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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 1, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER--033-88496-01
SDW HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2700 WESTCHESTER AVENUE,
PURCHASE, NEW YORK
(STATE OR OTHER JURISDICTION OF (ADDRESS OF PRINCIPAL
INCORPORATION OR ORGANIZATION) EXECUTIVE OFFICES)
13-3795926 10577
(ZIP CODE)
(I.R.S. EMPLOYERIDENTIFICATION NO.)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (914) 696-0021
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of Common Stock outstanding as of November 7, 1997 was
100,000 shares.
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PART I
ITEM 1. BUSINESS
SDW Holdings Corporation, a Delaware corporation, ("Holdings" or the
"Company") owns all the outstanding common stock of S.D. Warren Company ("S.D.
Warren" or "Warren"). Warren manufactures printing, publishing and specialty
papers and has pulp and timberland operations vertically integrated with
certain of its manufacturing facilities. Warren 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 operates a sheeting
and distribution facility in Allentown, Pennsylvania with annual sheeting
capacity of approximately 95,000 tons, with other sheeting capabilities
located at its Muskegon, Michigan mill (162,000 tons) and Mobile, Alabama mill
(137,000 tons). The Company operates regional distribution centers in Atlanta,
Georgia, Schaumburg, Illinois and Grand Prairie, Texas. The Company owns
approximately 911,000 acres of timberlands in the State of Maine.
Warren was founded in 1854 and was acquired by Scott Paper Company ("Scott")
in 1967. On December 20, 1994, SDW Acquisition Corporation ("SDW
Acquisition"), a wholly owned subsidiary of the Company, acquired (the
"Acquisition") from Scott all of the outstanding capital stock of Warren, then
a wholly owned subsidiary of Scott, and certain related affiliates of Scott
(the "Predecessor Corporation"). Immediately following the Acquisition, SDW
Acquisition merged with and into Warren, with Warren surviving (the
"Acquisition Merger"). In December 1995, Scott was acquired by Kimberly-Clark
Corporation ("Kimberly-Clark").
Holdings is an indirect, majority owned subsidiary of Sappi Limited
("Sappi"), a South African company. 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 of Warren, Sappi became
the largest coated free paper manufacturer in the world. On September 15,
1997, Sappi entered into an agreement to purchase KNP Leykam ("KNP"), the
holding company for the fine paper operations of NV Koninklijke KNP BT (the
"KNP Acquisition"). KNP is comprised of mills in the Netherlands, Austria and
Belgium with total annual capacity of 1.9 million tons of coated woodfree and
light weight coated paper. The KNP Acquisition is expected to be consummated
by the end of 1997.
In May 1997, the chairman of Sappi announced that Sappi was evaluating the
sale of non-core assets throughout the Sappi group. Consequently, Warren is in
the process of investigating the sale or monetization of businesses not within
its main area of focus.
PRINCIPAL PRODUCTS
Warren's principal products include coated, uncoated, specialty and
technical papers. The following table illustrates Warren's major markets,
expressed as a percentage of sales, for the period December 21, 1994 through
September 27, 1995 (the "nine months ended September 27, 1995"), the year
ended October 2, 1996 ("fiscal year 1996") and the year ended October 1, 1997
("fiscal year 1997"):
<TABLE>
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Coated paper................ 70.6% 72.2% 71.3%
Uncoated paper.............. 13.6 12.7 12.7
Specialty paper............. 10.2 11.5 11.8
Technical paper and other... 5.6 3.6 4.2
---- ---- ----
Total..................... 100% 100% 100%
==== ==== ====
</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,
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ranging from #1, which is premium, to #5, the lowest in quality and price.
Warren principally competes in the coated free paper market which is composed
of product grades #1 through #3, and a limited amount of #4. The #4 market
includes both coated free and coated groundwood products. 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, matte, or silk. 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, inventory levels 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 installation of new
paper machines at paper manufacturing facilities, each of which can take up to
three years to construct.
COMPETITION
The markets for coated free products are highly competitive with a number of
major companies competing in each market. Warren competes mainly with U.S. and
Canadian producers of coated free paper, and, to a lesser degree, European
producers. Warren's principal competitors in the coated free market are
Champion International, Westvaco Corporation, Consolidated Papers Inc., The
Mead Corporation, International Paper Company, Appleton, 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 Warren's competitors have greater financial
resources than Warren, 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 Warren.
