
quarters of the fiscal year, supply and demand were in relative balance, which
allowed the Company to announce price increases for sheet and web papers. During
the last quarter of fiscal year 2000, supply exceeded demand, which put downward
pressure on prices.
Uncoated and Technical Papers volume was down slightly in fiscal year 2000 vs.
fiscal year 1999. Growth in the first half of the year was offset by a demand
slow down in the second half, which led to increased inventories and depressed
prices. Within this market, the Company successfully increased its sales of
value added products.
The Company's release papers products experienced 8% volume growth in fiscal
year 2000 as compared to fiscal year 1999. The high end product line continues
to benefit from continued product quality improvements and strong economic
conditions in both Europe and South America. The commodity product line also
grew due to the strong automotive market in the United States. Price increases
were implemented in both lines but were somewhat offset by exchanges rate
changes in the European market.
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 2000 COMPARED TO FISCAL YEAR 1999
NET SALES
Net sales for fiscal year 2000 were $1,557.7 million compared to $1,424.7
million for fiscal year 1999, an increase of $133.0 million or 9.3%. This
increase from the previous year was due to a 76,836-ton or 5.1% increase in
volume, both paper and pulp, as well as a 4% increase in average net revenue per
ton.
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COSTS OF GOODS SOLD
Cost of goods sold for fiscal year 2000 was $1,227.3 million, compared to
$1,130.7 million for fiscal year 1999, an increase of $96.6 million or 8.5%.
Cost of goods sold on a per paper ton basis increased to $795 per ton from $767
per ton for the prior fiscal year. This $28 per ton increase was primarily due
to the impact of 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 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,
all amounts have been utilized as of September 27, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense totaled $155.5 million for fiscal
year 2000 compared to $151.4 million for fiscal year 1999, an increase of $4.1
million. The increase over the prior year results primarily from depreciation
associated with recently installed integrated information system.
EXTRAORDINARY ITEMS
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).
OTHER INCOME, NET
Other income, net totaling $7.7 million and $7.8 million includes interest
income of $3.9 million and $5.9 million for fiscal years 2000 and 1999,
respectively. Of the $7.7 million for fiscal year 2000, $1.5 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 - see Note 4- Evaluation and Sale of Noncore Assets).
INTEREST EXPENSE AND TAXES
Interest expense for fiscal year 2000 was $57.6 million compared to $55.3
million for fiscal year 1999. Interest expense adjusted for $20.2 million and
$6.0 million for fiscal years 2000 and 1999, respectively, for interest
related to the 14% Subordinated Exchange Debentures issued on June 15, 1999
was $37.4 million for the fiscal year 2000, compared to $49.3 million for
fiscal year 1999. The adjusted decrease was primarily due to lower levels of
outstanding debt in the current year as well as lower rates obtained on the
debt incurred in connection with the purchase of the 12% Senior Subordinated
Notes. Interest expense includes the amortization of deferred financing fees,
but excludes write-offs due to accelerated reductions in related financing.
6
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For fiscal year 2000, income tax expense, excluding the aggregate $6.9 million
and $3.8 million of tax benefits attributable to the extraordinary losses for
fiscal years 2000 and 1999, respectively, was $49.6 million compared to $54.4
million for fiscal year 1999 or 41.6% and 39.7% respectively. 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
in fiscal year 1999.
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 2.3%. 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.
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 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.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $173.3 million for fiscal year
2000 as compared to $154.2 million for fiscal year 1999. This increase of $19.1
million is due mainly to an increase in net income, after adjusting for the gain
in the sale of the Timberlands, offset by an unfavorable impact of a higher
investment in working capital, compared to fiscal year 1999.
The Company's operating working capital was $24.2 at September 27, 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 year ended
September 27, 2000.
Cash flows used for investing activities was $96.3 million of cash in fiscal
year 2000 as compared to $54.2 million of cash flows provided by investing
activities in fiscal year 1999. Fiscal year 1999 includes 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). Capital
expenditures for fiscal year 2000 were $96.3 million, down from $107.3 million
for fiscal year 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. Of the $96.3 million, $20.0 million was related to environmental
compliance expenditures at the Muskegon, Michigan mill. In addition, the Company
believes that future environmental compliance expenditures, the bulk of which
are for cluster rules compliance (environmental protection regulations - see
Note 14), will aggregate approximately $30.0 million to $55.0 million through
2001.
The Company believes that cash generated by operations and amounts available
under its revolving credit facility will be sufficient to meet its ongoing
operating and capital expenditure requirements.
Net cash used in financing activities was $111.3 million for fiscal year 2000
compared to $169.3 million for the previous year. In fiscal year 2000, the
Company made long term loan payments of $63.4 million, purchased $232.4
million face value of the Notes for cash of $242.9 million, and received
long-term advances of $195.0 million. 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. The current maturities of long-term debt
balance of $14.8 million at September 27, 2000 consists primarily of the
amounts payable in March 2001 and September 2001 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.
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 2000, 1999 and 1998.
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.
