<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1997
REGISTRATION NUMBER 333-834
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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)
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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)
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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)
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COPIES TO:
STUART M. CABLE
TREVOR L. LARKAN GOODWIN, PROCTER & HOAR LLP
S.D. WARREN EXCHANGE PLACE
COMPANY BOSTON, MASSACHUSETTS 02109
225 FRANKLIN (617) 570-1322
STREET
BOSTON,
MASSACHUSETTS
02110
(617) 423-7300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
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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]
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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. [_]
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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. [_]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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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>
SUBJECT TO COMPLETION DATED AUGUST 6, 1997
SDW HOLDINGS CORPORATION
1,500,000 SHARES 15% SENIOR EXCHANGEABLE PREFERRED STOCK
15% SUBORDINATED EXCHANGE DEBENTURES
2,700,000 CLASS A WARRANTS
150,000 CLASS B WARRANTS
COMMON STOCK
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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), 2,700,000 Class A Warrants (the
"Class A Warrants") to purchase initially up to an aggregate of 808,596 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 Holdings (as defined). As of April 2, 1997, Holdings had total
outstanding liabilities of $1,287.6 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 "Material 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)
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SEE "RISK FACTORS" ON PAGE 11 FOR A DESCRIPTION OF CERTAIN RISKS, INCLUDING
POTENTIAL MATERIAL ADVERSE TAX CONSEQUENCES, 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.
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The date of this Prospectus is August , 1997.
<PAGE>
(continued from previous page)
On July 30, 1997, Holdings entered into an Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which an indirect subsidiary of Sappi Limited
would be merged with and into Holdings, with Holdings continuing as the
surviving corporation (the "Merger"). Under the terms of the Merger Agreement,
each issued and outstanding share of Common Stock held by any party other than
Sappi and its affiliates or HSL will, subject to the exercise of appraisal
rights, be converted into the right to receive $17.60 per share in cash. As a
result, each outstanding Class A Warrant will become exercisable solely for
$5.2708 in cash, and each outstanding Class B Warrant will become exercisable
solely for $17.60 in cash, in each case upon payment of the exercise price and
satisfaction of the other terms and conditions of the related Warrant
Agreement. Additionally, each issued and outstanding share of Senior Preferred
Stock will, subject to the exercise of appraisal rights, remain outstanding,
without amendment. There can be no assurance, however, that the conditions to
the Merger will be satisfied or waived. See "Risk Factors--Control by Sappi",
"Certain Relationships and Related Transactions--Minority Acquisition and
Merger", "Description of Capital Stock--Holdings Common Stock" and "Material
Federal Income Tax Considerations--Effect of Merger".
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 per share plus accrued dividends of
$15.3 million ($10.20 per share) as of April 2, 1997. See "Risk Factors--Lack
of Public Market". To the extent required, the number of Securities to be
sold, the names of the Selling Security Holders, the purchase price, the
public offering price, the name of any agent, dealer or underwriter, the
amount of any offering expenses, any applicable commissions or discounts and
any other material information with respect to a particular offer will be set
forth in an accompanying Prospectus Supplement or, if appropriate, a post-
effective amendment to the Registration Statement of which this Prospectus is
a part. 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 six months ended April 2, 1997, S.D. Warren's sales of domestic paper
products consisted of coated paper (70.5%), uncoated paper (12.3%), specialty
paper (12.3%) and technical and other paper products (4.9%). 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.
On May 27, 1997, Western Ventures Limited ("WVL"), an indirect wholly-owned
subsidiary of Sappi Limited ("Sappi") acquired the minority common equity
interests (including both Common Stock and Warrants) in Holdings (the "Minority
Acquisition") 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. (collectively, "DLJMB") and UBS Capital L.L.C.
("UBS"); (collectively with DLJMB, the "Sellers") for an aggregate price of
$138.0 million, or $17.25 per share of Common Stock or Common Stock equivalent
(Sappi, DLJMB and UBS are collectively referred to herein as the "Investor
Group"). WVL exercised all of the Warrants acquired in the Minority Acquisition
upon the consummation thereof. In connection with the Minority
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Acquisition, Sappi and the Sellers terminated most of the provisions of their
Shareholders Agreement and the Sellers have ceased to have any rights or
obligations under the remaining provisions. See "Certain Relationships and
Related Transactions--Shareholders Agreement".
As part of the financing for the Minority Acquisition, on June 27, 1997, WVL
sold the Common Stock acquired in the Minority Acquisition to Heritage Springer
Limited ("HSL"), a British Virgin Islands company and HSL pledged such
securities to certain lenders. The securities acquired by HSL are subject to an
agreement pursuant to which Sappi has a right to purchase such securities at
any time prior to April 30, 2000, and HSL has a right to require Sappi to
purchase such securities upon the occurrence of certain events and at any time
between May 15, 2000 and May 30, 2000 (the "HSL Option Agreement"). Sappi has
been granted an irrevocable proxy to vote all such securities during the term
of the HSL Option Agreement, subject to compliance with its purchase
obligations upon exercise of such rights. Sappi has also been granted certain
rights of first refusal by such lenders in respect of such securities. As of
the date of this Prospectus, Sappi indirectly owns approximately 75.07%, and
controls the voting of approximately 97.33%, and HSL holds approximately
22.27%, of the common equity of Holdings on a fully diluted basis.
On July 30, 1997, Holdings entered into the Merger Agreement pursuant to
which SDW Acquisition II Corporation ("Acquisition II"), a Delaware corporation
and an indirect subsidiary of Sappi would be merged, subject to certain
important conditions, with and into Holdings, with Holdings continuing as the
surviving corporation. Under the terms of the Merger Agreement, each issued and
outstanding share of Common Stock held by any party other than Sappi and its
affiliates or HSL will be converted into the right to receive $17.60 per share
in cash, subject to the exercise of appraisal rights. As a result, each
outstanding Class A Warrant will become exercisable solely for $5.2708 in cash
and each outstanding Class B Warrant will become exercisable solely for $17.60
in cash, in each case upon payment of the exercise price and satisfaction of
the other terms and conditions of the related Warrant Agreement. Additionally,
each issued and outstanding share of Senior Preferred Stock will, subject to
the exercise of appraisal rights, remain outstanding, without amendment. As a
result of the Merger, Sappi will own 100% of the issued and outstanding voting
common stock and 75.07% of the common equity of Holdings in the form of new
Class A Common Stock, and HSL will own 24.94% of the common equity of Holdings
in the form of new non-voting, convertible Class B Common Stock. The Class B
Common Stock received by HSL in the Merger and any Class A Common Stock
received on conversion will be subject to the HSL Option Agreement and the
aforementioned irrevocable proxy in favor of Sappi. The Merger Agreement has
been approved by the written consent of the holders of a majority of the
outstanding common stock of Holdings and Acquisition II. It is anticipated the
Merger will become effective on or about September 5, 1997; however there can
be no assurance that the conditions to the Merger will be satisfied or waived.
See "Risk Factors--Control by Sappi", "Certain Relationships and Related
Transactions", "Description of Capital Stock--Holdings Common Stock" and
"Material Federal Income Tax Considerations--Effect of Merger".
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. See "Risk Factors--Risk of Early
Redemption of Senior Preferred Stock".
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<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 and UBS subsequently resold all their Senior
Preferred Stock and certain of their Class B Warrants to certain "qualified
institutional buyers" ("QIBs") pursuant to Rule 144A under the Act in 1995 and
sold all remaining Securities held by them (including 300,000 Class A Warrants
held by UBS) in the Minority Acquisition. See "Certain Relationships and
Related Transactions--Minority Acquisition and Merger".
Holdings filed 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.
2,700,000 Class A Warrants to purchase initially up
to 808,596 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.
IF THE MERGER BECOMES EFFECTIVE, EACH CLASS A WAR-
RANT WILL BECOME EXERCISABLE SOLELY FOR $5.2708 IN
CASH, AND EACH OUTSTANDING CLASS B WARRANT WILL BE-
COME EXERCISABLE SOLELY FOR $17.60 IN CASH, IN EACH
CASE UPON PAYMENT OF THE EXERCISE PRICE AND SATIS-
FACTION OF THE OTHER TERMS AND CONDITIONS OF THE
RELATED WARRANT AGREEMENT. AS A RESULT OF THE MERG-
ER, HOLDERS OF THE WARRANTS WILL NO LONGER HAVE ANY
RIGHT TO OBTAIN SHARES OF COMMON STOCK OF HOLDINGS
(AS CONSTITUTED BEFORE THE MERGER) OR CLASS A COM-
MON STOCK OR CLASS B COMMON STOCK OF HOLDINGS (AS
CONSTITUTED AFTER THE MERGER). SEE "CERTAIN RELA-
TIONSHIPS AND RELATED TRANSACTIONS--MINORITY ACQUI-
SITION AND MERGER", "DESCRIPTION OF CAPITAL STOCK"
AND "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS--
EFFECT OF MERGER".
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<PAGE>
Material Federal Income
Tax Considerations.....
For a discussion of certain federal income tax
considerations, including certain potential
material adverse tax consequences, relating to the
acquisition, ownership and disposition of the
Securities, see "Risk Factors--Potential Material
Adverse Federal Income Tax Consequences" on page 14
and "Material Federal Income Tax Considerations".
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 on or prior to December 15, 1999 and
were not previously paid in cash (the "Accumulated
Dividends"), except that if any shares of Senior
Preferred Stock are outstanding on and after Decem-
ber 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 outstand-
ing, up to a maximum rate of 20% per annum. It is
not anticipated that Holdings will pay any divi-
dends in cash for any period ending on or prior to
December 15, 1999. Subject to certain limited ex-
ceptions, 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 April 2, 1997, the Spec-
ified Amount was $35.20 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
4
<PAGE>
combinations involving Holdings or S.D. Warren or
(iii) the sale, lease, transfer or other disposi-
tion of all or substantially all of the assets 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 unpaid divi-
dends (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 class, will (a) upon the failure of
Holdings (1) with respect to dividend accrual peri-
ods after December 15, 1999, to pay, in whole or in
part, for more than six consecutive dividend ac-
crual periods dividends in cash equal to the divi-
dend that accrued during such dividend accrual pe-
riod, (2) to satisfy any mandatory redemption obli-
gation 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 comply 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 Securi-
ties (other than Senior Preferred Stock), except
that without the approval of the holders of Senior
Preferred Stock, Holdings may issue and have out-
standing 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
certain mergers, consolidations and sales of as-
sets. See "Description 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.
5
<PAGE>
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-annually
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 issu-
ing additional Exchange Debentures with a principal
amount equal to such interest. After December 15,
1999, interest on the Exchange Debentures 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 April 2, 1997,
the aggregate amount of such Senior Debt was $535.2
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.
6
<PAGE>
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.
IF THE MERGER BECOMES EFFECTIVE, EACH CLASS A
WARRANT WILL BECOME EXERCISABLE SOLELY FOR $5.2708
IN CASH, AND EACH OUTSTANDING CLASS B WARRANT WILL
BECOME EXERCISABLE SOLELY FOR $17.60 IN CASH, IN
EACH CASE UPON PAYMENT OF THE EXERCISE PRICE AND
SATISFACTION OF THE OTHER TERMS AND CONDITIONS OF
THE RELATED WARRANT AGREEMENT. AS A RESULT OF THE
MERGER, HOLDERS OF THE WARRANTS WILL NO LONGER HAVE
ANY RIGHT TO OBTAIN SHARES OF COMMON STOCK OF
HOLDINGS (AS CONSTITUTED BEFORE THE MERGER) OR
CLASS A COMMON STOCK OR CLASS B COMMON STOCK OF
HOLDINGS (AS CONSTITUTED AFTER THE MERGER). SEE
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--
MINORITY ACQUISITION AND MERGER", "DESCRIPTION OF
CAPITAL STOCK" AND "MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS--EFFECT OF MERGER".
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
7
<PAGE>
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.
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.
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. The selected financial data for the six months ended April 2, 1997
and April 3, 1996 are derived from the unaudited financial statements of
Holdings. 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 Corporation 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 SIX MONTHS
ENDED ENDED ENDED THROUGH THROUGH ENDED ENDED
DECEMBER 26, DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2, APRIL 3,
1992(1) 1993 1994 1994 1995 1996 1996
---------------- ---------------- ---------------- ---------------- ------------- ------------- ------------
COMPANY AND COMPANY AND COMPANY AND COMPANY AND CONSOLIDATED CONSOLIDATED CONSOLIDATED
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED SDW HOLDINGS SDW HOLDINGS SDW HOLDINGS
AFFILIATES AFFILIATES AFFILIATES AFFILIATES CORPORATION CORPORATION CORPORATION
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
---------------- ---------------- ---------------- ---------------- ------------- ------------- ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <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 $ 720.5
Gross profit.... 182.5 168.1 106.4 49.9 269.8 255.0 143.1
Selling, general
and
administrative
expense........ 91.0 91.7 72.1 22.2 96.2 134.0 64.2
Restructuring
charges........ -- 66.1 -- -- -- -- --
Income from
operations..... 91.5 10.3 34.3 27.7 173.6 121.0 78.9
Other income
(expense),
net............ 0.1 0.1 0.1 (0.5) 3.2 (0.1) 1.4
Interest
expense........ 9.0 8.5 6.4 2.3 106.0 108.9 59.1
Income tax
expense
(benefit)...... 32.0 6.5 11.2 9.9 28.4 5.1 8.6
Dividends and
accretion on
Warren Series B
preferred
stock.......... -- -- -- -- 9.1 13.5 6.6
Extraordinary
item, net of
tax............ -- -- -- -- -- (2.0) --
Net income
(loss)......... 50.6 (4.6) 16.8 15.0 33.3 (8.6) 6.0
Dividends on
preferred
stock.......... -- -- -- -- 4.6 6.9 3.4
Net income
(loss)
applicable to
common
stockholders... 50.6 (4.6) 16.8 15.0 28.7 (15.5) 2.6
SHARE DATA:
Net earnings
(loss) per
common share... $ -- $ -- $ -- $ -- $ 0.80 $ (0.50) $ 0.07
Weighted average
common share
outstanding -- -- -- -- 35.9 30.7 35.9
CASH FLOW DATA:
Net cash
provided by
operating
activities..... $ 141.9 $ 130.3 $ 27.8 $ 53.7 $ 136.0 $ 216.6 $ 25.1
Net cash used in
investing
activities..... (56.3) (73.7) (46.4) (14.5) (1,489.6) (48.6) (16.2)
Net cash
provided by
(used in)
financing
activities .... (85.4) (55.8) 21.2 31.1 1,340.8 (181.2) (71.1)
OTHER FINANCIAL
DATA:
Adjusted EBITDA
(2)............ $ 183.1 $ 169.5 $ 105.9 $ 56.5 $ 255.8 $ 227.8 $ 131.1
Capital
expenditures... 70.1 68.9 32.3 14.5 33.7 51.3 18.3
Depreciation,
cost of timber
harvested and
amortization... 91.6 93.1 71.6 28.8 89.8 115.2 56.4
Ratio of
earnings to
fixed charges
(3)............ 5.8x 1.1x 3.1x 8.3x 1.4x (4) 1.1x
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 90.9
Total assets.... 1,696.8 1,711.7 1,676.9 1,737.1 1,887.3 1,725.4 1,811.9
Total debt
(including
current
maturities).... 125.7 124.3 119.8 119.3 1,127.4 948.9 1,052.2
Warren Series B
preferred stock
(5)............ -- -- -- -- 74.5 88.0 81.1
Preferred Stock
at liquidation
value.......... -- -- -- -- 42.1 49.0 45.5
Parent's
equity......... 1,152.3 1,088.1 1,136.5 1,219.1 -- -- --
Stockholders'
equity
including
preferred
stock.......... -- -- -- -- 365.1 356.5 375.9
<CAPTION>
SIX MONTHS
ENDED
APRIL 2,
1997
------------
CONSOLIDATED
SDW HOLDINGS
CORPORATION
(SUCCESSOR)
------------
<S> <C>
OPERATING DATA:
Sales........... $ 660.2
Gross profit.... 123.9
Selling, general
and
administrative
expense........ 66.8
Restructuring
charges........ 10.0
Income from
operations..... 47.1
Other income
(expense),
net............ 2.0
Interest
expense........ 51.8
Income tax
expense
(benefit)...... (1.1)
Dividends and
accretion on
Warren Series B
preferred
stock.......... 7.4
Extraordinary
item, net of
tax............ 0.9
Net income
(loss)......... (9.0)
Dividends on
preferred
stock.......... 3.8
Net income
(loss)
applicable to
common
stockholders... (11.9)
SHARE DATA:
Net earnings
(loss) per
common share... $ (0.39)
Weighted average
common share
outstanding 30.7
CASH FLOW DATA:
Net cash
provided by
operating
activities..... $ 65.7
Net cash used in
investing
activities..... (35.1)
Net cash
provided by
(used in)
financing
activities .... (32.8)
OTHER FINANCIAL
DATA:
Adjusted EBITDA
(2)............ $ 112.1
Capital
expenditures... 25.2
Depreciation,
cost of timber
harvested and
amortization... 59.5
Ratio of
earnings to
fixed charges
(3)............ (4)
BALANCE SHEET
DATA (AT END OF
PERIOD):
Cash and cash
equivalents.... $ 46.8
Working
capital........ 96.0
Total assets.... 1,731.4
Total debt
(including
current
maturities).... 910.3
Warren Series B
preferred stock
(5)............ 95.4
Preferred Stock
at liquidation
value.......... 52.8
Parent's
equity......... --
Stockholders'
equity
including
preferred
stock.......... 348.4
</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) Adjusted EBITDA is defined as income from operations before restructuring
expense (as shown above) plus depreciation, cost of timber harvested and
amortization (excluding amortization of deferred financing fees). Based on
its experience in the paper industry, the Company's management believes
that Adjusted EBITDA and related measures of cash flow serve as important
tools for measuring paper companies in several areas such as liquidity,
operating performance, and leverage, and for assessing the ability to
service and incur debt. Management interprets the trend in Adjusted EBITDA
on an annualized basis over the periods shown to indicate a general
improvement in these measures and improved ability to service and incur
debt, with the exception of the first quarter of fiscal 1997 which reflects
lower gross profit. Adjusted 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. Investors should
be cautioned that Adjusted EBITDA as shown above may not be comparable to
similarly titled measures presented by other companies, and comparisons
could be misleading unless all companies and analysts calculate these
measures in the same fashion.
(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 periods ended October 2, 1996 and April 2, 1997, the Company's
earnings were insufficient to cover fixed charges by $13.4 million and
$16.4 million, respectively.
(5) Liquidation value was $103.2 million at April 2, 1997.
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 April 2, 1997, the aggregate amount of liabilities of S.D. Warren
was $1,287.6 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". In July 1997, Warren
obtained consent from the lenders under its credit agreement to the payment
from time to time of dividends to Holdings on or prior to September 30, 1998
for the purpose of such redemption subject to certain conditions and
limitations. See "Description of Warren Indebtedness".
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
11
<PAGE>
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 decrease in
the market price of pulp. However, the Company manufactures approximately 66%
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 April 2, 1997, S.D. Warren had total outstanding long-term
indebtedness (including the current portion thereof) of $910.3 million,
redeemable preferred stock with a liquidation preference of $103.2 million and
stockholder's equity of $348.4 million, resulting in a debt and redeemable
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.
12
<PAGE>
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,
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.
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 and the six-month period ended April 2,
1997, 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".
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
13
<PAGE>
April 2, 1997, the aggregate principal amount of such Senior Debt guaranteed
by Holdings was $535.2 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.
POTENTIAL MATERIAL ADVERSE FEDERAL INCOME TAX CONSEQUENCES
The acquisition, ownership and disposition of the Securities involves tax
consequences that may be potentially adverse to purchasers or holders of the
Securities. The Company has obtained an opinion of counsel with respect to
certain material federal income tax consequences, but, as a result of legal
and factual uncertainties, counsel was unable to opine on certain other
material federal income tax consequences that may be material and adverse to
certain holders or purchasers of the Securities.
Among these potentially material adverse federal income tax consequences are
the following:
. Holdings does not expect to pay any cash dividends on the Senior
Preferred Stock for any period ending on or prior to December 15, 1999.
Any such unpaid dividends will accrue and compound, and could be treated
as constructive distributions as they accrue, rather than when paid.
. Any redemption premium on the Senior Preferred Stock that is treated as
"unreasonable" may be required to be taken into account over the period
during which the Senior Preferred Stock is not callable, and counsel is
unable to determine whether any redemption premium on the Senior
Preferred Stock would be treated as "unreasonable". Moreover, since the
Senior Preferred Stock is immediately callable, it is uncertain when that
period would commence and what its duration would be.
. Holdings may, at its option and under certain circumstances, issue
Exchange Debentures in exchange for the Senior Preferred Stock. Any such
exchange will be a taxable event to holders of the Senior Preferred
Stock.
. 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 therefore 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.
These and other potentially adverse material federal income tax
consequences, as well as the potential effects of the Merger, and the opinion
of counsel with respect to the material federal income tax consequences of the
acquisition, ownership and disposition of the Securities, are set forth under
the caption "Material Federal Income Tax Considerations".
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
14
<PAGE>
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"). Final promulgation of the cluster rules may occur in late 1997, with
compliance with the rules required beginning in 2000. It is expected that the
cluster rules, if adopted as currently proposed, will require S.D. Warren to
incur approximately $70.0 million to $90.0 million of capital expenditures
through 2000. Holdings also anticipates that through 2000, S.D. Warren will
incur an additional estimated $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 (the "County") 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 negotiations with the County, the Company may not be
able to obtain additional treatment capacity for future expansions and the
County could impose stricter permit limits. In June 1997, the EPA sued the
County for failure to enforce permit limits associated with its operation of
the wastewater facility. The Company is uncertain as to the effect, if any, of
this action on its current dispute with the County. 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. 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 June 1, 1997, as a result of the Minority Acquisition, Sappi controlled
the voting of 100% of the outstanding voting stock of Holdings (approximately
97.33% of Holdings' voting stock on a fully diluted basis). In addition, the
Minority Acquisition resulted in termination of the contractual rights of
DLJMB and UBS to designate representatives to the Board of Directors and to
approve certain actions by Holdings and Warren.
15
<PAGE>
Accordingly, Sappi has the ability to control election of the entire Board of
Directors and to approve any matter requiring a vote of holders of Common
Stock. Upon the consummation of the Merger, Sappi will control the voting of
100% of the outstanding common equity of Holdings (including on a fully
diluted basis). As a result Sappi has the ability to exercise a controlling
influence over the business and operations of each of Holdings and S.D. Warren
and may therefore be deemed to control Holdings and S.D. Warren. See "Security
Ownership of Certain Beneficial Owners and Management", "Certain Relationships
and Related Transactions--Minority Acquisition and Merger" and "--Shareholders
Agreement".
REQUIREMENT TO DO BUSINESS WITH SAPPI AFFILIATES
Pursuant to a shareholders agreement among Sappi, an affiliate of Sappi,
Holdings and S.D. Warren, (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 six months ended April 2,
1997 and the year ended October 2, 1996, S.D. Warren had gross sales to
customers outside of the U.S. of $134.5 million and $240.9 million,
respectively, of which $96.6 million and $151.4 million, respectively, were
subject to the marketing agreements, and in respect of which Warren expensed
fees of approximately $4.3 million and $7.2 million, respectively.
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.
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 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.
16
<PAGE>
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 $15.3 million ($10.20 per share) as of April 2, 1997.
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 April 2, 1997. 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................................. $ 48.6
--------
Long-term debt:
Term Loan Facility (1).......................................... 367.2
Notes........................................................... 375.0
Other (2)....................................................... 119.5
--------
Total long-term debt.......................................... 861.7
--------
Warren Preferred Stock (3)........................................ 103.2
--------
Stockholders' equity (4):
Preferred Stock, at liquidation value........................... 52.8
Common Stock and additional paid in capital..................... 294.3
Retained earnings............................................... 1.3
--------
Total stockholders' equity.................................... 348.4
--------
Total capitalization........................................ $1,361.9
========
</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 $28.2 million of unpaid dividends.
(4) If the Merger becomes effective, the capital stock of Holdings will
consist of (i) 250,000 shares of voting Class A Common Stock, par value
$.01 per share, of which 75,065 shares will be issued and outstanding,
(ii) 50,000 shares of non-voting convertible Class B Common Stock, par
value $.01 per share, of which 24,935 shares will be issued and
outstanding and (iii) 5,000,000 shares of Preferred Stock, par value $.01
per share, of which 1,500,000 shares will be issued and outstanding as
Senior Preferred Stock (assuming no exercise of appraisal rights). There
will be no change in total consolidated stockholders' equity as a result
of the Merger.
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. The selected financial data for the six months ended April 2, 1997
and April 3, 1996 are derived from the unaudited financial statements of
Holdings. 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 SIX MONTHS
DECEMBER 26, DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2, ENDED
1992(1) 1993 1994 1994 1995 1996 APRIL 3, 1996
---------------- ---------------- ---------------- ---------------- ------------- ------------- -------------
S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND COMPANY AND CONSOLIDATED CONSOLIDATED CONSOLIDATED
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED SDW HOLDINGS SDW HOLDINGS SDW HOLDINGS
AFFILIATES AFFILIATES AFFILIATES AFFILIATES CORPORATION CORPORATION CORPORATION
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
---------------- ---------------- ---------------- ---------------- ------------- ------------- -------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <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 $ 720.5
Gross profit.... 182.5 168.1 106.4 49.9 269.8 255.0 143.1
Selling, general
and
administrative
expense........ 91.0 91.7 72.1 22.2 96.2 134.0 64.2
Restructuring
charges........ -- 66.1 -- -- -- -- --
Income from
operations..... 91.5 10.3 34.3 27.7 173.6 121.0 78.9
Other income
(expense),
net............ 0.1 0.1 0.1 (0.5) 3.2 (0.1) 1.4
Interest
expense........ 9.0 8.5 6.4 2.3 106.0 108.9 59.1
Income tax
expense
(benefit)...... 32.0 6.5 11.2 9.9 28.4 5.1 8.6
Dividends and
accretion on
Warren Series B
preferred
stock.......... -- -- -- -- 9.1 13.5 6.6
Extraordinary
item, net of
tax............ -- -- -- -- -- (2.0) --
Net income
(loss)......... 50.6 (4.6) 16.8 15.0 33.3 (8.6) 6.0
Dividends on
preferred
stock.......... -- -- -- -- 4.6 6.9 3.4
Net income
(loss)
applicable to
common
stockholders... 50.6 (4.6) 16.8 15.0 28.7 (15.5) 2.6
SHARE DATA:
Net earnings
(loss) per
common share... $ -- $ -- $ -- $ -- $ 0.80 $(0.50) $ 0.07
Weighted average
common shares
outstanding.... -- -- -- -- 35.9 30.7 35.9
CASH FLOW DATA:
Net cash
provided by
operating
activities..... $ 141.9 $ 130.3 $ 27.8 $ 53.7 $ 136.0 $ 216.6 $ 25.1
Net cash used in
investing
activities..... (56.3) (73.7) (46.4) (14.5) (1,489.6) (48.6) (16.2)
Net cash
provided by
(used in)
financing
activities..... (85.4) (55.8) 21.2 31.1 1,340.8 (181.2) (71.1)
OTHER FINANCIAL
DATA:
Adjusted EBITDA
(2)............ $ 183.1 $ 169.5 $ 105.9 $ 56.5 $ 255.8 $ 227.8 $ 131.1
Capital
expenditures... 70.1 68.9 32.3 14.5 33.7 51.3 18.3
Depreciation,
cost of timber
harvested and
amortization... 91.6 93.1 71.6 28.8 89.8 115.2 56.4
Ratio of
earnings to
fixed charges
(3)............ 5.8x 1.1x 3.1x 8.3x 1.4x (4) 1.1x
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 90.9
Total assets.... 1,696.8 1,711.7 1,676.9 1,737.1 1,887.3 1,725.4 1811.9
Total debt
(including
current
maturities).... 125.7 124.3 119.8 119.3 1,127.4 948.9 1052.2
Warren Series B
preferred stock
(5)............ -- -- -- -- 74.5 88.0 81.1
Preferred Stock
at liquidation
value.......... -- -- -- -- 42.1 49.0 45.5
Parent's
equity......... 1,152.3 1,088.1 1,136.5 1,219.1 -- -- --
Stockholders'
equity
including
preferred
stock.......... -- -- -- -- 365.1 356.5 375.9
<CAPTION>
SIX MONTHS
ENDED
APRIL 2, 1997
-------------
CONSOLIDATED
SDW HOLDINGS
CORPORATION
(SUCCESSOR)
-------------
<S> <C>
OPERATING DATA:
Sales........... $ 660.2
Gross profit.... 123.9
Selling, general
and
administrative
expense........ 66.8
Restructuring
charges........ 10.0
Income from
operations..... 47.1
Other income
(expense),
net............ 2.0
Interest
expense........ 51.8
Income tax
expense
(benefit)...... (1.1)
Dividends and
accretion on
Warren Series B
preferred
stock.......... 7.4
Extraordinary
item, net of
tax............ 0.9
Net income
(loss)......... (8.1)
Dividends on
preferred
stock.......... 3.8
Net income
(loss)
applicable to
common
stockholders... (11.9)
SHARE DATA:
Net earnings
(loss) per
common share... $ (0.39)
Weighted average
common shares
outstanding.... 30.7
CASH FLOW DATA:
Net cash
provided by
operating
activities..... $ 65.7
Net cash used in
investing
activities..... (35.1)
Net cash
provided by
(used in)
financing
activities..... (32.8)
OTHER FINANCIAL
DATA:
Adjusted EBITDA
(2)............ $ 112.1
Capital
expenditures... 25.2
Depreciation,
cost of timber
harvested and
amortization... 59.5
Ratio of
earnings to
fixed charges
(3)............ (4)
BALANCE SHEET
DATA (AT END OF
PERIOD):
Cash and cash
equivalents.... $ 46.8
Working
capital........ 96.0
Total assets.... 1,731.4
Total debt
(including
current
maturities).... 910.3
Warren Series B
preferred stock
(5)............ 95.4
Preferred Stock
at liquidation
value.......... 52.8
Parent's
equity......... --
Stockholders'
equity
including
preferred
stock.......... 348.4
</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) Adjusted EBITDA is defined as income from operations before restructuring
expense (as shown above) plus depreciation, cost of timber harvested and
amortization (excluding amortization of deferred financing fees). Based on
its experience in the paper industry, the Company's management believes
that Adjusted EBITDA and related measures of cash flow serve as important
tools for measuring paper companies in several areas such as liquidity,
operating performance, and leverage, and for assessing the ability to
service and incur debt. Management interprets the trend in Adjusted EBITDA
on an annualized basis over the periods shown to indicate a general
improvement in these measures and improved ability to service and incur
debt, with the exception of the first quarter of fiscal 1997 which
reflects lower gross profit. Adjusted 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. Investors
should be cautioned that Adjusted EBITDA as shown above may not be
comparable to similarly titled measures presented by other companies, and
comparisons could be misleading unless all companies and analysts
calculate these measures in the same fashion.
(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 periods ended October 2, 1996 and April 2, 1997, the Company's
earnings were insufficient to cover fixed charges by $13.4 million and
$16.4 million, respectively.
(5) Liquidation value was $103.2 million at April 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, owns approximately 911,000 acres of
timberlands in the State of Maine, and operates several regional distribution
facilities.
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 all of the outstanding capital stock of Warren
(the "Acquisition") from Scott Paper Company ("Scott") which has since been
acquired by Kimberly-Clark Corporation. 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 certain "forward-looking statements" as that term is defined under
the Private Securities Litigation Reform Act of 1995. The words "believe,"
"anticipate," "intend," "estimate," "plan," "assume" and other similar
expressions which are predictions of or indicate events and future trends
which do not relate to historical matters identify forward-looking statements.
Reliance should not be placed on forward-looking statements because they
involve known and unknown risks, uncertainties and other factors which are in
some cases beyond the control of the Company and may cause the actual results,
performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied
by such forward-looking statements. Certain factors that may cause such
differences include, but are not limited to the following: global economic and
market conditions; production and capacity in the United States and Europe;
production and pricing levels of pulp and paper; any major disruption in
production at the Company's key facilities; alterations in trade conditions in
and between the United States and other countries where the Company does
business; and changes in environmental, tax and other laws and regulations.
These and other factors that might cause differences between actual and
anticipated results, performance and achievements are discussed in greater
detail below.
MARKET OVERVIEW
North American supply/demand imbalances, inventory shifts and, to a lesser
degree, the availability and pricing of imported products have historically
caused price fluctuations in the market for coated paper. Coated
21
<PAGE>
free paper shipments in the segments in which the Company competes showed
volume increases of over 16% in the quarter ended April 2, 1997 when compared
to the same quarter last year.
Coated free mill inventories, which peaked at approximately 600,000 tons in
May of 1996, were reduced to 457,000 by the end of March 1997. The combination
of higher industry shipments and the reduction in inventory has brought with
it a stabilization in industry prices at a level about 13% below last year's
January to March level. The Company's coated sales volume was up 6% over the
same quarter last year. That increase is primarily due to new product
introductions, which include Strobe, a new product targeted at the higher
margin segment of the coated free marketplace.
For the first three months of calendar 1997, coated groundwood shipments
were up 27.5% over the prior year's shipments. Operating rates in the segment
are in the mid 90% range, and pricing is firming. Since coated groundwood
pricing provides the floor for coated free sheet pricing, the upward trend in
coated groundwood pricing is an indicator for the coated free sheet market.
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 an improvement in
business conditions for the Company's products as the Company exits the
seasonally weaker periods of its fiscal year although there can be no
assurance in this regard. 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
adversely affect market supply/demand balance and may constrain upward
movement of coated prices which may adversely affect the Company's revenues.
RESULTS OF OPERATIONS
SIX MONTHS ENDED APRIL 2, 1997 COMPARED TO THE SIX MONTHS ENDED APRIL 3, 1996
Sales
Sales for the six months ended April 2, 1997 were $660.2 million compared to
$720.5 million for the six months ended April 3, 1996, a decrease of $60.3
million or 8.4%. The decrease is primarily due to a 11.4% decrease in average
net revenue per paper ton, partially offset by a 3.5% increase in paper
shipment volume during such period.
Cost of Goods Sold
Cost of goods sold for the six months ended April 2, 1997 was $536.3 million
compared to $577.4 million for the six months ended April 3, 1996, a decrease
of $41.1 million or 7.1%. Cost of goods sold on a per paper ton basis
decreased to $854 per ton from $960 per ton for the corresponding prior year
period. The decrease was primarily due to lower fiber input costs and, to a
lesser extent, cost cutting efforts which resulted in lower personnel and
maintenance costs and decreased material costs resulting from cost reduction
initiatives.
Selling, General and Administrative Expense
Selling, general and administrative expense was $66.8 million for the six
months ended April 2, 1997 compared to $64.2 million for the six months ended
April 3, 1996, an increase of $2.6 million. The increase on a per paper ton
basis equates to 0.6% and is insignificant.
Interest Expense, Taxes, and Dividends and Accretion on Warren Series B
Preferred Stock
Interest expense for the six months ended April 2, 1997 was $51.8 million
compared to $59.1 million for the six months ended April 3, 1996. The $7.3
million reduction in interest expense was primarily due to lower levels of
outstanding debt. Interest expense includes the amortization of deferred
financing fees.
Income tax expense was a benefit of $1.1 million for the six months ended
April 2, 1997 compared to an expense of $8.6 million for the corresponding
period in the prior year, primarily reflecting the change in the Company's
earnings level.
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<PAGE>
Dividends and accretion on Warren Series B preferred stock of $7.4 million
and $6.6 million for the six months ended April 2, 1997 and April 3, 1996,
respectively, are accounted for as the equivalent of a minority interest for
financial statement purposes.
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>
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.
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<PAGE>
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.
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.
24
<PAGE>
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.
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
SIX MONTHS ENDED APRIL 2, 1997 COMPARED TO SIX MONTHS ENDED APRIL 3, 1996
The Company's net cash provided by operating activities was $65.7 million
for the six months ended April 2, 1997 as compared to $25.1 million for the
six months ended April 3, 1996. The increase is due mainly
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<PAGE>
to a $57.0 million favorable swing in working capital requirements for the
comparable periods, as accounts payable increased relative to the second
fiscal quarter of the prior year, partially offset by increases in inventories
and trade and other receivables.
The increase in accounts payable, accrued and other liabilities at April 2,
1997 compared to October 2, 1996 was primarily attributable to increased
purchasing activity as a result of the Westbrook flood, accrued and unpaid
restructuring charges, and higher outstanding interest payable. The increase
in other receivables is primarily attributable to the accrual of the Westbrook
property damage insurance recovery, net of cash received, and increased power
sales receivable.
The Company's operating working capital decreased to $68.6 million at April
2, 1997 compared to $79.8 million at October 2, 1996. Operating working
capital is defined as trade accounts receivable, other receivables and
inventories less accounts payable and accrued and other current liabilities.
This decrease primarily resulted from an increase in accounts payable and
accrued and other current liabilities offset by an increase in other
receivables.
Capital expenditures for the six months ended April 2, 1997 was $25.2
million, up from $18.3 million for the six months ended April 3, 1996. Capital
expenditures are estimated to approximate $70.0 million during fiscal year
1997. In addition, due to a wide variety of environmental laws and
regulations, including compliance with the cluster rules, the Company
anticipates that aggregate capital expenditures related to environmental
compliance will approximate $90.0 million through the end of fiscal year 2000,
assuming the cluster rules are adopted. See "Business--Environmental and
Safety Matters". The Company believes that cash generated by operations and
amounts available under its revolving credit facility will be sufficient to
meet its ongoing operating and capital expenditure requirements.
Net cash used in financing activities was lower during the six months ended
April 2, 1997 compared to the corresponding quarter of the previous year,
primarily due to the refinancing and issuance of industrial revenue bonds and
differences in optional and excess cash flow prepayments made with respect to
the Company's term loan facilities. The Company paid optional prepayments of
its term loans equaling $24.0 million and $74.9 million during the six months
ended April 2, 1997 and April 3, 1996, respectively.
Debt and Preferred Stock
At April 2, 1997, the Company's long-term debt was $861.7 million compared
to $902.5 million at October 2, 1996, a decrease of $40.8 million. The current
maturities of long-term debt balance of $48.6 million at April 2, 1997
primarily represents the amounts payable in June 1997 and December 1997 under
the Company's term loan facilities.
Warren has a $250.0 million revolving credit facility to finance working
capital needs. At April 2, 1997, Warren did not have any borrowings
outstanding under this facility, resulting in an unused borrowing capacity of
approximately $249.0 million, after giving effect to outstanding letters of
credit, which may be used to finance working capital needs. Warren is required
to pay a commitment fee, which is based on the achievement of a certain
financial ratio, of between 0.375% and 0.5% per annum on the average daily
unused commitment available under the revolving credit facility.
In addition, Warren had approximately $150.8 million and $170.5 million of
letters of credit outstanding under its letter of credit facility at April 2,
1997 and October 2, 1996, respectively. Warren pays a commission, which is
based on the achievement of a certain financial ratio, of between 1.00% and
2.50% on outstanding letters of credit and an issuance fee of between 0.125%
and 0.25% per annum on letters of credit issued.
On February 7, 1997, the Company amended certain provisions of the credit
agreement, as discussed in the Notes to Unaudited Condensed Consolidated
Financial Statements, including the interest coverage covenant, the optional
prepayment terms and, in order to permit the granting of senior liens in
connection with the refinancing of certain of the Company's industrial revenue
bonds, the covenant restricting certain liens.
26
<PAGE>
On March 5, 1997, pursuant to a loan agreement with the town of Skowhegan,
Maine, the Company expanded and refinanced certain environmental and solid
waste projects at its Somerset mill by redeeming or refunding revenue bonds
aggregating $23.7 million, defeasing revenue bonds aggregating $4.4 million
and issuing new bonds aggregating $38.1 million. The new bonds are due from
2000 to 2015 and bear interest at rates ranging from 6.65% to 8.00% per annum.
The extraordinary gain resulting from the extinguishment of the original
bonds, net of taxes of $0.6 million, was $0.9 million. In connection with this
transaction, an outstanding letter of credit was reduced by $19.7 million. The
agreement under which the $4.4 million in bonds was defeased required the
Company to purchase U.S. Treasury securities to be held by a trustee in an
amount that will cover the interest payments required to be paid to the
holders of these bonds until the first call date on the bonds, as well as the
principal due at that date. In the event that the U.S. Treasury securities,
together with income earned on these securities, do not cover interest and
principle on the defeased bonds, the Company will be liable for such
deficiency.
TWELVE MONTHS ENDED OCTOBER 2, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
27, 1995
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.
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.
27
<PAGE>
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.
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. In June 1997, the EPA sued the County for failure to enforce
permit limits associated with its operation of the wastewater facility. The
Company is uncertain as to the effect, if any, of this action on its current
dispute with the County. 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"). Final promulgation of the
cluster rules is expected to occur in late 1997, with compliance with the
rules required beginning in 2000. The Company believes that compliance with
the cluster rules, if adopted as currently proposed, may require aggregate
capital expenditures of approximately $70.0 million to $90.0 million through
2000. The ultimate financial impact to the
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<PAGE>
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
Environmental Quality ("DEQ") regarding a wastewater surge pond adjacent to the
Muskegon Lake. The DEQ presently is considering whether the surge pond is in
compliance with Michigan Act 451 (Part 31 of the Natural Resources and
Environmental Protection 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 DEQ 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 which is expected to be
completed in the year 2001. Total costs of the project are estimated to be
approximately $9.0 million, of which approximately $5.7 million had been spent
as of April 2, 1997. 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.
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.
Labor Relations
In February 1997, the Company reached settlement on a new six-year labor
agreement with its three Somerset, Maine mill unions. The ratified contract
reflects more flexible work rule provisions and a 3% annual wage increase for
the term of the agreement. The Company's labor agreements at its Westbrook,
Maine and Mobile, Alabama sites expired on June 1, 1997. All but one of the
Westbrook unions ratified a new five year agreement in May 1997 with more
flexible work rule provisions. The Company is engaged in negotiations with the
remaining union at Westbrook and the unions at Mobile. Those affected employees
are working under contract extensions which can be terminated upon 10 days
notice.
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Force Majeure 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. On March 26, 1997, the Company
reached an agreement with its insurance carrier pursuant to which it recovered
substantially all the lost inventory value, excluding the deductible of $0.5
million.
Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. Damage to mill equipment has since been repaired and
normal operating mill conditions have been restored. Total losses are not
expected to exceed the Company's insurance coverage limits, which include both
business interruption and property loss coverage. The Company had as of April
2, 1997, accrued an estimate of $44.7 million for costs to refurbish plant
assets at the Westbrook facility, of which $27.5 million has been received as
insurance proceeds at April 2, 1997 with the remainder, net of a deductible of
$3.5 million, included in other receivables in the condensed consolidated
balance sheet at April 2, 1997. In addition, the Company has accrued $9.0
million during the quarter ended April 2, 1997, representing a portion of the
business interruption claim submitted for the interference caused by the
Westbrook flood, which primarily took place during the quarter ended January
1, 1997. At July 2, 1997, the Company had received $7.5 million as business
interruption insurance proceeds.
Long-Term Contracts
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 are discounted due to the elimination of freight
costs associated with delivering pulp to Warren's Mobile paper mill and pulp
quantities are 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 are generally 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.
The Company's power requirements at its Somerset and Westbrook mills have
historically been satisfied through cogeneration agreements ("Power Purchase
Agreements" or "Agreements") whereby the mills each cogenerate electricity and
sell the output to Central Maine Power Company ("CMP") at above market rates.
The Agreements also provide that the mills purchase electricity from CMP at
the standard industrial tariff rate. The effect of these Agreements has been
to reduce the Company's historical cost of power. However, the Westbrook
Agreement expires on October 31, 1997, and the favorable pricing element of
the Somerset Agreement will end on November 30, 1997. The impact from the
change in the Somerset Agreement is not material; however, the expiration of
the Westbrook Agreement could have a material adverse impact if a replacement
market for excess power generated at the Westbrook mill is not found. The
Company is currently soliciting bids for such excess power and anticipates
that given current capacity constraints in Northeast power markets, any
material adverse impact should be mitigated. 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
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<PAGE>
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, fiscal year 1996, and the six
months ended April 2, 1997 amortization expense related to this asset
approximated $10.8 million, $12.0 million and $6.0 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, it is the present opinion
of the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's financial position, results of operations or
cash flows.
Regulatory Matters
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, and 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.
Credit Agreement Amendment
On July 25, 1997, Warren amended certain provisions of its Credit Agreement
with a syndicate of banks, including the prepayment provisions and the
limitation on indebtedness clause. The lenders also waived certain provisions
of the credit agreement, thereby allowing the Company to enter into a
sale/leaseback arrangement with General Electric Capital Corporation ("GECC")
pertaining to one of the Company's paper machines at its Somerset facility and
allowing Holdings to consummate a merger with Acquisition II. In addition,
Warren obtained consent from the lenders for the utilization of a portion of
the proceeds of the sale/leaseback other than as required by the credit
agreement, including the payment from time to time of dividends to Holdings on
or prior to September 30, 1998 for the purpose of redeeming the Senior
Preferred Stock, subject to certain conditions and limitations.
Sale/Leaseback Transaction
On July 29, 1997, the Company entered into a sale/leaseback arrangement with
GECC. The transaction involved the sale of one of the paper machines at its
Somerset mill for $150.4 million to State Street Bank and Trust Company of
Connecticut, National Association (the "Trustee"), as Trustee for GECC. In
connection with the transaction, the Company entered into a 15 year lease with
the Trustee to lease back the paper machine. Rental payments of approximately
$7.7 million will be made semi-annually in arrears in January and July of each
year. The sale/leaseback arrangement will be accounted for as an operating
lease. The gain on the transaction of approximately $20.8 million will be
deferred and amortized as an adjustment to future rental payments over the
lease term. The Company used approximately $100.3 million of the proceeds from
the sale to make a mandatory prepayment on its term loans. The extraordinary
loss resulting from the extinguishment of this debt is estimated to be $1.5
million, net of a related tax benefit of $1.0 million and will be recorded in
the fourth quarter of fiscal year 1997.
Control by Sappi
On May 27, 1997, WVL acquired the minority common equity interests
(including both Common Stock and Warrants) in Holdings from the Sellers at an
aggregate price of $138.0 million or $17.25 per share of Common Stock or
Common Stock equivalent. WVL exercised, for a price of $0.01 per common share
issued, all
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<PAGE>
of the Warrants acquired in the Minority Acquisition upon the consummation
thereof. As a result of the exercise of the Warrants, Holdings issued
4,252,343 shares of Common Stock. As part of the financing for the Minority
Acquisition, on June 27, 1997, WVL sold the Common Stock acquired in the
Minority Acquisition to HSL and HSL pledged such securities to certain
lenders. The securities acquired by HSL are subject to the HSL Option
Agreement pursuant to which Sappi has a right to purchase such securities at
any time prior to April 30, 2000, and HSL has a right to require Sappi to
purchase such securities upon the occurrence of certain events and at any time
between May 15, 2000 and May 30, 2000. Sappi has been granted an irrevocable
proxy to vote all such securities during the term of the HSL Option Agreement,
subject to compliance with its purchase obligations upon exercise of such
rights. Sappi has also been granted certain rights of first refusal by such
lenders in respect of such securities. As of the date of this Prospectus,
Sappi indirectly owns approximately 75.07% and controls the voting of
approximately 97.33%, and HSL holds approximately 22.27%, of the common equity
of Holdings on a fully diluted basis.
On July 30, 1997, Holdings entered into the Merger Agreement pursuant to
which Acquisition II would be merged, subject to certain important conditions,
with and into Holdings, with Holdings continuing as the surviving corporation.
Under the terms of the Merger Agreement, each issued and outstanding share of
Common Stock held by any party other than Sappi and its affiliates or HSL
will, subject to exercise of appraisal rights, be converted into the right to
receive $17.60 per share in cash. As a result, each outstanding Class A
Warrant will become exercisable solely for $5.2708 in cash and each
outstanding Class B Warrant will become exercisable solely for $17.60 in cash,
in each case upon payment of the exercise price and satisfaction of the other
terms and conditions of the related Warrant Agreement. Additionally, each
issued and outstanding share of Senior Preferred Stock will, subject to the
exercise of appraisal rights, remain outstanding, without amendment. As a
result of the Merger, Sappi will own 100% of the issued and outstanding voting
common stock and 75.07% of the common equity of Holdings in the form of new
Class A Common Stock, and HSL will own 24.94% of the common equity of Holdings
in the form of new non-voting, convertible Class B Common Stock. The Class B
Common Stock received by HSL in the Merger and any Class A Common Stock
received on conversion will be subject to the HSL Option Agreement and the
aforementioned irrevocable proxy in favor of Sappi. The Merger Agreement has
been approved by the written consent of the holders of a majority of the
outstanding common stock of Holdings and Acquisition II. It is anticipated the
Merger will become effective on or about September 5, 1997; however there can
be no assurance that the conditions to the Merger will be satisfied or waived.
See "Risk Factors--Control by Sappi", "Certain Relationships and Related
Transactions--Minority Acquisition and Merger", "Description of Capital
Stock--Holdings Common Stock" and "Material Federal Income Tax
Considerations--Effect of Merger".
Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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.
In February 1997, the FASB issued FAS No. 128, "Earnings per Share", and FAS
No. 129, "Disclosure of Information about Capital Structure", both of which
will be effective for the Company in fiscal year 1998. FAS No. 128 replaces
the presentation of primary earnings per share with basic earnings per share,
which
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<PAGE>
excludes dilution, and requires the dual presentation of basic and diluted
earnings per share. FAS No. 129 establishes standards for disclosing
information about an entity's capital structure and applies to all entities.
The implementation of FAS No. 128 and FAS No. 129 will not have a material
effect on the Company's earnings per share or financial statements.
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income",
and FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", both of which will be effective for the Company in fiscal year
1998. FAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. FAS No. 131 establishes
standards for the way that public business enterprises report selected
information about operating segments. FAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas, and
major customers. The implementation of FAS No. 130 and FAS No. 131 are not
expected to have a material effect on the Company's financial statements.
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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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
facility in Allentown, Pennsylvania, with annual sheeting capacity of
approximately 90,000 tons, owns approximately 911,000 acres of timberlands in
the State of Maine and operates several regional distribution centers.
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. As of June 1, 1997 Sappi indirectly owned approximately 75.07% and
controlled the voting of approximately 97.33% of the common equity of Holdings
on a fully diluted basis. See "Certain Relationships and Related
Transactions--Minority Acquisition and Merger".
On July 30, 1997, Holdings entered into the Merger Agreement with
Acquisition II providing for the merger, subject to certain important
conditions, of Acquisition II into Holdings with Holdings continuing as the
surviving corporation. Under the terms of the Merger Agreement, each issued
and outstanding share of Common Stock held by any party other than Sappi and
its affiliates or HSL will, subject to exercise of appraisal rights, be
converted into the right to receive $17.60 per share in cash. As a result,
each outstanding Class A Warrant will become exercisable solely for $5.2708 in
cash and each outstanding Class B Warrant will become exercisable solely for
$17.60 in cash, in each case upon payment of the exercise price and
satisfaction of the other terms and conditions of the related Warrant
Agreement. Additionally, each issued and outstanding share of Senior Preferred
Stock will, subject to the exercise of appraisal rights, remain outstanding,
without amendment. As a result of the Merger, Sappi will own 100% of the
issued and outstanding voting common stock and 75.07% of the common equity of
Holdings in the form of new Class A Common Stock, and HSL will own 24.94% of
the common equity of Holdings in the form of new non-voting, convertible Class
B Common Stock. The Class B Common Stock received by HSL in the Merger and any
Class A Common Stock received on conversion will be subject to the HSL Option
Agreement and the irrevocable proxy in favor of Sappi. The Merger Agreement
has been approved by the written consent of the holders of a majority of the
outstanding common stock of Holdings and Acquisition II. It is anticipated the
Merger will become effective on or about September 5, 1997; however there can
be no assurance that the conditions to the Merger will be satisfied or waived.