Several factors contribute to Warren's competitive strengths in the coated
free paper market, including high product quality, technological innovation,
high brand recognition and a strong distribution network. Warren is the
leading seller of #3 grade of coated free paper in North America and is among
the leaders with respect to #1 and #2 grades based on sales for fiscal year
1997.
DISTRIBUTION
Warren, unlike most of its competition, has made a strategic decision to
sell all of its coated products through the merchant distribution system.
Warren believes this policy increases the focus of the merchant sales force on
the sale of its products. The Company's sales force sells coated paper to
approximately 286 merchant distributing locations. Merchants are authorized to
distribute Warren products by geographic area and handle competitors' lines to
cover all segments of the market. 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
Warren and resell it, marking up their purchase price from Warren 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
Warren's invoice without regard to final collection from the end-user
customer.
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Warren sells uncoated paper in North America through a similar network of
merchant distributors that it uses for coated paper, with some exceptions
(approximately 315 merchant locations sell uncoated paper, versus the 286
which sell coated paper). Warren also distributes uncoated paper through
original equipment manufacturers, catalogues and merchant stores and is
beginning to explore additional distribution channels, such as warehouse
clubs, office superstores and telemarketing.
Warren 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. Customers in the specialties market include
label makers and casters of high pressure laminates and synthetic leather
products.
EXPORT SALES
Warren had sales to customers outside of the United States ("Export Sales")
of $83.1 million, $179.1 million and $186.2 million for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997, respectively.
Export Sales are primarily to Canada, Europe, Australia, Latin America and the
Far East. The Company's sales outside North America are handled by divisions
of Sappi.
CUSTOMERS
For fiscal year 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 Unisource Worldwide, Inc.
and certain affiliates of Sappi as a group. Each of these unaffiliated
customers is a merchant that resells the Company's paper products to a wide
range of end users. As indicated in the Notes to Consolidated Financial
Statements, the loss of any of these customers without the comparable
replacement of sales directly or indirectly to end users could have a material
adverse effect on the Company's business and results of operations.
BACKLOG AND SEASONALITY
Backlog as of October 1, 1997 was not significant. The Company had
approximately three to four weeks of backlog depending upon the product and
basis weights.
The Company's operations are not significantly affected by seasonality,
although the second and third quarters of the calendar year tend to be
stronger than the first 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), Strobe(R), Aero(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.
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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 93 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 $10.7 million, $15.6 million and $13.6
million on research and development activities for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 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 fiscal years 1996 and 1997, the Company manufactured approximately 65%
of its pulp requirements. This vertical integration reduces the Company's
exposure to (and ability to benefit from) fluctuations in the market price for
pulp. All three of the Company's northern mills are integrated with respect to
hardwood pulp production, and the Somerset, Maine mill 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 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. Kimberly-Clark is 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,
789,000 of which are net forested acres (or acres from which trees may be
harvested). Approximately 373,000 of these acres produce softwood timber, such
as spruce, fir, hemlock and white pine and 416,000 acres produce hardwood
timber, such as beech, birch and maple. The Company believes it can harvest
approximately 15,000 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 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, coal, oil, purchased steam from
the Mobile utility complex and natural gas, electricity and other.
The Company's power requirements at its Somerset mill are currently
satisfied through a power purchase agreement whereby the mill cogenerates
electricity and sells the output to Central Maine Power ("CMP") at market
rates. The CMP agreement relating to the Somerset mill also provides that the
mill purchase electricity
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from CMP at the standard industrial tariff rate. The Somerset Agreement
expires in the year 2012. Warren's long-term agreement with CMP relating to
the Westbrook mill expired on October 31, 1997, and has been replaced by a
short-term agreement with CMP in which the mill cogenerates electricity and
sells the excess output not used by the mill to CMP at market rates. The
short-term agreement for the Westbrook mill expires on April 30, 1998 and may
be renewed monthly through October 1998.
The Muskegon, Michigan 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.
EMPLOYEES AND LABOR RELATIONS
As of October 1, 1997, the Company had approximately 3,950 employees.
