<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1997
REGISTRATION NUMBER 333-834
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SDW HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6719 13-3795926
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR ---------------
ORGANIZATION) 2700 WESTCHESTER AVENUE
PURCHASE, NY 10577
(914) 696-0021
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
THE CORPORATION TRUST COMPANY
1209 ORANGE STREET
WILMINGTON, DELAWARE 19899
(302) 658-7581
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
TREVOR L. LARKAN STUART M. CABLE
S.D. WARREN GOODWIN, PROCTER & HOAR LLP
COMPANY
EXCHANGE PLACE
225 FRANKLIN BOSTON, MASSACHUSETTS 02109
STREET
(617) 570-1322
BOSTON,
MASSACHUSETTS
02110
(617) 423-7300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
---------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
SDW HOLDINGS CORPORATION
----------------
CROSS REFERENCE SHEET
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION
REQUIRED BY THE ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM AND CAPTION LOCATION IN PROSPECTUS
---------------- ----------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover Cover Pages of Registration Statement and
Page of Prospectus................ Prospectus; Cross-Reference Sheet
2. Inside Front and Outside Back
Cover Pages of Prospectus......... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed Prospectus Summary; Risk Factors; Selected
Charges........................... Historical Financial Data
4. Use of Proceeds.................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.. *
6. Dilution......................... *
7. Selling Security Holders......... Selling Security Holders
8. Plan of Distribution............. Cover Page; Plan of Distribution
9. Description of Securities to be Description of the Senior Preferred Stock;
Registered........................ Description of the Exchange Debentures;
Description of the Warrants
<CAPTION>
10. Interests of Named Experts and *
Counsel............................
<S> <C>
11. Information with Respect to the
Registrant
(a) Description of Business........ Prospectus Summary; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business
(b) Description of Property........ Business
(c) Legal Proceedings.............. Business
(d) Market Price of and Dividends
on the
Registrant's Common Equity and *
Related Stockholder Matters....
(e) Financial Statements........... Financial Statements
(f) Selected Financial Data........ Selected Historical Financial Data;
Capitalization
(g) Supplementary Financial Infor- Financial Statements
mation.........................
(h) Management's Discussion and
Analysis of Financial Condition
and Results of Management's Discussion and Analysis of
Operations..................... Financial Condition and Results of
Operations
(i) Changes in and Disagreements
with
Accountants on Accounting and Management's Discussion and Analysis of
Financial Disclosure........... Financial Condition and Results of
Operations
(j) Directors, Executive Officers,
Promoters and Control Persons.. Management
(k) Executive Compensation......... Management
(l) Security Ownership of Certain
Beneficial Owners and Manage- Principal Stockholders
ment...........................
(m) Certain Relationships and Re-
lated Management
Transactions...................
12. Disclosure of Commission Position
on *
Indemnification for Securities Act
Liabilities.......................
</TABLE>
- --------
* Item is omitted because response is negative or item is inapplicable.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 28, 1997
SDW HOLDINGS CORPORATION
1,500,000 SHARES 15% SENIOR EXCHANGEABLE PREFERRED STOCK
15% SUBORDINATED EXCHANGE DEBENTURES
3,000,000 CLASS A WARRANTS
150,000 CLASS B WARRANTS
COMMON STOCK
----------
The selling security holders (the "Selling Security Holders") are offering by
this Prospectus 1,500,000 shares of 15% Senior Exchangeable Preferred Stock,
par value $.01 per share (the "Senior Preferred Stock"), of SDW Holdings
Corporation ("Holdings") which are exchangeable at the option of the Company
for Exchange Debentures (as defined), 3,000,000 Class A Warrants (the "Class A
Warrants") to purchase initially up to an aggregate of 898,440 shares of common
stock par value $.01 per share (the "Common Stock") of Holdings and 150,000
Class B Warrants (the "Class B Warrants" and, together with the Class A
Warrants, the "Warrants") to purchase initially up to an aggregate of 150,000
shares of Common Stock. See "Selling Security Holders". All the Senior
Preferred Stock and Warrants offered hereby will be sold by the Selling
Security Holders. Holdings will not receive any of the proceeds from such sale.
To the extent a Selling Security Holder exercises a Warrant and receives shares
of Common Stock, this Prospectus may also be used by such Selling Security
Holder in connection with the resale of such shares (any such shares offered
hereby being herein called the "Offered Shares"). The Securities (as defined)
are effectively subordinated to all indebtedness and other obligations of
Warren (as defined). As of October 2, 1996, Warren had total outstanding
liabilities of $1,281.3 million.
Each share of Senior Preferred Stock has a liquidation preference of $25.00
per share and will rank senior to any Junior Securities (as defined) of
Holdings issued hereafter. As of the date hereof, Holdings has no Junior
Securities outstanding, other than its common stock. Subject to certain limited
exceptions, the Credit Agreement (as defined) prohibits Holdings from paying
dividends on the Senior Preferred Stock on or prior to December 15, 1999.
Therefore, Holdings does not expect to pay dividends on the Senior Preferred
Stock in cash for any period ending on or prior to December 15, 1999. See
"Description of the Senior Preferred Stock" and "Description of Warren
Indebtedness--The Credit Agreement--Covenants". On any scheduled dividend
payment date, Holdings may, at its option, exchange all or any portion of the
shares of Senior Preferred Stock then outstanding for Holdings' 15%
Subordinated Exchange Debentures due 2011 (the "Exchange Debentures"). The
Exchange Debentures contain payment terms and redemption provisions which do
not differ in any material respect from the Senior Preferred Stock. However,
because interest on the Exchange Debentures can, at the option of Holdings, be
paid in cash or in additional Exchange Debentures, the Exchange Debentures may
be treated, for federal income tax purposes, as having been issued with
original issue discount. See "Certain Federal Income Tax Considerations",
"Description of the Senior Preferred Stock--Exchange" and "Description of the
Exchange Debentures".
The Warrants are exercisable at any time prior to 5:00 p.m., New York City
time, on December 15, 2006, at which time the Warrants will terminate. Each
Class A Warrant, when exercised, will entitle the holder to receive 0.29948 of
one share of Common Stock at an initial Exercise Price (as defined) of $0.01
per share, subject to adjustment. Each Class B Warrant, when exercised, will
entitle the holder to receive one share of Common Stock at an initial Exercise
Price of $0.01 per share, subject to adjustment. The number of shares of Common
Stock purchasable upon the exercise of the Warrants and payment of the Exercise
Price is subject to adjustment upon the occurrence of certain events. Upon each
adjustment of the Exercise Price (except a voluntary reduction) or the
occurrence of an event that would require such an adjustment, the number of
shares of Common Stock for which each Warrant may be exercised will be
adjusted. See "Description of the Warrants--Adjustments".
The Senior Preferred Stock, the Exchange Debentures, the Warrants and the
Common Stock are referred to collectively herein as the "Securities". There is
no active market for the Securities, and there can be no assurance that an
active trading market will develop.
(continued on next page)
----------
SEE "RISK FACTORS" ON PAGE 11 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
The date of this Prospectus is January , 1997.
<PAGE>
(continued from previous page)
Each of the Selling Security Holders and the brokers or dealers engaged by
them may be deemed to be "underwriters", as that term is defined in Section
2(11) of the Securities Act of 1933 (the "Act"). The Securities may be offered
for sale and sold from time to time in negotiated transactions, or otherwise,
at market prices prevailing at the time of sale or at negotiated prices.
Accordingly, the Senior Preferred Stock may trade at a substantial discount
from its liquidation preference of $25.00 plus accrued dividends of $11.5
million as of October 2, 1996. See "Risk Factors--Lack of Public Market". The
net proceeds to be received by the Selling Security Holders upon any such sale
of the Securities will be the proceeds received by them less brokerage
commissions. No part of the proceeds from the sale of the Securities will be
received by Holdings. All of the expenses of this offering are payable by
Holdings, except such brokerage commissions as may be payable.
Holdings' Certificate of Designation, the indenture pursuant to which the
Exchange Debentures will be issued (the "Exchange Debenture Indenture") and
the Warrant Agreements (as defined) each provide that Holdings shall file with
the Securities and Exchange Commission (the "Commission"), and provide holders
of the Senior Preferred Stock and the Exchange Debentures with, all quarterly
and annual financial information and current reports that would be required if
Holdings were required to make the filings specified in Sections 13 and 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Holdings will deliver without charge a copy of the Certificate of
Designations, the Exchange Debenture Indenture and the Warrant Agreements upon
the written or oral request, directed to the offices of Holdings, 2700
Westchester Avenue, Purchase, NY 10577 ((914) 696-0021), of any person to whom
a copy of this Prospectus is delivered.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
included elsewhere in this Prospectus. Unless the context otherwise requires,
"Holdings" or the "Company" refers to SDW Holdings Corporation, and "S.D.
Warren" or "Warren" refers to S.D. Warren Company, a direct subsidiary of
Holdings in which Holdings owns all the common stock. All references to
shipments refer to U.S. domestic shipments of paper and the term "tons" refers
to short tons, in each case, unless otherwise noted. All references to fiscal
years in this Prospectus referring to S.D. Warren's fiscal years prior to the
Acquisition (as defined), refer to fiscal years ending on the last Saturday in
December. Effective December 20, 1994, S.D. Warren changed its fiscal year to
fiscal years ending on the Wednesday closest to September 30 until otherwise
determined by the Company's Board of Directors.
HOLDINGS AND S.D. WARREN
Holdings owns all of the outstanding common stock of S.D. Warren. Holdings is
a holding company with no material assets other than its investment in Warren.
All of the operations of Holdings (other than the management of its investment
in Warren and the provision of certain corporate services to Warren) are
currently conducted through Warren.
The Company manufactures printing, publishing and specialty papers and has
pulp and timberland operations vertically integrated with some of its
manufacturing facilities. The Company is the largest producer of coated free
paper (free of groundwood pulp) in the United States. The Company currently
operates four paper mills with total annual production capacity of
approximately 1.5 million tons of paper. The Company also owns a sheeting and
distribution facility in Allentown, Pennsylvania, with annual sheeting capacity
of approximately 90,000 tons, and owns approximately 911,000 acres of
timberlands in the State of Maine.
S.D. Warren is widely recognized for its product quality and technological
innovation in the development and manufacture of coated free paper, which has
allowed Warren to sustain the franchise value of its name-brand products such
as Somerset (R), Lustro (R), Warrenflo (R) and Patina (R). S.D. Warren has
strong customer relationships and a distribution network for coated paper which
includes over 288 merchant distributing locations.
For the year ended October 2, 1996 S.D. Warren's sales of domestic paper
products consisted of coated paper (72.2%), uncoated paper (12.7%), specialty
paper (11.5%) and technical and other paper products (3.6%). Coated paper is
used in corporate communications, advertising, brochures, magazine covers and
upscale magazines, catalogues, direct mail promotions and educational text
books. Uncoated paper is used by commercial printers, quick printers, large in-
house copy/printing end-users and small business and home applications.
Specialty and technical papers are used in business form printing, coated
fabric converters, pressure-sensitive laminators, label printers and other
niche market applications.
As of the date of this Prospectus, Sappi Limited ("Sappi") indirectly owns
75.07%, DLJ Merchant Banking Partners, L.P. and certain of its affiliates
("DLJMB") owns 18.35% and UBS Capital LLC ("UBSC") owns 3.92%, respectively, of
the common equity of Holdings on a fully diluted basis. Sappi, DLJMB and UBSC
are collectively referred to herein as the "Investor Group". Holdings'
principal executive offices are located at 2700 Westchester Avenue, Purchase,
NY 10577. The telephone number is (914) 696-0021.
On November 27, 1996, Sappi agreed to acquire (the "Minority Acquisition"),
subject to certain customary conditions, the minority common equity interests
in Holdings held by DLJ Merchant Banking Partners, L.P.; DLJ International
Partners, C.V.; DLJ Offshore Partners, C.V.; DLJ Merchant Banking Funding,
Inc.; DLJ First ESC L.L.C.; and UBS Capital L.L.C. (the "Sellers").
Collectively, the Sellers own approximately 22% of the common equity of
Holdings on a fully-diluted basis.
1
<PAGE>
Under the terms of the agreement, Sappi has agreed to purchase the Sellers'
interests at a price of $138.0 million, or $17.25 per share of common stock
within 180 days of the date of execution of the agreement.
Following the Minority Acquisition, Sappi will own over 97% of the common
equity of Holdings on a fully diluted basis. Sappi has agreed to use reasonable
efforts to acquire the remaining common equity interests in Holdings within 120
days of the closing of the Minority Acquisition. In connection with the
Minority Acquisition, Sappi and the Sellers have agreed to terminate a
Shareholders Agreement. See "Risk Factors--Control by Sappi" and "--
Restrictions on Corporate Actions of Holdings and S.D. Warren" and "Certain
Relationships and Related Transactions--Shareholders Agreement."
RISK FACTORS
Before making an investment in the Securities, prospective investors should
consider carefully the factors described in "Risk Factors," including the
consequences of S.D. Warren's substantial leverage, the risk that S.D. Warren
would be unable to service its debt, the cyclical industry conditions and
strong competition which S.D. Warren faces, the restrictions imposed on
Holdings and S.D. Warren by the Credit Agreement, the dependence of the Company
on certain customers, the subordination of the Securities to all indebtedness
and other obligations of S.D. Warren, stringent regulations faced by the
Company and control of the Company by Sappi. In addition, Sappi has announced a
desire to reduce the leverage of Holdings in due course, which could include
redemption of the Senior Preferred Stock.
2
<PAGE>
SELLING SECURITY HOLDERS
In connection with the Acquisition (as defined), Holdings sold $37.5 million
in liquidation preference of Senior Preferred Stock and 4,312,499 Class B
Warrants to purchase up to 4,312,499 shares of Common Stock to DLJMB and UBSC
pursuant to a securities subscription agreement dated as of December 20, 1994
(the "Securities Subscription Agreement"), among Holdings, SDW Acquisition
Corporation ("SDW Acquisition"), Sappi Deutschland GmbH ("Sappi Deutschland")
and the Investor Group.
Further in connection with the Acquisition, Holdings sold 3,000,000 Class A
Warrants to purchase up to 898,440 shares of Common Stock as part of units,
together with SDW Acquisition Senior Preferred Stock (as defined) in the Unit
Offering (as defined). DLJMB subsequently resold all its Class A Warrants to
certain "qualified institutional buyers" ("QIBs") pursuant to Rule 144A under
the Act.
Holdings is filing the Registration Statement of which this Prospectus is a
part to fulfill in part its obligations under the Preferred Stock Registration
Rights Agreement dated as of July 6, 1995, among
DLJMB, UBSC and Holdings (the "Registration Rights Agreement"), the Warrant
Agreement dated as of December 20, 1994, between Holdings and The Bank of New
York ("BNY") as Warrant Agent (the "Class A Warrant Agreement"), and the Class
B Warrant Agreement dated as of December 20, 1994, as amended and restated as
of July 6, 1995, between Holdings and BNY, as Warrant Agent (the "Class B
Warrant Agreement" and, together with the Class A Warrant Agreement, the
"Warrant Agreements").
SUMMARY DESCRIPTION OF THE SECURITIES
SECURITIES SUBJECT TO
THE OFFERING............
1,500,000 shares of 15% Senior Exchangeable Pre-
ferred Stock of Holdings.
Exchange Debentures issuable upon exchange of the
Senior Exchangeable Preferred Stock.
3,000,000 Class A Warrants to purchase initially up
to 898,440 shares of Common Stock.
150,000 Class B Warrants to purchase initially up
to 150,000 shares of Common Stock.
Shares of Common Stock initially issuable upon ex-
ercise of the Warrants plus such indeterminate
amount of Common Stock as may be issued pursuant to
the anti-dilution provisions of the Warrants..
SENIOR PREFERRED STOCK:
Dividends............... Holdings may elect not to pay dividends in cash on
or prior to December 15, 1999, in which case, such
unpaid dividends shall accrue and become part of
the Specified Amount of the Senior Preferred Stock
upon which dividends must be paid. Dividends on
each share will accrue in each period ending on
March 15, June 15, September 15 and December 15 of
each year in an amount equal to 15% per annum of
the Specified Amount thereof, defined as the sum of
(A) such share's liquidation preference of $25.00
and (B) the amount of dividends with respect to
such share that accrued in prior dividend accrual
periods ending
3
<PAGE>
on or prior to December 15, 1999 and were not pre-
viously paid in cash (the "Accumulated Dividends"),
except that if any shares of Senior Preferred Stock
are outstanding on and after December 15, 2006,
such rate will increase by 0.25% per annum on such
date and at each subsequent Dividend Accrual Date
on which such shares remain outstanding, up to a
maximum rate of 20% per annum. It is not antici-
pated that Holdings will pay any dividends in cash
for any period ending on or prior to December 15,
1999. Subject to certain limited exceptions, the
Credit Agreement prohibits Holdings from paying
dividends on the Senior Preferred Stock.
Liquidation $25.00 per share.
Preference.............
Specified Amount........
The Specified Amount of the Senior Preferred Stock
consists of the Liquidation Preference plus the Ac-
cumulated Dividends. As of October 2, 1996, the
Specified Amount was $32.67 per share.
Ranking................. The Senior Preferred Stock ranks senior in right of
payment with respect to all Junior Securities and
pari passu in right of payment with respect to all
Parity Securities (as defined). As of the date
hereof, Holdings has no Junior Securities outstand-
ing other than the Common Stock.
Optional Redemption..... The Senior Preferred Stock is redeemable at the op-
tion of Holdings, in whole at any time or in part
from time to time, at a redemption premium equal to
100% of the Specified Amount of the shares redeemed
plus all accrued and unpaid dividends (other than
Accumulated Dividends), if any, through the date of
redemption. See "Description of the Senior Pre-
ferred Stock--Redemption of Senior Preferred
Stock--Optional". The majority shareholder of Hold-
ings has announced a desire to reduce the leverage
of Holdings in due course, which could include re-
demption of the Senior Preferred Stock.
Mandatory Redemption.... Subject to certain exceptions, Holdings is required
to call the Senior Preferred Stock for redemption
upon the occurrence of (i) an Initial Public Offer-
ing, (ii) certain mergers, consolidations or other
business combinations involving Holdings or S.D.
Warren or (iii) the sale, lease, transfer or other
disposition of all or substantially all of the as-
sets of Holdings and its subsidiaries taken as a
whole at a redemption price equal to 100% of the
Specified Amount thereof plus all accrued and un-
paid dividends (other than Accumulated Dividends),
if any, through the date of redemption.
Change of Control....... In the event of a Change of Control (as defined),
holders of Senior Preferred Stock will have the
right to require Holdings to redeem their Senior
Preferred Stock, in whole or in part, at a price
equal to 101% of the Specified Amount thereof, plus
accrued and unpaid dividends (other than Accumu-
lated Dividends), if any, to the date of purchase.
See "Description of the Senior Preferred Stock--
Change of Control".
Voting Rights........... Holders of Senior Preferred Stock will have limited
voting rights, including (i) those required by law
and (ii) that holders of a majority of the out-
standing shares of Senior Preferred Stock, voting
as a separate
4
<PAGE>
class, will (a) upon the failure of Holdings (1)
with respect to dividend accrual periods after De-
cember 15, 1999, to pay, in whole or in part, for
more than six consecutive dividend accrual periods
dividends in cash equal to the dividend that ac-
crued during such dividend accrual period, (2) to
satisfy any mandatory redemption obligation with
respect to the Senior Preferred Stock, (3) to make
a Change of Control Offer (as defined) within 30
days following any Change of Control or (4) to com-
ply with the covenants set forth in the Certificate
of Designations, be entitled to elect two members
to the Board of Directors of Holdings, (b) have the
right to approve each issuance by Holdings of any
Senior Securities or Parity Securities (other than
Senior Preferred Stock), except that without the
approval of the holders of Senior Preferred Stock,
Holdings may issue and have outstanding shares of
Parity Securities issued from time to time in ex-
change for, or the proceeds of which are used to
redeem or repurchase, any or all of the shares of
Senior Preferred Stock or other Parity Securities
and (c) have the right to approve certain mergers,
consolidations and sales of assets. See "Descrip-
tion of the Senior Preferred Stock--Voting Rights".
Covenants............... The Certificate of Designations for the Senior Pre-
ferred Stock contains covenants that: (i) limit the
ability of Holdings to redeem or repurchase Junior
Securities or Parity Securities and pay dividends
thereon; (ii) prohibit, under certain circumstanc-
es, certain mergers and consolidations of and sales
of assets by Holdings; (iii) limit Holdings' abil-
ity to incur indebtedness; (iv) limit Holdings'
subsidiaries' ability to pay dividends; (v) limit
the ability of Warren to issue preferred stock;
(vi) prohibit Holdings from transferring shares of
Warren Common Equity (as defined therein); and
(vii) require Holdings to deliver certain reports
and information to the holders.
Exchange Feature ....... On any scheduled dividend payment date, Holdings
may, at its option, exchange all or any portion of
the shares of Senior Preferred Stock then outstand-
ing for Exchange Debentures in a principal amount
equal to the Specified Amount of Senior Preferred
Stock held by such holder at the time of such ex-
change.
EXCHANGE DEBENTURES:
Securities.............. 15% Subordinated Exchange Debentures due 2011, lim-
ited in principal amount to the Specified Amount of
the Senior Preferred Stock outstanding on the Ex-
change Date (as defined), plus such principal
amount of additional Exchange Debentures as may be
issued in lieu of cash interest.
Maturity................ December 15, 2011
Interest................ The Exchange Debentures will bear interest at the
rate of 15% per annum, payable semiannually on June
15 and December 15, commencing with the first of
such dates to occur after the Exchange Date. Howev-
er, if any Exchange Debentures are outstanding on
and after December 15, 2006, such rate will in-
crease by .25% per annum and quarter-an-
5
<PAGE>
nually thereafter, up to a maximum rate of 20% per
annum. On or prior to December 15, 1999, interest
may, at the option of Holdings, be paid in cash or
by issuing additional Exchange Debentures with a
principal amount equal to such interest. After De-
cember 15, 1999, interest on the Exchange Deben-
tures may be paid only in cash.
Ranking.................
The Exchange Debentures will be unsecured obliga-
tions of Holdings, subordinate to all existing and
future Senior Debt (as defined in the Exchange De-
benture Indenture) of Holdings. At October 2, 1996,
the aggregate amount of such Senior Debt was $453.7
million (which does not include certain letters of
credit of Warren, which, if drawn upon, would be
included therein).
Optional Redemption..... The Exchange Debentures may be redeemed at the op-
tion of Holdings in whole at any time or in part
from time to time, at a redemption price equal to
100% of the principal amount thereof, plus all ac-
crued and unpaid interest, if any, through the date
of redemption. See "Description of the Exchange De-
bentures--Optional Redemption".
Change of Control....... In the event of a Change of Control, the holders of
the Exchange Debentures will have the right to re-
quire Holdings to purchase their Exchange Deben-
tures at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid
interest to the date of purchase. See "Description
of the Exchange Debentures--Change of Control".
Certain Covenants....... The Exchange Debenture Indenture will contain cove-
nants similar to the covenants with respect to the
Senior Preferred Stock and will also limit the
ability of Holdings and its subsidiaries to incur
additional indebtedness, pay dividends or make
other distributions, repurchase Equity Interests
(as defined) or subordinated indebtedness or make
certain Restricted Investments (as defined).
WARRANTS:
Exercise and The Warrants are exercisable at any time prior to
Termination............ 5:00 p.m., New York City time, on December 15,
2006, at which time the Warrants will terminate.
Each Class A Warrant, when exercised, will entitle
the holder to receive 0.29948 of one share of Com-
mon Stock at an initial Exercise Price of $0.01 per
share, subject to adjustment.
Each Class B Warrant, when exercised, will entitle
the holder to receive one share of Common Stock at
an initial Exercise Price of $0.01 per share,
subject to adjustment.
No Warrant can be exercised unless at the time
thereof an effective registration statement under
the Act relating to the shares of Common Stock to
be issued upon such exercise has been declared ef-
fective by the Commission or the issuance of such
shares is permitted pursuant to an exemption from
the registration requirements of the Act.
6
<PAGE>
Adjustments:
To Exercise Price.......
The number of shares of Common Stock purchasable
upon the exercise of the Warrants and payment of
the Exercise Price is subject to adjustment in
certain events including: (i) the issuance by
Holdings of dividends or other distributions on its
Common Stock payable in Common Stock or shares of
its capital stock other than Common Stock; (ii)
subdivisions, combinations and reclassifications,
of Common; (iii) the issuance to all holders of
Common Stock of rights, options or warrants
entitling such holders to subscribe for Common
Stock or securities convertible into, or
exchangeable or exercisable for, Common Stock
within 60 days after the record date for such
issuance of rights, options or warrants at an
offering price (or with an initial conversion
exchange of exercise price plus such offering
price) that is less than the current market price
per share of Common Stock on the record date; (iv)
the distribution to all holders of Common Stock of
any of Holdings' assets (including cash), debt
securities, preferred stock or any rights or
warrants to purchase any such securities (excluding
those rights and warrants referred to in clause
(iii) above); (v) the issuance of shares of Common
Stock for a consideration per share less than the
current market price per share; and (vi) the
issuance of securities convertible into or for
Common Stock for a conversion or exchange price
less than the current market price for a share of
Common Stock (excluding securities issued in
transactions referred to in clauses (iii) or (iv)
above). The events described above are subject to
certain exceptions described in the Warrant
Agreements including, without limitation, in the
case of clauses (v) and (vi) above, certain bona
fide public offerings and private placements and
certain issuances of stock pursuant to employee
stock incentive plans.
If Holdings consolidates with or merges into
another person, sells, conveys, transfers, leases
or otherwise disposes of all or substantially all
its assets to another person, or enters into any
other business combination involving another
person, then upon consummation of such a
transaction, the Warrants will be automatically
exercisable for the amount and kind of securities,
cash or other property or assets to which the
holder of a Warrant would have been entitled
immediately before the effective date of such
transaction. The corporation formed by any such
merger or consolidation or other combination, or
the person to whom the assets were sold, conveyed,
transferred, leased or disposed, will enter into a
supplemental Warrant Agreement to effect the
exercise of Warrants described above and to provide
for adjustments as necessary.
To Number of Warrant Upon each adjustment of the Exercise Price or the
Shares................. occurrence of an event that would require such an
adjustment (except where the effect would be de
minimis or the Board of Directors of Holdings (the
"Board of Directors") determines that no adjustment
is necessary), the number of shares of Common Stock
for which each Warrant may be exercised will be
adjusted.
7
<PAGE>
When No Adjustment Is
Required............... No adjustment in the Exercise Price need be made
for transactions referred to above to the extent
that holders of Warrants will participate on a
basis that the Board of Directors determines to be
fair and appropriate in light of the basis of the
participation in such transactions of Common Stock
holders. No adjustment to the Exercise Price will
be made for any dividend or interest reinvestment
plan or for a change in the par value of the common
stock. To the extent the Warrants become
convertible into cash, no adjustments are required
to be made as to the cash, and no interest will
accrue on such cash.
No adjustment in the Exercise Price will be
required unless such adjustment would effect an
increase or decrease of at least 1% in the Exercise
Price. Adjustments that are not made will be
carried forward and taken into account in any
subsequent adjustment.
Voluntary Reduction of
Exercise Price......... Holdings may from time to time reduce the Exercise
Price to any amount for any period of time (but not
fewer than 20 business days), but not to an amount
less than $0.01 (except in the event that the par
value of the Common Stock is also reduced).
Registration............
Holdings is required to use its best efforts with
respect to the Class A Warrants, and its reasonable
best efforts with respect to the Class B Warrants,
to keep the registration statement, of which this
Prospectus is a part, continuously effective until
December 20, 1997.
Warrant Agent........... The Bank of New York.
Certain Federal Income
Tax Considerations..... For a discussion of certain federal income tax
considerations relating to the ownership and
disposition of the Securities, see "Certain Federal
Income Tax Considerations".
8
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth selected consolidated operating data, share
data, consolidated balance sheet data and other financial data for Holdings and
the Predecessor Corporation (as defined in the Notes to Financial Statements
appearing elsewhere in this Prospectus). The selected financial data for the
twelve months ended December 25, 1993, the nine months ended September 24, 1994
and the period from September 25, 1994 through December 20, 1994 are derived
from the combined financial statements of the Predecessor Corporation, which
have been audited by Deloitte & Touche LLP. The selected financial data for the
period from December 21, 1994 through September 27, 1995 and the twelve months
ended October 2, 1996 are derived from the consolidated financial statements of
Holdings which have been audited by Deloitte & Touche LLP. The selected
financial data for the twelve months ended December 26, 1992 were prepared from
unaudited selected financial data provided to Holdings by the Predecessor
Corporation's parent, Scott Paper Company, in connection with the acquisition
of Warren. Operating data for any periods less than one year are not
necessarily indicative of the results that may be expected for the full year.
Further, data for the Predecessor and Holdings are not necessarily comparable
as a result of a new basis of accounting for Holdings and the adoption of
certain accounting policies. This data should be read in conjunction with
Holdings' Financial Statements and the Notes thereto appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 21,
TWELVE MONTHS TWELVE MONTHS NINE MONTHS 1994 1994 TWELVE MONTHS
ENDED ENDED ENDED THROUGH THROUGH ENDED
DECEMBER 26, DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1992(1) 1993 1994 1994 1995 1996
---------------- ---------------- ---------------- ---------------- ------------- -------------
S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND COMPANY AND CONSOLIDATED CONSOLIDATED
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED SDW HOLDINGS SDW HOLDINGS
AFFILIATES AFFILIATES AFFILIATES AFFILIATES CORPORATION CORPORATION
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
---------------- ---------------- ---------------- ---------------- ------------- -------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales.................. $1,212.8 $1,143.6 $ 828.8 $ 313.6 $1,155.8 $1,441.6
Gross profit........... 182.5 168.1 106.4 49.9 269.8 255.0
Selling, general and
administrative
expense............... 91.0 91.7 72.1 22.2 96.2 134.0
Restructuring charges.. -- 66.1 -- -- -- --
Income from
operations............ 91.5 10.3 34.3 27.7 173.6 121.0
Other income (expense),
net................... 0.1 0.1 0.1 (0.5) 3.2 (0.1)
Interest expense....... 9.0 8.5 6.4 2.3 106.0 108.9
Income tax expense..... 32.0 6.5 11.2 9.9 28.4 5.1
Dividends and accretion
on Warren Series B
preferred stock....... -- -- -- -- 9.1 13.5
Extraordinary item, net
of tax................ -- -- -- -- -- (2.0)
Net income (loss)...... 50.6 (4.6) 16.8 15.0 33.3 (8.6)
Dividends on preferred
stock................. -- -- -- -- 4.6 6.9
Net income (loss)
applicable to common
stockholders.......... 50.6 (4.6) 16.8 15.0 28.7 (15.5)
SHARE DATA:
Net earnings per common
share ................ $ -- $ -- $ -- $ -- $ 0.80 $ (0.50)
Weighted average common
share outstanding -- -- -- -- 35.9 30.7
OTHER FINANCIAL DATA:
EBITDA (2)............. $ 183.1 $ 169.5 $ 105.9 $ 56.5 $ 263.4 $ 236.2
Capital expenditures... 70.1 68.9 32.3 14.5 33.7 51.3
Depreciation, cost of
timber harvested and
amortization.......... 91.6 93.1 71.6 28.8 89.8 115.2
Ratio of earnings to
fixed charges (3)..... 5.8x 1.1x 3.1x 8.2x 1.4x (4)
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash
equivalents........... $ 1.3 $ 2.1 $ 4.7 $ 75.0 $ 62.2 $ 49.0
Working capital........ 67.0 47.1 156.2 233.2 177.9 109.8
Total assets........... 1,696.8 1,711.7 1,676.9 1,737.1 1,887.3 1,725.4
Total debt (including
current maturities)... 125.7 124.3 119.8 119.3 1,127.4 948.9
Warren Series B
preferred stock (5)... -- -- -- -- 74.5 88.0
Preferred Stock at
liquidation value..... -- -- -- -- 42.1 49.0
Parent's equity........ 1,152.3 1,088.1 1,136.5 1,219.1 -- --
Stockholders' equity
including preferred
stock................. -- -- -- -- 365.1 356.5
</TABLE>
- -------
(1) Includes the revision in the estimated useful lives used to compute
depreciation for certain equipment which increased net income by
approximately $26.2 million as well as the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" which reduced net income by
approximately $6.1 million.
(Footnotes Continued on next page)
9
<PAGE>
(2) EBITDA is defined as income from operations before restructuring expense
plus depreciation, cost of timber harvested and amortization as reported
in the Statements of Cash Flows, EBITDA is presented because it is a
widely accepted financial indicator of a Company's ability to service and
incur debt. EBITDA should not be considered by an investor as an
alternative to GAAP operating income, as an indicator of the Company's
operating performance or as an alternative to the Company's cash flow from
operating activities as a measure of liquidity.
(3) For purposes of computing the ratio of earnings to fixed charges, fixed
charges consist of interest expense on long-term debt, amortization of
deferred financing cost accrued dividends on the Warren Series B Preferred
Stock on a pretax basis and that portion (one third) of rentals deemed to
be representative of interest. Earnings consist of income before income
taxes, plus fixed charges.
(4) For the period ended October 2, 1996, the Company's earnings were
insufficient to cover fixed charges by $13.4 million.
(5) Liquidation value was $96.2 million at October 2, 1996.
10
<PAGE>
RISK FACTORS
Before making an investment in the Securities, prospective investors should
consider carefully the following summary of all material risk factors
associated with an investment in the Securities.
HOLDING COMPANY; STRUCTURAL SUBORDINATION
Holdings is a holding company that conducts all of its business through and
derives virtually all of its income from S.D. Warren. Holdings has no
independent operations and no independent means of generating cash flow.
Therefore, Holdings' ability to make required principal and interest payments
with respect to its indebtedness (including the Exchange Debentures, if
issued) and other obligations, and dividend and redemption payments with
respect to the Senior Preferred Stock depends on the earnings of S.D. Warren
and on Holdings' ability to receive funds from S.D. Warren through dividends
or other payments (unless Holdings raises additional capital). The ability of
S.D. Warren to pay such dividends or make payments on intercompany
indebtedness or otherwise will be subject to applicable state laws and the
terms of its outstanding indebtedness. As a shareholder, a company's right to
the assets of its subsidiaries generally will be subordinate to all creditors
of such subsidiaries and will usually be subject to completion of local
corporate winding up and liquidation procedures and payment of applicable
taxes and outstanding corporate creditors. Accordingly, the rights of holders
of the Senior Preferred Stock to participate in any distribution of assets of
S.D. Warren upon its liquidation, bankruptcy, reorganization or otherwise will
be subject to prior claims of creditors, including trade creditors, of S.D.
Warren. At October 2, 1996, the aggregate amount of liabilities of S.D. Warren
was $1,218.3 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Considerations Relating to Holdings' Cash
Obligations".
RISK OF EARLY REDEMPTION OF SENIOR PREFERRED STOCK
Sappi has announced a desire to reduce the leverage of Holdings in due
course. Accordingly, there can be no assurance that Sappi will not cause
Holdings to redeem the Senior Preferred Stock pursuant to the terms of the
Certificate of Designations in the near future. See "Description of the Senior
Preferred Stock--Redemption of Senior Preferred Stock".
CYCLICAL INDUSTRY CONDITIONS; STRONG COMPETITION
The markets for the Company's products are highly cyclical, characterized by
periods of supply and demand imbalance. Between 1988 and 1993, the rate of
growth of demand slowed as a result of the world wide recession. Conversely,
coated paper capacity increased significantly in North America over such
period. In addition, in 1992, North American imports from Europe increased as
a result of excess capacity in Europe and a devaluation in certain European
currencies in relation to the U.S. dollar, causing North American prices to
deteriorate.
The large supply-demand imbalance as a result of significant capacity
additions and, to a lesser degree, imports from Europe caused operating
margins of the Company and its competitors to decline over the period from
1988 through early 1994. Beginning in mid-1994, however, the industry
rebounded from this decline, with several price increases announced throughout
the industry. However, since the third quarter of 1995, demand for the
Company's products decreased. Accordingly, demand was lower during fiscal year
1996 as compared to demand levels during the second half of fiscal 1995. This
decrease was due to a softening in orders experienced by the industry across
certain product lines primarily resulting from merchants, printers and other
converters reducing their inventory levels which had increased above normal
levels. The decline in demand resulted in reduced prices, with discounting
occurring on certain paper product grades. Accordingly, the Company realized
lower net selling prices per ton during fiscal year 1996 as compared to prices
realized during the second half of fiscal year 1995. However, because the
impact of the increase in prices in 1995 was not realized until the latter
half of fiscal year 1995, net selling prices realized during fiscal year 1996
remained relatively flat as compared to those prices realized during the
twelve-month period ended September 27, 1995. In addition, the cost of raw
materials decreased during fiscal year 1996 as compared to prices at the end
of fiscal year 1995 due to the
11
<PAGE>
decrease in the market price of pulp. However, the Company manufactures
approximately 65% of its pulp requirements which reduces its ability to
benefit from (and its exposure to) fluctuations in the market price for pulp.
As a result of the weaker market conditions, the Company temporarily reduced
production levels at certain of its manufacturing facilities during the first
quarter of fiscal year 1996. The reduction of inventory levels by the
Company's customers and the weaker market conditions continued into the summer
months which are typically strong due to increased demand from catalog
printers. In addition, new coated paper capacity scheduled for the end of
calendar year 1997 in Europe, as well as certain machine conversions during
1997 to coated free sheet manufacture in the United States, is expected to
increase competition for market share and may delay any improvement in market
conditions. The paper market is highly cyclical and to the extent that the
weaker market trend does not reverse or becomes more pervasive within the
Company's existing product lines, the Company's sales, gross margins and cash
flows will continue to be adversely effected.
In addition, the North American coated paper industry is highly competitive.
The Company competes mainly with U.S. and Canadian producers of coated free
paper, and, to a lesser degree, European producers. Manufacturers of coated
free paper compete primarily on the basis of quality, service, price and
breadth of product line, as well as product innovation and sales and
distribution support. Certain of the Company's competitors have greater
financial resources than the Company and certain of the mills operated by its
competitors may be lower cost producers of pulp and coated paper than certain
of the mills operated by the Company. See "Business--The Company--
Competition".
CONSEQUENCES OF S.D. WARREN'S SUBSTANTIAL LEVERAGE FOR HOLDINGS AND SECURITY
HOLDERS
In connection with the Acquisition, S.D. Warren incurred substantial
indebtedness. Consequently, S.D. Warren has significant debt service
obligations. As of October 2, 1996, S.D. Warren had total outstanding long-
term indebtedness (including the current portion thereof) of $948.9 million,
redeemable preferred stock with a liquidation preference of $96.2 million and
stockholder's equity of $356.1 million, resulting in a debt and preferred
stock to equity ratio of approximately 3 to 1. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The degree to which S.D. Warren is leveraged could have important
consequences to Holdings and holders of the Securities, including the
following: (i) S.D. Warren's ability to obtain additional financing for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired in the future; (ii) a substantial
portion of S.D. Warren's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness and subsequent to
December 1999, obligations with respect to its preferred stock, thereby
reducing the funds available for dividend payments to Holdings or other
purposes; (iii) certain of S.D. Warren's borrowings are and will continue to
be at variable rates of interest, which exposes S.D. Warren to the risk of
increased interest rates; (iv) S.D. Warren may be substantially more leveraged
than certain of its competitors, which may place it at a competitive
disadvantage; and (v) S.D. Warren's substantial degree of leverage may hinder
its ability to adjust rapidly to changing market conditions and could make it
more vulnerable in the event of a downturn in general economic conditions or
its business.
RISK OF S.D. WARREN'S INABILITY TO SERVICE DEBT AND PREFERRED STOCK
The ability of S.D. Warren to make scheduled payments or to refinance its
obligations with respect to its indebtedness and redeemable preferred stock
depends on its financial and operating performance, which, in turn, is subject
to prevailing economic conditions and to financial, business and other factors
beyond its control. There can be no assurance that its operating results will
be sufficient for payment of its indebtedness or its obligations with respect
to its preferred stock in the future.
In order for S.D. Warren to meet its debt service obligations and its
obligations with respect to its preferred stock, S.D. Warren will need to
maintain its recent operating results, which may depend, among other factors,
12
<PAGE>
on continuing favorable market conditions. There can be no assurance that S.D.
Warren's operating results will be of sufficient magnitude to enable S.D.
Warren to meet its debt service obligations and its obligations with respect
to its preferred stock. In the absence of such operating results, S.D. Warren
could face substantial liquidity problems and might be required to dispose of
material assets or operations to meet its debt service and other obligations,
and there can be no assurance as to the timing of such sales or the proceeds
which S.D. Warren could realize therefrom. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".
RESTRICTIONS IMPOSED BY THE WARREN INDEBTEDNESS
S.D. Warren's outstanding indebtedness contains a number of significant
covenants that, among other things, restrict the ability of S.D. Warren and
its subsidiaries to dispose of assets, incur debt, pay dividends, create
liens, make capital expenditures and make certain investments or acquisitions
and otherwise restrict corporate activities. In addition, under S.D. Warren's
credit agreement (the "Credit Agreement"), S.D. Warren is required to maintain
specified financial ratios, including maximum leverage and minimum interest
and fixed charge coverage ratios. The ability of S.D. Warren to comply with
such provisions may be affected by events beyond S.D. Warren's control. In
order to comply with some of these covenants, S.D. Warren will be required to
achieve financial and operating results which are significantly better than
those achieved last year. See "Description of Warren Indebtedness--The Credit
Agreement--Covenants". There can be no assurance that such results will be
achieved.
Currently, the specified financial ratios are all within the applicable
financial covenant levels. However, depending upon the actual financial
results for the second fiscal quarter of 1997, the Company may not achieve a
scheduled increase in the covenant level for its interest coverage ratio. As a
result, Management has requested an amendment to the interest coverage
covenant from the bank lending group, and believes that such amendment will be
effective prior to the end of the second fiscal quarter of 1997.
The breach of any of the covenants contained in its outstanding indebtedness
could result in a default with respect to such indebtedness. In the event of
any such default, the holders of such indebtedness could elect to declare all
amounts then outstanding, together with accrued interest, to be due and
payable. In the case of the Credit Agreement, if S.D. Warren were unable to
repay such borrowings, the lenders thereunder could proceed against their
collateral. If S.D. Warren's outstanding indebtedness were to be accelerated,
there can be no assurance that the assets of S.D. Warren would be sufficient
to repay such indebtedness in full or that there would be any assets remaining
to satisfy the claims of the other creditors and preferred stockholders of
S.D. Warren or, after satisfying such claims, to permit a distribution on its
common stock to Holdings. See "Description of the Credit Agreement" and
"Description of the Senior Preferred Stock--Dividends".
DEPENDENCE ON PRINCIPAL CUSTOMERS
For the year ended October 2, 1996, S.D. Warren's customers that
individually accounted for greater than 10% of sales were divisions or
subsidiaries of International Paper Company, Central National-Gottesman Inc.
and Alco Standard Corporation. Each of these customers is a merchant that
resells S.D. Warren's paper products to a wide-range of end-users. The loss of
any one of these customers could have a material adverse effect on S.D.
Warren's business and results of operations. See "Business--The Company--
Customers" and the Notes to Financial Statements.
JUNIOR RANKING OF SENIOR PREFERRED STOCK AND SUBORDINATION OF EXCHANGE
DEBENTURES TO SIGNIFICANT SENIOR DEBT OF S.D. WARREN GUARANTEED BY HOLDINGS
The Senior Preferred Stock ranks junior in right of payment to all existing
and future liabilities and obligations (whether or not for borrowed money) of
Holdings, pari passu with each other class of capital stock or series of
preferred stock issued by Holdings that specifically provides that such series
will rank on a parity with Senior Preferred Stock and senior in right of
payment to all common stock and each other class of capital stock or series of
preferred stock issued by Holdings that specifically provides that such series
will rank junior to the Senior Preferred Stock or which do not specify their
rank. The holders of the Senior Preferred Stock will have limited voting
rights. See "Description of the Senior Preferred Stock--Rank;--Voting Rights".
13
<PAGE>
The Exchange Debentures will be unsecured obligations of Holdings and will
be subordinated in right of payment to all existing and future Senior Debt (as
defined in the Exchange Debenture Indenture) of Holdings. At October 2, 1996,
the aggregate principal amount of such Senior Debt guaranteed by Holdings was
$567.2 million (which does not include certain letters of credit of Warren,
which, if drawn upon, would be included therein). In addition, a holder's
claims with respect to the Senior Preferred Stock and the Exchange Debentures
will be structurally subordinated to any liabilities or obligations of S.D.
Warren and its subsidiaries, which are substantial. See "--Holding Company;
Structural Subordination" and "Description of the Exchange Debentures--
Subordination".
In the event of bankruptcy, liquidation or reorganization of Holdings, the
assets of Holdings will be available to pay the Liquidation Preference with
respect to the Senior Preferred Stock or obligations on the Exchange
Debentures only after all senior obligations of Holdings (including such
guaranteed Senior Debt) have been paid in full, and there may not be
sufficient assets remaining to pay such Liquidation Preference or amounts due
on any or all of the Exchange Debentures then outstanding. Additional
indebtedness, including Senior Debt, may be incurred by Holdings and its
subsidiaries from time to time, subject, in the case of the Exchange
Debentures to the terms of the Exchange Debenture Indenture.
STRINGENT ENVIRONMENTAL REGULATION; PROPOSED TIMBER REGULATION
S.D. Warren and its operations are subject to a wide range of environmental
laws and regulations relating to, among other matters, air emissions,
wastewater discharges, landfill operations and hazardous waste management.
Compliance with these laws and regulations is an increasingly important factor
in S.D. Warren's business. S.D. Warren will continue to incur capital and
operating expenditures to maintain compliance with applicable federal and
state environmental laws and to meet new regulatory requirements. Such new
requirements include the proposed regulations announced in November 1993 by
the United States Environmental Protection Agency (the "EPA") that would
require more stringent controls on air and water discharges from pulp and
paper mills (generally referred to as the "cluster rules"). Although the EPA
has not made any commitments, final promulgation of the cluster rules may
occur by early 1997 and compliance with the rules may be required beginning in
1998. It is expected that the cluster rules, if adopted as currently proposed,
will require S.D. Warren to incur approximately $76.0 million of capital
expenditures through 1999. Holdings also anticipates that through 1999, S.D.
Warren will incur an additional $10.0 million to $20.0 million of capital
expenditures related to environmental compliance, other than as a result of
the cluster rules. The ultimate financial impact of the proposed cluster rules
on S.D. Warren will depend upon the nature of the final regulations, the
timing of required implementation and the cost and availability of new
technology. Expenditures to comply with future environmental laws and
regulations could have a material adverse effect on S.D. Warren's business and
financial condition. See "Business--The Company--Environmental and Safety
Matters".
In addition to conventional pollutants, minute quantities of dioxins and
other chlorinated organic compounds may be contained in the wastewater
effluent of Warren's bleached kraft pulp mills in Somerset and Westbrook,
Maine and Muskegon, Michigan. The most recent National Pollutant Discharge
Elimination System ("NPDES") wastewater permit limits proposed by the EPA
would limit dioxin discharges from S.D. Warren's Somerset and Westbrook mills
to less than the level of detectability. The Company is presently meeting the
EPA's proposed dioxin limits but it is not meeting the proposed limits for
other parameters (e.g, temperature and color) and is attempting to revise
these other wastewater permit limits for its facilities. While the permit
limitations at these two facilities are being challenged, the Company
continues to operate under existing EPA permits, which have technically
expired, in accordance with accepted administrative practice. In addition, the
Muskegon mill is involved, as one of various industrial plaintiffs, in
litigation with the County of Muskegon regarding the County's 1994 ordinance
governing the County's industrial wastewater pretreatment program. The lawsuit
challenges, among other things, the treatment capacity availability and local
effluent limit provisions of the ordinance. In July 1996, the Court rendered a
decision substantially in favor of the Company and the other plaintiffs, but
the County has appealed the Court's decision. If the Company and the other
plaintiffs do not prevail in that appeal or are not successful in ongoing
negotiation with the County, the Company may not be able to obtain additional
treatment capacity for future expansions and the County could impose stricter
permit limits. The imposition of
14
<PAGE>
currently proposed permit limits or the failure of the Muskegon lawsuit could
require substantial additional expenditures, including short-term
expenditures, and may lead to substantial fines for any noncompliance. See
"Business--The Company--Environmental and Safety Matters".
The Company owns approximately 911,000 gross acres of timberlands in Maine,
789,400 of which are net forested acres. The Company believes that it can
harvest approximately 13,100 acres per year on a sustainable basis. On
November 5, 1996, a proposed binding referendum measure to eliminate
clearcutting in unincorporated areas in the state of Maine was defeated. A
competing measure, which establishes new forestry standards stricter than
current law, but which does not completely ban clearcutting, received a
plurality vote. This competing measure was supported by the Company, other
major timber interests in Maine, several environmental groups as well as the
Governor of Maine. Under Maine law, this competing measure will not
automatically become law unless it receives a simple majority in a special
election to be held in 1997. If the competing measure does become law, as the
Company expects it will, the consequence to the Company will not be material
because such measure generally reflects sustainable forestry initiatives
already voluntarily adopted by the Company. See "Business--Timberlands".
CONTROL BY SAPPI
At October 2, 1996, Sappi controlled approximately 75.07% of Holdings'
outstanding voting stock on a fully diluted basis. Pursuant to a Shareholders
Agreement (as defined) among Sappi, DLJMB, UBSC, Holdings, S.D. Warren (as
successor by merger to SDW Acquisition) and certain other parties, Sappi is
entitled to nominate a majority of the Board of Directors and has certain
other special approval rights. Accordingly, it is expected that Sappi will
exercise significant influence over the Board of Directors and business and
operations of each of Holdings and S.D. Warren. Subject to the restrictions on
corporate actions described under "--Restrictions on Corporate Actions of
Holdings and S.D. Warren", Sappi may be deemed to control Holdings and S.D.
Warren. See "Security Ownership of Certain Beneficial Owners and Management"
and "Certain Relationships and Related Transactions".
On November 27, 1996, Sappi agreed to acquire, subject to certain customary
conditions, the minority common equity interests in Holdings held by DLJ
Merchant Banking Partners, L.P.; DLJ International Partners, C.V.; DLJ
Offshore Partners, C.V.; DLJ Merchant Banking Funding, Inc.; DLJ First ESC
L.L.C.; and UBS Capital L.L.C.. Collectively, the Sellers own approximately
22% of the common equity of Holdings on a fully-diluted basis.