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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, the twelve months ended October 2, 1996 and the six months ended
April 3, 1996 and April 2, 1997:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS TWELVE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2, APRIL 3, APRIL 2,
1994 1994 1995 1996 1996 1997
------------- ------------ ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Coated paper............ 70.9% 73.9% 70.6% 72.2% 71.6% 70.5%
Uncoated paper.......... 17.9 18.5 13.6 12.7 12.4 12.3
Specialty paper......... 5.0 4.8 10.2 11.5 11.9 12.3
Technical paper and
other.................. 6.2 2.8 5.6 3.6 4.1 4.9
----- ----- ----- ----- ----- -----
Total................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
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
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<PAGE>
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.
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, $174.3 million and
$88.7 million for the nine months ended September 24, 1994, the three months
ended December 20, 1994, the nine months ended September 27, 1995, the twelve
months ended October 2, 1996, and the six months ended April 2, 1997,
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 and the six months ended April 2, 1997,
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.
36
<PAGE>
BACKLOG AND SEASONALITY
Backlog as of September 27, 1995, October 2, 1996 and April 2, 1997 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 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,
$15.6 million and $6.5 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, the twelve months ended
October 2, 1996, and the six months ended April 2, 1997, 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 six months ended April 2, 1997 and the year ended October 2, 1996,
the Company manufactured approximately 66% and 65%, respectively, 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 the Somerset, Maine mill
37
<PAGE>
also has softwood pulping capability. In addition, 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 this announcement was retracted on
the 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.
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%).
The Company's power requirements at its Somerset and Westbrook mills have
historically been satisfied through Power Purchase Agreements whereby the
mills each cogenerate electricity and sell the output to CMP at above market
rates. The Agreements also provide that the mills purchase electricity from
CMP at the standard industrial tariff rate. The effect of these Agreements has
been to reduce the Company's historical cost of power. However, the Westbrook
Agreement expires on October 31, 1997 and the favorable pricing element of the
Somerset Agreement will end on November 30, 1997. The impact from the change
in the Somerset Agreement is not material; however, the expiration of the
Westbrook Agreement could have a material adverse impact if a replacement
market for excess power generated at the Westbrook mill is not found. The
Company is currently soliciting bids for such excess power and anticipates
that given current capacity constraints in Northeast power markets, any
material adverse impact should be mitigated.
The Muskegon mill cogenerates electricity, uses the total output in its
operations, and purchases standby power service from Consumers Power Company
at state regulated rates.
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.
38
<PAGE>
EMPLOYEES AND LABOR RELATIONS
As of April 2, 1997, the Company had 3,972 employees. Approximately 69% of
employees are represented by six international unions under ten different
contracts. In February 1997, the Company reached settlement on a new six-year
labor agreement with its three Somerset, Maine mill unions. The ratified
contract reflects more flexible work rule provisions and a 3.0% annual wage
increase for the term of the agreement. The Company's labor agreements at its
Westbrook, Maine and Mobile, Alabama sites expired on June 1, 1997. All but
one of the three Westbrook unions ratified a new five year agreement in May
1997 with more flexible work rule provisions. The Company is engaged in
negotiations with the remaining union at Westbrook and the unions at Mobile.
Those affected employees are working under contract extensions which can be
terminated upon 10 days notice. 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.
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
negotiations with the County, the Company may not be able to obtain additional
treatment capacity for future expansions and the County could impose stricter
permit limits. In June 1997, the EPA sued the County for failure to enforce
permit limits associated with its operation of the wastewater facility. The
Company is uncertain as to the effect, if any, of this action on its current
dispute with the County. 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"). Final promulgation of the
cluster rules is expected to occur in late 1997, with compliance with the
rules required beginning in 2000. The Company believes that compliance with
the cluster rules, if adopted as currently proposed, may require aggregate
capital expenditures of approximately $70.0 million to $90.0 million through
2000. 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
39
<PAGE>
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 approximately $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
Environmental Quality ("DEQ") regarding a wastewater surge pond adjacent to
the Muskegon Lake. The DEQ presently is considering whether the surge pond is
in compliance with Michigan Act 451 (Part 31 of the Natural Resources and
Environmental Protection 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 DEQ 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 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 which is expected to be
completed in the year 2001. Total costs of the project are estimated to be
approximately $9.0 million, of which approximately $5.7 million had been spent
as of April 2, 1997. 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.
40
<PAGE>
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 (d).
Atlanta, Georgia Distribution center (e).
Schaumburg, Illinois Distribution center (f).
Grand Prairie, Texas Distribution center (g).
</TABLE>
- --------
(a) Subject to a lease which expired in 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 February 2001.
(f) Subject to a lease renewable annually.
(g) Subject to a lease expiring September 1999.
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 late 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. 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.
During the second quarter of the fiscal year ended October 2, 1996, the
Company resumed full utilization. See "Risk Factors--Cyclical Industry
Conditions; Strong Competition."
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company
Set forth below are the names, ages (at June 1, 1997) and positions of the
directors and executive officers of Holdings.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Eugene van As................. 58 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
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.
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
42
<PAGE>
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.
43
<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.
44
<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.
45
<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.
46
<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................................ 34,978,904(2)(3) 100.00%
48 Ameshoff Street
Braamfontein 2001
Republic of South Africa
Heritage Springer Limited.................... 8,002,343(3)(4) 22.88%
c/o Royal Bank of Canada Trust Company (Jer-
sey) Limited
P.O. Box 194/St. Helier
Jersey JE48RR
Channel Islands
</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 July 15, 1997) by each such person or
group, respectively, but without the exercise of any warrants or options
owned by any other person or group.
(2) Includes 26,976,561 shares held through a subsidiary. Also includes
8,002,343 shares held by HSL that are subject to the HSL Option Agreement,
pursuant to which Sappi has a right to purchase such shares at any time
prior to April 30, 2000. HSL has also granted Sappi an irrevocable proxy
to vote such shares during the term of such agreement, subject to
compliance by Sappi with its purchase obligations upon exercise of its
purchase rights or certain rights of HSL to require Sappi to purchase such
shares. See "Certain Relationships and Related Transactions--Minority
Acquisition".
(3) If the Merger becomes effective, Sappi will own 75,065 shares (100%) of
Holdings' new Class A Common Stock and HSL will own 24,935 shares (100%)
of Holdings new non-voting convertible Class B Common Stock. See "Certain
Relationships and Related Transactions--Minority Acquisition".
(4) The shares and any shares acquired upon consummation of the Merger are
subject to the HSL Option Agreement, pursuant to which Sappi has a right
to purchase such shares at any time prior to April 30, 2000 and an
irrevocable proxy pursuant to which Sappi is entitled to vote all of such
shares. See "Certain Relationships and Related Transactions--Minority
Acquisition".
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. Sappi has proposed and is making efforts to consummate the Merger
in fulfillment of this obligation. See "Certain Relationships and Related
Transactions--Minority Acquisition".
SHAREHOLDERS AGREEMENT
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 contained certain agreements with respect to the capital
stock and corporate governance of Holdings and S.D. Warren following the
Acquisition. In connection with the Minority Acquisition, DLJMB and UBS ceased
to be parties to the Shareholders Agreement, and the parties to the
Shareholders Agreement agreed to the termination of most of the provisions
therein. See "Risk Factors--Control by Sappi". The following is a summary of
the material surviving terms of the Shareholders Agreement. Capitalized terms
used below and not otherwise defined have the meanings assigned thereto in the
Shareholders Agreement.
47
<PAGE>
Registration Rights
Sappi and its permitted transferees (the "Sappi 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 has the right to make up to three
Demand Registrations. Holdings has agreed to pay all reasonable expenses
incurred in connection with the first two Demand Registrations effected
pursuant to the Shareholders Agreement.
Piggyback Rights
Under certain circumstances, if Holdings registers Common Stock under the
Act, each member of the Sappi Group will have the right, subject to certain
limitations, to require Holdings to include such member'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.
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 recently merged with
Kimberly-Clark Corporation. The surviving entity, Kimberly-Clark Corporation,
is 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. Most of the
provisions of the Shareholders Agreement were terminated in connection with
the Minority Acquisition and the Sellers have ceased to have any rights or
obligations under the remaining provisions. 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 sponsers 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 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 $1.0 million.
49
<PAGE>
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 $1.0 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 January 1, 1997.
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 six
months ended April 2, 1997 and the year ended October 2, 1996, Warren sold
$96.6 million and $151.4 million, respectively, of products to Sappi
subsidiaries and expensed fees of approximately $4.3 million and $7.2 million,
respectively, relating to such sales. Trade accounts receivable at April 2 and
October 2, 1996 includes approximately $29.2 million and $37.1 million,
respectively, due from subsidiaries of Sappi. Warren has formalized certain of
these agreements and is in the process of formalizing the remainder.
MINORITY ACQUISITION AND MERGER
On May 27, 1997, WVL acquired the minority common equity interests
(including both Common Stock and Warrants) in Holdings from the Sellers for an
aggregate price of $138.0 million or $17.25 per share of Common Stock or
Common Stock equivalent. WVL exercised, for a price of $0.01 per common share
issued, all of the Warrants acquired in the Minority Acquisition upon the
consummation thereof. As a result of the exercise of the Warrants, Holdings
issued 4,252,343 shares of Common Stock. As part of the financing for the
Minority Acquisition, on June 27, 1997, WVL sold the Common Stock acquired
therein to HSL, and HSL pledged such Common Stock to certain lenders. The
securities acquired by HSL are subject to the HSL Option Agreement, pursuant
to which Sappi has a right to purchase such securities at any time prior to
April 30, 2000, and HSL has a right to require Sappi to purchase such
securities upon the occurrence of certain events and at any time between May
15, 2000 and May 30, 2000. Sappi has been granted an irrevocable proxy to vote
all such securities during
50
<PAGE>
the term of the HSL Option Agreement, subject to compliance with its purchase
obligations upon exercise of such rights. Sappi also has been granted certain
rights of first refusal by such lenders in respect to such securities. As of
the date of this Prospectus, Sappi indirectly owns approximately 75.07%, and
controls the voting of approximately 97.33% of the common equity of Holdings,
and HSL holds approximately 22.27% of the common equity of Holdings on a fully
diluted basis.
On July 30, 1997, Holdings entered into the Merger Agreement pursuant to
which Acquisition II would be merged, subject to certain important conditions,
with and into Holdings, with Holdings continuing as the surviving corporation.
Under the terms of the Merger Agreement, each issued and outstanding share of
Common Stock (other than shares held by Sappi and its affiliates or HSL) will,
subject to the exercise of appraisal rights, be converted into the right to
receive $17.60 per share in cash. As a result, each outstanding Class A
Warrant will become exercisable solely for $5.2708 in cash, and each
outstanding Class B Warrant will become exercisable solely for $17.60 in cash,
in each case upon payment of the exercise price and satisfaction of the other
terms and conditions of the related Warrant Agreement. Additionally, each
issued and outstanding share of Senior Preferred Stock will, subject to the
exercise of appraisal rights, remain outstanding, without amendment. As a
result of the Merger, Sappi will own 100% of the issued and outstanding voting
stock and 75.07% of the common equity of Holdings in the form of new Class A
Common Stock, and HSL will own 24.94% of the common equity of Holdings in the
form of new non-voting, convertible Class B Stock. The Class B Common Stock
received by HSL in the Merger and any Class A Common Stock received on
conversion will be subject to the HSL Option Agreement and the aforementioned
irrevocable proxy in favor of Sappi. The Merger Agreement has been approved by
the written consent of the holders of a majority of the outstanding common
stock of Holdings and Acquisition II. It is anticipated that the Merger will
become effective on or about September 5, 1997; however there can be no
assurance that the conditions to the Merger will be satisfied or waived. See
"Risk Factors--Control by Sappi", "Description of Capital Stock--Holdings
Common Stock", "Description of Capital Stock--Holdings Common Stock" and
"Material Federal Income Tax Considerations--Effect of Merger".
51
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth, as of May 9, 1997, certain information with
respect to the Securities owned by the Selling Security Holders that may be
offered from time to time pursuant to this Prospectus. Each Selling Security
Holder is registering the entire amount of the Class A Warrants, Class B
Warrants and Senior Preferred Stock set forth opposite its name below. In
addition, each Selling Security Holder is registering the entire number of
Exchange Debentures that may be issued with respect to the Senior Preferred
Stock set forth opposite its name below. See "Description of the Exchange
Debentures". Because the Selling Security Holders may sell pursuant to this
Prospectus all or some part of the Securities which they beneficially own and
because such offer may not be underwritten on a firm commitment basis, no
estimate can be made of the amount of Securities each Selling Security Holder
may retain upon completion of the offering pursuant to this Prospectus. See
"Plan of Distribution".
Information concerning the Selling Security Holders may change from time to
time and, to the extent required, will be set forth in an accompanying
Prospectus Supplement or, if appropriate, a post-effective amendment to the
Registration Statement of which this Prospectus is a part. In addition,
information concerning the unnamed Selling Security Holders will be set forth
in an accompanying Prospectus Supplement or, if appropriate, a post-effective
amendment to the Registration Statement of which this Prospectus is a part, as
such information becomes available to the Company. To the Company's knowledge,
none of the Selling Security Holders named below has, or has had within the
last three years, any material relationship with the Company except as set
forth in "Certain Transactions". The following table and the disclosure
concerning material relationships between the Selling Security Holders and the
Company in "Certain Relationships and Related Transactions" is based upon
information furnished to the Company by or on behalf of the Selling Security
Holders. See "Plan of Distribution".
CLASS A WARRANTS
<TABLE>
<CAPTION>
CLASS A WARRANTS
OWNED PRIOR TO
NAME THE OFFERING
- ---- ----------------
<S> <C>
Accounts managed by Fidelity Management Trust Company........ 278,735
Ameritech Corporation Pension Trust.......................... 20,000
BEA Strategic Income Fund, Inc. ............................. 8,000
BEA Income Fund.............................................. 12,000
Bear Stearns & Co. .......................................... 225,000
Brinson Relationship Funds--Brinson High Yield Fund.......... 60,000
Donaldson Lufkin & Jenrette Securities Corporation........... 155,000
Fidelity Advisor Series II:
Fidelity Advisor High Yield Fund............................ 190,970
Fidelity Advisor Series VIII:
Fidelity Advisor Strategic Income Fund...................... 16,500
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 Investment Management Co. ......................... 80,000
The Northwestern Mutual Life Insurance Company............... 160,000(1)
Northwestern Mutual Series Fund, Inc......................... 20,000(2)
Oppenheimer Multi-Sector Income Trust........................ 20,000
Phoenix Edge Multi-Sector.................................... 30,000
President and Fellows of Harvard College..................... 150,000
</TABLE>
52
<PAGE>
CLASS A WARRANTS (CONTINUES)
<TABLE>
<CAPTION>
CLASS A WARRANTS
OWNED PRIOR TO
NAME THE OFFERING
- ---- ----------------
<S> <C>
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........ 7,609
Unnamed holders of Class A Warrants and transferees ........... 718,216
---------
Total........................................................ 2,700,000
=========
</TABLE>
- --------
(1) Includes 20,000 Class A Warrants held in The Northwestern Mutual Life
Insurance Company Group Annuity Separate Account.
(2) Held in its High Yield Bond Portfolio.
CLASS B WARRANTS
<TABLE>
<CAPTION>
CLASS B WARRANTS
OWNED PRIOR TO
NAME THE OFFERING
- ---- ----------------
<S> <C>
Accounts managed by Fidelity Management Trust Company........ 5,626
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 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 Variable Trust-Putnam VT 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 Variable Trust-Putnam VT 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 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
Unnamed holders of Class B Warrants and transferees.......... 28,937
-------
Total...................................................... 150,000
=======
</TABLE>
53
<PAGE>
SENIOR PREFERRED STOCK
<TABLE>
<CAPTION>
SHARES OF SENIOR
PREFERRED STOCK
OWNED PRIOR
NAME TO THE OFFERING
- ---- ----------------
<S> <C>
Accounts managed by Fidelity Management Trust Company........ 56,260
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 Summer Street Trust: Fidelity Capital & Income
Fund........................................................ 125,550
Forehooks & Co............................................... 37,000
Landing & Co................................................. 37,000
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 Variable Trust-Putnam Diversified Income Fund......... 37,000
Putnam Variable Trust-Putnam 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 High Yield Managed Trust.............................. 17,650
Putnam High Income Convertible and 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
Unnamed holders of Preferred Stock and transferees........... 295,000
---------
Total...................................................... 1,500,000
=========
</TABLE>
54
<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".
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
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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 "Material 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. 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.
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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.
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
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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, 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
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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 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".
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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.
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
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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.
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.
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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 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.
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"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.
"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
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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 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.
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"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.
"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.
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"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
"Material 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 approximately $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.
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.
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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-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.
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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.
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
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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 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
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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.
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
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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.
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
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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 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.
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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 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
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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 2,700,000 Class A Warrants being
sold pursuant to the Offering will entitle the holders thereof to purchase in
the aggregate 808,596 shares of Common Stock, or approximately 2.3% 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.
IF THE MERGER BECOMES EFFECTIVE, EACH CLASS A WARRANT WILL BECOME EXERCISABLE
SOLELY FOR $5.2708 IN CASH, AND EACH OUTSTANDING CLASS B WARRANT WILL BECOME
EXERCISABLE SOLELY FOR $17.60 IN CASH, IN EACH CASE UPON PAYMENT OF THE
EXERCISE PRICE AND SATISFACTION OF THE OTHER TERMS AND CONDITIONS OF THE
RELATED WARRANT AGREEMENT. AS A RESULT OF THE MERGER, HOLDERS OF THE WARRANTS
WILL NO LONGER HAVE ANY RIGHT TO OBTAIN SHARES OF COMMON STOCK OF HOLDINGS (AS
CONSTITUTED BEFORE THE MERGER) OR CLASS A COMMON STOCK OR CLASS B COMMON STOCK
OF HOLDINGS (AS CONSTITUTED AFTER THE MERGER). SEE "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS--MINORITY ACQUISITION AND MERGER", "DESCRIPTION OF CAPITAL
STOCK" AND "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS--EFFECT OF MERGER".
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
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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.
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,
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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.
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.
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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.
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. As a result of the Company's failure to obtain the
effectiveness of the Registration Statement with respect to the Class A
Warrants by the required date, the Company is obligated to pay liquidating
damages. As of April 2, 1997, accrued liquidated damages were approximately
$0.9 million.
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
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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.
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. In
addition, Holdings' Amended and Restated Certificate of Incorporation will be
further amended pursuant to the Merger Agreement if the Merger becomes
effective. The description of the capital stock of Holdings and the amendment
to the Amended and Restated Certificate of Incorporation of Holdings to be
effected by the Merger is qualified in its entirety by reference to the text
of the such amendment attached as Annex I to the Merger Agreement, a copy of
which is filed as an exhibit 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. If the Merger becomes effective, the capital stock of
Holdings will consist of (i) 250,000 shares of voting Class A Common Stock,
par value $.01 per share, of which 75,065 shares will be issued and
outstanding, (ii) 50,000 shares of non-voting convertible Class B Common
Stock, par value $.01 per share, of which 24,935 shares will be issued and
outstanding and (iii) 5,000,000 shares of Preferred Stock, par value $.01 per
share, of which 1,500,000 shares will be issued and outstanding as Senior
Preferred Stock (assuming no exercise of appraisal rights).
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. The currently
outstanding shares of Common Stock are fully paid and non-assessable. If the
Merger becomes effective, each holder of voting Class A Common Stock will be
entitled to one vote per share on all matters on which holders of common stock
are entitled to vote. The Class B Common Stock is not entitled to vote except
as required by law and except with respect to certain charter amendments. Each
share of Class B Common Stock is convertible, to the extent permitted by law,
into one share of Class A Common Stock, upon notice to Holdings.
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.
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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 June 1, 1997, Holdings had 2,700,000 Class A Warrants and 150,000
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
nonassessable shares of Common Stock, respectively, at an exercise price of
$0.01 per share in each case.
IF THE MERGER BECOMES EFFECTIVE, EACH CLASS A WARRANT WILL BECOME
EXERCISABLE SOLELY FOR $5.2708 IN CASH, AND EACH OUTSTANDING CLASS B WARRANT
WILL BECOME EXERCISABLE SOLELY FOR $17.60 IN CASH, IN EACH CASE UPON PAYMENT
OF THE EXERCISE PRICE AND SATISFACTION OF THE OTHER TERMS AND CONDITIONS OF
THE RELATED WARRANT AGREEMENT. AS A RESULT OF THE MERGER, HOLDERS OF THE
WARRANTS WILL NO LONGER HAVE ANY RIGHT TO OBTAIN SHARES OF COMMON STOCK OF
HOLDINGS (AS CONSTITUTED BEFORE THE MERGER) OR CLASS A COMMON STOCK OR CLASS B
COMMON STOCK OF HOLDINGS (AS CONSTITUTED AFTER THE MERGER). SEE "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS--MINORITY ACQUISITION AND MERGER" AND
"MATERIAL FEDERAL INCOME TAX CONSIDERATIONS--EFFECT OF MERGER".
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DESCRIPTION OF WARREN INDEBTEDNESS
THE CREDIT AGREEMENT
At April 2, 1997 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 $238.5 million (the "Tranche A Term Loan"), and
an eight-year senior secured term loan facility in an aggregate principal
amount of $173.6 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.
On February 7, 1997, the Company amended certain provisions of the Credit
Agreement, including the interest coverage covenant, the optional prepayment
terms and, in order to permit the granting of senior liens in connection with
refinancing of certain of the Company's industrial revenue bonds, the covenant
restricting liens. Currently, the financial ratios specified in the Credit
Agreement, as amended, are all within the applicable financial covenant
levels.
On July 25, 1997, Warren amended certain provisions of the Credit Agreement
including the prepayment provisions and the limitation on indebtedness clause.
The lender also waived certain provisions of the credit agreement, thereby
allowing the Company to enter into a sale/leaseback arrangement with GECC
pertaining to one of the Company's paper machines at its Somerset facility and
allowing Holdings to consummate a merger with Acquisition II. In addition,
Warren obtained consent from the lenders for the utilization of a portion of
the proceeds of such sale/leaseback other than as required by the credit
agreement, including the payment from time to time of dividends to Holdings on
or prior to September 30, 1998 for the purpose of redeeming the Senior
Preferred Stock, subject to certain conditions and limitations.
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.
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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
FISCAL YEAR ANNUAL AMOUNT ANNUAL AMOUNT
----------- ------------- -------------
<S> <C> <C>
1997........................................... $ 9,478,823 $ --
1998........................................... 49,073,330 2,515,922
1999........................................... 51,410,155 2,515,922
2000........................................... 51,410,155 7,547,765
2001........................................... 51,410,155 23,062,615
2002........................................... 25,705,078 77,366,793
2003........................................... -- 60,593,982
</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.
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
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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.
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
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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.
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.
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MATERIAL FEDERAL INCOME
TAX CONSIDERATIONS
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF COMMON STOCK, SENIOR PREFERRED STOCK, CLASS A WARRANTS AND
CLASS B WARRANTS
In the opinion of Goodwin, Procter & Hoar LLP ("Counsel"), the following are
the material anticipated Federal income tax consequences of the acquisition,
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 acquires 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.
Counsel's opinion 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. Federal income tax consequences may
differ from those described in Counsel's opinion, due to a specific taxpayer's
individual circumstances, and no opinion is expressed with respect to the
possible effects of any such differences. In addition, Counsel's opinion 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, Counsel's opinion 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
Counsel's opinion 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 HOLDERS AND PROSPECTIVE PURCHASERS OF SECURITIES (IN PARTICULAR, HOLDERS
AND PROSPECTIVE PURCHASERS THAT ARE NOT U.S. HOLDERS) ARE ADVISED THAT SUCH
HOLDER'S OR PURCHASER'S SPECIFIC CIRCUMSTANCES MAY RESULT IN TAX CONSEQUENCES
THAT DIFFER FROM THOSE DESCRIBED BELOW, AND THEY SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE SECURITIES.
EFFECT OF MERGER
The Merger will be a taxable transaction and, as a result, holders of the
Common Stock and Warrants may recognize a gain. See "Material Federal Income
Tax Considerations--Common Stock and Senior Preferred Stock--Effect of Merger"
and "Material Federal Income Tax Considerations--Class A and Class B
Warrants--Effect of Merger".
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.
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Although it is possible that cash dividends will be paid on or prior to
December 15, 1999, Counsel understands that Holdings does not expect to 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, Counsel believes that
it is more likely than not 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). However, the legislative
history to the 1990 amendments to Section 305(c) of the Code indicates that
Congress intended to grant 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 and unless regulations
requiring such treatment with respect to Accrued Dividends are issued,
however, Counsel understands that 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.
HOLDERS AND PROSPECTIVE PURCHASERS OF SENIOR PREFERRED STOCK ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT OF ACCRUED DIVIDENDS AS
IT MAY BE AFFECTED BY THEIR SPECIFIC CIRCUMSTANCES AND THE LEGAL UNCERTAINTIES
DESCRIBED ABOVE.
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.
Counsel understands that 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. Under the Code and
Treasury Regulations in effect until the 1990 amendments to Section 305 of the
Code, any Discount Amount attributable to preferred stock that was immediately
callable was probably not subject to the economic accrual rules of Section
305. The 1990 amendments, among other things, directed the Service to adopt
amended Treasury Regulations to determine the amount of any Discount Amount
and to prescribe the method to be used to determine how to accrue the Discount
Amount. The amended regulations were effective December 20, 1995 and therefore
do not apply to the Senior Preferred Stock. However, preferred stock issued
after the effective date of the 1990 amendments and before the effective date
of these amended regulations remains subject to the 1990 amendments to Section
305 of the Code, and the December 1995 amendments to the Treasury Regulations,
consistent with the legislative history to the 1990 amendments, provide that
Congress intended the economic accrual rules to apply to preferred stock
issued with an "unreasonable" redemption premium. The Treasury Regulations do
not define "reasonable", stating only that "a redemption premium will be
considered reasonable if it is in the nature of a penalty for a premature
redemption of the preferred stock and if such premium does not exceed the
amount the corporation would be required to pay for the right to make such
premature redemption under market conditions existing at the time of
issuance". As a result, holders of preferred
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stock that is immediately callable may be subject to immediate accrual of any
Discount Amount under the economic accrual rules of Section 305. In the case
of the Senior Preferred Stock, it is not possible to determine under
applicable provisions of the Code and Treasury Regulations whether the amount
of any redemption premium is "unreasonable" because it cannot be determined
whether the redemption premium is in the nature of a penalty or whether it
exceeded the amount required by market conditions at the time the Senior
Preferred Stock was issued. Further, in the case of immediately callable
preferred stock such as the Senior Preferred Stock, the Code and the Treasury
Regulations do not specify the period, if any, over which any such redemption
premium should be amortized by the holder. Because of these factual and legal
uncertainties, there can be no assurance that the Service will not take the
position that the Senior Preferred Stock is subject to the economic accrual
rules of Section 305 of the Code or over what period the Service would assert
that such redemption premium should be amortized, and Counsel is therefore
unable to express any opinion with respect to the tax treatment of any
constructive dividends in respect of any Discount Amount on the Senior
Preferred Stock. If the Service were to successfully assert that preferred
stock that is immediately callable is subject to the economic accrual rules,
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.
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 AS IT MAY BE
AFFECTED BY THEIR SPECIFIC CIRCUMSTANCES.
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
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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 at the time of the disposition for more than
eighteen months. As stated above under "Distributions in General", Counsel
believes that it is more likely than not that amounts attributable to Accrued
Dividends would not be treated as having been received by holders of the
Senior Preferred Stock until any such Accrued Dividends were actually paid in
cash. However, as described above, 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"). As a result of the uncertain
treatment of 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), Counsel is unable to express any
opinion with respect to the tax treatment of such amounts.
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 applicable Treasury Regulations that define whether
a security is traded on an established market are worded in general terms that
are vague in their application; in addition, under applicable Treasury
Regulations a security may be deemed to be traded on an established market
without any action on the part of the issuer and without the knowledge of the
issuer. Whether or not the Exchange Debentures and/or the Senior Preferred
Stock is traded on an established market can only be determined as of the time
of the relevant exchange (as described below) and is neither within the
control of the Company nor a fact that would necessarily be known by the
Company. Because of these factual and legal uncertainties, it is not possible
for Counsel to opine as to the determination of any amount realized as a
result of the relevant 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.
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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.
Effect of Merger
If the Merger is effected, each issued and outstanding share of Common Stock
held by any party other than Sappi and its affiliates or HSL ("Cash Holders")
will be converted into the right to receive $17.60 per share in cash, subject
to the exercise of dissenters' rights. See "Certain Relationships and Related
Transactions--Minority Acquisition and Merger". For United States federal
income tax purposes, if the merger is effected, Cash Holders will recognize at
such time a gain or loss equal to the difference between the amount received
and the Cash Holder's adjusted basis in the Common Stock.
HOLDERS AND PROSPECTIVE PURCHASERS 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 AS IT MAY BE AFFECTED BY THEIR
SPECIFIC CIRCUMSTANCES.
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.
Alternatively, because the Warrants were 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.
94
<PAGE>
Effect of Merger
If the Merger is effected, under the terms of the relevant Warrant
Agreements, each outstanding Class A Warrant will become exercisable solely
for $5.2708 in cash and each outstanding Class B Warrant will become
exercisable solely for $17.60 in cash, in each case upon payment of the
exercise price and satisfaction of the other terms and conditions of the
related Warrant Agreement. See "Certain Relationships and Related
Transactions--Minority Acquisition and Merger". If the Merger is effected, for
United States federal income tax purposes, holders of the Warrants will be
treated as being in constructive receipt of the cash consideration they are
entitled to receive upon exercise of the Warrants, and will recognize gain or
loss equal to the difference between such consideration and the holder's
adjusted basis in the relevant Warrant.
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.
HOLDERS AND PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE CONSEQUENCES OF OWNING EXCHANGE DEBENTURES AS IT MAY BE
AFFECTED BY THEIR SPECIFIC CIRCUMSTANCES.
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 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
95
<PAGE>
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, and
accordingly Counsel is unable to express any opinion with respect to such
amounts.
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. 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%)
96
<PAGE>
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%.
Market Discount, Acquisition Premium
If a U.S. Holder acquires an Exchange Debenture for an amount that is less
than its revised issue price (generally, adjusted issued price) at the time of
acquisition, the amount of such difference will be treated as "market
discount" for U.S. federal income tax purposes, unless such difference is less
than a specified de minimis amount. Under the market discount rules, a U.S.
Holder will be required to treat any principal payment on, or any gain on the
sale, exchange, retirement or other disposition of, an Exchange Debenture as
ordinary income to the extent of the market discount which has not previously
been included in income and is treated as having accrued on such Exchange
Debenture at the time of such payment or disposition. If a U.S. Holder makes a
gift of an Exchange Debenture, accrued market discount, if any, will be
recognized as if such U.S. Holder had sold such Exchange Debenture for a price
equal to its fair market value. In addition, the U.S. Holder may be required
to defer, until the maturity of the Exchange Debenture or the earlier
disposition of the Exchange Debenture in a taxable transaction, the deduction
of a portion of the interest expense on any indebtedness incurred or continued
to purchase or carry such Exchange Debenture.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the
Exchange Debenture, unless the U.S. Holder elects to accrue market discount on
a constant interest method. A U.S. Holder of an Exchange Debenture may elect
to include market discount in income currently as it accrues (on either a
straight-line basis or constant interest method), in which case the rules
described above regarding the deferral of interest deductions will not apply.
This election to include market discount in income currently, once made,
applies to all market discount obligations acquired on or after the first day
of the first taxable year to which the election applies and may not be revoked
without the consent of the Internal Revenue Service.
A U.S. Holder that purchases an Exchange Debenture for an amount in excess
of its stated redemption price at its earliest call date will be considered to
have purchased the Exchange Debenture at a "premium". A U.S. Holder generally
may elect to amortize the premium over the remaining term of the Exchange
Debenture on a constant yield method. The amount amortized in any year will be
treated as a reduction of the U.S. Holder's interest income from the Exchange
Debenture. A U.S. Holder that elects to amortize such premium must also reduce
its tax basis in an Exchange Debenture by the amount of premium amortized
during its holding period. Bond premium on an Exchange Debenture held by a
U.S. Holder that does not make such an election will decrease the gain or
increase the loss otherwise recognized on disposition of the Exchange
Debenture. The election to amortize premium on a constant yield method once
made applies to all debt obligations held or subsequently acquired by the
electing U.S. Holder on or after the first day of the first taxable year to
which the election applies, other than debt instruments the interest on which
is excludable from gross income, and may not be revoked without the consent of
the Service.
Proposed regulations have been issued that, if finalized in their current
form, would require that a U.S. Holder that purchases an Exchange Debenture at
a premium, and elects to amortize such premium, must amortize such premium
under a constant yield method. As proposed, these rules will be applicable to
debt instruments issued on or after 60 days after the regulations are
published in final form. However, under the proposed rules, certain U.S.
Holders may elect to apply the new rules to all Exchange Debentures held on or
after the first day of the taxable year that contains the day which is 60 days
after the regulations are published in final form.
Sale, Redemption or other Taxable Disposition of Exchange Debentures
Generally, any sale, redemption or 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
97
<PAGE>
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 any accrued market discount if
the holder elected to currently include market discount in income as it
accrued, and reduced by any payments (including payments of cash interest)
previously made on the Exchange Debentures and any amortized premium.
Generally, 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; however, any such gain will be treated as ordinary to the extent
of any market discount that has accrued at the time of a sale, redemption or
other taxable disposition of an Exchange Debenture if such market discount has
not been previously included in the holder's income. The specific tax
consequences of any sale, redemption or other taxable disposition of Exchange
Debentures by a holder will therefore depend on each holder's facts and
circumstances, and accordingly Counsel is unable to express any opinion with
respect to a specific taxable 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 TAX CONSEQUENCES DESCRIBED IN THE FOREGOING OPINION MAY VARY AS A RESULT
OF A HOLDER'S SPECIFIC CIRCUMSTANCES. ACCORDINGLY, EACH PURCHASER OF
SECURITIES SHOULD CONSULT WITH ITS OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES TO SUCH HOLDER OR PURCHASER OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF SUCH SECURITIES, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
98
<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. The Securities may be sold through
brokers or dealers, which 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.
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
the rules and regulations thereunder (including, without limitation,
Regulation M), 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.
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 statement
schedules for such periods included in this Prospectus
99
<PAGE>
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 Company 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 Company and certain related affiliates for the nine month
period ended September 24, 1994, and for the period September 25, 1994 through
December 20, 1994, 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 Company 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.
100
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SDW HOLDINGS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Statements of Operations for the six months ended
April 3, 1996 and April 2, 1997......................................... F-2
Condensed Consolidated Balance Sheets at October 2, 1996 and April 2,
1997.................................................................... F-3
Condensed Consolidated Statements of Cash Flows for the six months ended
April 3, 1996 and April 2, 1997......................................... F-4
Notes to Unaudited Condensed Consolidated Financial Statements........... F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES:
Independent Auditors' Report............................................. F-12
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-13
Balance Sheets as of September 27, 1995 and October 2, 1996.............. F-14
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-15
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-16
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-17
Notes to Financial Statements............................................ F-18
Financial Statement Schedules:
I--Condensed Financial Information of Parent........................... F-44
II--Valuation and Qualifying Accounts.................................. F-48
</TABLE>
F-1
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
APRIL 3, 1996 APRIL 2, 1997
------------- -------------
<S> <C> <C>
Sales.............................................. $720.5 $660.2
Cost of goods sold................................. 577.4 536.3
------ ------
Gross profit....................................... 143.1 123.9
Selling, general and administrative expense........ 64.2 66.8
Restructuring...................................... -- 10.0
------ ------
Income from operations............................. 78.9 47.1
Other income, net.................................. 1.4 2.0
Interest expense................................... (59.1) (51.8)
------ ------
Income (loss) before income taxes, dividends and
accretion on Warren Series B preferred stock, and
extraordinary item................................ 21.2 (2.7)
Income tax expense (benefit)....................... 8.6 (1.1)
Dividends and accretion on Warren Series B pre-
ferred stock...................................... 6.6 7.4
------ ------
Income (loss) before extraordinary item............ 6.0 (9.0)
Extraordinary item, net of tax..................... -- 0.9
------ ------
Net income (loss).................................. 6.0 (8.1)
Dividends on preferred stock....................... 3.4 3.8
------ ------
Net income (loss) applicable to common stockhold-
ers............................................... $ 2.6 $(11.9)
====== ======
Earnings (loss) per common share:
Income (loss) before extraordinary item........... $ 0.17 $(0.29)
====== ======
Net income (loss)................................. $ 0.17 $(0.26)
====== ======
Net income (loss) applicable to common stockhold-
ers.............................................. $ 0.07 $(0.39)
====== ======
Weighted average number of shares outstanding
(excluding common stock equivalents).............. -- 30.7
====== ======
Weighted average number of shares outstanding
(including common stock equivalents).............. 35.9 --
====== ======
</TABLE>
See accompanying notes to unaudited condensed, consolidated financial
statements.
F-2
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 2, APRIL 2,
1996 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 49.0 $ 46.8
Trade accounts receivable, net......................... 49.1 42.9
Other receivables...................................... 34.2 57.2
Inventories............................................ 195.7 213.3
Deferred income taxes.................................. 18.0 18.0
Other current assets................................... 9.4 11.2
-------- --------
Total current assets.................................. 355.4 389.4
Plant assets, net....................................... 1,114.7 1,093.6
Timber resources, net................................... 95.3 95.1
Goodwill, net........................................... 94.1 92.1
Deferred financing fees, net............................ 44.8 41.3
Other assets, net....................................... 21.1 19.9
-------- --------
Total assets.......................................... $1,725.4 $1,731.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................... $ 46.4 $ 48.6
Accounts payable....................................... 101.6 121.2
Accrued and other current liabilities.................. 97.6 123.6
-------- --------
Total current liabilities............................. 245.6 293.4
-------- --------
Long-term debt:
Term loans............................................. 411.4 367.2
Senior subordinated notes.............................. 375.0 375.0
Other.................................................. 116.1 119.5
-------- --------
902.5 861.7
-------- --------
Deferred income taxes................................... 34.6 33.3
-------- --------
Other liabilities....................................... 98.2 99.2
-------- --------
Total liabilities..................................... 1,280.9 1,287.6
-------- --------
Commitments and contingencies (Notes 7 and 8)
Warren Series B redeemable exchangeable preferred stock
(liquidation value, $96.2 and $103.2, respectively).... 88.0 95.4
-------- --------
Stockholders' equity:
Preferred stock, at liquidation value.................. 49.0 52.8
Common stock........................................... 0.3 0.3
Capital in excess of par value......................... 294.0 294.0
Retained earnings...................................... 13.2 1.3
-------- --------
Total stockholders' equity............................ 356.5 348.4
-------- --------
Total liabilities and stockholders' equity............ $1,725.4 $1,731.4
======== ========
</TABLE>
See accompanying notes to unaudited condensed, consolidated financial
statements.
F-3
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS, UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
APRIL 3, 1996 APRIL 2, 1997
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................................. $ 6.0 $ (8.1)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, cost of timber harvested and amor-
tization........................................ 56.4 59.5
Loss on force majeure events..................... -- 7.5
Dividends and accretion on Warren preferred
stock........................................... 6.6 7.4
Deferred income taxes............................ -- (1.3)
Other............................................ 5.9 (6.5)
Changes in assets and liabilities:
Trade and other accounts receivable, net......... 1.0 (7.1)
Inventories...................................... (11.6) (17.6)
Accounts payable, accrued and other current lia-
bilities........................................ (35.5) 38.6
Other assets and liabilities..................... (3.7) (6.7)
------ ------
Net cash provided by operating activities....... 25.1 65.7
------ ------
Cash Flows from Investing Activities:
Proceeds from disposals of plant assets........... 2.1 0.1
Investment in plant assets and timber resources... (18.3) (25.2)
Refurbishment of plant assets..................... -- (37.5)
Insurance proceeds on force majeure events........ -- 27.5
------ ------
Net cash used in investing activities........... (16.2) (35.1)
------ ------
Cash Flows from Financing Activities:
Issuance of debt.................................. -- 38.1
Repayments of debt................................ (75.0) (65.8)
Defeasance of debt................................ -- (4.4)
Debt issue costs.................................. -- (0.7)
Bank overdraft.................................... 3.9 --
------ ------
Net cash used in financing activities........... (71.1) (32.8)
------ ------
Net change in cash and cash equivalents............ (62.2) (2.2)
Cash and cash equivalents, beginning of period..... 62.2 49.0
------ ------
Cash and cash equivalents, end of period........... $ -- $ 46.8
====== ======
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest......................................... $ 61.0 $ 40.9
====== ======
Income Taxes..................................... $ 4.4 $ 0.1
====== ======
</TABLE>
See accompanying notes to unaudited condensed, consolidated financial
statements.
F-4
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
Basis of Presentation
The accompanying unaudited condensed, consolidated financial statements
include the accounts of SDW Holdings Corporation ("Holdings"), a subsidiary of
Sappi Limited ("Sappi") and a holding company which owns all of the
outstanding common stock of S.D. Warren Company ("Warren"). Holdings has no
material assets other than its investment in Warren, and all 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 Warren are collectively referred to herein as the
"Company." Intercompany balances and transactions have been eliminated in the
preparation of the accompanying unaudited condensed, consolidated financial
statements.
Certain prior period items have been reclassified to conform to the current
presentation followed by the Company.
Business
The Company manufactures printing, publishing and specialty papers and has
pulp and timberland operations vertically integrated with certain of its
manufacturing facilities which represent the Company's single line of
business. The Company currently operates four paper mills, a sheeting facility
and several distribution facilities and owns approximately 911,000 acres of
timberlands in the State of Maine.
Unaudited Interim Condensed, Consolidated Financial Statements
In the opinion of management, the accompanying unaudited condensed,
consolidated financial statements include all adjustments, consisting of only
normal recurring adjustments, necessary for the fair presentation of the
Company's financial position and results of operations. The accompanying
unaudited condensed, consolidated financial statements should be read in
conjunction with the audited financial statements included in Holdings' Annual
Report on Form 10-K for the fiscal year ended October 2, 1996. The unaudited
condensed, consolidated results of operations for the six months ended April
2, 1997 are not necessarily indicative of results that could be expected for a
full year.
New Accounting Pronouncements
In February 1997, the FASB issued FAS No. 128, "Earnings per Share", and
Statement of Financial Accounting Standard ("FAS") No. 129, "Disclosure of
Information about Capital Structure", both of which will be effective for the
Company in fiscal year 1998. FAS No. 128 replaces the presentation of primary
earnings per share with basic earnings per share, which excludes dilution, and
requires the dual presentation of basic and diluted earnings per share. FAS
No. 129 establishes standards for disclosing information about an entity's
capital structure and applies to all entities. The implementation of FAS No.
128 and FAS No. 129 will not have a material effect on the Company's earnings
per share or financial statements.
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income",
and FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", both of which will be effective for the Company in fiscal year
1998. FAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. FAS No. 131 establishes
standards for the way that public business enterprises report selected
information about operating segments. FAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas, and
major customers. The implementation of FAS No. 130 and FAS No. 131 are not
expected to have a material effect on the Company's financial statements.
F-5
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--RELATED PARTY TRANSACTIONS
During the six months ended April 2, 1997, the Company sold products to
certain subsidiaries of Sappi ("Affiliates"), at market prices, primarily in
U.S. Dollars. These Affiliates then sold the Company's products to
external customers. Proceeds from sales to Affiliates are remitted to the
Company net of sales commissions. The Company sold approximately $75.4 million
to Affiliates and incurred fees of approximately $4.3 million relating to
these sales for the six months ended April 2, 1997. Similar sales for the
corresponding period in the prior year were $42.2 million. Trade accounts
receivable from Affiliates at April 2, 1997 were approximately $29.2 million
compared to $22.8 million at April 3, 1996. The Company has formalized certain
of these agreements and is in the process of formalizing the remainder.
During fiscal year 1996, the Company began purchasing products from certain
Affiliates in U.S. Dollars, primarily for sale to external customers. The
Company receives commissions from the Affiliates on such sales. These
transactions to date have not been material.
NOTE 3--INVENTORIES (IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 2, 1996 APRIL 2, 1997
--------------- -------------
<S> <C> <C>
Finished products................................. $ 92.8 $109.4
Work in process................................... 34.5 34.7
Pulp, logs and pulpwood........................... 25.8 29.4
Maintenance parts and other supplies.............. 42.6 39.8
------ ------
$195.7 $213.3
====== ======
</TABLE>
NOTE 4--LONG-TERM DEBT
The current maturities of long-term debt balance of $48.6 million at April
2, 1997 primarily represents the amounts payable in June 1997 and December
1997 under Warren's term loan facilities.
On February 7, 1997, the Company amended certain provisions of its credit
agreement with a syndicate of banks, including the interest coverage covenant,
the optional prepayment terms and, in order to permit the granting of senior
liens in connection with the refinancing of certain of the Company's
industrial revenue bonds, the covenant restricting certain liens.
On March 5, 1997, pursuant to a loan agreement with the town of Skowhegan,
Maine, the Company expanded and refinanced certain environmental and solid
waste projects at its Somerset, Maine mill by redeeming or refunding revenue
bonds aggregating $23.7 million, defeasing revenue bonds aggregating $4.4
million and issuing new bonds aggregating $38.1 million. The new bonds are due
from 2000 to 2015 and bear interest at rates ranging from 6.65% to 8.00% per
annum. The extraordinary gain resulting from the extinguishment of the
original bonds, net of taxes of $0.6 million, was $0.9 million. In connection
with this transaction, an outstanding letter of credit was reduced by $19.7
million. The agreement under which the $4.4 million in bonds was defeased
required the Company to purchase U.S. Treasury securities to be held by a
trustee in an amount that will cover the interest payments required to be paid
to the holders of these bonds until the first call date on the bonds, as well
as the principal due at that date. In the event that the U.S. Treasury
securities, together with income earned on these securities, do not cover
interest and principal on the defeased bonds, the Company will be liable for
such deficiency.
NOTE 5--RESTRUCTURING
In October 1996, the Company commenced a restructuring plan which resulted
in a pretax charge of $10.0 million taken during the quarter ended January 1,
1997 to cover the costs related to the reduction of approximately 200 salaried
positions, or approximately 14% of the Company's salaried workforce.
F-6
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--FORCE MAJEURE 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. On March 26, 1997, the Company
reached an agreement with its insurance carrier pursuant to which it recovered
substantially all the lost inventory value, excluding the deductible of $0.5
million.
Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. Damage to mill equipment has since been repaired and
normal operating mill conditions have been restored. Total losses are not
expected to exceed the Company's insurance coverage limits, which include both
business interruption and property loss coverage. As of April 2, 1997, the
Company had accrued an estimate of $44.7 million for costs to refurbish plant
assets at the Westbrook facility, of which $27.5 million has been received as
insurance proceeds at April 2, 1997, with the remainder, net of a deductible
of $3.5 million, included in other receivables in the condensed consolidated
balance sheet at April 2, 1997. In addition, the Company has accrued $9.0
million during the quarter ended April 2, 1997, representing a portion of the
business interruption claim submitted for the disruption caused by the
Westbrook flood, which primarily took place during the quarter ended January
1, 1997.
NOTE 7--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 accepted administrative practice. In addition, the
Muskegon mill is involved, as one of various industrial plaintiffs, in
litigation with the County of Muskegon (the "County") regarding a 1994
ordinance governing the County's industrial wastewater 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. In June 1997, the EPA sued the
County for failure to enforce permit limits associated with its operation of
the wastewater facility. The Company is uncertain as to the effect, if any, of
this action on its current dispute with the County. 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.
F-7
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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"). Final
promulgation of the cluster rules is expected to occur in late 1997, with
compliance with the rules required beginning in 2000. The Company believes
that compliance with the cluster rules, if adopted as currently proposed, may
require aggregate capital expenditures of approximately $70.0 million to $90.0
million through 2000. 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
Environmental Quality ("DEQ") regarding a wastewater surge pond adjacent to
the Muskegon Lake. The DEQ presently is considering whether the surge pond is
in compliance with Michigan Act 451 (Part 31 of the Natural Resources and
Environmental Protection 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 DEQ 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 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 of the Company from Scott Paper Company, now Kimberly-Clark
("Scott"), 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 demolition project in progress at its Westbrook
Facility for health and safety reasons which is expected to be completed in
the year 2001. Total costs of the project are estimated to be approximately
$9.0 million, of which approximately $5.7 million had been spent as of April
2, 1997. 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 or that any additional measures
necessary to fund the shortfall will not result in material increases in the
Company's workers' compensation premiums.
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.
F-8
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--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 is supplied generally at
market prices. Pulp prices are discounted due to the elimination of freight
costs associated with delivering pulp to Warren's Mobile paper mill and pulp
quantities are 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 are generally 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.
The Company's power requirements at its Somerset and Westbrook mills have
historically been satisfied through cogeneration agreements ("Power Purchase
Agreements" or "Agreements") whereby the mills each cogenerate electricity and
sell the output to Central Maine Power Company ("CMP") at above market rates.
The Agreements also provide that the mills purchase electricity from CMP at
the standard industrial tariff rate. The effect of these Agreements has been
to reduce the Company's historical cost of power. However, the Westbrook
Agreement expires on October 31, 1997 and the favorable pricing element of the
Somerset Agreement will end on November 30, 1997. The impact from the change
in the Somerset Agreement is not material; however, the expiration of the
Westbrook Agreement could have a material adverse impact if a replacement
market for excess power generated at the Westbrook mill is not found. The
Company is currently soliciting bids for such excess power and anticipates
that given current capacity constraints in Northeast power markets, any
material adverse impact should be mitigated. 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 being amortized over the
remaining life of the favorable Power Purchase Agreements. For the six months
ended April 2, 1997, amortization expense related to this asset approximated
$6.0 million.
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, it is the present opinion
of the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's financial position, results of operations or
cash flows.
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.
F-9
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--ACQUISITION OF MINORITY INTERESTS
On May 27, 1997, Western Ventures Limited ("WVL") acquired the minority
common equity interests (including both Common Stock and Warrants) in Holdings
(the "Minority Acquisition") 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. at an
aggregate price of $138.0 million or $17.25 per share of Common Stock, or
Common Stock equivalent. WVL exercised, for a price of $0.01 per common share
issued, all of the Warrants acquired in the Minority Acquisition upon the
consummation thereof. As a result of the exercise of the Warrants, Holdings
issued 4,252,343 shares of Common Stock. As part of the financing for the
Minority Acquisition, on June 27, 1997, WVL sold the Common Stock acquired in
the Minority Acquisition to Heritage Springer Limited, a British Virgin Island
company ("HSL") and HSL pledged such securities to certain lenders. The
securities acquired by HSL are subject to an agreement (the "HSL Option
Agreement") pursuant to which Sappi has a right to purchase such securities at
any time prior to April 30, 2000, and HSL has a right to require Sappi to
purchase such securities upon the occurrence of certain events and at any time
between May 15, 2000 and May 30, 2000. Sappi has been granted an irrevocable
proxy to vote all such securities during the term of the HSL Option Agreement,
subject to compliance with its purchase obligations upon exercise of such
rights. Sappi has also been granted certain rights of first refusal by such
lenders in respect of such securities.