Approximately 71% of employees are represented by six international unions
under ten different contracts. By early February 1997, the Company had reached
a settlement on a new six-year labor agreement with its three major 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. By
October 1, 1997, the Company had reached settlement with both of its unions at
Westbrook, with the unions in each case ratifying a new five year agreement
with more flexible work rule provisions. The Company is engaged in
negotiations with the two unions at Mobile whose contracts expired on June 1,
1997. Those affected employees are working under contract extensions which can
be terminated upon 10 days notice. The Company's contracts with the two unions
in Muskegon expire in June 1998. 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 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 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 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 hearing the lawsuit 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
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EPA sued the County for failure to implement and enforce its industrial pre-
treatment operations associated with its operation of the wastewater facility.
The Company is uncertain as to the effects, if any, of this action on its
current dispute with the County which has raised the industrial users'
contractual rights as an issue in the EPA lawsuit. Recently, the group of
industrial users and the municipalities filed motions to intervene in the
lawsuit. 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 before the end of calendar year 1997, with
compliance with the rules required beginning in 2000. The Company believes
that environmental compliance expenditures, the bulk of which are for the
cluster rules compliance, will require aggregate capital expenditures of
approximately $70.0 million to $112.0 million through 2000, of which $20.0
million has already been incurred. The ultimate financial impact to the
Company of compliance with the cluster rules will depend upon the cost and
availability of new technology.
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 $13.0
million, of which approximately $4.0 million will be spent prior to 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 Resource 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 the Acquisition, including all
damages and costs related to these seven sites. Since the date of the
Acquisition, Scott, and subsequently Kimberly-Clark, 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
$10.0 million, of which approximately $5.8 million had been spent as of
October 1, 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.
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ITEM 2. PROPERTIES
Warren's principal executive offices are located in Boston, Massachusetts.
The Company believes that its property and equipment are generally well
maintained, in good operating condition and adequate for its present needs.
The inability to renew any short-term leases would not have a material adverse
effect on the Company's financial position or results of operations.
The following table sets forth the location and use of the Company's
principal facilities, which are owned in fee unless otherwise indicated. All
of the Company's principal properties are pledged as collateral under Warren's
Credit Facilities (see the Notes to Consolidated Financial Statements).
<TABLE>
<CAPTION>
LOCATION USE
-------- ---
<S> <C>
Skowhegan, Maine (Somerset Mill). Manufacturing facility for the manufacture of coated
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
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>
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(a) Subject to a lease that operates on a month to month basis.
(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 in September 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits, environmental and
administrative proceedings. The relief sought in such lawsuits and proceedings
includes injunctions, damages and penalties. Although the final result in
these suits and proceedings cannot be predicted with certainty, it is the
present opinion of management, after consulting with legal counsel and based
on the Company's financial position and the information available to date that
they will not have a material effect on the Company's financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On July 30, 1997, Sappi Deutschland, then holder of record of 77.12% of the
shares of common stock of Holdings approved the execution of the Merger
Agreement and the consummation of the Merger (both as defined in Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Control by Sappi).
8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the common stock of the
Company. The common stock of the Company has not been traded or sold publicly,
and accordingly, no information with respect to sales practice or quotations
is available.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated statement of operations
data, consolidated share data and consolidated balance sheet data for Holdings
and the Predecessor Corporation. Holdings owns all of the outstanding common
stock of Warren (the "Successor Corporation"). 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 selected financial data for the year 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, the year ended October 2,
1996 (which includes 53 weeks) and the year ended October 1, 1997 are derived
from the consolidated financial statements of Holdings which have been audited
by Deloitte & Touche LLP. Operating data for any periods less than one year is
not necessarily indicative of the results that may be expected for the full
year. Further, data for the Predecessor and Successor Corporations are not
necessarily comparable as a result of a new basis of accounting for the
Successor Corporation and the adoption of certain accounting policies.