Under the terms of the agreement, Sappi has agreed to purchase the Sellers'
interests at a price of $138.0 million, or $17.25 per share of common stock
within 180 days of the date of execution of the agreement.
Following the Minority Acquisition, Sappi will own over 97% of the common
equity of Holdings on a fully diluted basis. Sappi has agreed to use
reasonable efforts to acquire the remaining common equity interests in
Holdings within 120 days of the closing of the Minority Acquisition.
RESTRICTIONS ON CORPORATE ACTIONS OF HOLDINGS AND S.D. WARREN
Pursuant to the Shareholders Agreement, Holdings has agreed not to take
certain corporate actions, including (i) dispositions of certain subsidiaries
or divisions of S.D. Warren, (ii) the hiring or dismissal of the chief
executive officer or chief financial officer of Holdings or S.D. Warren, (iii)
any merger involving (a) Holdings or (b) S.D. Warren (but only if S.D. Warren
is not the surviving corporation) and (iv) any change in the capital structure
of Holdings or S.D. Warren (including the incurrence of indebtedness)
involving amounts in excess of specified thresholds, without not only approval
by the majority of the board of Holdings present at a meeting at which a
Quorum exists but also approval by at least one Sappi Group director, the DLJ
Group director and, in certain cases, the UBS Group director (as such terms
are defined in the Shareholders Agreement). Consequently, each of the Sappi
Group, the DLJ Group and, in certain cases, the UBS Group effectively have the
power to block such actions. In addition, the Shareholders Agreement provides
that the annual business plan
15
<PAGE>
or budget of both Holdings and S.D. Warren must be approved by a director
designated by each of such Groups. Compliance with such special approval
requirements could delay or be disruptive to the normal corporate functioning
of Holdings and S.D. Warren. Sappi and the Sellers have agreed to terminate
the Shareholders Agreement on the closing date of the Minority Acquisition,
provided that Sappi may designate provisions of the Shareholders Agreement
that will survive with respect to parties other than the Sellers. See
"Security Ownership of Certain Beneficial Owners and Management--Shareholders
Agreement".
REQUIREMENT TO DO BUSINESS WITH SAPPI AFFILIATES
Pursuant to the Shareholders Agreement, if S.D. Warren sells products
outside of the United States and Canada, it is, subject to certain exceptions,
required to enter into arms' length marketing agreements with affiliates of
Sappi relating to such sales. For the year ended October 2, 1996, S.D. Warren
had sales to customers outside of the U.S. of $240.9 million of which $151.4
million was subject to the marketing agreements, and in respect of which
Warren expensed fees of approximately $7.2 million. See "Security Ownership of
Certain Beneficial Owners and Management--Shareholders Agreement" and "Certain
Relationships and Related Transactions--Transactions with Related Parties".
RESTRICTIONS ON MAKING A CHANGE OF CONTROL OFFER; ANTITAKEOVER EFFECTS OF
CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control, as defined in the Certificate of
Designations or the Exchange Debenture Indenture, as the case may be, each
holder of Senior Preferred Stock or, if issued, Exchange Debentures, will have
the right to require Holdings to purchase all or part of such holder's Senior
Preferred Stock or, if issued, Exchange Debentures, at a repurchase price
equal to 101% of the aggregate Specified Amount or principal amount thereof,
as the case may be, plus accrued and unpaid dividends (other than Accumulated
Dividends) or interest, as the case may be. See "Description of the Senior
Preferred Stock--Change of Control" and "Description of the Exchange
Debentures--Change of Control".
The Credit Agreement and the A/R Facility each contain, and Holdings' future
indebtedness may also contain, prohibitions of certain events which would
constitute a Change of Control. In addition, the exercise by the holders of
the Senior Preferred Stock or, if issued, the Exchange Debentures of their
right to require Holdings to repurchase the Senior Preferred Stock or, if
issued, the Exchange Debentures could cause a default under such indebtedness,
even if the Change of Control itself does not. Finally, Holdings' ability to
pay cash to the holders of the Senior Preferred Stock or, if issued, the
Exchange Debentures, upon a repurchase may be limited by Holdings' then
existing financing resources. See "Description of Warren Indebtedness."
The Change of Control purchase feature of the Senior Preferred Stock or, if
issued, the Exchange Debentures and the Change of Control prohibitions in each
of the Credit Agreement and the A/R Facility may in certain circumstances
discourage or make more difficult a sale or takeover of S.D. Warren and, thus,
the removal of its incumbent management.
TAX CONSEQUENCES OF DISTRIBUTIONS WITH RESPECT TO THE SENIOR PREFERRED STOCK
AND EXCHANGE OF EXCHANGE DEBENTURES
Holdings may, at its option and under certain circumstances, exchange
Exchange Debentures for the Senior Preferred Stock. Any such exchange will be
a taxable event to holders of the Senior Preferred Stock. Furthermore, the
Exchange Debentures will be treated as having been issued with original issue
discount ("OID") for Federal income tax purposes. Holders of Exchange
Debentures will be required to include such OID (as ordinary income) in income
over the life of the Exchange Debentures, in advance of the receipt of the
cash attributable to such income. See "Certain Federal Income Tax
Considerations".
LIMITATION ON CASH DIVIDENDS
Holdings is not required to pay cash dividends on the Senior Preferred Stock
until March 15, 2000 and Holdings does not anticipate paying any cash
dividends on the Senior Preferred Stock for any period ending on or prior to
December 15, 1999. Holdings also does not currently anticipate paying any cash
dividends on the
16
<PAGE>
Common Stock. S.D. Warren would have to fund any cash dividends payable with
respect to the Senior Preferred Stock or Common Stock, as the case may be, and
the terms of the Credit Agreement and the Indenture (as defined) limit the
amount of cash dividends S.D. Warren may pay to Holdings. See "Dividend
Policy", "Description of the Senior Preferred Stock--Dividends" and
"Description of Warren Indebtedness--The Credit Agreement". In addition, the
terms of the Credit Agreement restrict Holdings' ability to pay any dividends
on the Common Stock or the Senior Preferred Stock.
RISK THAT ISSUANCE OF EXCHANGE DEBENTURES DETERMINED TO BE A FRAUDULENT
CONVEYANCE
Various laws enacted for the protection of creditors may apply to the
Exchange Debentures, if issued. If a court in a lawsuit by a creditor or a
representative of creditors (such as a trustee in bankruptcy or Holdings
itself as debtor-in-possession) were to determine that Holdings did not
receive fair consideration or reasonably equivalent value for incurring the
indebtedness evidenced by the Exchange Debentures, if issued, and at the time
of such incurrence Holdings (i) was insolvent or was rendered insolvent by
such incurrence, (ii) had unreasonably small capital with which to carry on
its business and all businesses in which it intended to engage or (iii)
intended to incur, or believed it would incur, debts beyond its ability to
repay as such debts matured, then such court could invalidate, in whole or in
part, such indebtedness as a fraudulent conveyance. The obligations of
Holdings under the Exchange Debentures, if issued, could then be avoided, in
which case a court may direct the return of all payments made thereunder to
Holdings or to a fund for the benefit of its creditors. Alternatively, a court
could subordinate the Exchange Debentures, if issued, to all existing and
future liabilities of Holdings.
The measure of insolvency for purposes of the foregoing will vary depending
upon which jurisdiction's law is being applied. Generally, however, an entity
would be considered insolvent if (i) the amount of its debts (including
certain contingent liabilities) is greater than all of its assets at a fair
valuation or (ii) the present fair saleable value of its assets is less than
the amount that will be required to pay its probable liabilities on its
existing debts as they become absolute and mature.
In rendering opinions with respect to the validity of the Exchange
Debentures, if issued, counsel did not offer any opinion as to bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, including federal and state statutes dealing with fraudulent
conveyances.
LACK OF PUBLIC MARKET
As of the date of this Prospectus, there is no public market for the Senior
Preferred Stock, the Warrants or the Common Stock, and Holdings does not
intend to list the Senior Preferred Stock, the Warrants or the Common Stock on
any national securities exchange or to seek the admission thereof to trading
in the National Association of Securities Dealers Automated Quotation System.
Although Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), has
advised Holdings that it currently intends to make a market in the Senior
Preferred Stock, it is not obligated to do so and may discontinue such market
making at any time without notice. Accordingly, no assurance can be given that
an active market will develop for any of the Senior Preferred Stock, the
Warrants or the Common Stock or as to the liquidity of the trading market for
the Senior Preferred Stock, the Warrants or the Common Stock. If a trading
market does not develop or is not maintained, holders of the Senior Preferred
Stock, the Warrants or the Common Stock may experience difficulty in reselling
such Senior Preferred Stock, Warrants or Common Stock or may be unable to sell
them at all. If a market for the Senior Preferred Stock, the Warrants or the
Common Stock develops, any such market may be discontinued at any time. If a
trading market develops for the Senior Preferred Stock, the Warrants or the
Common Stock, future trading prices of such Senior Preferred Stock, Warrants
or Common Stock will depend on many factors, including, among other things,
Holdings' results of operations and the market for similar securities.
Depending on the market for similar securities and other factors, including
the financial condition of Holdings, the Senior Preferred Stock may trade at a
substantial discount from its liquidation preference of $25.00 per share plus
accrued dividends of $7.67 per share as of October 2, 1996.
17
<PAGE>
USE OF PROCEEDS
Holdings will not receive any proceeds from the sale of any Securities in
any transaction in connection with which this Prospectus may be delivered.
DIVIDEND POLICY
Holdings is not required to pay cash dividends on the Senior Preferred Stock
until March 15, 2000 and Holdings does not anticipate paying any cash
dividends on the Senior Preferred Stock for any period ending on or prior to
December 15, 1999. Holdings also does not currently anticipate paying any cash
dividends on the Common Stock. S.D. Warren would have to fund any cash
dividends payable with respect to the Senior Preferred Stock or the Common
Stock, as the case may be, and the terms of the Credit Agreement and the
Indenture limit the amount of cash dividends S.D. Warren may pay to Holdings.
See "Description of the Senior Preferred Stock--Dividends" and "Description of
Warren Indebtedness--The Credit Agreement". In addition, the terms of the
Credit Agreement restrict Holdings' ability to pay any dividends on the Common
Stock or the Senior Preferred Stock.
Holdings is not required to declare or pay dividends in respect of the
Warrants or shares of its Common Stock. Dividends are payable on shares of its
Common Stock when, as and if declared by the Board of Directors of Holdings.
There can be no assurance that any dividends will be declared.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization (including short-term
debt) of Holdings and its consolidated subsidiaries at October 2, 1996. This
table should be read in conjunction with the Financial Statements of Holdings
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Current portion of long-term debt................................. $ 46.4
--------
Long-term debt:
Term Loan Facility (1).......................................... 411.4
Notes........................................................... 375.0
Other (2)....................................................... 116.1
--------
Total long-term debt.......................................... 902.5
--------
Warren Preferred Stock (3)........................................ 96.2
--------
Stockholders' equity:
Preferred Stock, at liquidation value........................... 49.0
Common Stock and additional paid in capital..................... 294.3
Retained earnings............................................... 13.2
--------
Total stockholders' equity.................................... 356.5
--------
Total capitalization........................................ $1,401.6
========
</TABLE>
- --------
(1) SDW Acquisition financed the Acquisition in part through borrowings of
$630.0 million under senior secured term loan facilities (the "Term Loan
Facilities") and initial borrowings of $160.2 million under a $250.0
million revolving credit facility (the "Revolving Credit Facility" and,
together with the Term Loan Facilities, the "Bank Financing").
(2) Consists principally of tax-exempt industrial revenue and pollution
control bonds.
(3) Liquidation value of $75.0 million plus $21.2 million of unpaid
dividends.
19
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated operating data, share
data, consolidated balance sheet data and other financial data for Holdings
and the Predecessor Corporation. The selected financial data for the twelve
months ended December 25, 1993, the nine months ended September 24, 1994 and
the period from September 25, 1994 through December 20, 1994 are derived from
the combined financial statements of the Predecessor Corporation, which have
been audited by Deloitte & Touche LLP. The selected financial data for the
period from December 21, 1994 through September 27, 1995 and the twelve months
ended October 2, 1996 are derived from the consolidated financial statements
of Holdings which have been audited by Deloitte & Touche LLP. The selected
financial data for the twelve months ended December 26, 1992 were prepared
from unaudited selected financial data provided to Holdings by the predecessor
Corporation's parent, Scott Paper Company, in connection with the acquisition
of Warren. Operating data for any periods less than one year are not
necessarily indicative of the results that may be expected for the full year.
Further, data for the Predecessor and Holdings are not necessarily comparable
as a result of a new basis of accounting for the Holdings and the adoption of
certain accounting policies. This data should be read in conjunction with
Holdings' Financial Statements and the Notes thereto appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 21,
TWELVE MONTHS TWELVE MONTHS NINE MONTHS 1994 1994 TWELVE MONTHS
ENDED ENDED ENDED THROUGH THROUGH ENDED
DECEMBER 26, DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1992(1) 1993 1994 1994 1995 1996
---------------- ---------------- ---------------- ---------------- ------------- -------------
S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND COMPANY AND CONSOLIDATED CONSOLIDATED
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED SDW HOLDINGS SDW HOLDINGS
AFFILIATES AFFILIATES AFFILIATES AFFILIATES CORPORATION CORPORATION
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
---------------- ---------------- ---------------- ---------------- ------------- -------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales.................. $1,212.8 $1,143.6 $ 828.8 $ 313.6 $1,155.8 $1,441.6
Gross profit........... 182.5 168.1 106.4 49.9 269.8 255.0
Selling, general and
administrative
expense............... 91.0 91.7 72.1 22.2 96.2 134.0
Restructuring charges.. -- 66.1 -- -- -- --
Income from
operations............ 91.5 10.3 34.3 27.7 173.6 121.0
Other income (expense),
net................... 0.1 0.1 0.1 (0.5) 3.2 (0.1)
Interest expense....... 9.0 8.5 6.4 2.3 106.0 108.9
Income tax expense..... 32.0 6.5 11.2 9.9 28.4 5.1
Dividends and accretion
on Warren Series B
preferred stock....... -- -- -- -- 9.1 13.5
Extraordinary item, net
of tax................ -- -- -- -- -- (2.0)
Net income (loss)...... 50.6 (4.6) 16.8 15.0 33.3 (8.6)
Dividends on preferred
stock................. -- -- -- -- 4.6 6.9
Net income (loss)
applicable to common
stockholders.......... 50.6 (4.6) 16.8 15.0 28.7 (15.5)
SHARE DATA:
Net earnings per common
share................. $ -- $ -- $ -- $ -- $ 0.80 $(0.50)
Weighted average common
shares outstanding.... -- -- -- -- 35.9 30.7
OTHER FINANCIAL DATA:
EBITDA (2)............. $ 183.1 $ 169.5 $ 105.9 $ 56.5 $ 263.4 $ 236.2
Capital expenditures... 70.1 68.9 32.3 14.5 33.7 51.3
Depreciation, cost of
timber harvested and
amortization.......... 91.6 93.1 71.6 28.8 89.8 115.2
Ratio of earnings to
fixed charges (3)..... 5.8x 1.1x 3.1x 8.2x 1.4x (4)
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash
equivalents........... $ 1.3 $ 2.1 $ 4.7 $ 75.0 $ 62.2 $ 49.0
Working capital........ 67.0 47.1 156.2 233.2 177.9 109.8
Total assets........... 1,696.8 1,711.7 1,676.9 1,737.1 1,887.3 1,725.4
Total debt (including
current maturities)... 125.7 124.3 119.8 119.3 1,127.4 948.9
Warren Series B
preferred stock (5)... -- -- -- -- 74.5 88.0
Preferred Stock at
liquidation value..... -- -- -- -- 42.1 49.0
Parent's equity........ 1,152.3 1,088.1 1,136.5 1,219.1 -- --
Stockholders' equity
including preferred
stock................. -- -- -- -- 365.1 356.5
</TABLE>
- -------
(1) Includes the revision in the estimated useful lives used to compute
depreciation for certain equipment which increased net income by
approximately $26.2 million as well as the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" which reduced net income by
approximately $6.1 million.
(2) EBITDA is defined as income from operations before restructuring expense
plus depreciation, cost of timber harvested and amortization as reported
in the Statements of Cash Flows, EBITDA is presented because it is a
widely accepted financial indicator of a Company's ability to service and
incur debt. EBITDA should not be considered by an investor as an
alternative to GAAP operating income, as an indicator of the Company's
operating performance or as an alternative to the Company's cash flow from
operating activities as a measure of liquidity.
(3) For purposes of computing the ratio of earnings to fixed charges, fixed
charges consist of interest expense on long-term debt, amortization of
deferred financing costs, accrued dividends on the Warren Series B
Preferred Stock on a pretax basis and that portion (one third) of rentals
deemed to be representative of interest. Earnings consist of income before
income taxes, plus fixed charges.
(4) For the period ended October 2, 1996, the Company's earnings were
insufficient to cover fixed charges by $13.4 million.
(5) Liquidation value was $96.2 million at October 2, 1996.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Holdings owns all of the outstanding common stock of Warren. Holdings is a
holding company with no material assets other than its investment in Warren.
All of the operations of Holdings (other than the management of its investment
in Warren and the provision of certain corporate services to Warren) are
currently conducted through Warren. The following discussion relates
principally to the results of operations and financial condition of Warren.
Accordingly, Holdings, together with Warren, are referred to in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as
the "Company."
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 90,000 tons, and owns approximately 911,000 acres of
timberlands in the State of Maine.
On October 8, 1994, SDW Acquisition Corporation ("SDW Acquisition"), a
direct wholly-owned subsidiary of Holdings, entered into a definitive
agreement (the "Stock Purchase Agreement") pursuant to which, on December 20,
1994, SDW Acquisition acquired (the "Acquisition") from Scott Paper Company
("Scott") all of the outstanding capital stock of Warren. Immediately
following the Acquisition, SDW Acquisition merged with and into Warren (the
"Merger"), with Warren (the "Successor Corporation") surviving. See the Notes
to Financial Statements for information regarding the Acquisition and
financing thereto.
The Acquisition has resulted in a new basis of accounting, the adoption of
certain accounting policies which differ from the accounting policies of the
Predecessor Corporation, as defined in the Notes to Financial Statements, and
increases to certain manufacturing costs (purchased pulp and energy at the
Company's Mobile, Alabama facility) resulting from obtaining these
manufacturing resources on a third-party versus affiliate basis. As a result,
the Predecessor Corporation's financial statements for periods prior to the
Acquisition are not comparable to the Company's.
The Company wishes to caution readers that this discussion and analysis
contains forward-looking statements which, at the time made, speak about the
future and are based upon management's interpretation of what it believes are
significant factors affecting the Company's business, and there can be no
assurances that management's interpretations and the assumptions on which they
are based will prove to be correct. The Company believes that various factors
could affect the Company's actual results and could cause the Company's actual
results for 1996, and beyond, to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. Such factors
include, but are not limited to: global economic and market conditions;
production and capacity in the United States and Europe; production and
pricing levels of pulp and paper; any major disruption in production at key
facilities; alterations in trade conditions in and between the United States
and other countries where the Company does business and changes in
environmental, tax and other laws and regulations.
MARKET OVERVIEW
The market for coated paper has historically experienced price fluctuations
which are driven by North American supply/demand imbalances and, to a lesser
degree, the availability and relative pricing of imported products. In
contrast to the highs of fiscal year 1995, 1996 was disappointing for the
North American paper market. Coated free paper shipments in the segments in
which the Company competes declined approximately 12%, as customers worked
down inventories built the preceding year in the face of rising prices. With
shipments down and pulp prices falling sharply in the first six months of the
fiscal year, coated paper prices came under extreme pressure. By August 1996,
key lightweight coated free grades had fallen approximately 20% to 30% from
their July 1995 highs. During the final fiscal quarter of 1996, shipments had
begun to rebound and pricing had leveled off.
21
<PAGE>
The uncoated market also experienced inventory destocking, with a year over
year decline in shipments of 2.5% and prices of key grades falling 35% to 40%
from September 1995 to March 1996. The specialty businesses did not experience
this inventory fluctuation, instead having relatively stable market volume and
pricing.
Despite the unfavorable market, the Company managed to gain share through a
combination of strong customer mix, product quality, end user pull-through
selling and an extensive merchant distribution system. Sales volume,
incorporating all products of the Company, for fiscal year 1996 totaled
approximately 1.3 million tons compared with a figure marginally lower for the
twelve months ended September 1995.
Any failure of the industry to maintain its recovery in the near future, or
any prolonged or severe weakness in the market for any of the Company's
products in the future, may adversely affect the Company's financial position,
results of operations and cash flows. Management anticipates continued
improvement in business conditions for the Company's products. However, new
coated paper capacity scheduled for the end of calendar year 1997 in Europe,
as well as certain machine conversions during 1997 to coated freesheet
manufacture in the United States, will impact market supply/demand balance and
may constrain upward movement of coated prices.
The following discussion and analysis should be read in conjunction with the
Financial Statements and the Notes thereto.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED OCTOBER 2, 1996 ("FISCAL YEAR 1996") COMPARED TO NINE
MONTHS ENDED SEPTEMBER 27, 1995
The following discussion compares the results of operations for the twelve
months ended October 2, 1996 ("fiscal year 1996," which includes 53 weeks)
with the nine months ended September 27, 1995. The nine months ended September
27, 1995 represents the Company's post-Acquisition (December 20, 1994)
results. As previously stated, the Predecessor Corporation's financial
statements for periods prior to the Acquisition are not comparable to the
Company's financial statements. Results (in terms of dollar amounts) for
fiscal year 1996, and the nine-month period ended September 27, 1995 are not
directly comparable due to the differences in periods reported. The additional
week in fiscal year 1996 did not have a significant impact on sales or the
other results as a percentage of sales. Accordingly, management's discussion
and analysis for these periods is generally based upon a comparison of
specified results as a percentage of total sales. The following table
indicates the results of operations as a percent of sales:
<TABLE>
<CAPTION>
NINE MONTHS TWELVE
ENDED MONTHS ENDED
SEPTEMBER 27, OCTOBER 2,
1995 1996
-------------- -------------
% %
-------------- -------------
<S> <C> <C>
Cost of goods sold......................... 76.7 82.3
Selling, general and administrative ex-
pense..................................... 8.3 9.3
Other income (expense)..................... 0.3 --
Interest expense........................... 9.2 7.6
Income tax expense......................... 2.5 0.4
Extraordinary item, net of tax............. -- 0.1
</TABLE>
22
<PAGE>
Sales
The Company's sales for fiscal year 1996 were $1,441.6 million, which was
below the annualized sales for the nine months ended September 27, 1995.
However, sales volume, expressed as tons per day, was approximately 3,500 tons
for fiscal year 1996 which was marginally higher than that for the nine months
ended September 27, 1995. Average net revenues per ton sold for fiscal year
1996 fell to approximately $1,096 compared to $1,173 for the nine months ended
September 27, 1995, a 7% decline.
Cost of Goods Sold
The Company's cost of goods sold for fiscal year 1996 was 82.3% of sales
compared to 76.7% of sales for the nine months ended September 27, 1995. This
increase in cost of goods sold as a percentage of sales was primarily
attributable to reduced sales dollars per ton as well as lower production
volume resulting from a planned curtailment of production at certain of the
Company's manufacturing facilities in the first quarter of fiscal year 1996
and the net effect of a turbine failure at one manufacturing facility which
resulted in the loss of approximately 24 production days during the second
fiscal quarter. These costs were partially offset by reduced manufacturing
costs as a result of cost reduction efforts and decreases in the price of
purchased pulp, the primary raw material.
During the third quarter of fiscal year 1996, pulp prices declined to 50% of
peak levels achieved during the nine months ended September 27, 1995 through
the first quarter of fiscal year 1996. Although the decrease in pulp prices
did have an impact on production cost per ton, it was partially mitigated by
the Company's own pulp production as the Company manufactures approximately
65% of its pulp requirement.
Selling, General and Administrative Expense
Selling, general and administrative expense of $134.0 million was 9.3% of
sales for fiscal year 1996 as compared to 8.3% of sales for the nine months
ended September 27, 1995. This increase was primarily due to the continued
post-Acquisition increase in administrative related expenses. Administrative
expenses increased primarily as a result of costs incurred to obtain the
appropriate level of administrative services that were previously performed by
Scott.
Other Income (Expense), net
Other income (expense), net for fiscal year 1996 was a $0.1 million expense
compared to $3.2 million income for the nine months ended September 27, 1995.
This decrease was primarily due to $2.5 million of fees incurred for the
amendment to the credit agreement in April 1996 and securitization of a large
portion of the Company's trade receivables (see Liquidity and Capital
Resources) as well as a $1.0 million reduction in interest income due to lower
average cash balances available for short-term investment.
Interest Expense and Taxes
The Company's interest expense of $108.9 million was 7.6% of sales for
fiscal year 1996 as compared to 9.2% for the nine months ended September 27,
1995. The decrease represents lower average outstanding borrowings primarily
due to the $100.0 million reduction of long-term debt with cash received from
the sale of a significant portion of the Company's accounts receivable and
repayment of $75.4 million of bank debt pursuant to an excess cash flow
requirement as defined in the Credit Agreement. See the Notes to the Financial
Statements.
The Company's income tax expense decreased to $5.1 million for fiscal year
1996 from $28.4 million for the nine months ended September 27, 1995,
primarily due to lower earnings levels. Conversely, the Company's effective
tax rate for fiscal year 1996 increased to 42.5% from 40.1% for the nine
months ended September 27, 1995 due to the impact of certain permanent
differences.
23
<PAGE>
Extraordinary Item
The Company recorded an extraordinary loss of $2.0 million, net of a $1.3
million deferred tax benefit, resulting from the accelerated amortization of
$3.3 million of deferred finance costs related to the early extinguishment of
debt with the cash proceeds from the accounts receivable securitization.
NINE MONTHS ENDED SEPTEMBER 27, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER
24, 1994
The following discussion compares the results of operations for the
Successor Corporation's nine-month period ended September 27, 1995 with the
Predecessor Corporation's nine-month period ended September 24, 1994. For
purposes of this discussion, the period December 21, 1994 through September
27, 1995 is referred to as the nine-month period ended September 27, 1995. The
"Company" refers to both the Predecessor and Successor Corporations.
Sales
The Company's sales for the nine months ended September 27, 1995 were
$1,155.8 million compared to $828.8 million for the nine months ended
September 24, 1994, an increase of $327.0 million or 39.5%. Sales volume,
expressed as tons per day, was approximately 3,400 tons for the nine months
ended September 27, 1995 compared to approximately 3,100 tons for the nine
months ended September 24, 1994, a 9.7% increase. Average net revenue per ton
for the nine months ended September 27, 1995 increased to approximately $1,173
compared to $979 for the nine months ended September 24, 1994, a 19.8%
increase. The increased volume was primarily attributable to increased volume
of coated free paper, and the increase in average net sales per ton was across
all grades due to higher selling prices and reduced sales of second quality
paper resulting from improved manufacturing performance achieved during this
period.
Cost of Goods Sold
The Company's cost of goods sold for the nine months ended September 27,
1995 as a percentage of sales was 76.7% compared to 87.2% for the nine months
ended September 24, 1994. Cost of goods sold increased $163.6 million to
$886.0 million, or 22.6%, attributable to the increase in volume sold and
increased raw material cost for purchased pulp and wood and wood chips used to
manufacture pulp, partially offset by a net reduction in labor costs and
increased production efficiencies in output.
The increase in wood and wood chip costs was primarily attributable to the
increased demand for lumber by the housing sector as the economy expanded. The
increase in pulp costs primarily resulted from significantly higher prices on
purchased pulp and the effect of the Company's market-based, long-term pulp
supply contract at the Company's Mobile, Alabama, facility which was entered
into with Scott at the time of the Acquisition. Prior to the Acquisition, pulp
purchases for the Company's Mobile operations were on a shared cost basis with
other Scott operations located at the Mobile facility.
Selling, General and Administrative Expense
Selling, general and administrative expense for the nine months ended
September 27, 1995 increased approximately $24.1 million, or 33.4%. This
increase was primarily due to the increase in distribution and administrative
related expenses. Distribution related expenses increased primarily as a
result of the increase in sales volume. Administrative expenses increased
primarily as a result of the costs incurred to obtain the appropriate level of
administrative services that were previously performed by Scott. Selling,
general and administrative expense as a percentage of sales remained
relatively flat at 8.3% for the nine months ended September 27, 1995 as
compared to 8.7% for the nine months ended September 24, 1994.
Other Income (Expense), net
Other income (expense), net for the nine months ended September 27, 1995 was
$3.2 million income compared to $0.1 million income for the nine months ended
September 24, 1994. This increase was primarily due to an increase in interest
income resulting from interest earned on surplus cash balances held prior to
the application of such balances towards certain business requirements and the
reduction of long-term debt.
24
<PAGE>
Interest Expense and Taxes
Following the Acquisition, Warren's capitalization and tax basis of
accounting changed significantly. As a result, Warren's interest and tax
expense prior to the Acquisition are not comparable to results following the
Acquisition.
The Company's interest expense for the nine months ended September 27, 1995
was $106.0 million compared to $6.4 million for the nine months ended
September 24, 1994. This increase reflects the incremental interest costs for
the nine months ended September 27, 1995 associated with the financing of the
Acquisition, as discussed in the Notes to Financial Statements. For the nine
months ended September 27, 1995, interest expense includes the amortization of
deferred financing fees. The Company's hedging activities as discussed in the
Notes to Financial Statements did not have a material effect on the weighted
average borrowing rate or interest expense for the nine months ended September
27, 1995.
The Company's income tax expense was $28.4 million for the nine months ended
September 27, 1995 compared to $11.2 million for the nine months ended
September 24, 1994. This increase was primarily attributable to changes in the
Company's earnings levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $49.0 million at
October 2, 1996 from $62.2 million at September 27, 1995. The Company
generated cash from operating activities of $216.6 million during fiscal year
1996 which includes $90.0 million of cash proceeds realized on the sale of a
significant portion of the Company's accounts receivable. At October 2, 1996,
the Company had trade accounts receivable of $49.1 million compared to $129.4
million at September 27, 1995. The decrease was primarily due to the above
mentioned sale of $90.0 million of the Company's accounts receivable in April
1996. Inventories at October 2, 1996 declined to $195.7 million from $226.5
million at September 27, 1995 due to the effect of lower inventory levels,
changes in sales mix and reduced raw material costs during fiscal year 1996.
Accounts payable, accrued and other current liabilities decreased $6.6 million
due to a lower accounts payable balance primarily as a result of a decline in
market prices of pulp partially offset by increases in general operating
accruals. Other receivables increased by $10.0 million primarily as a result
of a receivable for income taxes and an outstanding insurance claim paid
subsequent to the end of the fiscal year; partially offset by a reduction in
the receivable for power sales.
The Company used $48.6 million of cash in investing activities during fiscal
year 1996 compared to $1,489.6 million during the nine months ended September
27, 1995 which included $1,455.9 million related to the Acquisition. Capital
spending of $51.3 million for fiscal year 1996 consisted of improvements to
the Company's manufacturing and distribution facilities as well as certain
environmental expenditures (see Environmental and Safety Matters). The Company
anticipates that capital expenditures related to environmental compliance
will, in the aggregate, be approximately $86.0 to $96.0 million through fiscal
year 1999, assuming the cluster rules are adopted (see Other Items). The
Company believes that cash generated by operations and amounts available under
its revolving credit facility will be sufficient to meet its on-going
operating and capital requirements.
The Company used $181.2 million of cash in financing activities in fiscal
year 1996 primarily to reduce long-term debt obligations which were funded
primarily by the sale of accounts receivable and excess cash flow from
operations. For the nine months ended September 27, 1995, financing activities
provided $1,340.8 million of cash primarily attributable to the incurrence of
$1,105.7 million of debt to finance the acquisition, with repayments of long
term debt of $162.1 million and proceeds from the issuance of common stock,
$294.3 million, and preferred stock, $37.5 million.
Debt and Preferred Stock
At October 2, 1996, the Company's long-term debt was $902.5 million compared
to $1,048.8 million at September 27, 1995, a decrease of $146.3 million. The
current maturities of long-term debt balance of $46.4
25
<PAGE>
million at October 2, 1996 primarily represents the amounts payable during
fiscal year 1997 under the Company's term loan facilities. The current
maturities of long-term debt at September 27, 1995 primarily reflects payments
of $74.9 million made during the first quarter of fiscal year 1996 pursuant to
an excess cash flow requirement as indicated in the Notes to Financial
Statements. The Company will not have the excess cash flow prepayment
requirement, as defined, in the first quarter of fiscal year 1997 due to the
prepayment of the Tranche B Term Loan under the Credit Agreement during the
third quarter of fiscal year 1996. The Company had received $90.0 million of
proceeds from the A/R Facility (see Notes to Financial Statements) which,
along with $10.0 million of cash on hand was used to prepay $100.0 million of
the Tranche B Term Loan under the Credit Agreement. As a result of the early
extinguishment of a portion of the Tranche B Term Loan, the Company recorded
an extraordinary loss of $2.0 million, net of a $1.3 million deferred tax
benefit, related to the unamortized deferred financing fees associated with
the Tranche B Term Loan.
The Company has a $250.0 million revolving credit facility to finance
working capital needs. The Company did not have any borrowings under this
facility at September 27, 1995 and October 2, 1996. However, the unused
borrowing capacity at the end of fiscal year 1996 and fiscal year 1995 was
lower than the full $250 million facility limit due to certain outstanding
letters of credit, being $249.0 million at October 2, 1996 compared to $229.4
million at September 27, 1995. This unused borrowing capacity could be used to
finance working capital needs should this be necessary.
In addition, the Company has a Letter of Credit Facility (as defined in the
Notes to Financial Statements) to support certain of its obligations. The
Company had $170.5 million of letters of credit outstanding under its Letter
of Credit Facility at September 27, 1995 and October 2, 1996.
The Credit Agreement, which was amended and restated as of April 26, 1996,
as indicated in the Notes to Financial Statements, 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 minimum debt service ratio and a net worth test.
Currently, the specified financial ratios are all within the applicable
financial covenant levels. However, depending upon the actual financial
results for the second fiscal quarter of 1997, the Company may not achieve a
scheduled increase in the covenant level for its interest coverage ratio. As a
result, Management has requested an amendment to the interest coverage
covenant from the bank lending group, and believes that such amendment will be
effective prior to the end of the second fiscal quarter of 1997. See
"Description of Warren Indebtedness--The Credit Agreement--Covenants". The
Company is also required by the terms of the Credit Agreement to enter into
fixed rate interest protection agreements on a portion of its outstanding
debt. At September 27, 1995 and October 2, 1996, $205 million of debt was
covered by such interest rate protection agreements.
The Company does not anticipate paying cash dividends on the Warren Series B
Preferred Stock or Preferred Stock (as defined in the Notes to Financial
Statements) for any period ending on or prior to December 15, 1999. The
Company intends to retain future earnings, if any, for use in its business and
does not anticipate paying any cash dividends on such preferred stock prior to
such date. In addition, the terms of the Credit Agreement and the indenture
(the "Indenture") relating to the Notes (as defined in the Notes to Financial
Statements) limit the amount of cash dividends the Company may pay with
respect to such preferred stock and other equity securities both before and
after that date. See the Notes to Financial Statements.
Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and debt. The Company uses
interest rate caps and swaps to the degree indicated above as a means of
protection against a portion of interest rate risk associated with the current
debt balances.
26
<PAGE>
During the second quarter of fiscal year 1996, the Company commenced
transacting business in currencies other than the U.S. Dollar. The Company
partly manages the potential exposure associated with transacting in foreign
currencies through the use of foreign currency forward contracts. These
contracts are used to offset the effects of exchange rate fluctuations on a
portion of the underlying foreign currency denominated exposure. These
exposures include firm related party trade accounts receivable. Realized and
unrealized gains and losses on these contracts for fiscal year 1996 were
insignificant. The Company does not hold derivative financial instruments for
trading purposes.
OTHER ITEMS
Environmental and Safety Matters
The Company is subject to a wide variety of increasingly stringent
environmental laws and regulations relating to, among other matters, air
emissions, wastewater discharges, past and present landfill operations and
hazardous waste management. These laws include the Federal Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act and their
respective state counterparts. The Company will continue to incur significant
capital and operating expenditures to maintain compliance with applicable
federal and state environmental laws. These expenditures include costs of
compliance with federal worker safety laws, landfill expansions and wastewater
treatment system upgrades.
In addition to conventional pollutants, minute quantities of dioxins and
other chlorinated organic compounds may be contained in the wastewater
effluent of the Company's bleached kraft pulp mills in Somerset and Westbrook,
Maine and Muskegon, Michigan. The most recent National Pollutant Discharge
Elimination System ("NPDES") wastewater permit limits proposed by the EPA
would limit dioxin discharges from the Company's Somerset and Westbrook mills
to less than the level of detectability. The Company is presently meeting the
EPA's proposed dioxin limits but it is not meeting the proposed limits for
other parameters (e.g., temperature and color) and is attempting to revise
these other wastewater permit limits for its facilities. While the permit
limitations at these two facilities are being challenged, the Company
continues to operate under existing EPA permits, which have technically
expired, in accordance with current administrative practice. In addition, the
Muskegon mill is involved, as one of various industrial plaintiffs, in
litigation with the County of Muskegon regarding a 1994 ordinance governing
the County's industrial wastewater pretreatment program. The lawsuit
challenges, among other things, the treatment capacity availability and local
effluent limit provisions of the ordinance. In July 1996, the Court rendered a
decision substantially in favor of the Company and other plaintiffs, but the
County has appealed the Court's decision. If the Company and the other
plaintiffs do not prevail in that appeal or are not successful in ongoing
negotiations with the County, the Company may not be able to obtain additional
treatment capacity for future expansions and the County could impose stricter
permit limits. The imposition of currently proposed permit limits or the
failure of the Muskegon lawsuit could require substantial additional
expenditures, including short-term expenditures, and may lead to fines for any
noncompliance.
In November 1993, the EPA announced proposed regulations that would impose
new air and water quality standards aimed at further reductions of pollutants
from pulp and paper mills, particularly those conducting bleaching operations
(generally referred to as the "cluster rules"). Although the EPA has not made
any commitments, final promulgation of the cluster rules is expected to occur
by early 1997 and compliance with the rules may be required beginning in 1998.
The Company believes that compliance with the cluster rules, if adopted as
currently proposed, may require aggregate capital expenditures of
approximately $76.0 million through 1999. The ultimate financial impact to the
Company of compliance with the cluster rules will depend upon the nature of
the final regulations, the timing of required implementation and the cost and
availability of new technology. The Company also anticipates that it will
incur an estimated $10.0 million to $20.0 million of capital expenditures
through 1999 related to environmental compliance other than as a result of the
cluster rules.
The Company's mills generate substantial quantities of solid wastes and by-
products that are disposed of at permitted landfills and solid waste
management units at the mills. The Company is currently planning to expand the
landfill at the Somerset mill at a projected total cost of approximately $16.0
million, of which $7.0 million is expected to be incurred prior to the year
2000 with the remainder being spent subsequent to 2004.
27
<PAGE>
The Muskegon mill has had discussions with the Michigan Department of
Natural Resources ("DNR") regarding a wastewater surge pond adjacent to the
Muskegon Lake. The DNR presently is considering whether the surge pond is in
compliance with Michigan Act 245 (Water Resources Commission Act) regarding
potential discharges from that pond. The matter is now subject to the results
of a pending engineering investigation. There is a possibility that, as a
result of DNR requirements, the surge pond may be closed in the future. The
Company estimates the cost of closure could be approximately $2.0 million. In
addition, if it is necessary to replace the functional capacity of the surge
pond with above-grade structures, the Company preliminarily estimates that up
to an additional $8.0 million may be required for such construction costs.
The Company has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for
cleanup of contamination at seven sites. Based upon the Company's
understanding of the total amount of liability at each site, its calculation
of its percentage share in each proceeding, and the number of potentially
responsible parties at each site, the Company presently believes that its
aggregate exposure for these matters will not be material. Moreover, as a
result of the acquisition, the Company's former parent, Scott, agreed to
indemnify and defend the Company for and against, among other things, the full
amount of any damages or costs resulting from the off-site disposal of
hazardous substances occurring prior to the date of closing, including all
damages and costs related to these seven sites. Since the date of closing of
the acquisition agreement, Scott has been performing under the terms of this
environmental indemnity and defense provision and, therefore, the Company has
not expended any funds with respect to these seven sites.
The Company currently has a five-year demolition project in progress at its
Westbrook Facility for health and safety reasons. Total costs of the project
are estimated to be approximately $9.0 million, of which approximately $5.7
million had been spent as of October 2, 1996. The Company recognizes these
costs as they are incurred.
The Company does not believe that it will have any liability under emergency
legislation enacted by the State of Maine to cover a significant shortfall in
the Maine workers' compensation system through assessments of employers and
insurers; however, there can be no assurance that the existing legislation
will fully address the shortfall.
Although no assurances can be provided, management believes that none of
these matters, individually or in the aggregate, will have a material adverse
effect on the Company's financial position, results of operations or cash
flows.
Long-Term Contracts
A substantial portion of the Company's electricity requirements are
satisfied through cogeneration agreements ("Power Purchase Agreements" or
"Agreements") whereby the Somerset and Westbrook mills each cogenerate
electricity and sell the output to Central Maine Power Company ("CMP"). The
Westbrook and Somerset Power Purchase Agreements require CMP to purchase such
energy produced by these cogeneration facilities at above market rates which
has reduced the Predecessor Corporation's historical cost of electrical
energy. The Westbrook Agreement expires October 31, 1997 and the Somerset
Agreement expires in the year 2012. The favorable pricing element of the
Westbrook and Somerset Agreements will end on October 30, 1997 and November
30, 1997, respectively. The Agreements also require the mills to purchase
electricity from CMP at the standard industrial tariff rate. See the Notes to
Financial Statements. To reflect the fair market value of the acquired Power
Purchase Agreements as of the Acquisition date, the Company established a
deferred asset of approximately $32.3 million, in accordance with APB No. 16.
This deferred asset is recorded with other contracts valued at the Acquisition
date as a net long-term liability. This deferred asset is being amortized over
the remaining life of the favorable Power Purchase Agreements. For the nine
months ended September 27, 1995 and fiscal year 1996, amortization expense
related to this asset approximated $10.8 million and $12.0 million,
respectively.
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<PAGE>
Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
FAS No. 123, "Accounting for Stock-Based Compensation." FAS No. 123 which is
effective for the Company in fiscal year 1997 addresses the financial
accounting and reporting requirements for stock-based employee compensation
plans. FAS No. 123 permits an entity to either record the effects of stock-
based employee compensation plans in its financial statements or retain the
current accounting and present pro forma disclosure in the notes to the
financial statements. The implementation of FAS No. 123 is not expected to
have a material impact on the Company's financial position, results of
operations, cash flows, or financial statement disclosure as the Company will
retain its current accounting.
In October 1996, FASB issued FAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," which
addresses accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. FAS No. 125 is required to
be adopted in 1997. The implementation of FAS No. 125 is not expected to have
a material impact on the Company's financial position, results of operations
or cash flows.
SUBSEQUENT EVENTS
On October 17, 1996, a fire occurred at an outside warehouse location in
Muskegon, Michigan, which resulted in the loss of approximately 8,000 tons of
inventory valued in excess of $6.0 million. While the Company cannot
reasonably estimate at this time the total loss experienced, or the amount to
be recovered under its insurance policies, it does not expect that losses will
exceed its insurance coverage limits.
Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. Damage to mill equipment is being repaired and normal
operating mill conditions are being restored. While the mill is not yet
operating at full production, it will have, by the end of December 1996,
attained a level of operation close to the pre-flood situation. While the
Company cannot reasonably estimate at this time the total loss experienced, or
the exact amount to be recovered under its insurance policies, early
indications suggest that such amounts may be significant. However, total
losses are not expected to exceed the Company's insurance coverage limits,
which include both business interruption and property loss coverage.
On October 24, 1996, the Company announced a restructuring plan that will
likely result in a pretax charge of approximately $10.0 million in the first
quarter of fiscal year 1997. The charge will be taken to cover the one-time
costs related to the reduction of up to approximately 200 salaried positions,
or approximately 14% of the Company's salaried workforce.
On November 5, 1996, a proposed binding referendum measure to eliminate
clearcutting in unincorporated areas in the State of Maine was defeated. A
competing measure, which could establish new forestry standards stricter than
current law, but which would not completely ban clearcutting, received a
plurality vote. This competing measure was supported by the Company, other
major timber interests in Maine, several environmental groups as well as the
Governor of Maine. Under Maine law, this competing measure will not
automatically become law unless it receives a simple majority of the votes
cast in a special election to be held in 1997. If this competing measure does
become law, the consequence to the Company is not expected to be material,
because such measure generally reflects sustainable forestry initiatives
already voluntarily adopted by the Company.
On November 27, 1996, Sappi agreed to acquire, subject to certain customary
conditions, the minority common equity interests in Holdings held by DLJ
Merchant Banking Partners, L.P.; DLJ International Partners, C.V.; DLJ
Offshore Partners, C.V.; DLJ Merchant Banking Funding, Inc.; DLJ First ESC
L.L.C.; and UBS Capital L.L.C. Collectively, the Sellers own approximately 22%
of the common equity of Holdings on a fully-diluted basis.
29
<PAGE>
Under the terms of the agreement, Sappi has agreed to purchase the Sellers'
interests at a price of $138.0 million, or $17.25 per share of common stock
within 180 days of the date of execution of the agreement.
Following the Minority Acquisition, Sappi will own over 97% of the common
equity of Holdings on a fully diluted basis. Sappi has agreed to use
reasonable efforts to acquire the remaining common equity interests in
Holdings within 120 days of the closing of the Minority Acquisition.
CONSIDERATIONS RELATING TO HOLDINGS' CASH OBLIGATIONS
Because Holdings has no material assets other than the outstanding common
stock of Warren (all of which is pledged to the lenders under the Credit
Agreement) and all of the operations of Holdings (other than the management of
its investment in Warren) are currently conducted through Warren and its
subsidiaries, Holdings' ability to meet its cash obligations is dependent upon
the earnings of Warren and its subsidiaries and the distribution or other
provision of those earnings to Holdings. Holdings has no material indebtedness
outstanding (other than advances that may be owed from time to time to Warren
and guarantees in respect of indebtedness of Warren and its subsidiaries) and
Holdings' Preferred Stock, which was issued in connection with the
Acquisition, is not mandatorily redeemable (except upon the occurrence of
certain specified events) and provides that dividends need not be paid in cash
until the year 2000. Holdings does, however, have various obligations with
respect to its equity securities (including registration rights granted by
Holdings) that are likely to require cash expenditures by Holdings. The
Company believes that the Credit Agreement, the Indenture and the Warren
Series B Preferred Stock permit Warren to pay a dividend or otherwise provide
funds to Holdings to enable Holdings to meet its known cash obligations for
the foreseeable future, provided that Warren meets certain conditions. Among
such conditions are that Warren maintain specified financial ratios and comply
with certain financial tests.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Deloitte & Touche llp were appointed independent auditors to Holdings prior
to the Acquisition. Coopers & Lybrand L.L.P. served as independent accountants
of the Predecessor Corporation prior to the Acquisition and, upon completion
of the Acquisition, Deloitte & Touche llp replaced Coopers & Lybrand L.L.P. as
independent auditors of the Predecessor Corporation. There were no
disagreements between the Predecessor Corporation and Coopers & Lybrand L.L.P.
on matters of accounting and financial disclosure in the two years and
subsequent interim period preceding their replacement by Deloitte & Touche
llp.
During 1995, Coopers & Lybrand L.L.P. informed the Company that they would
not consent to the use of their report on the Predecessor Corporation's
financial statements in certain anticipated registration statements to be
filed with the Commission. As a result, the Company engaged Deloitte & Touche
llp to reaudit the Predecessor Corporation's financial statements included in
this Prospectus.
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<PAGE>
BUSINESS
GENERAL
Business
Holdings is a holding company that was organized and incorporated in
Delaware on October 5, 1994, and owns all of the outstanding common stock of
S.D. Warren. Holdings has no material assets other than its investment in
Warren. All of the operations of Holdings (other than the management of its
investment in Warren and the provision of certain corporate services to
Warren) are currently conducted through Warren.
The Company manufactures printing, publishing and specialty papers and has
pulp and timberland operations vertically integrated with some of its
manufacturing facilities. The Company is the largest producer of coated free
paper (free of groundwood pulp) in the United States. The Company currently
operates four paper mills with total annual production capacity of
approximately 1.5 million tons of paper. The Company also owns a sheeting and
distribution facility in Allentown, Pennsylvania, with annual sheeting
capacity of approximately 90,000 tons, and owns approximately 911,000 acres of
timberlands in the State of Maine.
Formation and Acquisition
Warren was founded in 1854 and grew through internal growth and acquisitions
until it was acquired by Scott in 1967. Scott invested significant resources
in S.D. Warren, including approximately $1.0 billion from 1988 through 1994,
to upgrade, expand and rebuild many of the Warren facilities. As of October 8,
1994, SDW Acquisition entered into the Stock Purchase Agreement pursuant to
which, on December 20, 1994, SDW Acquisition acquired from Scott all of the
outstanding capital stock of Warren, then a wholly owned subsidiary of Scott,
and certain related affiliates of Scott. Immediately following the
Acquisition, SDW Acquisition merged with and into Warren, with Warren
surviving. Prior to the date of the Acquisition, there was no significant
activity, revenues received or expenditures incurred by either Holdings or SDW
Acquisition.
The largest investor in Holdings is Sappi. Sappi, a South African company,
is the largest forest products company in Africa, the third largest producer
of coated free paper in Europe and one of the world's leading pulp, paper and
timber exporters. Sappi owns and operates a number of timber processing plants
and eight mills in Southern Africa. Outside Africa, Sappi's operations include
four fine paper mills in the United Kingdom and two mills in Germany which
produce coated and uncoated free paper and specialty paper. Following the
Acquisition, Sappi became the largest coated free paper manufacturer in the
world. The other shareholders of Holdings are DLJMB and UBSC.