NOTE 10--SUBSEQUENT EVENTS
On July 25, 1997, Warren amended certain provisions of its credit agreement
with a syndicate of banks, including the prepayment provisions and the
limitation on indebtedness clause. At this time, the lenders also waived
certain provisions of the credit agreement, thereby allowing the Company to
enter into a sale/leaseback arrangement with General Electric Capital
Corporation ("GECC") pertaining to one of the Company's paper machines at its
Somerset facility and allowing Holdings to consummate a merger with SDW
Acquisition II Corporation ("Acquisition II"), a Delaware corporation and an
indirect subsidiary of Sappi. In addition, Warren obtained consent from the
lenders for utilization of a portion of the proceeds of the sale/leaseback
other than as required by the credit agreement, including the payment from
time to time of dividends to Holdings on or prior to September 30, 1998 for
the purpose of redeeming the Holdings Preferred Stock, subject to certain
conditions and limitations.
On July 29, 1997, the Company entered into a sale/leaseback arrangement with
GECC. The transaction involved the sale of one of the paper machines at the
Company's Somerset mill for $150.4 million to State Street Bank and Trust
Company of Connecticut, National Association (the "Trustee"), as Trustee for
GECC. In connection with the transaction, the Company entered into a 15 year
lease with the Trustee to lease back the paper machine. Rental payments of
approximately $7.7 million will be made semi-annually in arrears in January
and July of each year. The sale/leaseback arrangement will be accounted for as
an operating lease. The gain on the transaction of approximately $20.8 million
will be deferred and amortized as an adjustment to future rental payments. The
Company used $100.3 million of the proceeds from the sale to make a mandatory
prepayment on its term loans. The extraordinary loss resulting from the
extinguishment of this debt is estimated to be $1.5 million, net of a tax
benefit of $1.0 million and will be recorded in the fourth quarter of fiscal
year 1997.
On July 30, 1997, Holdings entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Acquisition II pursuant to which Acquisition II would
be merged, subject to certain important conditions, with and into Holdings,
with Holdings continuing as the surviving corporation (the "Merger"). Under
the terms of the Merger Agreement, each issued and outstanding share of Common
Stock held by any party other than Sappi and its affiliates or HSL will,
subject to exercise of appraisal rights, be converted into the right to
receive $17.60 per share in cash. As a result, each outstanding Class A
Warrant will become exercisable solely for $5.2708 in cash and each
outstanding Class B Warrant will become exercisable solely for $17.60 in cash,
in each case upon
F-10
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
payment of the exercise price and satisfaction of the other terms and
conditions of the related Warrant Agreement. Additionally, each issued and
outstanding share of Senior Preferred Stock of Holdings will, subject to the
exercise of appraisal rights, remain outstanding, without amendment. As a
result of the Merger, Sappi will own 100% of the issued and outstanding voting
common stock and 75.07% of the common equity of Holdings in the form of new
Class A Common Stock, and HSL will own 24.94% of the common equity of Holdings
in the form of new non-voting, convertible Class B Common Stock. The Class B
Common Stock received by HSL in the Merger and any Class A Common Stock
received on conversion will be subject to the HSL Option Agreement and the
aforementioned irrevocable proxy in favor of Sappi. The Merger Agreement has
been approved by the written consent of the holders of a majority of the
outstanding common stock of Holdings and Acquisition II. It is anticipated the
Merger will become effective on or about September 5, 1997; however there can
be no assurance that the conditions to the Merger will be satisfied or waived.
There will be no change to total consolidated stockholders' equity as the
result of the Merger.
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of SDW Holdings Corporation and subsidiary:
We have audited the consolidated balance sheets of SDW Holdings Corporation
and subsidiary (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-12
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-13
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-14
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-15
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-16
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-17
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-18
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-19
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-20
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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.
Revenue Recognition
The Company recognizes revenue when its products are shipped, title is
transferred, and the earnings process is complete.
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
F-21
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
determined based on the difference between the financial statement and income
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Workers' Compensation Insurance
The Company 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-22
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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 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.
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-23
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-24
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-25
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-26
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-27
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-28
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-29
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-30
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-31
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-32
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-33
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-34
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-35
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-36
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-37
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-38
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-39
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-40
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-41
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-42
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-43
<PAGE>
SCHEDULE I
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-44
<PAGE>
SCHEDULE I
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-45
<PAGE>
SCHEDULE I
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-46
<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-47
<PAGE>
SCHEDULE II
SDW HOLDINGS CORPORATION AND SUBSIDIARY
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-48
<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 Results of Operations and
Financial Condition .................................................... 21
Business................................................................. 34
Management............................................................... 42
Executive Compensation................................................... 44
The Acquisition.......................................................... 46
Security Ownership of Certain Beneficial Owners and Management........... 47
Certain Relationships and Related Transactions........................... 49
Selling Security Holders................................................. 52
Description of the Senior Preferred Stock................................ 55
Description of the Exchange Debentures................................... 67
Description of the Warrants.............................................. 79
Description of Capital Stock............................................. 84
Description of Warren Indebtedness....................................... 86
Material Federal Income Tax Considerations............................... 90
Plan of Distribution..................................................... 99
Experts.................................................................. 99
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
---------------
AUGUST , 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, 26,976,561 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.
(e) On May 27, 1997, Holdings issued 4,252,343 shares of Common Stock to
Western Ventures Limited upon exercise of Class A Warrants and Class B
Warrants.
The securities referred to in (a), (b), (c), (d) and (e) 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.**
5.2 Opinion of Goodwin, Procter & Hoar LLP, regarding the legality of
certain of the Securities.**
8.1 Opinion of Goodwin, Procter & Hoar LLP regarding certain tax
matters.**
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.**
10.32 Agreement among S.D. Warren Company, SDW Holdings Corporation,
Sappi Limited and Monte R. Haymon dated September 1, 1995.**
10.33 First Amendment to Amended and Restated Credit and Guarantee
Agreement among SDW Holdings Corporation, S.D. Warren Company,
certain Lenders and The Chase Manhattan Bank as Agent, dated
February 7, 1997.**
10.34 Termination Agreement dated May 27, 1997, 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.
10.35 Participation Agreement dated July 29, 1997 among S.D. Warren
Company, General Electric Capital Corporation and State Street
Bank and Trust Company of Connecticut, National Association.
10.36 Lease Agreement dated July 29, 1997 between S.D. Warren Company
and State Street Bank and Trust Company of Connecticut, National
Association.
10.37 Agreement and Plan of Merger dated as of July 30, 1997 between SDW
Acquisition II Corporation and SDW Holdings Corporation.
10.38 Second Amendment and Consent, dated as of July 25, 1997 to the
Amended and Restated Credit and Guarantee Agreement, dated as
April 26, 1996.
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.**
23.1 Consent of Cravath, Swaine & Moore (contained in Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP, independent auditors.
23.3 Consent of Goodwin, Procter & Hoar LLP (contained in Exhibit 5.2).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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.
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.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS POST EFFECTIVE AMENDMENT NO. 1 TO ITS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF JOHANNESBURG, ON AUGUST 6, 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
- ------------------------------------ August 6, 1997
(MONTE R. HAYMON)
* Director (Principal
- ------------------------------------ Executive Officer) August 6, 1997
(EUGENE VAN AS)
* Director, Vice
- ------------------------------------ President and August 6, 1997
(WILLIAM E. HEWITT) Treasurer
(Principal
Financial Officer
and Principal
Accounting
Officer)
* Director, Vice
- ------------------------------------ President and August 6, 1997
(ANDRIES G.J. VLOK) Secretary
* Director
- ------------------------------------ August 6, 1997
(NEIL S. THOMAS)
Director
- ------------------------------------
(J. RICHARD LEAMAN, JR.)
/s/ William E. Hewitt Attorney-in-Fact
*By_________________________________ August 6, 1997
(WILLIAM E. HEWITT)
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
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.**
5.2 Opinion of Goodwin, Procter & Hoar LLP, regarding the
legality of certain of the Securities.**
8.1 Opinion of Goodwin, Procter & Hoar LLP regarding certain
tax matters.**
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>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
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>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
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.**
10.32 Agreement among S.D. Warren Company, SDW Holdings
Corporation, Sappi Limited and Monte R. Haymon dated
September 1, 1995.**
10.33 First Amendment to Amended and Restated Credit and
Guarantee Agreement among SDW Holdings Corporation, S.D.
Warren Company, certain Lenders and The Chase Manhattan
Bank as Agent, dated February 7, 1997.**
10.34 Termination Agreement dated May 27, 1997, 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.
10.35 Participation Agreement dated July 29, 1997 among S.D.
Warren Company, General Electric Capital Corporation and
State Street Bank and Trust Company of Connecticut,
National Association.
10.36 Lease Agreement dated July 29, 1997 between S.D. Warren
Company and State Street Bank and Trust Company of
Connecticut, National Association.
10.37 Agreement and Plan of Merger dated as of July 30, 1997
between SDW Acquisition II Corporation and SDW Holdings
Corporation.
10.38 Second Amendment and Consent, dated as of July 25, 1997 to
the Amended and Restated Credit and Guarantee Agreement,
dated as April 26, 1996.
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.**
23.1 Consent of Cravath, Swaine & Moore (contained in Exhibit
5.1).
23.2 Consent of Deloitte & Touche LLP, independent auditors.
23.3 Consent of Goodwin, Procter & Hoar LLP (contained in
Exhibit 5.2).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
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.
<PAGE>
EXHIBIT 10.34
EXECUTION COPY
TERMINATION AGREEMENT dated as of May 27, 1997, 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 LLC
(each of the foregoing entities is a "Terminating
Shareholder" and collectively, the "Terminating
Shareholders"), SDW HOLDINGS CORPORATION ("Holdings"), SAPPI
LIMITED ("SL"), SAPPI DEUTSCHLAND GmbH ("Sappi") and S.D.
WARREN COMPANY ("Warren").
WHEREAS, the parties hereto have previously executed the Second Amendment
and Restatement dated as of July 6, 1995 of the Shareholders Agreement dated as
of December 20, 1994 (the "Shareholders Agreement"); and
WHEREAS, certain parties hereto (other than Sappi and Warren) have
executed the Stock Purchase Agreement dated as of November 27, 1996 (the "Stock
Purchase Agreement") pursuant to which the Terminating Shareholders agreed to
the termination of the Shareholders Agreement except for such provisions as SL
may designate that survive;
NOW THEREFORE, the undersigned parties hereby agree as follows:
1. The Shareholders Agreement is hereby terminated as of the date first
set forth above upon consummation of the Closing (as defined in the Stock
Purchase Agreement), except that the following provisions thereof shall remain
in full force and effect only as between and among Holdings, SL, Sappi and
Warren:
(a) the rights of the Sappi Group (such term and each other
capitalized term used but not otherwise defined herein term used but not
otherwise defined herein shall have the meaning ascribed to it in the
Shareholders Agreement) and the obligations of Holdings under Article 5;
(b) all rights and obligations of the parties under Section 6.4;
provided that no Extraordinary Board Approval shall be required for any
-------- ----
such action;
1
<PAGE>
(c) the provisions of Article 7, except references to the
Terminating Shareholders, the DLJ Designees, the DLJ Group, and UBSCC
Designee and the UBSCC Group and the like shall be of no force and effect
and impose no obligations upon or provide any rights to the Terminating
Shareholders or impose any limitations on Holdings, SL, Sappi and Warren;
and
(d) the definitions in Section 1.1, to the extent used directly
or indirectly in the foregoing provisions which survive termination.
2. For the avoidance of doubt, it is expressly agreed that (I) any and
all transfers of Shares of Holdings by any member of the Sappi Group are free
and clear of all rights and obligations under, or liens created by, the
Shareholders Agreement and (ii) each Terminating Shareholder is hereby released
from all of its obligations, and hereby relinquishes all of its rights, under
the Shareholders Agreement, including without limitation with respect to
transfers described in clause (I).
3. Holdings, Warren and Sappi agree with SL to enter into at the request
of SL an amendment and restatement of the Shareholders Agreement embodying the
provisions of the Shareholders Agreement which survive termination hereunder.
4. This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York (without regard to applicable principles
governing conflicts of laws to the extent that application of the laws of
another jurisdiction would be required thereby).
5. This Agreement may be signed in any number of counterparts, each of
which shall constitute an original but all of which when taken together shall
constitute but one contract; provided, however, that no party shall have any
-------- -------
rights or obligations under this Agreement until it has been executed by all
parties specified on the signature pages. Delivery of an executed counterpart
of a signature page by facsimile transmission shall be effective as delivery of
a manually executed counterpart of this Agreement.
[Signatures on next page.]
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above by a duly authorized officer,
general partner or managing member, as appropriate.
SAPPI LIMITED,
by
/s/ W.E. Hewitt
--------------------------------
Name: W.E. Hewitt
Title: Vice President
DLJ MERCHANT BANKING PARTNERS, L.P.,
by DLJ MERCHANT BANKING, INC.,
Managing General Partner;
by
/s/ Ivy Dodes
--------------------------------
Name: Ivy Dodes
Title: Vice President
DLJ INTERNATIONAL PARTNERS, C.V.,
by DLJ MERCHANT BANKING, INC.,
Advisory General Partner
by
/s/ Ivy Dodes
--------------------------------
Name: Ivy Dodes
Title: Vice President
DLJ OFFSHORE PARTNERS, C.V.,
by DLJ MERCHANT BANKING, INC.,
Advisory General Partner
by
/s/ Ivy Dodes
--------------------------------
Name: Ivy Dodes
Title: Vice President
3
<PAGE>
DLJ MERCHANT BANKING FUNDING, INC.,
by
/s/ Ivy Dodes
--------------------------------
Name: Ivy Dodes
Title: Vice President
DLJ FIRST ESC L.L.C.,
by DLJ LBO PLANS MANAGEMENT CORPORATION,
by
/s/ Ivy Dodes
--------------------------------
Name: Ivy Dodes
Title: Vice President
UBS CAPITAL LLC,
by
/s/ Unreadable
--------------------------------
Name:
Title:
by
/s/ Marc A. Unger
--------------------------------
Name: Marc A. Unger
Title: Chief Financial Officer
SDW HOLDINGS CORPORATION,
by
/s/ W.E. Hewitt
--------------------------------
Name: W.E. Hewitt
Title: Vice President
SAPPI DEUTSCHLAND GmbH,
by
/s/ Eugene van As
--------------------------------
Name: Eugene van As
Title: Director
4
<PAGE>
S.D. WARREN COMPANY,
by
/s/ Jennifer L. Miller
--------------------------------
Name: Jennifer L. Miller
Title: Vice President and General Counsel
5
<PAGE>
[EXECUTION COPY]
EXHIBIT 10.35
================================================================================
PARTICIPATION AGREEMENT
among
S.D. WARREN COMPANY
Lessee,
GENERAL ELECTRIC CAPITAL CORPORATION,
Owner Participant,
and
STATE STREET BANK AND TRUST COMPANY OF CONNECTICUT,
NATIONAL ASSOCIATION
as Owner Trustee
Dated as of July 29, 1997
--------------------------
#3 Paper Machine
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
ARTICLE I
<S> <C> <C>
Definitions......................... 2
ARTICLE II
Investment in Lessor's Cost................. 2
SECTION 2.01. Agreement to Invest....................... 2
SECTION 2.02. Payments on the Closing Date.............. 2
SECTION 2.03. Time and Place of Closing; Notice of
Closing Date.................................... 2
SECTION 2.04. Interest Payments to Owner Participant.... 3
ARTICLE III
Transactions to Occur on Closing Date........... 3
SECTION 3.01. Transactions To Occur on Closing Date..... 3
ARTICLE IV
Conditions Precedent.................... 4
SECTION 4.01. Conditions Precedent to Obligations of
Owner Participant and Owner Trustee............. 4
SECTION 4.02. Conditions Precedent to Obligations of
Lessee.......................................... 9
ARTICLE V
Representations and Warranties.................. 11
SECTION 5.01. Representations and Warranties of
Lessee.......................................... 11
SECTION 5.02. Representations and Warranties of Owner
Participant..................................... 18
SECTION 5.03. Representations and Warranties of Trust
Company......................................... 19
ARTICLE VI
Covenants.......................... 21
SECTION 6.01. Covenants of Lessee....................... 21
SECTION 6.02. Covenants of Owner Participant............ 30
SECTION 6.03. Covenants of Owner Trustee................ 31
ARTICLE VII
General Indemnity...................... 32
SECTION 7.01. General Indemnity......................... 32
SECTION 7.02. Payments and Survival..................... 38
ARTICLE VIII
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
General Tax Indemnity.................... 38
SECTION 8.01. Indemnity................................. 38
SECTION 8.02. Exclusions from General Tax Indemnity..... 39
SECTION 8.03. Calculation of General Tax Indemnity
Payments........................................ 40
SECTION 8.04. General Tax Indemnity -- Contests......... 41
SECTION 8.05. General Tax Indemnity -- Reports.......... 42
SECTION 8.06. General Tax Indemnity -- Payment.......... 43
ARTICLE IX
Expenses.......................... 44
SECTION 9.01. Transaction Expenses...................... 44
SECTION 9.02. Post-Closing Expenses....................... 44
SECTION 9.03. Lessee's Obligation......................... 45
ARTICLE X
Transfers of Owner Participant's Interests; Leverage Option 46
SECTION 10.01. Transfers of Owner Participant's
Interests....................................... 46
SECTION 10.02. Leverage Option............................ 48
ARTICLE XI
Miscellaneous......................... 49
SECTION 11.01. Notices.................................... 49
SECTION 11.02. GOVERNING LAW.............................. 49
SECTION 11.03. Amendment.................................. 49
SECTION 11.04. Successors and Assigns..................... 50
SECTION 11.05. Headings................................... 50
SECTION 11.06. Counterparts............................... 50
SECTION 11.07. Severability............................... 50
SECTION 11.08. Survival of Agreements..................... 50
SECTION 11.09. Liabilities of Owner Trustee............... 50
SECTION 11.10. No Guarantees............................. 51
SECTION 11.11. Successor Owner Trustee................... 51
SECTION 11.12. Jurisdictional and Related Matters........ 51
</TABLE>
SCHEDULES AND EXHIBITS
Appendix A Definitions
Schedule 1 Addresses for Notices and Payments
Schedule 1A Wire Instructions for Payment of Purchase Price
Schedule 2 Pricing Assumptions
Schedule 3 Recordations and Filings
Schedule 3A Existing Recordations and Filings
Schedule 4 Environmental Disclosure Matters
ii
<PAGE>
Page
----
Exhibit A Form of Letter of Credit
iii
<PAGE>
PARTICIPATION AGREEMENT dated as of July 29, 1997, by and
among S.D. WARREN COMPANY, a Pennsylvania corporation, GENERAL
ELECTRIC CAPITAL CORPORATION, a New York corporation, and STATE
STREET BANK AND TRUST COMPANY OF CONNECTICUT, NATIONAL
ASSOCIATION, a national banking association, not in its
individual capacity, except as otherwise expressly provided
herein, but solely in its capacity as Owner Trustee.
WHEREAS the Owner Participant and the Trust Company have entered into
the Trust Agreement for the purpose of creating the Trust and entering into the
transactions contemplated by this Agreement;
WHEREAS the Lessee desires to sell the Equipment to the Owner Trustee on
the Closing Date by delivering the Bill of Sale and the Conveyance Instrument
against receipt of the Purchase Price therefor;
WHEREAS the Owner Participant desires to cause the Owner Trustee to
purchase the Equipment from the Lessee on the Closing Date by paying the
Purchase Price therefor and accepting delivery of the Bill of Sale and the
Conveyance Instrument;
WHEREAS the Owner Trustee desires to lease the Equipment Site from the
Lessee, and to be granted certain easements and other rights by the Lessee, by
entering into the Ground Lease;
WHEREAS the Lessee desires to lease the Equipment Site to the Owner
Trustee, and to grant certain easements and other rights to the Owner Trustee,
by entering into the Ground Lease;
WHEREAS the Owner Participant desires to cause the Owner Trustee to
lease the Equipment and sublease the Equipment Site to the Lessee by entering
into the Lease; and
WHEREAS the Lessee desires to lease the Equipment and sublease the
Equipment Site from the Owner Trustee by entering into the Lease.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are
hereby acknowledged, the parties hereto hereby agree as follows:
<PAGE>
ARTICLE I
Definitions
-----------
For purposes of this Agreement, capitalized terms used herein and not
defined herein have the meanings assigned to them in Appendix A (such
definitions to be equally applicable to both the singular and plural forms of
the terms defined). Any term defined by reference to an agreement, instrument
or other document has the meaning so assigned to it whether or not such document
is in effect. Unless otherwise indicated, references in this Agreement to
sections, paragraphs, clauses, appendices, schedules and exhibits are to be the
same contained in or attached to this Agreement.
ARTICLE II
Investment in Lessor's Cost
---------------------------
SECTION 2.01. Agreement to Invest. Upon the terms and subject to the
-------------------
conditions set forth in Section 4.01 and in reliance on the representations and
warranties hereinafter set forth, the Owner Participant shall make an equity
investment on the Closing Date in an amount equal to the Purchase Price;
provided, however, that such investment shall not exceed $150,400,000.
- -------- -------
SECTION 2.02. Payments on the Closing Date. Upon the terms and subject
----------------------------
to the conditions of this Agreement, on the Closing Date the Owner Participant
shall make available to the Owner Trustee the amount required to be made
available by it pursuant to Section 2.01 through wire transfer in immediately
available funds to the account of the Owner Trustee specified in Schedule 1
hereto.
SECTION 2.03. Time and Place of Closing; Notice of Closing Date.
-------------------------------------------------
Subject to the conditions of this Agreement, the Closing Date shall be selected
by the Lessee, subject to compliance with the further provisions of this Section
2.03 and provided that the Closing Date shall not be a date later than July 29,
--------
1997. The closing on the Closing Date shall take place beginning at 10:00 a.m.,
New York City time, at the offices of Dewey Ballantine, 1301 Avenue of the
Americas, New York, New York. At least one Business Day prior to the Closing
Date, the Lessee shall deliver to the Owner Participant and the Owner Trustee
notice of the Closing Date, the Purchase Price to be paid on the Closing Date,
as supported by the Appraisal delivered with respect to the Equipment, and the
amount to be made available pursuant to Section 2.01 by the Owner Participant on
the Closing Date.
2
<PAGE>
SECTION 2.04. Interest Payments to Owner Participant. (a) If for any
--------------------------------------
reason the transactions contemplated hereby are not consummated on the Closing
Date proposed by the Lessee, then the Lessee shall reimburse the Owner
Participant for the loss of the use of any funds that it made available to the
Owner Trustee, after receipt of the notice contemplated by Section 2.03,
occasioned by the transactions contemplated hereby not being consummated on the
Closing Date proposed by the Lessee, by paying to the Owner Participant upon
demand interest at a rate per annum equal to the Prime Rate on the amount of
such funds for the period from and including the proposed Closing Date to but
excluding the earlier of the Business Day on which such funds shall be returned
to the Owner Participant (or, if returned after noon, New York City time, on
such Business Day, then to but excluding the next succeeding Business Day after
such funds are so returned to the Owner Participant) and the date on which the
transactions contemplated for the proposed Closing Date occur less the amount of
any investment earnings returned to the Owner Participant pursuant to the next
sentence. In the event the transactions contemplated for the proposed Closing
Date do not occur on the proposed Closing Date, the funds made available to the
Owner Trustee (plus any investment earnings thereon) shall be returned to the
Owner Participant on the next succeeding Business Day. The Owner Trustee shall
hold such funds in trust, not as part of the Trust Estate under the Trust
Agreement, but solely for the benefit of the Owner Participant.
(b) In the event that funds have been made available to the Owner
Trustee under the circumstances described in Section 2.04(a), the Owner Trustee
shall cause such funds to be invested until they are applied as therein provided
in Permitted Investments at the direction of the Lessee, if such Permitted
Investments are reasonably available for purchase at the time. Earnings on such
investments shall be for the account of the Owner Participant. Neither the
Owner Trustee nor the Owner Participant shall be liable for any losses resulting
from the investment of any amounts in accordance with this Section 2.04(b). The
Lessee shall be liable for any and all such losses and shall pay to the Owner
Trustee upon demand the amount of any such losses certified to the Lessee.
ARTICLE III
Transactions to Occur on Closing Date
-------------------------------------
SECTION 3.01. Transactions To Occur on Closing Date. On the Closing
-------------------------------------
Date, subject to the conditions set forth in Article IV:
(a) the Owner Participant shall make the equity investment to be made by
it on the Closing Date and authorize and
3
<PAGE>
direct the Owner Trustee to take the actions specified in clauses (b)(ii) and
(c) below;
(b) (i) the Lessee by executing and delivering the Bill of Sale and
the Conveyance Instrument, shall assign, set over, sell and deliver to the Owner
Trustee all its right, title and interest in and to the Equipment, and (ii) the
Owner Trustee, with the proceeds of the equity investment made by the Owner
Participant on the Closing Date, shall purchase all right, title and interest of
the Lessee in and to the Equipment by transferring an amount equal to the
Purchase Price therefor to such accounts and in such amounts as may be set forth
in Schedule 1A hereto and accepting delivery of the Bill of Sale and the
Conveyance Instrument (it being agreed that the delivery of the Bill of Sale and
the Conveyance Instrument shall constitute delivery of the Equipment and that
the Owner Trustee hereby appoints the Lessee as its agent for the purpose of
accepting physical delivery of the Equipment from the Lessee on the Owner
Trustee's behalf and the Lessee hereby accepts such appointment);
(c) the Lessee and the Owner Trustee shall execute and deliver the
Ground Lease and the Lease; and
(d) the Lessee and the Owner Participant shall execute and deliver the
Tax Indemnity Agreement.
ARTICLE IV
Conditions Precedent
--------------------
SECTION 4.01. Conditions Precedent to Obligations of Owner Participant
--------------------------------------------------------
and Owner Trustee. The obligation of the Owner Participant to participate in
- -----------------
the Overall Transaction on the Closing Date (including to direct the Owner
Trustee's participation therein, it being understood that the Owner Trustee's
obligation to so participate is conditioned upon such direction) shall be
subject to the fulfillment to the satisfaction of, or waiver by, the Owner
Participant on or prior to the Closing Date of the following conditions
precedent (except that the obligation of the Owner Participant shall not be
subject to its own performance or compliance):
(a) Notice. The Owner Participant and the Owner Trustee shall have
------
received the notice required by Section 2.03.
(b) Receipt of Lessee. The Lessee shall have duly executed and
-----------------
delivered to the Owner Trustee an instrument acknowledging receipt of the
amount paid by or on behalf of the Owner Trustee on the Closing Date.
4
<PAGE>
(c) No Violation of Law. The participation by the Owner Participant or
-------------------
any other party hereto in any of the transactions contemplated by the Basic
Agreements shall not violate any Applicable Law or subject the Owner
Participant or any other party hereto to any material penalty or liability
or unduly burdensome condition under or pursuant to any Applicable Laws.
(d) Governmental Action; Consents and Approvals. All Governmental
-------------------------------------------
Action, and all consents, waivers and approvals by or from any trustee or
holder of any indebtedness or obligation of the Lessee, required in
connection with the transactions contemplated by the Basic Agreements,
shall have been obtained.
(e) Authorizations; Execution and Delivery of Documents. The following
---------------------------------------------------
documents shall have been duly authorized, executed and delivered by the
respective parties thereto, shall be in full force and effect on the
Closing Date without any event or condition having occurred or existing
that constitutes, or with the giving of notice or lapse of time or both
would constitute, a default thereunder or breach thereof or would give any
party thereto the right to terminate any thereof, and an executed
counterpart of each thereof shall have been delivered to the Owner
Participant:
(i) this Agreement;
(ii) the Trust Agreement;
(iii) the Lease;
(iv) the Tax Indemnity Agreement;
(v) the Bill of Sale and the Conveyance Instrument;
(vi) the Ground Lease;
(vii) the Consent and Recognition Agreement;
(viii) the Release and Non-Disturbance Agreement; and
(ix) the Letter of Credit.
(f) Title. On the Closing Date, there shall be vested in the Owner
-----
Trustee (i) good and marketable title to the Equipment, free and clear of
all Liens except for Liens described in clause (i) of the definition of
"Permitted Liens" and (ii) a valid leasehold interest in the Equipment
5
<PAGE>
Site pursuant to the Ground Lease free and clear of all Liens.
(g) Filings and Recordings. All filings and recordings necessary or
----------------------
advisable in the opinion of the Owner Participant to establish and perfect
the right, title and interest of the Owner Trustee in and to the Equipment
purported to be created by the Basic Agreements and the right, title and
interest of the Owner Trustee under the Ground Lease shall have been duly
authorized, executed and delivered by an authorized officer of the Lessee
and otherwise prepared in appropriate form and substance for filing and
recording with the appropriate authorities, including, without limitation,
the recordings and filings specified in Schedule 3 hereto.
(h) Insurance. Insurance complying with the provisions of Article X of
---------
the Lease shall be in full force and effect and the Owner Participant shall
have received certificates of insurance signed in each case by the insurer
or an agent of the insurer, together with a report of Aon Risk Services
Inc. of Illinois that such insurance complies with the requirements of
Article X of the Lease.
(i) Resolutions, Certificates, etc. The Owner Participant shall have
------------------------------
received:
(i) copies of the certificate of incorporation and by-laws of
the Lessee and of resolutions of the Board of Directors of the Lessee
authorizing the transactions contemplated hereby and by the other
Basic Agreements to which it is a party, in each case certified as of
the Closing Date by the Secretary or an Assistant Secretary of the
Lessee, together with a certificate as to incumbency and signatures of
the officer or officers of the Lessee authorized to execute and
deliver such documents on its behalf; and
(ii) a copy of resolutions of the Board of Directors of the
Owner Trustee, certified as of the Closing Date by the Secretary or an
Assistant Secretary of the Owner Trustee, authorizing the execution,
delivery and performance by the Owner Trustee of each Basic Agreement
to which it is a party, together with a certificate as to the
incumbency and signature of the officer or officers of the Owner
Trustee authorized to execute and deliver such documents on its
behalf.
(j) Additional Officer's Certificates. The Owner Participant shall have
---------------------------------
received:
6
<PAGE>
(i) an Officer's Certificate of the Lessee, dated the Closing
Date, stating that (A) the representations and warranties of the
Lessee contained in Section 5.01 are true and correct on and as of
such date as though made on and as of such date except to the extent
that such representations and warranties expressly relate solely to an
earlier date (in which event such representations and warranties shall
have been true and correct on and as of such date), (B) no Default,
Event of Default, Event of Loss or event or condition which, with
notice or lapse of time or both, would become an Event of Loss has
occurred and is continuing or would result from the consummation on
the Closing Date of any transaction contemplated by any of the Basic
Agreements, and (C) each Basic Agreement to which it is a party
remains in full force and effect with respect to it; and
(ii) an Officer's Certificate of the Owner Trustee, dated the
Closing Date, stating that (A) the representations and warranties of
the Owner Trustee contained in Section 5.03 are true and correct on
and as of such date as though made on and as of such date except to
the extent that each representations and warranties expressly relate
solely to an earlier date (in which event such representations and
warranties shall have been true and correct on and as of such date)
and (B) each Basic Agreement to which it is a party remains in full
force and effect with respect to it.
(k) Performance. Each other party to this Agreement shall have
-----------
performed and complied with all material agreements and conditions
contained herein and in any other Basic Agreement to which it is a party
required to be performed or complied with by it on or prior to the Closing
Date.
(l) Opinions of Counsel. The Owner Participant and the Owner Trustee
-------------------
shall have received opinions, dated the Closing Date, in form and substance
satisfactory to the Owner Participant, from the counsels listed below:
(i) Jennifer L. Miller, General Counsel of the Lessee;
(ii) Ropes & Gray, special counsel to the Lessee; and
(iii) Pierce Atwood, special Maine and environmental counsel
to the Lessee.
7
<PAGE>
(m) Opinion of Counsel for Owner Trustee. The Owner Participant shall
------------------------------------
have received an opinion, dated the Closing Date, from Bingham Dana & Gould
LLP, counsel for the Owner Trustee, in form and substance satisfactory to
the Owner Participant.
(n) Opinion as to Tax Matters. The Owner Participant shall have
-------------------------
received an opinion, dated the Closing Date, from Dewey Ballantine, special
tax counsel for the Owner Participant, in form and substance satisfactory
to the Owner Participant, as to such tax matters related to the Overall
Transaction (including availability of like-kind exchange treatment) as the
Owner Participant may request.
(o) Payment of Taxes, etc. All taxes, fees and other charges payable in
---------------------
connection with the execution, delivery, recordation and filing of all
documents and instruments referred to in this Agreement, and all sales and
transfer taxes payable in connection with the sale of the Equipment
hereunder, shall have been paid in full.
(p) Appraisal. The Owner Participant shall have received from the
---------
Appraiser an Appraisal with respect to the Equipment, dated the Closing
Date and in form and substance satisfactory to the Owner Participant.
(q) Representations and Warranties. The representations and warranties
------------------------------
of the Lessee and the Owner Trustee contained in the Basic Agreements shall
be true and correct on and as of the Closing Date as though made on and as
of the Closing Date except to the extent that such representations and
warranties expressly relate solely to an earlier date (in which event such
representations and warranties shall have been true and correct on and as
of such date).
(r) Lien Search Records and Releases. The Owner Participant shall have
--------------------------------
received (i) the results of searches of the Uniform Commercial Code
financing statements filed with respect to the Lessee in the jurisdiction
where the Equipment is located and where the chief executive office of the
Lessee is located and a title search with respect to the Equipment Site and
(ii) evidence reasonably satisfactory to the Owner Participant that any and
all Liens on the Equipment have been released or terminated.
(s) No Material Adverse Change. Since April 2, 1997, there shall not
--------------------------
have been any material adverse change in the financial condition, business,
results of operations or properties of the Lessee or in the ability of the
Lessee to perform its obligations under the Basic Agreements.
8
<PAGE>
(t) Letter of Credit. The Lessee shall have delivered to the Owner
----------------
Trustee the Letter of Credit pursuant to Section 6.01(h).
(u) Engineering Report. The Owner Participant shall have received from
------------------
Sandwell an engineering report with respect to the Equipment, dated the
Closing Date and in form and substance satisfactory to the Owner
Participant.
(v) Jaakko Poyry Report. The Owner Participant shall have received from
-------------------
Jaakko Poyry a report, dated the Closing Date and in form and substance
satisfactory to the Owner Participant.
(w) Environmental Report. The Owner Participant and the Owner Trustee
--------------------
shall have received from Geomatrix an environmental report, dated the
Closing Date and in form and substance satisfactory to the Owner
Participant.
(x) Satisfaction of Obligations. The Owner Participant shall have
---------------------------
received evidence, in form and substance satisfactory to it, that the
Lessee shall have used a portion of the Purchase Price to prepay an amount
of the Term Loan equal to the greater of (A) $100,000,000 and (B) two-
thirds of the Purchase Price.
SECTION 4.02. Conditions Precedent to Obligations of Lessee. The
---------------------------------------------
obligations of the Lessee on the Closing Date to sell and to lease back the
Equipment and to carry out its other obligations under the Basic Agreements on
the Closing Date (except the obligations that are expressly made to survive
under the Basic Agreements if the closing shall not occur) shall be subject to
the fulfillment to the satisfaction of, or waiver by, the Lessee on or prior to
the Closing Date of the following conditions precedent (except that the
obligations of the Lessee shall not be subject to its own performance or
compliance):
(a) Basic Agreements; Closing Documents and Opinions. The Lessee shall
------------------------------------------------
have received:
(i) an executed counterpart of each of this Agreement, the
Trust Agreement, the Lease, the Tax Indemnity Agreement and the Ground
Lease;
(ii) copies of the certificates of insurance and the report
referred to in Section 4.01(h);
(iii) original copies of the certificates of the Owner
Trustee referred to in Sections 4.01(i)(ii) and 4.01(j)(ii);
9
<PAGE>
(iv) an original copy of the opinion referred to in Section
4.01(m); and
(v) a copy of the Appraisal referred to in Section 4.01(p).
The opinion referred to in clause (iv) above shall be addressed to the
Lessee and shall be in form and substance satisfactory to the Lessee.
(b) Due Authorization, Execution and Delivery. All of the documents
-----------------------------------------
described in Section 4.01(e) shall have been duly authorized, executed and
delivered by the respective parties thereto and shall be in full force and
effect on the Closing Date.
(c) Payment of Purchase Price. The Owner Trustee shall have paid to the
-------------------------
Lessee in accordance with Section 3.01(b) an amount in immediately
available funds equal to the Purchase Price for the Equipment.
(d) No Violation of Law. The participation by the Lessee in any of the
-------------------
transactions contemplated by the Basic Agreements shall not violate any
Applicable Law or subject the Lessee to any material penalty or unduly
burdensome condition pursuant to any Applicable Laws.
(e) Governmental Action; Consents and Approvals. All Governmental
-------------------------------------------
Action, and all consents, waivers and approvals by or from any trustee or
holder of any indebtedness or obligation of the Lessee required in
connection with the consummation by the Lessee of the transactions
contemplated by the Basic Agreements (including releases of Liens on the
Equipment), shall have been obtained.
(f) Opinion of Counsel for the Owner Participant. The Lessee shall have
--------------------------------------------
received an opinion, dated the Closing Date from counsel to the Owner
Participant, in form and substance satisfactory to the Lessee.
(g) Incumbency Certificate. The Lessee shall have received a
----------------------
certificate as to the incumbency and signature of the officer or officers
of the Owner Participant authorized to execute and deliver on its behalf
each Basic Agreement to which it is a party.
(h) Officer's Certificate. The Lessee shall have received an Officer's
---------------------
Certificate of the Owner Participant, dated the Closing Date, stating that
(A) the representations and warranties of the Owner Participant contained
in Section 5.02 are true and correct on and as of such date as though made
on and as of such date except to the extent that such
10
<PAGE>
representations and warranties relate solely to an earlier date (in which
event such representations and warranties shall have been true and correct
on and as of such date) and (B) each Basic Agreement to which it is a party
remains in full force and effect with respect to it.
(i) Representations and Warranties. The representations and warranties
------------------------------
of the Owner Trustee and the Owner Participant contained in the Basic
Agreements shall be true and correct on and as of the Closing Date as
though made on and as of the Closing Date except to the extent that such
representations and warranties expressly relate solely to an earlier date
(in which event such representations and warranties shall have been true
and correct on and as of such date).
(j) Filings and Recordings. All filings and recordings necessary or
----------------------
advisable in the opinion of the Lessee to protect the right, title and
interest of the Lessee under the Lease shall have been duly authorized,
executed and delivered by an authorized officer of the Owner Trustee and
otherwise prepared in appropriate form and substance for filing and
recording with the appropriate authorities.
ARTICLE V
Representations and Warranties
------------------------------
SECTION 5.01. Representations and Warranties of Lessee. The Lessee
----------------------------------------
represents and warrants to each of the other parties hereto as follows:
(a) Corporate Organization and Existence. The Lessee is a corporation
------------------------------------
duly organized and validly existing in good standing under the laws of the
Commonwealth of Pennsylvania and is duly qualified to do business in and in
good standing in the State of Maine and the Commonwealth of Massachusetts.
It has the corporate power and authority to own and operate its properties,
to carry on its business as presently conducted, and to enter into and
perform its obligations under the Basic Agreements to which it is a party.
(b) No Consent Required. No order, license, consent, permit,
-------------------
authorization or approval of, or exemption by, or the giving of notice to,
or the registration with or the taking of any other action in respect of,
any Government Authority, and no filing, recording, publication or
registration in any public office or any other place, is required or
necessary on its behalf to authorize the
11
<PAGE>
execution, delivery and performance by it of, the Basic Agreements to which
it is a party, or for the legality, validity, binding effect or
enforceability thereof against it. No consent, authorization or approval
of, or notice to, or other action in respect of, any holder of indebtedness
of the Lessee or any trustee or agent thereof or under any indenture,
mortgage, contract or other agreement to which the Lessee is a party or by
which any of its property or assets may be bound, is required or necessary
on the Lessee's behalf to authorize the execution, delivery and performance
by it of the Basic Agreements to which it is a party or for the legality,
validity, binding effect or enforceability thereof against it, except for
the release of certain Liens on the Equipment which as of the Closing Date
will have been obtained and will be in full force and effect and
instruments evidencing such release will have been delivered to the Owner
Participant.
(c) No Conflicts, etc. The execution and delivery of this Agreement and
-----------------
the other Basic Agreements to which the Lessee is a party, the performance
of its obligations hereunder and thereunder and the consummation by it of
the transactions contemplated hereby and thereby, do not and will not
contravene any Applicable Laws, or conflict with or result in any breach
of, or constitute a default under, its certificate of incorporation or by-
laws or any indenture, mortgage, contract, agreement or instrument to which
it is a party or by which any of its property or assets may be bound or
will result in the imposition of any Lien upon any of its properties.
(d) Due Authorization; Enforceability. The execution and delivery by
---------------------------------
the Lessee of the Basic Agreements to which it is a party, and the
performance thereof and of the transactions contemplated thereby, have been
duly authorized by all necessary corporate action. Each of such Basic
Agreements at the time of delivery thereof will have been duly executed and
delivered by it and will constitute its legal, valid and binding obligation
enforceable in accordance with its terms.
(e) Securities Act. Neither the Lessee nor any Person acting on its
--------------
behalf has directly or indirectly offered or sold the equity investment in
the Equipment, the Trust Estate or any similar securities to, or has
otherwise approached or negotiated with any Person with respect thereto, so
as to bring any of the transactions contemplated hereby within Section 5 of
the Securities Act of 1933.
(f) Litigation. Except as disclosed in the financial statements of the
----------
Lessee described in Section 5.01(g) below, there are no pending or, to the
knowledge of the Lessee,
12
<PAGE>
threatened investigations, suits or proceedings against it or affecting it
or its properties that, individually or in the aggregate, are likely
materially and adversely to affect the consummation of the transactions
contemplated by the Basic Agreements to which it is a party or the
performance of its obligations thereunder or its financial condition,
business, results of operations or properties.
(g) Financial Statements; Disclosure; No Material Adverse Change. (i)
------------------------------------------------------------
The Lessee has furnished to the Owner Participant copies of the Lessee's
audited consolidated financial statements as at and for the fiscal year
ended October 2, 1996, and unaudited consolidated financial statements as
at and for the fiscal quarter ended April 2, 1997. Such financial
statements are complete and correct in all material respects and present
fairly in all material respects the consolidated financial position of the
Lessee and its subsidiaries as of the dates thereof and the consolidated
results of operations and changes in financial position of the Lessee and
its subsidiaries for the periods covered thereby (subject, in the case of
such unaudited financial statements, to year-end audit adjustments), all in
conformity with generally accepted accounting principles consistently
applied (except as stated therein or in the notes thereto).
(ii) None of the financial statements described in clause (i) of
this Section 5.01(g), the Lessee's Annual Report on Form 10-K for the year
ended October 2, 1996 and the Lessee's Quarterly Report on Form 10-Q for
the quarter ended April 2, 1997 contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
therein not misleading as at the respective dates thereof. Since April 2,
1997, nothing has occurred which is likely materially and adversely to
affect the ability of the Lessee to carry on its business and operations
and, since such date, there has been no material adverse change in the
financial condition, business, results of operations or properties of the
Lessee or the ability of the Lessee to perform its obligations under the
Basic Agreements which was not disclosed in writing to the Owner
Participant prior to the Closing Date.
(h) Title. On the Closing Date, the Owner Trustee will have received
-----
from the Lessee (i) good and marketable title to the Equipment, free and
clear of all Liens except Liens described in clauses (i), (iii)(A) and
(iv)(A) of the definition of Permitted Liens, and (ii) a valid leasehold
interest in the Equipment Site pursuant to the Ground Lease free and clear
of all Liens except Liens described in clauses (i), (iii)(A) and (iv)(A) of
the definition of Permitted Liens. The description of the Equipment set
forth
13
<PAGE>
in Annex A to the Lease shall be, on the Closing Date, a true, correct and
complete description of the Equipment in all material respects. The
description of the Equipment Site set forth in Schedule 1 to the Ground
Lease will be true, correct and complete in all material respects. On the
Closing Date, (i) the filings and recordings listed on Schedule 3 hereto
are all the filings and recordings necessary to establish or perfect the
Owner Trustee's right, title and interest in and to the Equipment and the
Equipment Site or under the Lease or the Ground Lease, each of which
filings will be made in accordance with Section 6.01(l) hereof and will be
in full force and effect as of the date of such filings and recordings,
(ii) no other action, including any action to comply with any fraudulent
conveyance statute, will be required to protect the title and interest of
the Owner Trustee in and to the Equipment and the Equipment Site or under
the Lease or the Ground Lease against the claims of any Person whomsoever,
and (iii) the filings and recordings listed on Schedule 3A hereto are the
only filings and recordings of financing statements, fixture filings,
mortgages, security agreements, memoranda of lease and other like filings
and recordings that relate (in whole or in part) to the Equipment or the
warranties and claims against dealers, manufacturers, contractors or
subcontractors relating to the Equipment.
(i) Investment Company Act. The Lessee is not an "investment company"
----------------------
within the meaning of the Investment Company Act of 1940, as amended.
(j) Chief Executive Office. The chief executive office and chief place
----------------------
of business of the Lessee is, and has been during the four months preceding
the Closing Date, located at 225 Franklin Street, Boston, Massachusetts
02110.
(k) ERISA. Assuming that the Owner Participant is not acquiring its
-----
interest in the Trust with the "plan assets" (within the meaning of ERISA
and the regulations thereunder) of any Employee Benefit Plan or with the
assets of any Plan, the execution and delivery by the Lessee of this
Agreement and the other Basic Agreements to which the Lessee is or is to
become a party and consummation of the transactions contemplated hereby and
thereby will not involve any "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code.
(l) No Default, etc. No condition exists that constitutes, or with the
---------------
giving of notice or lapse of time or both would constitute, an Event of
Default or an event of default by the Lessee under any indenture, mortgage,
loan agreement or other material agreement, material lease or
14
<PAGE>
material instrument to which the Lessee is a party or by which it or any of
its properties may be bound.
(m) Margin Regulation. None of the proceeds from the participation by
-----------------
the Owner Participant have been or will be used directly or indirectly for
any purposes in violation of Regulations G, T, U or X of the Board of
Governors of the Federal Reserve System.
(n) Taxes. The Lessee has filed or caused to be filed all Federal,
-----
state and local tax returns that are required to be filed by it, which if
not so filed would cause a material adverse effect on the financial
condition, business, results of operations or properties of the Lessee or
on the Lessee's ability to perform its obligations under the Basic
Agreements to which it is or is to be a party or on the Owner Trustee's
title to or rights or interests in the Equipment, and the Lessee has paid
or caused to be paid all taxes shown to be due and payable on such returns
or on any assessments received by it to the extent that such taxes have
become due and payable, except for taxes and assessments currently being
contested in good faith by appropriate proceedings and with respect to
which the Lessee has established reserves to the extent required by
generally accepted accounting principles.
(o) No Broker. The Lessee has not, directly or indirectly, used the
---------
services of any broker, agent or finder in regard to any of the
transactions contemplated hereby other than UBS Lease Finance LLC.
(p) Transaction Costs. All taxes, recording and filing fees due on
-----------------
prior to the Closing Date in connection with the transactions consummated
on such date pursuant hereto will, as of the Closing Date, have been paid.
(q) Status of Equipment. On the Closing Date, (i) the Equipment will be
-------------------
in good working order and in the condition assumed by the Appraisal, (ii)
the Equipment will be located at the Equipment Site and (iii) no Event of
Loss or event or condition which, with notice or lapse of time or both,
would become an Event of Loss will have occurred and be continuing.
(r) Not Subject to Regulation. Neither the Owner Trustee nor the Owner
-------------------------
Participant will become, by reason of its execution, delivery and
performance of the Basic Agreements to which it is a party or the
consummation of the transactions contemplated thereby, subject to
regulation by any Governmental Authority.
15
<PAGE>
(s) Environmental Matters. To the best of the Lessee's knowledge, after
---------------------
diligent inquiry as of the Closing Date, except as disclosed in Schedule 4
hereto:
(i) The Equipment, the Equipment Site and the Facility do not contain
any Hazardous Materials in amounts or concentrations which constitute a
violation of any EH&S Requirements of Law or could reasonably be expected
to impair the Lessee's ability to meet its obligations under the Basic
Agreements.
(ii) The Equipment, the Equipment Site and the Facility are in
compliance with all applicable EH&S Requirements of Law and the Lessee has
obtained all permits, licenses, registrations, modifications, exemptions
and other authorizations required under EH&S Requirements of Law relating
to the Equipment and the Equipment Site, the Lessee reasonably believes all
of its contractors operating at the Facility are in compliance with all
applicable EH&S Requirements of Law, and the Lessee reasonably believes
that it will be able to comply with all applicable EH&S Requirements of Law
relating to the Equipment and the Equipment Site in the future and the
Lessee reasonably believes that it will be able to renew or obtain all
permits, licenses, registrations, modifications, exemptions and other
authorizations required under EH&S Requirements of Law necessary for its
operations relating to the Equipment and the Equipment Site in the future.
(iii) The Lessee has not received any written notice of any
violation, alleged violation, non-compliance, liability or potential
liability regarding environmental matters or compliance with EH&S
Requirements of Law with regard to any of the Equipment, the Equipment
Site, or the Facility; and the Lessee is not otherwise aware of the
existence of any such violation, alleged violation, non-compliance,
liability or potential liability which could have a material adverse effect
on the Lessee's ability to perform its obligations under the Basic
Agreements.
(iv) Except as permitted by Applicable Laws, Hazardous Materials have
not been transported, stored, treated, disposed of, emitted, discharged, to
the natural environment or otherwise released or threatened to be released
on, from, or under the Equipment, the Equipment Site or the Facility, nor
has disposal of Hazardous Materials relating to the Equipment or the
Equipment Site been arranged for, (A) by the Lessee or, based on the
Lessee's reasonable belief, any contractor of the Lessee, in violation of
any applicable EH&S
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Requirements of Law, or (B) in a manner or to a location which is likely to
give rise to liability under any applicable EH&S Requirements of Law which
impose liability without proof of fault (i.e., strict liability).
(v) No (A) judicial proceeding or (B) administrative action of or by
Government Authority or a private plaintiff is pending, or to the knowledge
of the Lessee, threatened, under any EH&S Requirements of Law to which the
Lessee is or will be named as a party, nor are there any consent decrees or
other decrees, consent orders, administrative orders or other orders, or
other administrative or judicial requirements outstanding under any EH&S
Requirements of Law with respect to the Lessee's ownership or operation of
the Equipment, the Equipment Site or the Facility.
(vi) No lien imposed pursuant to any EH&S Requirements of Law exists
with respect to the Equipment, the Equipment Site or the Facility.
(t) Ground Lease. The materials to be supplied to the Owner Trustee
------------
and the rights to be granted to the Owner Trustee pursuant to the Ground
Lease are sufficient to enable the Equipment to be located on the Equipment
Site for the entire Ground Lease Term and can reasonably be expected to
enable the Owner Trustee to occupy, use, possess, own, operate and maintain
the Equipment until the end of the Ground Lease Term in an efficient manner
on a commercially reasonable basis, and there are no facilities, services,
materials, easements or rights required for such operation other than those
granted or to be provided pursuant to the Ground Lease or those that can
reasonably be expected to be available on a commercially reasonable basis
at the Equipment Site for the duration of the Ground Lease Term.
(u) Environmental Disclosure. There is no fact of a material nature
------------------------
concerning the environmental conditions of the Equipment, the Equipment
Site or the Facility, known to the Lessee or which should reasonably have
been known to the Lessee that the environmental consultant was not given an
opportunity to investigate during the course of its due diligence
investigation and preparation of its environmental report prepared pursuant
to Section 4.01(w) hereof. The Owner Participant and the Owner Trustee
acknowledge that they have had the opportunity to (1) conduct an
environmental investigation of the Equipment, Equipment Site and Facility;
(2) interview employees of Lessee with knowledge of environmental issues
related to the Equipment, Equipment Site and Facility, and (3) review all
documents requested in connection therewith.
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SECTION 5.02. Representations and Warranties of Owner Participant.