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At September 27, 2000, long-term debt was $452.1 compared to $558.4 million at
September 29, 1999, a decrease of $106.3 million. At September 27, 2000, Warren
had borrowings outstanding of $140.0 million under the Revolving Credit
Facility. At September 29, 1999, Warren did not have any borrowings outstanding
under the Revolving Credit Facility. At September 27, 2000 and September 29,
1999, $15.2 million and $14.9 million, respectively, of the Revolving Credit
facility availability was utilized to guarantee the issuance of letters of
credit. At September 27, 2000 and September 29, 1999, availability under the
Revolving Credit Facility was $94.8 million and $235.1 million, respectively. In
addition, Warren had approximately $111.3 million and $120.2 million of letters
of credit outstanding under its Letter of Credit Facility at September 27, 2000
and September 29, 1999, 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. As of September 27, 2000, the Company was in compliance with all
debt covenants.
Historically, the Company has entered into fixed rate interest protection
agreements on a portion of its outstanding debt. No interest rate protection
agreements were in place at September 27, 2000. Debt covered by such interest
rate protection agreements was $25.0 million at September 29, 1999.
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.
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
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.
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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 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 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 semiannually 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 years ended September 27, 2000 and September 29, 1999. The
Company's investment in the undivided interest in SDW III of approximately $25.3
million and $24.5 million is included in the accompanying consolidated balance
sheets as of September 27, 2000 and September 29, 1999 respectively.
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
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 fiscal year 2000, the Company recorded a receivable from its
insurance company for property damage of $26.9 million, of which $23.0 million
has been collected as of September 27, 2000. In addition, the Company has
recorded a $8.0 million recovery for the business interruption claim caused by
damages incurred with respect to the Muskegon fire all of which has been
approved by the insurance carrier and $4.0 million of which has been received.
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 that 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.
10
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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.
CONTROL BY SAPPI
The Company is a wholly owned subsidiary of SDW Holdings Corporation
("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.
Considerations Relating to Holdings' Cash Obligations
The Company expects that it may make certain cash payments to Holdings or other
affiliates during fiscal 2001 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 27,
2000 and September 29, 1999, respectively, include an accrual of $14.4 million
and $6.3 million 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 debt covenants.
Because Holdings has no material assets other than the outstanding common stock
of Warren (all of which is pledged to the lenders under the Company's Credit
Agreement) and all of the operations of Holdings (other than the management of
its investment in Warren) are currently conducted through Warren and its
subsidiaries, Holdings' ability to meet its cash obligations is dependent upon
the earnings of Warren and its subsidiaries and the distribution or other
provision of those earnings to Holdings. Holdings has no material indebtedness
outstanding (other than advances that may be owed from time to time to Warren
and guarantees in respect of indebtedness of Warren and its subsidiaries).
Holdings does, however, have various obligations with respect to its equity
securities (including in respect of registration rights granted by Holdings)
that have required and are likely to continue to require cash expenditures by
Holdings. The Company believes that the Credit Agreement, the Indenture 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. 133, "Accounting for Derivative Instruments and Hedging
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
11
<PAGE>
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 $244.5 million at September 27, 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 would be $1.2 million
and $4.0 million, respectively. During the fiscal year ended September 27, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
S.D. WARREN COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report......................................................13
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended September 30, 1998,
September 29, 1999 and September 27, 2000......................................14
Consolidated Balance Sheets as of September 29, 1999 and September 27, 2000.......15
Consolidated Statements of Cash Flows for the years ended September 30, 1998,
September 29, 1999 and September 27, 2000......................................16
Consolidated Statements of Changes in Stockholder's Equity for the years ended
September 30, 1998, September 29, 1999 and September 27, 2000..................17
Notes to Consolidated Financial Statements........................................18
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts................................38
</TABLE>
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of S.D. Warren Company and subsidiaries:
We have audited the accompanying consolidated balance sheets of S.D. Warren
Company and subsidiaries (the "Company") as of September 27, 2000 and September
29, 1999, 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 27, 2000. 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 auditing standards generally accepted
in the United States of America. 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 27,
2000 and September 29, 1999, and the results of its operations, and its cash
flows for each of the three years in the period ended September 27, 2000 in
conformity with accounting principles generally accepted in the United States
of America. 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 13, 2000
13
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------
September 30, September 29, September 27
1998 1999 2000
---------------- ---------------- ------------------
<S> <C> <C> <C>
Net Sales ......................... $ 1,458.9 $ 1,424.7 $ 1,557.7
Cost of goods sold ................ 1,118.4 1,130.7 1,227.3
--------- --------- ---------
Gross profit ...................... 340.5 294.0 330.4
Selling, general and
administrative expense .......... 142.6 151.4 155.5
Restructuring ..................... -- 39.6 --
--------- --------- ---------
Income from operations ............ 197.9 103.0 174.9
Gain on sale of pressure
sensitive business............... 30.9 -- --
Gain on sale of timberlands ....... -- 75.4 --
Other income, net ................. 3.0 7.8 7.7
Interest expense .................. 71.3 55.3 57.6
--------- --------- ---------
Income before income taxes and
extraordinary items ............. 160.5 130.9 125.0
Income tax expense ................ 66.5 54.4 49.6
--------- --------- ---------