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 21,
YEAR NINE MONTHS 1994 1994 YEAR YEAR
ENDED ENDED THROUGH THROUGH ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1993 1994 1994 1995 1996 1997
--------------- --------------- --------------- ------------- ------------ ------------
S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND CONSOLIDATED CONSOLIDATED CONSOLIDATED
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED SDW HOLDINGS SDW HOLDINGS SDW HOLDINGS
AFFILIATES AFFILIATES AFFILIATES CORPORATION CORPORATION CORPORATION
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
--------------- --------------- --------------- ------------- ------------ ------------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Sales.................. $ 1,143.6 $ 828.8 $ 313.6 $ 1,155.8 $ 1,441.6 $1,405.6
Gross profit........... 168.1 106.4 49.9 269.8 255.0 290.2
Selling, general and
administrative
expense............... 91.7 72.1 22.2 96.2 134.0 137.9
Restructuring.......... 66.1 -- -- -- -- 10.0
Income from
operations............ 10.3 34.3 27.7 173.6 121.0 142.3
Other income (expense),
net................... 0.1 0.1 (0.5) 3.2 (0.1) 4.1
Interest expense....... 8.5 6.4 2.3 106.0 108.9 99.0
Income tax expense..... 6.5 11.2 9.9 28.4 5.1 19.2
Dividends and accretion
on Warren Series B
preferred stock....... -- -- -- 9.1 13.5 15.2
Extraordinary item, net
of tax................ -- -- -- -- (2.0) --
Net income (loss)...... (4.6) 16.8 15.0 33.3 (8.6) 13.0
Dividends on preferred
stock................. -- -- -- 4.6 6.9 7.9
Net income (loss)
applicable to common
stockholders.......... (4.6) 16.8 15.0 28.7 (15.5) 5.1
CONSOLIDATED SHARE
DATA(1):
Net income (loss)
applicable to common
stockholders.......... $ -- $ -- $ -- $ 279.35 $ (176.45) $ 49.74
Weighted average common
shares outstanding.... -- -- -- 102,740 87,843 102,537
CONSOLIDATED BALANCE
SHEET DATA (AT END OF
PERIOD):
Cash and cash
equivalents........... $ 2.1 $ 4.7 $ 75.0 $ 62.2 $ 49.0 $ 180.7
Working capital........ 47.1 156.2 233.2 177.9 109.8 179.5
Total assets........... 1,711.7 1,676.9 1,737.1 1,887.3 1,725.4 1,632.0
Total debt (including
current maturities)... 124.3 119.8 119.3 1,127.4 948.9 767.1
Warren Series B
preferred stock....... -- -- -- 74.5 88.0 103.2
Preferred stock........ -- -- -- 42.1 49.0 56.9
Parent's equity........ 1,088.1 1,136.5 1,219.1 -- -- --
Stockholders' equity... -- -- -- 365.1 356.5 368.9
</TABLE>
- -------
(1) Share and per share data for the period from December 21, 1994 through
September 27, 1995 and the year ended October 2, 1996 have been restated
to give effect to the September 5, 1997 recapitalization of Holdings using
a ratio of 35.0 million shares of common stock before the recapitalization
to 0.1 million shares of common stock after the recapitalization.
10
<PAGE>
ITEM 7. 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, is referred to collectively in
Management's Discussion and Analysis of Results of Operations and Financial
Condition 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 operates a sheeting and distribution facility in Allentown, Pennsylvania
with annual sheeting capacity of approximately 95,000 tons, with other
sheeting capabilities located at its Muskegon, Michigan mill (162,000 tons)
and Mobile, Alabama mill (137,000 tons). The Company owns approximately
911,000 acres of timberlands in the State of Maine and operates several
regional distribution facilities.
On December 20, 1994, SDW Acquisition acquired from Scott, which has since
been acquired by Kimberly-Clark, all of the outstanding capital stock of
Warren. Immediately following the Acquisition, SDW Acquisition merged with and
into Warren (the "Acquisition Merger"), with Warren surviving. See the Notes
to Consolidated Financial Statements for information regarding the
Acquisition.
The Company wishes to caution readers that this discussion and analysis
contains certain "forward-looking statements" as that term is defined under
the Private Securities Litigation Reform Act of 1995. The words "believe,"
"anticipate," "intend," "estimate," "plan," "assume" and other similar
expressions which are predictions of or indicate future events and future
trends which do not relate to historical matters identify forward-looking
statements. Reliance should not be placed on forward-looking statements
because they involve known and unknown risks, uncertainties and other factors
which are in some cases beyond the control of the Company and may cause the
actual results, performance or achievements of the Company to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements. Certain factors that
may cause such differences include but are not limited to the following:
global economic and market conditions; production and capacity in the United
States 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.