---------------------------------------------------
The Owner Participant represents and warrants to each of the other parties
hereto as follows:
(a) Corporate Organization and Existence; Due Authorization;
--------------------------------------------------------
Enforceability. The Owner Participant is a corporation duly organized and
--------------
validly existing in good standing under the laws of the State of New York
and has the corporate power and authority to enter into and perform its
obligations under each of the Basic Agreements to which it is a party. The
execution and delivery by it of each of such Basic Agreements and the
performance thereof and of the transactions contemplated thereby by it have
been duly authorized by all necessary corporate action, and each of such
Basic Agreements at the time of delivery thereof will have been duly
executed and delivered by it and will constitute its legal, valid and
binding obligation enforceable in accordance with its terms.
(b) No Consent Required. No order, license, consent, permit,
-------------------
authorization or approval of, or exemption by, or the giving of notice to,
or the registration with or the taking of any other action in respect of,
any Governmental Authority, and no filing, recording, publication or
registration in any public office or any other place, is required or
necessary on its behalf to authorize the execution, delivery and
performance by it of, the Basic Agreements to which it is a party, or for
the legality, validity, binding effect or enforceability thereof against
it.
(c) No Conflicts, etc. The execution and delivery of this Agreement
-----------------
and the other Basic Agreements to which the Owner Participant is a party,
the performance of its obligations hereunder and thereunder and the
consummation by it of the transactions contemplated hereby and thereby,
will not contravene any Applicable Laws, or conflict with or result in any
breach of or constitute any default under, its restated organization
certificate or by-laws or any material agreement or instrument to which it
is a party or by which any of its property or assets may be bound; provided
--------
that no representation is made in this Section 5.02(c) with respect to
ERISA or as to any Applicable Laws relating to the particular nature of the
Equipment or the use or operation thereof.
(d) Securities Act. It is acquiring its interest in the Trust Estate
--------------
for its own account for investment and not with a present view to, or for
sale in connection with, any distribution, but subject nevertheless to any
requirement of
18
<PAGE>
law that the disposition of its property shall at all times be and remain
within its control.
(e) Litigation. There are no pending or, to the knowledge of the Owner
----------
Participant, threatened investigations, suits or proceedings against it or
affecting it or its properties that, individually or in the aggregate, are
likely materially and adversely to affect the consummation of the
transactions contemplated by the Basic Agreements to which it is a party or
the performance of its obligations thereunder.
(f) Lessor Liens. No Lessor Lien attributable to the Owner Participant
------------
is in existence. The execution, delivery and performance by the Owner
Participant of the Basic Agreements to which it is a party will not subject
the Trust Estate, or any portion thereof, to any such Lessor Lien.
(g) ERISA. No part of the funds to be used by it to acquire the
-----
interests to be acquired by it under this Agreement constitutes "plan
assets" (within the meaning of ERISA and the regulations thereunder) of any
Employee Benefit Plan or of any Plan.
SECTION 5.03. Representations and Warranties of Trust Company. The
-----------------------------------------------
Trust Company represents and warrants to each of the other parties hereto as
follows:
(a) Corporate Organization and Existence; Due Authorization;
--------------------------------------------------------
Enforceability. It is a national banking association duly organized and
--------------
validly existing in good standing under the laws of the United States of
America and has the corporate power and authority to enter into and perform
its obligations under each of the Basic Agreements to which it is or is to
be a party (as Owner Trustee or in its individual capacity, as the case may
be). The execution and delivery by it of each of such Basic Agreements and
the performance thereof and of the transactions contemplated thereby have
been duly authorized by all necessary corporate action, and each of such
Basic Agreements at the time of delivery thereof will have been duly
executed and delivered by it and each such Basic Agreement to which it is a
party in its individual capacity will constitute the legal, valid and
binding obligation of it in its individual capacity enforceable against it
in its individual capacity in accordance with its terms.
(b) No Consent Required. No order, license, consent, permit,
-------------------
authorization or approval of, or exemption by, or the giving of notice to,
or the registration with or the taking of any other action in respect of,
any State of Connecticut or Federal Government Authority governing its
19
<PAGE>
banking or trust powers, and no filing, recording, publication or
registration in any public office or any other place, is required or
necessary on its behalf under any State of Connecticut or Federal
Applicable Laws governing its banking or trust powers to authorize the
execution, delivery and performance by it (as Owner Trustee or in its
individual capacity, as the case may be) of, the Basic Agreements to which
it is a party (as Owner Trustee or in its individual capacity, as the case
may be), or for the legality, validity, binding effect or enforceability
thereof against it.
(c) No Conflicts, etc. The execution and delivery of this Agreement
-----------------
and the other Basic Agreements to which it is a party (as Owner Trustee or
in its individual capacity, as the case may be), the performance of its
obligations hereunder and thereunder, and the consummation by it of the
transactions contemplated hereby and thereby will not contravene any State
of Connecticut or Federal Applicable Laws governing its banking or trust
powers, or conflict with, result in any breach of or constitute any default
under, its articles of association or by-laws or any agreement or
instrument to which it is a party (as Owner Trustee or in its individual
capacity, as the case may be) or by which any of its property or assets may
be bound.
(d) Securities Act. Neither it nor any Person authorized to act on its
--------------
behalf has directly or indirectly offered or sold the equity investment in
the Equipment, or any similar securities, or any interest in the Trust
Estate, to, or has otherwise approached or negotiated with any Person
(other than the owner Participant and the Lessee) with respect thereto.
(e) Lessor Liens. No Lessor Lien attributable to it in its individual
------------
capacity is in existence.
(f) Litigation. There are no pending or, to its knowledge, threatened
----------
investigations, suits or proceedings against it or affecting it or any of
its properties that, individually or in the aggregate, are likely
materially and adversely to affect the consummation of the transactions
contemplated by the Basic Agreements to which it is a party (as Owner
Trustee or in its individual capacity, as the case may be) or the
performance of its obligations thereunder.
20
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ARTICLE VI
Covenants
---------
SECTION 6.01. Covenants of Lessee. The Lessee covenants and agrees with
-------------------
each of the other parties hereto as follows:
(a) Further Assurances. The Lessee shall cause to be promptly and duly
------------------
taken, executed, acknowledged or delivered all such further acts, documents
and assurances as the Owner Participant or the Owner Trustee from time to
time may reasonably request in order to carry out the intent and purposes
of the Basic Agreements and the Overall Transaction. The Lessee shall
take, or cause to be taken, such action with respect to the recording,
filing, rerecording and refiling of any Basic Agreement, any memorandum
thereof and any financing or continuation statements, fixture filings or
other instruments as is necessary to maintain the right, title and interest
of the Owner Trustee in the Equipment and to preserve, protect and perfect
each of the other rights and interests created by the Trust Agreement and
by any other Basic Agreements in favor of the Owner Trustee and the Owner
Participant.
(b) Financial and Other Information. The Lessee shall deliver to the
-------------------------------
Owner Participant the following financial and other information:
(i) within 50 days after the end of each of the first three
quarterly periods of each fiscal year of the Lessee, a consolidated
balance sheet of the Lessee and its subsidiaries as of the close of such
period, together with the related consolidated statements of operations,
stockholder's equity and cash flows for such period and for the portion
of the Lessee's fiscal year then ended (setting forth in each case in
comparative form the figures for the corresponding portion of the
Lessee's previous fiscal year), all in reasonable detail and certified
(subject to normal year-end adjustments and the absence of footnotes) by
a Responsible Officer of the Lessee, provided that the delivery by the
Lessee to the Owner Participant of the Lessee's Quarterly Report on Form
10-Q for such quarterly period filed by the Lessee with the Securities
and Exchange Commission shall be deemed to satisfy the requirements of
this clause (i);
(ii) within 95 days after the close of each fiscal year of the
Lessee, a consolidated balance sheet of the Lessee and its subsidiaries
as of the close of such fiscal year, together with the related
21
<PAGE>
consolidated statements of operations, stockholder's equity and cash
flows for such fiscal year, accompanied by a report thereon by a
nationally recognized firm of independent public accountants provided
that the delivery by the Lessee to the Owner Participant of the Lessee's
Annual Report on Form 10-K for such fiscal year filed by the Lessee with
the Securities and Exchange Commission shall satisfy the requirements of
this clause (ii);
(iii) together with the delivery of the financial statements
referred to in subsection (ii) above, a certificate of the Lessee,
signed by a Responsible Officer of the Lessee, to the effect that the
signer has reviewed, or caused to be reviewed by persons under his
supervision, this Agreement, the Lease and such of the other Basic
Agreements as shall be necessary to make the determination required by
this subsection (iii), and that such review has not disclosed the
existence as at the date of such certificate of any condition or event
that constitutes a Default or an Event of Default or, if any such
condition or event exists, specifying the nature and period of existence
thereof and what action the Lessee has taken or is taking or proposes to
take with respect thereto;
(iv) together with the delivery of the financial statements
referred to in subsection (ii) above for every other fiscal year,
commencing with the delivery of such financial statements with respect
to the fiscal year ending September 30, 1998, an opinion of counsel
(which may be Lessee's in-house counsel) as to compliance by the Lessee
with its obligations under the first sentence of Article XVII of the
Lease and identifying any filings and recordings that will be necessary
for the Lessee to continue to comply with such obligations during the
two-year period following the date of such opinion;
(v) promptly upon any Responsible Officer of the Lessee becoming
aware of the existence thereof, a certificate of such officer stating
that a Default or an Event of Default has occurred and specifying the
nature and period of existence thereof and what action the Lessee has
taken or is taking or proposes to take with respect thereto;
(vi) promptly upon their becoming available, copies of all
regular and periodic reports filed by the Lessee with the Securities and
Exchange Commission;
22
<PAGE>
(vii) prompt written notice of any development or event which
could reasonably be expected to have a material adverse effect on the
financial condition, business, results of operations or properties of
the Lessee or on the ability the Lessee to perform its obligations under
the Basic Agreements; and
(viii) from time to time such other information as the Owner
Participant may reasonably request.
(c) Change in Chief Executive Office. The Lessee shall notify the
--------------------------------
Owner Trustee and the Owner Participant promptly after any change in its
name, its chief executive office and place of business or the office where
it keeps its records concerning its accounts.
(d) Merger, etc. The Lessee shall not merge, consolidate or liquidate
-----------
with or into, or sell or transfer all or substantially all its assets to,
another Person (the Person surviving any such merger or consolidation, or
the Person into which the Lessee is liquidated or which acquires all or
substantially all assets of the Lessee, being referred to as the
"Successor"), unless (i) the Successor (if not the Lessee) unconditionally
---------
and expressly assumes (pursuant to an agreement reasonably satisfactory in
form and substance to the Lessor) all the liabilities and obligations of
the Lessee under the Basic Agreements to which the Lessee is a party, (ii)
the Successor's net worth immediately after giving effect to such
transaction would not be less than $290 million, (iii) immediately after
giving effect to such transaction, no Event of Default or Specified Default
shall have occurred and be continuing, (iv) the Lessee shall have delivered
to the Owner Trustee and the Owner Participant a certificate signed by a
Responsible Officer of the Lessee and an opinion of outside counsel, each
stating that such merger, conveyance, transfer or lease and the assumption
agreement referred to above comply with this Section 6.01(d) and that all
conditions precedent herein provided for relating to such transaction have
been complied with, (v) if such Successor is not a corporation, limited
partnership, limited liability company or other legal entity organized in
any of the states of the United States of America or the District of
Columbia, the Lessee shall have delivered to the Owner Trustee and the
Owner Participant an opinion of outside counsel stating that the filings
and recordings listed in Schedule 3 hereto (as amended to reflect the
identity of such Successor, and together with any additional filings and
recordings made in connection with such merger, consolidation, liquidation
or sale) continue to be effective to establish and perfect the Owner
Trustee's right, title and interest in and to the Equipment and the
Equipment Site and under the Lease and the
23
<PAGE>
Ground Lease to the same extent as when such filings and recordings were
initially accomplished as contemplated by Section 6.01(l) hereof (but after
giving effect to all transactions permitted under the Lease and the other
Basic Agreements that shall have affected such right, title and interest),
and (vi) the Owner Trustee and the Owner Participant shall have received at
least 15 days' prior notice of the proposed merger, consolidation,
liquidation or sale, which notice shall specify the name and address of the
proposed Successor and the facts necessary to determine whether such
proposed Successor and such proposed merger, consolidation, liquidation or
sale will comply with the provisions of this Section 6.01(d). Upon the
consummation of any such transaction in accordance with this Section
6.01(d), the Successor (if not the Lessee) shall succeed to, and be
substituted for, and shall be entitled to exercise every right and power
of, the Lessee under the Basic Agreements to which the Lessee is a party
with the same effect as if such Successor had been named as the Lessee
therein, provided that notwithstanding such transaction, the Lessee shall
not be released from its obligations under the Basic Agreements without the
consent of the Owner Participant.
The Owner Trustee agrees that it shall, to the extent so requested
by the Lessee and at the Lessee's expense, use reasonable efforts to
cooperate with the Lessee in effecting any merger, consolidation,
liquidation or sale permitted by this Section 6.01(d); and, if requested by
the Lessee or any surviving or acquiring entity party to such transaction,
the Owner Trustee will give its written consent to any such transfer
complying with the provisions of this Section 6.01(d) promptly after a
request therefor.
(e) Compliance with Law. The Lessee shall comply in all material
-------------------
respects with all Applicable Laws applicable to it or by which the Lessee
or any of the Lessee's properties are bound or affected.
(f) Maintenance of Corporate Existence. The Lessee at all times shall
----------------------------------
preserve, renew and keep in full force and effect its corporate existence
and take all reasonable action to maintain all rights, privileges and
franchises necessary or desirable in the normal conduct of its business
except as otherwise permitted under Section 6.01(d).
(g) Environmental Matters. (i) The Lessee shall comply with, and shall
---------------------
make reasonable efforts to assure that its contractors operating at the
Facility or the Equipment comply with, all applicable EH&S Requirements of
Law applicable to the Equipment, the Equipment Site and the Facility and
shall obtain, comply with, maintain in force
24
<PAGE>
and timely renew, and maintain, any and all permits, licenses,
registrations, modifications, exemptions and other authorizations required
by applicable EH&S Requirements of Law. The Lessee shall not cause or
suffer or allow the causation of conditions at, on, or under the Equipment,
the Equipment Site or the Facility that could reasonably be concluded would
result in material liability under any EH&S Requirements of Law. The
Lessee shall conduct all investigations, studies, sampling and testing, and
all remedial, removal and other actions required under EH&S Requirements of
Law applicable to the Equipment, the Equipment Site and the Facility,
subject to Section 7.07 of the Lease. For the purposes of this Section
6.01(g), the term "applicable EH&S Requirements of Law" shall include all
current and subsequently enacted EH&S Requirements of Law.
(ii) The Lessee shall provide to the Owner Trustee and the Owner
Participant, annually on or before August 1, a copy of all publicly
disclosed documents filed in the preceding year (e.g., August 2 through
July 31) pursuant to federal securities law if requested by the Owner
Trustee or the Owner Participant; and copies of the following documents, to
the extent they relate to the Equipment or the Facility: (1) Toxic Release
Inventory Forms ("Forms R's") filed pursuant to EPCRA Section 313; (2)
spill reports filed pursuant to CERCLA or the Maine Hazardous Matter Law
and 801 DEP Regs. Section 4; and (3) notices of violation of EH&S
Requirements of Law, which Lessee reasonably believes may affect operation
of the Equipment or result in material liability related to contamination
of the Equipment Site, and responses thereto submitted by the Lessee.
(h) Letter of Credit. (i) On the Closing Date the Lessee shall
----------------
provide to Owner Trustee, and at all times on and after the Closing Date to
and including the date which is 30 days after the Basic Lease Term
Termination Date or earlier termination of the Lease, the Lessee shall
continue to provide to the Owner Trustee, an irrevocable, unconditional
letter of credit satisfying the requirements set forth in clause (ii) of
this Section (the "Letter of Credit").
----------------
(ii) The Letter of Credit (A) shall be in favor of the Owner
Trustee, (B) shall be issued by a banking institution domiciled in the
United States or a U.S. branch or agency (which agency shall be acceptable
to the Owner Participant) of a foreign banking institution, in each case
whose long-term senior unsecured debt obligations are rated "A" or better
by Standard & Poor's at the time the Letter of Credit is issued (the Person
issuing the Letter of Credit being herein referred to as the "Issuing
-------
Bank"), (C) shall
----
25
<PAGE>
be in a stated amount of $10,000,000 (or such higher stated amount as may
be required pursuant to clause (iii) of this Section 6.01(h)), (D) shall be
payable at an office of the Issuing Bank in New York, New York, (E) shall
have a stated expiration date of not earlier than 360 days after the date
of original issuance or any extension or renewal thereof, (F) shall permit
the beneficiary thereof to transfer its interest therein without the
consent of the Issuing Bank or the Lessee, and (G) shall be substantially
in the form of Exhibit A hereto or otherwise in form and substance
satisfactory to the Owner Trustee.
(iii) If at any time the long-term senior unsecured debt
obligations of the Issuing Bank shall cease to have an "A-" or better
rating by Standard & Poor's, the Lessee shall, promptly (and in any event
within 10 days) after the earlier of (A) the giving of notice by the Owner
Trustee or the Owner Participant to the Lessee of such cessation and (B) a
Responsible Officer of the Lessee obtaining actual knowledge of such
cessation, replace the Letter of Credit with a replacement Letter of Credit
satisfying the requirements set forth in clause (ii) of this Section. Upon
its receipt of such replacement Letter of Credit, the Owner Trustee shall
surrender the original Letter of Credit being replaced to the issuer of the
Letter of Credit being replaced. In addition, the Lessee shall, at least
10 Business Days prior to the stated expiration date of any Letter of
Credit, deliver to the Owner Trustee a replacement Letter of Credit, or a
renewal or extension of such expiring Letter of Credit, in either case
satisfying the requirements set forth in clause (ii) of this Section
6.01(h). If at any time Lessee's senior secured debt shall cease to have
both a "BB" or better rating by Standard & Poor's and a "Ba2" or better
rating by Moody's, the Letter of Credit shall be required to be in a stated
amount of $15,000,000, and the Lessee shall, promptly (and in any event
within 10 Business Days) after the earlier of (A) the giving of notice by
the Owner Trustee or the Owner Participant of such cessation and (B) a
responsible Officer of the Lessee obtaining actual knowledge of such
cessation, replace the Letter of Credit with an amended Letter of Credit or
a replacement Letter of Credit satisfying the requirements set forth in
clause (ii) of this Section 6.01(h).
(iv) At the time of issuance of any Letter of Credit, such Letter
of Credit shall be accompanied by an opinion of counsel to the Issuing Bank
as to due authorization, execution and delivery by and enforceability
against such Issuing Bank; provided, however, that such opinion of counsel
-------- -------
shall not be required in case of renewal
26
<PAGE>
or extension of an existing Letter of Credit with the issuer of such
existing Letter of Credit.
(v) The Lessee shall give the Owner Trustee and the Owner
Participant notice of the scheduled expiration of each Letter of Credit not
less than 45 days before its scheduled expiration date.
(vi) The Owner Trustee may make partial or full drawings under
the Letter of Credit (A) at any time an Event of Default has occurred and
is continuing, or (B) if the Letter of Credit is not extended or renewed,
or replaced by another Letter of Credit satisfying the requirements set
forth in clause (ii) of this Section 6.01(h), in each case in accordance
with clause (iii) of this Section 6.01(h) (each of the events or
circumstances referred to in clause (A) or (B) of this sentence being
referred to as a "Drawing Event"). If the proceeds of any drawing by the
--------------
Owner Trustee under the Letter of Credit exceed the amounts due and owing
by the Lessee under the Basic Agreements, such excess (together with any
interest or gain thereon) shall be held by the Owner Trustee as collateral
security for the Lessee's obligations under the Basic Agreements and may be
applied by the Owner Trustee to satisfy the obligations of the Lessee under
the Basic Agreements. If the amount of such proceeds held by the Owner
Trustee exceeds $100,000, such proceeds shall be invested from time to time
in Permitted Investments as directed in writing by Lessee (or, in the
absence of a timely direction, in Permitted Investments specified in clause
(i), (ii) or (viii) of the definition of the term "Permitted Investments"),
and at the expense and risk of the Lessee. Any income or gain realized as a
result of any such investment shall be applied to make up any losses
resulting from any such investment to the extent such losses shall not have
been recovered from Lessee, as provided below in this clause (vi), and any
balance shall be held and applied as above provided. Upon incurring any
losses from any such investment, which losses are not made up from income
or gain as aforesaid, the Owner Trustee shall promptly notify the Lessee
thereof and, upon receipt of such notice, the Lessee shall promptly pay to
the Owner Trustee the amount of such loss. Neither the Owner Trustee nor
the Owner Participant shall have any liability for any loss resulting from
any such investment. Any such investment may be sold (without regard to
maturity date) by the Owner Trustee whenever necessary to make any payment
of Rent required by any Basic Agreement.
(vii) Notwithstanding the foregoing, the Lessee shall not be
required to provide the Letter of Credit hereunder if and so long as all of
the following are satisfied: (A) no Default or Event of Default shall have
27
<PAGE>
occurred and be continuing; and (B) Lessee's senior secured debt shall be
rated both "BBB" or better by Standard & Poor's and "Baa2" or better by
Moody's. It is understood and agreed that if the Lessee does not have a
rated senior secured debt for the purposes of this provision, a private
rating may be obtained from Standard and Poor's and Moody's, and if and so
long as such private ratings shall be at least the equivalent of the
ratings set forth in clause (B) of the preceding sentence, then clause (B)
of the preceding sentence shall be deemed to be satisfied.
(i) Prepayment of Term Loan. The Lessee shall use a portion of the
-----------------------
Purchase Price to prepay an amount of the Term Loan equal to the greater of
(A) $100,000,000 and (B) two-thirds of the Purchase Price.
(j) Limitation on Senior Indebtedness. (i) The Lessee shall not
---------------------------------
create, incur, assume or suffer to exist any additional Senior Indebtedness
in connection with a merger, consolidation or acquisition, or in connection
with any purchase, repayment or redemption of, or payment of any dividends
or distributions on, Junior Securities (other than any redemption prior to
the third anniversary of the Closing Date of any of the Lessee's 14% Series
B Senior Exchangeable Preferred Stock issued and outstanding on the Closing
Date (and any of such Preferred Stock issued as a pay-in-kind dividend
thereon in accordance with the terms of such Preferred Stock as in effect
on the Closing Date), in which event clause (ii) of this Section 6.01(j)
shall be applicable to any such redemption), except if:
(A) immediately after giving effect to such transaction, the
senior secured debt of the Lessee, or its Successor, as the case may
be, is rated both "BBB-" or better by Standard & Poor's and "Baa3" or
better by Moody's; or
(B) the Lessee shall have complied with clause (iv) of this
Section 6.01(j) and, immediately after giving effect to such
transaction, both (I) the Capitalization Ratio of the Lessee, or its
Successor, as the case may be, is not greater than 0.6 to 1.0, and
(II) the Interest Coverage Ratio as of the date of such transaction is
not less than 1.5 to 1.0.
(ii) The Lessee shall not create, incur, assume or suffer to exist
any additional Senior Indebtedness in connection with any redemption prior
to the third anniversary of the Closing Date of the Lessee's 14% Series B
Senior Exchangeable Preferred Stock (and any of such Preferred Stock issued
as a pay-in-kind dividend thereon in accordance with the terms of such
Preferred Stock as in
28
<PAGE>
effect on the Closing Date) issued and outstanding on the Closing Date,
except if:
(A) immediately after giving effect to any such redemption, the
senior secured debt of the Lessee is rated both "BBB-" or better by
Standard & Poor's and "Baa3" or better by Moody's; or
(B) the Lessee shall have complied with clause (iv) of this
Section 6.01(j) and both (I) immediately prior to and without giving
effect to any such redemption, the Capitalization Ratio of the Lessee
is not greater than 0.6 to 1.0, and (II) immediately after giving
effect to any such redemption, the Interest Coverage Ratio as of the
date of such redemption is not less than 1.5 to 1.0.
(iii) It is understood that "additional Senior Indebtedness" as
used in this Section 6.01(j) shall not include additional Senior
Indebtedness incurred as a revolving credit loan under the Credit
Agreement, or under any replacement revolving credit facility of the
Lessee, in each case up to the maximum principal amount of $250 million.
(iv) At least 20 days prior to the consummation of any transaction
referred to clause (i) or (ii) of this Section 6.01(j), the Lessee shall
provide to the Owner Participant notice of the proposed transaction,
showing in reasonable detail the calculation of the Consolidated EBITDA and
the projection of the Consolidated Cash Interest Expense referred to in the
definition of Interest Coverage Ratio. The Lessee shall also provide such
other information as the Owner Participant may reasonably request to
support such calculation and projection. At least three Business Days
prior to the consummation of such transaction, the Lessee shall provide to
the Owner Participant a certificate signed by a Responsible Officer of the
Lessee certifying (A) that such transaction complies with this Section
6.01(j), which certificate shall set forth in reasonable detail the
calculations and projection required to establish that such transaction
complies with this Section 6.01(j) and (B) that such projection has been
prepared using assumptions believed in good faith by management of the
Lessee to be reasonable at the time made and that such Responsible Officer
has no reason to believe that such projection is incorrect or misleading in
any material respect. Notwithstanding the foregoing, the Lessee shall not
be required to comply with the preceding provisions of this clause (iv) if
at the time of consummation of such transaction the senior secured debt of
the Lessee or its Successor, as applicable, shall have
29
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the ratings referred to in clause (i)(A) or (ii)(A) of this Section
6.01(j), as applicable.
(k) Inspection. (i) At such times and as often as may be reasonably
----------
requested, the Owner Trustee and the Owner Participant and their respective
authorized representatives may inspect the Equipment, any Part thereof, the
Equipment Site and the books and records of Lessee or to which Lessee has
access relative thereto, and may make copies and extracts therefrom, at
their expense and subject to appropriate safety restrictions and
precautions; provided, however, that, unless an Event of Default has
-------- -------
occurred and is continuing, the Owner Trustee and the Owner Participant
shall conduct any such inspection during the Lessee's normal business hours
and so as not to interfere materially with the operation of the Equipment
or the conduct by the Lessee of its business, shall provide the Lessee with
reasonable prior notice thereof and shall be limited to two inspections of
the Equipment during any consecutive twelve-month period; and provided
--------
further, however, that during the continuance of an Event of Default, the
------- -------
Lessee shall pay the reasonable out-of-pocket expenses incurred by the
Owner Trustee or the Owner Participant in exercising its inspection rights.
Neither the Owner Trustee nor the Owner Participant shall have any duty to
make any such inspection or shall incur any liability by reason of not
making same.
(ii) During the Lease Term, at such times and as often as may be
reasonably requested, the Lessee will permit the Owner Trustee and the
Owner Participant and their respective authorized representatives to
discuss the Lessee's financial affairs with senior officers of the Lessee.
(l) Filings and Recordings. As promptly as possible after the Closing
----------------------
Date, but in any event not later than five Business Days after the Closing
Date, (i) all filings and recordings specified in Schedule 3 hereto shall
have been duly filed in the respective places specified in Schedule 3
hereto (ii) and UCC financing statement releases with respect to the
Equipment shall have been duly filed with respect to the financing
statements specified in Schedule 3A hereto.
SECTION 6.02. Covenants of Owner Participant. The Owner Participant
------------------------------
covenants and agrees with each of the other parties hereto as follows:
(a) No Lessor Liens. The Owner Participant shall not, directly or
---------------
indirectly, create, incur, assume or suffer to exist, and, at its expense
(without any right of indemnity under this Agreement or any other Basic
Agreement), shall
30
<PAGE>
promptly take such action as may be necessary duly to discharge, any Lessor
Lien attributable to it. For all purposes of this Agreement and the other
Basic Agreements, any Lessor Lien relating to or arising out of the
nonpayment of any Tax imposed on or measured by the net income of the Trust
Estate shall be attributed to the Owner Participant.
(b) Amendments of Trust Agreement; Appointment of Successor Owner
-------------------------------------------------------------
Trustee. The Owner Participant agrees that, prior to the expiration or
-------
termination of the Lease Term, the Owner Participant shall not (i)
terminate, or consent to the termination of, or, in any way materially
adverse to the Lessee or that would increase Lessee's liabilities or
obligations under the Basic Agreements (unless the Owner Participant agrees
to indemnify Lessee for such increased liabilities or obligations pursuant
to an agreement in form and substance reasonably satisfactory to the
Lessee), amend or supplement or consent to any such amendment of or
supplement to, the Trust Agreement without the prior written consent of the
Lessee, which consent shall not unreasonably be withheld, or (ii) so long
as no Event of Default shall have occurred and be continuing, appoint a
successor Owner Trustee under the Trust Agreement that has not been
approved by the Lessee (such approval not to be unreasonably withheld).
(c) Owner Participant's Obligations under Section 3.03 of the Lease.
---------------------------------------------------------------
The Owner Participant shall perform the obligations of the Owner
Participant under Section 3.03 of the Lease.
(d) Instructions to Owner Trustee. The Owner Participant will not
-----------------------------
instruct the Owner Trustee to take any action in violation of the express
covenants and agreements of the Owner Trustee to the Lessee in the Basic
Agreements.
SECTION 6.03. Covenants of Owner Trustee. The Owner Trustee in its
--------------------------
individual capacity and, to the extent set forth below, as Owner Trustee,
covenants and agrees with each of the other parties hereto as follows:
(a) No Lessor Liens. The Owner Trustee agrees that it will not (as
---------------
Owner Trustee or in its individual capacity), directly or indirectly,
create, incur, assume or suffer to exist, and, at its expense (without any
right of indemnity under this Agreement, the Trust Agreement or any other
Basic Agreement), shall promptly take such action as may be necessary duly
to discharge any Lessor Lien attributable to it or him.
(b) Transfer of Owner Trustee's Interest. The Owner Trustee agrees
------------------------------------
that, prior to the expiration or termination
31
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of the Lease Term, the Owner Trustee shall not assign, convey, pledge,
mortgage or otherwise transfer or encumber all or any part of its right,
title and interest in and to the Equipment, this Agreement and the other
Basic Agreements except (i) as expressly provided in the Trust Agreement or
required by the terms of the Basic Agreements, (ii) with the prior written
consent of the Lessee, which consent shall not be unreasonably withheld as
to a like-kind exchange, or (iii) as provided in Section 10.02; provided
--------
that the foregoing restrictions shall not apply after the expiration or
termination of the Lease Term.
(c) Successor Mortgagee of Equipment Site. The Owner Trustee agrees
-------------------------------------
that if, prior to the expiration or termination of the Lease, the Lessee
grants a mortgage Lien on the Lessee's fee title to the Equipment Site to
secure Senior Indebtedness which is a Permitted Lien described in clause
(viii) of the definition thereof, promptly after request by the Lessee and
at the Lessee's expense, the Owner Trustee will enter into agreements with
the holder of such Lien substantially identical to the Consent and
Recognition Agreement and, to the extent relevant, the Release and Non-
Disturbance Agreement, so long as in each case the Lessee and any other
appropriate Persons also enter into such agreements.
ARTICLE VII
General Indemnity
-----------------
SECTION 7.01. General Indemnity. The Lessee hereby assumes
-----------------
liability for, and does hereby agree (whether or not any of the transactions
contemplated hereby shall be consummated) to indemnify, protect, save and hold
harmless and keep whole, on an After-Tax Basis, each Indemnified Person from
and against, any and all Expenses that may be imposed on, incurred by or
asserted against such Indemnified Person in any way relating to or arising out
of or resulting from: (a) the Equipment or the Equipment Site, or any part
thereof or interest therein; or (b) any of the Basic Agreements or the Overall
Transaction; or (c) the manufacture, construction, financing, refinancing,
purchase, acquisition, preparation, installation, acceptance, possession,
rejection, ownership, delivery, nondelivery, transportation, use, assembly,
operation, leasing, subleasing, condition, maintenance, repair, modification,
sale, storage, return, dismantling, abandonment, repossession, redelivery or
other disposition of, or the imposition of any Lien other than Lessor Liens (or
incurrence of any liability to refund or pay over any amount as a result of any
such Lien) on, the Equipment, the Equipment Site, the Mill or the Mill Site, or
any part thereof or interest therein, including, without limitation, (i) any
claim or penalty arising
32
<PAGE>
out of negligence, violations of or the imposition of liability with or without
fault under Applicable Laws (including, without limitation, any EH&S
Requirements of Law), or in tort (by application of the doctrine of strict
liability or otherwise) (provided, however, that no indemnification will be
-------- -------
provided for any such Expenses referred to in this clause (i) incurred as the
result of any action taken by an Indemnified Person during any period during
which such Indemnified Person is operating the Equipment), (ii) latent or other
defects, whether or not discoverable by the Owner Participant, the Owner
Trustee, the Lessee or any other Person, (iii) loss or damage to any property or
the environment (including, without limitation, all expenses associated with
remediation, response, removal, corrective action, clean-up, remedial action,
treatment, compliance, restoration, abatement, containment, monitoring,
sampling, investigation, the protection of wildlife and aquatic and vegetation,
the interference with or contamination of any wetland or body of water or
aquifer, and any relevant mitigative action under any EH&S Requirements of Law
relating to the Equipment, the Equipment Site or the Facility and any expenses
associated with the existence or presence of any Hazardous Material at, in or
under the Equipment, the Equipment Site or the Facility, or any part thereof, or
the release, emission or discharge of any Hazardous Material into the
environment), or damages to or destruction of any natural resources, or death
of, illness of, or injury to any Person (provided, however, that no
-------- -------
indemnification will be provided for any such Expenses referred to in this
clause (iii) incurred as the result of any action taken by an Indemnified Person
during any period during which such Indemnified Person is operating the
Equipment), and (iv) any claim for patent, trademark or copyright infringement;
or (d) any breach of or failure to perform or observe, or other noncompliance
with, any covenant, condition or agreement to be performed or observed by the
Lessee under any of the Basic Agreements, or the inaccuracy of any
representation or warranty of the Lessee under any of the Basic Agreements or in
any certificate delivered in connection therewith or pursuant thereto; provided,
--------
however, that the foregoing indemnity shall not extend to any Expense imposed
- -------
on, incurred by or asserted against any Indemnified Person to the extent the
same arises out of or results from one or more of the following circumstances:
(1) the incorrectness of any representation or warranty of such
Indemnified Person contained in or made pursuant to this Agreement or any
of the other Basic Agreements or any other document delivered in connection
therewith;
(2) the breach by such Indemnified Person of, or failure of such
Indemnified Person to perform or observe, any covenant, agreement or
condition on its part required to
33
<PAGE>
be performed or observed in this Agreement or any of the other Basic
Agreements;
(3) the wilful misconduct or gross negligence of such Indemnified
Person or any of its Affiliates or any of their respective successors,
assigns, officers, directors, employees or agents (other than wilful
misconduct or gross negligence imputed to such Indemnified Person or any
such Affiliate, successor, assign, officer, director, employee or agent by
reason of its interest in the Equipment or any part thereof or by reason of
operation of law as a result of its interest in the Equipment or any part
thereof or its participation in the Overall Transaction);
(4) a disposition or offer (voluntary or involuntary) by the Owner
Trustee or the Owner Participant of all or any part of its interest in the
Trust Estate, the Equipment, the Lease or any of the other properties,
rights and interests constituting the Trust Estate, including any
disposition or offer by the Owner Participant contemplated by Article X of
this Agreement, but excluding any disposition or offer (A) requested by the
Lessee, (B) during the continuance of an Event of Default, (C) involving a
transfer of the Trust Estate to a successor trustee or co-trustee in
accordance with the Trust Agreement or (D) contemplated or required by the
Basic Agreements (but excluding from this clause (D) any disposition or
offer contemplated by Article X of this Agreement);
(5) any Tax, whether or not the Lessee is required to indemnify for
such Tax pursuant to Article VIII or the Tax Indemnity Agreement (it being
understood that Article VIII, the Tax Indemnity Agreement and provisions of
the Basic Agreements requiring payments to be made on an After-Tax Basis
exclusively provide for the Lessee's liability with respect to Taxes and
payments or indemnities with respect thereto);
(6) with respect to the Equipment, acts or events that occur after
the Lessee returns the Equipment to the Lessor upon the expiration or
termination of the Lease, or after the recovery of possession by the Lessor
of possession of the Equipment pursuant to the Lease, unless fairly
attributable to the period prior to such return or recovery or fairly
attributable to any noncompliance with Article XVI of the Lease in
connection with such return or recovery;
(7) a failure on the part of the Owner Trustee to distribute in
accordance with the Trust Agreement any amounts received and distributable
by it thereunder;
34
<PAGE>
(8) Expenses incurred by any Indemnified Person in giving or
withholding of any amendment, modification, supplement, waiver,
termination, approval or consent with respect to this Agreement or any of
the other Basic Agreements that is requested by the Owner Participant or
the Owner Trustee and not expressly contemplated by the Basic Agreements;
and
(9) any Expense that is (x) included in Transaction Expenses and for
which the Owner Participant is responsible pursuant to Article IX, or (y)
incurred by any Indemnified Person (or any Affiliate of such Indemnified
Person or any successor, assign, officer, director, employee or agent of
such Indemnified Person or any such Affiliate) to the extent that such
Indemnified Person shall have expressly agreed in this Agreement or any
other Basic Agreement or otherwise in writing to bear such Expense without
right of reimbursement or indemnity under this Agreement or any other Basic
Agreement.
Without limitation of the foregoing, whether or not any of the
transactions contemplated hereby are consummated, except to the extent that any
of the items hereinafter described are Transaction Expenses that are the
responsibility of the Owner Trustee pursuant to Article IX, the Lessee shall
pay: (a) the reasonable fees, expenses and disbursements of the Owner Trustee,
as trustee under the Trust Agreement, with respect to the administration of the
Trust Estate during the Lease Term, including the reasonable fees and expenses
of its counsel; and (b) all the reasonable costs and expenses (including the
reasonable fees and expenses of counsel but not including costs and expenses in
respect of overhead or internal administration) incurred by the Owner
Participant and the Owner Trustee in connection with (i) the entering into or
giving or withholding of any proposed amendment, modification, supplement,
waiver, termination, approval or consent with respect to any Basic Agreement
after the Closing Date (except those requested by the Owner Participant or the
Owner Trustee and not expressly contemplated by the Basic Agreements, other than
those requested in connection with a transfer by the Owner Participant of any of
its right, title or interest in and to the Trust Estate in accordance with
Section 10.01 hereof (except during the continuance of an Event of Default) or
the exercise by the Owner Trustee of the Leverage Option in accordance with
Section 10.02 hereof), (ii) any Event of Loss, (iii) any Event of Default or
(iv) any transfer of the Letter of Credit.
If the Lessee shall obtain knowledge of any Expense indemnified against
under this Section 7.01, the Lessee shall give prompt notice thereof to the
appropriate Indemnified Person or Persons, and if any Indemnified Person shall
obtain any such knowledge, such Indemnified Person shall give prompt notice
35
<PAGE>
thereof to the Lessee (but failure to so notify shall not affect any right
hereunder; provided that nothing herein shall affect the Lessee's right to bring
--------
a separate action for damages to the extent the Lessee is materially prejudiced
as a result of such failure). With respect to any amount that the Lessee is
requested by an Indemnified Person to pay by reason of this Section 7.01, such
Indemnified Person shall, if so requested by the Lessee and prior to any
payment, submit such additional information to the Lessee as the Lessee may
reasonably request properly to substantiate the requested payment.
In case any action, suit or proceeding shall be commenced (or any
written threat or assertion of a claim is received) that could give rise to an
Expense indemnified against under this Section 7.01, the affected Indemnified
Person shall notify the Lessee thereof (but the failure to do so shall not
relieve the Lessee of its obligation to indemnify such Indemnified Person;
provided that nothing herein shall affect the Lessee's right to bring a separate
- --------
action for damages to the extent that the Lessee is prejudiced as a result of
such failure), and the Lessee shall be entitled, at its expense, acting through
counsel selected by the Lessee and reasonably acceptable to such Indemnified
Person, to participate in, and, to the extent that the Lessee desires, to assume
and control the defense thereof; provided, however, that the Lessee shall not be
-------- -------
entitled to assume and control the defense of any such action, suit or
proceeding (i) if an Event of Default or Specified Default has occurred and is
continuing, (ii) unless the Lessee has acknowledged in writing to the affected
Indemnified Person its obligation to indemnify such Indemnified Person for any
Expense resulting from a settlement of or adverse determination of such action,
suit or proceeding, (iii) if the affected Indemnified Person notifies the Lessee
that it has determined, on advice of counsel, that defense of such action, suit
or proceeding by the Lessee would involve a conflict of interest between the
Lessee and such Indemnified Person, (iv) if such action, suit or proceeding
involves a material risk of the sale, forfeiture or loss of the Equipment or any
part thereof or interest therein, (v) if such action, suit or proceeding entails
any risk of criminal liability of the affected Indemnified Person or (vi) if
there is a reasonable likelihood that such action, suit or proceeding will be
adversely determined and the Lessee has not demonstrated to the reasonable
satisfaction of the affected Indemnified Person its ability to pay any Expense
arising as a result thereof (taking into consideration any applicable insurance
coverage). In the event that the Lessee shall have assumed control of the
defense of any action, suit or proceeding (or other claim) as provided above,
the Indemnified Person shall cooperate with the Lessee in such defense and shall
be entitled, at its expense, acting through counsel reasonably acceptable to the
Lessee, to participate in any such action, suit or proceeding. In any event, the
Lessee
36
<PAGE>
shall not have any right to settle any such action, suit or proceeding (or other
claim) in any manner or on any basis that involves the imposition of any
liability or obligation on any Indemnified Person (other than a monetary
liability that is fully discharged by the Lessee) without the prior written
consent of such Indemnified Person. Nothing contained in this Article VII shall
be deemed to require an Indemnified Person to contest any Expense or to assume
responsibility for, or control of, any action, suit or proceeding with respect
thereto.
Each Indemnified Person shall at the expense of the Lessee use its good
faith efforts to supply the Lessee with such information and documents
reasonably requested by the Lessee as are necessary or advisable for the Lessee
to participate in or defend any action, suit or proceeding (or other claim) to
the extent permitted by this Section 7.01. If any Indemnified Person enters
into any settlement or other compromise with respect to any Expense without the
prior written consent of the Lessee (which consent shall not be unreasonably
withheld, and shall not be required if an Event of Default or Specified Default
has occurred and is continuing at the time of such settlement or compromise), or
does not permit the Lessee to participate in or defend an action, suit or
proceeding (or other claim) that the Lessee is entitled to participate in or
defend hereunder, then such Indemnified Person shall be deemed to have waived
its right to be indemnified under this Section 7.01 with respect thereto.
Upon payment of any Expense by the Lessee pursuant to this Section 7.01
to or on behalf of an Indemnified Person, the Lessee, without any further act,
shall be subrogated to any and all claims that such Indemnified Person may have
relating thereto (other than claims in respect of insurance policies maintained
by such Indemnified Person at its own expense and other than claims against the
Owner Participant under the Trust Agreement). Such Indemnified Person shall
cooperate with the Lessee and give such further assurances as are necessary or
advisable to enable the Lessee to pursue such claims, at the Lessee's expense
(but not in an amount in excess of the amount Lessee has paid to such
Indemnified Person in respect of such Expense).
So long as no Event of Default or Specified Default has occurred and is
continuing, if an Indemnified Person obtains a refund of all or any part of any
Expense paid, reimbursed or otherwise indemnified by the Lessee hereunder, such
Indemnified Person shall pay to the Lessee the amount so refunded, including any
interest thereon actually received from the party from whom such refund was
obtained, net of any Taxes payable by such Indemnified Person in respect of the
receipt or accrual of such refund or interest (but not an amount in excess of
the amount Lessee has paid to such Indemnified Person in respect of such
Expense). If an Event of Default or Specified Default has occurred and is
continuing, any such amount shall be held by such
37
<PAGE>
Indemnified Person as security for the obligations of the Lessee under the Basic
Agreements and may be applied against Lessee's obligations under the Basic
Agreements, and, at such time thereafter as no Event of Default or Specified
Default shall be continuing, such amount, to the extent not theretofore applied
against such obligations, shall be paid promptly to the Lessee.
The Lessee shall be obligated (as a primary obligor) under this Section
irrespective of whether any Indemnified Person indemnified hereunder is also
indemnified with respect to the same matter under any other agreement by any
other Person, and the Indemnified Person seeking to enforce the indemnification
may proceed directly against the Lessee under this Section without first
resorting to any such other rights of indemnification.
Nothing contained in this Article VII shall be construed to confer any
right upon, or to be enforceable by, any Person other than an Indemnified
Person.
SECTION 7.02. Payments and Survival. All amounts payable by Lessee
---------------------
pursuant to this Article VII shall be payable directly to the Persons entitled
to payment or indemnification. The provisions of this Article VII shall survive
the expiration or termination of this Agreement, the Lease and the other Basic
Agreements.
ARTICLE VIII
General Tax Indemnity
---------------------
SECTION 8.01. Indemnity. Except as provided in Section 8.02 of this
---------
Agreement, the Lessee shall pay, and on written demand shall indemnify and hold
each Indemnified Person harmless from and against, (A) any and all Taxes imposed
on or with respect to any Indemnified Person, the Lessee, the Equipment, the
Mill, the Mill Site, the Equipment Site, the ground leasehold estate, or any
portion thereof or interest therein by the State or Maine or any local
government or taxing authority thereof (or by any other jurisdiction in which
all or any portion of the Equipment is located), and (B) any U.S. federal excise
or similar Tax, in either case in connection with or in any way relating to (a)
the financing, refinancing, purchase, acquisition, acceptance, rejection,
delivery, nondelivery, transport, ownership, assembly, possession, repossession,
operation, use, condition, maintenance, repair, sale, dismantling, return,
abandonment, preparation, installation, storage, replacement, redelivery,
leasing, subleasing, modification, transfer of title, rebuilding, rental,
importation, exportation or other application or disposition of, or the
imposition of any Lien (or incurrence of any liability to refund or pay over any
amount as a result of any Lien) on, the Equipment, or any portion thereof or
interest
38
<PAGE>
therein, (b) the payment of Rent or the receipts or earnings arising from or
received with respect to the Equipment, or any portion thereof or any interest
therein or any applications or dispositions thereof, (c) any other amount paid
or payable pursuant to any Basic Agreements, (d) the Equipment, or any portion
thereof or any interest therein or the applicability of the Lease to the
Equipment or any portion thereof or any interest therein, (e) all or any of the
Basic Agreements, any other documents contemplated thereby, and amendments and
supplements thereto, and (f) otherwise with respect to or in connection with the
Overall Transaction.
The provisions of this Section 8.01 shall survive the expiration or
termination of this Participation Agreement, the Lease and the other Basic
Agreements.
SECTION 8.02. Exclusions from General Tax Indemnity. Section 8.01
-------------------------------------
shall not apply to:
(a) any Tax (i) based on, or measured by, the net income, net
receipts, capital or net worth of any Indemnified Person or (ii) in the
nature of a minimum tax or a tax on or measured by items of tax preference
(in each case other than in the nature of sales, use, value added or rental
taxes); provided, however, that the provisions of this paragraph (a) shall
-------- ------
not apply to any Tax required to be taken into account in making any
payment on an "After-Tax Basis";
(b) any Tax which is based on, or measured by, the fees or other
compensation received by the Owner Trustee for acting as trustee under the
Trust Agreement;
(c) Taxes upon any voluntary or involuntary transfer by an
Indemnified Person of any interest in the Equipment, or any interest in an
Indemnified Person, or any interest arising under the Basic Agreements,
other than (A) as expressly contemplated by the Lease, this Agreement or
any other Basic Agreement (including any such disposition arising from the
exercise of remedies or in connection with an Event of Loss or the exercise
by the Lessee of any purchase option under the Lease, but excluding any
transfer pursuant to Article X hereof), or (B) while an Event of Default
shall have occurred and be continuing;
(d) any Tax that is imposed on any Indemnified Person as a result
of such Indemnified Person's gross negligence or wilful misconduct (other
than gross negligence or wilful misconduct imputed to such Indemnified
Person solely by reason of its interest in the Equipment);
39
<PAGE>
(e) any interest, penalties or additions to tax resulting from
failure of any Indemnified Person to file a return that is proper and
timely, unless such failure (i) results from the transactions contemplated
by the Basic Agreements in circumstances where the Lessee did not give
timely notice to such Indemnified Person of such filing requirement that
would have permitted a timely filing of such (ii) results from the failure
of the Lessee to supply information in its possession that was requested by
such Indemnified Person and not in its possession;
(f) any Tax related to the Equipment, ground leasehold estate,
support facilities and support services, including without limitation, all
services and materials provided by the Lessee under the Ground Lease,
arising from any act, event, ownership position or omission occurring after
the Separation Date; and
(g) any Tax which is being contested in accordance with the
provisions of Section 8.04 of this Agreement during the pendency of such
contest so long as the Owner Trustee shall be receiving all amounts of Rent
when payable without reduction by reason of such Tax.
SECTION 8.03. Calculation of General Tax Indemnity Payments. (a)
---------------------------------------------
Any payment which the Lessee shall be required to make to or for the account of
any Indemnified Person with respect to any Tax which is subject to
indemnification under this Article VIII shall be made on an After-Tax Basis.
(b) If an Indemnified Person (i) shall obtain a repayment of any
Tax paid by the Lessee pursuant to this Article VIII, or (ii) shall realize a
reduction in any Tax not indemnified under this Article VIII by reason of the
payment or accrual of any Tax or other amount for which the Lessee has made,
pursuant to any Basic Agreement, an indemnity payment or a payment calculated on
an After-Tax Basis (which reduction in Tax was not taken into account in
calculating the amount of the payment made by the Lessee), such Indemnified
Person shall, so long as no Default or Event of Default shall have occurred and
be continuing, promptly pay to the Lessee an amount which, when decreased by the
net Tax saving or increased by the net Tax detriment, as the case may be, to
such Indemnified Person of the receipt and payment to the Lessee of such
repayment of or reduction in Tax, shall be equal to the amount of such repayment
of or reduction in Tax, together with an amount which, when reduced by the net
Tax saving or increased by the net Tax detriment, as the case may be, to such
Indemnified Person of the receipt and payment to the Lessee of such interest,
shall equal any interest (other than interest for the Period, if any, after such
Tax was paid by such Indemnified Person until such Tax was paid or reimbursed by
the Lessee) received by such Indemnified
40
<PAGE>
Person on account of such repayment or reduction; provided, however, that any
-------- -------
amount so paid by such Indemnified Person with respect to such repayment or
reduction in Tax (not including the amount of such interest on account of such
repayment or reduction) shall not exceed the amount previously paid by the
Lessee in respect of the Tax or other amount with respect to which such
repayment or reduction was received. Any subsequent loss or disallowance of any
Tax repayment or reduction for which Tax repayment or reduction such Indemnified
Person has made a payment to the Lessee pursuant to this paragraph shall be an
indemnified Tax hereunder without regard to Section 8.02.
SECTION 8.04. General Tax Indemnity -- Contests. (a) If a written
---------------------------------
claim shall be made against any Indemnified Person for any Tax for which the
Lessee may be obligated to indemnify pursuant to this Article VIII or if any
Indemnified Person shall determine that any Tax as to which the Lessee shall
have any indemnity obligation pursuant to this Article VIII shall be payable,
such Indemnified Person shall notify the Lessee promptly of such claim upon
becoming aware of the same (but the failure to so notify the Lessee shall not
affect the Lessee's obligations hereunder except to the extent such failure
precludes the Lessee's ability to contest such claim or Tax or increases any
applicable fine or penalty). If the Lessee shall so request within 30 days
after receipt of such notice, such Indemnified Person shall in good faith and at
the Lessee's expense contest the imposition of such Tax (including taking such
appeals as the Lessee shall request); provided, however, that such Indemnified
-------- -------
Person may in its sole discretion select the forum for such contest and
determine whether any such contest shall be by (i) resisting payment of such
Tax, (ii) paying such Tax under protest or (iii) paying such Tax and seeking a
refund thereof; provided further, however, that at such Indemnified Person's
-------- ------- -------
option, such contest required to be conducted by such Indemnified Person shall
be conducted by the Lessee in the name of such Indemnified Person (subject to
the preceding proviso).