Income before extraordinary
items ........................... 94.0 76.5 75.4
Extraordinary items, net of tax ... (4.9) (5.3) (10.6)
--------- --------- ---------
Net income ........................ 89.1 71.2 64.8
Dividends and accretion on
Warren Series B redeemable
exchangeable preferred stock .... 16.3 13.4 --
--------- --------- ---------
Net income applicable to common
stockholder ..................... $ 72.8 $ 57.8 $ 64.8
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
14
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 27,
1999 2000
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 73.8 $ 39.5
Trade accounts receivable, net............................ 59.4 74.7
Other receivables......................................... 18.0 18.2
Inventories, net.......................................... 173.4 210.1
Deferred income taxes..................................... 20.4 12.3
Other current assets...................................... 24.2 19.6
--------------- ---------------
Total current assets.................................... 369.2 374.4
Plant assets, net............................................ 974.1 977.1
Goodwill, net................................................ 79.0 75.0
Deferred financing fees, net................................. 22.6 12.9
Other assets, net............................................ 38.6 33.0
--------------- ---------------
Total assets............................................ $ 1,483.5 $ 1,472.4
=============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt...................... $ 8.4 $ 14.8
Accounts payable.......................................... 155.8 168.5
Accrued and other current liabilities..................... 102.9 110.3
--------------- --------------
Total current liabilities............................... 267.1 293.6
--------------- --------------
Long-term debt:
Term loans................................................ 82.4 211.2
Senior subordinated notes................................. 232.4 0.0
Exchange debentures....................................... 133.1 134.0
Revenue bonds............................................. 110.5 106.9
--------------- --------------
Total long-term debt.................................... 558.4 452.1
Deferred income taxes........................................ 113.9 129.0
Other liabilities............................................ 118.1 106.9
--------------- --------------
Total liabilities....................................... 1,057.5 981.6
--------------- --------------
Commitments and contingencies (Notes 14 and 15)
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......................................... 104.6 169.4
--------------- --------------
Total stockholder's equity.............................. 426.0 490.8
--------------- --------------
Total liabilities and stockholder's equity.............. $ 1,483.5 $ 1,472.4
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
15
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
Twelve Months Ended
------------------------------------------
September 30, September 29, September 27,
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 89.1 $ 71.2 $ 64.8
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 90.8 92.0 100.7
Deferred income taxes 32.8 40.3 23.2
Extraordinary items 8.3 9.1 17.5
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 1.4 0.2 1.5
Changes in assets and liabilities:
Trade and other accounts receivable, net (10.9) (17.3) (22.9)
Inventories, net (13.0) (6.6) (36.7)
Accounts payable, accrued and other current liabilities (2.0) 28.0 19.7
Other assets and liabilities 0.6 (7.6) 5.5
------------ ------------ ------------
Net cash provided by operating activities 166.2 154.2 173.3
------------ ------------ ------------
Cash Flows from Investing Activities:
Monetization of note receivable -- 156.0 --
Investment in plant assets and timber resources (111.0) (107.3) (96.3)
Proceeds from disposal of plant assets and timber resources 0.4 3.3 --
Proceeds from sale of pressure sensitive business 51.5 -- --
Other investing activities (1.8) 2.2 --
------------ ------------ ------------
Net cash (used in) and provided by investing activities (60.9) 54.2 (96.3)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from short term borrowings -- 54.5 --
Proceeds from long term borrowings -- -- 234.5
Reopayments of short term borrowings -- (54.5) --
Repayments of long-term debt, including premiums paid (191.0) (153.8) (345.8)
Dividends paid to parent (58.2) (15.0) --
Other financing activities (2.1) (0.5) --
------------ ------------ ------------
Net cash used in financing activities (251.3) (169.3) (111.3)
------------ ------------ ------------
Net change in cash and cash equivalents (146.0) 39.1 (34.3)
Cash and cash equivalents:
Beginning of period 180.7 34.7 73.8
------------ ------------ ------------
End of period $ 34.7 $ 73.8 $ 39.5
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
16
<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 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
Net income.................................. -- -- -- 64.8 64.8
----------- ----------- ------------ ----------- ------------
Balance, September 27, 2000..................... 100 $ -- $ 321.4 $ 169.4 $ 490.8
=========== =========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
17
<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). The Company is a direct wholly
owned subsidiary of SDW Holdings Corporation ("Holdings"). 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.
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 accounting
principles generally accepted in the United States of America 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.
18
<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 27,
2000 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. The
Company periodically evaluates the recoverability of plant assets and goodwill
and intangible assets discussed below based on the undiscounted cash flows that
are anticipated to be generated at centers of cash flows as defined.
Interest expense is capitalized on major construction projects to the extent
that such timber has not yet matured. For fiscal years 1998, 1999 and 2000, the
Company capitalized interest of approximately $4.1 million, $3.9 million and
$0.4 million, respectively.
On November 12, 1998, the Company sold its interests in the timberlands, located
in Maine. As of September 27, 2000, there are no assets remaining on the balance
sheet related to the timberland investment (see Note 4).
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 27, 2000 and September 29, 1999, $49.9 million and $49.6 million of
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.
19
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 29, 1999 and September 27, 2000
was approximately $79.0 million and $75.0 million, respectively, net of
accumulated amortization of approximately $20.0 million and $24.0 million,
respectively.
DEFERRED FINANCING FEES
The deferred financing balance at September 27, 2000 and September 29, 1999 was
$12.9 million and $22.6 million, respectively, net of accumulated amortization
of $53.7 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 2000 and 1999, the Company
recorded pre-tax extraordinary losses of $7.0 million and $1.8 million,
respectively, related to the write-off of deferred financing fees and other
costs which were partially offset by a deferred tax benefit of $2.8 million and
$0.7 million in fiscal years 2000 and 1999, respectively.