PRINCIPAL PRODUCTS
The paper industry is generally divided into the printing and writing market
segment and the packaging market segment. The printing and writing market
segment is divided into newsprint and fine paper, which includes coated and
uncoated paper. The Company's principal products include coated, uncoated,
specialty and technical papers. The following table illustrates the Company's
major markets, expressed as a percentage of sales, for the nine months ended
September 24, 1994, the period September 25, 1994 through December 20 1994
(the "three months ended December 20, 1994"), the nine months ended September
27, 1995 and the twelve months ended October 2, 1996:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Coated paper............ 70.9% 73.9% 70.6% 72.2%
Uncoated paper.......... 17.9 18.5 13.6 12.7
Specialty paper......... 5.0 4.8 10.2 11.5
Technical paper and oth-
er..................... 6.2 2.8 5.6 3.6
----- ----- ----- -----
Total................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
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The coated paper market is divided into two types of products: coated free
paper and coated groundwood paper. Coated papers are primarily differentiated
into five product grades of decreasing quality and brightness, ranging from
#1, which is premium, to #5, the lowest in quality and price. The Company
principally competes in the coated free paper market which is composed of
product grades #1 through #3, and a limited amount of #4 and #5. The coated
groundwood market is composed of the #4 and #5 product grades. Each grade is
manufactured in a range of basis weights, which is the measurement of a
paper's weight for a given sheet size, as well as differentiated by finish
which can be either gloss, dull or matte. The appearance of coated paper can
also be significantly altered by finishing techniques, such as varnishing,
which can impart a dull or shiny property to a sheet. The coated paper market,
in addition to being segmented by product grade, is divided into products
which are coated on one side and products which are coated on both sides.
Paper which is coated on one side is used in special applications such as
consumer product and mailing label applications. The majority of coated paper
production is two-sided which permits quality printing on both sides of the
paper.
Coated paper is used in corporate communications, advertising, brochures,
magazine covers and upscale magazines, catalogues, direct mail promotions and
educational text books. Uncoated paper is used by commercial printers, quick
printers, large in-house copy/printing end-users and small business and home
applications. Specialty and technical papers are used in business form
printing, coated fabric converters, pressure-sensitive laminators, label
printers and other niche market applications.
The market for coated paper has historically experienced price fluctuations
which are driven by production supply, end-user demand and, to a lesser
degree, the availability and relative price of imported products. The growth
in the supply of coated paper is driven by the opening of new coated paper
manufacturing facilities, each of which can take up to three years to
construct. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for information regarding recent market trends.
COMPETITION
The markets for coated free products are highly competitive with a number of
major companies competing in each market. The Company competes mainly with
U.S. and Canadian producers of coated free paper, and, to a lesser degree,
European producers. The Company's principal competitors in the coated free
market are Champion International Corporation, Westvaco Corporation,
Consolidated Papers Inc., The Mead Corporation, Simpson Paper Co., Repap
Wisconsin, Inc. and Potlatch Corporation. Competition is primarily on the
basis of quality, service, price and breadth of product line, as well as
product innovation and sales and distribution support. Certain of the
Company's competitors have greater financial resources than the Company and
certain of the mills operated by its competitors may be lower cost producers
of pulp and coated paper than certain of the mills operated by the Company.
Several factors contribute to the Company's competitive strengths in the
coated free paper market, including high product quality, technological
innovation, high brand recognition and a strong distribution network. The
Company has a leading market share in the #1 and #3 grades of coated free
paper in North America and is among the leaders with respect to the #2 grade
based on sales for the year ended October 2, 1996.
DISTRIBUTION
The Company, unlike most of its competition, has made a strategic decision
to sell all of its coated products through the merchant distribution system.
The Company believes this policy increases the focus of the merchant sales
force on the sale of the Company's products. Warren was the first to develop
merchant distribution for branded coated paper. In 1917, Warren formed an
association of paper merchants that became the Warren Merchant's Association.
Today, the Company's sales force sells coated paper to approximately 288
merchant distributing locations. Merchants are authorized to distribute Warren
products by geographic area and handle competitors' lines to cover all
segments of the market. The Company believes it has created a loyal group of
merchant customers because Warren's sales force focuses on generating end-user
demand, which is then serviced by the merchant distributors, and does not
compete with the merchants to make sales.
32
<PAGE>
Merchants perform numerous functions, including sales, credit, warehousing,
local distribution and promotional activities. They purchase the paper from
the Company and resell it, marking up their purchase price from the Company to
a competitive market price. The product is delivered to the customer either
directly from the mill, a Warren distribution center or from the merchant's
warehouse. The merchant handles credit review and payment collection and pays
the Company's invoice without regard to final collection from the end-user
customer.
The Company sells uncoated paper in North America through the same network
of merchant distributors that it uses for coated paper, with some exceptions
(approximately 225 merchant locations sell uncoated paper, versus the 288
which sell coated paper). The Company also distributes uncoated paper through
original equipment manufacturers, catalogues and merchant stores and is
beginning to develop additional distribution channels, such as warehouse
clubs, office superstores and telemarketing.
The Company sells both specialty and technical paper in North America
directly to the customer base through the relevant sales force and ships
products directly from the mill to the customer.
EXPORT SALES
The Company had sales to customers outside of the United States ("Export
Sales") of $60.0 million, $24.7 million, $90.5 million and $240.9 million for
the nine months ended September 24, 1994, the three months ended December 20,
1994, the nine months ended September 27, 1995, and the twelve months ended
October 2, 1996, respectively. Export Sales are primarily to Canada, Europe
and the Far East. The Company's sales outside North America are handled by
divisions of Sappi (see the Notes to Financial Statements).
CUSTOMERS
For the year ended October 2, 1996, the Company's customers that
individually accounted for greater than 10% of sales were divisions or
subsidiaries of International Paper Company, Central National Gottesman Inc.,
and Alco Standard Corporation. Each of these customers is a merchant that
resells the Company's paper products to a wide range of end users. The loss of
any of these customers could have a material adverse effect on the Company's
business and results of operations. See the Notes to Financial Statements.
BACKLOG AND SEASONALITY
Backlog as of September 27, 1995 and October 2, 1996 was not significant.
The Company had approximately one to four weeks of backlog depending upon the
product and basis weights.
The Company's operations are not significantly affected by seasonality. The
first and third quarters of the calendar year tend to be stronger than the
second and fourth quarters.
PATENTS, TRADEMARKS AND LICENSES
S.D. Warren is widely recognized for its product quality and technological
innovation in the development and manufacture of coated free paper, which has
allowed Warren to sustain the franchise value of its name brand products such
as Somerset(R), Lustro(R), Warrenflo(R) and Patina(R).
Although the Company owns or licenses a number of patents and patent
applications that are important to its business, they are not material to the
conduct of the Company's business as a whole. The Company believes that its
position in each of its markets depends primarily on such factors as customer
service, prompt and accurate delivery and diversity of products rather than on
patent protection.
The Company has a long history of product innovations. It was the first
paper company to develop both one and two-sided coated paper, the first to
develop dull and matte coated paper, the first to develop high bulk-to-weight
coated paper and the first to develop lightweight coated free web. In
addition, the Company has a number
33
<PAGE>
of proprietary technologies, including the on-line finishing technology and
its Ultracast(R) electronbeam technology. The Company's on-line finishing
technology is used in its production of coated paper as well as in its
production of specialty papers. The Company's Ultracast(R) technology is
utilized in specialty papers and the Company plans to extend this technology
into a broader line of unique products and new market segments.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts continue to focus on creating
new and improved products as well as developing more efficient processes for
producing them. The Company's research facility is located in Westbrook,
Maine, and employs approximately 100 people who work closely with marketing,
sales and manufacturing personnel as well as the Company's customers to
respond to needs for technological improvements and to meet market
opportunities.
The Company spent approximately $9.5 million, $3.0 million, $10.7 million
and $15.6 million on research and development activities for the nine months
ended September 24, 1994, the three months ended December 20, 1994, the nine
months ended September 27, 1995, and the twelve months ended October 2, 1996,
respectively.
SUPPLY REQUIREMENTS
The principal supply requirements for the manufacture of the Company's
products are wood, pulp, energy and other supplies. The Company believes that
it has adequate sources of these and other raw materials and supplies
necessary for the manufacture of pulp and coated paper for the foreseeable
future. In the event that any of the Company's suppliers is unable to meet its
demands, the Company believes that adequate alternative suppliers or
substitute materials would be available at comparable prices.
Wood and Pulp
For the year ended October 2, 1996, the Company manufactured approximately
65% of its pulp requirements. This vertical integration reduces the Company's
exposure to (and ability to benefit from) fluctuations in the market price for
pulp. All three of the Company's northern mills are integrated with respect to
hardwood pulp production and Somerset, Maine mill also has softwood pulping
capability. The Mobile, Alabama facility receives most of its pulp
requirements from an adjacent pulp mill owned by Kimberly Clark. In connection
with the Acquisition, the Company entered into a long-term pulp supply
agreement with Scott Paper (which was then transferred to Kimberly Clark) to
supply the Company's Mobile paper mill with its wood pulp requirements
(subject to minimum and maximum amounts) at prices generally based upon market
prices, less a discount to reflect transportation and other cost savings.
Scott had previously announced its intention to sell the Mobile pulp mill, but
any sale is apparently on hold due to the recent merger between Scott and
Kimberly Clark Corporation. If sold, the buyer of this facility will be bound
by the terms of the above-mentioned agreement. Additional pulp requirements
for the remaining mills are purchased in the open market. In the event that
any of the Company's pulp suppliers are unable to meet its demands, the
Company believes it could obtain adequate supplies to meet its future pulp
requirements.
The Company owns approximately 911,000 gross acres of timberlands in Maine,
789,400 of which are net forested acres. Approximately 433,700 of these acres
produce softwood timber, such as spruce, fir, hemlock and white pine and
355,700 acres produce hardwood timber, such as beech, birch and maple. The
Company believes it can harvest approximately 13,100 acres per year on a
sustainable basis.
The Company currently offers recycled products in all coated and some
uncoated grade lines. The Company uses reprocessed fibers produced from its
existing operations and purchases post consumer waste from several different
suppliers to meet market requirements for recycled products.
34
<PAGE>
Energy Requirements
The Company's energy requirements are satisfied through wood and by-products
derived from the Company's pulping process (approximately 54% of the total
units of energy), coal (approximately 16%), oil (approximately 16%), purchased
steam from the Mobile utility complex (approximately 7%) and natural gas,
electricity and other (approximately 7%).
A substantial portion of the Company's electricity requirements is satisfied
through cogeneration agreements (the "Power Purchase Agreements" or
"Agreements") whereby the Somerset and Westbrook mills each cogenerate
electricity and sell the output to Central Maine Power Company ("CMP"). The
Westbrook and Somerset Agreements require CMP to purchase such energy produced
by these cogeneration facilities at above market rates which has reduced the
Company's historical cost of electrical energy. The Westbrook Agreement
expires October 31, 1997 and the Somerset Agreement expires in the year 2012.
The favorable pricing element of the Westbrook and Somerset Agreements will
end on October 30, 1997 and November 30, 1997, respectively. The agreements
also require the mills to purchase electricity from CMP at the standard
industrial tariff rate.
Muskegon cogenerates electricity and uses the total output in its
operations. The electric utility that supplies the Muskegon mill with standby
power has filed a request with the state to raise its rates for standby power.
The Company has in the past successfully challenged such proposed rate
increases and intends to challenge this increase.
In the past, Scott operated the Mobile facility (including the Warren paper
mill, a pulp mill, a tissue mill and an energy facility) on an integrated
basis. Prior to the Acquisition, Scott sold its energy facility at Mobile and
the buyer entered into a long-term agreement with Warren to provide electric
power and steam to the paper mill.
Other Supplies
The Company also requires substantial quantities of other supplies such as
coating clay, latex, starch and TiO/2/. All of these materials are supplied by
various suppliers.
EMPLOYEES AND LABOR RELATIONS
As of October 2, 1996, the Company had 4,190 employees. Approximately 69% of
employees are represented by six international unions under ten different
contracts. Prior to the Acquisition, employees at the Company's Mobile
facility were employed under contracts with Scott. The Company negotiated new
collective bargaining agreements with the Mobile employees which were executed
upon the consummation of the Acquisition. In addition, during 1995, the
Company negotiated an initial labor agreement with employees at its Allentown,
Pennsylvania facility. The Company's contract, covering approximately 750
employees, at the Somerset facility was terminated by the Company on December
13, 1996, when it implemented the terms of its last offer, including a 3%
general wage increase and industry standard work rules. The Company
anticipates reaching agreement on a new contract and does not expect a work
stoppage to occur. The Company has experienced normal production levels at the
Somerset facility since December. However, in the event an agreement cannot be
reached and a prolonged work stoppage that results in a curtailment of output
ensues, the Company's financial position, results of operations and cash flows
could be adversely affected. Other than the Somerset contract, there are no
labor agreements subject to renegotiation until June 1997. The Company has
experienced no work stoppage in the U.S. in the past eight years and believes
that its relationship with its employees is satisfactory.
ENVIRONMENTAL AND SAFETY MATTERS
The Company is subject to a wide variety of increasingly stringent
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.
35
<PAGE>
In addition to conventional pollutants, minute quantities of dioxins and
other chlorinated organic compounds may be contained in the wastewater
effluent of the Company's bleached kraft pulp mills in Somerset and Westbrook,
Maine and Muskegon, Michigan. The most recent National Pollutant Discharge
Elimination System ("NPDES") wastewater permit limits proposed by the EPA
would limit dioxin discharges from the Company's Somerset and Westbrook mills
to less than the level of detectability. The Company is presently meeting the
EPA's proposed dioxin limits but it is not meeting the proposed limits for
other parameters (e.g., temperature and color) and is attempting to revise
these other wastewater permit limits for its facilities. While the permit
limitations at these two facilities are being challenged, the Company
continues to operate under existing EPA permits, which have technically
expired, in accordance with accepted administrative practice. In addition, the
Muskegon mill is involved, as one of various industrial plaintiffs, in
litigation with the County of Muskegon regarding a 1994 ordinance governing
the Company's industrial wastewater pretreatment program. The lawsuit
challenges, among other things, the treatment capacity availability and local
effluent limit provisions of the ordinance. In July 1996, the Court rendered a
decision substantially in favor of the Company and the other plaintiffs, but
the County has appealed the Court's decision. If the Company and the other
plaintiffs do not prevail in that appeal or are not successful in ongoing
negotiation with the County, the Company may not be able to obtain additional
treatment capacity for future expansions and the County could impose stricter
permit limits. The imposition of currently proposed permit limits or the
failure of the Muskegon lawsuit could require substantial additional
expenditures, including short-term expenditures, and may lead to substantial
fines for any noncompliance.
In November 1993, the EPA announced proposed regulations that would impose
new air and water quality standards aimed at further reductions of pollutants
from pulp and paper mills, particularly those conducting bleaching operations
(generally referred to as the "cluster rules"). Although the EPA has not made
any commitments, final promulgation of the cluster rules may occur by early
1997 and compliance with the rules may be required beginning in 1998. The
Company believes that compliance with the cluster rules, if adopted as
currently proposed, may require aggregate capital expenditures of
approximately $76.0 million through 1999. The ultimate financial impact to the
Company of compliance with the cluster rules will depend upon the nature of
the final regulations, the timing of required implementation and the cost and
availability of new technology. The Company also anticipates that it will
incur an estimated $10.0 million to $20.0 million of capital expenditures
through 1999 related to environmental compliance other than as a result of the
cluster rules.
The Company's mills generate substantial quantities of solid wastes and by-
products that are disposed of at permitted landfills and solid waste
management units at the mills. The Company is currently planning to expand the
landfill at the Somerset mill at a projected total cost of approximately $12.0
million, of which approximately $5.0 million will be spent between 1996 and
1997.
The Muskegon mill has had discussions with the Michigan Department of
Natural Resources ("DNR") regarding a wastewater surge pond adjacent to the
Muskegon Lake. The DNR presently is considering whether the surge pond is in
compliance with Michigan Act 245 (Water Resources Commission Act) regarding
potential discharges from that pond. The matter is now subject to the results
of a pending engineering investigation. There is a possibility that, as a
result of DNR requirements, the surge pond may be closed in the future. The
Company estimates the cost of closure will be approximately $2.0 million. In
addition, if it is necessary to replace the functional capacity of the surge
pond with above-grade structures, the Company preliminarily estimates that up
to an additional $8.0 million may be required for such construction costs.
Warren has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for
cleanup of contamination at seven sites. Based upon the Company's
understanding of the total amount of liability at each site, its calculation
of its percentage share in each proceeding, and the number of potentially
responsible parties at each site, the Company presently believes that its
aggregate exposure for these matters will not be material. Moreover, as a
result of the Acquisition Warren's former parent, Scott, agreed to indemnify
and defend the Company for and against, among other things, the full amount of
any damages or
36
<PAGE>
costs resulting from the off-site disposal of hazardous substances occurring
prior to the date of closing, including all damages and costs related to these
seven sites. Since the date of closing of the acquisition agreement, Scott has
been performing under the terms of this environmental indemnity and defense
provision and, therefore, the Company has not expended any funds with respect
to these seven sites.
The Company currently has a five year demolition project in progress at its
Westbrook facility for health and safety reasons. Total costs of the project
are estimated to be approximately $9.0 million, of which approximately $5.7
million has been spent as of October 2, 1996. The Company recognizes these
costs as they are incurred.
The Company does not believe that it will have any liability under recent
emergency legislation enacted by the State of Maine to cover a significant
shortfall in the Maine workers' compensation system through assessments of
employers and insurers; however, there can be no assurance that the existing
legislation will fully address the shortfall.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position,
results of operations or cash flows.
PROPERTIES
Holdings' principal executive offices are located in Purchase, New York. The
Company believes that its property and equipment are generally well
maintained, in good operating condition and adequate for its present needs.
The inability to renew any short-term leases would not have a material adverse
effect on the Company's financial position or results of operations.
The following table sets forth the location and use of the Company principal
facilities, which are owned in fee unless otherwise indicated. All of the
Company's properties are pledged as collateral for Warren's outstanding
indebtedness (see the Notes to Financial Statements).
<TABLE>
<CAPTION>
LOCATION USE
-------- ----------------------------------------------------
<C> <S>
Skowhegan, Maine Manufacturing facility for the manufacture of coated
(Somerset Mill) paper and softwood and hardwood pulp.
Muskegon, Michigan Manufacturing facility for the manufacture of coated
paper and hardwood pulp and a warehouse (a).
Mobile, Alabama Manufacturing facility for the manufacture of
uncoated paper and specialty paper, a warehouse, a
warehouse/distribution center (b) and offices (c).
Westbrook, Maine Manufacturing facility for the manufacture of
specialty paper, high bulk coated paper and hardwood
pulp. A research and development facility is also
located at this site.
Allentown, Pennsylvania Coated paper sheeting facility and distribution
center.
Atlanta, Georgia Distribution center (d).
Schaumburg, Illinois Distribution center (e).
Grand Prairie, Texas Distribution center.
</TABLE>
- --------
(a) Subject to a lease expired in September 1996 but which has been extended
through April 1997.
(b) Subject to a lease expiring in December 2014.
(c) Subject to a lease expiring in December 2019.
(d) Subject to a lease expiring in May 2001.
(e) Subject to a lease expiring in May 2001.
37
<PAGE>
TIMBERLANDS
The Company owns approximately 911,000 gross acres of timberlands in Maine,
789,400 of which are net forested acres. Approximately 433,700 of these acres
produce softwood timber, such as spruce, fir, hemlock and white pine and
355,700 acres produce hardwood timber such as beech, birch and maple. The
Company believes that it can harvest approximately 13,100 acres per year on a
sustainable basis.
On November 5, 1996, a proposed binding referendum measure to eliminate
clearcutting in unincorporated areas in the state of Maine was defeated. A
competing measure, which establishes new forestry standards stricter than
current law, but which does not completely ban clearcutting, received a
plurality vote. This competing measure was supported by the Company, other
major timber interests in Maine, several environmental groups as well as the
Governor of Maine. Under Maine law, this competing measure will not
automatically become law unless it receives a simple majority in a special
election to be held in 1997. If the competing measure does become law, as the
Company expects it will, the consequence to the Company will not be material
because such measure generally reflects sustainable forestry initiatives
already voluntarily adopted by the Company.
CAPACITY
The Company currently operates four mills and a sheeting facility with total
annual production capacity of approximately 1.5 million tons of paper. The
Company's manufacturing facilities were fully utilized during the nine months
ended September 27, 1995. However, as a result of weaker market conditions,
the Company temporarily reduced production levels at certain of its
manufacturing facilities during the first quarter of the fiscal year ended
October 2, 1996. See "Risk Factors--Cyclical Industry Conditions; Strong
Competition."
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company
Set forth below are the names, ages (at October 2, 1996) and positions of
the directors and executive officers of Holdings.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Eugene van As................. 57 Director, Chairman of the Board of Directors
and President
William E. Hewitt............. 61 Director, Vice President, Treasurer
and Assistant Secretary
Andries G.J. Vlok............. 61 Director, Vice President and Secretary
Peter T. Grauer............... 51 Director and Assistant Secretary
John S. Chalsty............... 62 Director
Charles J. Delaney............ 37 Director
Monte R. Haymon............... 59 Director
Neil S. Thomas................ 48 Director
J. Richard Leaman, Jr. ....... 62 Director
</TABLE>
Set forth below is a brief account of the business experience of each of the
directors and executives of the Company as of the date hereof.
Eugene van As became President of Holdings on October 7, 1994 and has been a
director of Holdings since October 5, 1994. Mr. van As was appointed Chairman
of the Board of Directors on January 25, 1995. Mr. van As has been Executive
Chairman of Sappi since 1991 and served as President and Chief Executive
Officer of S.D. Warren from April 30, 1995 through September 30, 1995. He
joined Sappi in 1977 as the Managing Director of Sappi. He is also a director
of Malbak Limited, Olivetti Africa Limited, the Council for Scientific and
Industrial Research and the South African Foreign Trade Organization.
William E. Hewitt became Vice President, Treasurer and Assistant Secretary
of Holdings on October 7, 1994 and has been a Director of Holdings since
October 5, 1994. He has been the Executive Director-Finance of Sappi since
1987 and was appointed a non-executive director of Warren at the time of the
Acquisition. He qualified as a chartered accountant in 1957. He has held
executive financial positions in the motor, steel, transportation and
retailing sectors and was Group Financial Director, Toyota (South Africa)
until 1987. Mr. Hewitt is a director of Sappi.
Andries G.J. Vlok became Vice President and Secretary of Holdings on October
7, 1994 and has been a Director of Holdings since October 5, 1994. He has been
Technical Director of Sappi since 1988. He joined Sappi as a Technical
Assistant in 1962 and progressed through various positions within the Sappi
group of companies including Mill Manager and Managing Director of subsidiary
companies. Mr. Vlok has been a director of Sappi since 1983.
Peter T. Grauer became an Assistant Secretary of Holdings as of March 10,
1995, and has been a Director of Holdings since January 25, 1995. Mr. Grauer
has been a Managing Director of DLJ Merchant Banking, Inc. since September
1992. From April 1989 to September 1992, he was a Co-Chairman of Grauer &
Wheat, Inc., an investment firm specializing in leveraged buyouts. Prior
thereto, Mr. Grauer was a Senor Vice President of Donaldson, Lufkin & Jenrette
Securities Corporation. Mr. Grauer is a director of EZ Buy and EZ Sell
Recycler Corporation, Total Renal Care, Inc., OSF Holdings Inc., Doane
Production Company and Nabco Evans Holding Company.
John S. Chalsty has been a Director of Holdings since January 25, 1995. Mr.
Chalsty has been President and Chief Executive Officer of Donaldson, Lufkin &
Jenrette, Inc. since 1986, after having served as Chairman
39
<PAGE>
of DLJ's Capital Markets Group for more than two years. Mr. Chalsty joined DLJ
in 1969, became a director in 1971 and was appointed head of the Investment
Banking Division in 1979. Prior to joining DLJ, Mr. Chalsty worked for 12
years for Standard Oil of New Jersey (Exxon) in the United States and Europe.
Mr. Chalsty is a director of IBP, Inc., Anchor Glass Container Corporation and
Trident NGL, Inc. From 1988 to 1994, he was a director of the New York Stock
Exchange, serving as Vice Chairman from 1990 to 1994.
Charles J. Delaney has been a Director of Holdings since January 25, 1995.
Mr. Delaney has been President of UBSC, a wholly-owned merchant banking
subsidiary of Union Bank of Switzerland, since January 1993 and Managing
Director in charge of the Leveraged Finance Group of Union Bank of Switzerland
since May 1989. Mr. Delaney is also a director of Specialty Foods Corporation,
RU Corporation, Peoples Telephone Company, Inc., Van de Kamp's, Inc. and CBP
Resources, Inc.
Monte R. Haymon has been a Director of Holdings since October 1, 1995. He
was appointed President and Chief Executive Officer of Warren as of October 1,
1995. Previously he had been President and Chief Operating Officer of Ply-Gem
Industries, and for thirteen years, President and Chief Executive Officer of
Packaging Corporation of America, a division of Tenneco. In addition to his
business experience, Mr. Haymon is a member of the Board of Directors of
Evanston Hospital, a member of the Board of Trustees of Tufts University as
well as Chairman of the Board of Overseers of the Engineering School. Mr.
Haymon is a former member of the Board of Directors of the National
Association of Manufacturers. He is also a former Trustee of both the
Institute of Paper & Science and American Forest Products Association.
Neil S. Thomas has been a Director of Holdings since January 25, 1995. Mr.
Thomas joined Arthur Andersen & Co. in 1970, worked in their Johannesburg,
London and Houston offices and was made an international partner in 1980. In
1983 he was appointed executive director of Finansbank, a South African
merchant bank. In 1986 he formed Neil Thomas & Associates, which acts as
financial advisors to various leading companies. He has advised Sappi on all
their major plant expansions and corporate acquisitions since 1979.
J. Richard Leaman, Jr. became a Director of Holdings on January 25, 1995 and
was re-appointed to that position on October 1, 1995. Mr. Leaman joined Scott
in 1960. In 1978, he was named Senior Vice President and given the
responsibility for the consumer and commercial division's sales and marketing
functions. In October 1986, he was elected to the board of directors and in
November 1986 was named President of Scott Worldwide. He is also on the board
of directors of The Pep Boys, Manny, Mo & Jack and Church & Dwight Co., Inc.
Mr. Leaman resigned from the board of directors of Scott in October 1994 and
from his executive positions with Scott as of December 20, 1994. Mr. Leaman
served as President and Chief Executive Officer of Warren from April of 1991
until April 30, 1995.
40
<PAGE>
EXECUTIVE COMPENSATION
As the officers of Holdings do not receive any significant compensation,
other than, in some cases, fees as directors of Holdings, the following tables
set forth information with respect to the compensation of the Chief Executive
Officer and the four other most highly compensated individuals who served as
officers of S.D. Warren during fiscal year 1996. All references to shares,
options and stock appreciation rights ("SARs") therein refer to shares of
Scott Paper Company, S.D. Warren's former parent. S.D. Warren has not granted
shares, options or SARs to its employees prior to or during the fiscal year
ended October 2, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ --------------------- -------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS/ PAYOUTS COMPENSATION
(1)(2) ($) ($) ($) ($) SARS(#)(4) ($) ($)(3)
------ -------- -------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monte R. Haymon......... 1996 $600,565 $ -- $ -- $-- $ -- $-- $ --
Chief Executive Officer
and
President (5)
James H. Frick, Jr...... 1996 187,514 125,000 17,195 -- -- -- 20,644
Vice President--Coated 1995 152,744 -- -- -- -- -- 37,017
Printing and Publishing
(6)
1994 183,967
Trevor L. Larkan........ 1996 169,801 90,000 54,361(7) -- -- -- --
Chief Financial Offi- 1995 116,607 -- 67,076(7) -- -- -- --
cer,
Vice President and
Treasurer
O. Harley Wood.......... 1996 189,843 85,000 -- -- -- -- --
Vice President--Manu- 1995 134,601 -- -- -- -- -- 157,803
facturing
1994 173,025 -- -- -- 6,000 -- 54,493
E. Dannis Herring....... 1996 172,808 85,000 -- -- -- -- --
Vice President-- Pro- 1995 121,745 -- -- -- -- -- --
curement
and Distribution 1994 150,222 -- -- -- 4,500 -- --
</TABLE>
- --------
(1) Information with respect to years prior to 1995 is being provided only for
Messrs. Frick, Wood and Herring to the extent that information with
respect to their compensation has previously been required to be filed
with the Securities and Exchange Commission.
(2) Compensation for 1996, 1995 and 1994 is for the fiscal year ended October
2, 1996, the fiscal period December 21, 1994 through September 27, 1995
and the nine months ended September 24, 1994 combined with the period
September 25, 1994 through December 20, 1994, respectively.
(3) The amounts shown under "All Other Compensation" consist of matching
contributions under the Salaried Investment Plan, imputed income for life
insurance premiums for each year shown and educational assistance payouts
plus payments made upon withdrawals of vacation accrued consisting of
$18,219 in 1996 and $7,460 both in 1995 and 1994 for Mr. Frick, and
$13,310 in 1995 for Mr. Wood. In addition, the amounts shown under "All
Other Compensation" consist of bonuses associated with the sale of S.D.
Warren by Scott in the amount of $150,000 for Mr. Frick and $50,000 for
Mr. Wood paid in 1994 and $140,000 paid by Scott to Mr. Wood in 1995 under
a supplemental retirement plan.
(4) All options granted by Scott in 1994 were forfeited prior to the end of
1994 in connection with the sale of S.D. Warren by Scott.
(5) Mr. Haymon was appointed President and Chief Executive Officer of Warren
as of October 1, 1995.
(6) Mr. Frick retired as Vice President--Sales and Marketing effective August
1, 1996. Mr. Frick continues to serve as a Director of the Company and has
entered into a consulting agreement with the Company for the period August
1, 1996 through July 31, 1999. The fee for such consulting services to be
paid to Mr. Frick under such agreement is not considered significant.
(7) The amounts shown include $42,000 and $31,500 of housing allowance
payments in 1996 and 1995, respectively, and $27,577 of relocation
payments in 1995 for Mr. Larkan.
41
<PAGE>
PENSION BENEFITS
As of October 31, 1994, the Company assumed sponsorship of the portion of
the Scott qualified plans which covered employees who would continue to be
employed by the Company after the closing of the Acquisition (the "Closing
Date"). The defined benefit plan which covers the executive officers (the
"Salaried Plan") provides benefits based on a participant's years of service
and highest compensation during the final years of employment. Generally, the
hourly defined benefit plan provides covered employees with a stated amount of
retirement benefit for each year of service. The Company maintains a
Supplemental Executive Retirement Program for certain key executives. This
plan is a non-qualified deferred compensation plan.
The following table shows the estimated annual retirement benefits payable
to participants with specified amounts of compensation and years of credited
service at normal retirement age under the Salaried Plan. The estimated
retirement benefits are the amounts payable in the form of a single life
annuity and do not take into account the reduction with respect to years of
credited service after 1978 equal to a percentage (up to a maximum of 50%) of
the participant's Social Security benefit.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE(2)
AVERAGE FINAL -----------------------------------------------
COMPENSATION(1) 15 20 25 30 35 40
--------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$100,000................ $22,500 $30,000 $37,500 $45,000 $52,500 $60,000
$125,000................ 28,125 37,500 46,875 56,250 65,625 75,000
$150,000................ 33,750 45,000 56,250 67,500 78,750 90,000
$200,000................ 45,000 60,000 75,000 90,000 105,000 120,000
</TABLE>
- --------
(1) A participant's "Average Final Compensation" is the average of the
participant's annual compensation in the four calendar years (whether or
not consecutive), out of the last ten years of the participant's
employment, in which the participant's annual compensation was highest.
"Annual compensation" includes salary and bonuses paid in such year. For
this purpose, years of employment with, and compensation paid by, Scott
prior to the Acquisition are taken into account. To comply with tax
qualification requirements under the Internal Revenue Code, annual
compensation taken into account for any participant under the Salaried
Plan may not exceed $150,000. However, effective January 1, 1995, the
Company adopted a plan (the "SERP") to provide supplementary retirement
benefits where benefits are lost under the qualified plans as a result of
the statutory limitations and the benefits are reflected in the table.
Accordingly, the covered compensation of each executive officer for 1996
was equal to the amounts of salary and bonus shown on the Summary
Compensation Table above. There also is a statutory limitation on the
amount of annual benefit which may be paid under the Salaried Plan.
Benefits which accrued under the Plan in excess of the statutory
limitations are also protected under the SERP.
(2) The named executive officers had the following full years of credited
service under the Salaried Plan as of October 2, 1996: Messrs. Frick, 35;
Wood, 7; and Herring, 22. Mr. van As does not participate in the salaried
plan. The Company also adopted, effective January 1, 1995, the Plan for
Individual Deferred Compensation Arrangements in which Mr. Wood
participated. Mr. Wood will receive a benefit under this Plan based upon
an additional 10 years of credited service if he is employed by the
Company for five years from February 1, 1994.
In addition to the foregoing plans, the Company sponsors two collectively
bargained pension plans in the U.S. and one salaried plan in Belgium. The
collectively bargained plans provide benefits of stated amounts for each year
of credited service and the international plan provides benefits based on
years of service and compensation. No executive officer is covered by any of
these other plans.
42
<PAGE>
THE ACQUISITION
Holdings was organized and incorporated in Delaware on October 5, 1994, for
the purpose of acquiring, through its direct, wholly owned subsidiary SDW
Acquisition, the business, properties and assets of S.D. Warren from Scott. As
of October 8, 1994, SDW Acquisition entered into the Stock Purchase Agreement
pursuant to which, on December 20, 1994, (the "Closing Date") SDW Acquisition
acquired from Scott all of the outstanding capital stock of S.D. Warren for a
net cash purchase price of approximately $1.5 billion, plus the assumption of
various liabilities including approximately $121.9 million of outstanding
indebtedness (including capital leases) of S.D. Warren, subject to there being
a Net Assets (as defined therein) value of approximately $1.6 billion at
closing. Pursuant to the provisions of the Stock Purchase Agreement, $75.0
million of cash was required to be on S.D. Warren's balance sheet on the
Closing Date, effectively reducing the cash purchase price by such amount.
Sappi is the largest forest products company in Africa, the third largest
producer of coated free paper in Europe and one of the world's leading pulp,
paper and timber exporters. Sappi owns and operates a number of timber
processing plants and eight mills in Southern Africa. Outside Africa, Sappi's
operations include four fine paper mills in the United Kingdom and two mills
in Germany which produce coated and uncoated free paper and specialty paper.
With the Acquisition, Sappi became the largest coated free paper manufacturer
in the world. Sappi is based in Johannesburg, South Africa and employs
approximately 23,000 people worldwide.
SDW Acquisition financed the Acquisition (including approximately $87.7
million of transaction expenses) with the following sources of funds: (i)
borrowings of $630.0 million under the Term Loan Facilities and initial
borrowings of $160.2 million under the $250.0 million Revolving Credit
Facility, of which $75.0 million was available for repayment following the
Acquisition with cash required to be on Warren's balance sheet at closing,
(ii) the issuance of $375.0 million of SDW Acquisition 12% Senior Subordinated
Notes due 2004 (the "SDW Acquisition Notes" and the offering thereof the "Note
Offering"), (iii) the issuance of $75.0 million in liquidation preference of
SDW Acquisition 14% Senior Exchangeable Preferred Stock due 2006 (the "SDW
Acquisition Senior Preferred Stock") as part of Units (the "Units" and the
offering thereof, the "Unit Offering" and, together with the Note Offering,
the "Offerings") consisting of SDW Acquisition Senior Preferred Stock and
Class A Warrants and (iv) a net common equity contribution of $331.8 million
from Holdings. Holdings' common equity contribution was financed through the
purchase of common equity and Class B Warrants by the Investor Group, the
purchase of $37.5 million in liquidation preference of Senior Preferred Stock
by DLJMB and UBSC and the issuance of Class A Warrants as part of the Unit
Offering. The Bank Financing also included a $220.0 million Letter of Credit
Facility, pursuant to which letters of credit were issued to support an
existing letter of credit arranged by Scott and to support S.D. Warren's
obligations with respect to certain indebtedness and capital and operating
leases.
Immediately following the Acquisition, SDW Acquisition merged with and into
S.D. Warren and (i) the indebtedness outstanding under the Bank Financing and
the SDW Acquisition Notes was assumed by S.D. Warren (the assumed notes
hereinafter referred to as the "Series A Notes") and (ii) the SDW Acquisition
Senior Preferred Stock was converted into an equivalent amount of S.D.
Warren's 14% Series A Senior Exchangeable Preferred Stock due 2006 (the "Old
Warren Senior Preferred Stock").
Pursuant to an exchange offer consummated on May 31, 1995 (the "Exchange
Offer"), S.D. Warren issued its 12% Series B Senior Subordinated Notes due
2004 (the "Notes") in exchange for the Series A Notes and its 14% Series B
Senior Exchangeable Preferred Stock due 2006 (the "Warren Senior Preferred
Stock") in exchange for the Old Warren Senior Preferred Stock.
43
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of the date of this Prospectus. See
"Risk Factors--Significant Influence by Majority Stockholder".
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
------------------------------
NAME AND ADDRESS OF NUMBER OF PERCENT OF CLASS
BENEFICIAL OWNER SHARES OUTSTANDING(1)
------------------- ---------- ----------------
<S> <C> <C>
Sappi Limited(2)................................. 26,976,561 87.80
48 Ameshoff Street
Braamfontein 2001
Republic of South Africa
DLJ Merchant Banking............................. 6,593,749(3) 19.28
Partners, L.P. and certain
of its affiliates
140 Broadway
New York, NY 10005
UBS Capital LLC.................................. 1,408,594(3) 4.47
299 Park Avenue
New York, NY 10171
</TABLE>
- --------
(1) Percentages have been calculated assuming, in the case of each person or
group listed, the exercise of all warrants and options owned (which are
exercisable within 60 days following September 27, 1995) by each such
person or group, respectively, but not the exercise of any warrants or
options owned by any other person or group.
(2) Sappi's shares are held through one of its subsidiaries.
(3) Includes the following shares of Common Stock subject to Class B Warrants:
DLJMB, 3,468,749 shares and UBSC, 693,750 shares. In addition, UBSC's
ownership includes 89,844 shares of Common Stock issuable upon exercise of
Class A Warrants that UBSC purchased in connection with its purchase of
the Units.
(4) On November 27, 1996, Sappi agreed to acquire, subject to certain
customary conditions, the minority common equity interests in Holdings
held by DLJ Merchant Banking Partners, L.P.; DLJ International Partners,
C.V.; DLJ Offshore Partners, C.V.; DLJ Merchant Banking Funding, Inc.; DLJ
First ESC L.L.C.; and UBS Capital L.L.C. Jointly, the Sellers own
approximately 22% of the common equity of Holdings on a fully-diluted
basis.
Under the terms of the agreement, Sappi has agreed to purchase the Sellers'
interests at a price of $138.0 million, or $17.25 per share of common stock
within 180 days of the date of execution of the agreement.
Following the Minority Acquisition, Sappi will own over 97% of the common
equity of Holdings on a fully diluted basis. Sappi has agreed to use
reasonable efforts to acquire the remaining common equity interests in
Holdings within 120 days of the closing of the Minority Acquisition.
SHAREHOLDERS AGREEMENT
The following summary containing all material provisions of the Shareholders
Agreement (as defined) is qualified in its entirety by reference to the
complete text of the Shareholders Agreement, a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a
part. On the closing date of the Minority Acquisition, the Shareholders
Agreement will be terminated; provided that Sappi may designate provisions of
the Shareholders Agreement that will survive with respect to parties other
than the sellers.
In connection with the Acquisition, Sappi, an affiliate of Sappi, DLJMB,
UBSC, Holdings and S.D. Warren (as successor by merger to SDW Acquisition)
entered into a shareholders agreement, as amended (the "Shareholders
Agreement"), which contains certain agreements with respect to the capital
stock and corporate governance of Holdings and S.D. Warren following the
Acquisition. See "Risk Factors--Restrictions on
44
<PAGE>
Corporate Actions of Holdings and S.D. Warren". The following is a summary of
the material terms of the Shareholders Agreement. Capitalized terms used below
and not otherwise defined have the meanings assigned thereto in the
Shareholders Agreement.
Corporate Governance
The Board of Directors of Holdings (the "Holdings Board") will initially
consist of nine members. Sappi and its permitted transferees (the "Sappi
Group") have the right to designate a majority of the Holdings Board
(initially five directors) subject to the conditions that (a) if the Sappi
Group owns less than 50% of its original holdings of Common Stock, the Sappi
Group will lose such right and will be allowed to designate two directors of
the Holdings Board and (b) if the value of the Sappi Group's original holdings
of Common Stock is below a specified threshold, the Sappi Group will lose its
right to designate a second director. DLJMB and certain of its affiliates and
their permitted transferees (the "DLJ Group") originally had the right to
designate two directors; however, the value of the DLJ Group's original
investment fell below a specified threshold, and, as a result, the DLJ Group
lost its rights to designate a second director. UBSC and its permitted
transferees (the "UBS Group") have the right to designate one director. The
chief executive officer of S.D. Warren is also a director and does not count
as a designee for any member of the Investor Group. If any of the Sappi Group,
the DLJ Group or the UBS Group should own less than a specific percentage of
the Common Stock, such group will, subject to certain exceptions, lose all
rights to designate a director, which rights would not be regained through the
subsequent acquisition of additional shares of Common Stock other than shares
acquired upon the exercise of certain warrants acquired by such Group.
"Board Approval" generally requires the affirmative vote of at least a
majority of the directors at a duly convened meeting of the Holdings Board at
which a Quorum (as defined below) is present. "Special Board Approval"
generally requires (a) Board Approval, (b) approval by at least one DLJ Group
director (if any) and (c) approval by at least one Sappi Group director (if
any). "Extraordinary Board Approval" generally requires (a) Board Approval,
(b) approval by at least one DLJ Group director (if any), (c) approval by at
least one Sappi Group director (if any) and (d) approval by a UBS Group
director (if any). A "Quorum" of the Holdings Board (or any committee thereof)
generally requires (a) a majority of directors present to be Sappi Group
directors (so long as the Sappi Group is entitled to designate a majority of
Directors to the Holdings Board); (b) a DLJ Group director (so long as the DLJ
Group is entitled to one director); and (c) after the Sappi Group loses its
right to have a majority of its directors on the Holdings Board, a Sappi Group
director (so long as the Sappi Group is entitled to one director). There is no
requirement to have a majority of Sappi Group directors present after the
Sappi Group loses its right to have a majority of its directors on the
Holdings Board.
Each of the following actions requires Extraordinary Board Approval:
(a) prior to an Initial Public Offering (as defined), any amendment of
the Certificate or Articles of Incorporation or By-laws of Holdings or S.D.
Warren; (b) approval of any annual business plan or budget of Holdings or
S.D. Warren; (c) hiring or dismissal of the chief executive officer or
chief financial officer of Holdings or S.D. Warren; (d) certain issuances
of capital stock of Holdings or S.D. Warren (or issuances of securities
exchangeable, convertible or exercisable for such capital stock); (e) any
merger or similar transaction involving (i) Holdings or (ii) S.D. Warren
(but only if S.D. Warren is not the surviving corporation); (f) any sale of
Holdings or S.D. Warren; (g) any sale of all or substantially all the
assets of Holdings or S.D. Warren; (h) any transaction, contract or
arrangement with an affiliate of Holdings or with a Shareholder (as
defined) (or an affiliate thereof) if such transaction is not in the
business plan or budget (and identified therein as an affiliate
transaction) and involves an amount in excess of $1 million (Board Approval
is required for certain transactions that involve $1 million or less); (i)
entering into the marketing agreements referred to below under "--
Miscellaneous Provisions"; (j) the grant of any registration or similar
rights to any person other than various rights granted in connection with
the Acquisition and (k) the selection of the managing underwriters in
connection with any Underwritten Public Offering.
45
<PAGE>
Each of the following transactions requires the approval specified below:
(a) any merger involving (i) S.D. Warren where it is the surviving entity
or (ii) any subsidiary of S.D. Warren; (b) any sale of a subsidiary of S.D.
Warren or any division of S.D. Warren; (c) any sale of substantially all
the assets of any subsidiary or division of S.D. Warren; (d) any change in
the capital structure (including the incurrence of indebtedness) of
Holdings or S.D. Warren or any subsidiary thereof; (e) any appointment or
dismissal of auditors and principal legal counsel of Holdings or S.D.
Warren; (f) any voluntary filing of or failure to oppose a bankruptcy
petition; (g) compensation of the chief executive officer of Holdings or
S.D. Warren and (h) any declaration or payment of any dividend by Holdings
or Warren if not paid out of earnings (other than dividends on common stock
of S.D. Warren so long as Holdings owns 100% of such common stock,
dividends on Senior Preferred Stock or Warren Senior Preferred Stock). Any
transaction described in (e) through (h) above requires Special Board
Approval. Any transaction described in clauses (a) through (d) above
requires Special Board Approval if it involves more than $50 million or if
it involves more than $25 million and is not specifically set forth in an
approved budget or business plan. Any such transaction requires Board
Approval if it involves more than $20 million or if it involves more than
$10 million and is not specifically set forth in an approved budget or
business plan. In addition, Special Board Approval is required for any
contract involving the receipt or expenditure of more than $20 million in
any one year or more than $50 million over the term of the contract.
In addition to the transactions that are described in the preceding
paragraph as requiring Board Approval, the following transactions require
Board Approval: (a) any declaration or payment of any dividend or distribution
by Holdings or S.D. Warren if paid out of earnings (other than dividends on
S.D. Warren common stock so long as Holdings owns 100% of such common stock);
(b) compensation of the chief financial officer of Holdings or S.D. Warren;
and (c) election or appointment of the members of S.D. Warren's Board of
Directors. Board Approval is also required for any other contract involving
the receipt or expenditure of more than $10 million in any one year or more
than $25 million over the term of the contract and for certain transactions,
contracts or arrangements with an affiliate of Holdings or with any
Shareholder (or any affiliate thereof).
Preemptive Rights
Except in certain circumstances, upon any issuance of Common Stock
Equivalents (as defined) of Holdings, the Sappi Group, the DLJ Group and the
UBS Group have preemptive rights with respect to such Common Stock
Equivalents.
Transfer Restrictions
Except for certain permitted dispositions, members of the Sappi Group may
not transfer any Shares (as defined) until the earlier of an Initial Public
Offering by Holdings or December 20, 1997 (the earlier of such dates, the
"Restriction Termination Date"). After the Restriction Termination Date,
members of the Sappi Group may transfer Shares as follows: transfers in a
public offering upon exercise of registration rights; transfers pursuant to
Rule 144 of the Securities Act (subject, in certain circumstances, to certain
"first offer" and "tag along" rights); transfers (subject to certain "first
offer" and "tag along" rights) to a person who becomes a party to the
Shareholders Agreement and who is not an Adverse Person (as defined); and
transfers pursuant to certain specified pledge arrangements. Shareholders who
are not members of the Sappi Group (collectively, the "Minority Shareholders")
may transfer Shares as follows: subject to certain restrictions, transfers in
a public offering upon exercise of registration rights; transfers pursuant to
Rule 144 (subject, in certain circumstances, to certain "first offer" and "tag
along" rights); transfers pursuant to "tag along" rights; and transfers
(subject to certain "first offer" and "tag along" rights) to a person who
becomes a party to the Shareholders Agreement and who is not an Adverse
Person. Members of the Sappi Group may participate in such Initial Public
Offering only after the Minority Shareholders have participated to the fullest
extent requested by such Minority Shareholders. After June 18, 1998, the DLJ
Group or the UBS Group may, under certain circumstances, transfer the right to
designate a director of Holdings (but not any Special Approval or
Extraordinary Approval rights). Any Shareholder may transfer Shares to a
Permitted Transferee (as defined) who is not an Adverse Person and who becomes
a party to the Shareholders Agreement or to Sappi (subject to certain "tag
along" rights) or any of its Permitted Transferees.
46
<PAGE>
Right of First Offer
If either (i) any Minority Shareholder proposes to transfer any Shares to
any Person other than to one of its Permitted Transferees or to Sappi or any
of its Permitted Transferees or (ii) any member of the Sappi Group proposes to
transfer any Shares other than to one of its Permitted Transferees, such
Shareholder (the "Selling Shareholder") is required to offer to sell such
securities to certain other Shareholders party to the Shareholders Agreement
and Holdings. Sales of Shares to a Permitted Transferee of the seller or to
Sappi or any of its Permitted Transferees are not subject to these first offer
provisions.
Participation Rights
Under certain circumstances, if a member of the Sappi Group proposes to
transfer any Shares, it must offer the Minority Shareholders the right to
participate in such transfer. In addition, under certain circumstances, if any
member of the DLJ Group or the UBS Group is selling equity securities of the
Holdings or S.D. Warren it must offer members of the group whose member is not
the selling Shareholder a right to participate in such sale.
Registration Rights
Members of the Sappi Group, the DLJ Group and the UBS Group have the right,
subject to certain limitations, to require Holdings to register all or a
portion of their Registrable Stock (as defined) under the Act by giving
written notice to Holdings of such demand (a "Demand Registration"). Subject
to certain limitations, the Sappi Group and the DLJ Group each have the right
to make up to three Demand Registrations and the UBS Group has the right to
make one Demand Registration. The Shareholders Agreement also grants members
of the DLJ Group the right, under certain circumstances, to transfer one
demand right to a transferee of shares of Common Stock, subject to certain
limitations. Holdings has agreed to pay all reasonable expenses incurred in
connection with the first two Demand Registrations effected pursuant to the
Shareholders Agreement. If a Demand Registration involves an underwritten
public offering, any underwriters involved in such offering have the right,
subject to certain limitations, to limit the Registrable Stock included in
such registration, in which case Shareholders requesting the Demand
Registration shall, subject to certain exceptions, have priority over
Shareholders exercising piggyback rights (described below).
In addition, under certain circumstances, Shareholders holding certain Class
B Warrants can require registration by Holdings to permit the exercise of such
Class B Warrants.
Piggyback Rights
Under certain circumstances, if Holdings registers Common Stock under the
Act, each Shareholder (and certain transferees of members of the DLJ Group and
UBS Group) will have the right, subject to certain limitations, to require
Holdings to include such Shareholder's (or transferee's) Registrable Stock in
such registration.
Miscellaneous Provisions
If certain of Sappi's foreign operations intend to sell products into the
United States that are the same as or substantially similar to, or compete
with, S.D. Warren's products, they will, subject to certain exceptions, be
required to enter into an arms' length marketing agreement with S.D. Warren,
and if S.D. Warren intends to sell products outside of the United States and
Canada, it will, subject to certain exceptions, be required to enter into
arms' length marketing agreements with affiliates of Sappi. Each Shareholder
has agreed not to use Confidential Information (as defined) in any way that is
reasonably likely to result in a material detriment to the business of the
Company in the United States or to the business of Sappi and its affiliates
outside the United States. Moreover, each Shareholder has agreed not to
disclose Confidential Information, subject to certain limitations (including
that members of the Sappi Group may disclose Confidential Information to Sappi
and its affiliates in the ordinary course of business).