(b) In no event shall such Indemnified Person be required to contest
the imposition of any Tax for which the Lessee is obligated to indemnify
pursuant to this Article VIII unless: (i) the Lessee shall have agreed to pay
such Indemnified Person on demand and on an After-Tax Basis all reasonable costs
and expenses that such Indemnified Person may incur in connection with
contesting such claim (including, without limitation, all costs, expenses,
losses, reasonable legal and accounting fees, disbursements, penalties, interest
and additions to tax); (ii) such Indemnified Person shall have determined that
the action to be taken will not result in any danger of sale, forfeiture or loss
of, or the creation of any Lien (except if the Lessee shall have adequately
bonded such Lien or otherwise made provision to protect the interests of such
Indemnified Person in a manner reasonably satisfactory to such Indemnified
Person) on the
41
<PAGE>
Equipment, or any portion thereof or any interest therein; (iii) if such contest
shall be conducted in a manner requiring the payment of the claim, the Lessee
shall have advanced the amount required at no after-tax cost to any Indemnified
Person; (iv) no Default or Event of Default shall have occurred and be
continuing, unless the Lessee shall have provided security reasonably acceptable
to the Owner Participant for the Lessee's obligation to pay any amount that
would become payable if the contest were unsuccessful; and (v) prior to the
commencement of any judicial proceedings (A) independent tax counsel for the
Lessee shall have provided an opinion that there is a reasonable basis for such
contest and (B) the Lessee shall have acknowledged its indemnity obligation.
(c) Notwithstanding anything contained in this Section 8.04 to the
contrary, no Indemnified Person shall be required to contest any claim (A) in
the U.S. Supreme Court or (B) if the subject matter thereof shall be of a
continuing or recurring nature and shall have previously been decided adversely
pursuant to the contest provisions of this Section 8.04 unless there shall have
been a change in the law enacted, promulgated or effective after such claim
shall have been so previously decided, and such Indemnified Person shall have
received an opinion of tax counsel to the Lessee, furnished at the Lessee's sole
expense, to the effect that as a result of such change there is a reasonable
basis for such contest.
(d) Notwithstanding anything contained in this Section 8.04, an
Indemnified Person shall not be required to contest or continue to contest the
imposition of any Tax for which the Lessee is obligated to indemnify pursuant to
this Article VIII if such Indemnified Person (i) shall waive in writing its
rights to indemnification under this Article VIII with respect to such Tax (and
any claim made by any taxing authority with respect to other taxable periods
that is determined by the resolution of such claim) and (ii) shall pay to the
Lessee any amount previously paid or advanced by the Lessee pursuant to this
Article VIII with respect to such Tax or the contest of such Tax other than the
expenses of the conduct of such contest.
SECTION 8.05. General Tax Indemnity -- Reports. If any report,
--------------------------------
return or statement is required to be filed with respect to any Tax that is
subject to indemnification under this Article VIII, the Lessee shall timely file
the same in such manner as will show the ownership of the Equipment in the Owner
Trustee (and send a copy of such report, return or statement to the Owner
Participant and Owner Trustee), or, where not so permitted or where the
necessary information is not within the control of the Lessee, shall timely
notify the Owner Participant and the Owner Trustee of such requirement of which
it is aware or should be aware and prepare and deliver such report, return or
statement to the Owner Participant and the Owner Trustee and within a
42
<PAGE>
reasonable time prior to the time such report, return or statement is to be
filed. Each Indemnified Person, on behalf of itself and each Indemnified Person
claiming through it, agrees for the benefit of the Lessee that, in filing its
tax returns and in its dealings with taxing authorities, such Indemnified Person
shall in good faith use reasonable efforts to minimize its exposure to Taxes
(including, where appropriate, the filing of claims for refunds of Taxes
indemnified hereunder); provided that such actions will not, in the judgment of
--------
such Indemnified Person, subject such Indemnified Person to any risk of adverse
Tax or non-Tax consequences.
SECTION 8.06. General Tax Indemnity -- Payment. Unless otherwise
--------------------------------
requested by the appropriate Indemnified Person, the Lessee shall if appropriate
pay any Tax for which it is liable pursuant to this Article VIII directly to the
appropriate taxing authority and shall pay to such Indemnified Person promptly
on demand in immediately available funds any other amount due such Indemnified
Person pursuant to this Article VIII with respect to such Tax; provided that
Lessee shall not be required to pay to or for the account of any Indemnified
Person that is not a party to this Agreement unless and until such Indemnified
Person shall have agreed to be bound by the provisions of this Article VIII.
Each Indemnified Person shall promptly forward to the Lessee any notice, bill or
advice received by it concerning any Tax subject to indemnification under this
Article VIII (but the failure to so notify the Lessee shall not affect the
Lessee's obligations hereunder except to the extent such failure precludes the
Lessee's ability to contest such claim or Tax or increases any applicable fine
or penalty). Within 30 days after the date of each payment by the Lessee of any
Tax or if later, ten days after receiving a receipt for such payment, the Lessee
shall furnish the appropriate Indemnified Person with the original or a
certified copy of a receipt for the Lessee's payment of such Tax or such other
evidence of payment of such Tax as is reasonably acceptable to such Indemnified
Person. The Lessee shall also furnish promptly upon request such data as any
Indemnified Person may require to enable such Indemnified Person to comply with
the requirements of any taxing jurisdiction. Any amount payable to the Lessee
by an Indemnified Person pursuant to this Article VIII shall be payable in
immediately available funds 30 days after the date on which the Tax return which
reflects such Tax savings is required to be filed (whether in the normal course
or pursuant to any properly requested and allowed extensions of a filing date).
The obligations of an Indemnified Person hereunder shall survive termination of
this Agreement.
43
<PAGE>
ARTICLE IX
Expenses
--------
SECTION 9.01. Transaction Expenses. Subject to the provisions of
--------------------
Section 9.03, the Owner Trustee hereby agrees that, with funds to be provided by
the Owner Participant, the Owner Trustee shall pay when due, or reimburse any
Person who has previously paid, the fees and out-of-pocket expenses,
disbursements and costs (each of which shall be evidenced by appropriate bills
or invoices) incurred by the parties hereto in connection with the preparation,
execution and delivery of the Basic Agreements and the consummation of the
transactions provided for therein ("Transaction Expenses"), including, without
--------------------
limitation:
(a) the fees and disbursements of the counsel referred to in paragraphs
(m) and (n) of Section 4.01 and paragraph (f) of Section 4.02 of this
Agreement, for their services rendered in connection with the preparation,
execution and delivery of this Agreement and the other Basic Agreements;
(b) the initial (but not the ongoing) fees and expenses of the Owner
Trustee;
(c) all out-of-pocket expenses (other than investment banking or
brokerage fees, except as provided in clause (f) below) incurred in
connection with the preparation, execution and delivery of the Basic
Agreements and satisfaction of the conditions set forth in paragraph (g) of
Section 4.01;
(d) the fees and expenses of the Appraiser;
(e) the fees and expenses of Sandwell, Jaako Poyry, and Geomatrix; and
(f) the fees and expenses of UBS Lease Finance LLC in connection with
the transactions contemplated by this Agreement.
Subject to the provisions of Section 9.03, the Owner Participant shall provide
funds to the Owner Trustee for the timely payment of Transaction Expenses.
SECTION 9.02. Post-Closing Expenses. The Lessee shall pay, as
---------------------
Supplemental Rent, (a) the reasonable ongoing fees, costs and expenses
(including, but not limited to, reasonable legal fees and expenses, but not
including costs in respect of overhead and internal administration) of or
incurred by the Owner Trustee in connection with the administration of the Trust
Estate during the Lease Term, (b) on an After-Tax Basis to the Owner
44
<PAGE>
Participant, all reasonable costs and expenses (including, but not limited to,
reasonable legal fees and expenses, but not including costs in respect of
overhead and internal administration), incurred by the Owner Participant and the
Owner Trustee in connection with the entering into or giving or withholding of
any amendment, modification, supplement, waiver, termination, approval, consent
or other action with respect to any Basic Agreement (except those requested by
the Owner Participant or the Owner Trustee and not expressly contemplated by the
Basic Agreements, other than those requested in connection with a transfer by
the Owner Participant of any of its right, title or interest in and to the Trust
Estate in accordance with Section 10.01 hereof (except during the continuance of
an Event of Default) or the exercise by the Owner Trustee of the Leverage Option
in accordance with Section 10.02 hereof), and (c) the costs and expenses of any
transfer of the Letter of Credit.
SECTION 9.03. Lessee's Obligation. Notwithstanding Section 9.01, in the
-------------------
event the transactions contemplated by Section 3.01 of this Agreement shall not
be consummated, the Lessee shall pay or cause to be paid, and shall indemnify
and hold harmless the Owner Participant and the Owner Trustee in respect of, all
reasonable Transaction Expenses incurred in connection with such transactions
unless, in the case of the Owner Participant, such failure results solely from
the Owner Participant's default in making its equity investment hereunder after
all conditions set forth in Section 4.01 (other than those within the Owner
Participant's control) are satisfied or the Owner Participant's failure to
obtain like-kind exchange treatment in respect of the acquisition of the
Equipment, in which event the Owner Participant shall be responsible for its own
out-of-pocket expenses, including the fees and expenses of its counsel, but not
any other Transaction Expenses (including the expenses of the Owner Trustee and
the Lessee), which shall be paid by the Lessee; provided, however, that, if such
-------- -------
failure results solely from the Lessee's election not to proceed with the
transactions contemplated by Section 3.01 hereof due to the fact that the
Lessee's implicit rate increases as a result of the Appraiser's evaluation of
the Early Buyout Price, the Lessee shall pay or cause to be paid, and shall
indemnify and hold harmless the Owner Participant and the Owner Trustee in
respect of, all reasonable Transaction Expenses incurred in connection with such
transactions up to a maximum of $150,000, and to the extent that such
Transaction Expenses exceed $150,000, such excess shall be borne equally by the
Lessee and the Owner Trustee.
45
<PAGE>
ARTICLE X
Transfers of Owner Participant's Interests; Leverage Option
-----------------------------------------------------------
SECTION 10.01. Transfers of Owner Participant's Interests. Except with
------------------------------------------
the consent of the Lessee, the Owner Participant shall not directly or
indirectly assign, convey or otherwise transfer any of its right, title or
interest in and to the Trust Estate, this Agreement, the Trust Agreement, the
Tax Indemnity Agreement or any other Basic Agreement; provided, however, that,
-------- -------
after the Closing Date, subject only to fulfillment of the conditions set forth
below and without the consent of the Lessee, the Owner Participant (and any
Person to whom a transfer is duly made pursuant to this Article X) may transfer
all or part of its right, title and interest in and to the Trust Estate, this
Agreement, the Trust Agreement, the Tax Indemnity Agreement and each other Basic
Agreement to any Person (a "Transferee"); provided, further, that the
---------- -------- -------
restrictions of this Section shall not be applicable following the Lease Term or
so long as an Event of Default has occurred and is continuing. Each such
transfer shall be subject to the fulfillment of the following conditions:
(a) the Transferee to whom such transfer is to be made is a bank,
insurance company, financial institution, leasing company, credit or
finance company or institutional investor, or any majority-owned Affiliate
of any of the foregoing, who has a net worth, or a combined capital and
surplus, at the time of the transfer of at least $150,000,000 (or the
obligations of which under the Basic Agreements are guaranteed by a Person
who has a net worth, or a combined capital and surplus, at the time of
transfer of at least $150,000,000);
(b) the Owner Trustee and the Lessee shall have received at least 15
days' prior notice of the proposed transfer, which notice shall specify the
name and address of the proposed transferee and the facts necessary to
determine whether such proposed transferee qualifies as a Transferee under
paragraph (a) above;
(c) the Transferee shall have all requisite power and authority to enter
into and perform the obligations of an Owner Participant under this
Agreement and the other Basic Agreements;
(d) the Transferee shall have duly authorized, executed and delivered to
the Owner Trustee and the Lessee an agreement in a form reasonably
satisfactory to the Lessee whereby the transferee confirms that (i) it has
all requisite power and authority to enter into and perform the obligations
of an Owner Participant under this Agreement and
46
<PAGE>
the other Basic Agreements and (ii) it shall be bound by and obligated to
perform and observe each covenant and agreement required to be performed or
observed by the "Owner Participant" in this Agreement and the other Basic
Agreements arising after the transfer, except to the extent such covenant
or agreement is applicable to another Owner Participant and such other
Owner Participant is obligated to perform and observe the same;
(e) such transfer shall not violate any provision of any Applicable Laws
(provided that Applicable Laws for this purpose shall not include ERISA);
(f) no part of the funds to be used by the Transferee to acquire its
interest hereunder constitutes "plan assets" (within the meaning of ERISA
and the regulations thereunder) of any Employee Benefit Plan or any Plan;
(g) the Transferee shall not be substantially engaged in the paper
manufacturing business;
(h) the transferring Owner Participant or the Transferee shall have
delivered to the Owner Trustee and the Lessee a favorable opinion of
counsel (which may be in-house counsel of the transferring Owner
Participant or the Transferee) reasonably acceptable to the Lessee as to
the due authorization, execution, delivery and enforceability of any
guarantee referred to in paragraph (a) above and the agreement referred to
in paragraph (d) above, which opinion shall be reasonably acceptable to the
Lessee in form and substance; and
(i) such transfer shall not result in there being more than four Owner
Participants at any time.
From and after any transfer effected in accordance with this Article X,
(i) the Transferee shall be deemed an "Owner Participant" for all purposes of
the Basic Agreements and shall be deemed to have made all payments in respect of
the portion of the right, title and interest so transferred, and shall have a
ratable interest therein, and, except as provided in the last sentence of this
paragraph, each reference to the Owner Participant contained in the Basic
Agreements shall be deemed to include a reference to the Transferee for all
purposes and (ii) whenever any action shall be required or permitted by the
Owner Participant it shall be sufficient if such action shall be taken by Owner
Participants having interests aggregating more than 50% of the aggregate right,
title and interest in and to the Trust Estate. Notwithstanding any transfer
effected in accordance with this Article X, the transferring Owner Participant
shall nevertheless be entitled to all benefits accrued and all rights vested
prior to such transfer, including, without limitation, any
47
<PAGE>
right to indemnification under this Agreement or the Tax Indemnity Agreement,
and shall be released from its obligations under the Basic Agreements to the
extent assumed by the Transferee.
The Lessee agrees that it shall, to the extent so requested by the Owner
Participant, use reasonable efforts to cooperate with the Owner Participant in
effecting any transfer permitted pursuant to this Section 10.01 and, if
requested by the transferor or transferee, the Lessee will give its written
consent to any such transfer complying with the provisions of this Section 10.01
promptly after a request therefor.
SECTION 10.02. Leverage Option. (a) Subject to the limitations set
---------------
forth in this Section 10.02, the Owner Trustee may elect at any time to issue
secured debt instruments ("Bonds") in order to effectuate a leveraged lease of
-----
the Equipment (the "Leverage Option") by providing written notice to the Lessee
---------------
to that effect, provided, however, that without the consent of the Lessee, which
-------- -------
consent shall not be unreasonably withheld, (i) the Bonds shall not be issued in
a public offering and (ii) the purchasers of the Bonds shall be limited to
banks, insurance companies, financial institutions, leasing companies, credit or
finance companies or institutional investors, or any majority-owned Affiliates
of any of the foregoing. The original principal amount of the Bonds shall not
exceed 80% of Lessor's Cost.
(b) Principal of and premium, if any, and interest on the Bonds shall be
payable solely from the Trust Estate, without recourse to the Owner Trustee or
the Lessee. If the Owner Trustee elects to issue Bonds, the Owner Trustee shall
enter into an indenture or security agreement with the purchaser or purchasers
of the Bonds or a trustee on their behalf and, pursuant thereto, grant a
mortgage and security interest in all or any portion of its right, title and
interest in and to the Equipment and the Basic Agreements, and assign part or
all of the payments of Basic Rent to secure payment of the Bonds. Each
purchaser of the Bonds shall represent and warrant that no part of its purchase
will be made out of the assets of any account maintained by it in which any
employee benefit plan (as such term is defined in ERISA) has an interest or that
such purchase is otherwise not violative of ERISA. Neither the Lessee nor any
Affiliate of the Lessee may at any time acquire Bonds.
(c) The Owner Trustee or the Owner Participant shall pay all their
expenses and all reasonable costs and expenses of the Lessee (including, without
limitation, the reasonable fees and expenses of the Lessee's counsel) in
connection with the exercise of the Leverage Option, including the offering,
issuance and sale of the Bonds, the reasonable fees, costs and expenses of any
trustee on behalf of the holders of the Bonds and the
48
<PAGE>
reasonable incremental fees, costs and expenses of the Owner Trustee resulting
from the exercise of the Leverage Option.
(d) If the Owner Trustee elects the Leverage Option, the parties hereto
shall cooperate in good faith to cause Bonds to be issued and sold on a date
specified by the Owner Trustee. Each party agrees to execute and deliver
security assignments, consents, opinions and other customary closing documents
and to amend the Basic Agreements as reasonably necessary in connection with the
issue and sale of such Bonds, except that the Lessee shall not be obligated to
execute and deliver any document or agree to any amendment that could reasonably
be expected to increase the obligations of the Lessee under the Basic Agreements
or to interfere with the Lessee's rights under the Lease. Without limiting the
generality of the foregoing, it is understood and agreed that any Lien on the
Equipment granted by the Owner Trustee to secure the Bonds shall be subject to
the Lessee's rights under the Lease and shall expressly provide for release of
such Lien on the Equipment if purchased by the Lessee in accordance with the
Lease.
ARTICLE XI
Miscellaneous
-------------
SECTION 11.01. Notices. All notices, demands, declarations, consents,
-------
directions, approvals, instructions, requests and other communications required
or permitted by the terms hereof shall be in writing and shall be given in
person or by means of telecopy or other wire transmission, or mailed by
registered or certified mail, or sent by courier, in each case addressed as
provided in Schedule 1 hereto or at such other address or facsimile number as
any party hereto may from time to time designate by notice given in accordance
with this Section 11.01 to the other parties hereto. Any such communication
shall become effective and shall be deemed to have been received (i) when
delivered personally or by courier (or when delivery is tendered, if such
delivery is refused), (ii) in the case of mail delivery, upon delivery (or when
delivery is tendered, if such delivery is refused), or (iii) in the case of
telecopy or other wire transmission, at the time of dispatch with a transmission
confirmation appearing at the end of the communication.
SECTION 11.02. GOVERNING LAW. THIS AGREEMENT SHALL IN ALL RESPECTS BE
-------------
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
SECTION 11.03. Amendment. The terms and provisions of this Agreement
---------
may be changed, waived, discharged or terminated, but only by an instrument in
writing signed by the party against
49
<PAGE>
which enforcement of the change, waiver, discharge or termination is sought.
SECTION 11.04. Successors and Assigns. Subject to the other provisions
----------------------
hereof relating to assignments, this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their permitted successors and assigns.
Notwithstanding anything to the contrary contained in any of the Basic
Agreements, upon notice to the Lessee, each of the Owner Trustee's and the Owner
Participant's rights (but not any of its obligations other than the obligation
to pay the Purchase Price for the Equipment) under this Agreement to acquire the
Equipment shall be freely assignable in connection with a like-kind exchange
under Section 1031 of the Code.
SECTION 11.05. Headings. Section headings and the Table of Contents are
--------
for convenience only and shall not be construed as part of this Agreement.
SECTION 11.06. Counterparts. This Agreement may be executed by the
------------
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original for all purposes, but all such counterparts shall
together constitute but one and the same instrument.
SECTION 11.07. Severability. If any term or provision hereof or the
------------
application thereof to any circumstance shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such term or such provision shall not, to
the extent permitted by Applicable Laws, invalidate or render unenforceable any
remaining terms and provisions hereof or the application of such term or
provision to circumstances other than those as to which it is held invalid or
unenforceable. To the extent permitted by Applicable Laws, the parties hereto
hereby waive any provision of law that renders any term or provision hereof
invalid or unenforceable in any respect.
SECTION 11.08. Survival of Agreements. The representations, warranties
----------------------
and agreements of the parties provided for in the Basic Agreements, and the
parties' obligations under any and all thereof, shall survive the execution and
delivery of this Agreement, the participation by the Owner Participant pursuant
to this Agreement and any disposition of any interest of the Owner Participant
in the Trust Estate or the Equipment, and shall be and continue in effect
notwithstanding the fact that the Owner Trustee or the Owner Participant may
waive compliance with any of the other terms, provisions or conditions of any of
the Basic Agreements.
SECTION 11.09. Liabilities of Owner Trustee. The Lessee and the Owner
----------------------------
Participant each agrees that the Owner Trustee in its individual capacity shall
not have any personal
50
<PAGE>
liability whatsoever to the Lessee, the Owner Participant or any of their
respective successors and assigns for any claim based on or in respect of this
Agreement or any of the other Basic Agreements or arising in any way from the
transactions contemplated hereby or thereby; provided, however, that the Owner
-------- -------
Trustee shall be liable in its individual capacity (a) for its own wilful
misconduct or gross negligence, (b) for liabilities that may result from the
incorrectness of any representation or warranty expressly made by it in Section
5.03, or from its failure to perform the covenants and agreements set forth in
Section 6.03 hereof, or (c) for any Tax based on or measured by any fees,
commission or compensation received by it for acting as Owner Trustee in
connection with any of the transactions contemplated by the Basic Agreements, or
(d) to the Owner Participant as expressly provided in the Trust Agreement.
Notwithstanding the foregoing provisions of this Section 11.09 nothing herein
shall be deemed to prevent any party hereto (other than the Owner Participant)
from having recourse to and seeking enforcement against the Trust Estate for
performance and observance of covenants, agreements and conditions required to
be performed or observed by the Owner Trustee (in its capacity as the Owner
Trustee) in this Agreement and the other Basic Agreements.
SECTION 11.10. No Guarantees. The indemnities set forth in Articles
-------------
VII and VIII shall not constitute a guarantee to the Owner Participant or the
Owner Trustee of the residual value of the Equipment.
SECTION 11.11. Successor Owner Trustee. (a) If a successor Owner
-----------------------
Trustee is appointed in accordance with the terms of the Trust Agreement, such
successor Owner Trustee shall, without further act, succeed to all the rights,
powers, duties and obligations of its predecessor as Owner Trustee hereunder and
under the other Basic Agreements, all without in any way altering the term of
this Agreement or any of the other Basic Agreements or the obligations of the
parties to this Agreement or to any of the other Basic Agreements.
(b) If requested by the Lessee, any successor Owner Trustee shall
deliver to the Lessee an Officer's Certificate confirming that such successor
Owner Trustee is bound by all of the terms of, and has undertaken all of the
obligations of the Owner Trustee contained in, each of the Basic Agreements to
which the Owner Trustee is a party.
SECTION 11.12. Jurisdictional and Related Matters. (a) Jurisdiction.
---------------------------------- ------------
The Lessee (i) hereby irrevocably submits for itself and its property to the
nonexclusive jurisdiction of the courts of the State of New York in New York
County, and to the nonexclusive jurisdiction of the United States District Court
for the Southern District of New York, and any appellate court from
51
<PAGE>
any thereof, for the purposes of any suit, action or other proceeding arising
out of this Agreement, the Lease, the Tax Indemnity Agreement or any other Basic
Agreement to which it is a party, the subject matter of any thereof or any of
the transactions contemplated hereby or thereby brought by any party or parties
hereto or thereto, or their successors or assigns, and (ii) hereby waives, and
agrees not to assert, by way of motion, as a defense or otherwise, in any such
suit, action or proceeding, to the extent permitted by Applicable Laws, that the
suit, action or proceeding is brought in an inconvenient forum, that the venue
of the suit, action or proceeding is improper, or that this Agreement, the
Lease, the Tax Indemnity Agreement or any other Basic Agreement or the subject
matter of any thereof or any of the transactions contemplated hereby or thereby
may not be enforced in or by such courts.
(b) Service of Process. The Lessee hereby generally consents to service
------------------
of process by registered mail, return receipt requested, addressed to it at the
address specified on Schedule 1 hereto, or such other office as from time to
time may be designated by it in writing to the Owner Trustee, or the Owner
Participant, as applicable.
(c) Judgments. Final judgment against any party obtained in any suit
---------
commenced in the courts of the State of New York in New York County or in the
United States District Court for the Southern District of New York shall be
conclusive, and, to the extent permitted by Applicable Laws, may be enforced in
other jurisdictions by suit on the judgment, a certified or true copy of which
shall be conclusive evidence of the fact and of the amount of any indebtedness
or liability of the Lessee therein described; provided that the plaintiff may
---------
at its option bring suit, or constitute other judicial proceedings against, such
party or any of its assets in the courts of any country or place where such
party or such assets may be found.
52
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement
to be duly executed and delivered as of the day and year above written.
S.D. WARREN COMPANY,
Lessee
By
------------------------------------------
Name:
Title:
GENERAL ELECTRIC CAPITAL CORPORATION,
Owner Participant
By
------------------------------------------
Name:
Title:
STATE STREET BANK AND TRUST COMPANY OF
CONNECTICUT, NATIONAL ASSOCIATION, in its
individual capacity only to the extent set forth
herein and otherwise solely in its capacity as
Owner Trustee
By
------------------------------------------
Name:
Title:
[Participation Agreement]
<PAGE>
SCHEDULE 1
TO PARTICIPATION AGREEMENT
Participation Agreement
-----------------------
Addresses for Notices and Payments
----------------------------------
NOTICES
Lessee
- ------
S.D. Warren Company
225 Franklin Street
Boston, MA 02110
Attention: General Counsel
Telephone: (617) 423-5447
Telecopy: (617) 423-5493
Owner Participant
- -----------------
General Electric Capital Corporation
c/o Structured Finance Group
120 Long Ridge Road
3rd Floor
Stamford, CT 06927
Attention: Account Executive
Reference: 929-2; 1997 S.D. Warren Lease
Telecopy: (203) 961-2017
Owner Trustee
- -------------
State Street Bank and Trust Company of Connecticut,
National Association
225 Asylum Street
Goodwin Square
Hartford, CT 06103
Attention: Corporate Trust Department
Telecopy: (860) 244-1889
SCH1-1
<PAGE>
PAYMENTS
Owner Participant
- -----------------
General Electric Capital Corporation
Bankers Trust
New York, New York
ABA No. 0210-0103-3
Credit: GECC/T&I Depository Account
Account No. 50-205-776
Reference: 929-2; 1997 S.D.Warren Lease
with sufficient information to identify the source and application of such
funds.
Owner Trustee
- -------------
State Street Bank and Trust Company
of Connecticut, National Association
State Street Bank and Trust Company
Boston, MA
ABA No. 011-00-0028
Credit: Corporate Trust Department
- ------
Account No. 9900-3147
Reference: S.D. Warren
with sufficient information to identify the source and application of such
funds.
SCH1-2
<PAGE>
SCHEDULE 1A
TO PARTICIPATION AGREEMENT
Wire Instructions for Payment of Purchase Price
-----------------------------------------------
On the Closing Date, the Purchase Price shall be transferred as follows
pursuant to Section 3.01 of the Participation Agreement:
Account Name: Chase Manhattan Bank - S.D. Warren
Chase Manhattan Bank
ABA # 021-000-021
Account # 323-50-1664
Reference: S.D. Warren
Amount: $100,266,667.00
Contact Person: Linda Hill
Account Name: S.D. Warren Company
Chase Manhattan Bank
ABA # 021-000-021
Account # 323-08-1525
Reference: S.D. Warren
Amount: $50,133,333.00
Contact Person: Johnny Kahn
SCH1A-1
<PAGE>
SCHEDULE 2
TO PARTICIPATION AGREEMENT
<TABLE>
<CAPTION>
Pricing Assumptions
-------------------
<S> <C>
Closing Date: July 29, 1997
Purchase Price/Lessor's Cost: $150,400,000
Investment Amount: 100% of Lessor's Cost
Full Lease Term: 15 years
Rental Payment Dates: Semi-annual in arrears
payable on January 29 and
July 29
Depreciable Life (method): 100% of Lessor's Cost 7
yr. MACRS
Transaction Expenses: $1,537,250 amortized over
the Lease Term for
Federal tax purposes
First Early Buyout
Date and First
Early Buyout Price: January 29, 2003
81.47% of Lessor's Cost
Second Early Buyout
Date and Second
Early Buyout Price: January 29, 2008
50.10% of Lessor's Cost
Lease Rental Factor: 5.05354842% (for the Basic Rent
Payment Dates through January 29, 2008)
5.80780938% (for the Basic Rent Payment
Dates from July 29, 2008 to July 29,
2012)
Discount Rate for Present
Value Calculation: 10%
Composite Tax Rate: 40%
Tax Assumption: Lease treated as a True Lease and Lessor
treated as owner for Federal income tax
purposes
</TABLE>
SCH2-1
<PAGE>
SCHEDULE 3
TO PARTICIPATION AGREEMENT
Recordations and Filings
------------------------
A. State of Maine
(i) Secretary of State of the State of Maine: a precautionary
financing statement on Form UCC-1 in respect of the Equipment
naming S.D. Warren Company as debtor, and State Street Bank and
Trust Company of Connecticut, National Association, as Owner
Trustee and as secured party.
(ii) Registry of Deeds of Somerset County: a fixture filing financing
statement on Form UCC-1 in respect of the Equipment naming S.D.
Warren Company as debtor, and State Street Bank and Trust Company
of Connecticut, National Association, as Owner Trustee and as
secured party.
(iii) Registry of Deeds of Somerset County: Conveyance Instrument
(iv) Registry of Deeds of Somerset County: Ground Lease
(v) Registry of Deeds of Somerset County: Memorandum of Lease
(vi) Land Records of Somerset County: Release and Non-Disturbance
Agreement
B. Commonwealth of Massachusetts
(i) Secretary of State of the Commonwealth of Massachusetts: a
precautionary financing statement on Form UCC-1 in respect of the
Equipment naming S.D. Warren Company as debtor, and State
Street Bank and Trust Company of Connecticut, National
Association, as Owner Trustee and secured party.
(ii) City Clerk of the City of Boston: a precautionary financing
statement on Form UCC-1 in respect of the Equipment naming S.D.
Warren Company as debtor, and State Street Bank and Trust Company
of Connecticut, National Association, as Owner Trustee and
secured party.
SCH3-1
<PAGE>
SCHEDULE 3A
TO PARTICIPATION AGREEMENT
Existing Recordations and Filings
---------------------------------
<TABLE>
<CAPTION>
A. UCC Filings
Place of Date of Number of
UCC-1 Filing UCC-1 Filing UCC-1 Filing
------------ ------------ ------------
<S> <C> <C>
Massachusetts 12/28/94 282951
Secretary of State
Boston 12/28/94 379373
City Clerk
Maine Secretary 12/28/94 1107581
of State
10/17/95 1145542
10/17/95 1145563
Somerset County, 12/29/94 Book 2069, Page 24
Maine
10/23/95 Book 2148, Page 203
10/23/95 Book 2148, Page 208
</TABLE>
B. Mortgage Filings
Mortgage, Security Agreement and Financing Statement dated as of December
20, 1994 from the Lessee to Chase, recorded in the Somerset County, Maine
Registry of Deeds on December 23, 1994 at Book 2067, Page 259
SCH3A-1
<PAGE>
SCHEDULE 4
TO PARTICIPATION AGREEMENT
Environmental Disclosure Matters
--------------------------------
The representation and warranties included in Section 5.01(s) of
the Participation Agreement with regard to compliance with EH&S Requirements of
Law exclude:
1. Instances of non-compliance with EH&S Requirements of Law,
existing, pending or threatened notices of violations, and existing or
pending consent decrees and/or administrative settlements related to
alleged violations of EH&S Requirements of Law that are not related to
the Equipment, Equipment Site or Facility.
2. All liabilities related to past violations of EH&S Requirements of
Law or which resulted from the disposal of Hazardous Materials, at the
Facility or other locations, which were assumed by Kimberly Clark
pursuant to the transaction between SAPPI, Inc./S.D. Warren and
Kimberly Clark which closed on or about December 20, 1994.
3. Hazardous Materials spills that have been reported to DEP
including, but not limited to, those spills identified on Attachment A
to this Schedule 4. Attachment A to this Schedule 4 was supplied by a
consultant/contractor, hired by the Owner Trustee and the Owner
Participant, to the Owner Trustee.
4. Incidental spills that have not been reported to environmental
regulators which could be interpreted to constitute a violation of
EH&S Requirements of Law, but which are not likely to result in a
material liability.
5. Four water permit discharge exceedances which S.D. Warren has
reported, since 1980, on monthly Discharge Monitoring Reports filed
with the Maine Department of Environmental Protection. The
exceedances related to the following parameters: (1) biological oxygen
demand on or about March 1980; (2) total suspended solids on or about
September 1983; (3) pH on or about November 30, 1989; and (4) pH on or
about October 23, 1996.
6. Bypasses, upsets or overflows from the wastewater treatment plant
which could be interpreted to constitute a violation of EH&S
Requirements of Law, but which are not likely to result in a material
liability.
SCH4-1
<PAGE>
7. Technical violations of EH&S Requirements of Law that could not
reasonably be expected to result in material liability.
8. All exceptions contained in Exhibit D in a letter from Pierce
Atwood to General Electric Capital Corporation Re: SD Warren Company
Single Investor Lease Transaction, dated July 29, 1997.
9. Any liabilities resulting from certain employee complaints,
resulting inspections and investigations by the Occupational Health
and Safety Administration ("OSHA"), and the resulting issuance of OSHA
citations to S.D. Warren. Several of these citations, including but
not limited to two alleged willful violations, two serious citations,
and two other than serious citations, have been or will be contested
by S.D. Warren. In addition, investigations of a number of nonformal
employee complaints are ongoing.
10. Minor violations of EH&S Requirements of Law, and other violations
of EH&S Requirements of Law that are not reasonably likely to have an
adverse effect on the Equipment, that relate to any of the power
generating systems.
SCH4-2
<PAGE>
EXHIBIT A
TO PARTICIPATION AGREEMENT
Form of Letter of Credit
------------------------
A-1
<PAGE>
[EXECUTION COPY]
EXHIBIT 10.36
LEASE AGREEMENT
between
STATE STREET BANK AND TRUST COMPANY OF CONNECTICUT,
NATIONAL ASSOCIATION,
not in its individual capacity
but solely as Owner Trustee,
Lessor,
and
S.D. WARREN COMPANY,
Lessee
Dated as of July 29, 1997
------------
Lease of #3 Paper Machine
TO THE EXTENT, IF ANY, THAT THIS LEASE CONSTITUTES CHATTEL PAPER (AS DEFINED IN
THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION), NO
SECURITY INTEREST IN THIS LEASE MAY BE CREATED THROUGH THE TRANSFER OR
POSSESSION OF ANY COUNTERPART OTHER THAN THE ORIGINAL COUNTERPART CONTAINING
THE RECEIPT THEREFOR EXECUTED BY STATE STREET BANK AND TRUST COMPANY OF
CONNECTICUT, NATIONAL ASSOCIATION, AS OWNER TRUSTEE
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
Definitions........................................................... 1
ARTICLE II
Lease of the Equipment; Term.......................................... 2
SECTION 2.01. Lease of the Equipment............................ 2
SECTION 2.02. Sublease of the Equipment Site.................... 2
SECTION 2.03. Term.............................................. 2
SECTION 2.04. Personal Property................................. 2
SECTION 2.05. Descriptions...................................... 2
ARTICLE III
Rent.................................................................. 2
SECTION 3.01. Basic Rent........................................ 2
SECTION 3.02. Supplemental Rent................................. 3
SECTION 3.03. Adjustments of Basic Rent, Stipulated
Loss Value and Early Buyout Price................................ 3
SECTION 3.04. Method of Payment................................. 5
ARTICLE IV
Net Lease.............................................................. 5
ARTICLE V
Restriction on Liens................................................... 7
ARTICLE VI
Warranty of Lessor; Disclaimer......................................... 7
SECTION 6.01. Quiet Enjoyment.................................... 7
SECTION 6.02. Disclaimer of Other Warranties..................... 7
SECTION 6.03. Enforcement of Certain Warranties.................. 8
ARTICLE VII
Operation and Maintenance; Modifications; Location of
Equipment.............................................................. 9
SECTION 7.01. Operation and Maintenance.......................... 9
SECTION 7.02. Replacement of Parts............................... 10
SECTION 7.03. Modifications Required by Law...................... 11
SECTION 7.04. Optional Modifications............................. 11
SECTION 7.05. Title to Modifications............................. 11
SECTION 7.06. Removal of Property................................ 11
SECTION 7.07. Contest of Requirements of Law..................... 12
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 7.08. Location of the Equipment............................. 13
ARTICLE VIII
Event of Loss; Obsolescence Termination................................. 13
SECTION 8.01. Event of Loss......................................... 13
SECTION 8.02. Requisition Not Constituting an Event
of Loss............................................................ 14
SECTION 8.03. Obsolescence Termination.............................. 14
ARTICLE IX
Reports.................................................................. 16
SECTION 9.01. ..................................................... 16
Reports to Governmental Authorities.................................... 16
SECTION 9.02. Information Concerning the Equipment................... 16
ARTICLE X
Insurance................................................................ 17
SECTION 10.01. Coverage............................................... 17
SECTION 10.02. Endorsements........................................... 19
SECTION 10.03. Application of Certain Proceeds........................ 20
SECTION 10.04. Certifications......................................... 21
SECTION 10.05. Insurance Reports...................................... 22
SECTION 10.06. Right of Lessor and Owner Participant
To Insure........................................................... 22
ARTICLE XI
Identification........................................................... 23
SECTION 11.01. Identification......................................... 23
SECTION 11.02. Insignia of Lessee..................................... 23
ARTICLE XII
Default; Remedies........................................................ 23
SECTION 12.01. Events of Default...................................... 23
SECTION 12.02. Remedies............................................... 25
ARTICLE XIII
Additional Covenants; Indemnities........................................ 29
ARTICLE XIV
Assignment or Sublease................................................... 29
SECTION 14.01. Assignment or Sublease by Lessee....................... 29
ARTICLE XV
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Renewal and Purchase Options............................................. 30
SECTION 15.01. Renewal Option......................................... 30
SECTION 15.02. Early Buyout Options................................... 30
SECTION 15.03. Fair Market Purchase Options........................... 31
SECTION 15.04. Notices for Renewal and Purchase
Options; Certain Conditions......................................... 31
SECTION 15.05. Determination of Fair Market Values
and other Matters................................................... 33
ARTICLE XVI
Return of Equipment; Disposition Services................................ 33
SECTION 16.01. Return of Equipment.................................... 33
SECTION 16.02. Disposition Services................................... 34
ARTICLE XVII
Recording; Further Assurances............................................ 35
ARTICLE XVIII
Lessor's Right to Perform for Lessee..................................... 35
ARTICLE XIX
Notices.................................................................. 36
ARTICLE XX
Severability............................................................. 36
ARTICLE XXI
Effect and Modification of Lease......................................... 36
ARTICLE XXII
Third-Party Beneficiaries................................................ 37
ARTICLE XXIII
Execution................................................................ 37
ARTICLE XXIV
Governing Law; UCC Article 2-A........................................... 37
ARTICLE XXV
No Recourse.............................................................. 38
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE XXVI
Successors and Assigns................................................... 38
ARTICLE XXVII
Successor and Co-Trustees................................................ 38
ARTICLE XXVIII
Miscellaneous............................................................ 39
SECTION 28.01. No Conveyance.......................................... 39
SECTION 28.02. Captions............................................... 39
SECTION 28.03. Chattel Paper.......................................... 39
</TABLE>
Appendix A -- Definitions
Annex A -- Description of Equipment
Annex B -- Description of Equipment Site
Schedule I -- Basic Rent
Schedule II -- Stipulated Loss Values
Schedule III -- Certain Terms
iv
<PAGE>
LEASE AGREEMENT dated as of July 29, 1997, between STATE
STREET BANK AND TRUST COMPANY OF CONNECTICUT, NATIONAL
ASSOCIATION, a national banking association, not in its
individual capacity but solely as Owner Trustee under the Trust
Agreement, as Lessor, and S.D. WARREN COMPANY, a Pennsylvania
corporation, as Lessee.
WHEREAS pursuant to the Participation Agreement, the Bill of Sale and
the Conveyance Instrument, concurrently with the execution and delivery of this
Lease Lessee is selling the Equipment to Lessor and Lessor is purchasing the
Equipment from Lessee;
WHEREAS pursuant to the Ground Lease, concurrently with the execution
and delivery of this Lease Lessee is leasing the Equipment Site to Lessor and
Lessor is leasing the Equipment Site from Lessee; and
WHEREAS upon such sale and purchase of the Equipment, Lessee desires
to lease the Equipment and sublease the Equipment Site from Lessor and Lessor
desires to lease the Equipment and sublease the Equipment Site to Lessee upon
the terms and subject to the conditions hereinafter provided.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, Lessor and Lessee hereby
agree as follows:
ARTICLE I
Definitions
-----------
For purposes of this Lease, capitalized terms used herein and not
defined herein have the meanings assigned to them in Appendix A (such
definitions to be equally applicable to both the singular and plural forms of
the terms defined). Any term defined by reference to an agreement, instrument
or other document has the meaning so assigned to it whether or not such document
is in effect. Unless otherwise indicated, references in this Lease to sections,
paragraphs, clauses, appendices, schedules and exhibits are to the same
contained in or attached to this Lease.
<PAGE>
ARTICLE II
Lease of the Equipment; Term
----------------------------
SECTION 2.01. Lease of the Equipment. Upon the terms and subject to
----------------------
the conditions of this Lease, Lessor agrees to lease and hereby leases the
Equipment to Lessee hereunder, and Lessee agrees to lease and hereby leases the
Equipment from Lessor hereunder, for the Lease Term.
SECTION 2.02. Sublease of the Equipment Site. Upon the terms and
------------------------------
subject to the conditions of this Lease, Lessor agrees to sublease and hereby
subleases the Equipment Site to Lessee hereunder, and Lessee agrees to sublease
and hereby subleases the Equipment Site from Lessor hereunder, for the Lease
Term.
SECTION 2.03. Term. The term of this Lease shall begin on the Basic
----
Lease Term Commencement Date and, unless earlier terminated in accordance with
the provisions hereof, shall end on the Basic Lease Term Termination Date or the
last day of the Renewal Term, if any. The Lease Term shall be comprised of the
Basic Lease Term and the Renewal Term, if any.
SECTION 2.04. Personal Property. It is the intent of the parties
-----------------
hereto that the Equipment is now, and from and after this date shall continue to
be, personal property and not be or become a part of the real property on which
the Equipment is now located notwithstanding the extent of affixation thereto or
the fitness or adaption of the Equipment to the uses or purposes of such real
property. By executing this Lease, Lessee and Lessor affirm their desire and
intent that the Equipment be and remain personal property.
SECTION 2.05. Descriptions. The Equipment is described in Annex A
------------
hereto and the Equipment Site is described in Annex B hereto.
ARTICLE III
Rent
----
SECTION 3.01. Basic Rent. Lessee shall pay to Lessor, as basic rent
----------
("Basic Rent") for the Equipment, in arrears, the following amounts:
----------
(a) on each Basic Rent Payment Date occurring during the Basic Lease
Term, an amount equal to the product of (i) the Lessor's Cost and (ii) the
Basic
2
<PAGE>
Rent percentage set forth opposite such Basic Rent Payment Date in Schedule
I; and
(b) on each Basic Rent Payment Date occurring during the Renewal Term,
if any, an amount equal to the Fair Market Basic Rent for the Equipment for
the Rental Period then ending.
SECTION 3.02. Supplemental Rent. Lessee shall pay to Lessor, or to
-----------------
whoever shall be entitled thereto, as supplemental rent ("Supplemental Rent"),
-----------------
the following amounts:
(a) when due, any amount payable hereunder in respect of the Equipment
as Stipulated Loss Value or Early Buyout Price;
(b) when due or, if no due date is specified, within five Business
Days of demand, any amount (other than Basic Rent, Stipulated Loss Value or
Early Buyout Price) that Lessee is required to pay to, or for the account
of, Lessor (in its individual and trust capacity), the Owner Participant or
any other Person under this Lease or any other Basic Agreement;
(c) on demand, to the extent permitted by Applicable Laws, interest at
the rate of 2% per annum above the Prime Rate (computed on the basis of the
actual number of days elapsed over a year of 365 or 366 days, as
applicable) on any Rent not paid when due for each day from the date such
Rent becomes due and payable until the same is paid; and
(d) when due by the Lessor as lessee under the Ground Lease, as rent
for the sublease by Lessor to Lessee of the Equipment Site pursuant to
Section 2.02 hereof, an amount equal to all rent and other amounts payable
during or with respect to the Lease Term by Lessor under the Ground Lease.
For purposes of this Section 3.02, any payment made after 2:00 p.m., New York
City time, shall be deemed to have been made on the next succeeding Business
Day.
SECTION 3.03. Adjustments of Basic Rent, Stipulated Loss Value and
----------------------------------------------------
Early Buyout Price. (a) The percentages for Basic Rent, Stipulated Loss Value
- ------------------
and Early Buyout Price set forth, respectively, in Schedules I, II and III, have
been calculated in part on the basis of the Pricing Assumptions. If the amount
of Transaction Expenses payable by the Lessor is other than as set forth in the
Pricing Assumptions, then such percentages for Basic Rent, Stipulated Loss Value
and the Early Buyout Price shall be
3
<PAGE>
adjusted (upward or downward) so as to preserve the Owner Participant's Net
Economic Return. Any adjustments pursuant to this Section 3.03(a) shall be
satisfactory to Owner Participant's special tax counsel, using the same
standards applied by such counsel in approving the original rent structure,
Early Buyout Price and Stipulated Loss Values as of the Closing Date.
The percentages for Stipulated Loss Value also shall be subject to
adjustment pursuant to Section 7 of the Tax Indemnity Agreement.
(b) (i) Upon the occurrence of an event requiring adjustments to
the percentages for Basic Rent, Stipulated Loss Value and Early Buyout Price
pursuant to Section 3.03(a) hereof or pursuant to Section 7 of the Tax Indemnity
Agreement, the Owner Participant shall make the necessary computations as
promptly as possible on a basis consistent with that used by the Owner
Participant in the computation of the percentages for Basic Rent, Stipulated
Loss Value and the Early Buyout Price as of the Closing Date, taking into
account only the event, and the timing thereof, giving rise to the adjustments.
Subject to paragraph (ii) of this Section 3.03(b), such adjustments shall be
effective from and including the date the Owner Participant shall have furnished
to Lessee a certificate signed on behalf of the Owner Participant by a
Responsible Officer confirming that such adjustments have been properly computed
in accordance with the provisions of this Lease (and, if appropriate, the Tax
Indemnity Agreement), and shall remain effective until changed in consequence of
any inaccuracy discovered in the course of any verification procedure conducted
pursuant to paragraph (ii) of this Section 3.03(b) or in consequence of any
event occurring thereafter requiring further adjustment pursuant to Section
3.03(a) hereof or pursuant to Section 7 of the Tax Indemnity Agreement; provided
--------
that the consequences of any inaccuracy in any such certificate shall be limited
to those set forth in paragraph (ii) below.
(ii) Within 30 days after the Owner Participant shall have
provided Lessee with a certificate pursuant to paragraph (i) of this Section
3.03(b), Lessee shall have the right to require that such adjustments be
submitted to the independent accounting firm regularly employed by the Owner
Participant, whose determination in writing shall be binding on Lessee, Lessor
and the Owner Participant and conclusive, absent manifest error. The fees and
expenses of such accounting firm incurred in connection with the calculation and
verification procedures described in this paragraph (b) shall be paid by Lessee,
unless the net present value of the Basic Rent payments over the Lease Term as
computed by the Owner Participant exceeds by 15
4
<PAGE>
basis points or more of Lessor's Cost the net present value of the Basic Rent
payments over the Lease Term as verified. For purposes of the preceding
sentence, net present values shall be computed using a discount rate of 10.0%.
Each adjustment of the percentages for Basic Rent, Stipulated Loss Value or
Early Buyout Price for the Equipment may, but need not (unless requested by
Lessee, Lessor or the Owner Participant), be evidenced by the execution and
delivery of a supplement to this Lease in form and substance satisfactory to
Lessee and the Owner Participant, and shall be effective as provided herein
without regard to the date on which or whether such supplement to this Lease is
so executed and delivered. The responsibility of such independent accounting
firm shall be limited to verifying such adjustments and shall not extend to
matters of interpretation of any Basic Agreement.
SECTION 3.04. Method of Payment. Each payment of Rent shall be made
-----------------
in immediately available funds no later than 2:00 p.m., local time at the place
of receipt, on the date such payment is due and payable hereunder, and shall be
paid either (i) in the case of payments other than amounts payable to any
Indemnified Person pursuant to Article VII or VIII of the Participation
Agreement, to Lessor at its address for payments set forth in the Participation
Agreement, or at such other address as Lessor may specify by notice in writing
to Lessee, or (ii) in the case of Supplemental Rent payable to any Indemnified
Person pursuant to Article VII or VIII of the Participation Agreement, to such
Person as shall be entitled to receive such payment at such address as such
Person may specify by notice to Lessee. If the date on which any payment of Rent
is due hereunder is not a Business Day, such payment shall be made as aforesaid
on the next succeeding Business Day, with the same force and effect as if made
on the nominal due date provided for in this Lease.
ARTICLE IV
Net Lease
---------
This Lease is a net lease and the parties intend that Lessee shall pay
all costs, charges, fees and expenses in connection with the use, operation,
maintenance and repair of the Equipment and the Equipment Site, including,
without limitation, the costs, charges, fees and expenses expressly set forth in
this Lease. Notwithstanding any other provision of this Lease, the obligation
of Lessee to pay all Rent payable hereunder is absolute and unconditional and
Lessee shall not be entitled to any abatement, suspension, deferment or
reduction of, or any setoff against, Rent for any reason whatsoever, including,
but not
5
<PAGE>
limited to, abatements, suspensions, deferments, reductions or setoffs due or
alleged to be due by reason of any past, present or future claims of Lessee
against Lessor, the Owner Participant or any other Person or entity, either
under this Lease or otherwise; nor, except as otherwise expressly provided in
Section 8.01, 8.03, 12.02(d) or (e) or 15.02, shall the obligation of Lessee to
pay all Rent payable hereunder be released, discharged or otherwise affected, by
reason of (i) any defect in or damage to or loss of possession or loss of use
or destruction, requisition or taking of the Equipment or the Equipment Site, or
any part thereof, from whatsoever cause, (ii) any liens, encumbrances or rights
of others with respect to the Equipment or the Equipment Site, or any part
thereof, (iii) the prohibition of or other restriction against Lessee's use of
the Equipment or the Equipment Site, or any part thereof, (iv) the interference
with such use by any Person, (v) the invalidity or unenforceability or lack of
due authorization of this Lease or any provision hereof or any other Basic
Agreement, in each case whether against or by Lessee or otherwise, (vi) any
defect in the title to, compliance with plans or specifications for, condition,
design, quality, fitness for use, operation, damage or destruction of the
Equipment or the Equipment Site, or any part thereof, (vii) any insolvency of or
any bankruptcy, reorganization or similar proceeding against Lessee, Lessor or
any other Person, (viii) any claim that Lessee may have against Lessor or any
other Person or (ix) for any other cause whether similar or dissimilar to the
foregoing, it being the intention of the parties hereto that the Rent payable by
Lessee hereunder during the Lease Term shall continue to be payable in all
events in the manner and at the times herein provided unless the obligation to
pay the same shall expire or be terminated pursuant to Section 8.01, 8.03,
12.02(d) or (e) or 15.02. TO THE EXTENT PERMITTED BY APPLICABLE LAWS, LESSEE
HEREBY WAIVES ANY AND ALL RIGHTS WHICH IT MAY NOW HAVE OR WHICH AT ANY TIME
HEREAFTER MAY BE CONFERRED UPON IT, BY STATUTE OR OTHERWISE, TO TERMINATE,
CANCEL, QUIT OR SURRENDER THIS LEASE, OR TO ANY DIMINUTION OR REDUCTION OF RENT
PAYABLE BY LESSEE HEREUNDER, EXCEPT IN ACCORDANCE WITH THE EXPRESS PROVISIONS OF
THIS LEASE. If for any reason whatsoever this Lease shall be terminated in
whole or in part by operation of law or otherwise except as expressly provided
herein, Lessee shall nonetheless pay to Lessor (or, in the case of Supplemental
Rent, to whoever shall be entitled thereto) an amount equal to each Rent payment
at the time and in the manner that such payment would have become due and
payable under the terms of this Lease if it had not been terminated in whole or
in part. Subject to the next succeeding sentence, each payment of Rent made by
Lessee hereunder shall be final and Lessee shall not seek to recover all or any
part of such payment (except for any excess payment made in error) from Lessor
or the Owner
6
<PAGE>
Participant for any reason whatsoever. Nothing in this Article IV shall be
construed to prevent Lessee from pursuing any claim it may have against Lessor,
the Owner Participant or any other Person in such court of law or otherwise as
Lessee may deem appropriate.