OTHER ASSETS
Other assets include intangible assets aggregating $11.0 million and $12.5
million at September 27, 2000 and September 29, 1999, respectively. These
intangible assets are being amortized over their average estimated useful lives
of approximately 10 years. Intangibles are stated net of accumulated
amortization of approximately $10.1 million and $8.5 million at September 27,
2000 and September 29, 1999, respectively. The remaining balance of other assets
at September 27, 2000 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. No
interest rate protection agreements were in place as of September 27, 2000.
The Company does not hold derivative financial instruments for trading purposes.
INCOME TAXES
The Company uses an asset and liability approach to computing deferred income
taxes, which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this approach, deferred income taxes
are determined based on the difference between the financial statement and
income tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
WORKERS' COMPENSATION INSURANCE
The Company has a combination of self-insured and insured workers' compensation
programs. The self-insurance claim liability for workers' compensation is based
on claims reported and actuarial estimates of adverse developments and claims
incurred but not reported. The Company's workers' compensation liability is
20
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 7.75% and 5.5% for fiscal years 2000 and 1999. The gross
liability was $16.5 million and $25.8 million at September 27, 2000 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 $13.5 million, $13.9 million and $14.0
million for fiscal years 1998, 1999, and 2000 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 AND OTHER COMPREHENSIVE INCOME
Other income, net, represents interest income on cash and cash equivalents and
other non-operating income and expense items. Net Income is the only item
which meets the definition of other comprehensive income.
CASH PAID FOR INCOME TAXES
Cash paid for income taxes for fiscal years 2000, 1999 and 1998 was $15.4
million, $28.0 million and $35.5 million, respectively. Cash received for income
tax refunds in fiscal years 2000, 1999 and 1998 was $11.2 million, $9.4 million
and $0.8 million, respectively.
CASH PAID FOR INTEREST
Cash paid for interest during fiscal years 2000, 1999 and 1998 was $68.2
million, $55.5 million and $75.8 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, and types of customers and
distribution methods.
21
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 does not believe that the implementation of SFAS No. 133
will result in a material impact on financial position or earnings.
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.
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. The closures, or approximately 48% of the then remaining Westbrook
mill workforce have affected approximately 315 employees, both salaried and
hourly. 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. All amounts were utilized as of
September 27, 2000.
The components of the above restructuring charges are as follows (in
millions):
Write-down of long-lived assets.................... $ 21.2
Employee severance, termination benefits, and
other......................................... 18.4
----------------
$ 39.6
================
NOTE 4 - EVALUATION AND SALE OF NONCORE ASSETS
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.
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
22
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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 semiannually 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 years ended September 27, 2000 and September 29, 1999. The
Company's investment in the undivided interest in SDW III of approximately
$25.3 million and $24.5 million is included in the assets or consolidated
balance sheets as of September 27, 2000 and September 29, 1999, respectively.
NOTE 5 - 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 fiscal year 2000, the Company recorded a receivable from its
insurance company for property damage of $26.9 million, of which $23.0 million
has been collected as of September 27, 2000. In addition, the Company has
recorded a $8.0 million recovery for the business interruption claim caused by
damages incurred with respect to the Muskegon fire all, of which has been
approved by the insurance carrier and $4.0 million of which has been received.
NOTE 6 - TRADE ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 27,
1999 2000
------------------ -------------------
(IN MILLIONS)
<S> <C> <C>
Trade accounts receivable..................................... $ 62.9 $ 76.9
Allowance for doubtful accounts............................... (3.5) (2.2)
------------------ -------------------
$ 59.4 $ 74.7
================== ===================
</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.
23
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
The Company's trade accounts receivable, shown in the table above, are net of
$72.0 million and $87.0 million at September 29, 1999 and September 27, 2000,
respectively, which represents accounts receivable that were securitized and
sold under the A/R Facility.
NOTE 7 - INVENTORIES, NET (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 27,
1999 2000
------------------ ------------------
<S> <C> <C>
Finished products............................................ $ 81.7 $ 94.0
Work in progress............................................. 27.8 37.5
Pulp, logs and pulpwood...................................... 28.1 37.4
Maintenance parts and other supplies......................... 35.8 41.2
------------------ ------------------
$ 173.4 $ 210.1
================== ==================
</TABLE>
NOTE 8 - PLANT ASSETS (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 27,
1999 2000
------------------ ------------------
<S> <C> <C>
Plant assets, at cost:
Land and buildings...................................... $ 184.5 $ 196.4
Plant and equipment..................................... 1,153.2 1,234.8
------------------ ------------------
1,337.7 1,431.2
Accumulated depreciation................................ (363.6) (454.1)
------------------ ------------------
$ 974.1 $ 977.1
================== ==================
</TABLE>
NOTE 9 - INCOME TAXES
Income before income taxes and extraordinary items for fiscal years 1998, 1999
and 2000 were from domestic and foreign sources.