Any amendment to the Shareholders Agreement requires the approval of
Holdings (with Board Approval) and representatives of the Sappi Group, the DLJ
Group and the UBS Group (but only so long as a Group is entitled to designate
one director, subject to certain exceptions) but not the approval of S.D.
Warren.
47
<PAGE>
Termination
The Shareholders Agreement terminates on the earliest of (a) the tenth
anniversary of such Agreement unless earlier terminated, (b) subject to
certain exceptions, the merger, consolidation or sale of substantially all of
the assets of Holdings, (c) on the date on which none of the Sappi Group, the
DLJ Group or the UBS Group is entitled to designate a member of the Board or
(d) upon written agreement among Holdings, the Sappi Group (if it is entitled
to designate a member of the Board), the DLJ Group (if it is entitled to
designate a member of the Board) and the UBS Group (if it is entitled to
designate a member of the Board). The Sellers and Sappi have agreed to
terminate the Shareholders Agreement on the closing date of the Minority
Acquisition, provided that Sappi may designate provisions of the Shareholders
Agreement that will survive with respect to parties other than the Sellers.
48
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
S.D. WARREN'S MOBILE FACILITY: ARRANGEMENTS WITH SCOTT
S.D. Warren's Mobile, Alabama paper mill was historically operated by Scott
as part of an integrated facility (including a tissue mill, a pulp mill and
energy facility). In connection with the Acquisition, S.D. Warren entered into
long-term (25 years initially, subject to mill closures and certain force
majeure events) supply agreements with Scott for the supply of pulp and water
and the treatment of effluent at the Mobile facility. Wood pulp will be
supplied generally at market prices. Pulp prices will be discounted, primarily
because of the lower delivery costs due to the elimination of freight costs
associated with delivering pulp to Warren's Mobile paper mill and pulp
qualities will be subject to minimum (170,000 to 182,400 tons per year) and
maximum (220,000 to 233,400 tons per year) limits. Prices for other services
to be provided by Scott will generally be based upon cost. Prior to the
Acquisition, Scott sold its energy facility at Mobile to Mobile Energy
Services Corporation ("MESC"). In connection with the sale of the energy
facility, MESC entered into a long-term agreement with Warren to provide
electric power and steam to the paper mill at rates generally comparable to
market tariffs, including fuel cost and capital recovery components. Scott,
MESC and Warren have also entered into a long-term shared facilities and
services agreement (the "Shared Facilities Agreement") with respect to medical
and security services, common roads and parking areas, office space and
similar items and a comprehensive master operating agreement providing for the
coordination of services and integration of operations among the energy
facility, the paper mill, the pulp mill and the tissue mill. Annual fees under
the Shared Facilities Agreement are expected to be approximately $1.5 million
per year through the 25 year term of the agreement. Warren has the option to
cancel certain non-essential services covered by the Shared Services Agreement
at any time prior to the end of the 25 year term. Scott had previously
announced its intention to sell the Mobile pulp mill, but any sale is
apparently on hold due to the recent merger between Scott and Kimberly-Clark
Corporation. The buyer of the mill will be bound by the terms of the above-
mentioned agreements.
SHAREHOLDERS AGREEMENT
In connection with the Acquisition, Sappi, one of Sappi's affiliates, DLJMB
(an affiliate of DLJSC), UBSC, the Company and S.D. Warren (as successor by
merger to SDW Acquisition) entered into a Shareholders Agreement. See
"Security Ownership of Certain Beneficial Owners and Management--Shareholders
Agreement".
INVESTOR GROUP AGREEMENTS
Warren paid certain sponsor fees, reimbursed expenses for and provided
indemnification to, members of the Investor Group in connection with the
Acquisition and the financing thereof. Sappi received a sponsor fee in the
amount of $3,752,543 and UBSC received a sponsor fee in the amount of
$533,753. In addition, DLJSC, an affiliate of DLJMB, received a sponsors fee
in the amount of $2,768,766. Warren pays a yearly advisory fee to Sappi and/or
its Affiliates of up to $1.0 million. As a result of this fee, Sappi and its
Affiliates generally will not charge Warren for time spent on Warren matters
by the senior executive officers of Sappi and its Affiliates or for related
travel and out-of-pocket expenses.
TRANSACTIONS INVOLVING DLJMB AND UBSC
In connection with the Acquisition (i) DLJMB purchased for an aggregate
consideration of $65.0 million, $31.25 million in liquidation preference of
the Senior Preferred Stock, Class B Warrants to acquire 3,593,749 shares of
Common Stock, and 3,125,000 shares of Common Stock; (ii) UBSC, purchased for
an aggregate consideration of $20.2 million, $6.25 million in liquidation
preference of the Senior Preferred Stock, Class B Warrants to acquire 718,750
shares of Common Stock, 625,000 shares of Common Stock and 300,000 Units;
(iii) DLJSC provided investment banking services to Holdings and Warren in
connection with the offering of 2,700,000 Units, for which it received a
customary underwriting discount; and (iv) an affiliate of DLJMB provided a
standby bridge loan commitment for which it received approximately $5.6
million and was reimbursed for expenses.
49
<PAGE>
Following the Acquisition, the Units became separately transferable. On July
6, 1995, DLJMB sold all its Senior Preferred Stock and 125,000 Class B
Warrants and UBSC sold all its Senior Preferred Stock and 25,000 Class B
Warrants.
TRANSACTIONS WITH RELATED PARTIES
Pursuant to the limitations on restricted payments outlined in the Credit
Agreement, the Indenture and the Warren Senior Preferred Stock, Warren may
make cash payments to Holdings, including, among other things, (i) amounts
under a tax sharing agreement to be entered into between Warren and Holdings
necessary to enable Holdings to pay Warren's taxes and (ii) administrative
fees to Holdings and amounts to cover various specified costs and expenses of
Holdings. The associated administrative fee charged by Holdings to Warren for
the year ended October 2, 1996, was approximately $0.8 million.
The Company, through Warren, has contracted through a management services
agreement (the "Management Services Agreement") and central cost allocation
agreement (the "Central Cost Allocation Agreement") with two subsidiaries of
Sappi, Sappi International Management AG ("SIM") and Sappi Management Services
Limited ("SMS") to provide management advisory services. The aggregate fee to
be charged to Warren by SIM and SMS is limited to an annual amount of $1.0
million. For the year ended October 2, 1996, the Company incurred such a
management fee of approximately $0.8 million.
The Management Services Agreement with SIM establishes an agreement whereby
SIM provides strategic and corporate planning advice, financial and legal
services and services relating to public affairs and human resources. Warren
agrees to pay a service fee to SIM which is determined based upon Warren's
proportionate share in the aggregate amount of cost which SIM incurs in
providing services to the entire number of group companies which have entered
into agreements of this nature with SIM, plus a profit mark-up of 10%.
Warren's proportionate share is based upon the time spent on Warren services
divided by total time spent by SIM on total group company services. This
agreement commenced on January 1, 1995 and is effective until terminated by
either party with six months written notice.
The Central Cost Allocation Agreement with SMS provides for general
technical and administrative support services to supplement the services
provided by SIM. Warren has agreed to pay a service fee to SMS which is
determined based upon Warren's proportionate share in the aggregate amount of
costs which SMS incurs in providing services to the entire number of group
companies which have entered into agreements of this nature with SMS, plus a
profit mark-up of 10%. Warren's proportionate share is based upon Warren's
inventory turnover divided by total inventory turnover of SMS group companies.
This agreement commenced on January 1, 1995 and is effective until terminated
by either party with six months written notice.
Warren has also entered into a cross licensing agreement with Sappi
Deutschland, the worldwide holding company for all European and U.S. business
operations of the Sappi group, and Hannover Papier AG ("Hannover"), a
subsidiary of Sappi. Pursuant to this agreement, Warren and Hannover have
agreed to enter into specific written agreements to share paper processing
techniques and have also agreed to enter into specific distribution agreements
whereby Warren has agreed to use its distribution network in the United States
to facilitate and increase Hannover's exports. Sappi Deutschland will
facilitate the licensing process. No specific agreements have been entered
into in connection with this cross-licensing agreement as of October 2, 1996.
Warren sells products to certain Sappi subsidiaries (primarily Sappi Europe,
SA, Specialty Pulp Services and U.S. Paper Corporation) at market rates. These
subsidiaries then sell Warren's product to external customers and remitted the
proceeds from such sales to Warren, net of a sales commission. For the year
ended October 2, 1996, Warren sold $151.4 million of products to Sappi
subsidiaries and expensed fees of approximately $7.2 million relating to such
sales. Trade accounts receivable at October 2, 1996 includes approximately
$37.1 million due from subsidiaries of Sappi. Warren has formalized certain of
these agreements and is in the process of formalizing the remainder.
50
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth, as of the date of this Prospectus, certain
information with respect to the Securities owned by the Selling Security
Holders that are being offered pursuant to this Prospectus.
CLASS A WARRANTS
<TABLE>
<CAPTION>
CLASS A WARRANTS
OWNED PRIOR TO
NAME THE OFFERING
- ---- ----------------
<S> <C>
Ameritech Corporation Pension Trust.......................... 20,000
BEA Strategic Income Fund, Inc. ............................. 8,000
BEA Income Fund.............................................. 12,000
Bear Stearns & Co. .......................................... 225,000
Brinson Global Security Fund................................. 60,000
Fidelity Advisor Annuity Fund:
Fidelity Advisor Annuity High Yield Fund.................... 3,889
Fidelity Advisor Series II:
Fidelity Advisor High Yield Fund............................ 190,970
Fidelity Advisor Series VIII:
Fidelity Advisor Strategic Income Fund...................... 16,500
Fidelity Management Trust Company on behalf of accounts man-
aged by it.................................................. 278,735
Fidelity Puritan Trust: Fidelity Puritan Fund................ 1,970
Full & Co. .................................................. 225,000
Merrill Lynch Corporate Bond Fund, Inc. High Income Portfo-
lio......................................................... 60,000
Metropolitan Life Insurance Company Separate Account 184..... 27,000
New York City Employees' Retirement System................... 22,000
New York City Police Department Pension Fund................. 18,000
Northstar High Total Return Fund............................. 80,000
Northstar High Yield Bond Fund............................... 6,400
Northwestern Mutual Life Insurance Company................... 160,000
Northwestern Mutual Series Fund--High Yield Bond Portfolio... 20,000
Oppenheimer Multi-Sector Income Trust........................ 20,000
President and Fellows of Harvard College..................... 150,000
SIB Nominees Ltd. ........................................... 40,000
State Street Research Equity Income Fund..................... 27,000
State Street Research Managed Assets......................... 18,000
State Street Research High Income Fund....................... 108,000
Summit High Yield Fund....................................... 1,000
Variable Insurance Products Fund: High Income Portfolio...... 3,720
---------
Total...................................................... 1,803,184
=========
</TABLE>
51
<PAGE>
CLASS B WARRANTS
<TABLE>
<CAPTION>
CLASS B WARRANTS
OWNED PRIOR TO
NAME THE OFFERING
- ---- ----------------
<S> <C>
Fidelity Advisor Series II: Fidelity Advisor High Yield
Fund........................................................ 18,280
Fidelity Advisor Series VIII: Fidelity Advisor Strategic In-
come Fund................................................... 1,300
Fidelity Fixed-Income Trust: Spartan High Income Fund........ 15,189
Fidelity Management Trust Company on behalf of accounts man-
aged by it.................................................. 5,626
Fidelity Summer Street Trust: Fidelity Capital & Income
Fund........................................................ 12,555
Forehooks & Co. ............................................. 3,700
Landing & Co. ............................................... 3,700
Oppenheimer High-Yield Fund.................................. 6,188
Oppenheimer Variable Account Funds for the Account of Oppen-
heimer High Income Fund..................................... 3,750
Oppenheimer Variable Account Funds for the Account of Oppen-
heimer Strategic Bond Fund.................................. 3,750
Oppenheimer Multi-Sector Income Trust........................ 1,875
Putnam Capital Manager Trust--PCM Diversified Income Fund.... 3,700
Putnam Diversified Income Portfolio/Smith Barney/ Travelers
Series Fund................................................. 85
Putnam Convertible Opportunities and Income Trust............ 2,200
Putnam Master Income Trust................................... 2,940
Putnam Capital Manager Trust--PCM High Yield Fund............ 7,150
Putnam Equity Income Fund.................................... 40
Putnam High Income Convertible and Bond Fund................. 1,490
Putnam Managed High Yield Trust.............................. 3,710
Putnam Premier Income Trust.................................. 7,445
Putnam Fiduciary Trust Company on behalf of Putnam High Yield
Managed Trust............................................... 1,765
Putnam Master Intermediate Income Trust...................... 3,700
The Putnam Advisory Company, Inc. on behalf of Ameritech Cor-
poration Pension Trust...................................... 2,775
Variable Insurance Products Fund: High Income Portfolio...... 4,450
Whetstone & Co. ............................................. 3,700
-------
Total...................................................... 121,063
=======
</TABLE>
52
<PAGE>
SENIOR PREFERRED STOCK
<TABLE>
<CAPTION>
SHARES OF SENIOR
PREFERRED STOCK
OWNED PRIOR
NAME TO THE OFFERING
- ---- ----------------
<S> <C>
Fidelity Advisor Series II: Fidelity Advisor High Yield
Fund........................................................ 182,800
Fidelity Advisor Series VII: Fidelity Advisor Strategic In-
come Fund................................................... 13,000
Fidelity Fixed-Income Trust: Spartan High Income Fund........ 151,890
Fidelity Management Trust Company on behalf of accounts
managed by it............................................... 56,260
Fidelity Summer Street Trust: Fidelity Capital & Income
Fund........................................................ 125,550
Forehooks & Co............................................... 37,000
Landing & Co................................................. 37,000
Merrill Lynch Corporate Bond Fund, Inc. High Income
Portfolio................................................... 295,000
Oppenheimer Champion Income Fund............................. 28,120
Oppenheimer High Yield Fund.................................. 61,880
Oppenheimer Multi-Sector Income Trust........................ 18,750
Oppenheimer Variable Account Funds for the Account of
Oppenheimer High Income Fund................................ 37,500
Oppenheimer Variable Account Funds for the Account of
Oppenheimer Strategic Bond Fund............................. 3,750
Putnam Capital Manager Trust--PCM Diversified Income Fund.... 37,000
Putnam Capital Manager Trust--PCM High Yield Fund............ 71,500
Putnam Convertible Opportunities and Income Trust............ 22,000
Putnam Diversified Income Portfolio/Smith Barney/Travelers
Series Fund................................................. 850
Putnam Equity Income Fund.................................... 400
Putnam Fiduciary Trust Company on behalf of Putnam High Yield
Managed Trust............................................... 17,650
Putnam High Income Convertible Bond Fund..................... 14,900
Putnam Managed High Yield Trust.............................. 37,100
Putnam Master Income Trust................................... 29,400
Putnam Master Intermediate Income Trust...................... 37,000
Putnam Premier Income Trust.................................. 74,450
The Putnam Advisory Company, Inc., on behalf of Ameritech
Corporation Pension Trust................................... 27,750
Variable Insurance Products Fund: High Income Portfolio...... 44,500
Whetstone & Co............................................... 37,000
---------
Total...................................................... 1,500,000
=========
</TABLE>
53
<PAGE>
DESCRIPTION OF THE SENIOR PREFERRED STOCK
The Senior Preferred Stock was issued pursuant to a Certificate of
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (the "Certificate of Designations"), a copy of which is
filed as an exhibit to the Registration Statement of which this Prospectus
constitutes a part. The following summary containing all material provisions
of the Senior Preferred Stock is qualified in its entirety by reference to the
provisions of the Certificate of Designations relating thereto. All
capitalized terms not defined herein have the meaning assigned to them in the
Certificate of Designations.
GENERAL
Pursuant to the Certificate of Designations, 1,500,000 shares of the Senior
Preferred Stock with a liquidation preference of $25.00 per share were
authorized for issuance. The Senior Preferred Stock is fully paid and
nonassessable and holders thereof will have no preemptive rights in connection
therewith.
The liquidation preference or Specified Amount of the Senior Preferred Stock
is not necessarily indicative of the price at which shares of the Senior
Preferred Stock will actually trade and the Senior Preferred Stock may trade
at prices below its liquidation preference or Specified Amount. The market
price of the Senior Preferred Stock can be expected to fluctuate with changes
in the financial markets and economic conditions, the financial condition and
prospects of Holdings and other factors that generally influence the market
prices of securities.
All "distributions" with respect to the Senior Preferred Stock, including
the payment of dividends, the accrual of Accumulated Dividends, the exchange
of the Senior Preferred Stock for Exchange Debentures, redemptions,
repurchases and distributions upon a liquidation, dissolution or winding up of
Holdings, are subject to the provisions of the Delaware General Corporation
Law, including provisions which prohibit any "distributions" if, after giving
effect thereto, Holdings would be unable to pay its debts as they become due
in the usual course of its business or the total assets of Holdings would be
less than its total liabilities.
RANK
The Senior Preferred Stock, with respect to dividend rights and rights on
liquidation, winding up and dissolution, ranks: (i) senior to all classes of
common stock of Holdings and each other class of capital stock or series of
preferred stock issued by Holdings the terms of which provide that such series
will rank junior to the Senior Preferred Stock or which do not specify their
rank (collectively referred to with the common stock of Holdings as "Junior
Securities"); (ii) on a parity with each other class of capital stock or
series of preferred stock issued by Holdings that specifically provides that
such series will rank on a parity with the Senior Preferred Stock
(collectively referred to as "Parity Securities"); and (iii) junior to each
other class of capital stock or series of preferred stock issued by Holdings
that specifically provides that such series will rank senior to the Senior
Preferred Stock (collectively referred to as "Senior Securities"). In
addition, creditors and stockholders of S.D. Warren and its subsidiaries will
have priority over the Senior Preferred Stock with respect to claims on the
assets of S.D. Warren and its subsidiaries. Holdings may not issue any Parity
Securities or Senior Securities or any obligation or security convertible into
or evidencing the right to purchase Parity Securities or Senior Securities
without the approval of the holders of a majority of the outstanding shares of
Senior Preferred Stock then outstanding, voting as a separate class, except
that without the approval of the holders of Senior Preferred Stock, Holdings
may issue or have outstanding shares of Parity Securities issued from time to
time in exchange for, or the proceeds of which are used to redeem or
repurchase, any or all of the shares of Senior Preferred Stock or any other
Parity Securities. See "--Voting Rights".
54
<PAGE>
DIVIDENDS
Holders of Senior Preferred Stock will be entitled to receive, when, as and
if declared by the board of directors of Holdings, out of funds legally
available therefor, dividends on the Senior Preferred Stock, at the rate of
15% per annum of the Specified Amount, except that if any shares of Senior
Preferred Stock are outstanding on and after December 15, 2006, such rate will
increase by 0.25% per annum for each Dividend Period commencing on or after
December 15, 2006, up to a maximum rate of 20.0% per annum. Dividend Periods
will end on March 15, June 15, September 15 and December 15 of each year.
Holdings is not required to pay cash dividends on the Senior Preferred Stock
until March 15, 2000. It is not expected that Holdings will pay any dividends
in cash for any period ending on or prior to December 15, 1999. See "Risk
Factors--Ranking of the Senior Preferred Stock;--Restrictions Imposed by the
Credit Agreement;--Limitation on Cash Dividends". Cash dividends paid by
Holdings from time to time will be applied to unpaid dividends in the order in
which such dividends accrued; provided, that to the extent cash dividends are
not paid currently on the Senior Preferred Stock for a dividend accrual period
ending on or prior to December 15, 1999, Holdings may pay such dividends
thereafter only insofar as Holdings repurchases or redeems such Senior
Preferred Stock. Dividends payable for any period less than a full dividend
period will be computed on the basis of a 360-day year comprised of twelve 30-
day months. Accrued and unpaid dividends, if any, will not bear interest or,
except with respect to Accumulated Dividends, bear dividends thereon.
Dividends will cease to accrue in respect of shares of the Senior Preferred
Stock on the Exchange Date (as defined below) or on the date of their earlier
redemption or repurchase by Holdings. See "Certain Federal Income Tax
Considerations".
REDEMPTION OF SENIOR PREFERRED STOCK
Optional. The Senior Preferred Stock may be redeemed, in whole at any time
or in part from time to time, at a redemption price equal to 100% of the
Specified Amount of the shares redeemed, plus all accrued and unpaid dividends
(excluding any Accumulated Dividends but including an amount equal to a
prorated dividend from the immediately preceding Dividend Accrual Date to the
redemption date), if any, thereon to the date of redemption. See "Risk of
Early Redemption of Senior Preferred Stock."
Mandatory. Upon the occurrence of (i) an Initial Public Offering of
Holdings' common stock, (ii) a merger, consolidation or other business
combination involving Holdings or Warren (other than any merger (A) of
Holdings with and into Warren, (B) of Warren with and into Holdings, (C) of
Warren with and into any Wholly Owned Subsidiary of Holdings, (D) of any
Subsidiary of Holdings with and into Holdings or Warren, (E) of any other
Person with and into Holdings or any of its Subsidiaries, provided that
Holdings or such Subsidiary shall be the surviving corporation or (F) solely
for the purpose of changing its state of incorporation) or (iii) the sale,
lease, transfer or other disposition (in one transaction or a series of
related transactions) of all or substantially all of the assets of Holdings
and its Subsidiaries taken as a whole, Holdings shall call for redemption
(subject to the terms and conditions of the Credit Agreement and the legal
availability of funds therefor) all outstanding shares of Senior Preferred
Stock at a price equal to 100% of the Specified Amount thereof plus all
accrued and unpaid dividends (excluding any Accumulated Dividends but
including an amount equal to a prorated dividend from the immediately
preceding Dividend Accrual Date to the redemption date), if any, thereon to
the date of redemption. If, and to the extent that, the provisions of this
paragraph shall require Holdings to redeem the Senior Preferred Stock and the
provisions of the "Change of Control" section below shall simultaneously
require Holdings to make a Change of Control Offer for the Senior Preferred
Stock, the provisions of the "Change of Control" section below shall control.
EXCHANGE
On any Dividend Accrual Date, Holdings may, at its option, exchange all or
any portion of the shares of Senior Preferred Stock then outstanding for
Exchange Debentures (the date of such exchange being herein called the
"Exchange Date"). See "Description of the Exchange Debentures" for a summary
of the terms of the Exchange Debentures. Notwithstanding anything to the
contrary in the foregoing, Holdings will not be entitled to make the exchange
if a default under the Exchange Debenture Indenture would result from the
exchange.
55
<PAGE>
Holders of the outstanding shares of the Senior Preferred Stock will be
entitled to receive a principal amount of Exchange Debentures equal to the
Specified Amount of the Senior Preferred Stock held by such holder at the time
of exchange plus cash in an amount equal to all accrued and unpaid dividends
(excluding any Accumulated Dividends), if any, thereon to the Exchange Date.
The Exchange Debentures will be issuable in denominations of $1,000 and
integral multiples thereof. An amount in cash will be paid to holders for any
principal amount of Exchange Debentures otherwise issuable which is less than
$1,000. Notice of the intention to exchange will be sent by or on behalf of
Holdings not more than 60 days nor less than 30 days prior to the Exchange
Date, by first class mail, postage prepaid, to each holder of record of Senior
Preferred Stock at its registered address. In addition to any information
required by law or by the applicable rules of any exchange upon which Senior
Preferred Stock may be listed or admitted to trading, such notice will state:
(i) the Exchange Date; (ii) the aggregate number of such shares to be
exchanged and, if less than all shares held by such holder are to be
exchanged, the number of shares of such holder to be exchanged; (iii) the
place or places where certificates for such shares are to be surrendered for
exchange; and (iv) that dividends on the shares to be exchanged will cease to
accrue on the Exchange Date. If notice of any exchange has been properly
given, and if on or before the Exchange Date the Exchange Debentures will have
been duly executed and authenticated, then on and after the close of business
on the Exchange Date, the shares of Senior Preferred Stock to be exchanged
will no longer be deemed to be outstanding and will not have the status of
shares of Senior Preferred Stock, and all rights of the holders thereof as
shareholders of Holdings will cease, except the right of the holder thereof to
receive upon surrender of their certificates the Exchange Debentures and all
accrued and unpaid dividends (excluding any Accumulated Dividends), if any,
thereon to the Exchange Date.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
Holdings, holders of Senior Preferred Stock will be entitled to payment out of
the assets of Holdings available for distribution the Specified Amount per
share of Senior Preferred Stock held by such holder, plus accrued and unpaid
dividends (excluding Accumulated Dividends), if any, to the date fixed for
liquidation, dissolution or winding up (including an amount equal to a
prorated dividend from the last payment date to the date fixed for
liquidation, dissolution or winding-up), before any distribution is made on
any Junior Securities, including, without limitation, common stock of
Holdings. If upon any voluntary or involuntary liquidation, dissolution or
winding up of Holdings, the application of all amounts available for payments
with respect to the Senior Preferred Stock and all other Parity Securities
would not result in payment in full of the Senior Preferred Stock and such
other Parity Securities, holders of the Senior Preferred Stock and the Parity
Securities will share equally and ratably in any distribution of assets of
Holdings in proportion to the full amount payable upon liquidation to which
each is entitled. After payment in full of all amounts to which holders of
Senior Preferred Stock are entitled, such holders will not be entitled to any
further participation in any distribution of assets of Holdings. However,
neither the voluntary sale, conveyance, exchange or transfer (for cash, shares
of stock, securities or other consideration) of all or substantially all of
the property or assets of Holdings nor the consolidation or merger of Holdings
with one or more corporations will be deemed to be a voluntary or involuntary
liquidation, dissolution or winding up of Holdings, unless such sale,
conveyance, exchange or transfer shall be in connection with a dissolution or
winding up of the business of Holdings.
The Certificate of Designations does not contain any provision requiring
funds to be set aside to protect the liquidation preference or Specified
Amount of the Senior Preferred Stock, although such liquidation preference and
Specified Amount will be substantially in excess of the par value of such
shares of the Senior Preferred Stock.
56
<PAGE>
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of shares of Senior
Preferred Stock will have the right to require Holdings to repurchase all or
any part of such holder's shares of Senior Preferred Stock pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the Specified Amount of the Senior Preferred Stock plus
accrued and unpaid dividends (excluding any Accumulated Dividends but
including an amount equal to a prorated dividend from the immediately
preceding Dividend Accrual Date to the Change of Control Payment Date (as
defined)), if any, thereon to the date of purchase (the "Change of Control
Payment"). Within 30 days following any Change of Control, Holdings will mail
a notice to each holder stating: (1) that the Change of Control Offer is being
made pursuant to the covenant entitled "Change of Control" and that all shares
of Senior Preferred Stock properly tendered will be accepted for payment;
(2) the purchase price and the purchase date, which will be no earlier than 75
days nor later than 105 days from the date such notice is mailed (the "Change
of Control Payment Date"); provided that the Change of Control Payment Date
will not occur until at least 15 days after any Change of Control Payment Date
pursuant to the covenant entitled "Change of Control" in the Indenture
relating to any such Change of Control; (3) that any shares of Senior
Preferred Stock not properly tendered will continue to accrue dividends, if
any; (4) that, unless Holdings defaults in the payment of the Change of
Control Payment, all shares of Senior Preferred Stock accepted for payment
pursuant to the Change of Control Offer will cease to accrue dividends after
the Change of Control Payment Date; (5) that holders electing to have any
shares of Senior Preferred Stock purchased pursuant to a Change of Control
Offer will be required to surrender the shares of Senior Preferred Stock or
transfer the shares of Senior Preferred Stock (i) with respect to Senior
Preferred Stock issued in definitive form, to the Transfer Agent at the
address specified in the notice or (ii) with respect to Senior Preferred Stock
issued in global form, in accordance with the procedures of the depositary,
prior to the close of business on the third Business Day preceding the Change
of Control Payment Date; (6) that holders will be entitled to withdraw their
election if the Transfer Agent receives, not later than the close of business
on the second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the name of
the holder, the amount of Senior Preferred Stock delivered for purchase, and a
statement that such holder is withdrawing its election to have such shares of
Senior Preferred Stock purchased; and (7) that holders whose shares of Senior
Preferred Stock are being purchased only in part will be issued new
certificates of Senior Preferred Stock equal in amount to the unpurchased
portion of the Senior Preferred Stock surrendered (or transferred by book-
entry).
On the Change of Control Payment Date, Holdings will, to the extent lawful:
(1) accept for payment all shares of Senior Preferred Stock or portions
thereof properly tendered pursuant to the Change of Control Offer, (2) deposit
with the Transfer Agent an amount equal to the Change of Control Payment in
respect of all shares of Senior Preferred Stock or portions thereof so
tendered and (3) deliver or cause to be delivered to the holders of Senior
Preferred Stock so accepted an Officers' Certificate stating the aggregate
amount of Senior Preferred Stock or portions thereof being purchased by
Holdings. Holdings will promptly mail to each holder of shares of Senior
Preferred Stock so tendered the Change of Control Payment for such shares of
Senior Preferred Stock and will promptly mail (or cause to be transferred by
book-entry) to each such holder a new share of Senior Preferred Stock equal in
amount to any unpurchased portion of the Senior Preferred Stock surrendered,
if any. The Certificate of Designations provides that, prior to complying with
the provisions of this covenant, but in any event within 90 days following a
Change of Control, Holdings will either repay all of its outstanding
indebtedness or obtain the requisite consents, if any, under all agreements
governing its outstanding indebtedness to permit the repurchase of the shares
of Senior Preferred Stock required by this covenant. Holdings will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
Holdings' indebtedness may prohibit it from purchasing any shares of Senior
Preferred Stock or contain prohibitions of certain events which would
constitute a Change of Control. In the event a Change of Control occurs at a
time when Holdings is prohibited from purchasing the Senior Preferred Stock,
Holdings could seek the consent of its lenders to the purchase of the Senior
Preferred Stock or could attempt to refinance the borrowings that contain such
prohibition. If Holdings does not obtain such a consent or repay such
borrowings,
57
<PAGE>
Holdings will remain prohibited from purchasing the Senior Preferred Stock.
The ability of Holdings to purchase the Senior Preferred Stock upon a Change
of Control may also be limited by Holdings' then existing financial resources.
See "Risk Factors--Restrictions on Making a Change of Control Offer;
Antitakeover Effects of Change of Control Provisions".
Holdings will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rules 13e-4 and 14e-1, in connection
with any offer required to be made by Holdings to repurchase the Senior
Preferred Stock as a result of a Change of Control. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
the Certificate of Designation, Holdings shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the Certificate of Designation by virtue thereof.
The provisions relative to Holdings' obligation to make an offer to
repurchase the Senior Preferred Stock as a result of a Change of Control may
be waived or modified with the written consent of the holders of a majority in
liquidation preference of the Senior Preferred Stock.
VOTING RIGHTS
Holders of the Senior Preferred Stock will have limited voting rights,
including (i) those required by law, (ii) that holders of a majority of the
outstanding shares of Senior Preferred Stock, voting as a separate class, will
(a) upon the failure of Holdings (1) with respect only to Dividend Periods
ending after December 15, 1999, to pay, in whole or in part, for more than six
consecutive Dividend Periods, dividends in cash equal to the dividend that
accrued during each such Dividend Period, (2) to satisfy any mandatory
redemption or repurchase obligation (including, without limitation, pursuant
to any required Change of Control Offer) with respect to the Senior Preferred
Stock, (3) to make a Change of Control Offer within 30 days following any
Change of Control or (4) to comply with the covenants set forth below under
the caption "Certain Covenants", (each of the events described in clauses (1),
(2), (3) and (4) being referred to herein as a "Voting Rights Triggering
Event"), be entitled to elect two members to the Board of Directors of
Holdings and (b) have the right to approve each issuance by Holdings of any
Senior Securities or Parity Securities (other than Senior Preferred Stock),
except that without the approval of the holders of Senior Preferred Stock,
Holdings may issue and have outstanding shares of Parity Securities issued
from time to time in exchange for, or the proceeds of which are used to redeem
or repurchase, any or all of the shares of Senior Preferred Stock or other
Parity Securities and (c) have the right to approve any merger, consolidation
or other business combination involving Holdings (other than solely for the
purpose of changing its state of incorporation) or the sale, lease, transfer
or other disposition (in one transaction or a series of transactions) of all
or substantially all of the assets of Holdings (other than solely for the
purpose of changing its state of incorporation) except as permitted pursuant
to the covenant entitled "Merger, Consolidation and Sale of Assets" as set
forth below and (iii) the affirmative vote or consent of holders of a majority
of the outstanding shares of Senior Preferred Stock, voting as a class, will
be required for modification to the Exchange Debenture Indenture. Voting
rights arising as a result of a Voting Rights Triggering Event will continue
until such time as all dividends in arrears on the Senior Preferred Stock are
paid in full or such other Voting Rights Triggering Event has been cured or
waived.
CERTAIN COVENANTS
Merger, Consolidation and Sale of Assets. Without the consent of holders of
a majority of the outstanding shares of Senior Preferred Stock, voting as a
class, Holdings may not consolidate or merge with or into (whether or not
Holdings is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions, to another Person unless: (i)(a)
the resulting, surviving or transferee person (the "Successor Company") is a
corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia; (b) the Senior Preferred Stock
shall be converted into or exchanged for and shall become shares of the
Successor Company having in respect of the Successor Company substantially the
same powers, preferences and relative participating, optional or other special
rights, and the qualifications, limitations or restrictions thereon, that the
Senior Preferred Stock had immediately
58
<PAGE>
prior to such transaction; (c) the Successor Company will have Consolidated
Net Worth (immediately after the transaction on a pro forma basis but prior to
any purchase accounting adjustments resulting from the transaction) equal to
or greater than the Consolidated Net Worth of Holdings immediately preceding
the transaction; and (d) Holdings shall deliver to the transfer agent prior to
the consummation of the proposed transaction an Officers' Certificate and an
opinion of counsel to the effect that such sale, assignment, transfer, lease,
conveyance or other disposition complies with the terms of the Certificate of
Designations and that all conditions precedent to such sale, assignment,
transfer, lease, conveyance or other disposition have been satisfied or (ii)
the Senior Preferred Stock shall be called for redemption in connection with
such transaction in the manner contemplated in "--Redemption of Senior
Preferred Stock--Mandatory".
Junior Payments. So long as any shares of Senior Preferred Stock are
outstanding, Holdings will not declare, pay or set apart for payment on any
Junior Securities or Parity Securities any dividends whatsoever, whether in
cash, property or otherwise (other than dividends payable in shares of the
class or series upon which such dividends are declared or paid, or payable in
shares of Common Stock with respect to Junior Securities other than Common
Stock, together with cash in lieu of fractional shares), nor will Holdings
make any distribution on any Junior Securities or Parity Securities, nor will
any Junior Security or Parity Security be purchased, redeemed or otherwise
acquired or retired for value by Holdings or any of its Subsidiaries, nor will
any monies be paid or made available for a sinking fund for the purchase or
redemption of any Junior Security or Parity Security (each, a "Junior
Payment"), unless all dividends (other than dividends accruing on or prior to
December 15, 1999), redemption payments, Change of Control Payments or other
payments, if any, to which the holders of Senior Preferred Stock will have
been entitled at the time of such Junior Payment will have been paid or
declared and a sum of money sufficient for the payment thereof has been set
apart. Notwithstanding the foregoing, if Holdings is unable to meet its
payment obligations with respect to dividends, redemption payments, Change of
Control Payments or other payments, if any, with respect to the Senior
Preferred Stock and other Parity Securities as described herein, holders of
Senior Preferred Stock and Parity Securities will share equally and ratably in
any payments by Holdings with respect thereto. The foregoing provisions will
not prohibit: (i) the redemption, repurchase, retirement or other acquisition
of any Junior Securities or Parity Securities of Holdings in exchange for, or
out of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of Holdings) of Junior Securities (or, in the case of Parity
Securities, other Parity Securities) of Holdings (other than any Disqualified
Stock) or out of the proceeds of a substantially concurrent cash capital
contribution received by Holdings; (ii) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of Holdings held
by employees of Holdings or its Subsidiaries pursuant to any employee equity
subscription agreement, stock incentive agreement or stock ownership
arrangement; provided, that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $5.0 million
in any twelve-month period plus the aggregate cash proceeds received by
Holdings during such twelve-month period from any reissuance of Equity
Interests of Holdings to employees of Holdings and its Subsidiaries; (iii)
upon exercise of the Warrants, to any cash payments made in lieu of the
issuance of fractional Warrant Shares; or (iv) the payment of any liquidated
damages pursuant to the Warrant Agreement, dated as of July 6, 1995 between
Holdings and The Bank of New York, as warrant agent, relating to the Class A
Warrants issued by Holdings, as amended from time to time.
Ownership of Warren Common Equity. Holdings shall directly own all of the
outstanding Warren Common Equity and all warrants, options and other rights to
acquire Warren Common Equity.
Issuance of Other Preferred Stock of Warren. Holdings shall not permit
Warren to issue any other shares of Preferred Stock, other than shares of
Warren Senior Preferred Stock.
Incurrence of Indebtedness. Holdings shall not, directly or indirectly,
incur, create, issue, assume, guarantee or otherwise become liable for or with
respect to the payment of, contingently or otherwise, any Indebtedness
(including, without limitation, Acquired Debt), and Holdings shall not issue
any Disqualified Stock, other than (i) in respect of advances received from
Warren, but only to the extent Warren could have paid a cash dividend in lieu
thereof, and (ii) Guarantees by Holdings of (A) the obligations under the S.D.
Credit Agreement and (B) other obligations of Warren or any of its
Subsidiaries.
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Dividend Payments by Subsidiaries. Holdings shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to: (1)(A) pay dividends or make any other
distributions to Holdings or any of its Subsidiaries (i) on its Capital Stock
or (ii) with respect to any other interest or participation in, or measured
by, its profits, or (B) pay any Indebtedness owed to Holdings or any of its
Subsidiaries, (2) make loans or advances to Holdings or any of its
Subsidiaries or (3) transfer any of its properties or assets to Holdings or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness of Warren as in effect on the
Issue Date and any amendments, modifications, restatements or renewals
thereof, provided that such amendments, modifications, restatements or
renewals are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the applicable agreements as in
effect on the Issue Date; (b) the Credit Agreement as in effect on the Issue
Date, and any amendments, modifications, restatements, refundings,
replacements, restructurings or refinancings thereof, provided that such
amendments, modifications, restatements, refundings, replacements,
restructurings or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the Credit
Agreement as in effect on the Issue Date; (c) the Indenture and the Notes and
any amendments, modifications, restatements, refundings, replacements,
restructurings or refinancings thereof, provided that such amendments,
modifications, restatements, refundings, replacements, restructurings or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Indenture and the Notes on
the Issue Date; (d) applicable law; (e) any instrument governing Indebtedness
or Capital Stock of a Person acquired by Holdings or any if its Subsidiaries
as in effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or
the property or assets of the Person, so acquired, and any amendments,
modifications, restatements or renewals thereof, provided that such
amendments, modifications, restatements or renewals are no more restrictive
with respect to such dividend and other payment restrictions than those
contained in the applicable agreements as in effect at the time of such
acquisition; (f) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business; (g) purchase money
obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (3) above on the
property so acquired; (h) Permitted Refinancing Debt, provided that the
restrictions with respect to such dividend and other payment restrictions
contained in the agreements governing such Permitted Refinancing Debt are no
more restrictive than those contained in the agreements governing the
Indebtedness being refinanced; (i) any restriction with respect to a
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the capital stock or assets of such
Subsidiary pending the closing of such sale or disposition; (j) in the case of
clause (3), restrictions contained in the security agreements securing
Indebtedness of a Subsidiary to the extent such restrictions restrict the
transfer of the property subject to such agreements; (k) the Warren
Certificate of Designations as in effect on the Issue Date, and any
amendments, modifications or restatements thereof, provided that such
amendments, modifications or restatements are no more restrictive with respect
to such dividend and other payment restrictions than those contained in the
Warren Certificate of Designations as in effect on the Issue Date; or (l) upon
the issuance of the Warren Debentures in exchange for the Warren Senior
Preferred Stock pursuant to the provisions of the Warren Certificate of
Designations, the Warren Debenture Indenture and the Warren Debentures and any
amendments, modifications, restatements, refundings, replacements,
restructurings or refinancings thereof, provided that such amendments,
modifications, restatements, refundings, replacements, restructurings or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Warren Debenture Indenture
and the Warren Debentures on the date they are originally issued.
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Reports. Whether or nor required by the rules and regulations of the
Commission, so long as any shares of Senior Preferred Stock are outstanding,
Holdings will furnish to the holders thereof (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if Holdings were required to file such
Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and, with respect to the annual
information only, a report thereon by Holdings certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if Holdings were required to file such
reports. In addition, whether or not required by the rules and regulations of
the Commission, Holdings will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, Holdings has
agreed that, for so long as any shares of Senior Preferred Stock that bear or
are required to bear legends describing restrictions on transfer ("Transfer
Restricted Securities") remain outstanding and only during any period in which
Holdings is not subject to Section 13 or 15 (d) of the Exchange Act, it will
furnish to the holders of such Transfer Restricted Securities and to
prospective investors, upon the requests of such holder, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
TRANSFER AGENT AND REGISTRAR
The Bank of New York is the transfer agent and registrar for the Senior
Preferred Stock.
CERTAIN DEFINITIONS
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Attributable Debt" means, with respect to a Sale/Leaseback Transaction, at
the time of determination, the present value (discounted at a rate of interest
implicit in such transaction, determined in accordance with GAAP or, in the
event that such rate of interest is not reasonably determinable, discounted at
a rate of interest borne by the Notes) of the obligation of the lessee for net
rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended or may, at the option of the lessor, be extended).
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any authorized committee of such Board of
Directors.
"Business Day" means a day other than a Saturday or Sunday or any federal or
New York holiday.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" of any person means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any
and all shares, interests, participations, rights or other equivalents
(however designated) of corporate stock, (iii) in the case of a partnership,
partnership interests (whether general or limited) and (iv) in the case of any
Person, any other interest or participation that confers the right to receive
a share of the profits and losses of, or distributions of assets of, such
person.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of Holdings to
any Person or group (as such term is used in Sections 13(d)(3) and 14(d)(2) of
the Exchange Act) other than
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the Principals or their Related Parties, (ii) the adoption of a plan relating
to the liquidation or dissolution of Holdings or Warren, (iii) any Person or
group (as defined above), other than the Principals or their Related Parties,
is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all shares that any such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 40% of the total voting
power of the Voting Stock of Holdings or Warren, including by way of merger,
consolidation or otherwise; provided that the Principals or their Related
Parties "beneficially own" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser percentage of
the total voting power of the Voting Stock of Holdings that such other Person
(for the purposes of this clause (iii), any Person shall be deemed to
beneficially own any Voting Stock of a corporation (the "specified
corporation") held by any other corporation (the "parent corporation") if such
Person "beneficially owns" (with respect to any Person or group other than the
Principals or other Related Parties, as defined in clause (iii) above or, with
respect to the Principals and their Related Parties, as defined in the proviso
to clause (iii) above), directly or indirectly, more than 50% of the voting
power of the Voting Stock of such parent corporation) and (iv) the first day
on which a majority of the members of the Board of Directors of Holdings or
Warren are not Continuing Directors. For purposes of clause (i) of this
definition, references to Holdings shall mean Holdings and its Subsidiaries
taken as a whole.
"Consolidated Net Worth" means with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of Preferred Stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such Preferred Stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within
twelve months after the acquisition of such business) subsequent to the Issue
Date in the book value of any asset owned by such Person or a consolidated
Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries and (z)
all unamortized debt discount and expense and unamortized deferred charges as
of such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of Holdings or Warren who (i) was a member of such
Board of Directors on the Issue Date or (ii) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were member of such Board at the time of such
nomination or election or with the written approval of Sappi Limited.
"Credit Agreement" means the Credit and Guarantee Agreement, dated as of
December 20, 1994, among Holdings, SDW Acquisition Corporation, the several
banks and other financial institutions from time to time parties thereto (the
"Lenders") and Chemical Bank, as agent for the Lenders thereunder, including
any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
extended, modified, renewed, refunded, replaced, restructured or refinanced
from time to time.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part, on or
prior to December 16, 2007; provided that "Disqualified Stock" will not
include (i) the Senior Preferred Stock or (ii) any other Preferred Stock of
Holdings which is issued in exchange for or the proceeds of which are used to
redeem or repurchase the Senior Preferred Stock so long as such other
Preferred Stock does not require Holdings to pay dividends with respect to
such Preferred Stock, to make a redemption payment or to repurchase such
Preferred Stock in any amount in excess of the amounts thereof required herein
with respect to the Senior Preferred Stock or at a time earlier than required
herein with respect to the Senior Preferred Stock.
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"Dividend Period" means the period from, and including, the Issue Date to,
but not including, the first Dividend Accrual Date and thereafter each
quarterly period from, and including, a Dividend Accrual Date to, but not
including, the next Dividend Accrual Date.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means the Indebtedness of Holdings and its
Subsidiaries (other than Indebtedness under the Credit Agreement or the Notes)
in existence on the Issue Date.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including letters of credit and reimbursement
agreements in respect thereof), of all or any part of any Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, (i)
any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property, except any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
indebtedness (other than letters of credit) would appear as a liability upon a
balance sheet of such person prepared in accordance with GAAP, (ii) all
Indebtedness of others secured by a Lien on any asset of such Person whether
or not such Indebtedness is assumed by such Person (the amount of such
Indebtedness with respect to such Person being deemed to be the lesser of the
value of such asset or the amount of the Indebtedness of others so secured),
(iii) the Guarantee by such Person of any Indebtedness of any other Person and
(iv) Attributable Debt associated with Sale/Leaseback Transactions.
"Indenture" means the Indenture, dated as of December 20, 1994, between SDW
Acquisition Corporation and The Bank of New York, as Trustee, relating to the
12% Series A Senior Subordinated Notes due 2004 of Warren and the 12% Series B
Senior Subordinated Notes due 2004 of Warren, as amended from time to time.
"Initial Public Offering" shall mean the initial Public Offering.
"Issue Date" shall mean the date that shares of Senior Preferred Stock were
first issued by Holdings.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement and any lease in the
nature thereof).
"Officers' Certificate" means a certificate of Holdings signed on behalf of
Holdings by the President or any Vice President and a principal financial or
accounting officer.
"Permitted Refinancing Debt" means any Indebtedness of Holdings or any of
its Subsidiaries issued in exchange for, or the net proceeds of which are used
to extend, refinance, restructure, renew, replace, defease or refund other
Indebtedness of Holdings or any of its Subsidiaries; provided that: (i) the
principal amount of such Permitted Refinancing Debt does not exceed the
principal amount of the Indebtedness so extended, refinanced, renewed,
replaced, restructured, defeased or refunded (plus the amount of premiums and
reasonable fees and expenses incurred in connection therewith); (ii) such
Permitted Refinancing Debt has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; provided, that
this clause (ii) will not be applicable to any Permitted Refinancing Debt with
respect to Indebtedness under the Credit Agreement; (iii) if the Indebtedness
is being extended, refinanced, renewed, replaced, defeased, or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
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Debt is subordinated in right of payment to, the Notes on terms at least as
favorable to the holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Corporation or by the Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Principals" means Sappi Limited, DLJ Merchant Banking Partners, L.P., DLJ
Merchant Banking, Inc., DLJ International Partners, C.V., DLJ Offshore
Partners, C.V., DLJ Merchant Banking Funding, Inc. and UBS Capital
Corporation.
"Public Offering" shall mean an underwritten public offering by Holdings
after the Issue Date of Common Equity for its own account pursuant to an
effective registration statement under the Securities Act (other than a
registration (i) on Form S-8 or S-4 or any successor or similar forms, (ii)
relating to the issuance or resale of Common Equity upon exercise of employee
stock options, in connection with any employee benefit or similar plan of
Holdings or upon exercise, conversion or exchange of Equity Interests
(including, without limitation, upon exercise of the Warrants), (iii) relating
to the issuance of Common Equity in connection with a direct or indirect
merger, consolidation, acquisition or other similar transaction or (iv)
pursuant to and in accordance with (a) the Warrant Agreement, dated as of the
Issue Date, between Holdings and The Bank of New York, as warrant agent,
relating to the Class A Warrants issued by Holdings or the Warrant Agreement,
dated as of the Issue Date, between Holdings and The Bank of New York, as
warrant agent, relating to the Class B Warrants issued by Holdings, in each
case as amended from time to time, or (b) the provisions of Section 5.1(g) of
the Shareholders Agreement).
"Related Party" means, with respect to any Principal (i) any controlling
stockholder, majority owned subsidiary, or spouse or immediate family member
(in the case of an individual) of such Principal or (ii) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding a majority interest of which
consist of such Principal and/or such other Persons referred to in the
immediately preceding clause (i).
"Sale/Leaseback Transaction" means an arrangement relating to property owned
on the Issue Date or thereafter acquired whereby Holdings transfers such
property to a Person and leases it back from such Person, other than (i) any
such arrangement (a) the term of which is for not more than one year and (b)
the Attributable Debt associated with which is less than $1.0 million
(aggregating any series of related transactions), and (ii) any such
arrangement between Holdings and a Wholly Owned Subsidiary or between Wholly
Owned Subsidiaries.
"Specified Amount" on any specific date with respect to any share of Senior
Preferred Stock means the sum of (i) the liquidation preference with respect
to such share and (ii) the dividends that accrued in dividend accrual periods
ending on or prior to December 15, 1999 and on or prior to such specific date
that have not previously been paid in cash (the dividends described in this
clause (ii) being herein called "Accumulated Dividends"). As of September 27,
1995, the Specified Amount was $28.07 per share.
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"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof). The term "Subsidiary" will not include any "Unrestricted Subsidiary"
as such term is used in the Note Indenture (but without giving effect to any
amendments thereto after the Issue Date).
"Transfer Agent" means The Bank of New York or any successor thereto
appointed by Holdings as transfer agent with respect to the Senior Preferred
Stock.
"Voting Stock" means all classes of Capital Stock of such corporation then
outstanding and normally entitled to vote in the election of directors.
"Warrant Shares" means the shares of Common Stock issued by Holdings upon
the exercise of Warrants.
"Warrants" means warrants to purchase shares of Common Stock of Holdings.
"Warren Certificate of Designations" means the certificate of designations,
preferences and relative, participating, optional and other special rights of
preferred stock and qualifications, limitations and restrictions thereof
relating to the Warren Senior Preferred Stock, as amended from time to time.
"Warren Common Equity" means all shares now or hereafter authorized of any
class of common stock of Warren, including, without limitation, the common
stock, par value $.01 per share, of Warren, and any other stock of Warren,
howsoever designated, authorized after the Issue Date, which has the right
(subject always to prior rights of any class or series of Preferred Stock) to
participate in the distribution of the assets and earnings of Warren without
limit as to per share amount.