ARTICLE V
Restriction on Liens
--------------------
Lessee shall not, directly or indirectly, create, incur, assume or
suffer to exist any Lien on or with respect to the Equipment or the Equipment
Site, or any part thereof or Lessor's title thereto or interest therein, except
Permitted Liens, and Lessee shall promptly take such action at its expense as
may be necessary duly to discharge any such Lien that may arise.
ARTICLE VI
Warranty of Lessor; Disclaimer
------------------------------
SECTION 6.01. Quiet Enjoyment. Lessor warrants and covenants that,
---------------
unless an Event of Default shall have occurred and be continuing, Lessor, any
Person acting by, through or under Lessor or deriving its rights from Lessor,
and any successor or assign of Lessor or any such Person, shall not interfere
with Lessee's rights of quiet enjoyment, use and possession of the Equipment as
provided herein during the Lease Term.
SECTION 6.02. Disclaimer of Other Warranties. As between Lessor and
------------------------------
the Owner Participant on the one hand and Lessee on the other, the execution by
Lessee of this Lease shall be conclusive proof that Lessee has accepted the
Equipment and the Equipment Site, for all purposes of this Lease
(notwithstanding any defect or inherent vice with respect to design,
manufacture, condition or in any other respect), and that the Equipment and the
Equipment Site, has been delivered to and is in the possession of Lessee, has
been fully inspected by Lessee and Lessee has no knowledge of any such defect or
inherent vice, is suitable for its intended purposes, conforms in all respects
to the specifications of this Lease and to manufacturing specifications and
warranties and is in good working order and repair and conforms to all
requirements of Applicable Law. Lessee acknowledges and agrees that (i) NEITHER
LESSOR NOR THE OWNER PARTICIPANT IS A MANUFACTURER OF OR A DEALER IN PROPERTY OF
SUCH KIND, AND (ii) LESSOR LEASES AND LESSEE TAKES THE EQUIPMENT AND THE
EQUIPMENT SITE, AND LESSEE SHALL TAKE EACH MODIFICATION AND ANY PART THEREOF, AS
IS AND WHERE
7
<PAGE>
IS, WITH ALL FAULTS, and subject to all Applicable Laws and Governmental Actions
now in effect or hereafter adopted, and neither Lessor nor the Owner Participant
makes or shall be deemed to have made, and LESSOR AND THE OWNER PARTICIPANT EACH
HEREBY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED,
WITH RESPECT TO THE EQUIPMENT OR ANY PART OR COMPONENT THEREOF OR THE EQUIPMENT
SITE, INCLUDING, WITHOUT LIMITATION, THE DESIGN OR CONDITION OF THE EQUIPMENT OR
MODIFICATION OR PART, THE MERCHANTABILITY OR THE FITNESS OF THE EQUIPMENT OR
MODIFICATION OR PART FOR ANY PARTICULAR PURPOSE, TITLE TO THE EQUIPMENT OR
MODIFICATION OR PART OR THE EQUIPMENT SITE, THE QUALITY OF THE MATERIAL OR
WORKMANSHIP OF THE EQUIPMENT OR MODIFICATION OR PART OR THE CONFORMITY THEREOF
TO SPECIFICATIONS, FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT OR THE ABSENCE
OF ANY LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, NOR SHALL LESSOR OR
THE OWNER PARTICIPANT BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES
(INCLUDING LIABILITY IN TORT, STRICT OR OTHERWISE) WITH RESPECT TO THE
FOREGOING, it being agreed that all such risks, as between Lessor and the Owner
Participant on the one hand and Lessee on the other, are to be borne by Lessee,
except to the extent expressly provided in Section 6.02(a) and Section 6.03(a)
of the Participation Agreement, and except that Lessor (in its individual and
trust capacities) represents and warrants that on the Closing Date, Lessor shall
have received whatever title to the Equipment as was conveyed to it by the Bill
of Sale and the Conveyance Instrument covering the Equipment.
The provisions of this Section have been negotiated and, except to the
extent otherwise expressly stated in Section 6.02(a) and Section 6.03(a) of the
Participation Agreement, the foregoing provisions are intended to be a complete
exclusion and negation of any representations or warranties by Owner Participant
or Lessor, express or implied, with respect to the Equipment, whether arising
pursuant to any statute, ordinance, rule or regulation now or hereafter in
effect or otherwise. Neither Owner Participant nor Lessor shall at any time be
required to inspect the Equipment, nor shall any such inspection be deemed to
affect or modify the foregoing provisions of this Section.
SECTION 6.03. Enforcement of Certain Warranties. Lessee hereby
---------------------------------
assigns to Lessor any and all warranties and claims against dealers,
manufacturers, contractors or subcontractors relating to the Equipment. Except
if an Event of Default has occurred and is continuing, Lessor authorizes Lessee
(directly or through agents), at Lessee's expense, to assert for Lessor's
account, during the Lease Term, all of Lessor's rights (if any) under any
applicable warranty and any other claim Lessee or Lessor may have
8
<PAGE>
against any vendor or manufacturer with respect to the Equipment or Modification
or Part, and Lessor agrees to cooperate, at Lessee's expense, with Lessee in
asserting such rights. If an Event of Default shall have occurred and be
continuing, Lessor shall have the right to control the handling of all such
rights and claims, including without limitation the determination of whether and
when to assert and/or settle any such right or claim; provided that Lessee shall
--------
have the right to participate in the handling of any such right or claim that
Lessor shall have determined to assert so long as such participation by Lessee
does not interfere with the rights of Lessor to control the handling of such
right or claim. Any amount recovered by Lessee under any such warranty or other
claim against any vendor or manufacturer shall be applied as provided in Section
10.03 hereof.
ARTICLE VII
Operation and Maintenance; Modifications; Location of
-----------------------------------------------------
Equipment
---------
SECTION 7.01. Operation and Maintenance. At all times during the
-------------------------
Lease Term, Lessee shall operate and maintain the Equipment and the component
Parts thereof so as to keep the same in good working order and repair and in the
same condition as when delivered, ordinary wear and tear excepted, and in a
condition such that will enable the Equipment to perform its intended functions
for its intended useful life. In furtherance and not in limitation of the
foregoing, Lessee shall operate and maintain the Equipment and the Parts thereof
(i) in a prudent and responsible manner, (ii) in accordance with Lessee's
standard practice from time to time in effect for similar equipment located in
Skowhegan, Maine owned or leased by it without discrimination based on the
leased status of the Equipment or otherwise, (iii) in accordance with the terms
of all operating manuals and other documents applicable to the Equipment, all
applicable insurance policies and all appropriate specifications, procedures and
manufacturer requirements, (iv) subject to Section 7.07 hereof, in compliance
with all requirements of Applicable Laws and (v) in accordance with standard
industry practices. During the Lease Term, Lessee shall (x) keep reports
regarding maintenance, repair, modifications and replacements in respect of the
Equipment in sufficient detail to indicate the nature and date of major work
done in accordance with Lessee's standard operating practices and (y) maintain
current operating manuals (including training, maintenance and technology
manuals) and a complete set of plans and specifications of the Equipment, in
sufficient detail to enable an engineer not otherwise familiar with the
Equipment to locate and identify the various items of property
9
<PAGE>
comprising the Equipment, in each case in accordance with the standards set
forth above and promptly update the same as necessary. A set of such reports,
manuals, plans and specifications shall be kept by Lessee at its offices at the
Equipment Site and shall be made available to Lessor or Owner Participant in
accordance with Section 9.01 hereof. Lessor shall have no obligation to
maintain, alter, repair, rebuild or replace the Equipment, and Lessee expressly
waives the right to perform any such action at the expense of Lessor pursuant to
any law at any time in effect.
SECTION 7.02. Replacement of Parts. (a) Subject to Section 8.01
--------------------
hereof, in the event that any Part becomes worn out or is lost, stolen,
destroyed, seized, condemned, confiscated, requisitioned, damaged beyond repair
or permanently rendered unfit for normal use for any reason whatsoever, Lessee
at its expense shall repair or replace such Part. Each such replacement Part
shall be free and clear of all Liens (except Permitted Liens) and shall be in as
good operating condition as, and shall have a value, utility and remaining
useful life at least equal to, the Part being replaced, it being assumed for
this purpose that such replaced Part was in the condition and repair required to
be maintained pursuant to Section 7.01 hereof; provided, however, that, pending
-------- -------
the completion of repairs to any Part or the installation of a permanent
replacement Part therefor, Lessee may, if necessary in order to operate the
Equipment, install a temporary Part, in which event Lessee shall complete such
repairs or install a permanent replacement Part meeting the requirements of this
Section 7.02 or shall cause such temporary replacement Part to meet such
requirements as soon as reasonably practicable but in any event within the
earlier of 90 days (or such longer period as shall be necessary under the
circumstances so long as Lessee is diligently attempting to obtain a permanent
replacement Part) and the expiration or termination of the Lease Term.
Immediately upon the permanent replacement of a Part, without further act, (i)
title to the replacement Part shall vest in Lessor, (ii) the replacement Part
shall become subject to this Lease and be deemed to be part of the Equipment for
all purposes hereof, and (iii) all of Lessor's right, title and interest in and
to the replaced Part shall pass to Lessee on an "as-is, where-is" basis, without
recourse or warranty (except as to the absence of Lessor Liens), and such
replaced Part shall no longer be subject to this Lease. From time to time at the
request of Lessor and at Lessee's expense, Lessee will take such action as is
reasonably practicable to confirm Lessor's title to any replacement Part. From
time to time at the request of Lessee and at Lessee's expense, Lessor shall take
such action as is reasonably practicable to confirm Lessee's title to each
replaced Part. No matter where located, any Part at any time removed therefrom
shall remain the property
10
<PAGE>
of Lessor unless and until title thereto shall pass to Lessee in accordance with
the second preceding sentence.
SECTION 7.03. Modifications Required by Law. Subject to Section
-----------------------------
7.07 hereof, Lessee at its expense shall make such Modifications as may be
required from time to time to meet the requirements of any Applicable Laws or as
soon as reasonably practicable after any such requirement shall arise but in any
event not later than the earlier of the date required by such Applicable Laws
(subject to Section 7.07) and the expiration or termination of the Lease Term.
SECTION 7.04. Optional Modifications. Provided no Default or Event
----------------------
of Default shall have occurred and be continuing, Lessee at its expense from
time to time may make such Modifications to the Equipment as Lessee may deem
desirable in the conduct of its business; provided, however, that Lessee shall
-------- -------
not have the right to make any such optional Modification that would diminish
the fair market value, residual value, utility or remaining useful life of the
Equipment or cause the Equipment to become "limited use property" within the
meaning of Revenue Procedure 76-30.
SECTION 7.05. Title to Modifications. Title to each Modification
----------------------
(other than a Severable Modification) shall vest in Lessor, without further act,
effective on the date such Modification (or any Part in replacement thereof or
in substitution therefor) becomes incorporated into or installed in or attached
to the Equipment. Immediately upon title to any Modification vesting in Lessor
pursuant to this Section 7.05, such Modification shall, without further act,
become subject to this Lease and be deemed part of the Equipment for all
purposes hereof. The provisions of this Section shall not be construed to
impose any obligation on Lessor to finance the cost of any Modification, or any
obligation on Lessee to offer Lessor an opportunity to finance any Modification;
provided, however, that Lessor and Lessee may, if they choose (in their
- -------- -------
respective sole discretion), enter into any such arrangements on mutually
acceptable terms.
SECTION 7.06. Removal of Property. (a) Subject to compliance with
-------------------
Applicable Laws, so long as no Event of Default or Specified Default shall have
occurred and be continuing, Lessee from time to time may remove any Severable
Modification (or any Part in replacement thereof or in substitution therefor).
Notwithstanding the foregoing, if Lessee does not exercise a purchase option
under Article XV hereof with respect to the Equipment, Lessee will (i) notify
Lessor in writing not less than 90 days prior to the expiration of the Lease
Term of any Severable Modification that Lessee is entitled to remove and intends
to remove in accordance with this Section 7.06(a)
11
<PAGE>
and (ii) afford Lessor an opportunity to purchase such Severable Modification at
a cash price equal to the Fair Market Sale Value thereof. In any event Lessee
will repair any damage to the Equipment caused by the removal of a Severable
Modification therefrom as provided herein.
(b) In addition, if at any time during the Lease Term Lessee shall
conclude that any property included in the Equipment to which Lessor shall have
title (other than a Severable Modification that may be removed as provided in
Section 7.06(a)) is unnecessary and can be removed without diminishment of the
fair market value, residual value, utility or remaining useful life of the
Equipment, Lessee may remove such property; provided, however, that, if, in the
-------- -------
reasonable judgment of Lessee, the sum of the net proceeds from a disposition of
such property plus the net proceeds from any and all prior dispositions of
property of the type referred to in this Section 7.06(b), would exceed 0.5% of
Lessor's Cost of the Equipment, then, Lessee shall give Lessor reasonably prompt
notice of all such property so removed, which notice will request Lessor's
direction as to the disposition of such property. If Lessor does not respond to
such notice within 60 days of the date of delivery thereof, Lessee may, on
behalf of Lessor, dispose of such property in a commercially reasonable manner
and upon such disposal, without further act, title thereto shall vest in the
purchaser thereof, on an "as-is, where-is" basis, without recourse or warranty
and free and clear of any Lien or other interest in favor of Lessor or the Owner
Participant. Lessee shall pay over to Lessor any net proceeds received from
such dispositions in excess of 0.5% of Lessor's Cost of the Equipment. From
time to time at the request of Lessee and at Lessee's expense, Lessor shall take
such action as is reasonably practicable to confirm the relevant purchaser's
title to such property.
SECTION 7.07. Contest of Requirements of Law. If, with respect to
------------------------------
any requirement of Applicable Laws relating to the operation, maintenance or
modification of the Equipment or the Facility, (i) Lessee is contesting such
requirement diligently and in good faith by appropriate proceedings, (ii)
compliance with such requirement shall have been excused or exempted by a
nonconforming use permit, waiver, extension or forbearance exempting Lessee from
such requirement or (iii) Lessee shall be making a good faith effort and shall
be diligently taking appropriate steps to comply with such requirement, then the
failure by Lessee to comply with such requirement shall not constitute a Default
hereunder; provided that such contest or noncompliance does not involve (A) any
--------
material danger of (1) foreclosure, forfeiture or loss of the Equipment or any
part thereof or (2) criminal liability or any material civil liability being
imposed on Lessor or the Owner Participant or (B) any
12
<PAGE>
material danger of (1) sale of, or the creation of any Lien (other than a
Permitted Lien) on, the Equipment or any part thereof or (2) the non-payment of
Rent or a material adverse effect on Lessee's ability to perform its obligations
hereunder or under the other Basic Agreements or (3) extending the ultimate
application of such requirements of Applicable Laws beyond the termination of
the Basic Lease Term or the Renewal Term, as appropriate, unless Lessee has
posted a bond or other security in respect thereof satisfactory to Lessor.
Lessee shall provide Lessor with notice of any contest of the type described in
clause (i) above to enable Lessor to ascertain whether such contest may have the
effect of the type described in the proviso above.
SECTION 7.08. Location of the Equipment. During the Lease Term
-------------------------
Lessee shall not, without the prior written consent of Lessor, remove the
Equipment or any part thereof from the Equipment Site, which is located in the
Skowhegan, Maine (it being understood that this Section 7.08 shall not prohibit
removal from the Equipment Site of (i) replaced Parts, title to which has passed
to Lessee pursuant to Section 7.02 hereof, (ii) Severable Modifications, and
(iii) unnecessary property, title to which has passed to a purchaser pursuant to
Section 7.06(b) hereof).
ARTICLE VIII
Event of Loss; Obsolescence Termination
---------------------------------------
SECTION 8.01. Event of Loss. (a) Upon the occurrence of an Event of
-------------
Loss with respect to the Equipment, Lessee shall promptly (and in any event
within the earlier of 30 days after the occurrence of such Event of Loss and
five days after a Responsible Officer of Lessee obtains knowledge thereof)
notify Lessor of such Event of Loss. On the earlier of (A) the Determination
Date next following the date of receipt by Lessee of insurance proceeds in
respect of such Event of Loss and (B) the latest Determination Date that occurs
on or before the date 180 days following the occurrence of such Event of Loss,
Lessee shall pay to Lessor an amount equal to the Stipulated Loss Value of the
Equipment, computed as of such Determination Date, plus (if such Determination
Date is a Basic Rent Payment Date) any Basic Rent payable on such date (it being
understood and agreed that Lessee shall continue to be obligated to pay all
Basic Rent due on any Basic Rent Payment Date occurring on or prior to the
Determination Date on which such Stipulated Loss Value is due (notwithstanding
the occurrence of such Event of Loss)). The excess of any proceeds referred to
in Section 10.03(a) received by Lessee with respect to an Event of Loss over the
amount of Stipulated Loss Value computed pursuant to the preceding
13
<PAGE>
sentence shall be the property of Lessee, except for payments with respect to
the condemnation, confiscation, seizure or the requisition of title of the
Equipment and except further for payments attributable to the property interest
of Lessor in the Equipment recovered from any dealer, manufacturer, contractor
or subcontractor pursuant to Section 6.03, in all of which cases such excess
shall be divided between Lessor and Lessee as their interests may appear.
(b) Upon payment by Lessee of the Stipulated Loss Value for the
Equipment following an Event of Loss, together with all other Basic Rent and
Supplemental Rent then due hereunder (including, without limitation, all Basic
Rent due on any Basic Rent Payment occurring on or prior to the Determination
Date on which such Stipulated Loss Value payment is due), (i) all obligations of
Lessee hereunder to pay Basic Rent for the Equipment, and the Lease Term, shall
terminate and (ii) Lessor shall transfer, without recourse or warranty (except
as to the absence of Lessor Liens) and on an "as-is, where-is" basis, all right,
title and interest of Lessor in and to the Equipment to or at the direction of
Lessee, and shall furnish to or at the direction of Lessee, at Lessee's expense,
one or more bills of sale, in form and substance reasonably satisfactory to
Lessee, evidencing such transfer.
SECTION 8.02. Requisition Not Constituting an Event of Loss. In the
---------------------------------------------
event of the requisition for use of the Equipment that does not constitute an
Event of Loss, all of Lessee's obligations under this Lease (including, without
limitation, the obligation to pay Rent) shall continue as if such requisition
had not occurred; provided, however, that all payments received by Lessor or
-------- -------
Lessee for the use of the Equipment shall, so long as no Event of Default or
Specified Default has occurred and is continuing, be paid over to, or retained
by, Lessee, or if an Event of Default or Specified Default has occurred and is
continuing, be paid over to, or retained by, Lessor.
SECTION 8.03. Obsolescence Termination. (a) If the Senior
------------------------
Management and/or the Board of Directors of Lessee shall have determined in good
faith that the Equipment has become technologically obsolete and/or is no longer
economically viable, Lessee shall have the right to terminate this Lease on any
Basic Rent Payment Date occurring on or after the sixth anniversary of the
Closing Date that is specified by Lessee (a "Termination Date") in a notice to
----------------
the Lessor (a "Termination Notice") given not later than 60 days prior to the
------------------
proposed Termination Date and accompanied by a certificate of a Responsible
Officer of Lessee evidencing such determination. Subject to paragraph (c) of
this Section 8.03, Lessee, as agent for Lessor, shall
14
<PAGE>
use commercially reasonable efforts to obtain cash bids for the purchase of the
Equipment. Lessee shall certify to Lessor the amount and terms of each bid
received by Lessee and the name and address of the Person who submitted such
bid. Lessor and Owner Participant shall have the right to obtain such cash bids,
in either case either directly or through agents other than Lessee. Neither
Lessee nor any Affiliate of Lessee shall, directly or indirectly, submit a bid
for, or enter into any arrangement to acquire title to or an interest in or the
right to use, the Equipment or any part thereof.
(b) Subject to paragraph (c) of this Section 8.03, on the Termination
Date Lessor shall transfer, without recourse or warranty (except as to the
absence of Lessor Liens), and on an "as-is, where-is" basis, all right, title
and interest of Lessor in and to the Equipment to or at the direction of the
Person who shall have submitted the highest cash bid prior to the Termination
Date, and shall furnish to or at the direction of such Person, and at the
expense of Lessee, one or more bills of sale, in form and substance reasonably
satisfactory to such Person, evidencing such transfer. The net proceeds of such
transfer shall be paid to or retained by Lessor, and, in addition, on such
Termination Date Lessee shall pay to Lessor (or, in the case of Supplemental
Rent, to the Person or Persons entitled thereto) (i) an amount equal to the
excess, if any, of (A) the higher of (I) the Stipulated Loss Value of the
Equipment, computed as of such Termination Date, and (II) the Fair Market Sale
Value of the Equipment as of such Termination Date, over (B) such net proceeds,
(ii) the Basic Rent for the Equipment payable on such date and (iii) all other
Basic Rent and Supplemental Rent then due hereunder. If for any reason (other
than default by Lessee or the applicability of paragraph (c) of this Section
8.03) the transfer of the Equipment to the highest bidder does not occur on or
as of such Termination Date, then this Lease shall continue in full force and
effect in accordance with its terms (including the terms of this Section 8.03).
Lessor shall be under no duty to solicit bids, to inquire into the efforts of
Lessee to obtain bids or otherwise to take any action in connection with any
such proposed termination of this Lease other than to transfer the Equipment to
the Person named in the highest bid certified by Lessee to Lessor or obtained by
Lessor against receipt of the payments provided for herein. Lessee shall pay all
reasonable expenses of Lessor and Owner Participant incurred in connection with
any termination pursuant to this Section.
(c) Notwithstanding the provisions of paragraphs (a) and (b) of this
Section 8.03, upon receipt of a Termination Notice, Lessor shall have the
option, by irrevocable written notice to Lessee given no later than 30
15
<PAGE>
days after receipt of such Termination Notice, to elect to retain the Equipment,
in which case on the relevant Termination Date Lessee shall deliver the
Equipment to Lessor in accordance with Article XVI hereof and pay to Lessor (or,
in the case of Supplemental Rent, to the Person or Persons entitled thereto), in
lieu of the amounts payable under paragraph (b) above, (i) an amount equal to
the excess, if any, of (A) the Stipulated Loss Value of the Equipment, computed
as of such Termination Date, over (B) the Fair Market Sale Value thereof as of
the Termination Date (as determined by the Appraisal Procedure promptly upon
exercise of such option), (ii) the Basic Rent for the Equipment payable on such
date and (iii) all other Basic Rent and Supplemental Rent then due hereunder.
(d) Upon payment by Lessee of all amounts payable by it under this
Section 8.03, all obligations of Lessee hereunder to pay Basic Rent for the
Equipment, and the Lease Term, shall terminate.
(e) Notwithstanding any other provision of this Article VIII, Lessee
may, by notice to Lessor, revoke any Termination Notice previously delivered at
any time prior to the Termination Date specified in such Termination Notice, but
such right of revocation may not be exercised with respect to more than a total
of three Termination Notices.
ARTICLE IX
Reports
-------
SECTION 9.01. Reports to Governmental Authorities. Lessee shall
-----------------------------------
prepare (or cause to be prepared) and file in a timely fashion, or, if Lessor
shall be required to file, Lessee shall prepare or cause to be prepared and
deliver to Lessor within a reasonable time prior to the date for filing, all
reports with respect to the Equipment, or the condition or operation thereof,
that are required from time to time to be filed with any Government Authority.
Upon discovering that it is required to file any such report, Lessor shall give
timely notice thereof to Lessee; provided, however, that Lessor shall not be
-------- -------
liable for any failure to give such notice.
SECTION 9.02. Information Concerning the Equipment. Lessee shall
------------------------------------
furnish Lessor and Owner Participant such information as Lessor or Owner
Participant reasonably may request from time to time concerning the Equipment,
including information concerning the condition, maintenance, use and location
thereof, as well as copies of non-privileged studies or reports prepared by or
for Lessee, or non-privileged audits prepared by or for Lessee
16
<PAGE>
concerning the environment or the conditions relating to public or worker health
and safety at the Equipment, the Equipment Site or the Facility, in accordance
with the provisions of Article VI of the Participation Agreement.
ARTICLE X
Insurance
---------
SECTION 10.01. Coverage. Without limiting any of the other
--------
obligations or liabilities of Lessee under this Lease, Lessee shall, during the
Lease Term, carry and maintain, at its own expense, at least the minimum
insurance coverage set forth in this Article X. Lessee shall also carry and
maintain any other insurance that Lessor may reasonably require from time to
time. All insurance carried pursuant to this Article X shall be placed with
such insurers with an AM Best Rating of A-X or other insurers as are acceptable
to Lessor; provided that, with respect to the all risk property insurance and
--------
business interruption insurance required to be carried and maintained pursuant
to clauses (a) and (b) of this Section 10.01, (1) up to an aggregate of
$1,000,000 of such insurances on a combined basis may be placed with an insurer
with an AM Best rating of A/VI or better, (2) up to an aggregate of $1,000,000
of such insurances on a combined basis may be placed with an insurer with an AM
Best rating of A/VIII or better, (3) up to an aggregate of $2,000,000 of such
insurances on a combined basis may be placed with an insurer with an AM Best
rating of A/IX or better, and (4) up to an aggregate of $1,000,000 of such
insurances may be placed with an insurer with an AM Best rating of A++/IX or
better. Such insurance shall be written with deductibles or self insured
retentions as are acceptable to Lessor.
(a) All Risk Property Insurance. Lessee shall maintain all risk
---------------------------
property insurance covering the Equipment against physical loss or damage,
including, but not limited, to fire and extended coverage, collapse, flood,
earth movement and comprehensive boiler and machinery coverage (including
electrical malfunction and mechanical breakdown). Coverage shall be
written in the greater of the then current Stipulated Loss Value or
replacement cost value of the Equipment in an amount acceptable to Lessor
except with respect to the perils of flood and earthquake in which case
separate sublimits of not less than $100,000,000 may apply. Such insurance
policy shall include expediting expense in an amount not less than
$1,000,000 and contain an agreed amount endorsement waiving any coinsurance
penalty.
17
<PAGE>
(b) Business Interruption. As an extension of the insurance required
---------------------
under clause (a) of this Section 10.01, Lessee shall maintain business
interruption insurance in an agreed amount equal to twelve (12) months of
continuing expenses including lease payments. Such policy shall include an
agreed amount endorsement waiving any coinsurance penalty. If business
interruption insurance required to be maintained by Lessee pursuant to this
clause (b) (including the limits on deductibles or any other terms under
policies for such insurance) ceases to become available on a commercially
reasonable basis at the time of renewal, Lessee shall provide written
notice to Lessor accompanied by a letter from Lessee's insurance broker
stating that such insurance is unavailable on a commercially reasonably
basis. Such notice shall be given not less than thirty (30) days prior to
the scheduled date for renewal of any such policy. Upon receipt of such
notice Lessor and Lessee shall immediately negotiate in good faith to
obtain a commercially reasonably alternative to such insurance. In the
event that Lessor and Lessee can not reach a resolution acceptable to both
parties within five (5) days, Lessor shall make arrangements for the
formation of an insurance panel consisting of Lessee's insurance advisor
(or broker), Lessor's insurance adviser (or broker) and an independent
insurance expert chosen by Lessor and reasonably acceptable to Lessee
selected from an internationally recognized insurance brokerage. Such
independent expert shall conduct a separate review of the relevant
insurance requirements of this clause (b) and the market for such insurance
at the time, giving due consideration to the representations of both
insurance advisors, and upon conclusion of such review shall issue a
written report stating that such insurance is either available or not
available on a commercially reasonable basis. In the event the insurance
expert concludes that such insurance is not available on a commercially
reasonably basis, the insurance expert shall provide a written
recommendation not less than fifteen (15) days before the date for renewal
of such insurance which shall be conclusive and binding on both Lessee and
Lessor. Lessor shall issue a waiver to Lessee for a period of two (2)
years upon the insurance expert certifying that the relevant insurance is
not available on a commercially reasonable basis and the Lessee having
implemented the recommendation of the insurance expert. All fees, costs
and expenses associated with the insurance panel (including the review by
the insurance expert) shall be for the sole account of Lessee.
18
<PAGE>
(c) Comprehensive General Liability Insurance. Lessee shall maintain
-----------------------------------------
comprehensive general liability insurance written on an occurrence basis
with a limit of not less than $1,000,000. Such coverage shall include, but
not be limited to, premises/operations, explosion, collapse, underground
hazards, contractual liability, independent contractors, products/completed
operations, property damage and personal injury liability. Such insurance
shall not exclude coverage for punitive or exemplary damages where
insurable by law.
(d) Workers' Compensation/Employer's Liability. Lessee shall maintain
------------------------------------------
workers' compensation insurance in accordance with statutory provisions
covering accidental injury, illness or death of an employee of Lessee while
at work or in the scope of his employment with Lessee and employer's
liability in an amount not less than $1,000,000. Such coverage shall not
contain any exclusions for occupational disease exclusions.
(e) Excess Liability. Lessee shall maintain excess or umbrella
----------------
liability insurance in an amount not less than $25,000,000 written on an
occurrence basis providing coverage limits excess of the insurance limits
required under clause (c) of this Section 10.01 and clause (d) of this
Section 10.01 with respect to employer's liability only. Such insurance
shall provide drop down coverage in case of exhaustion of underlying limits
and/or aggregates. Such insurance shall not exclude coverage for punitive
or exemplary damages where insurable by law.
SECTION 10.02. Endorsements. Lessee shall cause all insurance carried
------------
and maintained in accordance with Section 10.01 hereof to be endorsed as
follows:
(a) Lessee shall be the named insured and Lessor shall be an
additional named insured and as a loss payee for (x) insurance proceeds in
excess of $4,000,000 (whether in one payment or a series of payments) with
respect to loss or damage to the Equipment and (y) for all insurance
proceeds with respect to loss or damage to the Equipment while an Event of
Default or Specified Default shall be continuing, in each case net of the
applicable deductible, with respect to the policy described in clause (a)
of Section 10.01 hereof. Lessee shall be the named insured and Lessor
shall be an additional named insured and as a loss payee for (x) insurance
proceeds in excess of $4,000,000 (whether in one payment or a series of
payments) on account of an event relating to the Equipment and (y) for all
insurance
19
<PAGE>
proceeds while an Event of Default or Specified Default shall be
continuing, in each case net of the applicable deductible, with respect to
the policy described in clauses (b) of Section 10.01 hereof. Lessee shall
be the named insured and Lessor (in both its individual and trust
capacities) and the Owner Participant shall be additional insureds with
respect to policies described in clauses (c) and (e) of Section 10.01
hereof. It shall be understood that any obligation imposed upon Lessee,
including, but not limited to, the obligation to pay premiums, shall be the
sole obligation of Lessee and not that of Lessor or Owner Participant.
(b) With respect to policies described in clauses (a) and (b) of
Section 10.01 hereof, the interests of Lessor and Owner Participant shall
not be invalidated by any action or inaction of Lessee, or any other
Person, and shall insure Lessor and Owner Participant regardless of any
breach or violation by Lessee or any other Person, of any warranties,
declarations or conditions of such policies.
(c) Inasmuch as the liability policies are written to cover more than
one insured, all terms, conditions, insuring agreements and endorsements,
with the exception of the limits of liability, shall operate in the same
manner as if there were a separate policy covering each insured.
(d) The insurers thereunder shall waive all rights of subrogation
against Lessor and Owner Participant, any right of setoff or counterclaim
and any other right to deduction, whether by attachment or otherwise.
(e) Such insurance shall be primary without right of contribution of
any other insurance carried by or on behalf of Lessor or Owner Participant
with respect to their interests as such in the Equipment.
(f) If such insurance is canceled for any reason whatsoever, including
nonpayment of premium, or any changes are initiated by Lessee or carrier
which affect the interests of Lessor or Owner Participant, such
cancellation or change shall not be effective as to Lessor or Owner
Participant until thirty (30) days, except for non-payment of premium which
shall be ten (10) days, after receipt by Lessor and Owner Participant of
written notice sent by registered mail from such insurer.
20
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SECTION 10.03. Application of Certain Proceeds. (a) All insurance
-------------------------------
proceeds with respect to the policies described in clause (a) and (b) of Section
10.01 hereof while an Event of Default or Specified Default shall be continuing
shall be paid to Lessor and held or dealt with as provided in clause (b) of this
Section 10.03. Subject to the preceding sentence, all insurance proceeds in
excess of $4,000,000 (whether in one payment or a series of payments) with
respect to the policies described in clause (a) and (b) of Section 10.01 hereof
in respect of loss or damage to the Equipment from a single event or related
series of events, or in respect of an Event of Loss, or relating to the
Equipment in the case of business interruption insurance, shall be paid to
Lessor and such proceeds shall be applied or dealt with as follows:
(i) All such proceeds in excess of $4,000,000 (whether in one payment
or a series of payments) with respect to the policy described in clause (a)
of Section 10.01 hereof on account of a loss or damage to the Equipment not
constituting an Event of Loss shall be paid to Lessor and shall be assigned
over to Lessee to pay the cost of restoration of the Equipment, upon notice
from Lessee (x) that it has established a plan for such restoration
acceptable to Lessor and (y) stating that no Specified Default or Event of
Default exists. Lessor may request reasonable documentation evidencing the
expenses incurred or to be incurred in respect of such restoration.
(ii) All such proceeds on account of an Event of Loss shall be dealt
with in accordance with Section 8.01 hereof.
(iii) All such proceeds in excess of $4,000,000 (whether in one
payment or a series of payments) with respect to the policy described in
clause (b) of Section 10.01 hereof on account of an event relating to the
Equipment not constituting an Event of Loss shall, if Lessor shall have
received reasonable assurance of Lessee's continuing ability to make
scheduled Basic Rent payments, be assigned over to Lessee. All such
proceeds with respect to the policy described in clause (b) of Section
10.01 hereof not so required to be assigned over to Lessee shall be paid to
and held by Lessor and held as security for the obligations of Lessee under
this Lease and the other Basic Agreements and may be applied against
Lessee's obligations under the Basic Agreements. Any such proceeds held by
Lessor at such time as the event giving rise to the payment of such
business interruption insurance shall have ceased, shall, so long as no
Event of Default or Specified
21
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Default shall have occurred and be continuing, be paid over or assigned to
Lessee or as it may direct.
(b) If an Event of Default or Specified Default shall have occurred
and be continuing, any proceeds or amounts payable to or for the account of
Lessor or Lessee, or to be retained by Lessee, pursuant to Section 10.02(a) or
10.03(a) hereof shall be paid to Lessor and held as security for the obligations
of Lessee under this Lease and the other Basic Agreements and may be applied by
Lessor to satisfy the obligations of Lessee under the Basic Agreements, and, at
such time thereafter as no Event of Default or Specified Default shall be
continuing, such proceeds and amounts, to the extent they have not been applied
against such obligations, shall be paid promptly to Lessee.
SECTION 10.04. Certifications. On the Closing Date, and at each
--------------
policy renewal, but not less frequently than annually, Lessee shall provide to
Lessor and Owner Participant approved certification from each insurer or by an
authorized representative of each insurer. Such certification shall identify
the underwriters, the type of insurance, the limits, deductibles, and term
thereof and shall specifically list the special provisions delineated for such
insurance required for this Article X. Upon request, Lessee shall permit Lessor
and Owner Participant to review all policies of insurance required by Section
10.01 during normal business hours at Lessee's corporate offices in the United
States.
SECTION 10.05. Insurance Reports. Concurrently with the furnishing of
-----------------
all certificates referred to in Section 10.04, Lessee shall furnish Lessor and
Owner Participant with an opinion from Aon Risk Services Inc. of Illinois or any
other internationally recognized independent insurance broker, reasonably
acceptable to Lessor; stating that all premiums then due have been paid and
that, in the opinion of such broker, the insurance then maintained by Lessee is
in accordance with this Article X.
SECTION 10.06. Right of Lessor and Owner Participant To Insure. (a)
-----------------------------------------------
Lessor and the Owner Participant shall have the right (but not the obligation),
at their expense, to maintain any insurance in respect of any of the Equipment
or any Part thereof, and any insurance so maintained shall not result in a
reduction of coverage or amounts payable under insurance required to be
maintained by Lessee hereunder.
(b) In addition, if Lessee is in default in respect of its
obligations to maintain insurance pursuant to this Article X, Lessor and the
Owner Participant shall have the right (but not the obligation), and without in
any way
22
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limiting or otherwise modifying any other rights or remedies of Lessor or the
Owner Participant under this Lease by reason of such default or otherwise, to
obtain such insurance at the expense of Lessee and, in such event, Lessee shall
be obligated in accordance with Article XVIII. To the extent that Lessor has
placed such insurance required to be maintained by Lessee pursuant to this
Article X and that there are no other outstanding Events of Default, Lessor will
cancel such insurance upon Lessee providing satisfactory evidence that
replacement coverage has become effective and is in compliance with Article X.
Lessee shall also immediately reimburse Lessor or Owner Participant for any
additional costs, including but not limited, to short rate cancellation
penalties which are incurred by Lessor or Owner Participant.
ARTICLE XI
Identification
--------------
SECTION 11.01. Identification. At all times during the Lease Term,
--------------
Lessee at its expense shall maintain in a prominent place on the Equipment
conspicuous markings stating the following: "THIS UNIT IS OWNED BY STATE STREET
BANK AND TRUST COMPANY OF CONNECTICUT, NATIONAL ASSOCIATION, AS OWNER TRUSTEE,
AND IS UNDER LEASE TO S.D. WARREN COMPANY" or other appropriate words reasonably
satisfactory to Lessor, with appropriate changes thereof and additions thereto
as from time to time may be required under Applicable Laws in order to protect
Lessor's right, title and interest in and to the Equipment and the rights of
Lessor under this Lease. Lessee will replace promptly any such marking which
may be removed, defaced, obliterated or destroyed.
SECTION 11.02. Insignia of Lessee. The Equipment may be lettered with
------------------
the names or initials or other insignia customarily used by Lessee but Lessee
will not allow the name of any other Person to be placed on the Equipment as a
designation that might be interpreted as a claim of ownership or right to
possession or use thereof.
ARTICLE XII
Default; Remedies
-----------------
SECTION 12.01. Events of Default. The term "Event of Default",
-----------------
wherever used herein, shall mean any of the following events (whatever the
reason for such event and whether it shall be voluntary or involuntary, or come
about or be effected by operation of law, or be pursuant to or in
23
<PAGE>
compliance with any Applicable Laws or Governmental Action), and any such event
shall continue to be an Event of Default if and for so long as it shall not have
been remedied:
(1) default in the payment of any Basic Rent, Stipulated Loss Value or
Early Buyout Price when and as the same shall become due and payable, and
the continuance of such default unremedied for a period of one Business Day
after notice of such default shall have been received by Lessee; or default
in the payment of any other Supplemental Rent when and as the same shall
become due and payable, and the continuance of such default unremedied for
a period of 10 Business Days after notice of such default shall have been
received by Lessee; or
(2) default in Lessee's obligations with respect to the location of
the Equipment under Section 7.08 hereof; or default in the maintenance of
any insurance required by Article X hereof; or default in Lessee's
obligation to provide a Letter of Credit satisfying the requirements of,
and otherwise in compliance with, Section 6.01(h) of the Participation
Agreement (including, without limitation, default in Lessee's obligation to
provide a replacement Letter of Credit satisfying the requirements of, or
to obtain an extension or renewal of the Letter of Credit in accordance
with, such Section 6.1(h)); or default in the performance or observance of
any of the terms and provisions of Article XIV hereof or Section 6.01(d) of
the Participation Agreement; or default in the performance or observance of
Lessee's obligations under Section 6.01(j) of the Participation Agreement;
or
(3) default in any material respect in the observance or performance
of any covenant or agreement of Lessee contained herein or in any other
Basic Agreement (other than those specified in clauses (1) and (2) above),
and the continuance of such default unremedied for a period of 30 days
after notice of such default shall have been received by Lessee (or such
longer period (not exceeding 120 days) as may be necessary to remedy the
same, so long as Lessee is diligently proceeding to do so and provides
satisfactory evidence thereof to Lessor); or
(4) any representation or warranty made by Lessee in this Lease or in
any other Basic Agreement (other than those set forth in the Tax Indemnity
Agreement), or in any document or certificate furnished by Lessee in
connection herewith or therewith or pursuant hereto or thereto, shall have
been incorrect in any material respect when made, and shall continue to be
material
24
<PAGE>
and unremedied for a period of 30 days after notice thereof shall have been
received by Lessee (or such longer period (not exceeding 120 days) as may
be necessary to remedy the same, so long as Lessee is diligently proceeding
to do so); or
(5) a court having jurisdiction in the premises shall enter a decree
or order (i) approving as properly filed or commenced an involuntary
proceeding or case under the Federal bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state or foreign bankruptcy,
insolvency or other similar laws against Lessee seeking liquidation,
reorganization or other relief with respect to it or its debts, and such
proceeding or case shall not be dismissed or stayed within 60 days
thereafter, or (ii) for the appointment of a receiver, liquidator,
assignee, custodian, trustee or sequestrator (or other similar official) of
Lessee or of any substantial part of its property, or ordering the winding-
up or liquidation of the affairs of Lessee, and such decree or order
remains unstayed and in effect for a period of 60 days; or
(6) the institution by Lessee of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by Lessee to the institution of
bankruptcy or insolvency proceedings against Lessee, or the commencement by
Lessee of a voluntary proceeding or case under the Federal bankruptcy laws,
as now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency or other similar laws, or the consent by
Lessee to the filing of any petition seeking a reorganization, arrangement,
adjustment or composition of or in respect of Lessee or to the appointment
of or taking possession by a receiver, liquidator, assignee, trustee,
custodian or sequestrator (or other similar official) of Lessee or of any
substantial part of its property, or the making by Lessee of an assignment
for the benefit of creditors, or the admission by Lessee of its inability
to pay its debts generally as they become due or of its willingness to be
adjudicated a bankrupt, or the failure of Lessee generally to pay its debts
as they become due; or
(7) Lessee shall, in respect of any Indebtedness of Lessee exceeding
$1,000,000 in aggregate amount outstanding (i) fail to pay any amount of
principal or interest when due (after the expiration of any applicable
grace period), whether at maturity, at a date fixed for prepayment, upon
acceleration or otherwise, or (ii) default in the performance or observance
of any other provision contained in any
25
<PAGE>
instrument or agreement evidencing such Indebtedness or pursuant to which
such Indebtedness was issued or incurred if the effect of such default is
to cause, or permit the holder of such Indebtedness or a trustee or agent
thereof to cause, such Indebtedness to become or be declared due and
payable prior to its stated maturity; provided, that no Event of Default
--------
shall exist under this Section 12.01(7) from and after the time when such
failure or default is cured or waived.
SECTION 12.02. Remedies. Upon the occurrence of any Event of Default
--------
and at any time thereafter so long as the same shall be continuing, Lessor at
its option may, by notice to Lessee (except that such notice shall not be
required with respect to an Event of Default specified in Section 12.01(5) or
(6), in which case this Lease shall automatically be deemed to be declared in
default), declare this Lease to be in default; and at any time thereafter Lessor
may, to the extent permitted by Applicable Laws, exercise one or more of the
following remedies, except as hereinbelow otherwise set forth, as Lessor in its
sole discretion shall elect:
(a) Lessor may demand that Lessee, and Lessee shall solely at Lessee's
expense, return the Equipment and the Equipment Site promptly to Lessor or its
agent in the manner and condition required by, and otherwise in accordance with
the provisions of, Article XVI hereof and the Ground Lease as if the same were
being returned at the end of the Basic Lease Term or the Renewal Term; or Lessor
or its agents, at Lessor's option, may enter upon the premises where any of the
Equipment is located and take immediate possession of and remove the same by
summary proceedings or otherwise, all without liability on the part of Lessor or
its agents for or by reason of such entry or taking of possession, whether for
the restoration of damage to property caused by such taking or otherwise;
(b) Lessor may sell its right, title and interest in and to the
Equipment or the Equipment Site, or any part thereof, or any of its rights or
interests under the Ground Lease, at public or private sale, as Lessor may
determine, and with or without notice to Lessee, free and clear of any rights of
Lessee and without any duty to account to Lessee with respect to such sale or
for the proceeds thereof except to the extent required by Section 12.02(e)
hereof if Lessor elects to exercise its rights thereunder, in which event
Lessee's obligation to pay Basic Rent with respect to the Equipment for periods
commencing after the date of such sale shall be terminated (except to the extent
that Basic Rent is to be included in computations under Section 12.02(e) hereof
if Lessor shall elect to exercise its rights thereunder);
26
<PAGE>
(c) Lessor may hold, keep idle, use, operate, assign, lease or
sublease to others any of the Equipment or the Equipment Site, or any part
thereof, or any of its rights or interests under the Ground Lease, as Lessor may
determine, free and clear of any rights of Lessee and without any duty to
account to Lessee with respect to any such action or inaction or for any
proceeds thereof, except that Lessee's obligation to pay Basic Rent for the
Equipment after Lessee shall have been deprived of the possession thereof
pursuant to this Section 12.02(c) shall be reduced by an amount equal to the net
proceeds, if any, received by Lessor from leasing the Equipment or such part
thereof to any Person other than Lessee;
(d) If Lessor has not sold the Equipment pursuant to paragraph (b) of
this Section 12.02, Lessor may, by notice to Lessee specifying a payment date
(which shall be a Determination Date not earlier than 15 days nor later than 180
days after the date of such notice), demand that Lessee pay to Lessor, and
Lessee shall pay to Lessor, on the Determination Date specified in such notice,
as liquidated damages for loss of a bargain and not as a penalty (in lieu of the
Basic Rent due after the Determination Date specified in such notice, any unpaid
Basic Rent specified in such notice, plus whichever of the following amounts
Lessor, in its sole discretion, shall specify in such notice (together with
interest on such amount at the rate of 2% per annum over the Prime Rate from
such Determination Date to the date of actual payment):
(i) an amount equal to the excess, if any, of (A) the Stipulated
Loss Value of the Equipment, computed as of the Determination Date
specified in such notice, over (B) the Fair Market Sale Value of the
Equipment, determined as of the Determination Date specified in such
notice; or
(ii) an amount equal to the excess, if any, of (A) the Stipulated
Loss Value of the Equipment referred to and determined in accordance with
clause (i)(A) above, over (B) the Fair Market Rental Value of the Equipment
until the end of the Basic Lease Term or the Renewal Term, as the case may
be, after discounting such Fair Market Rental Value to present value as of
the Determination Date specified in such notice at the Prime Rate; or
(iii) an amount equal to the excess of (A) the present value,
as of the Determination Date specified in such notice, of all installments
of Basic Rent for the Equipment, until the end of the Basic Lease Term or
the Renewal Term, as the case may be, discounted at the Prime Rate, over
(B) the present value as of such
27
<PAGE>
Determination Date of the Fair Market Rental Value of the Equipment until
the end of the Basic Lease Term or the Renewal Term, as the case may be,
discounted at the Prime Rate;
(e) If Lessor shall have sold its right, title and interest in and to
any of the Equipment or the Equipment Site, or any part thereof, or its rights
and interests under the Ground Lease, pursuant to Section 12.02(b) hereof,
Lessor may, in lieu of exercising its rights under Section 12.02(d) hereof with
respect thereto, by notice to Lessee specifying a payment date, demand that
Lessee pay to Lessor, and Lessee shall pay to Lessor on the date specified in
such notice, as liquidated damages for loss of a bargain and not as a penalty
(in lieu of Basic Rent for the Equipment due for periods commencing after the
date specified in such notice), (i) all unpaid Basic Rent for the Equipment due
on any Basic Rent Payment Date occurring prior to the date specified in such
notice and, if the date specified in such notice is coincident with a Basic Rent
Payment Date, an amount equal to the Basic Rent for the Equipment payable on
such date plus (ii) an amount equal to the excess, if any, of (X) the Stipulated
Loss Value for the Equipment, computed as of the Determination Date coincident
with or next preceding the date of such sale, over (Y) the aggregate net
proceeds theretofore received by Lessor with respect to the Equipment from such
sale (together with interest on the amount of such Rent at the rate of 2% per
annum over the Prime Rate from such specified payment date to the date of actual
payment, computed on the basis of actual days elapsed over a year of 365 or 366
days, as appropriate); or
(f) Lessor may rescind or terminate this Lease or exercise any other
right or remedy that may be available to Lessor under Applicable Laws or proceed
by appropriate court action to enforce the terms hereof or to recover damages
for the breach hereof or to rescind this Lease.
In addition (but without duplication), Lessee shall be liable, except
as otherwise provided above, for any and all unpaid Supplemental Rent due
hereunder before or during the exercise of any of the foregoing remedies and, on
an After-Tax Basis, for all costs and expenses (including the reasonable fees
and expenses of counsel but not including costs and expenses in respect of
overhead or internal administration) incurred or suffered by reason of the
occurrence of any Default or Event of Default or the exercise of any of Lessor's
rights and remedies with respect thereto, including all costs and expenses
incurred in connection with the return of the Equipment or the Equipment Site,
or any part thereof, or in placing the Equipment or the Equipment Site, or any
part thereof, in the condition required by Article XVI hereof or by the Ground
Lease.
28
<PAGE>
At any sale of any of the Equipment or the Equipment Site, or any part
thereof, or the rights and interests of the Lessor under the Ground Lease,
pursuant to this Section 12.02, the Owner Participant may bid for and purchase
the same.
Except as and to the extent specifically otherwise provided in Section
12.02(d) and Section 12.02(e), to the extent permitted by Applicable Law, no
right or remedy referred to in this Section 12.02 is intended to be exclusive,
but each shall be cumulative and in addition to any other right or remedy
referred to above or otherwise available to Lessor under any of the Basic
Agreements or at law or in equity; and to the extent permitted by Applicable
Law, the exercise or beginning of exercise by Lessor of any one or more of such
rights or remedies shall not preclude the simultaneous or later exercise by
Lessor of any or all such other rights and remedies. No express or implied
waiver by Lessor of any Default or Event of Default shall in any way be, or be
construed to be, a waiver of any other Default or Event of Default. No delay or
omission in the exercise of any right, power or remedy shall restrict Lessor
from exercising the same or any other right, power or remedy thereafter nor be
construed to be a waiver of any Default or Event of Default or to be an
acquiescence therein.