The components of the tax provisions before extraordinary items are as follows
(in millions):
24
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 27,
1998 1999 2000
------------------- ------------------ ------------------
<S> <C> <C> <C>
Current:
Federal............................ $ 27.1 $ 11.7 $ 23.7
State and local.................... 4.8 1.1 2.0
Foreign............................ - - .7
------------------- ------------------ ------------------
Total current........................... 31.9 12.8 26.4
------------------- ------------------ ------------------
Deferred:
Federal............................ 24.9 36.1 20.2
State and local.................... 9.7 5.5 3.0
------------------- ------------------ ------------------
Total deferred................. 34.6 41.6 23.2
------------------- ------------------ ------------------
$ 66.5 $ 54.4 $ 49.6
=================== ================== ==================
</TABLE>
The components of the deferred tax provisions before extraordinary items are as
follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 27,
1998 1999 2000
------------------- ------------------- ------------------
<S> <C> <C> <C>
Inventory...................................... $ (0.8) $ 5.3 $ (2.3)
Plant assets................................... 0.5 17.9 22.3
Accrued and other liabilities.................. 28.6 34.9 8.9
AMT credit carryforwards....................... (28.1) (16.7) (8.0)
Tax loss carryforwards......................... 34.4 0.2 2.3
------------------- ------------------- ------------------
Deferred tax provision $ 34.6 $ 41.6 $ 23.2
=================== =================== ==================
</TABLE>
The components of the deferred tax assets and (liabilities) are as follows (in
millions):
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 27,
1999 2000
------------------ ------------------
<S> <C> <C>
Current:
Deferred tax assets:
Restructuring reserves....................................... $ 0.3 $ -
Accrued and other liabilities................................ 28.0 17.2
Inventory.................................................... 1.9 4.1
------------------ ------------------
Total current deferred tax assets 30.2 21.3
Deferred tax liabilities:
Accrued and other liabilities and prepaids................... (9.8) (9.0)
------------------ ------------------
Net current deferred tax asset................................... 20.4 12.3
------------------ ------------------
Noncurrent:
Deferred tax assets:
Other....................................................... - 1.5
Alternative minimum tax credit carryforward.................. 72.7 80.8
Tax loss carryforwards (Federal)............................. 2.3 -
Accrued and other liabilities................................ 46.2 47.2
------------------ ------------------
Total noncurrent deferred tax assets...................... 121.2 129.5
------------------ ------------------
</TABLE>
25
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 27,
1999 2000
------------------ ------------------
<S> <C> <C>
Deferred tax liabilities:
Plant assets................................................. (152.8) (175.1)
Other........................................................ (82.3) (83.4)
------------------ ------------------
Total noncurrent deferred tax liability................... (235.1) (258.5)
------------------ ------------------
Net noncurrent tax liability..................................... (113.9) (129.0)
------------------ ------------------
Net deferred tax liability....................................... $ (93.5) $ (116.7)
================== ==================
</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
---------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 27,
1998 1999 2000
------------------ ------------------- ------------------
<S> <C> <C> <C>
U.S. statutory income tax rate................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit....... 5.9 3.4 2.6
Other factors.................................... 0.5 3.1 1.9
------------------ ------------------- ------------------
Effective tax rate............................... 41.4% 41.5% 39.5%
================== =================== ==================
</TABLE>
As of September 27, 2000, the Company had available state tax net operating loss
carryforwards of approximately $4.4 million. 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 $80.8 million, which will carry forward to future taxable
years indefinitely.
NOTE 10 - ACCRUED AND OTHER CURRENT LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 27,
1999 2000
-------------------- --------------------
<S> <C> <C>
Accrued salaries, wages and employee benefits............... $ 32.6 $ 31.0
Accrued interest............................................ 19.9 11.0
Accrued workers' compensation............................... 1.4 4.6
Other accrued expenses...................................... 49.0 63.7
-------------------- --------------------
$ 102.9 $ 110.3
==================== ====================
</TABLE>
NOTE 11 - LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 27,
1999 2000
-------------------- ---------------------
(IN MILLIONS)
<S> <C> <C>
Bank term loans under Credit Agreement....................... $ 90.8 $ 82.4
Revolver loans under Credit Agreement........................ - 140.0
Warren Series B Senior Subordinated Notes.................... 232.4 -
Revenue bonds................................................ 110.5 110.5
Exchange debentures.......................................... 133.1 134.0
-------------------- --------------------
566.8 466.9
Current maturities of long-term debt......................... 8.4 14.8
-------------------- ---------------------
Long-term debt............................................... $ 558.4 $ 452.1
==================== =====================
</TABLE>
26
<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.
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 the Company. The Credit
Facilities and such guarantees are secured by security interests (subject to
other liens permitted by the terms of the Credit Facilities), to the extent
permissible under the applicable laws and regulations, in (a) all of the capital
stock of Warren and each of its U.S. subsidiaries and 65% of the common stock
and 100% of the preferred stock of each foreign subsidiary and (b) all assets
(subject to certain limitations), except certain trade accounts receivable,
owned by Warren and its subsidiaries.
The Credit Agreement contains restrictive covenants which limit Holdings, Warren
and their subsidiaries with respect to certain matters including, among other
things, the ability to incur debt, pay dividends, make acquisitions, sell
assets, merge, grant or incur liens, guarantee obligations, make investments or
loans, make capital expenditures, create subsidiaries or change its line of
business. The Credit Agreement also restricts Warren from prepaying certain of
its indebtedness. Under the Credit Agreement, Warren is required to satisfy
certain financial covenants which require Warren to maintain specified financial
ratios and comply with certain financial tests, including a minimum interest
coverage ratio, a 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 27, 2000, 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 semiannual 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 semiannual installments in
September 1999. At September 27, 2000, the Term Loan was a Eurodollar loan with
a weighted-average interest rate of 7.39%. 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 1998, 1999 and 2000 were
not required.
27
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company may also make optional prepayments without premium or penalty at any
time (subject to payments of certain termination costs if other than on the last
day of an interest period under certain circumstances).
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
29,1999, Warren had no loans outstanding under the Revolving Credit Facility.