"Warren Debenture Indenture" means the indenture to be entered into between
Warren and the United States Trust Company, as trustee, under which the Warren
Debentures can be issued, which will be substantially in the form from time to
time on file with the Secretary of Warren.
"Warren Debentures" means the 14% Series A Subordinated Exchange Debentures
due 2006 of Warren and the 14% Series B Subordinated Exchange Debentures due
2006 of Warren.
"Warren Senior Preferred Stock" means the 14% Series A Senior Exchangeable
Preferred Stock due 2006 of Warren or the 14% Series B Senior Exchangeable
Preferred Stock due 2006 of Warren or any other preferred stock of Warren
issued in exchange for or the proceeds of which are used to purchase or redeem
any such Senior Exchangeable Preferred Stock due 2006.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the sum of all such
payments.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interest of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF THE EXCHANGE DEBENTURES
GENERAL
The Exchange Debentures will, if and when issued, be issued pursuant to an
Indenture (the "Exchange Debenture Indenture") between Holdings and United
States Trust Company of New York, as trustee (the "Exchange Debenture
Trustee") a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus constitutes a part. The terms of the Exchange
Debentures include those stated in the Exchange Debenture Indenture and those
made part of the Exchange Debenture Indenture by reference to the Trust
Indenture Act). The Exchange Debentures will be subject to all such terms, and
Holders of Exchange Debentures are referred to the Exchange Debenture
Indenture and the Trust Indenture Act for a statement thereof. The following
summary containing all material provisions of the Exchange Debenture Indenture
is qualified in its entirety by reference to the Exchange Debenture Indenture,
including the definitions therein of certain terms used below, and the Trust
Indenture Act. The definitions of certain terms used in the Exchange Debenture
Indenture and in the following summary and not defined under "--Certain
Definitions" are substantially the same as those used in the Certificate of
Designations. For a description thereof, see "Description of the Senior
Preferred Stock--Certain Definitions".
The Exchange Debentures will be general unsecured obligations of Holdings
and will be subordinated to all existing and future Senior Debt of Holdings
(as defined in the Exchange Debenture Indenture). See "--Subordination". In
addition, the Exchange Debentures will be effectively subordinated to all
indebtedness and other liabilities and commitments (including trade payables
and lease obligations) of Subsidiaries. Any right of Holdings to receive
assets of any of its Subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the holders of the Exchange
Debentures to participate in those assets) will be effectively subordinated to
the claims of that Subsidiary's creditors, except to the extent that Holdings
is itself recognized as a creditor of such Subsidiary, in which case the
claims of Holdings would still be subordinate to any security in the assets of
such Subsidiary and any indebtedness of such Subsidiary senior to that held by
Holdings. The principal amount of Senior Debt of Holdings outstanding as of
September 27, 1995, was approximately $630.0 million (which does not include
certain letters of credit of Warren, which, if drawn upon, would be included
therein).
MATURITY AND INTEREST
The Exchange Debentures will be limited in aggregate principal amount to the
Specified Amount of the Senior Preferred Stock exchanged therefor, plus such
principal amount of additional Exchange Debentures as may be issued in lieu of
cash interest, and will mature on December 15, 2011. Interest on the Exchange
Debentures will accrue initially at the rate of 15% per annum, except that if
any Exchange Debentures are outstanding on and after December 15, 2006, such
rate will increase by 0.25% per annum quarter-annually on March 15, June 15,
September 15 and December 15 of each year commencing on December 15, 2006, up
to a maximum rate of 20% per annum. Interest will be payable semi-annually in
arrears on June 15 and December 15, commencing with the first such date to
occur after the date of exchange, to Holders of record on the immediately
preceding June 1 and December 1. Interest on the Exchange Debentures will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Exchange Debentures will be
payable at the office or agency of Holdings maintained for such purpose within
the City and State of New York or, at the option of Holdings, payment of
interest, if any, may be made by check mailed to the Holders of the Exchange
Debentures at their respective addresses set forth in the register of Holders
of Exchange Debentures; provided that all payments with respect to debentures
issued in global form will be required to be made by wire transfer of
immediately available same day funds to the accounts specified by the holders
thereof. Until otherwise designated by Holdings, Holdings' office or agency in
New York will be the office of the Exchange Debenture Trustee maintained for
such purpose. On or prior to December 15, 1999, Holdings may pay all or a
portion of any installment of interest on the Exchange Debentures by issuing
additional Exchange Debentures valued at 100% of their principal amount. See
"Certain Federal
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Income Tax Considerations". After December 15, 1999, interest may only be paid
in cash. Holdings does not expect to pay interest on the Exchange Debentures
in cash prior to June 15, 2000. The Exchange Debentures will be issued in
denominations of $1,000 and integral multiples thereof.
REDEMPTION
Optional. The Debentures shall be redeemable at Holdings' option in whole,
at any time, or in part, from time to time, at a redemption price equal to
100% of the principal amount thereof, plus all accrued and unpaid interest, if
any, thereon to the date of redemption.
Mandatory. Upon the occurrence of (i) an Initial Public Offering of Common
Stock, (ii) a merger, consolidation or other business combination involving
Holdings or Warren (other than any merger (A) of Holdings with and into
Warren, (B) of Warren with and into Holdings, (C) of Warren with and into any
Wholly Owned Subsidiary of Holdings, (D) of any Subsidiary of Holdings with
and into Holdings or Warren, (E) of any other Person with and into Holdings or
any of its Subsidiaries, provided that Holdings or such Subsidiary shall be
the surviving corporation, or (F) solely for the purpose of changing its state
of incorporation) or (iii) the sale, lease, transfer or other disposition (in
one transaction or a series of related transactions) of all or substantially
all of the assets of Holdings and its Subsidiaries taken as a whole, Holdings
will call for redemption (subject to the terms and conditions of the Credit
Agreement) all outstanding Debentures at a redemption price equal to 100% of
the principal amount thereof, plus all accrued and unpaid interest, if any,
thereon to the date of redemption. If, and to the extent that, the provisions
of this paragraph will require Holdings to redeem the Debentures and the
provisions of the covenant "Change of Control" below will simultaneously
require Holdings to make a Change of Control Offer (as defined below) for the
Debentures, the provisions of the covenant "Change of Control" below will
control.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Exchange
Debentures is subordinated in right of payment, as set forth in the Exchange
Debenture Indenture, to the prior payment in full of all Senior Debt.
Upon any distribution to creditors of Holdings in a liquidation or
dissolution of Holdings or in a bankruptcy, reorganization, insolvency,
winding up, receivership or similar proceeding relating to Holdings or its
property, in an assignment for the benefit of creditors or any marshalling of
Holdings' assets and liabilities, in each such case whether voluntary or
involuntary, domestic or foreign (i) the holders of Senior Debt of Holdings
will be entitled to receive payment in full of all Obligations due in respect
of such Senior Debt (including interest after the commencement of any such
proceeding in accordance with the terms of the applicable Senior Debt, whether
or not such interest is an allowed claim enforceable against the debtor in a
bankruptcy case under Title 11 of the United States Code) before the Holders
of Exchange Debentures will be entitled to receive any payment (including any
payment or other distribution that may be payable by reason of the payment of
any other Indebtedness of Holdings being subordinated to the payment of the
Exchange Debentures) with respect to the Exchange Debentures, and (ii) until
all Obligations with respect to Senior Debt of Holdings are paid in full, any
such distribution to which the Holders of Exchange Debentures would be
entitled shall be made to the holders of such Senior Debt (except that so long
as the Exchange Debentures are not treated in any case or proceeding or other
event described above as part of the same class of claims as the Senior Debt
or any class of claim on a parity with or senior to the Senior Debt for any
payment or distribution, Holders of Exchange Debentures may receive securities
that are subordinated at least to the same extent as the Exchange Debentures
to Senior Debt of Holdings and any securities issued in exchange for such
Senior Debt and that are authorized by an order or decree of a court of
competent jurisdiction in a reorganization proceeding under any applicable
bankruptcy, insolvency or similar law which gives effect to the subordination
of the Exchange Debentures to Senior Debt in a manner and with an effect which
would be required if this parenthetical clause were not included in this
paragraph; provided that the Senior Debt is assumed by the new corporation, if
any, resulting from any such reorganization or readjustment and issuing such
securities).
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Holdings also may not make any payment upon or distribution in respect of
the Exchange Debentures whether on account of principal, interest, premium, if
any, or otherwise (other than securities that are subordinated to at least the
same extent as the Exchange Debentures to (a) Senior Debt and (b) any
securities issued in exchange for Senior Debt) if: (i) a default in the
payment of the principal of, premium, if any, or interest on any Senior Debt
occurs and is continuing beyond any applicable period of grace or (ii) any
other default occurs and is continuing with respect to Designated Senior Debt
or would occur as a consequence of such payment that permits holders of the
Designated Senior Debt as to which such default relates to accelerate its
maturity without further notice (except such notice as may be required to
effect such acceleration) or lapse of time and the Trustee receives a notice
of such default (a "Payment Blockage Notice") from Holdings or any
representative of the holders of any such Designated Senior Debt (including
the administrative agent under the Credit Agreement). Payments on the Exchange
Debentures may and shall be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived and (b) in case of a non-
payment default, the earlier of the date on which such non-payment default is
cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior Debt
has been accelerated and not paid. No new period of payment blockage may be
commenced within 365 days after the receipt by the Trustee of any prior
Payment Blockage Notice. No nonpayment default that existed or was continuing
on the date of delivery of any Payment Blockage Notice to the Trustee shall
be, or be made, the basis for a subsequent Payment Blockage Notice.
The Indenture further requires that Holdings promptly notify holders of
Senior Debt of Holdings if payment of the Exchange Debentures is accelerated
because of an Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Exchange Debentures may recover less
ratably than creditors of Holdings who are holders of Senior Debt. At
September 27, 1995, the aggregate principal amount of Senior Debt of Holdings
was approxiamtely $630.0 million (which does not include certain letters of
credit of Warren, which, if drawn upon, would be included therein). The
Exchange Debenture Indenture limits, subject to certain financial tests, the
amount of additional Indebtedness, including Senior Debt, that Holdings and
its Restricted Subsidiaries can incur. See "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock".
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchange
Debentures will have the right to require Holdings to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's
Exchange Debentures pursuant to the offer described below (the "Change of
Control Offer") at an offer price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest, if any, thereon to
the date of purchase (the "Change of Control Payment"). Within 30 days
following any Change of Control, Holdings will mail a notice to each Holder
stating: (1) that the Change of Control Offers is being made pursuant to the
covenant entitled "Change of Control" and that all Exchange Debentures
properly tendered will be accepted for payment; (2) the purchase price and the
purchase date, which will be no earlier than 75 days nor later than 105 days
from the date such notice is mailed (the "Change of Control Payment Date"),
provided that the Change of Control Payment Date shall not occur until at
least 15 days after the "Change of Control Payment Date" pursuant to the
Indenture relating to any such Change of Control; (3) that any Exchange
Debenture not properly tendered will continue to accrue interest, if any; (4)
that, unless Holdings defaults in the payment of the Change of Control
Payment, all Exchange Debentures accepted for payment pursuant to the Change
of Control Offer will cease to accrue interest after the Change of Control
Payment Date; (5) that Holders electing to have any Exchange Debentures
purchased pursuant to a Change of Control Offer will be required to surrender
the Exchange Debentures, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Exchange Debentures completed to the Paying
Agent at the address specified in the notice prior to the close of business on
the third Business Day preceding the Change of Control Payment Date; (6) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the second Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter
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setting forth the name of the Holder, the principal amount of Exchange
Debentures delivered for purchase, and a statement that such Holder is
withdrawing his election to have such Exchange Debentures purchased; and (7)
that Holders whose Exchange Debentures are being purchased only in part will
be issued new Exchange Debentures equal in principal amount to the unpurchased
portion of the Exchange Debentures surrendered, which unpurchased portion must
be equal to $1,000 in principal amount or an integral multiple thereof.
On the Change of Control Payment Date, Holdings will, to the extent lawful:
(1) accept for payment all Exchange Debentures or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Exchange Debentures or portions thereof so tendered and (3) deliver or cause
to be delivered to the Trustee the Exchange Debentures so accepted together
with an Officers' Certificate stating the aggregate principal amount of
Exchange Debentures or portions thereof being purchased by Holdings. The
Paying Agent will promptly mail to each Holder of Exchange Debentures so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail to each Holder a new Exchange Debenture equal
in principal amount to any unpurchased portion of the Exchange Debentures
surrendered, if any; provided that each such new Exchange Debenture will be in
a principal amount of $1,000 or an integral multiple thereof. The Indenture
provides that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, Holdings will either
repay all outstanding Senior Debt or obtain the requisite consents, if any,
under all agreements governing outstanding Senior Debt to permit the
repurchase of Exchange Debentures required by this covenant. Holdings will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Exchange
Debenture Indenture does not contain provisions that permit the Holders of the
Exchange Debentures to require that the Company repurchase or redeem the
Exchange Debentures in the event of a takeover, recapitalization or similar
restructuring.
The Credit Agreement provides that a default will occur thereunder if (i)
Sappi and its wholly owned Subsidiaries cease to beneficially own at least 51%
(or 40% after an initial public offering or subsequent public offering of
common stock) of the Capital Stock (as defined therein) of Holdings or to have
the right to appoint a majority of the Board of Directors of Holdings, (ii)
Holdings shall cease to own all the Capital Stock of Warren (other than the
Warren Senior Preferred Stock) or (iii) a Change of Control (as defined in the
Indenture) shall have occurred under the Indenture. Any future credit
agreements or other agreements relating to Senior Debt to which Holdings or
Warren becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when Holdings is prohibited from
purchasing Exchange Debentures, Holdings could seek the consent of its lenders
to the purchase of Exchange Debentures or could attempt to refinance the
borrowings that contain such prohibition. If Holdings does not obtain such a
consent or repay such borrowings, Holdings will remain prohibited from
purchasing Exchange Debentures. In such case, Holdings' failure to purchase
tendered Exchange Debentures would constitute an Event of Default under the
Exchange Debenture Indenture which would, in turn, constitute a default under
the Credit Agreement. In such circumstances, the subordination provisions in
the Exchange Debenture Indenture would likely restrict payments to the Holders
of Exchange Debentures. See "Risk Factors--Restrictions on Making a Change of
Control Offer, Antitakeover Effects of Change of Control Provisions".
Holdings will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1 and Rule 13e-4, in
connection with any offer required to be made by Holdings to repurchase the
Exchange Debentures as a result of a Change of Control. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
the Exchange Debenture Indenture, Holdings shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the Exchange Debenture Indenture by virtue thereof.
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The provisions relative to Holdings' obligation to make an offer to
repurchase the Exchange Debentures as a result of a Change of Control may be
waived or modified with the written consent of the Holders of a majority in
principal amount of the Exchange Debentures.
CERTAIN COVENANTS
Restricted Payments. The Exchange Debenture Indenture provides that Holdings
will not, and will not permit any of its Restricted Subsidiaries to, directly
or indirectly: (i) declare or pay any dividend or make any distribution (or
payment of fees or other amounts in lieu thereof) on account of Holdings' or
any of its Restricted Subsidiaries' Equity Interests (other than (x) dividends
or distributions payable in Equity Interests (other than Disqualified Stock)
of Holdings, (y) dividends or distributions payable (A) to Holdings or any
Wholly Owned Restricted Subsidiary of Holdings or (B) pro rata to all holders
of Capital Stock of a Restricted Subsidiary of Holdings or (z) dividends or
distributions with respect to the Senior Preferred Stock and the Warren Senior
Preferred Stock); (ii) purchase, redeem or otherwise acquire or retire for
value any Equity Interests of Holdings or any Restricted Subsidiary or other
Affiliate of Holdings (other than any such Equity Interests owned by Holdings
or any Wholly Owned Restricted Subsidiary of Holdings); (iii) purchase, redeem
or otherwise acquire or retire for value any Indebtedness that is subordinated
to the Debentures, except at final maturity or in accordance with the
mandatory redemption or repurchase provisions set forth in the original
documentation governing such Indebtedness; or (iv) make any Investment in an
Unrestricted Subsidiary of Holdings (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of such Restricted Payment:
(a) no Default shall have occurred and be continuing or would occur as a
consequence thereof; and
(b) Warren would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in Section 4.08 of the Warren
Debenture Indenture; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by Holdings and its Restricted Subsidiaries after
the Issue Date (including Restricted Payments
permitted by clauses (i), (ii) and (xi) of the next succeeding paragraph
but excluding Restricted Payments permitted by clauses (iii) through (x),
(xii), (xiii) and (xiv) of the next succeeding paragraph), is less than the
sum (without duplication) of:
(A) 50% of the Consolidated Net Income of Holdings (determined by
excluding amounts included in clause (D)) for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the Issue Date to the end of Holdings' most recently
ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such
consolidated Net Income for such period is a deficit, less 100% of such
deficit);
(B) 100% of the aggregate net cash proceeds received by Holdings from
the issue or sale after the Issue Date of Equity Interests of Holdings
or of debt securities of Holdings that have been converted into such
Equity Interests (other than Equity Interests (or convertible debt
securities) sold to a Subsidiary of Holdings and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock);
(C) the aggregate cash received by Holdings after the Issue Date as
capital contributions to Holdings; and
(D) the amount of the net reduction in Investments in Unrestricted
Subsidiaries resulting from (1) the payment of cash dividends or the
repayment in cash of the principal of loans or the cash return on any
Investment, in each case to the extent received by Holdings or any
Wholly Owned Restricted Subsidiary of Holdings from Unrestricted
Subsidiaries, (2) to the extent that any Restricted Investment that was
made after the Issue Date is sold for cash or otherwise liquidated or
repaid for cash, the after-
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tax cash return of capital with respect to such Restricted Investment
(less the cost of disposition, if any) and (3) the redesignation of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued as
provided in the definition of "Investment"), such aggregate amount of
the net reduction in Investments not to exceed in the case of any
Unrestricted Subsidiary, the amount of Restricted Investments
previously made by Holdings or any Restricted Subsidiary in such
Unrestricted Subsidiary, which amount was included in the calculation
of the amount of Restricted Payments.
The foregoing provisions shall not prohibit: (i) the making of any
Restricted Payment within 60 days after the date of declaration thereof or the
making of any binding commitment in respect thereof, if at said date of
declaration or commitment such Restricted Payment would have complied with the
provisions of the Exchange Debenture Indenture; (ii) the redemption,
repurchase, retirement or other acquisition of any Equity Interests of
Holdings, or the defeasance, redemption or repurchase of subordinated
Indebtedness in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Subsidiary of Holdings) of Equity Interests
of Holdings (other than any Disqualified Stock) or out of the proceeds of a
substantially concurrent cash capital contribution received by Holdings; (iii)
the repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of Holdings held by employees of Holdings or its Subsidiaries
pursuant to any employee equity subscription agreement, stock incentive
agreement or stock ownership arrangement; provided that (A) the aggregate
price paid for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed $5.0 million in any twelve-month period plus the
aggregate cash proceeds received by Holdings during such twelve-month period
from any reissuance of Equity Interests of Holdings to employees of Holdings
or its Subsidiaries and (B) no Default shall have occurred and be continuing
immediately after such transaction; (iv) the issuance of the Debentures in
exchange for the Senior Preferred Stock and the issuance of the Warren
Debentures in exchange for the Warren Senior Preferred Stock and any cash
payments made in lieu of the issuance of Debentures or Warren Debentures
having a face value less than $1,000 and any cash payments representing
accrued and unpaid liquidated damages and dividends on the Warren Senior
Preferred Stock; (v) a yearly advisory fee to Sappi Limited and/or its
Affiliates of $1.0 million in lieu of charges to Holdings for time spent on
Holdings matters by senior executive officers of Sappi Limited and its
Affiliates or for related travel and out-of-pocket expenses; (vi) Investments
in Unrestricted Subsidiaries in an aggregate amount outstanding not to exceed
$10.0 million; (vii) any cash payments by Holdings representing accrued and
unpaid dividends on the Senior Preferred Stock; (viii) upon exercise of the
Warrants, cash payments made by Holdings in lieu of the issuance of fractional
Warrant Shares; (ix) the repurchase of Warren Senior Preferred Stock and
Senior Preferred Stock in accordance with the terms thereof upon the
occurrence of a Change of Control and the mandatory redemption of Senior
Preferred Stock in accordance with the terms thereof; (x) Investments in
employees in the ordinary course of business; (xi) an Investment in a joint
venture at lease 50% owned by Holdings where the consideration for such
Investment consists of existing coating, laminating or finishing machines at
Warren's Westbrook, Maine and Mobile, Alabama facilities; provided that such
joint venture shall not Incur or at any time have outstanding any Indebtedness
(other than Indebtedness consisting of a Lien on such machines to secure
Indebtedness under the Credit Agreement); (xii) an Investment in an amount up
to $15.0 million for the development of a de-inked fiber facility and
businesses related thereto being sponsored by the Bronx Community Paper
Company; (xiii) cash payments representing liquidated damages under the Class
A Warrant Agreement and (xiv) Affiliate Transactions (as defined in the
Indenture) permitted pursuant to Section 4.11 of the Indenture pursuant to
agreements existing at the time of the Merger.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. Such
designation will only be permitted if such Restricted Payment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
Incurrence of Indebtedness. The Exchange Debenture Indenture provides that
Holdings will not, directly or indirectly, Incur any Indebtedness (including
Acquired Debt) and that Holdings will not issue any Disqualified Stock other
than (i) in respect of advances received from Warren, but only to the extent
Warren could have paid a cash dividend in lieu thereof and (ii) Guarantees by
Holdings of (A) obligations under the Credit Agreement and (B) other
obligations of Warren or any of its Subsidiaries.
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Merger, Consolidation or Sale of Assets. The Exchange Debenture Indenture
provides that Holdings shall not consolidate or merge with or into (whether or
not Holdings is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions, to another Person unless (a)(i)
the resulting, surviving or transferee person (the "Successor Company") is a
corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia, (ii) the Successor Company (if
other than the Company) assumes all the obligations of Holdings under the
Debentures, the Exchange Debenture Indenture and the Registration Rights
Agreement (but only to the extent applicable to the Debentures) pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee, (iii)
immediately after such transaction no Default exists, and (iv) the Successor
Company will have Consolidated Net Worth (immediately after the transaction on
a pro forma basis but prior to any purchase accounting adjustments resulting
from the transaction) equal to or greater than the Consolidated Net Worth of
Holdings immediately preceding the transaction, or (b) the Debentures will be
called for redemption in connection with such transaction in the manner
contemplated by "--Redemption--Mandatory".
Ownership of Warren Common Equity. The provisions of the Exchange Debenture
Indenture relating to ownership of Warren Common Equity are substantially the
same as the provisions of the Certificate of Designations relating to such
matters. For a description thereof, see "Description of the Senior Preferred
Stock-- Certain Covenants--Ownership of Warren Common Equity".
Issuance of Other Preferred Stock of Warren. The Exchange Debenture
Indenture provides that for so long as any Debentures are outstanding,
Holdings shall cause Warren not to issue any shares of Preferred Stock, other
than shares of Warren Senior Preferred Stock.
Dividend Payments by Subsidiaries. The provisions of the Exchange Debenture
Indenture relating to dividend payments by Subsidiaries are substantially the
same as the provisions of the Certificate of Designations relating to such
matters. For a description thereof, see "Description of the Senior Preferred
Stock--Certain Covenants--Dividend Payments by Subsidiaries."
Payments for Consent. The Exchange Debenture Indenture provides that neither
Holdings nor any of its Subsidiaries will, directly or indirectly, pay or
cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any Holder of any Debentures for or as an inducement to any
consent, waiver or amendment or any of the terms or provisions of the Exchange
Debenture Indenture, the Registration Rights Agreement (but only to the extent
applicable to the Debentures) or the Debentures, unless such consideration is
offered to be paid or agreed to be paid to all Holders of the Debentures that
so consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
Reports. The provisions of the Exchange Debenture Indenture relating to the
provision of reports and information by Holdings are substantially the same as
the provisions of the Certificate of Designations relating to such matters.
For a description thereof, see "Description of the Senior Preferred Stock--
Certain Covenants--Reports".
EVENTS OF DEFAULT AND REMEDIES
The Exchange Debenture Indenture provides that each of the following
constitutes an Event of Default: (i) default for 30 days in the payment when
due of interest on the Debentures (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due
of the principal of or premium, if any, on the Debentures (whether or not
prohibited by the subordination provisions of the Indenture); (iii) failure by
Holdings to comply with the provisions described above under the caption "--
Change of Control"; (iv) failure by Holdings for 30 days after notice from the
Trustee or holders of 25% of the aggregate principal amount of the Debentures
then outstanding to comply with the covenants described under "--Restricted
Payments", "--Incurrence of Indebtedness" or "--Merger, Consolidation or Sale
of Assets" above; (v) failure of Holdings for 60 days after notice from the
Trustee or Holders of 25% of the aggregate principal amount of the Debentures
then outstanding to comply with any of its other agreements in the Exchange
Debenture Indenture, the
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Registration Rights Agreement (but only to the extent applicable to the
Debentures) or the Exchange Debenture; (vi) default under any mortgage,
indenture or instrument under which there may be issued, or by which there may
be secured or evidenced, any Indebtedness for money borrowed by Holdings or
any of its Restricted Subsidiaries (or the payment of which is guaranteed by
Holdings or any of its Restricted Subsidiaries) whether such Indebtedness or
guarantee now exists, or is created after the Issue Date, which default (a) is
caused by a failure to pay principal of or premium, if any, on such
Indebtedness when due after giving effect to any applicable grace periods
provided in such Indebtedness on the date of such default (a "Payment
Default") or (b) results in the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal amount of any such
Indebtedness (which Indebtedness has not been repaid and as to which such
default has not been cured or such acceleration has not been rescinded),
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated (which Indebtedness has not been repaid and as to which such
default has not been cured or such acceleration has not been rescinded),
aggregates $20.0 million or more; (vii) failure by Holdings or any Restricted
Subsidiary which is a Significant Subsidiary to pay final judgments
aggregating in excess of $20.0 million, which judgments are not paid,
discharged, bonded or stayed for a period of 60 days; and (viii) certain
events of bankruptcy or insolvency with respect to Holdings or any Restricted
Subsidiary which is a Significant Subsidiary.
If any event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Debentures may
declare all the Debentures to be due and payable immediately. Notwithstanding
the foregoing, in the case of an Event of Default arising from certain events
of bankruptcy or insolvency with respect to Holdings, all outstanding
Debentures will become due and payable without further action or notice.
Holders of the Debentures may not enforce the Exchange Debenture Indenture or
the Debentures except as provided in the Exchange Debenture Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding Debentures may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Debentures notice of any
continuing Default (except a Default relating to the payment of principal or
interest), if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Debentures
then outstanding by notice to the Trustee may on behalf of the Holders of all
of the Debentures waive any existing Default and its consequences under the
Exchange Debenture Indenture except a continuing Default in the payment of
interest on, or the principal of, the Debentures.
Holdings is required to deliver to the Trustee annually a statement
regarding compliance with the Exchange Debenture Indenture, and Holdings is
required upon becoming aware of any Default, to deliver to the Trustee a
statement specifying such Default.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Holdings may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Debentures ("Legal
Defeasance"), except for: (i) the rights of Holders of outstanding Debentures
to receive payments from the trust described below in respect of the principal
of, premium, if any, and interest on such Debentures when such payments are
due, (ii) Holdings' obligations with respect to the Debentures concerning
issuing temporary Debentures, registration of Debentures, mutilated,
destroyed, lost or stolen Debentures and the maintenance of an office or
agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and Holdings'
obligations in connection therewith and (iv) the Legal Defeasance provisions
of the Exchange Debenture Indenture. In addition, Holdings may, at its option
and at any time, elect to have the obligations of Holdings released with
respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default with respect to the Debentures. In the event Covenant
Defeasance occurs, certain events (not including non-payment, and bankruptcy,
receivership, rehabilitation and insolvency events with respect to Holdings)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Debentures.
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In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
Holdings must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Debentures, cash in U.S. dollars, non-callable
Government Securities or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the outstanding Debentures on the stated maturity or on the applicable
redemption date, as the case may be, and Holdings must specify whether the
Debentures are being defeased to maturity or to a particular redemption date;
(ii) in the case of Legal Defeasance, Holdings shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) Holdings has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the Issue
Date, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders of the outstanding Debentures will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, Holdings shall have delivered to the Trustee an opinion of counsel
in the United States reasonably acceptable to the Trustee confirming that the
Holders of the outstanding Debentures will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default shall have occurred and be continuing on the
date of such deposit (other than a Default resulting from the borrowing of
funds to be applied to make such deposit) or insofar as Events of Defaults
from bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance will not result in a breach or violation of, or constitute
a default under any material agreement or instrument (other than the
Indenture) to which Holdings or any of its Subsidiaries is a party or by which
Holdings or any of its Subsidiaries is bound; (vi) Holdings must have
delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds are not subject to any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) Holdings must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by Holdings with
the intent of preferring the Holders of Debentures over the other creditors of
Holdings with the intent of defeating, hindering, delaying or defrauding
creditors of the Holdings or others; and (viii) Holdings must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Holdings, as
such, shall have any liability for any obligations of Holdings under the
Exchange Debentures and the Exchange Debenture Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Exchange Debentures by accepting an Exchange Debenture waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Exchange Debentures. Such waiver may not be
effective to waive liabilities under the federal securities laws and does not
affect any Holder's right to sue under federal securities laws for violations
thereof.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Exchange Debentures in accordance with the
Exchange Debenture Indenture. The Registrar and the Exchange Debenture Trustee
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and Holdings may require a Holder to pay any taxes and
fees required by law or permitted by the Exchange Debenture Indenture.
Holdings is not required to transfer or exchange any Exchange Debenture
selected for redemption. Also, Holdings is not required to transfer or
exchange any Exchange Debenture for a period of 15 days before a selection of
Exchange Debentures to be redeemed.
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The registered Holder of a Exchange Debenture will be treated as the owner
of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Exchange
Debenture Indenture or the Debentures may be amended or supplemented with the
consent of the Holders of a majority in principal amount of the Debentures
then outstanding (including consents obtained in connection with a tender
offer or exchange offer for Debentures), and any existing default or
compliance with any provision of the Exchange Debenture Indenture or the
Debentures may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Debentures (including consents
obtained in connection with a tender offer or exchange offer for Debentures).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Debentures held by a non-consenting Holder): (i) reduce
the principal amount of Debentures whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Debenture or alter the provisions with respect to the
redemption of the Debentures, (iii) reduce the rate of or change the time for
payment of interest on any Debenture, (iv) waive a Default in the payment of
principal of or premium, if any, or interest on the Debentures (except a
rescission of acceleration of the Debentures by the Holders of at least a
majority in aggregate principal amount of the Debentures and a waiver of the
payment default that resulted from such acceleration), (v) make any Debenture
payable in money other than that stated in the Debentures, (vi) make any
change in the provisions of the Exchange Debenture Indenture relating to
waivers of past Defaults or the rights of Holders of Debentures to receive
payments of principal or premium, if any, or interest on the Debentures, (vii)
waive a redemption payment with respect to any Debenture, or (viii) make any
change in the foregoing amendment and waiver provisions. In addition, without
affecting the right of any third party beneficiary to consent to such
amendment, any amendment to the provisions of Article 10 of the Exchange
Debenture Indenture (which relate to subordination) will require the consent
of the Holders of at least 75% in aggregate principal amount of the Debentures
then outstanding, if such amendment would adversely affect the rights of
Holders of Debentures.
Notwithstanding the foregoing, without notice to or the consent of any
Holder of Debentures, Holdings and the Trustee may amend or supplement the
Exchange Debenture Indenture or the Debentures to cure any ambiguity, defect
or inconsistency, to provide for uncertificated Debentures in addition to or
in place of certificated Debentures, to provide for the assumption of
Holdings' obligations to Holders of Debentures in the case of a merger or
consolidation, to secure the Debentures, to add Guarantees with respect to the
Debentures, to make any change that would provide any additional rights or
benefits to the Holders of Debentures or that does not adversely affect the
legal rights under the Exchange Debenture Indenture of any such Holder, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE EXCHANGE DEBENTURE TRUSTEE
The Exchange Debenture Indenture contains certain limitations on the rights
of the Exchange Debenture Trustee, should it become a creditor of Holdings, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Exchange
Debenture Trustee will be permitted to engage in other transactions with
Holdings and its Affiliates; however, if it acquires any conflicting interest
it must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Exchange Debentures will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available to the
Exchange Debenture Trustee, subject to certain exceptions. The Exchange
Debenture Indenture provides that in the case an Event of Default shall occur
(which shall not be cured), the Exchange Debenture Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent man in
the conduct of his own
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affairs. Subject to such provisions, the Exchange Debenture Trustee will be
under no obligation to exercise any of its rights or powers under the Exchange
Debenture Indenture at the request of any Holder of Exchange Debentures,
unless such Holder shall have offered to the Exchange Debenture Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
"Board Resolution" means a resolution authorized by the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"Designated Senior Debt" means any Senior Debt permitted hereunder and that
has been designated by Holdings as "Designated Senior Debt."
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized
by law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
"Non-Recourse Debt" means Indebtedness (i) as to which neither Holdings nor
any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other
than the Debentures) of Holdings or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to
be accelerated or payable prior to its stated maturity.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Registration Rights Agreement" means that certain Preferred Stock
Registration Rights Agreement dated as of July 6, 1995 among DLJ Merchant
Banking Partners, L.P., DLJ International Partners, C.V., DLJ Offshore
Partners, C.V., DLJ Merchant Banking Funding, Inc., DLJ First ESC, L.L.C., UBS
Capital Corporation and Holdings, as amended from time to time.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Debt" means with respect to Holdings, (i) any Indebtedness Incurred
by Holdings, unless the instrument under which such Indebtedness is Incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Debentures; provided that Senior Debt will not include (a) any
liability for federal, state, local or other taxes owed or owing, (b) any
Indebtedness owing to any Subsidiaries of Holdings, (c) any trade payables or
(d) any Indebtedness that is incurred in violation hereof.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution and (ii) any Subsidiary of an Unrestricted Subsidiary; but, in each
case, only to the extent that such Subsidiary: (a) has no Indebtedness other
than Non-Recourse Debt; provided that Holdings or any of its Restricted
Subsidiaries may Guarantee, endorse, agree to provide funds for the payment or
maintenance of, or otherwise become directly or indirectly liable with respect
to, Indebtedness of an Unrestricted Subsidiary but only to the extent that
Holdings or such Restricted Subsidiary could make an Investment in such
Unrestricted Subsidiary pursuant to "Certain Covenants--Restricted Payments"
above and any such arrangement shall be deemed an Incurrence of Indebtedness
by Holdings or such Restricted Subsidiary
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for purposes of "Certain Covenants--Incurrence of Indebtedness" above; (b)
subject to clause (a) above, is a Person with respect to which neither
Holdings nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Equity Interests or (y) to maintain
or preserve such Person's financial condition or to cause such Person to
achieve any specified levels of operating results; and (c) has at least one
director on its board of directors that is not a director or executive officer
of Holdings or any of its Restricted Subsidiaries and has at least one
executive officer that is not a director or executive officer of Holdings or
any of its Restricted Subsidiaries. Any such designation by the Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by "Certain Covenants--Restricted
Payments" above. If, at any time, any Unrestricted Subsidiary would fail to
meet the foregoing requirements of an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Exchange
Debenture Indenture and any Indebtedness of such Subsidiary shall be deemed to
be Incurred by a Restricted Subsidiary of Holdings as of such date (and, if
such Indebtedness is not permitted to be Incurred as of such date under
"Certain Covenants--Incurrence of Indebtedness" above, Holdings shall be in
default of such covenant). The Board of Directors of Holdings may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an Incurrence of Indebtedness by a
Restricted Subsidiary of Holdings of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i)
such Indebtedness is permitted under "Certain Covenants--Incurrence of
Indebtedness" above, and (ii) no Default would be in existence following such
designation.
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DESCRIPTION OF THE WARRANTS
The Class A Warrants were issued pursuant to a Warrant Agreement (the "Class
A Warrant Agreement") dated as of December 20, 1994, between Holdings and the
Bank of New York, a New York banking corporation ("BNY"), as Warrant Agent.
The Class B Warrants were issued pursuant to a Class B Warrant Agreement (the
"Class B Warrant Agreement" and, together with the Class A Warrant Agreement,
the "Warrant Agreements") dated as of December 20, 1994, as amended and
restated as of July 6, 1995, between Holdings and BNY, as Warrant Agent. A
copy of each of the Warrant Agreements is filed as an exhibit to the
Registration Statement of which this Prospectus constitutes a part. The
following summary containing all material provisions of the Class A Warrants
and the Class B Warrants is qualified in its entirety by reference to the
provisions of the Class A Warrant Agreement and the Class B Warrant Agreement,
respectively, relating thereto. The Class A Warrant Agreement and the Class B
Warrant Agreement are substantially similar with respect to the terms and
conditions of the Warrants. The following summary applies to both the Class A
Warrants and the Class B Warrants, except where distinctions are specifically
noted. Any capitalized term not defined herein shall have the meaning assigned
to it in the respective Warrant Agreements.
GENERAL
Each Class A Warrant, when exercised, will entitle the holder thereof to
receive 0.29948 of one fully paid and non-assessable share of Common Stock
(each, a "Warrant Share") at an exercise price of $0.01 per share, subject to
adjustment (the "Exercise Price"). Each Class B Warrant, when exercised, will
entitle the holder thereof to receive one Warrant Share at an Exercise Price
of $0.01 per share, subject to adjustment. The 3,000,000 Class A Warrants
being sold pursuant to the Offering will entitle the holders thereof to
purchase in the aggregate 898,440 shares of Common Stock, or approximately
2.5% of Holdings' outstanding Common Stock as of the date hereof on a fully
diluted basis. The 150,000 Class B Warrants being sold pursuant to the
Offering will entitle the holders thereof to purchase in the aggregate 150,000
shares of Common Stock or approximately 0.4% of Holdings' outstanding Common
Stock as of the date hereof on a fully diluted basis.
The Warrants may be exercised at any time prior to 5:00 p.m., New York City
time, on December 15, 2006 (the "Expiration Date"), subject to applicable
federal and state securities laws. All outstanding Warrants not exercised
prior to the Expiration Date will terminate and become void. No adjustments as
to dividends will be made upon exercise of the Warrants. The Warrants may be
exercised by surrendering to Holdings the Warrant certificates evidencing the
Warrants with the accompanying form of election to purchase properly completed
and executed, together with payment of the Exercise Price to the Warrant Agent
for the account of Holdings. Payment may be made in cash or by certified or
official bank check to the order of Holdings. Alternatively, a holder may
exercise its right to receive Warrant Shares on a net basis, such that without
the exchange of any funds, the Holder receives that number of Warrant Shares
otherwise issuable upon exercise of its Warrants, less that number of Warrant
Shares having a current market price on the date immediately preceding such
exercise equal to the aggregate Exercise Price that such holder would
otherwise have paid. Upon surrender of the Warrants and payment of the
Exercise Price, Holdings will issue and cause to be delivered, to or upon the
written order of such holder, a stock certificate representing the number of
full Warrant Shares issuable upon exercise of such Warrants. In the event that
such exercise would cause the issuance of a fraction of a Warrant Share,
Holdings will pay an amount in cash equal to the current market price per
Warrant Share on the day immediately preceding such exercise, multiplied by
such fraction. A Holder of Warrant Shares shall be deemed to have become a
holder of record of such Warrant Shares as of the date of the surrender of
such Warrants and payment of the Exercise Price. Warrants are exercisable
either in full or from time to time in part prior to the Expiration Date. If
fewer than all the Warrants to be exercised are evidenced by a Warrant
Certificate, a new Warrant Certificate will be issued for the remaining number
of Warrants. The Warrant Agent will cancel all Warrant Certificates
surrendered upon the exercise of the Warrants and will deliver such cancelled
certificates to Holdings for disposal.
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Holdings will at all times reserve the maximum number of shares of Common
Stock that may be deliverable upon exercise of all outstanding Warrants. Such
shares of Common Stock are kept available out of Holdings, authorized but
unissued, or authorized and issued and held in its treasury, for the purpose
of enabling it to satisfy any obligation to issue Warrant Shares upon the
exercise of Warrants. Holdings or an appointed transfer agent for the Common
Stock is irrevocably authorized and directed to reserve such shares for such
purpose. Holdings covenants that all Warrant Shares that may be issued upon
the exercise of Warrants will be fully paid, nonassessable, free of preemptive
rights, free from all taxes (except as described above) and free from all
liens.
No Warrant can be exercised unless at the time thereof an effective
registration statement under the Act relating to the shares of Common Stock to
be issued upon such exercise has been declared effective by the Commission or
the issuance of such shares is permitted pursuant to an exemption from the
registration requirements of the Act.
The Exercise Price and the number of Warrant Shares are both subject to
adjustment in certain cases referred to below.
ADJUSTMENTS
The Exercise Price and the number of Warrant Shares issuable upon the
exercise of each Warrant are subject to adjustment from time to time upon the
occurrence of the events, and in the manner, described below. De minimis
adjustments are not required.
The current market price per share of Common Stock for purposes of the
adjustments discussed below on any date is the average of the Quoted Price of
the Common Stock for 30 consecutive trading days commencing 45 trading days
before the date in question. The "Quoted Price" of the Common Stock is the
last reported sales price of the Common Stock as reported by the Nasdaq
National Market or the last reported sales price for consolidated trading of
the Common Stock on an exchange. In the absence of one or more such
quotations, the Board of Directors will determine the current market price in
good faith (assuming a valuation of Holdings and its subsidiaries as a whole,
in the case of the Class B Warrants).
Holdings will notify holders of all Exercise Price adjustments. If: (a)
Holding takes any action that would require an adjustment in the Exercise
Price or an adjustment in the number of Warrant Shares issuable (as described
below); (b) Holdings effects a reorganization; or (c) there is a liquidation
or dissolution of Holdings; then Holdings will mail a notice to all holders of
Warrants 15 days prior to the proposed record date for a dividend or
distribution, or the proposed effective date of a subdivision, combination,
reclassification, consolidation, merger, transfer, lease, liquidation or
dissolution.
Change in Capital Stock. If Holdings: (a) pays a dividend or makes a
distribution on its Common Stock payable in shares of its Common Stock; (b)
subdivides its Common Stock into a greater number of shares; (c) combines its
Common Stock into a smaller number of shares; (d) makes a distribution on its
Common Stock in shares of its capital stock other than Common Stock; or (e)
issues any shares of its capital stock by reclassification of its Common
Stock; then the Exercise Price then in effect will be proportionately adjusted
so that the holder of any Warrant exercising its Warrants after such event may
receive, upon payment of the aggregate adjusted Exercise Price, the aggregate
number and kind of shares of Holdings' capital stock that such holder would
have received had such Warrants been exercised immediately prior to such event
and prior to the adjustment of the Exercise Price. The adjustment will become
effective immediately after the record date, in the case of a dividend or
distribution, and immediately after the effective date, in the case of a
subdivision, combination or reclassification. If after an adjustment a Warrant
holder upon exercise may receive shares of two or more classes of Holdings'
capital stock, then the Board of Directors will determine the allocation of
the adjusted Exercise Price among the classes of capital stock. After such
allocation, the exercise privilege and the Exercise Price of each class of
capital stock will be subject to adjustment on terms comparable to those
described above.
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Rights Issue. If Holdings distributes any rights, options or warrants to all
holders of Common Stock, entitling them to subscribe for Common Stock or
securities convertible into, or exchangeable or exercisable for, Common Stock
within 60 days after the record date for such issuance of rights, options or
warrants at an offering price (or with an initial conversion, exchange or
exercise price plus such offering price) that is less than the current market
price per share on the record date, then the Exercise Price will be adjusted
accordingly. The adjustment will become effective immediately after the record
date for the determination of stockholders entitled to receive the rights,
options or warrants requiring the adjustment. If, at the end of the period
during which such rights, options or warrants are exercisable, not all such
instruments were exercised, then the Exercise Price will be readjusted
immediately to reflect the number of shares actually issued.
Other Distributions. If Holdings distributes to all holders of its Common
Stock any of Holdings' assets, debt securities or any rights, options or
warrants to purchase debt securities, assets or other securities of Holdings,
then the Exercise Price will be adjusted (subject to certain exceptions)
accordingly. The adjustment will become effective immediately after the record
date for the determination of stockholders entitled to receive the
distribution.
Common Stock Issue. If Holdings issues shares of Common Stock for a
consideration per share less than the current market price per share on the
date Holdings fixes the offering price of such additional shares, then the
Exercise Price will be adjusted (subject to certain exceptions) accordingly.
The adjustment will become effective immediately after such issuance.
Convertible Securities Issue. If Holdings issues any securities convertible
into or exchangeable for Common Stock for a conversion or exchange price less
than the current market price for a share of Common Stock, then the Exercise
Price will be adjusted (subject to certain exceptions) accordingly. This
adjustment will become effective immediately after such issuance.
If the conversion or exchange privileges of any securities for which the
adjustment described above has been made expire prior to the exercise of such
privileges, then the Exercise Price will be readjusted upon such expiration to
reflect the number of shares of Common Stock actually issued or sold upon the
exercise of any such privileges, and the exercise price and aggregate
consideration Holdings actually received. No such readjustment will, however,
increase the Exercise Price or decrease the number of Warrant Shares issuable
upon exercise of each Warrant to an amount higher or lower, respectively, than
that determined by the initial adjustment described above.
Reorganization of Holdings. If Holdings consolidates with or merges into
another person, sells, conveys, transfers, leases or otherwise disposes of all
or substantially all its assets to another person, or enters into any other
business combination involving another person, then upon consummation of such
a transaction, the Warrants will be automatically exercisable for the amount
and kind of securities, cash or other property or assets to which the holder
of a Warrant would have been entitled immediately before the effective date of
such transaction. The corporation formed by any such merger or consolidation
or other combination, or the person to whom the assets were sold, conveyed,
transferred, leased or disposed, will enter into a supplemental warrant
agreement to effect the exercise of Warrants described above and to provide
for adjustments as necessary.
Number of Shares. Upon each adjustment of the Exercise Price or the
occurrence of an event that would require such an adjustment (except where the
Board of Directors determines that no adjustment is necessary), the number of
shares of Common Stock for which each Warrant may be exercised will be
adjusted accordingly.
When No Adjustment Is Required. No adjustment in the Exercise Price need be
made for certain transactions referred to above to the extent that holders of
Warrants will participate on a basis that the Board of Directors determines to
be fair and appropriate in light of the basis of the participation in such
transactions of Common Stock holders. No adjustment to the Exercise Price will
be made for any dividend or interest reinvestment plan or for a change in the
par value of the Common Stock. To the extent the Warrants become convertible
into cash, no adjustments are required to be made as to the cash, and no
interest will accrue on such cash.
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NOTICES TO WARRANT HOLDERS
Upon each adjustment of the Exercise Price or the number of Warrant Shares,
Holdings will within 15 days (i) cause an independent public accountants firm
of nationally recognized standing selected by the Board of Directors to file a
certificate with the Warrant Agent setting forth the adjusted Exercise Price
or the new number of Warrant Shares, the method of calculation and the facts
upon which the calculations were based and (ii) mail notice of such
adjustments to all Warrants holders.
If Holdings: (i) authorizes the issuance to all Common Stock holders of
rights, options or warrants to purchase shares of Common Stock or other
subscription rights; (ii) authorizes the distribution to all Common Stock
holders of evidences of indebtedness or assets (other than cash dividends or
distributions); (iii) is a party to any consolidation or merger for which
shareholder approval is required, or intends to convey all its assets or
reclassify its stock or participate in a tender offer or exchange offer for
shares of Common Stock; (iv) will be voluntarily or involuntarily subject to
dissolution, liquidation, or winding up; or (v) proposes to take action that
would require an adjustment of the Exercise Price or number of Warrant Shares
to be issued upon exercise of a Warrant, then Holdings will file a notice with
the Warrant Agent and deliver a notice to each Warrant holder. The notice will
state: (i) the record date for the right of Common Stock holders to receive
any rights, options, warrants or distribution; (ii) the initial expiration
date of any tender offer or exchange offer for shares of Common Stock; or
(iii) the date on which Holdings expects any reclassification, consolidation,
merger, conveyance, transfer, dissolution, liquidation or winding up to become
effective or to be consummated, and the date as of which record holders of
Common Stock will be entitled to exchange such shares for securities or other
property in connection with the specified transaction. Nothing in the Warrant
Agreement or any Warrant certificate may be construed as conferring on the
holders of Warrants the right to vote, consent or receive notice as
shareholders in respect of the meetings of shareholders, the election of
directors of Holdings or any other matter.
REGISTRATION
Holdings is required to use its best efforts with respect to the Class A
Warrants, and its reasonable best efforts with respect to the Class B
Warrants, to keep the registration statement, of which this Prospectus is a
part, continuously effective until December 20, 1997. The Company does not
believe there is a material difference between the "best efforts" standard and
"reasonable best efforts" standard for maintaining the effectiveness of such
Registration Statement.
REPORTS
Whether or not required by the rules and regulations of the Commission, so
long as any Warrants or Warrant Shares are outstanding, Holdings will furnish
to the holders thereof (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-
Q and 10-K if Holdings were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by Holdings' certified independent auditors and (ii) all current reports that
would be required to be filed with the Commission on Form 8-K if Holdings were
required to file such reports. In addition, whether or not required by the
rules and regulations of the Commission, Holdings shall file a copy of all
such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
WARRANT AGENT
The Bank of New York is the Warrant Agent. The Warrant Agent may resign upon
30 days' notice to Holdings. Holdings will appoint a successor if the Warrant
Agent resigns or becomes incapable of acting as Warrant Agent.
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AMENDMENT
From time to time, Holdings and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including curing defects or inconsistencies or making any
change that does not materially adversely affect the rights of any holder. Any
amendment or supplement to the Warrant Agreement that has a material adverse
effect on the interests of the holders of the Warrants will require the
written consent of the holders of a majority of the then outstanding Warrants
(excluding Warrants held by Holdings or any of its Affiliates). The consent of
each holder of the Warrants affected will be required for any amendment
pursuant to which the Exercise Price would be increased or the number of
shares of Common Stock purchasable upon exercise of Warrants would be
decreased (other than pursuant to adjustments provided in the Warrant
Agreement) or the exercise period with respect to the Warrants would be
shortened.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK OF HOLDINGS
The following description of the capital stock of Holdings and the
description of Holdings' Amended and Restated Certificate of Incorporation and
By-laws containing all material provisions thereof is qualified in its
entirety by reference to the Amended and Restated Certificate of Incorporation
and By-laws of Holdings, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus constitutes a part.