MARKET OVERVIEW
The market for coated paper has historically experienced price fluctuations
which are driven by North American supply/demand imbalances, inventory shifts
and, to a lesser degree, the availability and relative pricing of imported
products. During fiscal year 1996, the industry built coated free inventory
which peaked at 598,000 tons in May 1996. This producer inventory had,
however, dropped to a level of approximately 413,000 tons by the end of fiscal
year 1997. In addition to the reduction in inventory, mill shipments
increased, indicating a return to more normal demand growth patterns that have
averaged about 5% per year over the past 10 years. The industry has shipped
over 400,000 tons of coated free paper per month for six consecutive months
for the first time in its history, and because of the steady volume increase,
there has been incremental improvement and firming of pricing during the
Company's last fiscal quarter. Coated groundwood shipments have increased by
approximately 18% over 1996 and pricing has firmed. Since coated groundwood
pricing can provide a floor for coated free pricing, the upward trend in
coated groundwood shipments and pricing, as well as the increase in coated
free paper shipments over the prior year, supported a firming in the coated
free sheet price.
The uncoated and technical specialty side of the business experienced a
strong demand in the latter part of the fiscal year with sales volume for
fiscal year 1997 at 108% of fiscal year 1996. The Company continues to
11
<PAGE>
push higher value opportunities in order to optimize sales mix, although
average net selling prices for this area of business ended the year marginally
down from the fiscal year 1996 average. The specialty business, consisting of
pressure sensitive and release casting papers, experienced consistent demand
for its products during the year.
Any failure of the industry to maintain its recovery in the future, or any
prolonged or severe weakness in the market for any of the Company's products
in the future, may adversely affect the Company's financial position, results
of operations and cash flows. In addition, new coated paper capacity scheduled
for the end of calendar year 1997 in Europe and the Far East, as well as
certain machine conversions during 1997 to coated free sheet manufacture in
the United States, will impact market supply/demand balance and may constrain
upward movement of coated prices.
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto.
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO THE FISCAL YEAR 1996
The following discussion compares the results of operations for fiscal year
1997 with fiscal year 1996 (which included 53 weeks). The additional week in
fiscal year 1996 did not have a significant impact on sales or other operating
results.
Sales
Sales for fiscal year 1997 were $1,405.6 million compared to $1,441.6
million for fiscal year 1996, a decrease of $36.0 million or 2.5%. This
decrease was primarily due to a 7% decrease in average net sales per paper ton
which was partially offset by a 61,000 ton increase in paper shipment volume
over the previous year. Paper sales volume for fiscal year 1997 totaling 1.336
million tons was achieved despite a flood-related closure of the Westbrook
mill during the first fiscal quarter of 1997. The volume improvement was
driven by strong marketing efforts, including certain successful new product
launches, and supported by improved levels of productivity.
Cost of Goods Sold
Cost of goods sold for fiscal year 1997 was $1,115.4 million compared to
$1,186.6 million for fiscal year 1996, a decrease of $71.2 million or 6.0%.
Cost of goods sold on a per paper ton basis decreased to $820 per ton from
$917 per ton for the prior year. The decrease is primarily due to aggressive
cost reduction initiatives including more efficient maintenance and staffing
levels, decreased chemical and other material procurement costs and lower
fiber input costs. Productivity improvements were achieved in both the pulp
and paper operations which also contributed to the improved cost structure.
Selling, General and Administrative Expense
Selling, general and administrative expense was $137.9 million for fiscal
year 1997 compared to $134.0 million for fiscal year 1996, an increase of $3.9
million. The increase was due primarily to the opening of additional regional
distribution centers, professional services supporting the Company's profit
improvement initiatives, and other administrative expenses.
Restructuring
In October 1996, the Company commenced a restructuring plan which resulted
in a pretax charge of $10.0 million taken during fiscal year 1997 to cover the
costs related to the reduction of approximately 200 salaried positions or
approximately 14% of the Company's salaried work force.
Other Income (Expense), net
Other income (expense), net for fiscal year 1997 was $4.1 million income
compared to $0.1 million expense for fiscal year 1996. This change was largely
due to higher interest income resulting from higher average cash balances on
hand during fiscal year 1997.
12
<PAGE>
Interest Expense, Taxes, and Dividends and Accretion on Warren Series B
Preferred Stock
Interest expense for fiscal year 1997 was $99.0 million compared to $108.9
million for fiscal year 1996. The $9.9 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 $19.2 million for fiscal year 1997 compared to $5.1
million for the prior year, primarily reflecting the change in the Company's
earnings level.
Dividends and accretion on Warren Series B Redeemable Exchangeable Preferred
Stock ("Warren Series B Preferred Stock") of $15.2 million and $13.5 million
for the fiscal year 1997 and fiscal year 1996, respectively, are accounted for
as the equivalent of a minority interest for financial statement purposes.