At September 27, 2000, Warren had Eurodollar Loans outstanding of $140
million with a weighted average interest rate of 7.43%. At September 29, 1999
and September 27, 2000, $14.9 million and $15.2 million, respectively, of the
Revolving Credit Facility availability was utilized to guarantee the issuance
of letters of credit. At September 29, 1999 and September 27, 2000,
availability under the Revolving Credit Facility was $235.1 million and $94.8
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.
LETTER OF CREDIT FACILITY
Warren had approximately $120.2 million and $111.3 million of letters of credit
outstanding under the Letter of Credit Facility at September 29, 1999 and
September 27, 2000, 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.
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 27, 2000, the Company is obligated under revenue bonds
aggregating $110.5 million which are due from 2000 to 2022 and bear interest
from 5.90% to 8.000%.
LONG-TERM DEBT PREPAYMENTS
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).
28
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During fiscal year 2000, Warren purchased $232.4 million face value of the
Warren 12% Series B Senior Subordinated Notes ("Notes") for $242.9 million.
These Notes are unsecured, subordinated obligations of Warren. 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 (as
discussed in Note 2) relating to purchased Notes and the repayments of term
loans, resulted in an aggregate extraordinary loss of $10.6 million (net of a
$6.9 million tax benefit). Increasing the indebtedness under the revolver
portion of the Credit Facility by $195.0 million, increasing the accounts
receivable securitization facility by $15 million and utilizing $40.0 million of
cash financed the Notes purchase. During the remainder of fiscal year 2000, the
indebtedness under the revolver portion of the credit facility was reduced by
$55.0 million.
FUTURE MATURITIES OF LONG-TERM DEBT
Scheduled maturities of long-term debt, including sinking fund payments, at
September 27, 2000 are as follows (in millions):
2001.................................................. $ 14.8
2002.................................................. 15.3
2003.................................................. 18.1
2004.................................................. 24.4
2005.................................................. 154.0
Thereafter............................................ 240.3
--------------------
$ 466.9
====================
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 29, 1999 SEPTEMBER 27, 2000
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENTS (IN MILLIONS):
Term loans............................................ $ 90.8 $ 90.8 $ 82.4 $ 82.4
Revolver loans........................................ -- -- 140.0 140.0
Notes................................................. 232.4 245.1 -- --
Exchange debentures................................... 133.1 149.1 134.0 147.0
Revenue bonds and other............................... 110.5 115.1 110.5 112.4
Interest rate swaps................................... -- (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 the Revolving Credit Facility and the Letter of Credit Facility,
interest rate swaps, and the A/R Facility. Unrealized losses related to the
interest rate swaps approximated $0.2 million at September 29, 1999. The
total carrying amounts of accounts receivable reflect $72.0 million and $87.0
million at September 29, 1999 and September 27, 2000, respectively, of
reductions related to the A/R Facility. There are no unrealized losses on the
A/R Facility at September 29, 1999 or September 27, 2000.
29
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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 semiannually 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 $14.0 million, $14.1
million and $14.1 million for fiscal years 1998, 1999 and 2000, 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 $6.6 million, $9.3 million and $10.8
million for fiscal years 1998, 1999 and 2000, 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 $7.7 million, $7.3 million and $7.4 million for fiscal years 1998,
1999 and 2000, respectively.
The future minimum obligations under leases (including the Somerset paper
machine lease) and other commitments as of September 27, 2000 are as follows (in
millions):
<TABLE>
<CAPTION>
OPERATING OTHER
YEAR ENDING SEPTEMBER LEASES COMMITMENTS
-------------------- --------------------
<S> <C> <C>
2001........................................................ $ 24.9 $ 8.8
2002........................................................ 20.3 12.1
2003........................................................ 18.1 8.9
2004........................................................ 17.6 10.3
2005........................................................ 17.0 9.0
Thereafter.................................................. 118.1 22.2
-------------------- --------------------
$ 216.0 $ 71.3
==================== ====================
</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.
30
<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.
In 1995, the Company, as one of several industrial plaintiffs, initiated
litigation in state court against the County of Muskegon (the "County")
challenging an Ordinance governing the County's industrial wastewater
pretreatment program. The lawsuit challenged, among other things, the treatment
capacity availability and local effluent limit provisions of the Ordinance. In
1996, the state trial court ruled substantially in favor of the Company. In
1998, a state appeals court affirmed the lower court's ruling. 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 in federal court for failure (a) to 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 to protect
the earlier state court ruling. In December 1998, however, 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 court also authorized the County to
readopt the Ordinance previously invalidated by the state courts. The Company
has appealed the federal ruling, and the appeal is pending. The Company also
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 and may pursue litigation on these issues. If the Company
and other plaintiffs do not prevail on their appeal, or in any future litigation
regarding the Ordinance, 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. This, in turn, could result in substantial expenditures to add
pretreatment at the Muskegon facility or potential fines being levied by the
County.
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 $20.0 million to $45.0 million through 2001.
Approximately $35.0 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.
31
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 15 - COMMITMENTS AND CONTINGENCIES
In connection with the Acquisition of Warren by Sappi, the Company entered into
long-term (25 years initially, subject to mill closures and certain FORCE
MAJEURE events) agreements with Scott Paper Company (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 is generally supplied at market prices. 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 27, 2000. Prices for other services provided by
Kimberly-Clark are generally based on 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 that provide for MESC to recover fuel and capital
costs. 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 resulted in increased energy rates in Mobile during fiscal year
2000.