Holdings was incorporated in 1994 under the Delaware General Corporation Law
(the "DGCL"). The authorized capital stock of Holdings currently consists of
(i) 100,000,000 shares of Common Stock, par value $.01 per share, of which
approximately 30,700,000 shares were issued and outstanding as of the date of
this Prospectus and (ii) 5,000,0000 shares of Preferred Stock, par value $.01
per share, of which 1,500,000 shares are issued and outstanding as Senior
Preferred Stock.
The holders of the Common Stock are entitled to receive dividends, when and
as declared by the Board of Directors out of funds legally available therefor
and to receive pro rata the assets of Holdings legally available for
distribution upon liquidation after payment to holders of preferred stock
having a liquidation preference over the Common Stock. Each holder of Common
Stock is entitled to one vote per share on all matters on which the holders of
Common Stock are entitled to vote. There are no preemptive, conversion or
redemption rights applicable to the shares of Common Stock other than certain
contractual preemptive rights pursuant to the Shareholders Agreement. See
"Security Ownership of Certain Beneficial Owners and Management--Shareholders
Agreement" for a description of certain contractual rights and obligations of
certain holders of Holdings Common Stock. The currently outstanding shares of
Common Stock are fully paid and non-assessable.
Holdings' Amended and Restated Certificate of Incorporation contains certain
provisions relating to the limitation of liability and indemnification of
directors and officers. Holdings' Amended and Restated Certificate of
Incorporation provides that directors of Holdings may not be held personally
liable to Holdings or its stockholders for monetary damages for a breach of
fiduciary duty, except for liability (i) for any breach of the director's duty
of loyalty to Holdings or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DCGL, relating to prohibited dividends,
distributions and repurchases or redemptions of stock, or (iv) for any
transaction from which the director derives an improper benefit. However, such
limitation does not limit the availability of non-monetary relief in any
action or proceeding against a director. In addition, Holdings' Amended and
Restated Certificate of Incorporation and By-laws provide that Holdings shall
indemnify its directors and officers to the fullest extent authorized by
Delaware law, including circumstances in which indemnification is otherwise
discretionary.
PREFERRED STOCK OF HOLDINGS
Holdings' only issued and outstanding shares of preferred stock are the
Senior Preferred Stock offered by this Prospectus and described under
"Description of the Senior Preferred Stock." In the future, the Board of
Directors of Holdings may, solely by action of the Board of Directors, issue
shares of preferred stock in one or more series and determine the designation
and fix the number of shares of each series. The Board of Directors of
Holdings is further authorized to fix and determine, solely by action of the
Board of Directors, the dividend rate, premium or redemption rate, conversion
rights, voting rights, preferences, privileges, restrictions and other
variations granted to or imposed on any unissued series of such preferred
stock.
WARRANTS OF HOLDINGS
As of December 31, 1995, Holdings had 3,000,000 Class A Warrants and
4,312,499 Class B Warrants outstanding. When exercised, each Class A Warrant
and Class B Warrant entitles the holder thereof to receive 0.29948 and one
fully paid and nonassesable shares of Common Stock, respectively, at an
exercise price of $0.01 per share in each case.
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DESCRIPTION OF WARREN INDEBTEDNESS
THE CREDIT AGREEMENT
At October 2, 1996 the Credit Agreement consists of (i) the Term Loan
Facilities, consisting of a seven-year senior secured term loan facility in an
aggregate principal amount of $268.7 million (the "Tranche A Term Loan"), and
an eight-year senior secured term loan facility in an aggregate principal
amount of $186.4 million (the "Tranche B Term Loan"), (ii) the Revolving
Credit Facility and (iii) the Letter of Credit Facility. The Term Loan
Facilities, the Revolving Credit Facility and the Letter of Credit Facility
are collectively referred to herein as the "Facilities". The following summary
containing all material provisions of the Credit Agreement is qualified in its
entirety by reference to the complete text of the documents entered into in
connection therewith, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus constitutes a part. Certain
defined terms used herein have the meaning ascribed thereto in such documents.
On April 23, 1996 the Company amended its Credit Agreement to include
changes to certain provisions relating to restrictive covenants including,
among other things, the ability to incur debt, pay dividends and sell certain
assets. In addition, certain provisions relating to interest rates, fees,
collateral, prepayments and affirmative covenants also have been amended.
Concurrently with the above, the Company entered into an agreement with the
Bank of Montreal ("BOM") whereby BOM, through its securities unit, Nesbitt
Burns Securities ("Nesbitt"), as agent, will provide a five-year, $110.0
million revolving accounts receivable securitization facility. Under this
facility the Company established a new subsidiary, S.D. Warren Finance Co.
("SDWF"), into which the Company will sell, on a non-recourse basis, all of
its rights and interests in its accounts receivable. SDWF in turn will sell
certain accounts receivable to an unrelated financial institution under
similar terms. The proceeds from the A/R facility along with $10 million of
cash on hand were used to prepay $100.0 million of the final installment of
the Tranche B term loan under the Credit Agreement.
Currently, the financial ratios specified in the Credit Agreement are all
within the applicable financial covenant levels. However, depending upon the
actual financial results for the second fiscal quarter of 1997, the Company
may not achieve a scheduled increase in the covenant level for its interest
coverage ratio. As a result, Management has requested an amendment to the
interest coverage covenant from the bank lending group, and believes that such
amendment will be effective prior to the end of the second fiscal quarter of
1997.
Amount and Maturity of Facilities
The Tranche A Term Loan will mature in twelve consecutive semi-annual
installments commencing June 30, 1996 with a final maturity in December 2001.
The Tranche B Term Loan will mature in fourteen consecutive semi-annual
installments commencing June 30, 1996 with a final maturity in December 2002.
The installments of the Tranche A Term Loan and the Tranche B Term Loan due
in each year will be the following respective aggregate amounts:
<TABLE>
<CAPTION>
TRANCHE A TRANCHE B
TERM LOAN TERM LOAN
YEAR ANNUAL AMOUNT ANNUAL AMOUNT
---- ------------- -------------
<S> <C> <C>
1.............................................. $0 $0
2.............................................. $16,357,777 $2,643,294
3.............................................. $46,736,505 $2,643,294
4.............................................. $51,410,155 $2,643,294
5.............................................. $51,410,155 $2,643,293
6.............................................. $51,410,155 $13,216,471
7.............................................. $51,410,155 $35,243,922
8.............................................. -- $127,323,295
</TABLE>
Loans under the Revolving Credit Facility ("Revolving Credit Loans)" will be
made, and letters of credit ("Letters of Credit") will be issued at any time
until the Revolving Credit Facility matures in December 2001 (the "Revolving
Credit Termination Date"). No Letter of Credit shall have an expiration date
later than the Revolving Credit Termination Date.
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Standby letters of credit ("Facility Letters of Credit") were issued under
the Letter of Credit Facility at the time of the Acquisition to support an
existing letter of credit arranged by Scott and to support S.D. Warren's
obligations with respect to certain indebtedness and capital and operating
leases existing at the time of the Acquisition, including certain obligations
of Scott with respect to Warren's business that continue after the
consummation of the Acquisition. The amount available under the Letter of
Credit Facility will be reduced as S.D. Warren's obligations in respect of
such indebtedness and leases reduce until such Facility matures on the
Revolving Credit Termination Date. The Facility Letters of Credit may be drawn
upon from time to time in accordance with their terms. If any such Facility
Letter of Credit is drawn upon as a result of the bankruptcy or insolvency of
Scott, S.D. Warren's obligations with respect to such amount of indebtedness
may be shortened as to maturity (from up to 20 years, in the case of certain
tax exempt obligations, to the remaining term of the Letter of Credit
Facility) and increased as to interest rate (from a tax exempt rate to the
rate provided for borrowings under the Credit Agreement).
S.D. Warren is required to prepay the Term Loan Facilities with (i) 100% of
the net proceeds of certain asset sales, (ii) 100% of the net proceeds of
certain incurrences of indebtedness and (iii) 50% of the net proceeds from
issuances of equity after the Closing Date by Holdings or any of its
subsidiaries. S.D. Warren is also required to prepay the Term Loan Facilities
annually in an amount equal to 75% of the Excess Cash Flow of S.D. Warren and
its subsidiaries for the prior fiscal year; provided, that S.D. Warren will be
required to prepay annually an amount equal to only 50% of such Excess Cash
Flow if (a) the aggregate outstanding principal amount of the Term Loan
Facilities is less than $250.0 million and (b) the Consolidated Interest
Expense Ratio as of the last day of the fiscal quarter immediately preceding
the date of such prepayment (calculated on a rolling four quarter basis)
exceeds 3.00 to 1.00. S.D. Warren may also make optional prepayments without
premium or penalty at any time (subject to payment of certain breakage costs
if other than on the last day of an interest period under certain
circumstances). Optional prepayments shall be applied pro rata to the Tranche
A Term Loan and the Tranche B Term Loan based on the respective amounts
outstanding and shall be applied to installments thereof on a pro rata basis
and may not be reborrowed.
Interest Rate
The loans under the Credit Agreement will bear interest at a rate equal to,
at S.D. Warren's option, (i) the Base Rate plus the Applicable Margin ("Base
Rate Loans") or (ii) the Eurodollar Rate (adjusted for reserves) as determined
by Chase for the respective interest period plus the Applicable Margin
("Eurodollar Loans"). "Applicable Margin" means a percentage per annum ranging
(a) in the case of Base Rate Loans, from 1.50% to 0.00% (2.00% in the case of
Tranche B Term Loans), and (b) in the case of Eurodollar Loans, from 2.50% to
1.00% (3.00% in the case of Tranche B Term Loans), in each case based upon
S.D. Warren's ability to maintain a certain financial ratio determined from
the most recent financial statements of S.D. Warren calculated as of the last
day of each fiscal quarter on a rolling four quarter basis. "Base Rate" means
the highest of (1) the rate of interest publicly announced by Chase as its
prime rate in effect at its principal office in New York City, (2) the
secondary market rate for three month certificates of deposit (adjusted for
reserves) plus 1% and (3) the federal funds rate in effect from time to time
plus 0.5%.
Overdue loans payable under the Credit Agreement will bear interest at a
rate per annum equal to the rate which is 2% in excess of the rate then
otherwise applicable to such borrowings. Such interest will be payable on
demand.
Fees
S.D. Warren is required to pay commitment fees between 0.375% to 0.5% based
upon the Company's ability to maintain a certain financial ratio determined
from the most recent financial statements of S.D. Warren calculated as of the
last day of each fiscal quarter on a rolling four quarter basis per annum on
the average daily unused commitments available to be drawn under the Revolving
Credit Facility, as in effect from time to time, to Chase for the account of
the arranged syndicate of lenders (the "Lenders") for the period commencing on
the Closing Date through the maturity date of the Revolving Credit Facility.
S.D. Warren is also required to pay letter of credit fees with respect to each
letter of credit issued, until the first anniversary of the Closing Date,
2.50% per annum of the face amount of each letter of credit; this percentage
shall be no greater than 2.50% based on the applicable Eurodollar Rate
Applicable Margin in effect from time to time (based upon S.D. Warren's
ability to maintain a certain financial ratio), plus 0.25%. Chase and the
Lenders shall receive such other fees as have been separately agreed upon with
Chase and the Lenders.
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Guarantees and Collateral Security
The Facilities are guaranteed by Holdings and each of S.D. Warren's U.S.
subsidiaries. The Facilities and such guarantees are secured by security
interests (subject to other liens permitted by the terms of the Facilities),
to the extent permissible under applicable laws and regulations, in (a) all of
the capital stock of S.D. 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 accounts
receivable owned by S.D. Warren and its subsidiaries.
Covenants
The Credit Agreement contains restrictive covenants which limit Holdings and
S.D. Warren and its 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 S.D. Warren
from prepaying certain of its indebtedness. Under the Credit Agreement, S.D.
Warren is required to satisfy certain financial covenants which require it to
maintain specified financial ratios and comply with certain financial tests,
including a minimum interest coverage ratio, a minimum debt service ratio and
a net worth test.
Currently, the specified financial ratios are all within the applicable
financial covenant levels. However, depending upon the actual financial
results for the second fiscal quarter of 1997, the Company may not achieve a
scheduled increase in the covenant level for its interest coverage ratio. As a
result, Management has requested an amendment to the interest coverage
covenant from the bank lending group, and believes that such amendment will be
effective prior to the end of the second fiscal quarter of 1997.
Events of Default
The Credit Agreement contains customary Events of Default as well as Events
of Default particular to the ownership of S.D. Warren and the Transactions,
including (i) if Sappi or any of its majority owned subsidiaries fails to
beneficially own at least a majority of the issued and outstanding capital
stock of S.D. Warren (on a fully diluted basis) and fails to have the right to
appoint a majority of the members of the board of directors of Holdings, (ii)
if Holdings ceases to own all the capital stock of S.D. Warren or (iii) the
occurrence of a Change in Control under the Indenture.
THE NOTES
The following summary containing all material provisions of the Notes is
qualified in its entirety by reference to the Indenture. Certain defined terms
used herein have the meaning ascribed thereto in the Indenture.
General
The Notes are general unsecured obligations of Warren in an aggregate
principal amount of $375.0 million. Interest on the Notes accrues at the rate
of 12% per annum and is payable semiannually in arrears on June 15 and
December 15 of each year.
Optional Redemption
The Notes may be redeemed at the option of Warren, in whole or in part, on
or after December 15, 1999 at a premium declining to par in 2002, plus accrued
and unpaid interest and Liquidated Damages, if any, through the redemption
date. In the event that Holdings consummates one or more public offerings of
its common stock on or before December 15, 1997, Warren may, at its option,
redeem up to $130.0 million in aggregate principal amount of the Notes with
the net proceeds therefrom at 111.0% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
through the redemption date; provided, that at least $245.0 million in
aggregate principal amount of the Notes remains outstanding following such
redemption.
Change of Control
In the event of a Change of Control, the holders of the Notes will have the
right to require Warren to purchase their Notes at a price equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase.
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Covenants
The Indenture contains certain covenants that, among other things, limit the
ability of Warren and its subsidiaries to incur additional Indebtedness and
issue preferred stock, pay dividends or make other distributions, repurchase
Equity Interests or pari passu or subordinated Indebtedness, make Restricted
Investments, engage in sale and leaseback transactions, create certain liens,
enter into certain transactions with affiliates, sell assets, issue or sell
Equity Interests of Warren's subsidiaries or enter into certain mergers and
consolidations. In addition, under certain circumstances, Warren is required
to offer to purchase the Notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase, with the proceeds of certain Asset Sales.
Events of Default
The Indenture contains customary Events of Default.
CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS
FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
COMMON STOCK, SENIOR PREFERRED STOCK, CLASS A WARRANTS AND CLASS B WARRANTS
The following discussion sets forth the material anticipated Federal income
tax consequences of the purchase, ownership and disposition of the Common
Stock, Senior Preferred Stock, the Class A and Class B Warrants and the
Exchange Debentures by a purchaser that is a "U.S. holder" and that purchases
such Securities at the relevant offering prices set forth herein and by
holders that receive Exchange Debentures upon an exchange by the Company of
such Debentures for Senior Preferred Stock. A "U.S. holder" is (i) a citizen
or resident of the United States, (ii) a corporation created or organized
under the laws of the United States or any State thereof (including the
District of Columbia) or (iii) a person otherwise subject to United States
Federal income taxation on its worldwide income. This summary is based upon
the provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
the final, temporary and proposed regulations promulgated thereunder, and
administrative rulings and judicial decisions now in effect, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. This summary does not purport to deal with all aspects of
Federal income taxation that may be relevant to an investor's decision to
purchase and it is not intended to be applicable to all categories of
investors, some of which, such as dealers in securities, banks, insurance
companies, tax-exempt organizations and foreign persons, may be subject to
special rules. In addition, the summary is limited to persons that will hold
the Securities as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Code and is not applicable to
holders who own, directly or through attribution, stock in the Company,
Holdings or Sappi, other than stock acquired in the Offering or upon the
exercise of a Warrant acquired in the Offering. Holders should note that this
discussion is not binding on the Internal Revenue Service (the "Service") and
there can be no assurance that the Service will take a similar view with
respect to the tax consequences described below. No ruling has been or will be
requested by Holdings from the Service on any tax matters relating to the
Securities.
ALL PROSPECTIVE PURCHASERS OF SECURITIES (IN PARTICULAR, HOLDERS THAT ARE
NOT U.S. HOLDERS) ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE SECURITIES.
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COMMON STOCK AND SENIOR PREFERRED STOCK
Distributions in General
Dividends on the Common Stock and Senior Preferred Stock will be taxable for
Federal income tax purposes as ordinary dividend income to the extent paid out
of the current or accumulated earnings and profits of Holdings as determined
for Federal income tax purposes. To the extent that the amount of such a
distribution exceeds the current and accumulated earnings and profits of
Holdings, such excess will be treated as a non-taxable recovery of the
holder's basis in the stock in respect of which the distribution is made (to
the extent thereof), with any remaining excess treated as gain from the sale
or exchange of such stock.
Although it is possible that cash dividends will be paid on or prior to
December 15, 1999, it is not expected that Holdings will pay any dividends on
the Senior Preferred Stock in cash for any period ending on or prior to
December 15, 1999. Any unpaid dividends will accrue and compound and will be
payable upon the optional or mandatory redemption of the Senior Preferred
Stock or the exchange of Exchange Debentures for Senior Preferred Stock. The
tax treatment of such accruing and compounding dividends ("Accrued Dividends")
is not free from doubt. Under current law, it would appear that Accrued
Dividends would not be treated as having been received by holders of the
Senior Preferred Stock until such Accrued Dividends were actually paid in cash
(and would then be taxable for Federal income tax purposes as a dividend to
the extent of Holdings' current and accumulated earnings and profits at such
time). The legislative history to the 1990 amendments to Section 305(c) of the
Code, however, grants the Service authority to issue regulations (possibly
with retroactive effect) which would treat such Accrued Dividends as part of
the redemption price of the stock. If Accrued Dividends were included in the
redemption price of the Senior Preferred Stock, a holder would be required to
take such Accrued Dividends into account in determining the amount that
constitutes an excessive redemption price for purposes of Section 305(c) of
the Code, as described below under "Excessive Redemption Price". The effect of
such treatment could be to treat such holder as having received such Accrued
Dividends as constructive distributions at the time they accrue, rather than
at the time they are paid in cash. Until regulations requiring such treatment
with respect to Accrued Dividends are issued, however, Holdings intends to
take the position that Accrued Dividends on the Senior Preferred Stock need
not be treated as received by a holder until such time as such Accrued
Dividends are actually paid to such holder in cash and will report to the
Service on that basis.
PROSPECTIVE PURCHASERS OF SENIOR PREFERRED STOCK ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE TAX TREATMENT OF ACCRUED DIVIDENDS.
Excessive Redemption Price
Under Section 305 of the Code and Treasury Regulations authorized
thereunder, if the redemption price of preferred stock exceeds its issue price
(i.e., its fair market value at its date of original issue), such excess may,
under certain circumstances, be taxable as a constructive distribution to the
holder (treated as a dividend to the extent of Holdings' current and
accumulated earnings and profits and otherwise subject to the treatment
described above for distributions in excess of current and accumulated
earnings and profits). The Senior Preferred Stock may have been issued to the
original purchasers at an issue price that was less than its redemption price
(the "Discount Amount").
The Senior Preferred Stock does not have a fixed mandatory redemption date
and the holders of such stock cannot put the stock to Holdings. In addition,
the Senior Preferred Stock is redeemable at Holdings' option at any time. As a
result, Holdings has taken the position that holders of the Senior Preferred
Stock should not be treated as receiving constructive dividends in respect of
any Discount Amount on such stock. There can be no assurance, however, that
the Service will not take a contrary position. If the Service were to
successfully assert that preferred stock that is immediately callable is
subject to the economic accrual rules of Section 305 of the Code, irrespective
of whether such stock is mandatorily redeemable or puttable by the holder,
purchasers of the Senior Preferred Stock (including purchasers from the
Selling Security Holders) could be treated as receiving constructive
dividends, regardless of the price paid for such stock.
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Dividends to Corporate Shareholders
In general, an actual or constructive distribution that is treated as a
dividend for Federal income tax purposes and that is made to a corporate
shareholder with respect to the Common Stock or Senior Preferred Stock will
qualify for the 70% dividends-received deduction.
Under Section 1059 of the Code, the tax basis of Common Stock or Senior
Preferred Stock that has been held by a corporate shareholder for two years or
less (ending on the earliest of the date on which the Company declares,
announces or agrees to the payment of such actual or constructive dividend) is
reduced (but not below zero) by the non-taxed portion of an "extraordinary
dividend" for which a dividends-received deduction is allowed. To the extent a
corporate holder's tax basis would have been reduced below zero but for the
foregoing limitation, such holder must increase the amount of gain recognized
on the ultimate sale or exchange of such Common Stock or Senior Preferred
Stock. Generally, an "extraordinary dividend" is a dividend that (1) equals or
exceeds 5% of the holder's adjusted basis in the Senior Preferred Stock or, in
the case of Common Stock, 10% of the holder's adjusted basis in the Common
Stock (treating all dividends having ex-dividend dates within an 85-day period
as a single dividend) or (2) exceeds 20% of the holder's adjusted basis in the
Senior Preferred Stock or the Common Stock (treating all dividends having ex-
dividend dates within a 365-day period as a single dividend). If an election
is made by the holder, under certain circumstances the fair market value of
the Common Stock or the Senior Preferred Stock as of the day before the ex-
dividend date may be substituted for the holder's basis in applying these
tests.
CORPORATE STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE POSSIBLE APPLICATION OF SECTION 1059 TO THEIR OWNERSHIP AND
DISPOSITION OF THE COMMON STOCK AND SENIOR PREFERRED STOCK.
A corporate stockholder's liability for alternative minimum tax may be
affected by the portion of dividends received which such corporate stockholder
deducts (pursuant to the dividends-received deduction) in computing taxable
income. This results from the fact that corporate stockholders are required to
increase alternative minimum taxable income by 75% of the excess of current
earnings and profits (with certain adjustments, but determined without regard
to the dividends-received deduction), over alternative minimum taxable income
(determined without regard to this earnings and profits adjustment or the
alternative tax net operating loss deduction, but taking into account the
dividends-received deduction).
Sale Redemption or other Taxable Disposition
Upon a sale, redemption or other taxable disposition of Common Stock or
Senior Preferred Stock (including an exchange of Exchange Debentures for
Senior Preferred Stock), a holder generally will recognize capital gain or
loss for Federal income tax purposes (except to the extent of cash payments
received on the disposition that are attributable to declared dividends, which
will be treated in the same manner as distributions described above under
"Distributions in General") in an amount equal to the difference between (1)
the sum of the amount of cash and the fair market value of any property
received upon such sale, redemption or other taxable disposition (the "amount
realized") and (2) the holder's adjusted tax basis in the stock being disposed
of. Such capital gain or loss will be long-term capital gain or loss if the
stock had been held by the holder for more than one year at the time of the
disposition. Notwithstanding the foregoing, it is possible that the Service
may require a holder to treat amounts received upon the redemption of Senior
Preferred Stock or the exchange of Exchange Debentures for Senior Preferred
Stock that are attributable to Accrued Dividends (and not previously treated
as received by a holder as a constructive distribution as described above
under "Distributions in General") as a constructive distribution, regardless
of whether Holdings declares a dividend of such Accrued Dividends in
connection with such redemption or exchange. In such case, such amounts would
be taxable for Federal income tax purposes as ordinary dividend income to the
extent of Holdings' current and accumulated earnings and profits for Federal
income tax purposes at such time (and any amounts in excess thereof would be
taxable as described above under "Distribution in General").
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A holder's initial tax basis in the Common Stock will equal the purchase
price paid for such stock. A holder's initial tax basis in the Senior
Preferred Stock will equal the purchase price of the Senior Preferred Stock,
as described above under "Excessive Redemption Price". Thereafter, such
initial tax basis will be (i) increased by the amount (if any) of any
constructive distributions the holder is treated as having received pursuant
to the rules described above under "Distributions in General" and "Excessive
Redemption Price", and (ii) decreased by the portion of any (actual or
constructive) distribution that is treated as a tax-free recovery of basis as
described above under "Distributions in General".
If Holdings elects to exchange Exchange Debentures for Senior Preferred
Stock on a dividend date, the amount realized on the exchange will depend on
whether the Exchange Debentures and/or the Senior Preferred Stock is traded on
an established market (as defined in applicable Treasury Regulations) at the
time of the exchange. The amount realized will equal (i) the fair market value
of the Exchange Debentures as of the exchange date if the Exchange Debentures
are traded on an established market at such time or (ii) the fair market value
of the Senior Preferred Stock as of the exchange date if such Senior Preferred
Stock is traded on an established market at such time but the Exchange
Debentures are not. If neither the Senior Preferred Stock nor the Exchange
Debentures are so traded, the amount realized will equal the stated principal
amount of the Exchange Debentures provided that the yield on the Exchange
Debentures is equal to or greater than the relevant "applicable Federal rate".
(The applicable Federal rate is a rate announced monthly by the Treasury that
is intended to reflect the average yield of United States government
obligations.) If neither the Exchange Debentures nor the Senior Preferred
Stock is so traded and the yield on the Exchange Debentures is less than the
applicable Federal rate, the amount realized will equal the present value as
of the exchange date of all payments to be made on the Exchange Debentures,
discounted at the applicable Federal rate. It cannot be determined at the
present time whether the Senior Preferred Stock or the Exchange Debentures
will be, at the relevant time, traded on an established market within the
meaning of the Treasury Regulations.
Depending upon a holder's particular circumstances, the tax consequences of
holding Exchange Debentures (described below) may be less advantageous than
the tax consequences of holding Senior Preferred Stock because, for example,
payments of interest on the Exchange Debentures will not be eligible for any
dividends-received deduction that may be available to corporate holders and
because, as discussed below, since the Exchange Debentures permit the
distribution of Additional Exchange Debentures in lieu of the payment of
interest in cash, such Exchange Debentures will be issued with OID.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE LIKELIHOOD
OF CAPITAL GAIN TREATMENT (IN WHOLE OR PART) ON THE REDEMPTION OF COMMON
STOCK, SENIOR PREFERRED STOCK OR THE EXCHANGE OF SENIOR PREFERRED STOCK FOR
EXCHANGE DEBENTURES.
CLASS A AND CLASS B WARRANTS
A holder's initial tax basis in a Warrant will equal the purchase price of
the Warrant. Upon a sale, exchange or other disposition (including repurchase
by Holdings) of a Warrant, a holder will generally recognize gain or loss for
Federal income tax purposes in an amount equal to the difference between (i)
the sum of the amount of cash and the fair market value of any property
received upon such sale, exchange or other disposition and (ii) the holder's
adjusted tax basis (see below) in the Warrant being disposed of. Gain or loss
recognized upon a sale, exchange or other disposition of a Warrant generally
will be capital gain or loss and will be long-term capital gain or loss if the
Warrant had been held by the holder for more than one year at the time of the
disposition. Notwithstanding the foregoing, the repurchase of a Warrant by
Holdings may not qualify for capital gain or loss treatment. Upon the lapse of
a Warrant, a holder will recognize a capital loss equal to such holder's
adjusted tax basis (see below) in the Warrant. Any such loss will be long-term
capital loss if the Warrant had been held by the holder for more than one year
at the time of lapse. A holder will not recognize gain or loss upon exercise
of a Warrant. The tax basis of a share of Holdings' Common Stock acquired upon
exercise of a Warrant will equal the sum of (i) the adjusted tax basis (see
below) of such Warrant and (ii) the exercise price. The holding period of
Holding's Common Stock acquired upon exercise of a Warrant will begin on the
day after the day of exercise of the Warrant and will not include the period
during which the Warrant was held.
90
<PAGE>
Alternatively, because the Warrants are issued with a nominal exercise
price, they may constitute Common Stock of Holdings for Federal income tax
purposes. In such case, the tax consequences to holders would not materially
differ from those described above except that (i) a repurchase of the Warrants
by Holdings would generally give rise to capital gain or loss and (ii) the
holding period of Common Stock actually received upon exercise of the Warrants
would include the period during which the Warrants were held by the holder.
The conversion ratio of the Warrants is subject to adjustment under certain
circumstances. Under Section 305 of the Code and the Treasury Regulations
issued thereunder, holders of the Warrants will be treated as having received
a constructive distribution, resulting in ordinary income (subject to a
possible dividends-received deduction in the case of corporate holders) to the
extent of Holding's current and/or accumulated earnings and profits, if, and
to the extent that, certain adjustments in the conversion ratio that may occur
in limited circumstances (particularly an adjustment to reflect a taxable
dividend to holders of Common Stock of Holdings) increase the proportionate
interest of a holder of a Warrant in the fully diluted Common Stock, whether
or not the holder ever exercises the Warrant. Generally, a holder's tax basis
in a Warrant will be increased by the amount of any such constructive
distribution.
EXCHANGE DEBENTURES
Consequences of Owning Exchange Debentures
The consequences of owning Exchange Debentures will depend in part upon the
facts existing at the time of issuance, as described below. Accordingly, the
ultimate Federal income tax treatment of the ownership of the Exchange
Debentures may differ substantially from that described below. If any Exchange
Debentures are issued, Holdings will report to holders on a timely basis the
reportable amount of original issue discount ("OID") and interest income with
respect to the Exchange Debentures, based on its understanding of then
applicable law.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
CONSEQUENCES OF OWNING EXCHANGE DEBENTURES.
Original Issue Discount
Because interest on the Exchange Debentures can, at the option of Holdings,
be paid in cash or in additional Exchange Debentures, the Exchange Debentures
will be treated, for Federal income tax purposes, as having been issued with
OID. Under the provisions of the Treasury Regulations dealing with OID (the
"OID Regulations") (i) the distribution of additional Exchange Debentures in
lieu of the payment of interest in cash ("Additional Exchange Debentures")
will not be treated as the payment of interest and accordingly, (ii) an
Exchange Debenture and all Additional Exchange Debentures that could be issued
with respect thereto (if all interest payments that could be satisfied in
Additional Exchange Debentures were satisfied in Additional Exchange
Debentures) will be treated as single OID obligation. Accordingly, under the
provisions of the OID Regulations (i) the stated redemption price at maturity
of an Exchange Debenture will be equal to the sum of all cash payments due on
such Exchange Debentures and on all Additional Exchange Debentures that could
be issued with respect to such Exchange Debenture or Additional Exchange
Debentures (if all interest payments that could be satisfied in Additional
Exchange Debentures were satisfied in Additional Exchange Debentures), (ii)
each Exchange Debenture will be issued with OID in an amount equal to the
excess of such stated redemption price at maturity over the issue price of
such Exchange Debenture and (iii) no interest payment on the Exchange
Debentures or on any Additional Exchange Debentures distributed with respect
thereto will be treated as qualified stated interest and therefore no such
interest will be included in income when paid (because equivalent amounts will
be included in income as OID).
The holder of an Exchange Debenture issued with OID will be required to
include such OID in income as interest over the term of the Exchange
Debentures, in advance of the receipt of the cash attributable to such income,
under a constant interest rate method described below that takes account of
the compounding of interest.
The amount of OID accruing with respect to any Exchange Debenture will be
the sum of the "daily portions" of OID with respect to such Exchange Debenture
for each day during the taxable year in which a holder owns an Exchange
Debenture ("accrued OID"). The daily portion is determined by allocating to
each
91
<PAGE>
day in any "accrual period" a pro rata portion of the OID allocable to that
accrual period. An accrual period may be of any length and may vary in length
over the term of an Exchange Debenture provided that each accrual period is no
longer than one year and each scheduled payment of principal or interest
occurs either on the final day of an accrual period or on the first day of an
accrual period. The amount of OID accruing during any accrual period with
respect to an Exchange Debenture will be equal to the following amount; (i)
the "adjusted issue price" of such Exchange Debenture at the beginning of that
accrual period, multiplied by (ii) the yield to maturity of such Exchange
Debenture. OID allocable to a final accrual period is the difference between
the amount payable at maturity and the adjusted issue price at the beginning
of the final accrual period. If all accrual periods are of equal length,
except for an initial short accrual period, the amount of OID allocable to the
initial short accrual period may be computed under any reasonable method. The
adjusted issue price of an Exchange Debenture at the beginning of its first
accrual period will be equal to its issue price. An Exchange Debenture's issue
price will equal the amount realized upon the exchange of Exchange Debentures
for Senior Preferred Stock, as described above under "Sale, Redemption or
other Taxable Disposition". The adjusted issue price at the beginning of any
subsequent accrual period will be equal to (i) the adjusted issue price at the
beginning of the preceding accrual period, plus (ii) the amount of OID
allocable to the preceding accrual period, minus (iii) any payments (including
payments of cash interest) made during the preceding accrual period and on the
first day of such subsequent accrual period.
Under current Treasury Regulations Holdings will be deemed to exercise its
optional redemption right on any date if the exercise of such right would
lower the yield of the Exchange Debentures (a "Presumed Exercise Date"). Due
to the operation of the interest rate adjustment provisions described above
under "Description of the Exchange Debentures--Maturity and Interest", it is
possible that Holdings would be deemed to exercise its redemption right on
December 15, 2006, because, depending upon the issue price of the Exchange
Debentures, the exercise of such redemption right may reduce the yield of the
Exchange Debentures. Under such circumstances, the determination of the daily
portion of accrued OID for each accrual period ending on or prior to December
15, 2006, would be made by assuming that the Exchange Debentures are redeemed
on such date. If the Exchange Debentures are not in fact redeemed on any
Presumed Exercised Date, they will be treated as reissued on such date (for an
amount equal to their adjusted issue price as of such date) and will be deemed
to mature on any subsequent Presumed Exercise Date for a stated redemption
price that takes into account the increase in the interest rate.
Applicable High Yield Discount Obligations
Pursuant to Section 163 of the Code, a portion of the OID accruing on
certain debt instruments will be treated as a dividend eligible for the
dividends-received deduction, and the corporation issuing such debt instrument
will not be entitled to deduct such portion of the OID and will be allowed to
deduct the remainder of the OID only when paid.
This treatment would apply to "applicable high yield discount obligations"
("AHYDO"), that is, debt instruments that have a term of more than five years,
have a yield to maturity that equals or exceeds five percentage points over
the "applicable Federal rate" and have "significant" OID. A debt instrument is
treated as having "significant" OID if the aggregate amount that would be
includible in gross income with respect to such debt instrument for periods
before the close of any accrual period ending after the date five years after
the date of issue exceeds the sum of (i) the aggregate amount of interest to
be paid in cash under the debt instrument before the close of such accrual
period and (ii) the product of the initial issue price of such debt instrument
and its yield to maturity. Because the amount of OID attributable to the
Exchange Debentures will be determined at the time such Exchange Debentures
are issued and the applicable Federal rate at the time the Exchange Debentures
are issued is not predictable, it is impossible to determine at the present
time whether the Exchange Debentures will be treated as an AHYDO.
If the Exchange Debentures are treated as AHYDO's, a holder would be treated
as receiving dividend income (to the extent of Holdings' current and
accumulated earnings and profits) solely for purposes of the dividends-
received deduction in an amount equal to the "disqualified portion" of the OID
of such AHYDO.
92
<PAGE>
The "disqualified portion" of the OID is equal to the lesser of (i) the amount
of the OID or (ii) the portion of the "total return" (the excess of all
payments to be made with respect to the Exchange Debenture obligation over its
issue price) on the Exchange Debenture that bears the same ratio to the
Exchange Debenture's total return as the "disqualified yield" (the extent to
which the yield exceeds the applicable Federal rate plus 6%) bears to the
Exchange Debenture's yield to maturity. To the extent that Holdings' earnings
and profits are insufficient, any portion of the OID that otherwise would have
been recharacterized as a dividend for purposes of the dividends-received
deduction will continue to be taxed as ordinary OID income in accordance with
the rules described above. Holdings' deduction for OID will be substantially
deferred with respect to an Exchange Debenture that is treated as an AHYDO. In
addition, such deduction will be disallowed to the extent that the yield on
such AHYDO exceeds the applicable Federal rate by more than 6%.
Sale, Redemption or other Taxable Disposition of Exchange Debentures
Generally, any sale, redemption other taxable disposition of Exchange
Debentures by a holder will result in taxable gain or loss equal to the
difference between (i) the sum of the amount of cash and the fair market value
of any property received upon such sale, redemption or disposition and (ii)
the holder's adjusted tax basis in such Exchange Debentures. The adjusted tax
basis of a holder in such Exchange Debentures will equal the issue price of
such Exchange Debentures, increased by any OID on the Exchange Debentures
previously included in such holder's income, and reduced by any payments
(including payments of cash interest) previously made on the Exchange
Debentures. Such gain or loss will be capital gain or loss, and will be long-
term capital gain or loss if the Exchange Debentures had been held by the
holder for more than one year at a time of the sale, redemption or
disposition.
BACKUP WITHHOLDING
In general, a noncorporate holder of Securities will be subject to backup
withholding at the rate of 31% with respect to reportable payments of
dividends, interest, or OID accrued with respect to, or the proceeds of a
sale, exchange or redemption of, Securities, as the case may be, if the holder
fails to provide a taxpayer identification number or certification of foreign
or other exempt status or fails to report in full dividend and interest
income. Amounts paid as backup withholding do not constitute an additional tax
and will be credited against the holder's Federal income tax liabilities.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PURCHASER OF SECURITIES SHOULD CONSULT WITH ITS OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PURCHASER OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF SUCH SECURITIES, INCLUDING THE APPLICATION AND
EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
93
<PAGE>
PLAN OF DISTRIBUTION
The Securities may be sold from time to time directly by any of the Selling
Security Holders. Alternatively, the Selling Security Holders may from time to
time offer the Securities through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Security Holders and/or the purchasers of
Securities for whom they may act as agent. The Selling Security Holders and
any underwriters, dealers or agents that participate in the distribution of
Securities may be deemed to be underwriters under the Act, and any profit on
the sale of Securities by them and any discounts, commissions or concessions
received by any such underwriters, dealers or agents might be deemed to be
underwriting discounts and commissions. At the time a particular offer of
Securities is made, to the extent required, a Prospectus Supplement will be
distributed which will set forth the name of the Selling Security Holders for
whose account Securities are to be so offered, the aggregate principal amount
of Exchange Debentures, the amount of the Senior Preferred Stock, the amount
of the Warrants or the amount of Common Stock being offered, and the terms of
the offering, including the name or names of any underwriters, dealers or
agents, items constituting compensation from the Selling Security Holders, and
any discounts, commissions, or concessions allowed or reallowed or paid to
dealers. Holdings will not receive any of the proceeds from the sale by the
Selling Security Holders of the Securities offered hereby.
The Securities may be sold from time to time in one or more transactions at
a fixed offering price, which may be changed, at varying prices determined at
the time of sale, or at negotiated prices. Although there is no agreement to
do so, DLJSC and UBS Securities, who may currently be deemed to be affiliates
of Holdings, as well as others, may act as broker or dealer in connection with
the sale of the Securities contemplated by this Prospectus and may receive
fees or commissions in connection therewith, and any such broker dealer as
part of its normal broker-dealer activities, may purchase from one or more of
the Selling Security Holders a portion, which may be substantial, of the
Securities. Sappi has agreed to acquire the minority common equity interests
in Holdings held by affiliates of DLJSC and UBS Securities, and to terminate a
Shareholders Agreement relating to these equity interests. See "Security
Ownership of Certain Beneficial Owners and Management."
There is currently no active market for the Securities. There can be no
assurance as to the liquidity of any market for the Securities, the ability of
the holders of the Securities to sell their Securities, or the price holders
of the Securities would be able to sell their Securities.
Pursuant to applicable rules and regulations under the Exchange Act, any
person engaged in a "distribution" of any of the Securities may not
simultaneously engage in market making activities with respect to any of the
Securities for a period of nine business days prior to the commencement of
such distribution. In addition and without limiting the foregoing, the Selling
Security Holders and any other person participating in the distribution of the
Securities will be subject to applicable provisions of the Exchange Act and
Rule 10b-2, 10b-6, and 10b-7 thereunder, which provisions may otherwise limit
the time of purchases and sales of any of the Securities by the Selling
Security Holders and such other person.
Holdings will pay substantially all of the expenses incident to this
offering of the Securities by the Selling Security Holders to the public,
other than commissions and discounts of underwriters, dealers, or agents, and
will indemnify the Selling Security Holders and certain other persons against
certain liabilities, including liabilities as underwriters or otherwise, under
the Act.
In order to comply with certain states' securities laws, if applicable, the
Securities will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the Securities may
not be sold unless such Securities have been registered or qualified for sale
in such state or an exemption from registration or qualification is available
and is complied with.
94
<PAGE>
EXPERTS
The consolidated balance sheets of Holdings as of October 2, 1996 and
September 27, 1995, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the twelve months ended
October 2, 1996 and for the period December 21, 1994 (commencing with the
Acquisition) through September 27, 1995 and the related financial schedules
for such periods included in this Prospectus have been audited by Deloitte &
Touche llp, independent auditors, as stated in their report appearing herein
(which report expresses an unqualified opinion and includes an explanatory
paragraph referring to the comparability of the Holdings financial statements
with those of S.D. Warren and certain related affiliates), and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The combined statements of operations, changes in parent's equity, and cash
flows of S.D. Warren and certain related affiliates for the nine month period
ended September 24, 1994, and for the periods September 25, 1994 through
December 20, 1994, and December 21, 1994 (commencing with the Acquisition)
through September 27, 1995 and the related financial statement schedule for
such periods included in this Prospectus have been audited by Deloitte &
Touche llp, independent auditors, as stated in their report appearing herein
(which report expresses an unqualified opinion and includes an explanatory
paragraph referring to the comparability of S.D. Warren and certain related
affiliates financial statements with those of Holdings), and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
95
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SDW HOLDINGS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Financial Statements:
Statements of Operations for the nine months ended September 24, 1994,
the period September 25, 1994 through December 20, 1994, the period De-
cember 21, 1994 through September 27, 1995 and the twelve months ended
October 2, 1996......................................................... F-3
Balance Sheets as of September 27, 1995 and October 2, 1996.............. F-4
Statements of Cash Flows for the nine months ended September 24, 1994,
the period September 25, 1994 through December 20, 1994, the period De-
cember 21, 1994 through September 27, 1995 and the twelve months ended
October 2, 1996......................................................... F-5
Statements of Changes in Parent's Equity for the nine months ended Sep-
tember 24, 1994 and the period September 25, 1994 through December 20,
1994.................................................................... F-6
Statements of Changes in Stockholders' Equity for the period December 21,
1994 through September 27, 1995 and the twelve months ended October 2,
1996.................................................................... F-7
Notes to Financial Statements............................................ F-8
Financial Statement Schedules:
I--Condensed Financial Information of Parent........................... F-35
II--Valuation and Qualifying Accounts.................................. F-39
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of SDW Holdings Corporation and subsidiaries:
We have audited the consolidated balance sheets of SDW Holdings Corporation
and subsidiaries (the "Company") as of October 2, 1996 and September 27, 1995
and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the twelve-month period ended October
2, 1996 and the period December 21, 1994 (commencing with the acquisition)
through September 27, 1995. We have also audited the combined statements of
operations, changes in parent's equity, and cash flows for the nine-month
period ended September 24, 1994 and for the period September 25, 1994 through
December 20, 1994 of S.D. Warren Company and certain related affiliates (the
"Predecessor Corporation"). Our audits also included the financial statement
schedules listed in the Index. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 2 to the financial statements, S.D. Warren Company and
certain related affiliates were acquired effective December 20, 1994. The
transaction was accounted for using the purchase method of accounting whereby
the purchase price was allocated to the assets acquired and liabilities
assumed based on their respective fair values. Accordingly, the statements of
operations, changes in parent's equity and cash flows of the Predecessor
Corporation for the periods referred to in the first paragraph of this report
are not comparable with those presented for the Company.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of October 2,
1996 and September 27, 1995 and the results of their operations and their cash
flows for the twelve-month period ended October 2, 1996 and the period from
December 21, 1994 (commencing with the acquisition) through September 27, 1995
in conformity with generally accepted accounting principles. Also, in our
opinion, the combined financial statements of the Predecessor Corporation
present fairly, in all material respects, the results of their operations, and
their cash flows for the nine-month period ended September 24, 1994 and for
the period September 25, 1994 through December 20, 1994 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 28, 1996
(November 5, 1996 as to Note 23)
F-2
<PAGE>
SDW HOLDINGS CORPORATION
STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS PERIOD SEPTEMBER 25, PERIOD DECEMBER 21, TWELVE MONTHS
ENDED 1994 THROUGH 1994 THROUGH ENDED
SEPTEMBER 24, 1994 DECEMBER 20, 1994 SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ -------------------- ------------------- ----------------
S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND SDW HOLDINGS SDW HOLDINGS
CERTAIN RELATED CERTAIN RELATED CORPORATION CORPORATION
AFFILIATES AFFILIATES AND SUBSIDIARIES AND SUBSIDIARIES
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
------------------ -------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Sales........................................... $828.8 $313.6 $1,155.8 $1,441.6
Cost of goods sold.............................. 722.4 263.7 886.0 1,186.6
------ ------ -------- --------
Gross profit.................................... 106.4 49.9 269.8 255.0
Selling, general and administrative expense..... 72.1 22.2 96.2 134.0
------ ------ -------- --------
Income from operations.......................... 34.3 27.7 173.6 121.0
Other income (expense), net..................... 0.1 (0.5) 3.2 (0.1)
Interest expense................................ 6.4 2.3 106.0 108.9
------ ------ -------- --------
Income before income taxes, dividends and
accretion on Warren Series B redeemable
exchangeable preferred stock and extraordinary
item........................................... 28.0 24.9 70.8 12.0
Income tax expense.............................. 11.2 9.9 28.4 5.1
Dividends and accretion on Warren Series B
redeemable exchangeable preferred stock........ -- -- 9.1 13.5
------ ------ -------- --------
Income (loss) before extraordinary item......... 16.8 15.0 33.3 (6.6)
Extraordinary item, net of tax.................. -- -- -- (2.0)
------ ------ -------- --------
Net income (loss)............................... 16.8 15.0 33.3 (8.6)
Dividends on preferred stock.................... -- -- 4.6 6.9
------ ------ -------- --------
Net income (loss) applicable to common
stockholders................................... $ 16.8 $ 15.0 $ 28.7 $ (15.5)
====== ====== ======== ========
Earnings (loss) per common share:
Income (loss) before extraordinary item....... $ 0.93 $ (0.21)
======== ========
Net income (loss)............................. $ 0.93 $ (0.28)
======== ========
Net income (loss) applicable to common
stockholders................................. $ 0.80 $ (0.50)
======== ========
Weighted average number of shares outstanding... 35.9 30.7
- --------------------------------------------------
======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
SDW HOLDINGS CORPORATION
BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 62.2 $ 49.0
Trade accounts receivable, net............ 129.4 49.1
Other receivables......................... 24.2 34.2
Inventories, net.......................... 226.5 195.7
Deferred income taxes..................... 8.9 18.0
Other current assets...................... 11.1 9.4
-------- --------
Total current assets.................... 462.3 355.4
Plant assets, net........................... 1,153.8 1,114.7
Timber resources, at cost less timber har-
vested, net................................ 95.3 95.3
Goodwill, net............................... 98.1 94.1
Deferred financing fees, net................ 53.1 44.8
Other assets, net........................... 24.7 21.1
-------- --------
Total assets............................ $1,887.3 $1,725.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...... $ 78.6 $ 46.4
Accounts payable.......................... 112.2 101.6
Accrued and other current liabilities..... 93.6 97.6
-------- --------
Total current liabilities............... 284.4 245.6
-------- --------
Long-term debt:
Term loans................................ 553.8 411.4
Senior subordinated notes................. 375.0 375.0
Other..................................... 120.0 116.1
-------- --------
Total long-term debt.................... 1,048.8 902.5
-------- --------
Deferred income taxes....................... 21.2 34.6
-------- --------
Other liabilities........................... 93.3 98.2
-------- --------
Total liabilities....................... 1,447.7 1,280.9
-------- --------
Commitments and contingencies (Notes 14 and
15)
Warren Series B redeemable exchangeable
preferred stock (liquidation value, $83.5
and $96.2, respectively)................... 74.5 88.0
-------- --------
Stockholders' equity:
Preferred stock (at liquidation value).... 42.1 49.0
Common stock ($.01 par value; 100 shares
authorized; 30.7 shares issued and out-
standing at September 27, 1995 and Octo-
ber 2, 1996)............................. 0.3 0.3
Capital in excess of par value............ 294.0 294.0
Retained earnings......................... 28.7 13.2
-------- --------
Total stockholders' equity.............. 365.1 356.5
-------- --------
Total liabilities and stockholders'
equity................................. $1,887.3 $1,725.4
======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
SDW HOLDINGS CORPORATION
STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS PERIOD SEPTEMBER 25, PERIOD DECEMBER 21, TWELVE MONTHS
ENDED 1994 THROUGH 1994 THROUGH ENDED
SEPTEMBER 24, 1994 DECEMBER 20, 1994 SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ -------------------- ------------------- ---------------
S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND SDW HOLDINGS SDW HOLDINGS
CERTAIN RELATED CERTAIN RELATED CORPORATION AND CORPORATION AND
AFFILIATES AFFILIATES SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
------------------ -------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................... $ 16.8 $ 15.0 $ 33.3 $(8.6)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, cost of timber harvested and
amortization.................................. 71.6 28.8 89.8 115.2
Deferred income taxes.......................... 8.4 15.8 12.3 5.6
Dividends and accretion on Warren Series B
redeemable exchangeable preferred stock....... -- -- 9.1 13.5
Extraordinary item............................. -- -- -- 2.0
Changes in assets and liabilities net of the
effect of the Acquisition:
Trade accounts receivable, net................. (9.8) (1.7) (23.0) 80.3
Inventories, net............................... (13.0) 5.4 (57.6) 30.8
Accounts payable, accrued and other current
liabilities................................... (19.3) 18.6 66.0 (6.6)
Accruals for restructuring programs............ (28.4) (12.7) -- --
Other assets and liabilities................... 1.5 (15.5) 6.1 (15.6)
------ ------ --------- -------
Net cash provided by operating activities........ 27.8 53.7 136.0 216.6
------ ------ --------- -------
Cash Flows from Investing Activities:
Acquisition, net of related costs............... -- -- (1,455.9) --
Investments in plant assets and timber
resources...................................... (32.3) (14.5) (33.7) (51.3)
Other investing activities...................... (14.1) -- -- 2.7
------ ------ --------- -------
Net cash used in investing activities............ (46.4) (14.5) (1,489.6) (48.6)
------ ------ --------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt........ 0.9 -- 1,105.7 --
Repayments of long-term debt.................... (5.4) (0.5) (162.1) (178.2)
Proceeds from issuance of common stock.......... -- -- 294.3 --
Proceeds from issuance of Warren Series B
redeemable exchangeable preferred stock, net of
expenses....................................... -- -- 65.4 --
Proceeds from issuance of preferred stock....... -- -- 37.5 --
Predecessor Corporation's parent company capital
infusions, net................................. 25.4 31.6 -- --
Other financing activities...................... 0.3 -- -- (3.0)
------ ------ --------- -------
Net cash provided by (used in) financing
activities...................................... 21.2 31.1 1,340.8 (181.2)
------ ------ --------- -------
Net change in cash and cash equivalents.......... 2.6 70.3 (12.8) (13.2)
Cash and cash equivalents:
Beginning of period............................. 2.1 4.7 75.0 62.2
------ ------ --------- -------
End of period................................... $ 4.7 $ 75.0 $ 62.2 $ 49.0
- --------------------------------------------------
====== ====== ========= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
SDW HOLDINGS CORPORATION
STATEMENTS OF CHANGES IN PARENT'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
PARENT'S
EQUITY
--------
<S> <C>
Balance, December 25, 1993............................................ $1,088.1
Net income........................................................... 16.8
Foreign currency translation adjustment.............................. 1.2
Capital infusion, net................................................ 25.4
Minimum pension liability adjustment................................. 5.0
--------
Balance, September 24, 1994........................................... 1,136.5
Net income........................................................... 15.0
Foreign currency translation adjustment.............................. 1.0
Capital infusion, net................................................ 66.6
--------
Balance, December 20, 1994 prior to acquisition....................... $1,219.1
========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
SDW HOLDINGS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON COMMON EXCESS OF PREFERRED RETAINED
SHARES STOCK PAR VALUE STOCK EARNINGS TOTAL
------ ------ ---------- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 21,
1994...................... -- $-- $ -- $ -- $ -- $ --
Issuance of common stock
and warrants............. 30.7 0.3 294.0 -- -- 294.3
Issuance of preferred
stock.................... -- -- -- 37.5 -- 37.5
Net income................ -- -- -- -- 33.3 33.3
Dividends accrued on
preferred stock.......... -- -- -- 4.6 (4.6) --
---- ---- ------ ----- ----- ------
Balance, September 27,
1995...................... 30.7 0.3 294.0 42.1 28.7 365.1
Net loss.................. -- -- -- -- (8.6) (8.6)
Dividends accrued on
preferred stock.......... -- -- -- 6.9 (6.9) --
---- ---- ------ ----- ----- ------
Balance, October 2, 1996... 30.7 $0.3 $294.0 $49.0 $13.2 $356.5
==== ==== ====== ===== ===== ======
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS
SDW Holdings Corporation ("Holdings"), a Delaware holding company, owns all
of the outstanding common stock of S.D. Warren Company ("S.D. Warren,"
"Warren," or the "Successor Corporation"). Holdings has no material assets
other than its investment in Warren. All of the operations of Holdings (other
than the management of its investment in Warren and the provision of certain
corporate services to Warren) are currently conducted through Warren. Holdings
and its subsidiary, Warren, are referred to herein as the "Company."