ARTICLE XIII
Additional Covenants; Indemnities
---------------------------------
Lessee agrees to perform and observe all of its covenants and
obligations contained in Articles VI, VII and VIII of the Participation
Agreement and the provisions of said Sections are hereby incorporated herein by
reference with the same force and effect as though set forth in full herein.
Lessee further agrees to perform all covenants and obligations (including,
without limitation, payment obligations) imposed during the Lease Term by the
Ground Lease on the Owner Trustee directly for the benefit of the Ground Lessor
thereunder.
ARTICLE XIV
Assignment or Sublease
----------------------
SECTION 14.01. Assignment or Sublease by Lessee. (a) Except as
--------------------------------
contemplated by Section 6.01(d) of the Participation Agreement, Lessee may not
assign any of its right, title and interest in and to, or its obligations under,
this Lease. Lessee may sublease the Equipment to any Person (including in such
sublease a sub-sublease of the
29
<PAGE>
Equipment Site); provided that (i) any such sublease shall be expressly subject
--------
and subordinate to this Lease (including the right to repossess the Equipment
and the Equipment Site and to void such sublease upon such repossession) and no
such sublease shall release Lessee from any of its obligations as Lessee
hereunder or from any of its obligations under any of the other Basic
Agreements, (ii) no such sublease shall be entered into by Lessee so long as any
Event of Default or Specified Default has occurred and is continuing, (iii) the
term of any such sublease shall not extend beyond the Lease Term, (iv) the
Equipment shall not be removed from the Equipment Site (except as permitted by
Section 7.08 hereof), (v) the terms and provisions of any such sublease shall
not conflict with the terms and provisions of this Lease, (vi) the terms of any
such sublease shall prohibit the sublessee from sub-subleasing the Equipment or
sub-sub-subleasing the Equipment Site, or from assigning its rights or
obligations under such sublease, and (vii) Lessee shall not enter into any such
sublease with a sublessee that is bankrupt or insolvent. Lessee shall not be
required to assign to Lessor any rights of Lessee under any such sublease,
except that Lessee agrees to assign to Lessor, as collateral security pursuant
to an assignment reasonably satisfactory in form and substance to Lessor, its
rights under any such sublease entered into with a party that is not an
Affiliate of Lessee if such sublease has a term in excess of two years.
(b) Without limiting the generality of Section 14.01(a) above, Lessee
shall not grant any Lien (other than a Permitted Lien) on its rights as lessee
under this Lease.
ARTICLE XV
Renewal and Purchase Options
----------------------------
SECTION 15.01. Renewal Option. Subject to the provisions of Section
--------------
15.04 hereof, Lessee shall have the option to renew the term of this Lease on
the Basic Lease Term Termination Date for a period as determined by Lessee and
specified in the Twelve Month Notice (as defined in Section 15.04 below)
provided such period satisfies the following conditions: (i) such period shall
be at least two years and shall end on and include a Basic Rent Payment Date and
(ii) the length of such period shall not exceed 80% of the remaining economic
useful life of the Equipment as of the Basic Lease Term Termination Date as
determined by the appraisal delivered on the Closing Date pursuant to Section
4.01 of the Participation Agreement, or, at Lessee's option, as determined by
the Appraisal Procedure. During the Renewal Term, Lessee shall pay to Lessor
the Fair Market Rental Value of the Equipment in semiannual installments in
30
<PAGE>
arrears on each Basic Rent Payment Date during the Renewal Term.
SECTION 15.02. Early Buyout Options. (a) Subject to the provisions of
--------------------
Section 15.04 hereof, Lessee shall have the option to purchase all (but not less
than all) of the Equipment on the First Early Buyout Date for a price equal to
the First Early Buyout Price.
(b) Subject to the provisions of Section 15.04 hereof, Lessee shall
have the option to purchase all (but not less than all) of the Equipment on the
Second Early Buyout Date for a price equal to the Second Early Buyout Price.
(c) Upon payment by Lessee of the Early Buyout Price for the Equipment
pursuant to Section 15.02(a) or 15.02(b) hereof, as the case may be, together
with all Basic Rent for the Equipment and all Supplemental Rent then due
hereunder, (i) all obligations of Lessee hereunder to pay Basic Rent for the
Equipment, and the Lease Term, shall terminate, and (ii) Lessor shall transfer,
without recourse or warranty (except as to the absence of Lessor Liens and Liens
granted by Lessor to secure any Bonds issued in connection with the exercise of
the Leverage Option in accordance with Section 10.02 of the Participation
Agreement) and on an "as-is, where-is" basis, all right, title and interest of
Lessor in and to the Equipment to or at the direction of Lessee, and shall
furnish to or at the direction of Lessee, at the expense of Lessee, one or more
bills of sale, in form and substance reasonably satisfactory to Lessee,
evidencing such transfer.
SECTION 15.03. Fair Market Purchase Options. (a) Subject to the
----------------------------
provisions of Section 15.04 hereof, Lessee shall have the option to purchase all
(but not less than all) of the Equipment on the Basic Lease Term Termination
Date for a price equal to the Fair Market Sale Value of the Equipment on the
Basic Lease Term Termination Date.
(b) Subject to the provisions of Section 15.04 hereof, Lessee shall
have the option to purchase all (but not less than all) of the Equipment on the
last day of the Renewal Term, if any, for a price equal to the Fair Market Sale
Value of the Equipment on such day.
(c) Upon payment by Lessee of the purchase price for the Equipment
pursuant to Section 15.03(a) or 15.03(b) hereof, as the case may be, together
with all Basic Rent for the Equipment and all Supplemental Rent then due
hereunder, Lessor shall transfer, without recourse or warranty (except as to the
absence of Lessor Liens and Liens granted by
31
<PAGE>
Lessor to secure any Bonds issued in connection with the exercise of the
Leverage Option in accordance with Section 10.02 of the Participation Agreement)
and on an "as-is, where-is" basis, all right, title and interest of Lessor in
and to the Equipment to or at the direction of Lessee, and shall furnish to or
at the direction of Lessee, at the expense of Lessee, one or more bills of sale,
in form and substance reasonably satisfactory to Lessee, evidencing such
transfer.
SECTION 15.04. Notices for Renewal and Purchase Options; Certain
-------------------------------------------------
Conditions. (a) Not earlier than twenty-four months and not later than eighteen
- ----------
months prior to the Basic Lease Term Termination Date, Lessee shall give to
Lessor notice (the "Eighteen Month Notice") of its election (i) to return the
---------------------
Equipment to Lessor pursuant to Article XVI hereof or (ii) to exercise in the
Twelve Month Notice (as defined below) either the option to renew this Lease for
the Renewal Term pursuant to Section 15.01 hereof or the option to purchase the
Equipment on the Basic Lease Term Termination Date pursuant to Section 15.03
hereof. If the Eighteen Month Notice is not given within the prescribed period,
Lessee shall be deemed to have made the election specified in clause (ii) of the
preceding sentence. If in the Eighteen Month Notice Lessee shall have made the
election specified in clause (ii) of the first sentence of this Section
15.04(a), then not later than twelve months prior to the Basic Lease Term
Termination Date Lessee shall give to Lessor notice (the "Twelve Month Notice")
-------------------
of its election (x) to exercise the option to renew this Lease for the Renewal
Term pursuant to Section 15.01 hereof (which notice shall specify the length of
the Renewal Term as permitted by Section 15.01 hereof) or (y) to exercise the
option to purchase the Equipment pursuant to Section 15.03 hereof. If the
Twelve Month Notice is not given by such date, Lessee shall be deemed to have
made the election specified in clause (y) of the preceding sentence.
(b) Not earlier than twenty-four months and not later than eighteen
months prior to the expiration date of the Renewal Term, if any, Lessee shall
give to Lessor notice of its election (i) to return the Equipment to Lessor
pursuant to Article XVI hereof or (ii) to exercise the option to purchase the
Equipment on the last day of the Renewal Term pursuant to Section 15.03 hereof.
If such notice is not given within the prescribed period, Lessee shall be deemed
to have made the election specified in clause (ii) of the preceding sentence.
(c) If Lessee desires to exercise its option to purchase the Equipment
pursuant to Section 15.02(a) hereof, Lessee shall give to Lessor notice of its
election to exercise such option not earlier than 360 days and not later
32
<PAGE>
than 180 days prior to the First Early Buyout Date. If Lessee desires to
exercise its option to purchase the Equipment pursuant to Section 15.02(b)
hereof, Lessee shall give to Lessor notice of its election to exercise such
option not earlier than 360 days and not later than 180 days prior to the Second
Early Buyout Date.
(d) Lessee's right to exercise its option to renew this Lease for the
Renewal Term pursuant to Section 15.01 hereof, or to exercise its option to
purchase the Equipment pursuant to Section 15.02 or Section 15.03 hereof, shall
be subject to the conditions that (i) no Event of Default or Specified Default
shall have occurred and be continuing either at the date that notice of such
election is given by Lessee or at the date that the Lessee would purchase the
Equipment or the date that the Renewal Term would commence, as the case may be,
and (ii) in the case of such renewal, if the Renewal Term is in excess of seven
years, then at the date the Renewal Term would commence Lessee's senior secured
debt shall be rated at least "BB" by Standard & Poor's and "Ba2" by Moody's.
(e) Any election made by Lessee pursuant to this Article XV shall be
irrevocable by Lessee, and such election shall be binding on Lessor, in each
case subject to the conditions specified in Section 15.04(d) hereof.
SECTION 15.05. Determination of Fair Market Values and other Matters.
-----------------------------------------------------
If in the Eighteen Month Notice Lessee makes the election specified in clause
(ii) of the first sentence of Section 15.04(a) hereof, then, Lessee shall
forthwith inform Lessor of the proposed length of Renewal Term Lessee may desire
to elect in the Twelve Month Notice (the "Proposed Renewal Period") and promptly
-----------------------
thereafter Lessor and the Lessee shall attempt to agree on the Fair Market
Rental Value of the Equipment during the Proposed Renewal Period and the Fair
Market Sale Value of the Equipment on the Basic Lease Term Termination Date and
the last day of the Proposed Renewal Period. If pursuant to Section 15.04(b)
hereof Lessee gives Lessor notice of its election to purchase the Equipment on
the last day of the Renewal Term pursuant to Section 15.03 hereof, then, Lessor
and Lessee shall promptly thereafter attempt to agree on the Fair Market Sale
Value of the Equipment as of such last day. If Lessee and Lessor are unable to
agree upon such Fair Market Rental Value or Fair Market Sale Value, such Fair
Market Rental Value or Fair Market Sale Value shall be determined by the
Appraisal Procedure. If the Proposed Renewal Period is longer than 80% of the
remaining economic useful life of the Equipment as determined by the Appraisal
delivered on the Closing Date, Lessor and Lessee shall promptly thereafter
attempt to agree on the remaining economic useful life of the Equipment as of
the Basic Lease
33
<PAGE>
Term Termination Date and if they are unable to agree, such remaining economic
useful life shall be determined by the Appraisal Procedure.
ARTICLE XVI
Return of Equipment; Disposition Services
-----------------------------------------
SECTION 16.01. Return of Equipment. Upon the expiration of the Lease
-------------------
Term, unless Lessee exercises its option to purchase the Equipment as provided
in Section 15.02 or 15.03 hereof, Lessee shall return the Equipment and the
Equipment Site to Lessor or to any transferee or assignee of Lessor by
surrendering the same to Lessor or such transferee or assignee at the Equipment
Site, in the condition required to be maintained under Article VII hereof and
under the Ground Lease and free and clear of all Liens other than Lessor Liens
and Liens granted by Lessor to secure any Bonds issued in connection with the
exercise of the Leverage Option in accordance with Section 10.02 of the
Participation Agreement. Prior to such expiration, Lessee shall remove all
Parts or property incorporated or installed in or attached to the Equipment that
are not owned by, or not being purchased by, Lessor, and any Parts or property
not so removed that are owned by Lessee shall become the property of Lessor. In
addition, in connection with the delivery of the Equipment pursuant to this
Article, Lessee will deliver to Lessor copies of any manuals, technical
information and other data in Lessee's possession or control (including non-
exclusive rights to the use of software, patents and other intellectual
property) necessary for the operation of the Equipment for its intended
purposes. The obligations of Lessee under this Section shall survive the
termination of this Lease.
SECTION 16.02. Disposition Services. If Lessee shall not have
--------------------
exercised any of its rights provided in Article XV with respect to the
Equipment, then, during the last six months of the Lease Term, Lessee, at
Lessor's expense, will cooperate in a reasonable manner with Lessor in
connection with efforts to lease or dispose of the Equipment.
SECTION 16.03. Dismantling of Equipment. If Lessor shall request at
------------------------
or prior to the expiration of the Ground Lease Term, then unless Lessee shall
have purchased the Equipment pursuant to this Lease, Lessee shall, at its own
cost and expense, within a reasonable period of time after expiration of the
Ground Lease Term (not to exceed one year), dismantle the Equipment and deliver
the salvageable portions thereof to the railhead nearest the Equipment Site
prepared for shipment to Lessor in an acceptable manner;
34
<PAGE>
provided that in lieu of its obligation to so dismantle and deliver the
Equipment, Lessee may purchase the Equipment for a cash price equal to the Fair
Market Sale Value of the Equipment, net of the estimated cost of such
dismantlement and delivery (but in no event less than $1), whereupon Lessor
shall transfer, without recourse or warranty (except as to the absence of Lessor
Liens and as to the absence of Liens granted by Lessor to secure any Bonds
issued in connection with the exercise of the Leverage Option in accordance with
Section 10.02 of the Participation Agreement) and on an "as-is, where-is" basis,
all right, title and interest of Lessor in and to the Equipment to or at the
direction of Lessee, and shall furnish to or at the direction of Lessee, at the
expense of Lessee, one or more bills of sale, in form and substance reasonably
satisfactory to Lessee, evidencing such transfer. The obligations of Lessee
under this Section 16.03 shall survive the expiration or other termination of
this Lease.
ARTICLE XVII
Recording; Further Assurances
-----------------------------
Lessee at its expense shall cause this Lease, a memorandum of this
Lease and/or appropriate financing statements or continuation statements and
fixture filings to be filed and recorded and, from time to time when required,
refiled and rerecorded, in accordance with the applicable provisions of the
Uniform Commercial Code as in effect in the State of Maine and the Commonwealth
of Massachusetts (and, if Lessee changes its chief executive office, in any
other state where Lessee's chief executive office is located) and other
Applicable Laws and in any other state of the United States of America or the
District of Columbia where filing and/or recording is necessary or reasonably
requested by the Owner Participant for the purpose of protecting their
respective interests in the Equipment and rights under this Lease. In addition,
Lessee at its expense shall do and perform any other act, and shall execute,
acknowledge, deliver, file, register, record (and will refile, reregister,
deposit and redeposit or rerecord whenever required) any and all further
instruments, from time to time required by law or reasonably requested by the
Owner Participant for the purpose of protecting their respective interests in
the Equipment and rights under this Lease.
35
<PAGE>
ARTICLE XVIII
Lessor's Right to Perform for Lessee
------------------------------------
If Lessee fails to perform or comply with any of its covenants or
agreements contained herein or in any other Basic Agreement, Lessor or Owner
Participant may perform or comply with such covenant or agreement, and the
amount of the reasonable costs and expenses of Lessor or Owner Participant
incurred in connection with such performance or compliance, together with
interest on such amount at the rate of 2% per annum over the Prime Rate
(computed on the basis of the actual days elapsed over a year of 365 or 366
days, as appropriate), shall be payable by Lessee upon demand except as
otherwise provided in this Lease. No such performance or compliance by Lessor or
Owner Participant shall be deemed a waiver of the rights and remedies of Lessor
or any assignee of Lessor against Lessee hereunder.
ARTICLE XIX
Notices
-------
All communications, declarations, demands and notices provided for in
this Lease shall be in writing and shall be given in person or by means of
telecopy, or other wire transmission, or mailed by registered or certified mail,
or sent by courier, addressed as provided in Section 11.01 of the Participation
Agreement or at such other address or facsimile number as any party hereto may
from time to time designate by notice given in accordance with Section 11.01 of
the Participation Agreement to the other party hereto. All such communications,
declarations, demands and notices given in such manner shall be effective and
shall be deemed to have been received (i) when delivered personally or by
courier (or when delivery is tendered, if such delivery is refused), (ii) in the
case of mail delivery, upon delivery (or when delivery is tendered, if such
delivery is refused), or (iii) in the case of telecopy or other wire
transmission, at the time of dispatch with a transmission confirmation appearing
at the end of the communication.
ARTICLE XX
Severability
------------
Any provision of this Lease that is prohibited or unenforceable in any
jurisdiction shall be, as to such jurisdiction, to the extent permitted by
Applicable Laws, ineffective to the extent of such prohibition or
36
<PAGE>
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by Applicable Laws, the parties hereto hereby waive any provision of
law that renders any provision hereof prohibited or unenforceable in any
respect.
ARTICLE XXI
Effect and Modification of Lease
--------------------------------
Except for the Participation Agreement and the other Basic Agreements
referred to therein, this Lease exclusively and completely states the rights of
Lessor and Lessee with respect to the leasing of the Equipment and supersedes
all other agreements, oral or written, with respect thereto. Except as provided
in Section 3.03 hereof, no variation or modification of this Lease and no waiver
of any of its provisions or conditions shall be valid unless in writing and
signed by a duly authorized signatory of the party against which enforcement of
such variation or modification or waiver is sought.
ARTICLE XXII
Third-Party Beneficiaries
-------------------------
Nothing in this Lease shall be deemed to create any right in any
Person not a party hereto (other than the Owner Participant and the permitted
successors and assigns of the Owner Participant and any party hereto) and this
instrument shall not be construed in any respect to be a contract in whole or in
part for the benefit of a third party except as aforesaid.
ARTICLE XXIII
Execution
---------
This Lease may be executed in several counterparts, such counterparts
together constituting but one and the same instrument.
37
<PAGE>
ARTICLE XXIV
Governing Law; UCC Article 2-A
------------------------------
THIS LEASE IS BEING DELIVERED IN THE STATE OF NEW YORK AND SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
LESSOR AND LESSEE AGREE THAT THIS LEASE IS A "FINANCE LEASE" FOR
PURPOSES OF ARTICLE 2-A OF, AND AS DEFINED BY SECTION 2-A-103(g) OF, THE NEW
YORK UNIFORM COMMERCIAL CODE. THE LESSEE AGREES THAT NO RIGHT OR REMEDY GRANTED
SOLELY BY REASON OF ARTICLE 2-A OF THE UNIFORM COMMERCIAL CODE SHALL BE
AVAILABLE TO LESSEE AS AGAINST LESSOR UNLESS EXPRESSLY SET FORTH IN THIS LEASE.
ARTICLE XXV
No Recourse
-----------
The Trust Company is entering into this Lease solely as trustee for
the Owner Participant under the Trust Agreement and not in its individual
capacity, and in no case whatsoever shall the Trust Company (or any entity or
individual acting as successor trustee, co-trustee or separate trustee under the
Trust Agreement) or the Owner Participant be personally liable for any of the
statements, representations, warranties, agreements or obligations of the Lessor
hereunder, as to all of which the Lessee agrees to look solely to the Trust
Estate, except that the Trust Company shall be liable in its individual capacity
for any loss caused by its own willful misconduct or gross negligence and as
provided in Section 6.02 (it being understood and agreed that the foregoing
shall not constitute a waiver of any claims the Lessee may have against the
Owner Participant for a breach of its obligations under Section 6.02(d) of the
Participation Agreement).
ARTICLE XXVI
Successors and Assigns
----------------------
The terms and provisions of this Lease and the respective rights and
obligations of Lessor and Lessee and the rights of the Owner Participant
hereunder shall be binding upon, and inure to the benefit of, their respective
permitted successors and assigns.
38
<PAGE>
ARTICLE XXVII
Successor and Co-Trustees
-------------------------
If a successor trustee is appointed in accordance with the terms of
the Trust Agreement, such successor trustee shall, without further act, succeed
to the rights, duties, immunities and obligations of Lessor hereunder and the
predecessor trustee shall be released from all further duties and obligations
hereunder, all without the necessity of any consent or approval by Lessee and
without in any way altering the terms of this Lease or Lessee's obligations
hereunder. The trustee under the Trust Agreement or any successor trustee
thereunder may from time to time, with prior consultation with the Owner
Participant and (unless an Event of Default or Specified Default has occurred
and is continuing) Lessee, appoint one or more co-trustees or separate trustees
pursuant to the Trust Agreement, and such right may be exercised repeatedly so
long as this Lease shall be in effect. Upon receipt of written notice of the
appointment of a successor trustee, co-trustee or separate trustee under the
Trust Agreement, Lessee at its own expense shall make such changes to reflect
such appointment as shall be reasonably requested by the Owner Participant or
such successor trustee, co-trustee or separate trustee in such insurance
policies, schedules, certificates and other instruments relating to the
Equipment or this Lease, all in form and substance satisfactory to the Owner
Participant and such successor trustee, co-trustee or separate trustee.
ARTICLE XXVIII
Miscellaneous
-------------
SECTION 28.01. No Conveyance. This Lease shall constitute an
-------------
agreement of lease only and nothing herein shall be construed as conveying to
Lessee any right, title or interest in the Equipment or any Part thereof except
as lessee only.
SECTION 28.02. Captions. The captions in this Lease and the table of
--------
contents are for convenience of reference only and shall not define or limit any
of the terms or provisions hereof.
SECTION 28.03. Chattel Paper. To the extent, if any, that this Lease
-------------
constitutes chattel paper (as defined in the Uniform Commercial Code as in
effect in any applicable jurisdiction), no security interest in this Lease may
be created through the transfer or possession of any counterpart other than the
original counterpart containing the receipt therefor executed by State Street
Bank and Trust
39
<PAGE>
Company of Connecticut, National Association, as Owner Trustee.
40
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed or caused this
instrument to be executed as of the date first above written.
STATE STREET BANK AND TRUST COMPANY
OF CONNECTICUT, NATIONAL
ASSOCIATION, not in its
individual capacity but solely as
Owner Trustee, Lessor
By:
--------------------------------
Name:
Title:
S.D. WARREN COMPANY, Lessee
By:
--------------------------------
Name:
Title:
[Lease Agreement]
<PAGE>
STATE OF )
) ss.: July __, 1997
COUNTY OF )
Personally appeared the above-named _____________________ _________________ of
the aforesaid S.D. Warren Company, and acknowledged the foregoing instrument to
be his free act and deed in his said capacity, and the free act and deed of said
corporation.
Before me,
-------------------------------
Notary Public
STATE OF )
) ss.: July __, 1997
COUNTY OF )
Personally appeared the above-named _______________, ____________________ of
State Street Bank and Trust Company of Connecticut, National Association, a
national banking association, as Owner Trustee aforesaid, and acknowledged the
foregoing instrument to be his free act and deed in his said capacity, and the
free act and deed of said national banking association.
Before me,
-------------------------------
Notary Public
[Lease Agreement]
<PAGE>
SCHEDULE I
TO LEASE AGREEMENT
------------------
Basic Rent
----------
Basic Rent Basic Rent
Percentages
Payment Date (percentage of Lessor's Cost)
- ------------ -----------------------------
<PAGE>
SCHEDULE II
TO LEASE AGREEMENT
------------------
Stipulated Loss Values
----------------------
Stipulated Loss Value
Percentages
Determination Date (percentage of Lessor's Cost)
- ------------------ -----------------------------
<PAGE>
SCHEDULE III
TO LEASE AGREEMENT
------------------
Certain Terms
-------------
Purchase Price and Lessor's Cost: $ 150,400,000
First Early Buyout Price: 81.47% of Lessor's Cost
Second Early Buyout Price: 50.10% of Lessor's Cost
<PAGE>
EXHIBIT 10.37
AGREEMENT AND PLAN OF MERGER dated as of July 30, 1997,
between SDW ACQUISITION II CORPORATION, a Delaware
corporation ("SDW Acquisition"), and SDW HOLDINGS
---------------
CORPORATION, a Delaware corporation ("Holdings").
--------
WHEREAS, the respective Boards of Directors of SDW Acquisition and Holdings
have approved the merger of SDW Acquisition into Holdings (the "Merger"), upon
------
the terms and subject to the conditions set forth in this Agreement;
WHEREAS, for U.S. Federal income tax purposes, the Merger will constitute
(i) a taxable stock purchase by Heritage Springer Limited, a company organized
under the laws of the British Virgin Islands ("HSL"), and Sappi Deutschland
---
GmbH, a company incorporated in Germany ("Sappi Deutschland"), of the shares of
-----------------
Holdings Common Stock held by Cash Holders (as defined below) and (ii) a
recapitalization to the extent that (A) Sappi Deutschland's shares of Holdings
Common Stock (as defined below) are recapitalized into shares of Class A Common
Stock of the Surviving Corporation (as defined below) and (B) HSL's shares of
Holdings Common Stock are recapitalized into shares of Class B Common Stock of
the Surviving Corporation; and
WHEREAS, SDW Acquisition and Holdings desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement the parties agree as
follows:
ARTICLE I
The Merger
----------
SECTION 1.01. The Merger. Upon the terms and subject to the conditions
-----------
set forth in this Agreement, and in accordance with the Delaware General
Corporation Law (the "DGCL"), SDW Acquisition shall be merged with and into
----
Holdings at the Effective Time (as hereinafter defined). Following the Merger,
the separate corporate existence of SDW Acquisition shall cease and Holdings
shall continue as the surviving corporation (the "Surviving Corporation") and
---------------------
<PAGE>
2
shall succeed to and assume all the rights and obligations of SDW Acquisition in
accordance with the DGCL.
SECTION 1.02. Closing. The closing of the Merger (the "Closing") will
-------- -------
take place at a date and time to be specified by the parties, subject to
satisfaction or waiver of the conditions set forth in Sections 5.01, 5.02 and
5.03 (the "Closing Date"), at the offices of Cravath, Swaine & Moore, 825 Eighth
------------
Avenue, New York, New York 10019, unless another date or place is agreed to in
writing by the parties hereto.
SECTION 1.03. Effective Time. As soon as practicable following the
---------------
satisfaction or waiver of the conditions set forth in Article V, the parties
shall file a certificate of merger or other appropriate documents (in any such
case, the "Certificate of Merger") executed in accordance with the relevant
---------------------
provisions of the DGCL and shall make all other filings or recordings required
under the DGCL. The Merger shall become effective at such time as the
Certificate of Merger is duly filed with the Delaware Secretary of State, or at
such subsequent time as shall be specified in the Certificate of Merger (the
time the Merger becomes effective being the "Effective Time").
--------------
SECTION 1.04. Effects of the Merger. The Merger shall have the effects
----------------------
set forth in Section 259 of the DGCL.
SECTION 1.05. Certificate of Incorporation and By-Laws. (a) The Restated
-----------------------------------------
Certificate of Incorporation of Holdings, as in effect immediately prior to the
Effective Time, shall be amended as of the Effective Time so that Article FOURTH
of such Restated Certificate of Incorporation is as set forth in Annex A hereto;
provided however that such amendment shall not result in any amendment or
- -------- -------
deletion of Holdings' Certificate of Designations of 15% Senior Exchangeable
Preferred Stock filed with the Secretary of State of the State of Delaware on
December 19, 1994, as corrected by the Certificate of Corrections filed with the
Secretary of State of the State of Delaware on January 25, 1995, as further
amended by the Certificate of Amendment of Restated Certificate of Incorporation
as filed with the Secretary of State of the State of Delaware on July 6, 1995
(the "Certificate of Designations").
---------------------------
(b) The By-laws of Holdings as in effect at the Effective Time shall be
the By-laws of the Surviving Corporation until thereafter changed or amended as
provided therein or by applicable law.
<PAGE>
3
SECTION 1.06. Directors. The directors of Holdings at the Effective Time
----------
shall be the directors of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly elected or
appointed and qualified, as the case may be.
SECTION 1.07. Officers. The officers of Holdings at the Effective Time
---------
shall be the officers of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly elected or
appointed and qualified, as the case may be.
ARTICLE II
Effect of the Merger on the Capital Stock of the
------------------------------------------------
Constituent Corporations; Exchange of Certificates
--------------------------------------------------
SECTION 2.01. Effect on Capital Stock. As of the Effective Time, by
------------------------
virtue of the Merger and without any action on the part of the holder of any
shares of Common Stock, par value $0.01 per share, of Holdings ("Holdings Common
---------------
Stock") or preferred stock, par value $0.01 per share of Holdings or any shares
- -----
of capital stock of SDW Acquisition:
(a) Cancellation of Treasury Stock. Each share of Holdings Common Stock
-------------------------------
that is owned by Holdings as treasury stock shall automatically be
cancelled and retired and cease to exist and each share of capital stock of
SDW Acquisition that is owned by SDW Acquisition as treasury stock shall
automatically be cancelled and retired and cease to exist.
(b) Capital Stock of SDW Acquisition. Each issued and outstanding share
---------------------------------
of Class B Common Stock of SDW Acquisition shall be converted into the
right to receive one share of Class B Common Stock of the Surviving
Corporation and each issued and outstanding share of Class A Common Stock
of SDW Acquisition shall be converted into the right to receive one share
of Class A Common Stock of the Surviving Corporation.
(c) Holdings Common Stock. Subject to Sections 2.01(a) and 2.01(e), (x)
----------------------
each issued and outstanding share of Holdings Common Stock held by HSL,
Sappi Deutschland, Sappi Limited, a company organized under the laws of
South Africa, and any affiliate of Sappi Limited (together, the "Non-Cash
--------
Holders") shall be canceled and (y) each issued and outstanding share of
-------
Holdings Common Stock held by any holder other than
<PAGE>
4
a Non-Cash Holder (a "Cash Holder") shall be converted into the right to
-----------
receive $17.60 per share in cash (the "Cash Consideration"). As of the
------------------
Effective Time, all such shares of Holdings Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a certificate representing any such shares of
Holdings Common Stock shall cease to have any rights with respect thereto,
except Cash Holders shall have the right to receive the Cash Consideration
per share paid in consideration therefor upon surrender of such certificate
in accordance with Section 2.02, without interest.
(d) Holdings Preferred Stock. Each issued and outstanding share of 15%
-------------------------
Senior Exchangeable Preferred Stock of Holdings shall remain outstanding as
15% Senior Exchangeable Preferred Stock of the Surviving Corporation.
(e) Dissenting Shares. Notwithstanding anything in this Agreement to the
------------------
contrary, shares of Holdings Common Stock and 15% Senior Exchangeable
Preferred Stock of Holdings ("Holdings Preferred Stock") outstanding
------------------------
immediately prior to the Effective Time held by a holder (if any) who is
entitled to demand, and who properly demands, appraisal of such Holdings
Common Stock or Holdings Preferred Stock, as applicable, in accordance with
Section 262 of the DGCL shall not be subject to Sections 2.01(c) and (d),
as applicable, unless such holder fails to perfect or otherwise loses such
holder's rights to appraisal, if any. If after the Effective Time, any
such holder fails to perfect or loses any such right to appraisal, the
shares of such holder shall be treated as if they had been subject to
Section 2.01(c) and (d), as applicable, as of the Effective Time.
(f) Withholding Rights. The Surviving Corporation shall be entitled to
-------------------
deduct and withhold from the consideration otherwise payable pursuant to
this Agreement to stockholders such amounts as it is required to deduct and
withhold with respect to the making of such payment under the provision of
federal, state, local or foreign tax law. To the extent that amounts are
so withheld by the Surviving Corporation, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the
holder of the shares in respect of which such deduction and withholding was
made by the Surviving Corporation.
<PAGE>
5
SECTION 2.02. Exchange of Certificates. (a) Exchange Agent. As of the
------------------------- ---------------
Effective Time, the Surviving Corporation shall deposit with a bank or trust
company as may be designated by it prior to the Effective Time (the "Exchange
--------
Agent"), for the benefit of the Cash Holders, for exchange in accordance with
- -----
this Article II, through the Exchange Agent, an amount equal to the Cash
Consideration multiplied by the aggregate number of shares of Holdings Common
Stock held by the Cash Holders (the "Cash Fund").
---------
(b) Exchange Procedures. As soon as reasonably practicable after the
--------------------
Effective Time, the Surviving Corporation shall cause to be mailed to each
holder of record of a certificate or certificates (a "Certificate") which
-----------
immediately prior to the Effective Time represented Holdings Common Stock
converted into the right to receive the Cash Consideration, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Holdings may specify) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for the Cash Consideration
therefor. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by the Company,
together with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such Certificate
shall be entitled to receive in exchange therefor a payment equal to the
aggregate Cash Consideration payable in respect of the shares of Holdings Common
Stock held by such Cash Holder, and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of Holdings
Common Stock which is not registered in the transfer records of Holdings, the
Cash Consideration with respect to such shares may be paid to a person other
than the person in whose name the Certificate so surrendered is registered, if
such Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such payment shall pay any transfer or other
taxes required by reason of the payment of any Cash Consideration to a person
other than the registered holder of such Certificate or establish to the
satisfaction of Holdings that such tax has been paid or is not applicable.
Until surrendered as contemplated by this Section 2.02, each Certificate held by
a Cash Holder shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the Cash Consideration payable
<PAGE>
6
with respect to such shares of Holdings Common Stock as contemplated by this
Section 2.02. No interest will be paid or will accrue on any Cash Consideration
payable.
(c) No Further Ownership Rights in Company Common Stock. All Cash
----------------------------------------------------
Consideration paid upon the surrender for exchange of Certificates in accordance
with the terms of this Article II shall be deemed to have been paid in full
satisfaction of all rights pertaining to the shares of Holdings Common Stock
theretofore represented by such Certificates, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Holdings Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation or the Exchange Agent
for any reason, they shall be canceled as provided in this Article II.
(d) Termination of Cash Fund. Any portion of the Cash Fund which remains
-------------------------
undistributed to the Cash Holders of the Certificates for six months after the
Effective Time shall be delivered to the Surviving Corporation, upon demand, and
any Cash Holders of the Certificates who have not theretofore complied with this
Article II shall thereafter look only to the Surviving Corporation for payment
of their claim for Holdings Common Stock.
(e) No Liability. None of SDW Acquisition, Holdings, the Surviving
-------------
Corporation or the Exchange Agent shall be liable to any person in respect of
any Cash Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any Certificates shall not have
been surrendered prior to seven years after the Effective Time (or immediately
prior to such earlier date on which any Cash Consideration in respect of such
Certificate would otherwise escheat to or become the property of any
Governmental Entity (as defined in Section 4.01)), any such Cash Consideration
shall, to the extent permitted by applicable law, become the property of the
Surviving Corporation, free and clear of all claims or interest of any person
previously entitled thereto.
(f) Investment of Cash Fund. The Exchange Agent shall invest the Cash
------------------------
Fund as directed by the Surviving Corporation, on a daily basis. Any interest
and other income resulting from such investments shall be paid to the Surviving
Corporation.
<PAGE>
7
ARTICLE III
Representations and Warranties
------------------------------
SECTION 3.01. Representations and Warranties of Holdings. Holdings
-------------------------------------------
represents and warrants to SDW Acquisition as follows:
(a) Organization, Standing and Corporate Power. Each of Holdings and each
-------------------------------------------
of its subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction in which it is
incorporated and has the requisite corporate power and authority to carry
on its business as now being conducted. Each of Holdings and each of its
subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure to
be so qualified or licensed (individually or in the aggregate) would not
have a material adverse effect on Holdings and its subsidiaries taken as a
whole.
(b) Authority. Holdings has the requisite corporate power and authority
----------
to enter into this Agreement and, subject to approval and adoption of this
Agreement by the holders of a majority of the outstanding shares of
Holdings Common Stock, to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by Holdings and
the consummation by Holdings of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate action on
the part of Holdings, subject, in the case of this Agreement, to approval
and adoption of this Agreement by the holders of a majority of the
outstanding shares of Holdings Common Stock. This Agreement has been duly
executed and delivered by Holdings and constitutes a valid and binding
obligation of Holdings, enforceable against Holdings in accordance with its
terms.
(c) Voting Requirements. The affirmative vote of the holders of a
--------------------
majority of the outstanding shares of Holdings Common Stock approving and
adopting this Agreement is the only vote of the holders of any class or
series of Holdings' capital stock necessary to approve this Agreement and
the transactions contemplated by this Agreement.
<PAGE>
8
(d) No Conflict. The execution and delivery of this Agreement by Holdings
------------
do not, and, upon satisfaction of the conditions to Holdings' obligations
hereunder, the performance of this Agreement by Holdings will not, (i)
conflict with or violate the Certificate of Incorporation or By-Laws of
Holdings, (ii) conflict with or violate any law, rule, regulation, order,
judgment or degree applicable to Holdings or any of its subsidiaries or by
which any of its respective properties is bound or affected, or (iii)
result in any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration, or cancellation
of, or result in the creation of a lien or encumbrance on any of the
properties or assets of Holdings or any of its subsidiaries pursuant to,
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which Holdings is a
party or by which Holdings or any of its properties is bound or affected,
except, in each case, for any such conflicts, violations, breaches,
defaults, or other occurrences which have not been waived or would not,
individually or in the aggregate, have a material adverse effect on
Holdings and its subsidiaries taken as a whole.
SECTION 3.02. Representations and Warranties of SDW Acquisition. SDW
--------------------------------------------------
Acquisition represents and warrants to Holdings as follows:
(a) Organization, Standing and Corporate Power. SDW Acquisition is a
-------------------------------------------
corporation duly organized, validly existing and in good standing under the
laws of Delaware and has the requisite corporate power and authority to
carry on its business as now being conducted. SDW Acquisition is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification or licensing necessary,
other than in such jurisdictions where the failure to be so qualified or
licensed (individually or in the aggregate) would not have a material
adverse effect on SDW Acquisition.
(b) Authority. SDW Acquisition has the requisite corporate power and
----------
authority to enter into this Agreement and, subject to approval and
adoption of this Agreement by the holders of a majority of the outstanding
shares of Class A Common Stock of SDW Acquisition, to consummate the
transactions contemplated by this Agreement. The execution and delivery of
this Agreement and the consummation of the transactions
<PAGE>
9
contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of SDW Acquisition, subject (in the case of
such consummation) to approval and adoption of this Agreement by the
holders of a majority of the outstanding shares of Class A Common Stock of
SDW Acquisition. This Agreement has been duly executed and delivered by SDW
Acquisition and constitutes a valid and binding obligation of SDW
Acquisition, enforceable against it in accordance with its terms.
(c) Voting Requirements. The affirmative vote of the holders of a majority
--------------------
of the outstanding shares of SDW Acquisition's Class A Common Stock
approving and adopting this Agreement is the only vote of the holders of
any class or series of SDW Acquisition's capital stock necessary to approve
and adopt this Agreement and the transactions contemplated by this
Agreement.
ARTICLE IV
Covenants
---------
SECTION 4.01. Reasonable Efforts; Further Action. Upon the terms and
----------------------------------
subject to the conditions set forth in this Agreement, each of the parties
agrees to use all reasonable efforts to take, or cause to be taken, all actions,
and do, or cause to be done, and to assist and cooperate with the other party in
doing, all things necessary, proper or advisable, to consummate and make
effective, in the most expeditious manner practicable, the Merger and the other
transactions consummated by this Agreement, including (i) obtaining all
consents, approvals, orders, authorizations, declarations and making filings
with, any Federal, state or local government or any court, administrative agency
or commission or other governmental authority or agency, domestic or foreign (a
"Governmental Entity") and taking all reasonable steps as may be necessary to
-------------------
obtain an approval or waiver from, or to avoid an action or proceeding by, any
Governmental Entity, (ii) obtaining all necessary consents, approvals or waivers
from third parties, the defending of any lawsuits or other legal proceedings,
whether judicial or administrative, challenging this Agreement or the
transactions contemplated hereby and (iii) the execution and delivery of any
additional instruments necessary to consummate the transactions contemplated by,
and to fully carry out the purposes of, this Agreement. In case at any time
after the Effective
<PAGE>
10
Time any further action is necessary or desirable to carry out the purposes of
this Agreement, the proper officers and directors of each party to this
Agreement shall use their reasonable efforts to take all such necessary action.
SECTION 4.02. Notices. Holdings and SDW Acquisition shall (x) give all
-------
notices, if any, required by Section 228(d) of the DGCL in connection with the
approval by its shareholders of the Merger and (y) give all notices, if any, of
appraisal rights required by Section 262 of the DGCL. If the condition in
Section 5.01(g)(i) has been satisfied, Holdings shall give a redemption notice
in respect of the Holdings Preferred Stock in accordance with the Certificate of
Designations concurrently with or promptly following the effectiveness of the
Merger and take such other action as may be required thereunder in connection
with such redemption.
SECTION 4.03. Rule 13E-3. If required under the Securities Exchange Act
-----------
of 1934 (the "Exchange Act"), as soon as practicable following the date of this
------------
Agreement, Holdings and SDW Acquisition shall prepare and file with the
Securities and Exchange Commission a Transaction Statement on Schedule 13E-3 (a
"Transaction Statement") pursuant to Rule 13e-3 under the Exchange Act and mail
---------------------
such statement to persons required by law to receive it.
SECTION 4.04. Public Announcements. SDW Acquisition and Holdings shall
---------------------
consult with each other before issuing any press release or otherwise making any
public statements with respect to the Merger and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law or any listing agreement with a national securities
exchange.
ARTICLE V
Conditions Precedent
--------------------
SECTION 5.01. Conditions to Each Party's Obligation To Effect the Merger.
-----------------------------------------------------------
The respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
---------------------
adopted by (x) the affirmative vote or consent of the holders of a majority
of the outstanding shares of Holdings Common Stock in
<PAGE>
11
accordance with applicable law and Holdings' Restated Certificate of
Incorporation and (y) the affirmative vote or consent of the holders of a
majority of the outstanding shares of Class A Common Stock of SDW
Acquisition in accordance with applicable law and SDW Acquisition's
Certificate of Incorporation.
(b) No injunctions or Restraints. No temporary restraining order,
-----------------------------
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect; provided, however, that
-------- -------
each of the parties shall have used its reasonable efforts to prevent the
entry of any such injunction or other order and to appeal as promptly as
possible any such injunction or other order that may be entered.
(c) Chase Consent. Any consents required under the Amended and Restated
--------------
Credit and Guarantee Agreement, dated as of April 26, 1996, as amended to
date, among Holdings, S.D. Warren Company, a Pennsylvania corporation, the
several banks, financial institutions and other entities from time to time
parties thereto (the "Lenders"), and The Chase Manhattan Bank (formerly
-------
known as Chemical Bank), a New York banking corporation, as agent for the
Lenders thereunder, in order for Holdings to consummate the Merger and for
the Surviving Corporation to comply with its obligations arising as a
result thereof (including in respect of warrants to purchase Holdings
Common Stock) shall have been obtained.
(d) Warrant Agreements. All notices required under the Warrant Agreement
-------------------
between Holdings and The Bank of New York dated as of December 20, 1994
(with respect to the Class A Warrants) and the Amended and Restated Class B
Warrant Agreement between Holdings and The Bank of New York dated as of
July 6, 1995 (with respect to the Class B Warrants), shall have been given.
(e) Transaction Statement. If a Transaction Statement was required to be
----------------------
prepared and filed with the SEC and to be mailed to applicable security
holders, the required time period for such dissemination shall have lapsed.
(f) Financing. HSL shall have performed its obligations under the Stock
----------
Subscription Agreement (the "Subscription Agreement") among HSL, Sappi
Deutschland
<PAGE>
12
and SDW Acquisition dated as of June 24, 1997, to the satisfaction of
Holdings; and SDW Acquisition shall have received (including from HSL under
the Subscription Agreement) the aggregate amount of Cash Consideration (as
defined in the Subscription Agreement) plus the Additional Funding Amount
(as defined in the Subscription Agreement) to be contributed to SDW
Acquisition under Section 2.01(d)(i) of the Subscription Agreement.
(g) Preferred Stock. Either (i) if Holdings shall have determined to
----------------
redeem the Holdings Preferred Stock in connection with the Merger, Holdings
shall have taken such steps as are reasonably necessary to permit it to
give notice of redemption in respect thereof concurrently with or promptly
following the effectiveness of the Merger and the amount in paragraph (f)
above shall include an amount representing the aggregate redemption price
for all of the Holdings Preferred Stock or (ii) Holdings' transfer agent
shall have received the opinion of counsel and officer's certificate
referred to in Section 8(a) of the Certificate of Designations and Holdings
and SDW Acquisition shall be satisfied in every respect that a class vote
of the holders of Holdings Preferred Stock is not necessary with respect to
the transactions contemplated hereby and that such preferred stock need not
be called for redemption as a result of the transactions contemplated
hereby.
(h) Appraisal Rights. The period for demanding appraisal in connection
-----------------
with the Merger pursuant to Section 262 of the DGCL shall have expired with
respect to all capital stock of Holdings having appraisal rights and no
such demand shall have been received and not withdrawn.
SECTION 5.02. Conditions to Obligations of Holdings. The obligations of
--------------------------------------
Holdings to effect the Merger are further subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of
-------------------------------
SDW Acquisition set forth in this Agreement that are qualified as to
materiality shall be true and correct, and the representations and
warranties of SDW Acquisition set forth in this Agreement that are not so
qualified shall be true and correct in all material respects, in each case
as of the date of this Agreement and as of the Closing
<PAGE>
13
Date as though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement.
(b) Performance of Obligations of SDW Acquisition. SDW Acquisition shall
----------------------------------------------
have performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Closing Date.
SECTION 5.03. Conditions to Obligation of SDW Acquisition. The
--------------------------------------------
obligations of SDW Acquisition to effect the Merger are further subject to the
following conditions:
(a) Representations and Warranties. The representations and warranties of
-------------------------------
Holdings set forth in this Agreement that are qualified as to materiality
shall be true and correct, and the representations and warranties of
Holdings set forth in this Agreement that are not so qualified shall be
true and correct in all material respects, in each case as of the date of
this Agreement and as of the Closing Date as though made on and as of the
Closing Date, except as otherwise contemplated by this Agreement.
(b) Performance of Obligations of Holdings. Holdings shall have performed
---------------------------------------
in all material respects all obligations required to be performed by it
under this Agreement at or prior to the Closing Date.
ARTICLE VI
Termination, Amendment and Waiver
---------------------------------
SECTION 6.01. Termination. This Agreement may be terminated at any time
------------
prior to the Effective Time, whether before or after approval of matters
presented in connection with the Merger by the stockholders of Holdings or SDW
Acquisition:
(a) by mutual written consent of SDW Acquisition and Holdings;
(b) by Holdings if any holder of Holdings Common Stock or Holdings
Preferred Stock demands appraisal of such Holdings Common Stock or Holdings
Preferred Stock, as applicable, under Section 262 of the DGCL; or
(c) by either Holdings or SDW Acquisition if the Effective Time has not
occurred on or prior to November 30, 1997.
<PAGE>
14
SECTION 6.02. Effect of Termination. In the event of termination of this
----------------------
Agreement by either Holdings or SDW Acquisition as provided in Section 6.01,
this Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of SDW Acquisition or Holdings.
SECTION 6.03. Amendment. Subject to any contractual restriction to which
----------
Holdings or SDW Acquisition is a party, this Agreement may be amended by the
parties at any time before or after any required approval of matters presented
in connection with the Merger by the stockholders of Holdings and SDW
Acquisition; provided, however, that after any such approval, there shall be
-------- -------
made no amendment that by law requires further approval by such stockholders
without the further approval of such stockholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties.
SECTION 6.04. Extension; Waiver. At any time prior to the Effective Time,
------------------
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties contained in this Agreement or in any
document delivered pursuant to this Agreement or (c) subject to the proviso of
Section 6.03, waive compliance with any of the agreements or conditions
contained in this Agreement. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party. The failure of either party to this Agreement
to assert any of its rights under this Agreement or otherwise shall not
constitute a waiver of such rights.
SECTION 6.05. Procedure for Termination, Amendment, Extension or Waiver.
----------------------------------------------------------
A termination of this Agreement pursuant to Section 6.01, an amendment of this
Agreement pursuant to Section 6.03 or an extension or waiver pursuant to Section
6.04 shall, in order to be effective, require in the case of SDW Acquisition or
Holdings, action by its Board of Directors or the duly authorized designee of
its Board of Directors.
ARTICLE VII
General Provisions
------------------
SECTION 7.01. Nonsurvival of Representations and Warranties. None of the
---------------------------------- -----------
representations and warranties in this Agreement or in any instrument delivered
pursuant to
<PAGE>
15
this Agreement shall survive the Effective Time. This Section 7.01 shall not
limit any covenant or agreement of the parties which by its terms contemplates
performance after the Effective Time.
SECTION 7.02. Notices. All notices, requests, claims, demands and other
--------
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to SDW Acquisition, to
SDW Acquisition II Corporation
In care of Sappi Limited
48 Ameshoff Street
Braamfontein
Republic of South Africa
Attention: William E. Hewitt
Chief Financial Officer
Facsimile: 27 11 339 8297
(b) if to Holdings, to
SDW Holdings Corporation
2700 Westchester Avenue
Purchase, NY 10577
USA
Attention: Chief Financial Officer
Facsimile: 1 914 696 55 33
with a copy separately delivered to:
Sappi Limited
48 Ameshoff Street
Braamfontein
Republic of South Africa
Attention: William E. Hewitt
Chief Financial Officer
Facsimile: 27 11 339 8297
<PAGE>
16
SECTION 7.03. Definitions. For purposes of this Agreement:
------------
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person;
(b) "material adverse effect" means, when used in connection with Holdings
or SDW Acquisition, any change or effect (or any development that, insofar
as can reasonably be foreseen, is likely to result in any change or effect)
that is materially adverse to the business, properties, assets, condition
(financial or otherwise), results of operations or prospects of such party
and its subsidiaries taken as a whole;
(c) "person" means an individual, corporation, partnership, joint venture,
association, trust, unincorporated organization or other entity; and
(d) a "subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests
of which is sufficient to elect at least a majority of its Board of
Directors or other governing body (or, if there are no such voting
interests, 50% or more of the equity interests of which) is owned directly
or indirectly by such first person.
SECTION 7.04. Interpretation. When a reference is made in this Agreement
---------------
to a Section or Annex, such reference shall be to a Section of, or an Annex to,
this Agreement unless otherwise indicated. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation".
SECTION 7.05. Counterparts. This Agreement may be executed in one or more
-------------
counterparts, all of, which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
SECTION 7.06. Entire Agreement; No Third-Party Beneficiaries. This
-------------------------------- --------------
Agreement and the Subscription Agreement (a) constitute the entire agreement,
and supersede all prior agreements and understandings, both, written and
<PAGE>
17
oral, between the parties with respect to the subject matter of this Agreement
and the Subscription Agreement and (b) except for the provisions of Article II
from and after the Effective Time, are not intended to confer upon any person
other than the parties any rights or remedies.
SECTION 7.07. Governing Law. This Agreement shall be governed by, and
--------------
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 7.08. Assignment. Neither this Agreement nor any of the rights,
-----------
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by either of the parties without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by, the parties and their respective successors and assigns.
SECTION 7.09. Enforcement. The parties agree that irreparable damage
------------
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any Federal court located in the State of Delaware or
any Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated by this Agreement, (b) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court and (c) agrees that it will not bring any
action relating to this Agreement or any of the transactions contemplated by
this Agreement in any court other than a Federal court sitting in the State of
Delaware or a Delaware state court.
SECTION 7.10. Further Assurances. Subject to the conditions hereof, each
-------------------
party hereto shall make, execute, acknowledge and deliver such other instruments
and documents, and take all such other actions, as may be reasonably requested
by the other party in order to
<PAGE>
18
effectuate the purposes of this Agreement and to consummate the transactions
contemplated hereby.
SECTION 7.11 Waiver of Jury Trial. Each party waives, to the fullest
---------------------
extent permitted by applicable law, any right it may have to a trial by jury in
respect of any litigation arising out of or relating to this Agreement.
[Signatures on next page.]