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, the Company 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. 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.
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 lawsuit
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. Sappi was formally served with a summons with respect to this lawsuit
in September 2000. 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 have a material adverse
effect upon the Company's operating results or financial position. 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.
32
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 and the items discussed above cannot be predicted with
certainty, it is the present opinion of the Company, after consulting with legal
counsel, that they will not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
NOTE 16 - RETIREMENT BENEFITS
PENSION PLANS
The Company has four defined-benefit, trusteed pension plans that provide
retirement benefits for substantially all employees. Benefits provided are
primarily based on employees' years of service and compensation. The Company's
funding policy complies with the requirements of Federal law and regulations.
Plan assets consist of equity securities, bonds and short-term investments. The
current portion of the net pension liability, detailed below, was $10.6 million
and $8.0 million at September 29, 1999 and September 27, 2000, respectively.
The following schedule provides the funded status and amounts recognized for the
Company's defined benefit pension plans (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 27,
1999 2000
-------------------- --------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year....................... $ 197.7 $ 200.8
Service cost................................................ 7.6 6.6
Interest cost............................................... 13.3 14.6
Amendments.................................................. - -
Curtailments................................................ 1.5 -
Special termination benefits................................ 6.4 .1
Actuarial (gains) losses.................................... (20.5) (10.7)
Benefits paid............................................... (5.2) (7.8)
-------------------- --------------------
Benefit obligation, end of year............................. 200.8 203.6
-------------------- --------------------
Change in plan assets:
Fair value of plan assets, beginning of year................ 174.1 192.1
Return on plan assets....................................... 17.6 10.3
Employer contributions...................................... 5.6 10.6
Benefits paid............................................... (5.2) (7.8)
-------------------- --------------------
Fair value of plan assets, end of year...................... 192.1 205.2
-------------------- --------------------
Funded status............................................... (8.7) 1.6
Unrecognized net actuarial gain............................. (37.9) (39.4)
Unrecognized prior service cost............................. 8.0 7.5
Contributions............................................... 10.6 5.2
Additional minimum liability................................ -- --
-------------------- --------------------
Net amount recognized....................................... $ (28.0) $ (25.1)
==================== ====================
</TABLE>
33
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Amounts recognized in the balance sheet consist of:
<TABLE>
<CAPTION>
<S> <C> <C>
Prepaid benefit cost $ 6.3 $ 8.7
Accrued benefit liability (34.3) (33.8)
Intangible asset -- --
-------------------- --------------------
$ (28.0) $ (25.1)
==================== ====================
</TABLE>
The projected benefit obligation at September 29, 1999 and September 27, 2000
was determined using assumed discount rates of 7.5% and 7.75%, respectively, and
assumed long-term rates of compensation increases of 4.0% for both years. The
assumed rate of return on plan assets (on an annualized basis) was 9.25% for
fiscal years 1999 and 2000, respectively.
The projected benefit obligations and fair value of plan assets for pension
plans with benefit obligations in excess of plan assets were $135.2 million and
$121.7 million, respectively, as of September 29, 1999 and $101.3 million and
$94.1 million, respectively, as of September 27, 2000.
The components of the net pension cost are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 27,
1998 1999 2000
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Service cost........................... $ 7.1 $ 7.6 $ 6.6
Interest cost.......................... 12.3 13.3 14.6
Expected return on plan assets......... (13.5) (15.9) (18.2)
Amortization of prior service cost..... 0.4 0.7 0.6
Recognized net actuarial gain.......... (0.5) (0.6) (1.4)
--------------------- --------------------- ---------------------
Total.................................. 5.8 5.1 2.2
Curtailment loss....................... -- 0.8 -
--------------------- --------------------- ---------------------
Net pension cost....................... $ 5.8 $ 5.9 $ 2.2
===================== ===================== =====================
</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 $5.3 million, $5.2 million and $4.9 million for fiscal years
1998, 1999 and 2000, 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 was $1.3 million and $2.3 million at September 29, 1999 and September
27, 2000, respectively.
34
<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
-----------------------------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 29, 1999 SEPTEMBER 27, 2000
------------------- ------------------- -------------------
<S> <C> <C> <C>
Net postretirement benefit cost:
Service cost......................................... $ 2.5 $ 2.6 $ 2.6
Interest cost........................................ 2.7 2.9 4.0
Amortization of unrecognized prior service cost...... (0.1) (0.1) (0.1)
Curtailment loss..................................... -- 2.4 -
------------------- ------------------- -------------------
Net postretirement benefit cost...................... $ 5.1 $ 7.8 $ 6.5
=================== =================== ===================
Change in benefit obligation:
Benefit obligation, beginning of year................ $ 34.2 $ 39.9 $ 49.9
Service cost......................................... 2.5 2.6 2.6
Interest cost........................................ 2.7 2.9 4.0
Curtailment loss..................................... -- 2.4 -
Special termination benefits......................... -- 1.0 -
Actuarial losses..................................... 1.1 2.4 5.5
Benefits paid........................................ (0.6) (1.3) (2.1)
------------------- ------------------- -------------------
Benefit obligation, end of year...................... 39.9 49.9 59.9
Fair value of plan assets............................ -- -- --
------------------- ------------------- -------------------
Funded status........................................ (39.9) (49.9) (59.9)
Unrecognized net actuarial (gain) loss............... (0.7) 1.7 6.9
Unrecognized prior service cost...................... (0.8) (0.8) (0.7)
------------------- ------------------- -------------------
Net amount recognized................................ $ (41.4) $ (49.0) $ (53.7)
=================== =================== ===================
</TABLE>
The discount rates used to estimate the benefit obligations as of September 29,
1999 and September 27, 2000 were 7.5% and 7.5%, respectively. The initial health
care cost trend rates used to value the benefit obligation were 6.0%, 6.5% and
6.5% at September 30, 1998, September 29, 1999 and September 27, 2000,
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 6.5% at
September 27, 2000 and would increase the sum of the benefits earned and
interest cost components of net postretirement benefit cost for 2000 by
approximately 8.8%.