The Company manufactures printing, publishing and specialty papers and has
pulp and timberland operations vertically integrated with certain of its
manufacturing facilities which represents the Company's single line of
business. The Company currently operates four paper mills, a sheeting and
several distribution facilities and owns approximately 911,000 acres of
timberlands in the State of Maine.
NOTE 2--FORMATION AND ACQUISITION
As of October 8, 1994, SDW Acquisition Corporation ("SDW Acquisition"), a
direct wholly-owned subsidiary of Holdings, entered into a definitive
agreement (the "Stock Purchase Agreement") pursuant to which, on December 20,
1994, SDW Acquisition acquired (the "Acquisition") from Scott Paper Company
("Scott") all of the outstanding capital stock of Warren, then a wholly-owned
subsidiary of Scott, and certain related affiliates of Scott (referred to
herein as the "Predecessor Corporation"). Immediately following the
Acquisition, SDW Acquisition merged with and into Warren (the "Merger"), with
Warren (the "Successor Corporation") surviving. Prior to the date of
Acquisition, there was no significant activity, revenues received or
expenditures incurred by either Holdings or SDW Acquisition. Scott has since
been acquired by Kimberly Clark Corporation.
The Acquisition was accounted for as a purchase, applying the provisions of
Accounting Principles Board Opinion ("APB") No. 16. The total purchase cost of
approximately $1.9 billion, including the effect of liabilities assumed, was
allocated to the assets acquired based on their respective fair values as
follows (in millions):
<TABLE>
<S> <C>
Plant assets...................................................... $1,186.0
Timber resources.................................................. 98.6
Intangible assets:
Patents......................................................... 23.0
Goodwill........................................................ 100.6
Other assets...................................................... 62.8
Current assets, net realizable value in the case of inventories,
receivables and prepaid expenses................................. 436.7
--------
$1,907.7
========
</TABLE>
Liabilities assumed in the Acquisition, based on their respective fair
market values, were treated as non-cash activity for presentation in the
Statement of Cash Flows. Liabilities assumed were as follows (in millions):
<TABLE>
<S> <C>
Current liabilities.................................................. $142.6
Long term debt....................................................... 121.9
Other long term liabilities.......................................... 80.9
------
$345.4
======
</TABLE>
F-8
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
To effect the Acquisition, SDW Acquisition issued $75.0 million of 14%
Series A Senior Exchangeable Preferred Stock due 2006 (the "Old Senior
Preferred Stock") and $375.0 million of 12% Series A Senior Subordinated Notes
due 2004 (the "Series A Notes") and received $331.8 million from Holdings as a
contribution to capital. Holdings funded the $331.8 million contributed from
the proceeds Holdings received from the issuance of the preferred stock,
common stock and warrants (as discussed in Notes 20 and 21). The Old Senior
Preferred Stock and the Series A Notes were subject to an exchange offer
discussed in Notes 11 and 19. The remaining purchase price was financed, in
part, through the credit facilities discussed in Note 11. Indebtedness
incurred by SDW Acquisition to finance the Acquisition was assumed by Warren,
including preferred stock issued by SDW Acquisition which was converted into
preferred stock of Warren having identical terms.
Subsequent to the Acquisition, the Company and Scott jointly elected to
treat the stock purchase as an asset purchase for federal income tax purposes
pursuant to Internal Revenue Code Section 338 (h) (10).
Pro Forma Information (Unaudited)
The following table sets forth pro forma information on the Acquisition of
the Predecessor Corporation as though it had occurred on September 25, 1994.
These pro forma results of operations are not necessarily indicative of either
the actual results of operations that would have occurred had the Acquisition
been made on September 25, 1994 or of the results which may occur in the
future.
Unaudited Pro Forma Statements of Operations Data (in millions, except per
share data):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 27, 1995
------------------
<S> <C>
Net sales.............................................. $1,469.4
========
Operating income....................................... $ 202.9
========
Net income............................................. $ 29.2
========
Net income applicable to common stockholders........... $ 23.1
========
Net income per common share............................ $ 0.64
========
</TABLE>
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of the Company have been
prepared on the accrual basis of accounting and include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain prior period amounts have been
reclassified to conform with the current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates used by management include realization
of certain assets such as trade and other accounts receivable, inventory,
goodwill and deferred tax assets, as well as estimates of exposure and certain
liabilities of the Company. Actual results could differ from those estimates.
As the Acquisition resulted in a new basis of accounting and the adoption of
certain accounting policies which differ from the Predecessor Corporation's
accounting policies, the Company's financial statements for the
F-9
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
periods subsequent to the Acquisition date are not comparable to the
Predecessor Corporation's financial statements for the periods prior to the
Acquisition.
The following presents the significant accounting policies of the Company.
Except as discussed in Note 4, the significant accounting policies of the
Predecessor Corporation are comparable to those of the Company.
Fiscal Year
The Company and its subsidiaries' fiscal year ends on the Wednesday closest
to the last day of September. The twelve months ended October 2, 1996 ("fiscal
year 1996") included 53 weeks.
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, 1995 and October 2, 1996, the Company had no
short-term marketable securities.
Other Receivables
Other receivables primarily represent amounts due from the sale of energy
produced by the Company's cogeneration facilities, certain outstanding
insurance claims, income taxes receivable and sundry other receivables.
Inventories
Inventories are valued at the lower of cost or market, using the first-in,
first-out ("FIFO") cost method. Inventories of maintenance parts and other
supplies are recorded at purchase cost.
Plant Assets
Plant assets are recorded at cost. For financial accounting purposes,
depreciation is principally calculated by the straight-line method over the
estimated useful lives of the assets, which range from three to twenty years.
Expenditures for renewals and improvements which increase the useful life or
capacity of plant assets are capitalized. On retirements or sales of assets
which have not been fully depreciated, the cost of plant assets and the
related accumulated depreciation are removed from the asset account. The
Company records gains and losses on the retirement or sale of plant assets
when realized.
Interest expense is capitalized on major construction projects, including
timber resources, discussed below, to the extent that such timber has not yet
matured. For the nine months ended September 24, 1994, the period December 21,
1994 through September 27, 1995 (the "nine months" ended September 27, 1995),
and fiscal year 1996, the Company capitalized interest of approximately $1.4
million, $0.9 million, and $1.9 million, respectively. No interest was
capitalized for the period September 25, 1994 through December 20, 1994 (the
"three months" ended December 20, 1994).
Timber Resources
Timber resources are recorded at cost, which includes original costs, road
construction costs and reforestation costs such as site preparation and
planting costs. Property taxes, surveying, fire control and other forest
management expenses are charged to expense as incurred.
F-10
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Goodwill
Goodwill, which resulted from the Acquisition, is being amortized for
financial statement purposes on a straight-line basis over 25 years. On an
ongoing basis, the carrying value of goodwill is evaluated on the basis of
whether anticipated operating cash flows generated by the acquired businesses
are adequate to recover the recorded asset balance over its estimated useful
life. The goodwill balance at September 27, 1995 and October 2, 1996 was
approximately $98.1 million and $94.1 million, respectively, net of
approximately $3.1 million and $7.1 million, respectively, of accumulated
amortization.
Deferred Financing Fees
Deferred financing fees, primarily resulting from the financing of the
Acquisition are being amortized over the average life of the related debt and
are recorded net of accumulated amortization of approximately $7.2 million and
$15.2 million at September 27, 1995 and October 2, 1996, respectively. As a
result of the partial early extinguishment of debt during fiscal year 1996,
the Company recorded a $2.0 million extraordinary loss which was comprised of
a $3.3 million write-off of deferred financing fees partially offset by a $1.3
million deferred tax benefit.
Other Assets
Other assets include intangible assets, primarily patents, arising as part
of the purchase price allocation, of $21.5 million and $19.6 million at
September 27, 1995 and October 2, 1996, respectively. These intangible assets
are being amortized over their estimated useful lives of approximately eleven
years. Intangibles are stated net of accumulated amortization of approximately
$1.5 million and $3.4 million at September 27, 1995 and October 2, 1996,
respectively.
Financial Instruments
The Company uses interest rate swap agreements ("Swaps") and interest rate
cap agreements ("Caps") as a means of managing interest-rate risk associated
with debt balances. These instruments are matched with either fixed or
variable rate debt and are recorded on a settlement basis as an adjustment to
interest expense. Premiums paid to purchase Caps are amortized as an
adjustment to interest expense over the life of the contract. Cash flows from
Swaps and Caps are classified in the Statements of Cash Flows in the same
category as the items being hedged or on a basis consistent with the nature of
the investment.
During the third quarter of fiscal year 1996, the Company commenced
transacting business in currencies other than the U.S. Dollar. The Company
manages the potential exposure associated with transacting in foreign
currencies through the use of foreign currency forward contracts. These
contracts are used to offset the effects of exchange rate fluctuations on a
portion of the underlying foreign currency denominated exposure. These
exposures include firm related party trade accounts receivable. Realized and
unrealized gains and losses on these contracts for the fiscal year 1996 were
insignificant.
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.
F-11
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Workers' Compensation Insurance
The Company is primarily self-insured for workers' compensation insurance.
The self-insurance claim liability for workers' compensation is based on
claims reported and actuarial estimates of adverse developments and claims
incurred but not reported. The Company's workers' compensation liability is
discounted to reflect the passage of several years before the claims related
to a particular year are paid in full. The liability has been determined based
on an actuarial valuation and the timing of payments associated therewith are
reasonably estimable. The present value of such claims was determined using
discount rates of 8.25% for the nine months ended September 24, 1994 and 5.5%
for the three months ended December 20, 1994, the nine months ended September
27, 1995, and fiscal year 1996, respectively. The gross liability was $44.0
million and $46.0 million at September 27, 1995 and October 2, 1996,
respectively.
Research and Development Expenditures
Expenditures for research and development are charged to expense as
incurred. Research and development costs were $9.5 million, $3.0 million,
$10.7 million, and $15.6 million for the nine months ended September 24, 1994,
the three months ended December 20, 1994, the nine months ended September 27,
1995, and fiscal year 1996, respectively.
Environmental Expenditures
Environmental expenditures that pertain to current operations or relate to
future revenues are expensed or capitalized consistent with the Company's
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations, and do not contribute to current
or future revenues, are expensed. Environmental accruals are recorded based on
current interpretations of environmental laws and regulations when it is
probable that a liability has been incurred and the amount of such liability
can be reasonably estimated. Amounts accrued are not discounted and do not
include third-party recoveries. Liabilities are recognized for remedial
activities when the clean-up is probable and the cost can be reasonably
estimated. All available information is considered including the results of
remedial investigation/feasibility studies ("RI/FS"). In evaluating any
disposal site environmental exposure, an assessment is made of the Company's
potential share of the remediation costs by reference to the known or
estimated volume of the Company's waste that was sent to the site and the
range of costs to treat similar waste at other sites if a RI/FS is not
available.
Other Income (Expense), net
Other income (expense), net, represents interest income on cash and cash
equivalents and other non-operating income and expense items.
Earnings per Common Share
Income per common share of Holdings is computed using the weighted average
number of common shares outstanding during the period and dilutive common
equivalent shares. Warrants exercisable for approximately 5.2 million common
shares of Holdings are included as common stock equivalents for the nine
months ended September 27, 1995. During fiscal year 1996, such warrants were
antidilutive and, accordingly, were not included in weighted average shares
outstanding. The Company's net income (loss) has been reduced by preferred
stock dividends to arrive at net income (loss) applicable to common
stockholders of Holdings.
F-12
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cash Paid for Income Taxes
Cash paid for income taxes for the nine months ended September 27, 1995 and
fiscal year 1996 was $20.6 million and $4.7 million, respectively. In periods
prior to December 21, 1994 the Predecessor Corporation's income taxes were
paid by Scott.
Cash Paid for Interest
Cash paid for interest during the nine months ended September 24, 1994, the
three months ended December 20, 1994, the nine months ended September 27, 1995
and fiscal year 1996 was $5.0 million, $2.9 million, $75.6 million and $112.3
million, respectively.
Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
FAS No. 123, "Accounting for Stock-Based Compensation." FAS No. 123 which is
effective for the Company in fiscal year 1997 addresses the financial
accounting and reporting requirements for stock-based employee compensation
plans. FAS No. 123 permits an entity to either record the effects of stock-
based employee compensation plans in its financials statements or retain the
current accounting and present pro forma disclosure in the notes to the
financial statements. The implementation of FAS No. 123 is not expected to
have a material impact on the Company's financial position, results of
operations, cash flows, or financial statement disclosure as the Company will
retain its current accounting.
In October 1996, FASB issued FAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," which
addresses accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. FAS No. 125 is required to
be adopted in 1997. The implementation of FAS No. 125 is not expected to have
a material impact on the Company's financial position, results of operations
or cash flows.
NOTE 4--BASIS OF PRESENTATION AND ACCOUNTING POLICIES (PREDECESSOR
CORPORATION)
Basis of Presentation
The combined financial statements of the Predecessor Corporation consist of
Scott's wholly-owned subsidiary S.D. Warren Company and its wholly-owned
subsidiaries, as well as the net assets and results of operations of the
printing, publishing, and specialty papers businesses in Bornem, Belgium (the
"Belgian Affiliate") and a mill facility located in Mobile, Alabama that were
owned by Scott. All significant transactions between combined entities have
been eliminated. As previously stated, the Predecessor Corporation's financial
statements for periods prior to the Acquisition are not comparable to the
Company's.
The combined financial statements include allocations of costs for services,
including accounting and tax, treasury and cash management, data processing,
legal and environmental, facility and risk management, human resources and
labor relations, and government and public affairs. These costs have been
allocated based upon a variety of methods, including: specific identification,
based on estimates of time and services provided; relative identification,
based on relevant criteria that establishes the Predecessor Corporation's
relationship to the entire pool of beneficiaries and formula driven, not
specifically identifiable to the Predecessor Corporation but incurred for the
benefit of all Scott affiliates.
Management believes the allocations reflected in the Statements of
Operations, while reasonable, may not represent the cost of similar activities
on a separate entity basis.
The Mobile, Alabama facility is located adjacent to the former Scott tissue
and pulp operations and a power generation facility. These operations are
currently owned and operated by Kimberly Clark and Mobile Energy
F-13
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Systems Company ("MESC"), respectively. Historically, the Mobile, Alabama
facility purchased pulp, utilities
and other services from Scott based on shared cost arrangements. The Company
continues to purchase pulp and
utilities from Kimberly Clark and MESC. Amounts purchased were $71.0 million,
$18.4 million, $127.3 million and $148.0 million for the nine months ended
September 24, 1994, the three months ended December 20, 1994, the nine months
ended September 27, 1995 and fiscal year 1996, respectively.
Predecessor Corporation Accounting Policies
The Predecessor Corporation had accounting policies similar to those of the
Company with the following significant exceptions:
Inventory cost was determined using the last-in, first-out ("LIFO") method.
For certain major capital assets, the Predecessor Corporation calculated
depreciation on the units-of-production method during the learning curve phase
of the project. On retirements or sales of plant assets which had not been
fully depreciated, the Predecessor Corporation charged gains and losses to the
related depreciation reserve account. The Predecessor Corporation capitalized
certain pre-operating costs on any single capital project for which such costs
were expected to exceed $3.0 million. The capitalized costs were amortized
over a five year period.
Income taxes for the Predecessor Corporation, through December 20, 1994 were
included in the U.S. consolidated federal income tax return of Scott and on a
separate company basis for state tax purposes. For periods prior to December
21, 1994 the financial statements include a charge in lieu of tax which
approximates the federal tax provision assuming the Predecessor Corporation
filed a separate tax return.
Assets and liabilities of the Predecessor Corporation's foreign operations
were translated into U.S. dollars using year-end exchange rates. Revenues and
expenses of foreign operations were translated at the average exchange rates
in effect during the year. Adjustments resulting from financial statement
translations were included as a separate component of parent's equity. Gains
and losses resulting from foreign currency transactions were not material and
were included in net income.
NOTE 5--TRADE ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
(IN MILLIONS)
<S> <C> <C>
Trade accounts receivable.............................. $135.0 $54.4
Allowance for doubtful accounts........................ (5.6) (5.3)
------ -----
$129.4 $49.1
====== =====
</TABLE>
Trade accounts receivable includes the Company's undivided interest in its
investment in accounts receivable which were securitized during fiscal year
1996 (Note 11). Securitized trade accounts receivable aggregated $139.1
million at October 2, 1996.
The Company had sales to customers outside of the United States ("Export
Sales") of $60.0 million, $24.7 million, $90.5 million, and $174.3 million for
the nine months ended September 24, 1994, the three months ended December 20,
1994, the nine months ended September 27, 1995 and fiscal year 1996,
respectively. Export sales are primarily to Canada, Europe and the Far East.
Export sales do not exceed 10% for any geographic region. Export sales prior
to the Acquisition were handled primarily by direct sales, sales through
agents and
F-14
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
sales through the Company's Belgian Affiliate. During 1995, the Belgian
Affiliate was closed and its property and equipment were sold. Effective with
the closure of the Belgian Affiliate, the Company's sales outside of the
United States and Canada are primarily handled by the Company's affiliates
under the common control of Sappi Limited ("Sappi") (see Note 22). Sappi,
through its indirect ownership in Holdings, is the largest investor in the
Company.
Sales to customers which individually exceed 10% of total sales amounted to
approximately 58.1%, 51.1%, 54.0% and 52.5% of sales for the nine months ended
September 24, 1994, the three months ended December 20, 1994, the nine months
ended September 27, 1995, and fiscal year 1996, respectively. Each of these
customers is a merchant that resells the Company's paper products to a wide
range of end users. The loss of any of these customers could have a material
effect on the Company's business and results of operations. Sales to each such
customer are indicated below (in millions):
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
NINE MONTHS ENDED ENDED NINE MONTHS ENDED ENDED
SEPTEMBER 24, 1994 DECEMBER 20, 1994 SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ ----------------- ------------------ ---------------
<S> <C> <C> <C> <C>
1... $160.8 $81.2 $292.4 $355.0
2... 128.5 40.5 163.0 201.9
3... 106.9 38.5 168.7 199.8
4... 85.4 * * *
</TABLE>
- --------
* Less than 10% of total sales.
Aggregate trade receivables from customers which individually exceeded 10%
of total receivables were $57.3 million and $91.1 million as of September 27,
1995 and October 2, 1996, respectively. Included in the computation of
receivables exceeding 10% at October 2, 1996 are a portion of the gross
receivables which were securitized (Note 11) and certain related party
receivables from Sappi and its subsidiaries (Note 22).
NOTE 6--INVENTORIES, NET (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ ---------------
<S> <C> <C>
Finished products........................ $ 89.8 $ 92.8
Work in process.......................... 51.0 34.5
Pulp, logs and pulpwood.................. 33.2 25.8
Maintenance parts and other supplies..... 52.5 42.6
-------- --------
$ 226.5 $ 195.7
======== ========
NOTE 7--PLANT ASSETS (IN MILLIONS)
<CAPTION>
SEPTEMBER 27, 1995 OCTOBER 2, 1996
------------------ ---------------
<S> <C> <C>
Plant assets, at cost:
Land and buildings..................... $ 171.1 $ 172.7
Plant and equipment.................... 1,048.2 1,095.5
-------- --------
1,219.3 1,268.2
Accumulated depreciation............... (65.5) (153.5)
-------- --------
$1,153.8 $1,114.7
======== ========
</TABLE>
F-15
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--DEPRECIATION & COST OF TIMBER HARVESTED (IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Depreciation of plant assets....................................... $69.9 $27.3 $65.5 $86.8
Cost of timber harvested and amortization of logging roads......... 0.5 0.2 1.3 0.9
----- ----- ----- -----
-------------------------------------------------- $70.4 $27.5 $66.8 $87.7
===== ===== ===== =====
</TABLE>
NOTE 9--INCOME TAXES
The domestic and foreign components of income before taxes, dividends and
accretion on Warren Series B Redeemable Exchangeable preferred stock and
extraordinary item are as follows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Domestic........................................................... $24.8 $22.4 $68.4 $12.0
Foreign............................................................ 3.2 2.5 2.4 --
--------------------------------------------------
----- ----- ----- -----
$28.0 $24.9 $70.8 $12.0
===== ===== ===== =====
</TABLE>
The components of the tax provisions before extraordinary item are as
follows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Current:
Federal.......................................................... $ 2.6 $(5.7) $15.1 $(1.1)
Foreign.......................................................... 1.2 1.0 0.1 (1.2)
State and local.................................................. (1.0) (1.2) 0.9 1.8
----- ----- ----- -----
Total current.................................................. 2.8 (5.9) 16.1 (0.5)
----- ----- ----- -----
Deferred:
Federal.......................................................... 5.8 13.0 8.1 5.3
Foreign.......................................................... -- -- -- 1.2
State and local.................................................. 2.6 2.8 4.2 (0.9)
--------------------------------------------------
----- ----- ----- -----
Total deferred................................................. 8.4 15.8 12.3 5.6
----- ----- ----- -----
$11.2 $ 9.9 $28.4 $ 5.1
===== ===== ===== =====
</TABLE>
F-16
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred tax provisions before extraordinary item are
as follows, excluding the $1.3 million deferred tax benefit associated with
the $3.3 million extraordinary loss recorded as a result of the early
retirement of debt (in millions):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Inventory............... $ -- $ 0.1 $ 5.3 $ (0.1)
Plant assets............ 9.3 (17.0) 16.4 93.0
Accrued and other lia-
bilities............... 6.3 38.5 (0.1) (35.5)
AMT credit
carryforwards.......... (2.5) (0.8) (9.3) (3.7)
Tax loss carryforwards.. (4.7) (5.0) -- (41.7)
Other credits........... -- -- -- (6.4)
----- ------ ----- ------
Deferred tax provision.. $ 8.4 $ 15.8 $12.3 $ 5.6
===== ====== ===== ======
</TABLE>
The components of the deferred tax assets and (liabilities) are as follows
(in millions):
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
<S> <C> <C>
Current:
Deferred tax assets:
Restructuring reserves........................... $ 0.3 $ 0.3
Accrued and other liabilities.................... 7.9 18.5
Inventory........................................ 1.3 1.4
------ -------
Total current deferred tax assets.............. 9.5 20.2
Deferred tax liabilities:
Accrued and other liabilities and prepaids....... (0.6) (2.2)
------ -------
Net current deferred tax asset..................... 8.9 18.0
------ -------
Noncurrent:
Deferred tax assets:
Alternative minimum tax credit carryforwards..... 9.3 13.0
Tax loss carryforwards........................... -- 41.7
Accrued and other liabilities.................... 21.3 46.0
Other............................................ -- 7.7
------ -------
Total noncurrent deferred tax assets........... 30.6 108.4
------ -------
Deferred tax liabilities:
Property, plant and equipment.................... (13.4) (106.0)
Other............................................ (38.4) (37.0)
------ -------
Total noncurrent deferred tax liability........ (51.8) (143.0)
------ -------
Net noncurrent deferred tax liability.............. (21.2) (34.6)
------ -------
Net deferred tax liability....................... $(12.3) $ (16.6)
====== =======
</TABLE>
F-17
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The differences between the U.S. statutory income tax rate and the Company's
effective income tax rate before extraordinary item are:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
U.S. statutory income tax rate........................................ 35.0% 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............................ 3.8 4.2 4.9 5.2
International......................................................... 0.4 0.3 0.1 --
Other factors......................................................... 0.8 0.3 0.1 2.3
---- ---- ---- ----
Effective tax rate.................................................... 40.0% 39.8% 40.1% 42.5%
- --------------------------------------------------
==== ==== ==== ====
</TABLE>
As of October 2, 1996, the Company had available federal and state tax net
operating loss carryforwards of approximately $120 million. For federal tax
purposes, the loss carryforwards will expire in the year 2011. For state tax
purposes, the loss carryforwards will expire between the years 2001 and 2011.
The Company also has available an alternative minimum tax credit carryforward
for tax return purposes of $13 million which will carry forward to future
taxable years indefinitely.
NOTE 10--ACCRUED AND OTHER CURRENT LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
<S> <C> <C>
Accrued salaries, wages and employee benefits..... $49.9 $47.5
Accrued interest.................................. 23.8 15.2
Accrued workers' compensation..................... 5.6 7.4
Other accrued expenses............................ 14.3 27.5
----- -----
$93.6 $97.6
===== =====
</TABLE>
NOTE 11--LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
(IN MILLIONS)
<S> <C> <C>
Credit Agreement:
Term Loan, Tranche A.............................. $ 305.0 $268.7
Term Loan, Tranche B.............................. 325.0 185.0
Series B Senior Subordinated Notes.................. 375.0 375.0
Revenue Bonds....................................... 121.3 119.5
Capital Leases...................................... 1.1 0.7
-------- ------
1,127.4 948.9
Current maturities of long-term debt................ 78.6 46.4
-------- ------
Long-term debt...................................... $1,048.8 $902.5
======== ======
</TABLE>
Credit Agreement
Holdings and Warren entered into an agreement (the "Credit Agreement") with
Chemical Bank (now known as The Chase Manhattan Bank, "Chase") and 43 other
domestic and international lenders on December 20, 1994, which consists of (i)
the Term Loan Facilities, comprised of a seven-year senior secured
F-18
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
term loan facility originally in an aggregate principal amount of $305.0
million (the "Tranche A Term Loan"), and an eight-year senior secured term
loan facility originally in an aggregate principal amount of $325.0 million
(the "Tranche B Term Loan"), (ii) the Revolving Credit Facility and (iii) the
Letter of Credit Facility (together collectively referred to herein as the
"Credit Facilities".)
On April 26, 1996, the Company amended its Credit Agreement to include
changes to certain provisions relating to restrictive covenants including,
among other things, the ability to incur debt, pay dividends and sell certain
assets. In addition, certain provisions relating to interest rates, fees,
collateral, prepayments and affirmative covenants also have been amended.
Concurrently with the above, the Company, a newly established bankruptcy
remote subsidiary, S.D. Warren Finance Co. ("SDWF"), the Bank of Montreal
("BOM") and its securities unit, Nesbitt Burns Securities ("Nesbitt"), as
agent, entered into a receivables purchase agreement whereby BOM through
Nesbitt has agreed to provide a five-year $110 million revolving accounts
receivable securitization facility (the "A/R Facility"). Under this facility,
the Company sells to SDWF, pursuant to a purchase and contribution agreement
between the Company and SDWF, on a non-recourse basis, all rights and
interests in its accounts receivable. Pursuant to the receivables purchase
agreement, SDWF, in turn, sells certain interests in the accounts receivable
pool owned by SDWF to Nesbitt under similar terms. Proceeds of $90.0 million
from the A/R Facility, along with $10.0 million cash on hand, were used to
prepay $100.0 million of the final installment of the Tranche B Term Loan
under the Credit Agreement. As a result of the early extinguishment of a
portion of the Tranche B Term Loan, the Company recorded an extraordinary loss
of $2.0 million, net of a $1.3 million deferred tax benefit, related to the
unamortized deferred financing fees associated with the Tranche B Term Loan.
The loans under the Credit Agreement bear interest at a rate equal to, at
the Company's option, (i) the Base Rate plus the Applicable Margin ("Base Rate
Loans") or (ii) the Eurodollar Rate (adjusted for reserves) as determined by
Chase for the respective interest period plus the Applicable Margin
("Eurodollar Loans"). Applicable Margin means a percentage per annum ranging
(a) in the case of Base Rate Loans, from 1.50% to 0.00% (2.00% in the case of
Tranche B Term Loans), and (b) in the case of Eurodollar Loans, from 2.50% to
1.00% (3.00% in the case of Tranche B Term Loans), in each case based upon the
Company's ability to maintain certain financial ratios determined from the
most recent financial statements of the Company calculated as of the last day
of each fiscal quarter on a rolling four quarter basis. "Base Rate" means the
highest of (1) the rate of interest publicly announced by Chase as its prime
rate in effect at its principal office in New York City, (2) the secondary
market rate for the three month certificates of deposit (adjusted for
reserves) plus 1.0% and (3) the federal funds rate in effect from time to time
plus 0.5%.
The Credit Facilities are guaranteed by Holdings and each of its U.S.
subsidiaries. The Credit Facilities and such guarantees are secured by
security interests (subject to other liens permitted by the terms of the
Credit Facilities), to the extent permissible under the applicable laws and
regulations, in (a) all of the capital stock of Warren and each of its U.S.
subsidiaries and 65% of the common stock and 100% of the preferred stock of
each 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 minimum debt service ratio, and
a net worth test. Such covenants are not considered by the Company to be of a
restrictive nature in conducting its business activities. As of October 2,
1996, management believes the Company is in compliance with all covenants.
F-19
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO 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 Nesbitt, as agent. 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.
Under the terms of the Credit Agreement, Warren was required to enter into
interest rate protection agreements, primarily interest rate swap and interest
rate cap agreements. At September 27, 1995 and October 2, 1996, Warren had two
interest rate swap agreements outstanding under which the interest rates have
been fixed at rates between 7.43% and 9.95% with respect to $75 million of
notional principal amount of debt. Warren also has two interest rate cap
agreements outstanding with respect to $130 million of notional principal
amount of debt under which the interest rate has been capped at rates between
8.00% and 9.50%. Net receipts or payments under the agreements are recognized
as adjustments to interest expense. The swap and cap agreements expire at
varying dates between December 1997 and January 2000.
Term Loans
The Tranche A Term Loan is payable in semi-annual installments commencing
June 30, 1996 with a final maturity in December 2001. The Tranche B Term Loan
is payable in semi-annual installments commencing on June 30, 1996 with a
final maturity in December 2002. Interest rates on the term loans are set, at
the Company's option, at either the Base Rate or the Eurodollar Rate, both
plus an Applicable Margin (as described above). At October 2, 1996, both the
Tranche A Term Loan and the Tranche B Term Loan were Eurodollar loans. At
September 27, 1995 and October 2, 1996 the interest rate on the Tranche A Term
Loan was 8.38% and 7.19%, respectively; and the interest rate on the Tranche B
Term Loan was 8.82% and 7.69%, respectively.
Warren is required to prepay the Term Loan Facility with (i) 100% of the net
proceeds of certain asset sales, (ii) 100% of the net proceeds of incurrences
of certain indebtedness and (iii) 50% of the net proceeds from issuances of
equity by Holdings or any of its subsidiaries. Warren is also required to
prepay the Term Loan Facilities annually in an amount equal to 75% of the
Excess Cash Flow (as defined therein) of Warren and its subsidiaries for the
prior fiscal year; provided that the Company will be required to prepay
annually an amount equal to only 50% of such Excess Cash Flow if (a) the
aggregate outstanding principal amount of the Term Loan Facilities is less
than $250.0 million and (b) Consolidated Interest Expense Ratio (as defined
therein) as of the last day of the fiscal quarter immediately preceding the
date such payment (calculated on a rolling four quarter basis) exceeds 3.00 to
1.00. The Company made $74.9 million of Excess Cash Flow payments relating to
fiscal year 1995, during the first quarter of fiscal year 1996. The Company
will not have the excess cash flow prepayment requirements, as defined, in the
first quarter of fiscal year 1997 due to the prepayment of the Tranche B Term
Loan under the Credit Agreement during the third quarter of fiscal year 1996.
The Company may also make optional prepayments without premium or penalty at
any time (subject to payments of certain termination costs if other than on
the last day of an interest period under certain circumstances). Optional
prepayments shall be applied pro rata to the Tranche A Term Loan and the
Tranche B Term Loan based on the respective amounts outstanding and shall be
applied to installments thereof on a pro rata basis, and may not be
reborrowed. The amount of any optional prepayments funded with the portion of
Excess Cash Flow which is not otherwise required to be used to prepay Term
Loans and/or the Letter of Credit Facility Loans may, at the Company's option,
be applied to prepay the Tranche A Term Loan and/or the Tranche B Term Loan in
such amounts as the Company may determine with any such prepayment to be
applied first to any scheduled installment due within six months of the date
of prepayment and then to the remaining installments of the Tranche A Term
Loan and/or the Tranche B Term Loan, as the case may be, on a pro rata basis.
F-20
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revolving Credit Facility
Under the Revolving Credit Facility, Warren can borrow up to $250.0 million
to fund working capital needs. In addition, a portion of the Revolving Credit
Facility is available to Warren for letters of credit up to $75.0 million. At
September 27, 1995 and October 2, 1996, $20.6 million and $1.0 million,
respectively, of the Revolving Credit Facility was utilized to guarantee the
issuance of letters of credit. At September 27, 1995 and October 2, 1996,
availability under the Revolving Credit Facility was $229.4 million and $249.0
million, respectively.
The interest rate on loans under the Revolving Credit Facility are set, at
Warren's option, at either the Base Rate or the Eurodollar Rate, both plus an
Applicable Margin (see Credit Agreement section). At October 2, 1996, the
Company had no loans outstanding under the Revolving Credit Facility. Letters
of credit issued through the Revolving Credit Facility are charged an annual
commission equal to the Applicable Margin in effect from time to time (see
Credit Agreement section). Warren also pays an annual fronting fee to Chase on
Revolving Credit Facility letters of credit. In addition, Warren pays a
quarterly commitment fee between 0.375% and 0.50% per annum, based on the
achievement of a certain financial ratio, on the unused portion of the
Revolving Credit Facility.
Letter of Credit Facility
In accordance with the Agreement to which the Acquisition was effected,
letters of credit in an aggregate principal amount of $220.0 million were
issued in favor of Scott to support its ongoing obligations under nine
separate tax-exempt bond financings and the financing of the Biomass
Cogeneration Facility at the Company's Westbrook, Maine facility assumed by
Warren. At September 27, 1995 and October 2, 1996, such letters of credit
outstanding aggregated approximately $170.5 million.
Warren Series B Senior Subordinated Notes
On May 31, 1995, Warren consummated an exchange offer pursuant to which it
offered to (1) exchange the existing Series A Notes for an equivalent amount
of 12% Series B Senior Subordinated Notes due 2004 (the "Series B Notes" and
together with the Series A Notes, the "Notes") having substantially identical
terms and (2) exchange the existing Old Senior Preferred Stock for an
equivalent amount of its 14% Series B Senior Redeemable Exchangeable Preferred
Stock due 2006 (the "Warren Series B Preferred Stock") having substantially
identical terms. Such exchange transactions were contemplated in the original
issues of the Series A Notes and the Old Senior Preferred Stock (collectively,
the "Exchanged Securities").
The Series B Notes are unsecured, subordinated obligations of Warren and
rank i) junior in right of payment to all existing and future Senior Debt (as
defined for purposes of the Notes), including obligations of Warren under the
Credit Agreement and ii) senior in right of payment to or pari passu in right
of payment with all existing and future subordinated indebtedness.
Revenue Bonds
Warren assumed $119.3 million of revenue bonds from Scott. Such debt is
comprised of nine separate tax-exempt municipal bond issues (the "Issues")
relating to certain environmental and solid waste disposal projects. The
issues have various maturities ranging from 1997 through 2022. Warren assumed
responsibility for Scott's obligations under the Issues but with respect to
each Issue (other than the Issue which was re-marketed on August 21, 1995, as
described below) Scott remains either contingently liable as a guarantor, or
directly liable as the original obligor. Interest rates on these issues at
September 27, 1995 and October 2, 1996 ranged from 5.75% to 9.375%. Bonds in
an amount of $44.0 million bearing variable interest rates were re-marketed on
August 21, 1995 as fixed interest rate bonds. Warren became the sole obligor
under the bonds and a $49.5 million letter of
F-21
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
credit issued in favor of Scott was canceled. The trustee for each Issue has
been granted or assigned the issuer's rights under a sale, lease purchase or
loan agreement, as the case may be, between the relevant issuer and Warren
relating to each respective project and, in respect of two of the Issues, a
security interest in the project financed thereby.
Future Maturities of Long-term Debt
Scheduled maturities of long-term debt, including capital leases and sinking
fund payments, at October 2, 1996 are as follows (in millions):
<TABLE>
<S> <C>
1997............................................ $ 46.4
1998............................................ 59.5
1999............................................ 54.5
2000............................................ 59.8
2001............................................ 77.6
Thereafter...................................... 651.1
------
$948.9
======
</TABLE>
NOTE 12--FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and debt. In addition, the
Company uses interest rate caps and swaps, which were required under the terms
of the Credit Agreement, as a means of managing interest rate risk associated
with outstanding debt. Summarized below are the carrying values and fair
values of the Company's financial instruments. The carrying amounts for cash,
cash equivalents, receivables and payables approximate fair value due to the
short-term nature of these instruments. Accordingly, these items have been
excluded from the table below (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 27, 1995 OCTOBER 2, 1996
-------------------- ---------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- -------- ------
<S> <C> <C> <C> <C>
BALANCE SHEET FINANCIAL INSTRUMENT:
Term Loans, Tranche A and B......... $ 630.0 $ 630.0 $453.7 $453.7
Notes............................... 375.0 414.9 375.0 405.0
Revenue Bonds and Capital Leases.... 122.4 119.1 120.2 119.2
Interest rate caps and swaps........ 1.6 (3.0) 0.9 (2.1)
</TABLE>
The fair value of the Notes, Revenue Bonds and Capital Leases was estimated
by the Company based upon discussions with its investment bankers. The
principal amounts of the Tranche A and B Term Loans approximate market since
they are variable rate instruments which reprice monthly.
The Company's off-balance sheet financial instruments include the Revolving
Credit Facility letters of credit, the Letter of Credit Facility letters of
credit and interest rate caps and swaps. At September 27, 1995 and October 2,
1996, the total carrying amount of the premium associated with the interest
rate caps was $1.6 million and $0.9 million, respectively. Unrealized losses
related to the interest rate caps and swaps approximated $4.6 million and $3.0
million, at these two dates, respectively. Additionally, at October 2, 1996,
the Company's off-balance sheet financing included the A/R Facility; the total
carrying amount of accounts receivable reflects a $90.0 million reduction
related to the A/R Facility. There are no unrealized losses on the A/R
Facility.
The fair value of interest rate swaps and caps is the estimated amount that
the Company would pay or receive to terminate the swap agreement at the
balance sheet date, taking into account current interest rates and the current
credit-worthiness of the swap counterparties. The fair value of the Revolving
Credit Facility
F-22
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and the Letter of Credit Facility are based upon fees currently charged for
similar agreements or on the estimated cost to terminate the obligation at the
reporting date.
A significant portion of the Company's sales and accounts receivable are
from major customers (Note 5). 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
The Company leases office and warehouse space and various office and
manufacturing equipment under operating leases. Unexpired lease terms for
operating leases range from one to six years. Most leases contain renewal
options and options to purchase such equipment at fair market value. Rental
expense relating to these leases was $4.9 million, $0.8 million, $2.4 million
and $3.5 million for the nine months ended September 24, 1994, the three
months ended December 20, 1994, the nine months ended September 27, 1995 and
fiscal year 1996, respectively.
Additionally, the Company has other commitments, which expire in 2008, to
operate a biomass cogeneration facility adjacent to its Westbrook mill and to
purchase its steam and electricity output on a take-or-pay basis (the
"Cogeneration Obligation"). Under the Cogeneration Obligation, the Company
paid approximately $7.0 million each for the nine months ended September 24,
1994, the nine months ended September 27, 1995 and fiscal year 1996. No
payments were made during the three months ended December 20, 1994.
The future minimum obligations under leases and other commitments having an
initial or remaining noncancelable term in excess of one year as of October 2,
1996 are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDING OPERATING OTHER
SEPTEMBER, LEASES COMMITMENTS
----------- --------- ------------
<S> <C> <C>
1997................................................ $2.6 $ 7.5
1998................................................ 2.0 7.8
1999................................................ 1.8 7.3
2000................................................ 1.3 7.4
2001................................................ 0.4 8.8
Thereafter.......................................... -- 62.4
---- ------
$8.1 $101.2
==== ======
</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 related contract's terms.
NOTE 14--ENVIRONMENTAL AND SAFETY MATTERS
The Company is subject to a wide variety of increasingly stringent
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.
F-23
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In addition to conventional pollutants, minute quantities of dioxins and
other chlorinated organic compounds may be contained in the wastewater
effluent of the Company's bleached kraft pulp mills in Somerset and Westbrook,
Maine and Muskegon, Michigan. The most recent National Pollutant Discharge
Elimination System ("NPDES") wastewater permit limits proposed by the EPA
would limit dioxin discharges from the Company's Somerset and Westbrook mills
to less than the level of detectability. The Company is presently meeting the
EPA's proposed dioxin limits but it is not meeting the proposed limits for
other parameters (e.g., temperature and color) and is attempting to revise
these other wastewater permit limits for its facilities. While the permit
limitations at these two facilities are being challenged, the Company
continues to operate under existing EPA permits, which have technically
expired, in accordance with accepted administrative practice. In addition, the
Muskegon mill is involved, as one of various industrial plaintiffs, in
litigation with the County of Muskegon regarding a 1994 ordinance governing
the County's industrial wastewater pretreatment program. The lawsuit
challenges, among other things, the treatment capacity availability and local
effluent limit provisions of the ordinance. In July 1996, the Court rendered a
decision substantially in favor of the Company and other plaintiffs, but the
County has appealed the Court's decision. If the Company and the other
plaintiffs do not prevail in that appeal or are not successful in ongoing
negotiations with the County, the Company may not be able to obtain additional
treatment capacity for future expansions and the County could impose stricter
permit limits. The imposition of currently proposed permit limits or the
failure of the Muskegon lawsuit could require substantial additional
expenditures, including short-term expenditures, and may lead to substantial
fines for any noncompliance.
In November 1993, the EPA announced proposed regulations that would impose
new air and water quality standards aimed at further reductions of pollutants
from pulp and paper mills, particularly those conducting bleaching operations
(generally referred to as the "cluster rules"). Although the EPA has not made
any commitments, final promulgation of the cluster rules is expected to occur
by early 1997 and compliance with the rules may be required beginning in 1998.
The Company believes that compliance with the cluster rules, if adopted as
currently proposed, may require aggregate capital expenditures of
approximately $76.0 million through 1999. The ultimate financial impact to the
Company of compliance with the cluster rules will depend upon the nature of
the final regulations, the timing of required implementation and the cost and
availability of new technology. The Company also anticipates that it will
incur an estimated $10.0 million to $20.0 million of capital expenditures
through 1999 related to environmental compliance other than as a result of the
cluster rules.
The Company's mills generate substantial quantities of solid wastes and by-
products that are disposed of at permitted landfills and solid waste
management units at the mills. The Company is currently planning to expand the
landfill at the Somerset mill at a projected total cost of approximately $16.0
million, of which $7.0 million is expected to be incurred prior to the year
2000 with the remainder being spent subsequent to 2004.
The Muskegon mill has had discussions with the Michigan Department of
Natural Resources ("DNR") regarding a wastewater surge pond adjacent to the
Muskegon Lake. The DNR presently is considering whether the surge pond is in
compliance with Michigan Act 245 (Water Resources Commission Act) regarding
potential discharges from that pond. The matter is now subject to the results
of a pending engineering investigation. There is a possibility that, as a
result of DNR requirements, the surge pond may be closed in the future. The
Company estimates the cost of closure will be approximately $2.0 million. In
addition, if it is necessary to replace the functional capacity of the surge
pond with above-grade structures, the Company preliminarily estimates that up
to an additional $8.0 million may be required for such construction costs.
The Company has been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), or analogous state law, for
cleanup of contamination at seven sites. Based upon the Company's
understanding of the total amount of liability at each site, its calculation
of its percentage share in each proceeding, and the number
F-24
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of potentially responsible parties at each site, the Company presently
believes that its aggregate exposure for these matters is not material.
Moreover, as a result of the Acquisition, the Company's former parent, Scott,
agreed to indemnify and defend the Company for and against, among other
things, the full amount of any damages or costs resulting from the off-site
disposal of hazardous substances occurring prior to the date of closing,
including all damages and costs related to these seven sites. Since the date
of closing of the Acquisition, Scott has been performing under the terms of
this environmental indemnity and defense provision and, therefore, the Company
has not expended any funds with respect to these seven sites.
The Company currently has a five year demolition project in progress at its
Westbrook Facility for health and safety reasons. Total costs of the project
are estimated to be approximately $9.0 million, of which approximately $5.7
million had been spent as of October 2, 1996. The Company recognizes these
costs as they are incurred.
The Company does not believe that it will have any liability under recent
emergency legislation enacted by the State of Maine to cover a significant
shortfall in the Maine workers' compensation system through assessments of
employers and insurers; however, there can be no assurance that the existing
legislation will fully address the shortfall.
The Company believes that none of these matters, individually or in the
aggregate, is expected to have a material adverse effect on its financial
position, results of operations or cash flows.
NOTE 15--COMMITMENTS AND CONTINGENCIES
The Mobile, Alabama, paper mill was historically operated by Scott as part
of an integrated facility (including a tissue mill, a pulp mill and energy
facility). In connection with the Acquisition, Warren entered into long-term
(25 years initially, subject to mill closures and certain force majeure
events) supply agreements with Scott for the supply of pulp and water and the
treatment of effluent at the Mobile Mill. Wood pulp will be supplied generally
at market prices. Pulp prices will be discounted, primarily because of the
lower delivery costs due to the elimination of freight costs associated with
delivering pulp to Warren's Mobile paper mill and pulp quantities will be
subject to minimum (170,000 to 182,400 tons per year) and maximum (220,000 to
233,400 tons per year) limits. Prices for other services to be provided by
Scott will generally be based upon cost. Prior to the Acquisition, Scott sold
its energy facility at Mobile to MESC. In connection with the sale of the
energy facility, MESC entered into a long-term agreement with Warren to
provide electric power and steam to the paper mill at rates generally
comparable to market tariffs, including fuel cost and capital recovery
components. Scott, MESC and Warren have also entered into a long-term shared
facilities and services agreement (the "Shared Facilities Agreement") with
respect to medical and security services, common roads and parking areas,
office space and similar items and a comprehensive master operating agreement
providing for the coordination of services and integration of operations among
the energy facility, the paper mill, the pulp mill and the tissue mill. Annual
fees under the Shared Facilities Agreement are expected to be approximately
$1.5 million per year through the 25 year term of the agreement. Warren has
the option to cancel certain non-essential services covered by the Shared
Services Agreement at any time prior to the end of the 25 year term.
A substantial portion of the Company's electricity requirements are
satisfied through cogeneration agreements ("Power Purchase Agreements" or
"Agreements") whereby the Somerset and Westbrook mills each cogenerate
electricity and sell the output to Central Maine Power Company ("CMP"). The
Westbrook and Somerset Power Purchase Agreements require CMP to purchase such
energy produced by these cogeneration facilities at above market rates which
has reduced the Predecessor Corporation's historical cost of electrical
energy. The Westbrook Agreement expires October 31, 1997 and the Somerset
Agreement expires in the year 2012. The favorable pricing element of the
Somerset Agreement will end on November 30, 1997. The
F-25
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
agreements also require the mills to purchase electricity from CMP at the
standard industrial tariff rate. To reflect the fair market value of the
acquired Power Purchase Agreements in accordance with APB No. 16, as of the
Acquisition date, the Company established a deferred asset of approximately
$32.3 million. This deferred asset is recorded with other contracts valued at
the Acquisition date as a net long-term liability. This deferred asset is
being amortized over the remaining life of the favorable Power Purchase
Agreements. For the nine months ended September 27, 1995 and fiscal year 1996,
amortization expense related to this asset approximated $10.8 million and
$12.0 million, respectively.
The Company is also involved in various other lawsuits and administrative
proceedings. The relief sought in such lawsuits and proceedings include
injunctions, damages and penalties. Although the final results in these suits
and proceedings cannot be predicted with certainty, the Company believes that
they will not have a material effect on the Company's financial position,
results of operations or cash flows.