<PAGE>
19
IN WITNESS WHEREOF, SDW Acquisition and Holdings have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first written above.
SDW HOLDINGS CORPORATION,
By: /s/ W. E. Hewitt
-------------------------------
Name: W. E. Hewitt
Title: Vice President
SDW ACQUISITION II CORPORATION,
By: /s/ W. E. Hewitt
-------------------------------
Name: W. E. Hewitt
Title: Vice President
<PAGE>
20
ANNEX A TO
AGREEMENT AND
PLAN OF MERGER
Article FOURTH of Holdings' Restated Certificate of Incorporation
shall be amended to read as follows, provided that such amendment shall not
-------- ----
result in any amendment or deletion of the Certificate of Designations of 15%
Senior Exchangeable Preferred Stock filed with the Secretary of State of the
State of Delaware on December 19, 1994, as corrected by the Certificate of
Corrections filed with the Secretary of State of the State of Delaware on
January 25, 1995, as further amended by the Certificate of Amendment of Restated
Certificate of Incorporation as filed with the Secretary of State of the State
of Delaware on July 6, 1995:
ARTICLE FOURTH
(a) The aggregate number of shares of stock that the Corporation
shall have authority to issue is 5,300,000 shares with a par value of $.01
per share. A total of 300,000 of such shares shall be designated "Common
Stock", comprised of 250,000 shares of "Class A Common Stock" and 50,000
shares of "Class B Common Stock". A total of 5,000,000 of such shares
shall be designated as "Preferred Stock".
(b) Each holder of shares of Class A Common Stock shall be
entitled to one vote for each share of Common Stock held of record on all
matters on which the holders of shares of Common Stock are entitled to
vote. Subject to the provisions of applicable law and any certificate of
designation providing for the issuance of any shares of Preferred Stock,
the holders of outstanding shares of Class A Common Stock shall have and
possess the exclusive right to notice of stockholders meetings and the
exclusive power to vote. No stockholder will be permitted to cumulate
votes at any election of directors. Except as otherwise provided herein or
required by law, the holders of Class B Common Stock shall have no voting
rights and shares of Class B Common Stock shall not be included in
determining the number of shares voting or entitled to vote on any such
matters; provided, however, that any amendment, repeal or modification to
-------- -------
the Restated Certificate of Incorporation which would have the effect of
changing the right of the Corporation's shares of Class B Common Stock to
be converted into Class A Common Stock (including the obligation of the
Corporation to reserve shares of Class A Common Stock to be issued upon
conversion of the Class B Common Stock) must be approved by the affirmative
vote of at least a majority of such shares.
<PAGE>
21
(c) Except as provided in subsection (b) above regarding voting
rights, the Corporation's Common Stock shall be equal in every respect
insofar as their relationship to the Corporation is concerned (but such
equality of rights shall not imply equality of treatment as to redemption
or other acquisition of Common Stock by the Corporation). Subject to the
rights of the Preferred Stock, the holders of Common Stock shall be
entitled to share ratably, when, as and if declared by the Board of
Directors, out of funds legally available therefor, dividends and other
distributions (other than purchases, redemptions or other acquisitions of
Common Stock by the Corporation) payable in cash, stock or otherwise;
provided, however, that (x) in the case of dividends payable in shares of
-------- -------
Class A Common Stock, or options, warrants or rights to acquire shares of
Class A Common Stock, or securities convertible into or exchangeable for
shares of Class A Common Stock, the dividend payable with respect to the
Class B Common Stock shall be payable in shares of, or options, warrants or
rights to acquire, or securities convertible into or exchangeable for,
Class B Common Stock and (y) if any dividend consists of other voting
securities of the Corporation, the Corporation shall make available to each
holder of Class B Common Stock, dividends consisting of non-voting
securities of the Corporation that are otherwise identical to the voting
securities and that are convertible into or exchangeable for such voting
securities on the same terms as the Class B Common Stock is convertible
into the Class A Common Stock.
Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, and after the holders of the
Preferred Stock of each series shall have been paid in full in cash the
amounts to which they respectively shall be entitled or a sum sufficient
for such payment in full shall have been set aside, the remaining net
assets of the Corporation shall be distributed pro rata to the holders of
the Common Stock in accordance with their respective rights and interests,
to the exclusion of the holders of Preferred Stock.
Each share of Class B Common Stock shall be convertible, to the
extent permitted by law, into one share of Class A Common Stock at the
election of the holder. The Corporation shall, as promptly as practicable
and in any event within fourteen days after receipt of written notice of
such election in respect of shares of Class B Common Stock, execute and
deliver
<PAGE>
22
or cause to be executed and delivered, in accordance with such
notice, a certificate or certificates representing the shares of Class A
Common Stock in exchange for the certificate or certificates representing
the converted shares of Class B Common Stock. If less than all of the
shares of Class B Common Stock represented by a single certificate have
been converted, the Corporation shall, at the time of delivery of the
certificate or certificates, deliver to the holder thereof a new
certificate or certificates evidencing the remaining shares of Class B
Common Stock. The Corporation shall pay all expenses, taxes and other
charges payable in connection with the preparation, issuance and delivery
of share certificates, except that, if share certificates shall be
registered in a name or names other than the name of the holder thereof
prior to conversion, funds sufficient to pay all transfer taxes payable as
a result of such transfer shall be paid by such holder at the time of
delivering the aforementioned notice or promptly upon receipt of a written
request of the Corporation for payment. Such conversion, to the extent
permitted by law, shall be deemed to have been effected as of the close of
business on the date on which such notice shall have been received by the
Corporation, and at such time the rights of the holder of the shares of
Class B Common Stock so converted shall cease and the person or persons in
whose name or names the certificate or certificates for the shares of Class
A Common Stock are to be issued upon such conversion shall be deemed to
have become the holder or holders of record of the shares so converted and
the certificate or certificates representing such shares of Class B Common
Stock shall be deemed to represent such Class A Common Stock until
exchanged as provided above.
All shares of Class A Common Stock issued upon the conversion of
the Class B Common Stock shall be validly issued, fully paid and
nonassessable, free of all liens, taxes and other charges.
At all times while any Class B Common Stock is authorized, the
Corporation shall maintain its corporate authority to issue, and shall
reserve for issuance upon conversion of the Class B Common Stock, such
number of shares of Class A Common Stock as shall be sufficient to allow
full conversion of all Class B Common Stock.
If the Corporation shall in any manner subdivide (by stock split,
stock dividend, or otherwise) or
<PAGE>
23
combine (by reverse stock split or otherwise) the outstanding shares of
Class A Common Stock or Class B Common Stock, then the outstanding shares
of Class A Common Stock or Class B Common Stock, as applicable, shall be
subdivided or combined, as the case may be, to the same extent, share and
share alike, and effective provision shall be made for the protection of
the conversion rights hereunder. In case of any reorganization,
reclassification or change of shares of Class A Common Stock or Class B
Common Stock (other than a change in par value or a change from par to no-
par value or as a result of a subdivision or combination), or in case of
any consolidation of the Corporation with one or more corporations, or any
merger of the Corporation with another corporation (other than a
consolidation or merger in which the Corporation is the resulting or
surviving corporation and that does not result in any reclassification or
change of outstanding shares of Class A Common Stock or Class B Common
Stock), each holder of any share of Class B Common Stock that remains
outstanding subsequent to such event shall have the right at any time
thereafter so long as the conversion right hereunder with respect to such
Class B Common Stock would exist had such event not occurred, to convert
its Class B Common Stock into the kind and amount of shares of stock and
other securities and properties (including cash) receivable upon such
reorganization, reclassification, change, consolidation or merger by a
holder of the number of shares of Class A Common Stock into which such
shares of Class B Common Stock might have been converted immediately prior
to such reorganization, reclassification, change, consolidation or merger.
In the event of such reorganization, reclassification, change,
consolidation or merger, effective provisions shall be made in the
Certificate of Incorporation of the resulting or surviving corporation or
otherwise for the protection of the conversion rights of the holders of any
shares of Class B Common Stock that remain outstanding subsequent to such
event that shall be applicable, as nearly as reasonably may be, to any such
other shares of stock and other securities and property deliverable upon
conversion of the Class A Common Stock into which such Class B Common Stock
might have been converted immediately prior to such event.
(d) The Board of Directors of the Corporation shall have the
full authority permitted by law, at any time and from time to time, to
divide the authorized and unissued shares of Preferred Stock into classes
or
<PAGE>
24
series, or both, and to determine the following provisions, designations,
preferences, qualifications, limitations, restrictions and the special or
relative rights for shares of any such class or series of Preferred Stock:
(i) the designation of such class or series, the number of
shares to constitute such class or series and the stated or
liquidation value thereof if different from the par value thereof;
(ii) whether the shares of such class or series shall have
voting rights, in addition to any voting rights provided by law, and,
if so, the terms of such voting rights;
(iii) the dividends, if any, payable on such class or
series, whether any such dividends shall be cumulative, and, if so,
from what dates, the conditions and dates upon which such dividends
shall be payable, the preference or relation which such dividends
shall bear to the dividends payable on any shares of stock of any
other class or any other series of the same class;
(iv) whether the shares of such class or series shall be
subject to redemption at the election of the Corporation and/or the
holders of such class or series and, if so, the times, price and other
conditions of such redemption, including securities or other property
payable upon any such redemption if any;
(v) the amount or amounts payable upon shares of such class
or series upon, and the rights of the holders of such class or series
in, the voluntary or involuntary liquidation, dissolution or winding
up, or any distribution of the assets of, the Corporation;
(vi) whether the shares of such class or series shall be
subject to the operation of a retirement or sinking fund and, if so,
the extent to and manner in which any such retirement or sinking fund
shall be applied to the purchase or redemption of the shares of such
class or series for retirement or other corporate purposes and the
terms and provisions relative to the operation thereof;
<PAGE>
25
(vii) whether the shares of such class or series shall be
convertible into, or exchangeable for, shares of stock of any other
class or any other series of the same class or any securities, whether
or not issued by the Corporation, and, if so, the price or prices or
the rate or rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions or conversion
or exchange;
(viii) the limitations and restrictions, if any, to be
effective while any shares of such class or series are outstanding
upon the payment of dividends or the making of other distributions on,
and upon the purchase, redemption or other acquisition by the
Corporation of, the Common Stock or shares of stock of any other class
or any other series of the same class;
(ix) the conditions or restrictions, if any, upon the
creation of indebtedness of the Corporation or upon the issue of any
additional shares of stock, including additional shares of such class
or series or of any other series of the same class or of any other
class;
(x) the ranking (be it pari passu, junior or senior) of each
---- -----
class or series vis-a-vis any other class or series of any class of
Preferred Stock as to the payment of dividends, the distribution of
assets and all other matters; and
(xi) any other powers, preferences and relative,
participating, optional and other special rights, and any
qualifications, limitations and restrictions thereof, insofar as they
are not inconsistent with the provisions of this Certificate of
Incorporation, to the full extent permitted in accordance with the
laws of the State of Delaware.
(e) Such divisions and determinations may be accomplished by an
amendment to this Article FOURTH, which amendment may be made solely by
action of the Board of Directors, which shall have the full authority
permitted by law to make such divisions and determinations.
(f) The powers, preferences and relative, participating,
optional and other special rights of each class or series of Preferred
Stock, and the
<PAGE>
26
qualifications, limitations or restrictions thereof, if any, may differ
from those of any and all other classes or series at any time outstanding.
(g) Holders of shares of Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors, out of funds
legally available for the payment thereof, dividends at the rates fixed by
the Board of Directors for the respective series, and no more, before any
dividends shall be declared and paid, or set aside for payment, on shares
of Common Stock with respect to the same dividend period.
(h) In the event of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, holders of shares of each
series of Preferred Stock will be entitled to receive the amount fixed for
such series upon any such event plus, in the case of any series on which
dividends will have been determined by the Board of Directors to be
cumulative, an amount equal to all dividends accumulated and unpaid thereon
to the date of final distribution whether or not earned or declared before
any distribution shall be paid, or set aside for payment, to holders of
Common Stock. If the assets of the Corporation are not sufficient to pay
such amounts in full, holders of all shares of Preferred Stock will
participate in the distribution of assets ratably in proportion to the full
amounts to which they are entitled or in such order or priority, if any, as
will have been fixed in the resolution or resolutions providing for the
issue of the series of Preferred Stock. Neither the merger nor
consolidation of the Corporation into or with any other corporation, nor a
sale, transfer or lease of all or part of its assets, will be deemed a
liquidation, dissolution or winding up of the Corporation within the
meaning of this paragraph except to the extent specifically provided for
herein.
(i) The Corporation, at the option of the Board of Directors,
may redeem all or part of the shares of any series of Preferred Stock on
the terms and condition fixed for such series.
(j) Except as otherwise required by law, as otherwise provided
herein or as otherwise determined by the Board of Directors as to the
shares of any series of Preferred Stock prior to the issuance of any such
shares, the holders of Preferred Stock shall have no voting rights and
shall not be entitled to any notice of meetings of stockholders.
<PAGE>
Exhibit 10.38
EXECUTION COPY
SECOND AMENDMENT AND CONSENT, dated as of July 25, 1997 (this
"Amendment"), to the Amended and Restated Credit and Guarantee Agreement, dated
- ----------
as of April 26, 1996 (as amended pursuant to the First Amendment thereto, dated
as of February 7, 1997 and this Amendment and as the same may be further
amended, supplemented or otherwise modified from time to time, the "Credit
------
Agreement"), among SDW HOLDINGS CORPORATION, a Delaware corporation
- ---------
("Holdings"), S.D. WARREN COMPANY (as successor by merger to SDW Acquisition
--------
Corporation), a Pennsylvania corporation (the "Borrower"), the several banks,
--------
financial institutions and other entities from time to time parties thereto
(collectively, the "Lenders"; individually, a "Lender"), and THE CHASE MANHATTAN
------- ------
BANK (formerly known as Chemical Bank), a New York banking corporation
("Chase"), as agent for the Lenders thereunder (in such capacity, the "Agent").
----- -----
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrower has requested the Lenders to amend the Credit
Agreement in the manner provided for herein;
WHEREAS, the Borrower has also requested that the Lenders consent to
the consummation of a Sale/Leaseback Transaction with General Electric Capital
Corporation ("GE Capital") with respect to one of the papermachines located at
----------
the Borrower's Somerset Mill;
WHEREAS, in connection with such Sale/Leaseback Transaction, the
Borrower has further requested that (a) only 66-2/3% of the Net Proceeds of such
Sale/Leaseback Transaction be required to be used to prepay Term Loans and (b)
it be permitted to use the remaining Net Proceeds of such Sale/Leaseback
Transaction to pay dividends to Holdings to be used to redeem the Holdings
Preferred Stock (and that Holdings be permitted to redeem the Holdings Preferred
Stock) and/or to purchase Senior Subordinated Notes to the extent required by
the Senior Subordinated Note Indenture;
WHEREAS, Sappi Limited ("Sappi") previously held approximately 75% of
-----
the common equity of Holdings (on a fully diluted basis), and, in connection
with the recent acquisition by an indirect wholly owned subsidiary of Sappi of
an additional 22% of the common equity in Holdings (the "DLJ/UBSC Acquisition"),
--------------------
Sappi has agreed to use its reasonable effort to acquire the remaining common
equity of Holdings;
WHEREAS, as part of the financings of the DLJ/UBSC Acquisition, the
common equity purchased by the subsidiary of Sappi was subsequently sold to an
independent special purpose British Virgin Islands company ("BVI Company")
-----------
subject to a call option and irrevocable proxy in favor of Sappi;
WHEREAS, the acquisition of the remaining common equity interests in
Holdings not currently held directly or indirectly by Sappi or BVI Company may
be effected through a merger ("Merger") involving Holdings as a result of which
------
such equity interests (including outstanding warrants to acquire common equity
of Holdings) are converted into the right to receive cash;
<PAGE>
2
WHEREAS, it is anticipated that any payments required to be made by
Holdings in connection with the Merger (including payments to be made in respect
of Holdings common stock, payments required upon exercise of warrants to
purchase Holdings common stock and payments required in respect of the exercise
of appraisal rights under applicable law) would be funded directly or indirectly
by Sappi or BVI Company through equity investments in Holdings (or in any
acquisition vehicle merged into Holdings) or through contributions to the
capital of Holdings or through the issuance of preferred stock of Holdings or
through similar equity based funding ("Permitted Financing"); and
-------------------
WHEREAS, Holdings wishes to facilitate the Merger and has requested
the Lenders consent to the Merger:
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. Unless otherwise defined herein, terms defined
-------------
in the Credit Agreement and used herein (and in the recitals hereto) shall have
the meanings given such terms in the Credit Agreement.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT
2.1 Amendment of Subsection 5.1(a)(i) of the Credit Agreement.
---------------------------------------------------------
Subsection 5.1 of the Credit Agreement is hereby amended by deleting the final
sentence of paragraph (a)(i) of such subsection and substituting therefor the
following new sentence:
"Except as provided in paragraph (ii) below, all optional prepayments of
the Term Loans shall, first be allocated between the Tranche A Term Loans
and the Tranche B Term Loans pro rata (except that, at the option of the
Borrower by written notice to such effect to the Agent, the Borrower may
first allocate any such optional prepayment between the Tranche A Term
Loans and the Tranche B Term Loans in such amounts as may be necessary to
pay in whole or in part the scheduled installments of principal, if any, of
the Tranche A Term Loans and/or the Tranche B Term Loans due within six
months of the date of such optional prepayment and the remaining amount of
such optional prepayment shall then be allocated between the Tranche A Term
Loans and the Tranche B Term Loans pro rata), second, be applied against
the scheduled installments of principal, if any, of the Tranche A Term
Loans due within six months of the date of such prepayment and/or against
the scheduled installments of principal, if any, of the Tranche B Term
Loans due within six months of the date of such prepayment, as the case may
be, and, third, be applied to the remaining installments of the Tranche A
Term Loans and/or the Tranche B Term Loans, as the case may be, pro rata."
2.2 Amendment of Subsection 9.2(g) of the Credit Agreement.
------------------------------------------------------
Subsection 9.2 of the Credit Agreement is hereby amended by deleting the
reference to the amount "$100,000,000" in paragraph (g) of such subsection and
substituting in lieu thereof a reference to the amount "$50,000,000".
<PAGE>
3
SECTION 3. CONSENT TO SALE/LEASEBACK TRANSACTION AND MERGER
3.1 Sale/Leaseback Transaction with GE Capital. Each of the
------------------------------------------
undersigned Lenders hereby (a) consents to the consummation by the Borrower of
the Sale/Leaseback Transaction with GE Capital substantially on the terms and
conditions described in Exhibit A hereto ("GE Capital Sale/Leaseback
-------------------------
Transaction") and (b) agrees that the consummation of such Sale/Leaseback
Transaction shall not violate subsection 9.6, 9.12 or 9.14 of the Credit
Agreement, provided that (i) upon consummation of the GE Capital Sale/Leaseback
--------
Transaction, the Borrower acknowledges and agrees that it shall not thereafter
be permitted to consummate any Sale/Leaseback Transaction pursuant to clause (b)
of subsection 9.12, (ii) 66-2/3% of the Net Proceeds of the GE Capital
Sale/Leaseback Transaction shall concurrently be applied to prepay the Term
Loans in accordance with subsection 5.1 of the Credit Agreement and (iii) the
final documentation (the "Sale/Leaseback Documentation") with respect to the GE
----------------------------
Capital Sale/Leaseback Transaction shall be acceptable to the Agent. The
Borrower and the Lenders hereby further agree that an event of default or
termination event under the Sale/Leaseback Documentation shall constitute an
Event of Default under the Credit Agreement.
3.2 Mandatory Prepayment Relating to GE Capital Sale/Leaseback
----------------------------------------------------------
Transaction. Each of the undersigned Lenders hereby agrees that (a) only 66-
- -----------
2/3% of the Net Proceeds of the GE Capital Sale/Leaseback Transaction shall be
applied to prepay the Term Loans pursuant to such subsection and that the
remaining Net Proceeds may be retained by the Borrower and (b) the foregoing
shall not violate subsection 5.1(c) of the Credit Agreement.
3.3 Special Dividend Payments to Holdings. Each of the undersigned
-------------------------------------
Lenders hereby (a) consents to the payment from time to time by the Borrower of
dividends to Holdings on or prior to September 30, 1998 to be used to redeem all
or part of the Holdings Preferred Stock from time to time (the "Redemption") so
----------
long as (i) the GE Capital Sale/Leaseback Transaction shall have been
consummated prior to the payment of any dividend, (ii) the aggregate amount of
such dividends, together with the aggregate purchase price of Senior
Subordinated Notes purchased pursuant to subsection 3.4 hereof, does not exceed
an amount equal to 33-1/3% of the Net Proceeds of the GE Capital Sale/Leaseback
Transaction, (iii) no Default or Event of Default shall have then occurred and
be continuing or would result therefrom (after giving effect to this Amendment)
and (iv) the payment of such dividend does not violate any Contractual
Obligation of the Borrower or any of its Subsidiaries and (b) agrees that (i)
such dividends shall not violate subsection 9.7 of the Credit Agreement and
shall be in addition to any other dividends permitted thereunder and (ii) the
Redemption shall not violate subsection 9A.1, 9A.3 or 9A.5 of the Credit
Agreement. Each of the undersigned Lenders also hereby (a) consents to the
payment from time to time by the Borrower of dividends to Holdings on or prior
to September 30, 1998 (in addition to dividends permitted under the first
sentence of this subsection) also to be used to finance the Redemption out of
the Borrower's Portion of Excess Cash Flow for the previous fiscal year, so long
as (i) the amount of the Borrower's Portion of Excess Cash Flow for the 1996 and
1997 fiscal years which shall be available to make dividend payments pursuant to
subsection 9.7(f) of the Credit Agreement and to make optional prepayments
applied in accordance with the first sentence of subsection 5.1(a)(ii) of the
Credit Agreement shall be reduced by the amount of any dividends paid pursuant
to this sentence, (ii) no Default or Event of Default shall have then occurred
and be continuing or would result therefrom (after giving effect to
<PAGE>
4
this Amendment) and (iii) the payment of any such dividend does not violate any
Contractual Obligation of the Borrower or any of its Subsidiaries and (b) the
Redemption shall not violate subsection 9A.5 of the Credit Agreement.
3.4 Purchase of Senior Subordinated Notes. Each of the undersigned
-------------------------------------
Lenders hereby (a) consents to the purchase of Senior Subordinated Notes by the
Borrower pursuant to Section 4.10 of the Senior Subordinated Note Indenture with
any Excess Proceeds (as defined in Section 4.10 of the Senior Subordinated Note
Indenture) resulting from the GE Capital Sale/Leaseback Transaction so long as
(i) the GE Capital Sale/Leaseback Transaction shall have been consummated prior
to any such purchase, (ii) the aggregate purchase price of Senior Subordinated
Notes so purchased, together with the aggregate amount of dividends paid
pursuant to subsection 3.3 hereof, does not exceed an amount equal to 33-1/3% of
the Net Proceeds of the GE Capital Sale/Leaseback Transaction, (iii) no Default
or Event of Default shall have then occurred and be continuing or would result
therefrom (after giving effect to this Amendment) and (iv) such purchase does
not violate any Contractual Obligation of the Borrower or any of its
Subsidiaries and (b) agrees that such purchase shall not violate subsection
5.1(c) or 9.10 of the Credit Agreement.
3.5 Merger. Each of the undersigned Lenders consents to the
------
consummation of the Merger by Holdings and agrees that the Merger will not
violate Section 9A of the Credit Agreement, provided that (a) Holdings is the
--------
surviving entity in any such Merger, (b) payments required to be made by
Holdings in connection with such Merger are to be provided through Permitted
Financing and (c) no Default or Event of Default would result therefrom (after
giving effect to this Amendment).
SECTION 4. MISCELLANEOUS
4.1 Limited Effect. Except as expressly amended, modified and
--------------
supplemented hereby, the Credit Agreement is, and shall remain, in full force
and effect in accordance with its terms, provided that the transactions
--------
contemplated by Section 3 of this Amendment shall not violate or be deemed to
violate the Credit Agreement.
4.2 Effectiveness. This Amendment shall become effective as of the
-------------
date hereof (the "Second Amendment Date") upon receipt by the Agent of a
---------------------
counterpart hereof duly executed by Holdings, the Borrower and the Required
Lenders.
4.3 Representations and Warranties. On and as of the date hereof
------------------------------
and after giving effect to this Amendment, the Borrower hereby confirms,
reaffirms and restates the representations and warranties set forth in Section 6
of the Credit Agreement mutatis mutandis, except to the extent that such
------- --------
representations and warranties expressly relate to a specific earlier date in
which case the Borrower hereby confirms, reaffirms and restates such
representations and warranties as of such earlier date.
<PAGE>
5
4.4 Counterparts. This Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the copies of this Amendment signed by all the parties
shall be lodged with the Borrower and the Agent. This Amendment may be
delivered by facsimile transmission of the relevant signature pages hereof.
4.5 GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS
-------------
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
CONFLICTS OF LAW PRINCIPLES THEREOF.
4.6 Releases. The Lenders hereby authorize and direct the
--------
Administrative Agent to execute and deliver such releases or other documents and
to take such other actions as may be reasonably necessary or desirable for the
release of the Liens created on the Collateral which is sold pursuant to the GE
Capital Sale/Leaseback Transaction.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
SDW HOLDINGS CORPORATION
By: [SIGNATURE ILLEGIBLE]
-------------------------------------
Title: Vice President
S.D. WARREN COMPANY
By: [SIGNATURE ILLEGIBLE]
-------------------------------------
Title:
THE CHASE MANHATTAN BANK, as Agent and as
a Lender
By:
-------------------------------------
Title:
<PAGE>
5
4.4 Counterparts. This Amendment may be executed by one or more of
------------
the parties hereto on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the copies of this Amendment signed by all the parties
shall be lodged with the Borrower and the Agent. This Amendment may be
delivered by facsimile transmission of the relevant signature pages hereof.
4.5 GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS
-------------
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
CONFLICTS OF LAW PRINCIPLES THEREOF.
4.6 Releases. The Lenders hereby authorize and direct the
--------
Administrative Agent to execute and deliver such releases or other documents and
to take such other actions as may be reasonably necessary or desirable for the
release of the Liens created on the Collateral which is sold pursuant to the GE
Capital Sale/Leaseback Transaction.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
SDW HOLDINGS CORPORATION
By:
-------------------------------------
Title:
S.D. WARREN COMPANY
By:
-------------------------------------
Title:
THE CHASE MANHATTAN BANK, as Agent and as
a Lender
By: /s/ Helene Santo
-------------------------------------
Title: Vice President
<PAGE>
6
The Lenders:
-----------
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Janet Williams
-------------------------------------
Title: Duly Authorized Signatory
BANK OF MONTREAL
By:
-------------------------------------
Title:
BHF-BANK AKTIENGESELLSCHAFT
By:
-------------------------------------
Title:
CITICORP USA, INC.
By:
-------------------------------------
Title:
DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN
BRANCHES
By:
-------------------------------------
Title:
By:
-------------------------------------
Title:
MARINE MIDLAND BANK PLC, NEW YORK BRANCH
By:
-------------------------------------
Title:
<PAGE>
6
The Lenders:
-----------
GENERAL ELECTRIC CAPITAL CORPORATION
By:
-------------------------------------
Title:
BANK OF MONTREAL
By: /s/ Susan Blackburn
-------------------------------------
Title: Director
BHF-BANK AKTIENGESELLSCHAFT
By:
-------------------------------------
Title:
CITICORP USA, INC.
By:
-------------------------------------
Title:
DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN
BRANCHES
By:
-------------------------------------
Title:
By:
-------------------------------------
Title:
MARINE MIDLAND BANK PLC, NEW YORK BRANCH
By:
-------------------------------------
Title:
<PAGE>
The Lenders:
-----------
GENERAL ELECTRIC CAPITAL CORPORATION
By:
-------------------------------------
Title:
BANK OF MONTREAL
By:
-------------------------------------
Title:
BHF-BANK AKTIENGESELLSCHAFT
By: [SIGNATURES ILLEGIBLE]
-------------------------------------
Title: V.P. A.V.P.
CITICORP USA, INC.
By:
-------------------------------------
Title:
DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN
BRANCHES
By:
-------------------------------------
Title:
By:
-------------------------------------
Title:
MARINE MIDLAND BANK PLC, NEW YORK BRANCH
By:
-------------------------------------
Title:
<PAGE>
6
The Lenders:
-----------
GENERAL ELECTRIC CAPITAL CORPORATION
By:
-------------------------------------
Title:
BANK OF MONTREAL
By:
-------------------------------------
Title:
BHF-BANK AKTIENGESELLSCHAFT
By:
-------------------------------------
Title:
CITICORP USA, INC.
By: [SIGNATURE ILLEGIBLE]
-------------------------------------
Title: Attorney-in-Fact
DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN
BRANCHES
By:
-------------------------------------
Title:
By:
-------------------------------------
Title:
MARINE MIDLAND BANK PLC, NEW YORK BRANCH
By:
-------------------------------------
Title:
<PAGE>
6
The Lenders:
-----------
GENERAL ELECTRIC CAPITAL CORPORATION
By:
-------------------------------------
Title:
BANK OF MONTREAL
By:
-------------------------------------
Title:
BHF-BANK AKTIENGESELLSCHAFT
By:
-------------------------------------
Title:
CITICORP USA, INC.
By:
-------------------------------------
Title:
DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN
BRANCHES
By: /s/ Christopher E. Sarisky
-------------------------------------
Title: Assistant Treasurer
By: /s/ John W. Sweeney
-------------------------------------
Title: Assistant Vice President
MARINE MIDLAND BANK PLC, NEW YORK BRANCH
By:
-------------------------------------
Title:
<PAGE>
7
SOCIETE GENERALE
By:
-------------------------------------
Title:
THE BANK OF NEW YORK
By: [SIGNATURE ILLEGIBLE]
-------------------------------------
Title: Assistant Vice President
THE BANK OF NOVA SCOTIA
By:
-------------------------------------
Title:
THE CIT GROUP/BUSINESS CREDIT, INC.
By:
-------------------------------------
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By:
-------------------------------------
Title:
THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, NEW
YORK BRANCH
By:
-------------------------------------
Title:
THE MITSUBISHI TRUST AND BANKING CORPORATION
By:
-------------------------------------
Title:
<PAGE>
7
SOCIETE GENERALE
By:
---------------------------------
Title:
THE BANK OF NEW YORK
By:
---------------------------------
Title:
THE BANK OF NOVA SCOTIA
By: [SIGNATURE ILLEGIBLE]
---------------------------------
Title: Vice President
THE CIT GROUP/BUSINESS CREDIT, INC.
By:
---------------------------------
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By:
---------------------------------
Title:
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:
---------------------------------
Title:
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By:
---------------------------------
Title:
<PAGE>
7
SOCIETE GENERALE
By:
---------------------------------
Title:
THE BANK OF NEW YORK
By:
---------------------------------
Title:
THE BANK OF NOVA SCOTIA
By:
---------------------------------
Title:
THE CIT GROUP/BUSINESS CREDIT, INC.
By: [SIGNATURE ILLEGIBLE]
---------------------------------
Title: Assistant Secretary
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By:
---------------------------------
Title:
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:
---------------------------------
Title:
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By:
---------------------------------
Title:
<PAGE>
7
SOCIETE GENERALE
By:
---------------------------------
Title:
THE BANK OF NEW YORK
By:
---------------------------------
Title:
THE BANK OF NOVA SCOTIA
By:
---------------------------------
Title:
THE CIT GROUP/BUSINESS CREDIT, INC.
By:
---------------------------------
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By: /s/ Jim Kawade
---------------------------------
Title: Joint General Manager
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:
---------------------------------
Title:
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By:
---------------------------------
Title:
<PAGE>
7
SOCIETE GENERALE
By:
---------------------------------
Title:
THE BANK OF NEW YORK
By:
---------------------------------
Title:
THE BANK OF NOVA SCOTIA
By:
---------------------------------
Title:
THE CIT GROUP/BUSINESS CREDIT, INC.
By:
---------------------------------
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By:
---------------------------------
Title:
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By: [SIGNATURE ILLEGIBLE]
---------------------------------
Title: Deputy General Manager
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By:
---------------------------------
Title:
<PAGE>
7
SOCIETE GENERALE
By:
---------------------------------
Title:
THE BANK OF NEW YORK
By:
---------------------------------
Title:
THE BANK OF NOVA SCOTIA
By:
---------------------------------
Title:
THE CIT GROUP/BUSINESS CREDIT, INC.
By:
---------------------------------
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By:
---------------------------------
Title:
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:
---------------------------------
Title:
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By: /s/ T. Hayashi
---------------------------------
Title: Senior Vice President
<PAGE>
8
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By: /s/ Gilles Marchand
---------------------------------
Title: Gilles Marchand, CFA
Authorized Signatory
SENIOR HIGH INCOME PORTFOLIO, INC.
By: /s/ Gilles Marchand
---------------------------------
Title: Gilles Marchand, CFA
Authorized Signatory
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By: /s/ Gilles Marchand
-----------------------------
Title: Gilles Marchand, CFA
Authorized Signatory
VAN KAMPEN AMERICAN CAPITAL PRIME RATE
INCOME TRUST
By:
---------------------------------
Title:
SENIOR DEBT PORTFOLIO
By: Boston Management and Research, as
Investment Advisor
By:
----------------------------
Title:
ORIX USA CORPORATION
By:
---------------------------------
Title:
<PAGE>
8
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By:
---------------------------------
Title:
SENIOR HIGH INCOME PORTFOLIO, INC.
By:
---------------------------------
Title:
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By:
-----------------------------
Title:
VAN KAMPEN AMERICAN CAPITAL PRIME RATE
INCOME TRUST
By: /s/ Jeffrey W. Maillet
---------------------------------
Title: Jeffrey W. Maillet
Sr. Vice Pres.- Portfolio Mgr.
SENIOR DEBT PORTFOLIO
By: Boston Management and Research, as
Investment Advisor
By:
----------------------------
Title:
ORIX USA CORPORATION
By:
---------------------------------
Title:
<PAGE>
8
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By:
---------------------------------
Title:
SENIOR HIGH INCOME PORTFOLIO, INC.
By:
---------------------------------
Title:
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By:
-----------------------------
Title:
VAN KAMPEN AMERICAN CAPITAL PRIME RATE
INCOME TRUST
By:
---------------------------------
Title:
SENIOR DEBT PORTFOLIO
By: Boston Management and Research, as
Investment Advisor
By: /s/ Payson F. Swaffield
----------------------------
Title: Payson F. Swaffield
Vice President
ORIX USA CORPORATION
By:
---------------------------------
Title:
<PAGE>
8
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By:
---------------------------------
Title:
SENIOR HIGH INCOME PORTFOLIO, INC.
By:
---------------------------------
Title:
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By:
-----------------------------
Title:
VAN KAMPEN AMERICAN CAPITAL PRIME RATE
INCOME TRUST
By:
---------------------------------
Title:
SENIOR DEBT PORTFOLIO
By: Boston Management and Research, as
Investment Advisor
By:
----------------------------
Title:
ORIX USA CORPORATION
By: /s/ Hiroyuki Miyauchi
---------------------------------
Title: Hiroyuki Miyauchi
Senior Vice President
<PAGE>
9
ARAB BANKING CORPORATION
By: [SIGNATURE ILLEGIBLE]
----------------------------------
Title: Vice President
BANK OF SCOTLAND
By:
----------------------------------
Title:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By:
----------------------------------
Title:
THE NIPPON CREDIT BANK, LTD.
By:
----------------------------------
Title:
WACHOVIA BANK OF GEORGIA, N.A.
By:
----------------------------------
Title:
CHRISTIANA BANK OG KREDITKASSE
By:
----------------------------------
Title:
By:
----------------------------------
Title:
<PAGE>
9
ARAB BANKING CORPORATION
By:
----------------------------------
Title:
BANK OF SCOTLAND
By: /s/ Joseph Fratus
----------------------------------
Title: Asst. Vice President
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By:
----------------------------------
Title:
THE NIPPON CREDIT BANK, LTD.
By:
----------------------------------
Title:
WACHOVIA BANK OF GEORGIA, N.A.
By:
----------------------------------
Title:
CHRISTIANA BANK OG KREDITKASSE
By:
----------------------------------
Title:
By:
----------------------------------
Title:
<PAGE>
9
ARAB BANKING CORPORATION
By:
----------------------------------
Title:
BANK OF SCOTLAND
By:
----------------------------------
Title:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By: /s/ Thomas M. Cambern
----------------------------------
Title: Vice President
THE NIPPON CREDIT BANK, LTD.
By:
----------------------------------
Title:
WACHOVIA BANK OF GEORGIA, N.A.
By:
----------------------------------
Title:
CHRISTIANA BANK OG KREDITKASSE
By:
----------------------------------
Title:
By:
----------------------------------
Title:
<PAGE>
9
ARAB BANKING CORPORATION
By:
----------------------------------
Title:
BANK OF SCOTLAND
By:
----------------------------------
Title:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By:
----------------------------------
Title:
THE NIPPON CREDIT BANK, LTD.
By:
----------------------------------
Title:
WACHOVIA BANK OF GEORGIA, N.A.
By:
----------------------------------
Title:
CHRISTIANA BANK OG KREDITKASSE
By: [SIGNATURE ILLEGIBLE]
----------------------------------
Title: First Vice President
By: /s/ Peter M. Dodge
----------------------------------
Title: First Vice President
<PAGE>
10
CORESTATES BANK, N.A.
By: [SIGNATURE ILLEGIBLE]
------------------------------------
Title: Vice President
D G BANK DEUTSCHE GENOSSENSCHAFTSBANK
By:
------------------------------------
Title:
By:
------------------------------------
Title:
THE FIRST NATIONAL BANK OF MARYLAND
By:
------------------------------------
Title:
FLEET NATIONAL BANK
By:
------------------------------------
Title:
KREDIETBANK N.V.
By:
------------------------------------
Title:
By:
------------------------------------
Title:
THE YASUDA TRUST AND BANKING COMPANY LIMITED
By:
------------------------------------
Title:
<PAGE>
10
CORESTATES BANK, N.A.
By:
------------------------------------
Title:
D G BANK DEUTSCHE GENOSSENSCHAFTSBANK
By: [SIGNATURE ILLEGIBLE]
------------------------------------
Title: Vice President
By: /s/ Paul M. Dolan
------------------------------------
Title: Asst. Vice President
THE FIRST NATIONAL BANK OF MARYLAND
By:
------------------------------------
Title:
FLEET NATIONAL BANK
By:
------------------------------------
Title:
KREDIETBANK N.V.
By:
------------------------------------
Title:
By:
------------------------------------
Title:
THE YASUDA TRUST AND BANKING COMPANY LIMITED
By:
------------------------------------
Title:
<PAGE>
10
CORESTATES BANK, N.A.
By:
------------------------------------
Title:
D G BANK DEUTSCHE GENOSSENSCHAFTSBANK
By:
------------------------------------
Title:
By:
------------------------------------
Title:
THE FIRST NATIONAL BANK OF MARYLAND
By: [SIGNATURE ILLEGIBLE]
------------------------------------
Title: Vice President
FLEET NATIONAL BANK
By:
------------------------------------
Title:
KREDIETBANK N.V.
By:
------------------------------------
Title:
By:
------------------------------------
Title:
THE YASUDA TRUST AND BANKING COMPANY LIMITED
By:
------------------------------------
Title:
<PAGE>
10
CORESTATES BANK, N.A.
By:
------------------------------------
Title:
D G BANK DEUTSCHE GENOSSENSCHAFTSBANK
By:
------------------------------------
Title:
By:
------------------------------------
Title:
THE FIRST NATIONAL BANK OF MARYLAND
By:
------------------------------------
Title:
FLEET NATIONAL BANK
By: /s/ Roger C. Boucher
------------------------------------
Title: Vice President
KREDIETBANK N.V.
By:
------------------------------------
Title:
By:
------------------------------------
Title:
THE YASUDA TRUST AND BANKING COMPANY LIMITED
By:
------------------------------------
Title:
<PAGE>
10
CORESTATES BANK, N.A.
By:
------------------------------------
Title:
D G BANK DEUTSCHE GENOSSENSCHAFTSBANK
By:
------------------------------------
Title:
By:
------------------------------------
Title:
THE FIRST NATIONAL BANK OF MARYLAND
By:
------------------------------------
Title:
FLEET NATIONAL BANK
By:
------------------------------------
Title:
KREDIETBANK N.V.
By: [SIGNATURE ILLEGIBLE]
------------------------------------
Title: Assistant Treasurer
By: [SIGNATURE ILLEGIBLE]
------------------------------------
Title: Vice President
THE YASUDA TRUST AND BANKING COMPANY LIMITED
By:
------------------------------------
Title:
<PAGE>
CORESTATES BANK, N.A.
By:
------------------------------------
Title:
D G BANK DEUTSCHE GENOSSENSCHAFTSBANK
By:
------------------------------------
Title:
By:
------------------------------------
Title:
THE FIRST NATIONAL BANK OF MARYLAND
By:
------------------------------------
Title:
FLEET NATIONAL BANK
By:
------------------------------------
Title:
KREDIETBANK N.V.
By:
------------------------------------
Title:
By:
------------------------------------
Title:
THE YASUDA TRUST AND BANKING COMPANY LIMITED
By: /s/ RM Laudenschlogn
------------------------------------
Title: Senior Vice President
<PAGE>
11
UNITED STATES NATIONAL BANK OF OREGON
By:
------------------------------------------
Title:
MEESPIERSON N.V.
By:
------------------------------------------
Title:
By:
------------------------------------------
Title:
NORDDEUTSCHE LANDESBANK GIROZENTRALE
NEW YORK BRANCH AND/OR CAYMAN
ISLANDS BRANCH
By: /s/ Stephen K. Hunter
------------------------------------------
Title: SVP
By: /s/ Stephanie Hoevermann
------------------------------------------
Title: VP
COBANK, ACB
By:
------------------------------------------
Title:
BANK AUSTRIA AKTIENGESELLSCHAFT
By:
------------------------------------------
Title:
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
By:
------------------------------------------
Title:
<PAGE>
11
UNITED STATES NATIONAL BANK OF OREGON
By:
------------------------------------------
Title:
MEESPIERSON N.V.
By:
------------------------------------------
Title:
By:
------------------------------------------
Title:
NORDDEUTSCHE LANDESBANK GIROZENTRALE
NEW YORK BRANCH AND/OR CAYMAN
ISLANDS BRANCH
By:
------------------------------------------
Title:
By:
------------------------------------------
Title:
COBANK, ACB
By: [SIGNATURE ILLEGIBLE]
------------------------------------------
Title: VP
BANK AUSTRIA AKTIENGESELLSCHAFT
By:
------------------------------------------
Title:
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
By:
------------------------------------------
Title:
<PAGE>
11
UNITED STATES NATIONAL BANK OF OREGON
By:
------------------------------------------
Title:
MEESPIERSON N.V.
By:
------------------------------------------
Title:
By:
------------------------------------------
Title:
NORDDEUTSCHE LANDESBANK GIROZENTRALE
NEW YORK BRANCH AND/OR CAYMAN
ISLANDS BRANCH
By:
------------------------------------------
Title:
By:
------------------------------------------
Title:
COBANK, ACB
By:
------------------------------------------
Title:
BANK AUSTRIA AKTIENGESELLSCHAFT
By: /s/ Jeanene Ball/[SIGNATURE ILLEGIBLE]
------------------------------------------
Title: AVP VP
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
By:
------------------------------------------
Title:
<PAGE>
11
UNITED STATES NATIONAL BANK OF OREGON
By:
------------------------------------------
Title:
MEESPIERSON N.V.
By:
------------------------------------------
Title:
By:
------------------------------------------
Title:
NORDDEUTSCHE LANDESBANK GIROZENTRALE
NEW YORK BRANCH AND/OR CAYMAN
ISLANDS BRANCH
By:
------------------------------------------
Title:
By:
------------------------------------------
Title:
COBANK, ACB
By:
------------------------------------------
Title:
BANK AUSTRIA AKTIENGESELLSCHAFT
By:
------------------------------------------
Title:
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
By: [SIGNATURE ILLEGIBLE]
------------------------------------------
Title:
<PAGE>
12
IMPERIAL BANK, CALIFORNIA BANKING CORPORATION
By: /s/ Ray Vadalma
---------------------------------------------
Title: RAY VADALMA
SENIOR VICE PRESIDENT
CREDIT LYONNAIS NEW YORK BRANCH
By:
---------------------------------------------
Title:
MELLON BANK, N.A.
By:
---------------------------------------------
Title:
NATIONSBANK, N.A.
By:
---------------------------------------------
Title:
THE SANWA BANK, LIMITED
By:
---------------------------------------------
Title:
CHASE SECURITIES INC., as agent for The Chase
Manhattan Bank
By:
---------------------------------------------
Title:
<PAGE>
12
IMPERIAL BANK, CALIFORNIA BANKING CORPORATION
By:
---------------------------------------------
Title:
CREDIT LYONNAIS NEW YORK BRANCH
By: [SIGNATURE ILLEGIBLE]
---------------------------------------------
Title: Vice President
MELLON BANK, N.A.
By:
---------------------------------------------
Title:
NATIONSBANK, N.A.
By:
---------------------------------------------
Title:
THE SANWA BANK, LIMITED
By:
---------------------------------------------
Title:
CHASE SECURITIES INC., as agent for The Chase
Manhattan Bank
By:
---------------------------------------------
Title:
<PAGE>
12
IMPERIAL BANK, CALIFORNIA BANKING CORPORATION
By:
---------------------------------------------
Title:
CREDIT LYONNAIS NEW YORK BRANCH
By:
---------------------------------------------
Title:
MELLON BANK, N.A.
By:
---------------------------------------------
Title:
NATIONSBANK, N.A.
By: [SIGNATURE ILLEGIBLE]
---------------------------------------------
Title: Officer
THE SANWA BANK, LIMITED
By:
---------------------------------------------
Title:
CHASE SECURITIES INC., as agent for The Chase
Manhattan Bank
By:
---------------------------------------------
Title:
<PAGE>
12
IMPERIAL BANK, CALIFORNIA BANKING CORPORATION
By:
---------------------------------------------
Title:
CREDIT LYONNAIS NEW YORK BRANCH
By:
---------------------------------------------
Title:
MELLON BANK, N.A.
By:
---------------------------------------------
Title:
NATIONSBANK, N.A.
By:
---------------------------------------------
Title:
THE SANWA BANK, LIMITED
By: /s/ Yutaka Higashino
---------------------------------------------
Title: Senior Vice President
Yutaka Higashino
CHASE SECURITIES INC., as agent for The Chase
Manhattan Bank
By:
---------------------------------------------
Title:
<PAGE>
13
MERITA BANK LTD.
By:
----------------------------------------
Title:
By:
----------------------------------------
Title:
WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK
BRANCH
By:
----------------------------------------
Title:
By:
----------------------------------------
Title:
FALCON 94, LIMITED
By:[SIGNATURE ILLEGIBLE]
----------------------------------------
Title: PORTFOLIO MANAGER
AERIES FINANCE LTD.
By:
----------------------------------------
Title:
CERES FINANCE LTD.
By:
----------------------------------------
Title:
STRATA FUNDING LTD.
By:
----------------------------------------
Title:
By:
----------------------------------------
Title:
<PAGE>
SPS TRADE
By:/s/ William J. Bokos
----------------------------------------
Title: William J. Bokos
Authorized Signatory
<PAGE>
SPS SWAPS 2
By:/s/ Mark Magnoli
----------------------------------------
Title: Mark Magnoli
Vice President
<PAGE>
PROTECTIVE LIFE INSURANCE CO.
By:/s/ James Dondero
----------------------------------------
Title: JAMES DONDERO
AUTHORIZED SIGNATOR
<PAGE>
MORGAN STANLEY SENIOR FUNDING, INC.
By:/s/ Christopher A. Pucillo
----------------------------------------
Title: CHRISTOPHER A. PUCILLO
VICE PRESIDENT
<PAGE>
LEHMAN COMMERCIAL PAPER INC.
By:[SIGNATURE ILLEGIBLE]
----------------------------------------
Title:
<PAGE>
Exhibit 12.1
SDW HOLDINGS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD
DECEMBER 21,
TWELVE MONTHS TWELVE MONTHS NINE MONTHS THREE MONTHS 1994
ENDED ENDED ENDED ENDED THROUGH
DECEMBER 26, DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27,
1992 1993 1994 1994 1995
--------------- --------------- --------------- --------------- -------------
S.D. WARREN S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND COMPANY AND CONSOLIDATED
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED SDW HOLDINGS
AFFILIATES AFFILIATES AFFILIATES AFFILIATES CORPORATION
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
--------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Income (loss)
before taxes
and other
items.......... $82.6 $ 1.9 $28.0 $24.9 $ 70.8
Adjustments:
Capitalized
interest...... (0.8) -- (1.4) -- (0.9)
Dividends and
accretion on
subsidiary's
preferred
stock......... -- -- -- -- (15.8)
Total fixed
charges, net.. 17.1 15.8 12.5 3.4 125.8
----- ----- ----- ----- ------
Excess of
earnings to
cover fixed
charges and
preferred stock
dividends...... $98.9 $17.7 $39.1 $28.3 $179.9
===== ===== ===== ===== ======
Ratio of
earnings to
cover fixed
charges and
preferred stock
dividends...... 5.8x 1.1x 3.1x 8.3x 1.4x
===== ===== ===== ===== ======
Fixed charges
and preferred
stock
dividends:
Interest
expense....... $ 9.0 $ 8.5 $ 6.4 $ 2.3 $106.0
Interest
portion of
Biomass
contract...... 5.1 4.6 3.2 0.9 2.4
Interest
portion of
rent(1)....... 2.2 2.7 1.5 0.2 0.7
Dividends and
accretion on
subsidiary's
preferred
stock......... -- -- -- -- 15.8
Capitalized
interest...... 0.8 -- 1.4 -- 0.9
----- ----- ----- ----- ------
Total fixed
charges and
preferred stock
dividends...... $17.1 $15.8 $12.5 $ 3.4 $125.8
===== ===== ===== ===== ======
<CAPTION>
TWELVE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
OCTOBER 2, APRIL 3, APRIL 2,
1996 1996 1997
------------- ------------ ------------
CONSOLIDATED CONSOLIDATED CONSOLIDATED
SDW HOLDINGS SDW HOLDINGS SDW HOLDINGS
CORPORATION CORPORATION CORPORATION
(SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
------------- ------------ ------------
<S> <C> <C> <C>
Income (loss)
before taxes
and other
items.......... $ 12.0 $21.2 $(2.7)
Adjustments:
Capitalized
interest...... (1.9) (0.6) (0.8)
Dividends and
accretion on
subsidiary's
preferred
stock......... (23.5) (11.5) (12.9)
Total fixed
charges, net.. 138.1 73.3 67.0
------------- ------------ ------------
Excess of
earnings to
cover fixed
charges and
preferred stock
dividends...... $124.7 $82.4 $50.6
============= ============ ============
Ratio of
earnings to
cover fixed
charges and
preferred stock
dividends...... * 1.1x *
============= ============ ============
Fixed charges
and preferred
stock
dividends:
Interest
expense....... $108.9 $59.1 $51.8
Interest
portion of
Biomass
contract...... 2.7 1.6 1.0
Interest
portion of
rent(1)....... 1.1 0.5 0.5
Dividends and
accretion on
subsidiary's
preferred
stock......... 23.5 11.5 12.9
Capitalized
interest...... 1.9 0.6 0.8
------------- ------------ ------------
Total fixed
charges and
preferred stock
dividends...... $138.1 $73.3 $67.0
============= ============ ============
</TABLE>
- ------------
* Ratio is less than 1 to 1 for period presented.
(1) Interest expense component of rent is 30% of rental expense.
<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 Post-Effective Amendment No. 1 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 Financial Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche llp
Boston, Massachusetts
August 5, 1997