NOTE 18 - OTHER LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 27,
1999 2000
-------------------- --------------------
<S> <C> <C>
Accrued workers' compensation............................ $ 22.6 $ 10.7
Accrued pension and other postretirement benefits........ 65.1 70.0
Deferred gain on sale\leaseback.......................... 13.6 12.5
Other accrued liabilities................................ 16.8 13.7
-------------------- --------------------
$ 118.1 $ 106.9
==================== ====================
</TABLE>
35
<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 option 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 1998 and 1999 (in millions):
<TABLE>
<CAPTION>
<S> <C>
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, $1.0 million, and $0 million for each of the fiscal years 1998, 1999
and 2000, 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 is limited to an annual amount of
$1.0 million. The aggregate fees charged to Warren by Sappi Fine Paper were $1.0
million, $7.3 million and $9.1 million in fiscal years 1998, 1999 and 2000,
respectively, of which $14.4 million is accrued as a liability in the
accompanying balance sheet at September 27, 2000.
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. Net of a 5% commission, Warren shipped $114.9 million, $118.1
million and $138.2 million of products to Sappi subsidiaries for fiscal years
1998, 1999 and 2000, respectively. Trade accounts receivable at September 29,
1999 and September 27, 2000 included approximately $24.9 million and $35.6
million, respectively, due from subsidiaries of Sappi. Amounts as of
September 29, 1999 and September 27, 2000 are included in the pool of
receivables securitized under the A/R Facility (see Note 6).
Warren also imports products from certain Sappi affiliates (Sappi UK, Hannover
Papier, and KNP Leykam) for sale to its North American customers. Warren resells
these products at market prices and remits the proceeds, net
36
<PAGE>
S.D. WARREN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
of a 5% sales commission, to the Sappi affiliates. Net of commissions, Warren
imported approximately $26.8 million, $74.6 million and $110.6 million of
products from certain Sappi affiliates for fiscal years 1998, 1999 and 2000,
respectively. Accounts payable at September 29, 1999 and September 27, 2000
included $16.8 million and $28.3 million, respectively, due to subsidiaries of
Sappi.
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
----------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 27,
1998 1999 2000
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Coated Papers................... $ 1,037.8 $ 1,048.9 $ 1,126.5
Uncoated Papers................. 242.0 237.0 248.2
Specialty Papers & other........ 179.1 138.8 183.0
--------------------- --------------------- ---------------------
Total...................... $ 1,458.9 $ 1,424.7 $ 1,557.7
===================== ===================== =====================
</TABLE>
Net sales to unaffiliated customers which individually exceed 10% of total net
sales amounted to approximately 53.8%, 57.1% and 60.6% of net sales for fiscal
years 1998, 1999 and 2000, 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
-----------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 27,
1998 1999 2000
--------------------- --------------------- ---------------------
<S> <C> <C>
1..................................... $ 353.0 $ 404.7 $ 498.1
2..................................... 202.9 183.5 224.1
3..................................... 228.6 225.4 222.3
</TABLE>
At September 29, 1999 and September 27, 2000, approximately 44.2% and 51.2%,
respectively, of the Company's net trade receivables, including those
receivables which are securitized and sold, were concentrated in these three
customers.
The Company had net sales to customers outside the United States ("Export
Sales") of $185.0 million, $181.3 million and $210.8 million for fiscal years
1998, 1999 and 2000, 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.
37
<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 27, 2000.................... $ 3.5 $ -- $ 1.3 $ 2.2
Year ended September 29, 1999.................... 5.4 -- 1.9 3.5
Year ended September 30, 1998.................... 5.0 2.7 2.3 5.4
</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.*
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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.
38
<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 4, 2000
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>
President, Chief Executive Officer and December 8, 2000
/s/ MONTE R. HAYMON Director (Principal Executive Officer)
--------------------------------------
Monte R. Haymon
Chief Financial Officer, Vice President, December 8, 2000
/s/ MARK BECKER Treasurer, Assistant Secretary and
-------------------------------------- Director (Principal Financial and
Mark Becker Accounting Officer)
Vice President and Director December 8, 2000
/s/ O. HARLEY WOOD
--------------------------------------
O. Harley Wood
Director December 8, 2000
/s/ JAMES FRICK
--------------------------------------
James Frick
Director December 8, 2000
/s/ EUGENE VAN AS
--------------------------------------
Eugene Van As
Director December 8, 2000
/s/ DONALD WILSON
--------------------------------------
Donald Wilson
Director December 8, 2000
/s/ D'OEKO BOSSCHER
--------------------------------------
D'oeko Bosscher
Director December 8, 2000
/s/ HENRY MOLLENHAUER
--------------------------------------
Henry Mollenhauer
</TABLE>
39