NOTE 16--RETIREMENT BENEFITS
Pension Plans
Prior to the Acquisition, employees participated in two Warren sponsored
hourly pension plans and a salaried pension plan and two Scott sponsored
hourly pension plans. During 1994, the assets and obligations relating to
Warren's active employees were allocated to four newly formed pension plans
based on the requirements of Section 414(l) of the Internal Revenue Code and
the regulations thereunder. Management and the Plan's trustees believe such
allocation is reasonable.
The four defined-benefit, trusteed pension plans provide retirement benefits
for substantially all employees. Benefits provided are primarily based on
employees' years of service and compensation. The Company's funding policy
complies with the requirements of Federal law and regulations. Plan assets
consist of equity securities, bonds and short-term investments. The current
portion of the net pension liability, detailed below, was $3.0 million at
October 2, 1996. The net pension liability at September 27, 1995 was all long-
term.
The funded status of the Warren sponsored pension plans is shown below (in
millions):
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested.......................................... $ 71.3 $ 82.4
Nonvested....................................... 18.0 16.5
------ ------
Accumulated benefit obligation................ 89.3 98.9
Additional obligation for future salary increas-
es............................................... 27.2 21.0
------ ------
Projected benefit obligation...................... 116.5 119.9
Plan assets at fair value......................... 102.5 116.2
------ ------
Projected benefit obligation in excess of plan as-
sets............................................. (14.0) (3.7)
Unrecognized net gain............................. (8.5) (27.7)
------ ------
Accrued pension cost.............................. (22.5) (31.4)
Contributions..................................... -- 7.1
------ ------
Net pension liability ............................ $(22.5) $(24.3)
====== ======
</TABLE>
F-26
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The net pension cost for the Warren sponsored plans include the following
components (in millions):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE
ENDED ENDED ENDED MONTHS ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Service cost-benefits earned during the period...................... $ 1.5 $0.4 $ 4.5 $ 6.3
Interest cost on projected benefit obligation....................... 6.5 2.1 6.9 9.8
Actual return on plan assets........................................ (0.8) 2.7 (10.4) (14.1)
Net deferral........................................................ (5.4) (4.7) 4.2 4.9
----- ---- ------ ------
Net pension cost.................................................... $ 1.8 $0.5 $ 5.2 $ 6.9
===== ==== ====== ======
</TABLE>
Pension expense allocated to the Predecessor Corporation relating to its
participation in the Scott plans was $5.7 million and $1.9 million for the
nine months ended September 24, 1994 and the three months ended December 20,
1994, respectively.
The projected benefit obligation at September 27, 1995 and October 2, 1996
was determined using an assumed discount rate of 8.0% and 8.25%, respectively,
and an assumed long-term rate of compensation increase of 5.25% and 4.75%,
respectively. The assumed rate of return on plan assets (on an annualized
basis) was 10.5%, 10.5%, 9.0% and 9.0% for the nine months ended September 24,
1994, the three months ended December 20, 1994, the nine months ended
September 27, 1995 and fiscal year 1996, respectively.
Savings Plan
The Predecessor Corporation's contributions to various savings plans were
based on employee contributions and compensation and totaled $3.8 million and
$0.6 million for the nine months ended September 24, 1994 and the three months
ended December 20, 1994, respectively. Warren currently sponsors two 401(k)
deferred contribution plans covering substantially all Warren employees
pursuant to which Warren is obligated to match, up to specified amounts,
employee contributions. Warren contributions to these plans totaled $3.8
million and $5.3 million for the nine months ended September 27, 1995 and
fiscal year 1996, respectively.
Supplemental Executive Retirement Plan
Effective in fiscal year 1996, Warren approved a Supplemental Executive
Retirement Plan ("SERP"). Key executives are eligible to participate in the
SERP provided such individuals meet specified criteria upon retirement.
Payments to the plan are made at the time key executives retire. The related
expense is recorded in each fiscal year based on actuarially determined
amounts. To date, payments made pursuant to the plan and the related expense
have not been material to Warren's results of operations or cash flows.
NOTE 17--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Warren sponsors a defined benefit postretirement plan that provides health
care and life insurance benefits to eligible retired employees. Employees are
generally eligible for benefits upon retirement and completion of a specified
number of years of service. The current portion of Warren's net postretirement
liability, detailed below, was $0.1 million at October 2, 1996. The net
postretirement liability at September 27, 1995 was all long-term.
F-27
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following schedule provides the plan's funded status and obligations (in
millions):
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligations
(APBO):
Retirees....................................... $ -- $ 0.6
Active Participants............................ 25.7 30.6
------ ------
Total APBO..................................... 25.7 31.2
Plan assets at fair value........................ -- --
------ ------
APBO in excess of plan assets.................... (25.7) (31.2)
Unrecognized transition obligation............. -- --
Unrecognized net actuarial gain................ (1.8) (1.1)
------ ------
Net postretirement liability..................... $(27.5) $(32.3)
====== ======
</TABLE>
Components of the net periodic postretirement benefit expense are as follows
(in millions):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE
ENDED ENDED ENDED MONTHS ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2,
1994 1994 1995 1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Service cost.................................................... $ 2.7 $0.9 $2.0 $2.6
Interest cost on APBO........................................... 5.0 1.7 1.6 2.3
Net amortization and deferral................................... 4.0 1.3 -- --
----- ---- ---- ----
Net postretirement benefit cost................................. $11.7 $3.9 $3.6 $4.9
===== ==== ==== ====
</TABLE>
The discount rates used to estimate the accumulated benefit obligations as
of September 27, 1995 and October 2, 1996 were 8.0% and 8.25%, respectively.
The health care cost trend rates used to value APBO were 10.5%, 10.5%, 9.0%
and 9.0% at September 24, 1994, December 20, 1994, September 27, 1995 and
October 2, 1996, respectively, decreasing gradually to an ultimate rate of
5.25% in the year 2007. A one-percentage point increase in the assumed health
care trend rate for each future year would increase the APBO by approximately
8.7% at October 2, 1996 and would increase the sum of the benefits earned and
interest cost components of net postretirement benefit cost for 1996 by
approximately 14.6%.
NOTE 18--OTHER LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
<S> <C> <C>
Accrued workers' compen-
sation................. $35.0 $29.7
Accrued pension and
other postretirement
benefits............... 50.0 53.5
Other accrued liabili-
ties................... 8.3 15.0
----- -----
$93.3 $98.2
===== =====
</TABLE>
NOTE 19--WARREN SERIES B REDEEMABLE EXCHANGEABLE PREFERRED STOCK
Warren has authorized 10.0 million shares of Series B redeemable
exchangeable preferred stock (the "Warren Series B Preferred Stock") from
which the Warren's Board of Directors designated a series consisting of 3.0
million shares of Old Senior Preferred Stock. The Old Senior Preferred Stock
was issued in connection with the financing of the Acquisition. The Old Senior
Preferred Stock was exchanged for Warren Series B Preferred Stock on May 31,
1995.
F-28
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Warren Series B Preferred Stock has a liquidation preference of $25.00
per share (aggregate liquidation preference is $75.0 million, plus accumulated
dividends). The Warren Series B Preferred Stock was recorded at the net
proceeds of $65.4 million received from the issuance after deducting stock
issuance costs and excluding approximately $6.9 million paid by the purchaser
to Holdings for class A warrants which were issued in conjunction with the Old
Senior Preferred Stock. The excess of the liquidation preference over the
carrying value is being accreted by periodic charges to retained earnings over
the life of the issue. The Warren Series B Preferred Stock has been accounted
for as the equivalent of a minority interest for the purposes of Holdings'
financial statements.
Dividends are cumulative and accrue quarterly at a rate of 14% per annum of
(a) the liquidation preference amount and (b) the amount of accrued but unpaid
dividends from prior dividend accrual periods ending on or prior to December
15, 1999 ("Accumulated Dividends"). Warren does not expect to pay dividends on
the Warren Series B Preferred Stock in cash for any period ending on or prior
to December 15, 1999. Cumulative dividends on Warren Series B Preferred Stock
that have not been paid at September 27, 1995 and October 2, 1996 are $8.5
million and $21.2 million, respectively, and are included in the carrying
amount of the Warren Series B Preferred Stock as indicated below (in
millions):
<TABLE>
<S> <C>
Issuance on December 21, 1994 for cash (at fair value on date of is-
suance)............................................................ $65.4
Accretion to redemption value...................................... 0.6
Dividends on Warren Series B Preferred Stock....................... 8.5
-----
Balance, September 27, 1995......................................... 74.5
Accretion to redemption value...................................... 0.8
Dividends on Warren Series B Preferred Stock....................... 12.7
-----
Balance, October 2, 1996............................................ $88.0
=====
</TABLE>
Redemption
The Warren Series B Preferred Stock is redeemable at the option of Warren,
in whole or in part, at any time on or after December 15, 2001 at the
redemption prices (expressed as a percentage of the Specified Amount) with
respect to the Warren Series B Preferred Stock set forth below plus all
accrued and unpaid liquidated damages and dividends (excluding any Accumulated
Dividends), if any, if redeemed during the twelve month period beginning on
December 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................ 104.2%
2002........................................ 102.8%
2003........................................ 101.4%
2004........................................ 100.0%
</TABLE>
"Specified Amount" on any specific date with respect to any share of Warren
Series B Preferred Stock means the sum of (i) the liquidation preference with
respect to such share and (ii) the Accumulated Dividends with respect to such
share.
In the event that Holdings consummates one or more public offerings of its
common stock on or before December 15, 1997, Warren may, at its option, redeem
the Warren Series B Preferred Stock with the proceeds therefrom at a
redemption price equal to 113% of the Specified Amount, plus all accrued and
unpaid liquidated damages and dividends (excluding any Accumulated Dividends),
if any, through the redemption date; provided, that at least $50.0 million in
aggregate Specified Amount of Warren Series B Preferred Stock remains
outstanding immediately following such redemption.
F-29
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Warren is required to redeem the Warren Series B Preferred Stock on December
15, 2006 at the Specified Amount plus all accrued and unpaid damages and
dividends (excluding any Accumulated Dividends).
At any scheduled dividend payment date, Warren may, at its option, exchange
all of the shares of the Warren Series B Preferred Stock then outstanding for
Warren's 14% Series B Subordinated Exchange Debentures due 2006.
In the event of a Change of Control, as defined, the holders of Warren
Series B Preferred Stock will have the right to require Warren to repurchase
such Warren Series B Preferred Stock, in whole or in part, at a price equal to
101% of the Specified Amount thereof, plus accrued and unpaid liquidated
damages and dividends (excluding any Accumulated Dividends).
Holders of the Warren Series B Preferred Stock have limited voting rights,
customary for preferred stock, including the right to elect two additional
directors upon certain events such as Warren failing to pay dividends in cash
for more than six consecutive dividend accrual periods ending after December
15, 1999.
NOTE 20--PREFERRED STOCK
Holdings has authorized 5.0 million shares of preferred stock from which
Holdings' Board of Directors designated a series consisting of 1.5 million
shares of 15% Senior Exchangeable Preferred Stock (the "Preferred Stock"). The
Preferred Stock was issued in connection with the financing of the
Acquisition. The Preferred Stock has a liquidation preference of $25.00 per
share.
Dividends are cumulative and accrue quarterly at a rate of 15% per annum of
(a) the liquidation preference amount and (b) the amount of accrued but unpaid
dividends from prior dividend accrual periods ending on or prior to December
15, 1999 ("Accumulated Dividends"), except that if any shares of Preferred
Stock are outstanding after December 15, 2006, such rate will increase by
0.25% per annum for each quarterly period after such date up to a maximum rate
of 20% per annum. The Company does not expect to pay dividends on the
Preferred Stock in cash for any period ending on or prior to December 15,
1999. Cumulative dividends on the Preferred Stock that have not been paid at
September 27, 1995 and October 2, 1996 are $4.6 million and $11.5 million,
respectively, and are included in the carrying amount of the Preferred Stock
as indicated below (in millions):
<TABLE>
<S> <C>
Issuance on December 21, 1994 for cash................................ $37.5
Dividends on Preferred Stock.......................................... 4.6
-----
Balance, September 27, 1995........................................... 42.1
Dividends on Preferred Stock.......................................... 6.9
-----
Balance, October 2, 1996.............................................. $49.0
=====
</TABLE>
Redemption
The Preferred Stock is redeemable at the option of Holdings, in whole or in
part, at any time at a redemption price of 100% of the Specified Amount plus
all accrued and unpaid dividends (excluding Accumulated Dividends).
"Specified Amount" on any specific date with respect to any share of
Preferred Stock means the sum of (i) the liquidation preference with respect
to such share and (ii) the Accumulated Dividends with respect to such share.
F-30
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In the event that the Company consummates certain specified transactions,
Holdings will be required to redeem the Preferred Stock at a redemption price
equal to 100% of the Specified Amount, plus all accrued and unpaid dividends
(excluding Accumulated Dividends).
At any scheduled dividend payment date, the Company may, at its option,
exchange all of the shares of the Preferred Stock then outstanding for
Holdings 15% Subordinated Exchange Debentures due 2011.
In the event of a Change of Control, as defined, the holders of Preferred
Stock will have the right to require Holdings to repurchase such Preferred
Stock at a price equal to 101% of the Specified Amount thereof, plus accrued
and unpaid dividends (excluding Accumulated Dividends).
Holders of the Preferred Stock have limited voting rights, customary for
preferred stock, including the right to approve certain issuances of
securities, mergers, consolidations and sales of assets and the right to elect
two additional directors upon certain events such as Holdings failing to pay
dividends in cash for more than six consecutive dividend accrual periods
ending after December 15, 1999.
Registration
Holdings has agreed to use reasonable efforts to cause a shelf registration
statement relating to the Preferred Stock to be declared effective by the
Securities and Exchange Commission (the "Commission"). Holdings has also
agreed to keep such registration statement continuously effective for three
years from the effective date of such registration statement, subject to
certain exceptions. A preliminary shelf registration statement has been filed,
but has yet to be declared effective by the Commission.
NOTE 21--COMMON STOCK
Holdings Common Stock
The authorized common stock of Holdings (the "Common Stock") consists of
100.0 million shares, par value of $0.01, of which 30.7 million shares are
issued and outstanding.
In connection with the acquisition, Holdings issued 6.3 million Class B
warrants (the "Class B Warrants") each exercisable for one share of Common
Stock at $0.01 per share. On April 7, 1995, approximately 2.0 million Class B
Warrants were exercised by Sappi. Holdings has agreed to use reasonable best
efforts to cause a shelf registration statement relating to the Class B
Warrants to be filed no later than January 31, 1996 and to cause such
registration statement to be declared effective by the Commission no later
than 90 days after such filing date. A preliminary shelf registration
statement has been filed, but has yet to be declared effective by the
Commission.
In connection with the issuance of the Warren Series B Preferred Stock, 3.0
million Class A warrants (the "Class A Warrants") exercisable for 0.9 million
shares of Common Stock were issued at $0.01 per share. Proceeds from the
issuance of the Class A Warrants were approximately $6.9 million. Holdings has
agreed to use its best efforts to cause a shelf registration statement
relating to the Class A Warrants to be filed no later than January 31, 1996
and to cause such registration statement to be declared effective by the
Commission no later than 90 days after such filing. Such registration
statement has yet to be declared effective. Accordingly, Holdings is obligated
to pay liquidated damages in an amount equal to $.0025 per week per Class A
Warrant (or number of shares of common stock issuable upon exercise of a Class
A Warrant), increasing by $.0025 after each subsequent 90 day period, up to a
maximum amount of $.0125 per week per Class A Warrant until such time of the
registration statement is declared effective. As of October 2, 1996, Holdings
has accrued liquidated damages of $0.2 million.
The Class A Warrants and Class B Warrants are exercisable at any time
through December 15, 2006. The Company has reserved 5.2 million shares of
Common Stock for issuance upon exercise of such warrants.
F-31
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Warren Common Stock
Warren is authorized to issue 1,000 shares of $0.01 par value common stock.
In connection with the Acquisition, Warren issued 100 shares of common stock
to Holdings (Note 2). No other shares of Warren common stock have been issued
or are outstanding.
NOTE 22--RELATED PARTY TRANSACTIONS
Warren has contracted through a management services agreement (the
"Management Services Agreement") and central cost allocation agreement (the
"Central Cost Allocation Agreement") with two subsidiaries of Sappi, Sappi
International Management AG ("SIM") and Sappi Management Services Limited
("SMS"), to provide management advisory services. The aggregate fee to be
charged to Warren by SIM and SMS is limited to an annual amount of $1.0
million. For the nine months ended September 27, 1995 and fiscal year 1996,
Warren incurred such a management fee of approximately $0.8 million and $1.0
million, respectively.
The Management Services Agreement with SIM establishes an agreement whereby
SIM provides strategic and corporate planning advice, financial and legal
services and services relating to public affairs and human resources. Warren
agrees to pay a service fee to SIM which is determined based upon Warren's
proportionate share in the aggregate amount of costs which SIM incurs in
providing services to the entire number of Sappi group companies which have
entered into agreements of this nature with SIM, plus a profit mark-up of 10%.
Warren's proportionate share is based upon the time spent on Warren services
divided by total time spent by SIM on total Sappi group company services. This
agreement commenced on January 1, 1995 and is effective until terminated by
either party with six months written notice.
The Central Cost Allocation Agreement with SMS provides for general
technical and administrative support services to supplement the services
provided by SIM. Warren has agreed to pay a service fee to SMS which is
determined based upon Warren's proportionate share in the aggregate amount of
costs which SMS incurs in providing services to the entire number of Sappi
group companies which have entered into agreements of this nature with SMS,
plus a profit mark-up of 10%. Warren's proportionate share is based upon
Warren's inventory turnover divided by total inventory turnover of SMS group
companies. This agreement commenced on January 1, 1995 and is effective until
terminated by either party with six months written notice.
Warren has also entered into a cross licensing agreement with Sappi
Deutschland, the worldwide holding company for all European and U.S. business
operations of Sappi, and Hannover Papier AG ("Hannover"), a subsidiary of
Sappi. Pursuant to this agreement, Warren and Hannover have agreed to enter
into specific written agreements to share paper processing techniques and have
also agreed to enter into specific distribution agreements whereby Warren has
agreed to use its distribution network in the United States to facilitate and
increase Hannover's exports. Sappi Deutschland will facilitate the licensing
process. No specific agreements have been entered into in connection with this
cross licensing agreement as of October 2, 1996.
During fiscal 1996, Warren shipped products to certain Sappi subsidiaries
(Sappi Europe, SA, Specialty Pulp Services and U.S. Paper). These subsidiaries
then sold Warren's product to external customers at market prices and remitted
the proceeds from such sales to Warren, net of a sales commission. Warren
shipped $33.0 million and $151.4 million of products to subsidiaries of Sappi
and expensed fees of approximately $1.1 million and $7.2 million relating to
these sales for the nine months ended September 27, 1995 and fiscal year 1996,
respectively. Trade accounts receivable at September 27, 1995 and October 2,
1996 included approximately $12.4 million and $37.1 million due from
subsidiaries of Sappi, respectively. Amounts as of October 2, 1996, are
included in the pool of receivables securitized under the A/R Facility (Note
11). The Company has formalized certain of these agreements and is in the
process of formalizing the remainder.
F-32
<PAGE>
SDW HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 23--SUBSEQUENT EVENTS
On October 17, 1996, a fire occurred at an outside warehouse location in
Muskegon, Michigan, which resulted in the loss of approximately 8,000 tons of
inventory valued in excess of $5.5 million. While the Company cannot
reasonably estimate at this time the total loss experienced, or the amount to
be recovered under its insurance policies, it does not expect that losses will
exceed its insurance coverage limits.
Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. Damage to mill equipment is being repaired and normal
operating mill conditions are being restored. While the mill is not yet
operating at full production, it will have, by the end of December 1996,
attained a level of operation close to the pre-flood situation. While the
Company cannot reasonably estimate at this time the total loss experienced, or
the exact amount to be recovered under its insurance policies, early
indications suggest that such amounts may be significant. However, total
losses are not expected to exceed the Company's insurance coverage limits,
which include both business interruption and property loss coverage.
On October 24, 1996, the Company announced a restructuring plan that will
likely result in a pretax charge of approximately $10.0 million in the first
quarter of fiscal 1997. The charge will be taken to cover the one-time costs
related to the reduction of up to approximately 200 salaried positions, or
approximately 14% of the Company's salaried workforce.
On November 5, 1996, a proposed binding referendum measure to eliminate
clearcutting in unincorporated areas in the State of Maine was defeated. A
competing measure, which could establish new forestry standards stricter than
current law, but which would not completely ban clearcutting, received a
plurality vote. This competing measure was supported by the Company, other
major timber interests in Maine, several environmental groups as well as the
Governor of Maine. Under Maine law, this competing measure will not become law
unless it receives a simple majority of the votes cast in a special election
scheduled to be held in 1997. If this competing measure does become law, the
consequence to the Company is not expected to be material, because such
measure generally reflects sustainable forestry initiatives already
voluntarily adopted by the Company.
F-33
<PAGE>
SCHEDULE I
SDW HOLDINGS CORPORATION
CONDENSED FINANCIAL INFORMATION OF PARENT
CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD
DECEMBER 21,
1994 TWELVE
THROUGH MONTHS ENDED
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ------------
<S> <C> <C>
Management fee...................................... $ -- $ 1.0
Administration expense.............................. (0.5) (0.9)
Equity in earnings of S.D. Warren Company, net of
dividends and accretion on S.D. Warren Series B
redeemable exchangeable preferred stock and income
tax expense of $9.1 and $13.5, respectively........ 33.0 (8.7)
----- ------
Income before income taxes.......................... 33.5 (8.6)
Income tax expense.................................. 0.2 --
----- ------
Net income (loss)................................... 33.3 (8.6)
Dividends on preferred stock........................ 4.6 6.9
----- ------
Net income (loss) applicable to common stockhold-
ers................................................ $28.7 $(15.5)
===== ======
</TABLE>
See accompanying notes to the condensed financial statements.
F-34
<PAGE>
SCHEDULE I
SDW HOLDINGS CORPORATION
CONDENSED FINANCIAL INFORMATION OF PARENT
CONDENSED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 27, OCTOBER 2,
1995 1996
------------- ----------
<S> <C> <C>
Assets:
Due from S.D. Warren Company........................ $ 0.8 $ 1.0
Investment in S.D. Warren Company................... 364.8 356.1
------ ------
Total Assets...................................... $365.6 $357.1
====== ======
Liabilities and Stockholders' Equity:
Current liabilities--Accrued and other current lia-
bilities........................................... $ 0.5 $ 0.6
------ ------
Stockholders' Equity:
Preferred stock (at liquidation value)............. 42.1 49.0
Common Stock....................................... 0.3 0.3
Capital in excess of par value .................... 294.0 294.0
Retained earnings.................................. 28.7 13.2
------ ------
Total Stockholders' Equity........................ 365.1 356.5
------ ------
Total Liabilities and Stockholders' Equity........ $365.6 $357.1
====== ======
</TABLE>
See accompanying notes to the condensed financial statements.
F-35
<PAGE>
SCHEDULE I
SDW HOLDINGS CORPORATION
CONDENSED FINANCIAL INFORMATION OF PARENT
STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS TWELVE
ENDED MONTHS ENDED
SEPTEMBER 27, OCTOBER 2,
1995 1996
-------------- -------------
<S> <C> <C>
Cash provided by operating activities:
Net income (loss)............................... $ 33.3 $(8.6)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Equity in (earnings) losses of S.D. Warren
Company...................................... (33.0) 8.7
Change in working capital..................... (0.3) (0.1)
------- -----
Net cash provided by operations............. 0.0 0.0
Cash flow used in investing activities:
Investment in S.D. Warren Company............... (331.8) --
------- -----
Cash flow provided by financing activities:
Net proceeds from the sale of common and pre-
ferred stock................................... 331.8 --
------- -----
Net change in cash and cash equivalents........... 0.0 0.0
------- -----
Cash and cash equivalents at beginning and end of
period........................................... $ 0.0 $ 0.0
======= =====
</TABLE>
See accompanying notes to the condensed financial statements.
F-36
<PAGE>
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
These condensed financial statements should be read in conjunction with SDW
Holdings Corporation's financial statements and notes thereto.
Basis of Presentation:
Investment in S.D. Warren Company is accounted for using the equity method of
accounting.
F-37
<PAGE>
SCHEDULE II
SDW HOLDINGS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT DEDUCTIONS BALANCE AT
BEGINNING COSTS AND (PRINCIPALLY END OF
OF PERIOD EXPENSES WRITE-OFFS) PERIOD
---------- --------- ------------ ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Twelve months ended October 2,
1996............................ $ 5.6 $ -- $ 0.3 $ 5.3
Nine months ended September 27,
1995............................ 5.4 0.2 -- 5.6
Three months ended December 20,
1994............................ 6.3 -- 0.9 5.4
Nine months ended September 24,
1994............................ 5.4 0.9 -- 6.3
ALLOWANCE FOR INVENTORY OBSOLES-
CENCE:
Twelve months ended October 2,
1996............................ $ 4.1 $ -- $ 2.7 $ 1.4
Nine months ended September 27,
1995............................ -- 4.1 -- 4.1
Three months ended December 20,
1994............................ 2.1 0.5 -- 2.6
Nine months ended September 24,
1994............................ 2.3 0.6 0.8 2.1
RESERVE FOR RESTRUCTURING:
Twelve months ended October 2,
1996............................ $ -- $ -- $ -- $ --
Nine months ended September 27,
1995............................ -- -- -- --
Three months ended December 20,
1994............................ 12.7 -- 12.7 --
Nine months ended September 24,
1994............................ 91.7 -- 79.0 12.7
</TABLE>
F-38
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES IN ANY JU-
RISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OF-
FER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLI-
CATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PRO-
SPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Selected Historical Financial Data....................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 31
Management............................................................... 39
Executive Compensation................................................... 41
The Acquisition.......................................................... 43
Security Ownership of Certain Beneficial Owners and Management........... 44
Certain Relationships and Related Transactions........................... 49
Selling Security Holders................................................. 51
Description of the Senior Preferred Stock................................ 54
Description of the Exchange Debentures................................... 66
Description of the Warrants.............................................. 78
Description of Capital Stock............................................. 83
Description of Warren Indebtedness....................................... 84
Certain Federal Income Tax Considerations................................ 87
Plan of Distribution..................................................... 94
Experts.................................................................. 95
Index to Financial Statements............................................ F-1
</TABLE>
---------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SDW HOLDINGS CORPORATION
15% SENIOR EXCHANGEABLE
PREFERRED STOCK
15% SUBORDINATED EXCHANGE DEBENTURES
CLASS A WARRANTS CLASS B WARRANTS AND
COMMON STOCK OF SDW HOLDINGS CORPORATION
---------------
PROSPECTUS
---------------
JANUARY , 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the expenses of issuance and distribution of the
Securities registered hereunder on Form S-1, other than underwriting discounts
and commissions. All amounts except the Registration Fee are estimated.
<TABLE>
<S> <C>
Registration Fee.................................................... $ 26,359
Legal Fees and Expenses............................................. 80,000
Accounting Fees and Expenses........................................ 140,000
Printing and Engraving Expenses..................................... 150,000
Miscellaneous....................................................... 8,641
--------
Total............................................................. $405,000
========
</TABLE>
All of the above expenses have been or will be paid by Holdings.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b) (7) of the General Corporation Law of the State of Delaware
permits a Delaware corporation to limit the personal liability of its
directors in accordance with the provisions set forth therein. Holdings' By-
laws and Restated Certificate of Incorporation provide that the personal
liability of its directors shall be limited to the fullest extent permitted by
applicable law.
Section 145 of the General Corporation Law of the State of Delaware contains
provisions permitting Delaware corporations to indemnify directors, officers,
employees or agents against expenses, including attorneys' fees, judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person was or is a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, provided that (i) such
person acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, the corporation's best interest, and (ii) in the case
of a criminal proceeding such person had no reasonable cause to believe his or
her conduct was unlawful. In the case of actions or suits by or in the right
of the corporation, no indemnification shall be made in a case in which such
person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such
action or suit was brought shall have determined upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses. Indemnification as described above shall only be granted in a
specific case upon a determination that indemnification is proper in the
circumstances because the indemnified person has met the applicable standard
of conduct. Such determination shall be made (a) by a majority vote of the
directors who are not parties to such proceeding, even though less than a
quorum, (b) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (c) by the stockholders of
the corporation. Notwithstanding the foregoing, to the extent that a director,
officer, employee or agent of the corporation has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to
in subsections (a) or (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Additionally, a corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation could indemnify him against
such liability.
II-1
<PAGE>
Holdings' By-laws and Restated Certificate of Incorporation provide that
Holdings shall indemnify to the fullest extent permitted by law any person who
is or was involved in any manner (including, without limitation, as a party or
a witness) or is threatened to be made so involved in any threatened, pending
or completed investigation, claim, action, suit or proceeding, whether civil,
criminal, administrative or investigative (including, without limitation, any
action, suit or proceeding by or in the right of Holdings to procure a
judgment in its favor) (a "Proceeding"), by reason of the fact that such
person is or was a Director or Officer of Holdings, or is or was serving at
the request of Holdings as a Director or Officer of another corporation or of
a partnership, joint venture, trust or other enterprise (including, without
limitation, any employee benefit plan) against all expenses (including
attorneys' fees), judgments, fines and amounts paid in connection with such
Proceeding.
Holdings has obtained directors' and officers' liability insurance that
covers certain liabilities and expenses of Holdings' directors and officers.
Holdings may enter into indemnification agreements with each of its directors
and certain of its officers.
Sappi carries directors' and officers' liability insurance that covers
certain liabilities and expenses of directors and officers of subsidiaries of
Sappi. Directors and officers of Holdings who are employees of Sappi have the
benefit of the coverage, subject to the limitations of such insurance.
Directors of Holdings who are also employees of Sappi may be entitled to
indemnification from Sappi for certain liabilities and expenses incurred as a
result of serving as directors of Holdings.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The securities of Holdings sold by Holdings within the past three years
which were not registered under the Securities Act of 1933 (the "Act") are as
follows:
(a) On December 20, 1994, 100 shares of Common Stock were sold to Sappi.
Subsequently, 249,989,900 shares of Common Stock were sold to Sappi
Deutschland. Additional shares of Common Stock were sold to DLJ Merchant
Banking Partners, L.P. ("DLJMB") and UBS Capital Corporation ("UBSCC").
(b) On December 20, 1994, 3,000,000 Units were issued at a purchase price
of $25.00 per Unit, with the Units consisting of 3,000,000 shares of 14%
Series A Senior Exchangeable Preferred Stock due 2006 of S.D. Warren and
Class A Warrants to purchase 898,440 shares of Holdings' common stock. Of
the 3,000,000 Units, 2,700,000 were sold to Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC") for resale to certain "Qualified
Institutional Buyers" and "Institutional Accredited Investors". In
connection with such resale, DLJSC earned a commission of $1.00 per Unit.
The remaining 300,000 Units were sold to UBSCC pursuant to Section 4(2) of
the Act.
(c) On December 20, 1994, Holdings issued Class B Warrants to purchase up
to an aggregate of 6,289,060 shares of Holdings' common stock to Sappi
Deutschland GmbH, DLJMB and certain of its affiliates (the "DLJ Entities")
and UBSCC.
(d) On December 20, 1994, Holdings issued 1,500,000 shares of its Senior
Preferred Stock to the DLJ Entities and UBSCC.
The securities referred to in (a), (b), (c) and (d) above were sold pursuant
to Section 4(2) of the Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant.**
3.2 By-laws of the Registrant.**
4.1 Amended and Restated Certificate of Designations, Preferences and
Relative, Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of 15% Senior Exchangeable Preferred Stock of SDW Holdings
Corporation, dated as of July 5, 1995.**
4.2 Form of the Exchange Debenture Indenture between SDW Holdings
Corporation and the United States Trust Company of New York
relating to SDW Holdings Corporation's 15% Subordinated Exchange
Debentures due 2011.**
4.3 Warrant Agreement between SDW Holdings Corporation and The Bank of
New York dated December 20, 1994.**
4.4 Amended and Restated Class B Warrant Agreement between SDW
Holdings Corporation and The Bank of New York dated as of July 6,
1995.**
5.1 Opinion of Cravath, Swaine & Moore, regarding the legality of the
Securities.**
10.1 Credit and Guarantee Agreement dated as of December 20, 1994 among
SDW Holdings Corporation, SDW Acquisition Corporation (and
following the merger, S.D. Warren Company as successor thereto),
the Lenders (as defined therein) and Chemical Bank, as Agent.*
10.2 Preferred Stock Registration Rights Agreement dated as of July 6,
1995 among DLJ Merchant Banking Partners, L.P. and certain of its
affiliates, UBS Capital Corporation and SDW Holdings
Corporation.**
10.3 Securities Subscription Agreement, dated as of December 20, 1994,
among SDW Holdings Corporation, SDW Acquisition Corporation (and
following the merger, S.D. Warren Company as successor thereto),
and each of Sappi Limited, Sappi Deutschland GmbH, DLJ Merchant
Banking Partner, L.P. and certain of its affiliates and UBS
Capital Corporation.*
10.4 Second Amended and Restated Shareholders Agreement dated as of
July 6, 1995, among Sappi Limited, Sappi Deutschland GmbH, DLJ
Merchant Banking Partners, L.P. and certain of its affiliates, UBS
Capital Corporation, SDW Holdings Corporation and S.D. Warren
Company as successor to SDW Acquisition Corporation.**
10.5 Participation Agreement dated as of January 1, 1982 among Scott
Paper Company, as Purchaser, General Electric Credit Corporation,
as Owner Participant and The Connecticut Bank and Trust Company,
as Owner Trustee.*
10.6 Refinancing Participation Agreement dated as of December 15, 1986,
among Scott Paper Company, as Purchaser, General Electric Credit
Corporation, as Owner Participant, and The Connecticut Bank and
Trust Company National Association, as Owner Trustee.*
10.7 Power Sales Agreement dated as of January 1, 1982, between The
Connecticut Bank and Trust Company, Owner Trustee, as Seller, and
Scott Paper Company, as Purchaser, as amended by the First
Amendment dated as of December 15, 1986.*
10.8 Ground Lease Agreement dated as of January 1, 1982 between Scott
Paper Company, as Lessor, and The Connecticut Bank and Trust
Company, Owner Trustee, as Lessee, as amended by First Amendment
dated as of December 15, 1986.*
10.9 Operating Agreement dated as of January 1, 1982 between The
Connecticut Bank and Trust Company, as Owner Trustee, and Scott
Paper Company, as Operator, as amended by First Amendment dated as
of December 15, 1986.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.10 Tax Indemnification Agreement dated as of January 1, 1982, among
General Electric Credit Corporation, Owner Participant, The
Connecticut Bank and Trust Company, as Owner Trustee, and Scott
Paper Company, Purchaser, as amended by the Amendment dated as of
November 25, 1986.*
10.11 Facilities Agreement dated as of January 1, 1982 between Scott
Paper Company and The Connecticut Bank and Trust Company, as Owner
Trustee, as amended by First Amendment dated as of December 15,
1986.*
10.12 Indenture and Security Agreement dated as of December 15, 1986,
among The Connecticut Bank and Trust Company, National
Association, as Westbrook Owner Trustee and Winslow Owner Trustee,
Scott Paper Company, and The Bank of New York, as Indenture
Trustee.*
10.13 Transfer Agreement dated as of June 29, 1986 between Scott Paper
Company and S.D. Warren Company, as amended October 25, 1990, as
further amended November 1, 1993.*
10.14 Stock Purchase Agreement by and among Scott Paper Company, Sappi
Limited and SDW Acquisition Corporation dated as of October 8,
1994.*
10.15 Supplemental Agreement to Stock Purchase Agreement dated as of
October 8, 1994 by and among Scott Paper Company, Sappi Limited
and SDW Acquisition Corporation dated as of December 19, 1994.*
10.15(a) Extension of Time Period specified in Section 1.6(e) of the Stock
Purchase Agreement dated as of October 8, 1994 by and among Scott
Paper Company, Sappi Limited and SDW Acquisition Corporation.*
10.16 Assignment and Assumption Agreement (relating to Westbrook Biomass
Financing) dated as of December 20, 1994 between Scott Paper
Company and S.D. Warren Company.*
10.17 General Assignment and Assumption Agreement dated as of December
20, 1994 by and between Scott Paper Company, Scott Continental
N.V. and S.D. Warren Company.*
10.18 Contract dated as of August 1, 1978 between Central Maine Power
Company ("CMP") and S.D. Warren Company, as amended by Amendment
dated as of May 15, 1982, as further amended by Amendment dated as
of October 27, 1982.*
10.19 Westbrook Long-term Contract for the Sale of Electricity to CMP,
dated October 27, 1982 between CMP and Scott Paper Company, S.D.
Warren Division.*
10.20 Agreement for Electric Service for the Westbrook Mill of S.D.
Warren Company dated as of August 1, 1983 between CMP and S.D.
Warren Company.*
10.21 Agreement for Electric Service for Scott Paper Company, S.D.
Warren Division, Somerset County, dated as of December 1, 1982
between CMP and S.D. Warren, as amended by Amendment dated as of
July 9, 1990.*
10.22 Power Purchase Agreement between Scott Paper Company, S.D. Warren
Division (Somerset) and CMP dated as of December 1, 1982, as
amended by Amendment dated April 11, 1983, as further amended by
Amendment dated July 9, 1990.*
10.23 Pulp Supply Agreement between Scott Paper Company and S.D. Warren
Company dated as of December 20, 1994.*
10.24 Paper Mill Energy Services Agreement between S.D. Warren Company
and Mobile Energy Services Company, Inc. dated as of December 12,
1994.*
10.25 Master Operating Agreement among Scott Paper Company, S.D. Warren
Company and Mobile Energy Services Company, Inc. dated as of
December 12, 1994.*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.26 Purchase Agreement dated as of December 13, 1994, among SDW
Holdings Corporation, SDW Acquisition Corporation, Sappi Limited,
DLJ Merchant Banking, Inc. and certain of its affiliates, UBS
Capital Corporation and Donaldson, Lufkin & Jenrette Securities
Corporation (the "Purchase Agreement").*
10.27 Amendment Number 1 to the Purchase Agreement, dated as of December
19, 1994, among SDW Holdings Corporation, SDW Acquisition
Corporation, Sappi Limited, DLJ Merchant Banking, Inc. and certain
of its affiliates, UBS Capital Corporation and Donaldson, Lufkin &
Jenrette Securities Corporation.*
10.28 Amendment Number 2 to the Purchase Agreement, dated as of December
20, 1994, among SDW Holdings Corporation, S.D. Warren Company and
Donaldson, Lufkin & Jenrette Securities Corporation.*
10.29 Registration Rights Agreement, dated as of December 20, 1994 by
and between SDW Acquisition Corporation and Donaldson, Lufkin &
Jenrette Securities Corporation (the "Registration Agreement").*
10.30 Amendment Number 1 to the Registration Agreement, dated as of
December 20, 1994, by and between S.D. Warren Company and
Donaldson, Lufkin & Jenrette Securities Corporation.*
10.31 Stock Purchase Agreement, dated as of November 27, 1996, among SDW
Holdings Corporation, Sappi Limited, DLJ Merchant Banking
Partners, L.P., DLJ International Partners, C.V., DLJ Offshore
Partners, C.V., DLJ Merchant Banking Funding, Inc., DLJ First ESC
L.L.C., and UBS Capital LLC.***
12.1 Statements regarding the computation of ratio of earnings to fixed
charges and ratio of earnings to fixed charges and preferred stock
dividends for the Registrant.**
21.1 Subsidiaries of the Registrant.**
23.2 Consent of Deloitte & Touche LLP, independent auditors.
24.1 Powers of Attorney.**
25.1 Statement of Eligibility and Qualification on Form T-1 of the Bank
of New York, as Trustee under the Indenture relating to the New
Notes.*
</TABLE>
- --------
* Incorporated by Reference to Post-Effective Amendment No. 1 to
Registration Statement 33-88496 on Form S-4 under the Securities Act of
1933 of S.D. Warren Company.
** Previously filed.
** *To be filed by amendment.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceedings) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF JOHANNESBURG, ON JANUARY
28, 1997.
SDW Holdings Corporation
/s/ William E. Hewitt
By:__________________________________
WILLIAM E. HEWITT
VICE PRESIDENT (PRINCIPAL
FINANCIAL OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Monte R. Haymon Director January 28,
- ------------------------------------- 1997
(MONTE R. HAYMON)
*
- ------------------------------------- Director (Principal
(EUGENE VAN AS) Executive Officer)
* Director, Vice
- ------------------------------------- President and
(WILLIAM E. HEWITT) Treasurer
(Principal
Financial Officer
and Principal
Accounting Officer)
* Director, Vice
- ------------------------------------- President and
(ANDRIES G.J. VLOK) Secretary
* Director and
- ------------------------------------- Assistant Secretary
(PETER T. GRAUER)
* Director
- -------------------------------------
(JOHN S. CHALSTY)
* Director
- -------------------------------------
(CHARLES J. DELANEY)
* Director
- -------------------------------------
(NEIL S. THOMAS)
Director
- -------------------------------------
(J. RICHARD LEAMAN, JR.)
/s/ William E. Hewitt Attorney-in-Fact
*By__________________________________ January 28,
(WILLIAM E. HEWITT) 1997
II-7
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EXHIBIT INDEX
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3.1 Restated Certificate of Incorporation of the Registrant.**
3.2 By-laws of the Registrant.**
4.1 Amended and Restated Certificate of Designations,
Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications,
Limitations and Restrictions Thereof of 15% Senior
Exchangeable Preferred Stock of SDW Holdings Corporation,
dated as of July 5, 1995.**
4.2 Form of the Exchange Debenture Indenture between SDW
Holdings Corporation and the United States Trust Company of
New York relating to SDW Holdings Corporation's 15%
Subordinated Exchange Debentures due 2011.**
4.3 Warrant Agreement between SDW Holdings Corporation and The
Bank of New York dated December 20, 1994.**
4.4 Amended and Restated Class B Warrant Agreement between SDW
Holdings Corporation and The Bank of New York dated as of
July 6, 1995.**
5.1 Opinion of Cravath, Swaine & Moore, regarding the legality
of the Securities.**
10.1 Credit and Guarantee Agreement dated as of December 20,
1994 among SDW Holdings Corporation, SDW Acquisition
Corporation (and following the merger, S.D. Warren Company
as successor thereto), the Lenders (as defined therein) and
Chemical Bank, as Agent.*
10.2 Preferred Stock Registration Rights Agreement dated as of
July 6, 1995 among DLJ Merchant Banking Partners, L.P. and
certain of its affiliates, UBS Capital Corporation and SDW
Holdings Corporation.**
10.3 Securities Subscription Agreement, dated as of December 20,
1994, among SDW Holdings Corporation, SDW Acquisition
Corporation (and following the merger, S.D. Warren Company
as successor thereto), and each of Sappi Limited, Sappi
Deutschland GmbH, DLJ Merchant Banking Partner, L.P. and
certain of its affiliates and UBS Capital Corporation.*
10.4 Second Amended and Restated Shareholders Agreement dated as
of July 6, 1995, among Sappi Limited, Sappi Deutschland
GmbH, DLJ Merchant Banking Partners, L.P. and certain of
its affiliates, UBS Capital Corporation, SDW Holdings
Corporation and S.D. Warren Company as successor to SDW
Acquisition Corporation.**
10.5 Participation Agreement dated as of January 1, 1982 among
Scott Paper Company, as Purchaser, General Electric Credit
Corporation, as Owner Participant and The Connecticut Bank
and Trust Company, as Owner Trustee.*
10.6 Refinancing Participation Agreement dated as of December
15, 1986, among Scott Paper Company, as Purchaser, General
Electric Credit Corporation, as Owner Participant, and The
Connecticut Bank and Trust Company National Association, as
Owner Trustee.*
10.7 Power Sales Agreement dated as of January 1, 1982, between
The Connecticut Bank and Trust Company, Owner Trustee, as
Seller, and Scott Paper Company, as Purchaser, as amended
by the First Amendment dated as of December 15, 1986.*
10.8 Ground Lease Agreement dated as of January 1, 1982 between
Scott Paper Company, as Lessor, and The Connecticut Bank
and Trust Company, Owner Trustee, as Lessee, as amended by
First Amendment dated as of December 15, 1986.*
10.9 Operating Agreement dated as of January 1, 1982 between The
Connecticut Bank and Trust Company, as Owner Trustee, and
Scott Paper Company, as Operator, as amended by First
Amendment dated as of December 15, 1986.*
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10.10 Tax Indemnification Agreement dated as of January 1,
1982, among General Electric Credit Corporation, Owner
Participant, The Connecticut Bank and Trust Company, as
Owner Trustee, and Scott Paper Company, Purchaser, as
amended by the Amendment dated as of November 25,
1986.*
10.11 Facilities Agreement dated as of January 1, 1982
between Scott Paper Company and The Connecticut Bank
and Trust Company, as Owner Trustee, as amended by
First Amendment dated as of December 15, 1986.*
10.12 Indenture and Security Agreement dated as of December
15, 1986, among The Connecticut Bank and Trust Company,
National Association, as Westbrook Owner Trustee and
Winslow Owner Trustee, Scott Paper Company, and The
Bank of New York, as Indenture Trustee.*
10.13 Transfer Agreement dated as of June 29, 1986 between
Scott Paper Company and S.D. Warren Company, as amended
October 25, 1990, as further amended November 1, 1993.*
10.14 Stock Purchase Agreement by and among Scott Paper
Company, Sappi Limited and SDW Acquisition Corporation
dated as of October 8, 1994.*
10.15 Supplemental Agreement to Stock Purchase Agreement
dated as of October 8, 1994 by and among Scott Paper
Company, Sappi Limited and SDW Acquisition Corporation
dated as of December 19, 1994.*
10.15(a) Extension of Time Period specified in Section 1.6(e) of
the Stock Purchase Agreement dated as of October 8,
1994 by and among Scott Paper Company, Sappi Limited
and SDW Acquisition Corporation.*
10.16 Assignment and Assumption Agreement (relating to
Westbrook Biomass Financing) dated as of December 20,
1994 between Scott Paper Company and S.D. Warren
Company.*
10.17 General Assignment and Assumption Agreement dated as of
December 20, 1994 by and between Scott Paper Company,
Scott Continental N.V. and S.D. Warren Company.*
10.18 Contract dated as of August 1, 1978 between Central
Maine Power Company ("CMP") and S.D. Warren Company, as
amended by Amendment dated as of May 15, 1982, as
further amended by Amendment dated as of October 27,
1982.*
10.19 Westbrook Long-term Contract for the Sale of
Electricity to CMP, dated October 27, 1982 between CMP
and Scott Paper Company, S.D. Warren Division.*
10.20 Agreement for Electric Service for the Westbrook Mill
of S.D. Warren Company dated as of August 1, 1983
between CMP and S.D. Warren Company.*
10.21 Agreement for Electric Service for Scott Paper Company,
S.D. Warren Division, Somerset County, dated as of
December 1, 1982 between CMP and S.D. Warren, as
amended by Amendment dated as of July 9, 1990.*
10.22 Power Purchase Agreement between Scott Paper Company,
S.D. Warren Division (Somerset) and CMP dated as of
December 1, 1982, as amended by Amendment dated April
11, 1983, as further amended by Amendment dated July 9,
1990.*
10.23 Pulp Supply Agreement between Scott Paper Company and
S.D. Warren Company dated as of December 20, 1994.*
10.24 Paper Mill Energy Services Agreement between S.D.
Warren Company and Mobile Energy Services Company, Inc.
dated as of December 12, 1994.*
10.25 Master Operating Agreement among Scott Paper Company,
S.D. Warren Company and Mobile Energy Services Company,
Inc. dated as of December 12, 1994.*
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10.26 Purchase Agreement dated as of December 13, 1994, among SDW
Holdings Corporation, SDW Acquisition Corporation, Sappi
Limited, DLJ Merchant Banking, Inc. and certain of its
affiliates, UBS Capital Corporation and Donaldson, Lufkin &
Jenrette Securities Corporation (the "Purchase
Agreement").*
10.27 Amendment Number 1 to the Purchase Agreement, dated as of
December 19, 1994, among SDW Holdings Corporation, SDW
Acquisition Corporation, Sappi Limited, DLJ Merchant
Banking, Inc. and certain of its affiliates, UBS Capital
Corporation and Donaldson, Lufkin & Jenrette Securities
Corporation.*
10.28 Amendment Number 2 to the Purchase Agreement, dated as of
December 20, 1994, among SDW Holdings Corporation, S.D.
Warren Company and Donaldson, Lufkin & Jenrette Securities
Corporation.*
10.29 Registration Rights Agreement, dated as of December 20,
1994 by and between SDW Acquisition Corporation and
Donaldson, Lufkin & Jenrette Securities Corporation (the
"Registration Agreement").*
10.30 Amendment Number 1 to the Registration Agreement, dated as
of December 20, 1994, by and between S.D. Warren Company
and Donaldson, Lufkin & Jenrette Securities Corporation.*
10.31 Stock Purchase Agreement, dated as of November 27, 1996,
among SDW Holdings Corporation, Sappi Limited, DLJ Merchant
Banking Partners, L.P., DLJ International Partners, C.V.,
DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding,
Inc., DLJ First ESC L.L.C., and UBS Capital LLC.***
12.1 Statements regarding the computation of ratio of earnings
to fixed charges and ratio of earnings to fixed charges and
preferred stock dividends for the Registrant.**
21.1 Subsidiaries of the Registrant.**
23.2 Consent of Deloitte & Touche LLP, independent auditors.
24.1 Powers of Attorney.**
25.1 Statement of Eligibility and Qualification on Form T-1 of
the Bank of New York, as Trustee under the Indenture
relating to the New Notes.*
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* Incorporated by Reference to Post-Effective Amendment No. 1 to
Registration Statement 33-88496 on Form S-4 under the Securities Act of
1933 of S.D. Warren Company.
** Previously filed.
** *To be filed by amendment.
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
SDW Holdings Corporation
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-834 of SDW Holdings Corporation on Form S-1 of our report dated October
28, 1996 (November 5, 1996 as to Note 23) (which expresses an unqualified
opinion and includes an explanatory paragraph referring to the comparability
of the S.D. Warren Company and certain related affiliates financial statements
with those of SDW Holdings Corporation), appearing in the Prospectus, which is
a part of this Registration Statement and to the reference to us under the
headings "Summary Financial Data," "Selected Historical Data" and "Experts" in
such Prospectus.
Deloitte & Touche llp
Boston, Massachusetts
January 28, 1997