FISCAL YEAR 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 27, 1995
The following discussion compares the results of operations for 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. 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 months 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 of Results of Operations and Financial Condition 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 YEAR
ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996
% %
------------------ ---------------
<S> <C> <C>
Cost of goods sold................... 76.7 82.3
Selling, general and administrative
expense............................. 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 revenue 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.
13
<PAGE>
During the third quarter of fiscal year 1996, pulp prices declined to 50% of
peak levels achieved during the nine months ended September 27, 1995 through
the first quarter of fiscal year 1996. Although the decrease in pulp prices
did have an impact on production cost per ton, it was partially mitigated by
the Company's own pulp production as the Company manufactures approximately
65% of its pulp requirement.
Selling, General and Administrative Expense
Selling, general and administrative expense of $134.0 million was 9.3% of
sales for fiscal year 1996 as compared to 8.3% of sales for the nine months
ended September 27, 1995. This increase was primarily due to the continued
post-Acquisition increase in administrative 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 costs associated with the 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 Consolidated
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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $222.6 million for fiscal year
1997 as compared to $216.6 million for fiscal year 1996. The increase is due
mainly to the improved earnings level in 1997 together with the impact of
increases in accounts payable, accrued and other liabilities and a decrease in
inventories, countered by the effect of the receipt in 1996 of $90.0 million
of proceeds from the sale of the Company's accounts receivable. The increase
in accounts payable, accrued and other liabilities during fiscal year 1997 was
primarily attributable to the timing of payments for certain raw materials and
interest, and increases in short-term retirement plan and restructuring
accruals.
Operating working capital decreased from $79.8 million at October 2, 1996 to
an operating working capital deficit of $12.0 million at October 1, 1997.
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, and decreases in
trade and other receivables and inventories.
14
<PAGE>
During fiscal year 1997, the Company received $150.4 million as proceeds
from the sale/leaseback of one of the Company's paper machines at its Somerset
facility. In connection with the transaction, the Company entered into a 15
year agreement to lease back the paper machine. Rental payments of
approximately $7.6 million will be made semi-annually in arrears in January
and July. The sale/leaseback agreement is being accounted for as an operating
lease. The gain on the transaction of approximately $17.4 million was deferred
and is being amortized as an adjustment to future rent payments.
Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. Damage to mill equipment has since been repaired, and
normal operating mill conditions have been restored. In connection with the
flood, the Company spent $44.1 million to refurbish the mill, of which $4.0
million was capitalized representing improvements to existing plant assets.
The Company received, net of deductibles of $3.5 million, insurance proceeds
totaling $52.7 million of which $40.9 million related to the refurbishment and
$11.8 million related to business interruption claims. All claims have been
submitted and finalized as of October 1, 1997.
Capital expenditures for fiscal 1997 were $61.0 million, up from $51.3
million for fiscal year 1996. In addition, the Company believes that
environmental compliance expenditures, the bulk of which are for cluster rules
compliance, will aggregate capital expenditures of approximately $70.0 million
to $112.0 million through 2000, of which $20.0 million has already been
incurred. The Company believes that cash generated by operations and amounts
available under its revolving credit facility will be sufficient to meet its
ongoing operating and capital expenditure requirements.
Net cash used in financing activities was $177.3 million for fiscal year
1997 as compared to $181.2 million for the previous fiscal year. Net cash used
in financing activities for fiscal year 1997 is comprised primarily of $38.1
million of proceeds received from the refinancing and issuance of certain new
industrial revenue bonds, which was more than offset by the related redeeming,
refunding and defeasing of an aggregate of $28.1 million of industrial revenue
bonds and $182.5 million of term loan repayments, $100.3 million of which was
obtained from the proceeds of the sale/leaseback transaction. During fiscal
year 1996, the Company repaid $176.3 million of its term loans, $90.0 million
of which was repaid from the proceeds received from the sale of the Company's
accounts receivable.
Debt and Preferred Stock
At October 1, 1997, long-term debt was $739.8 million compared to $902.5
million at October 2, 1996, a decrease of $162.7 million. The current
maturities of long-term debt balance of $27.3 million at October 1, 1997
primarily represents the amounts payable in June 1998 under the Company's term
loan facilities under the Credit Agreement (as defined in the Notes to
Consolidated Financial Statements).
Warren has a $250.0 million revolving credit facility to finance working
capital needs. At October 1, 1997, Warren did not have any borrowings
outstanding under this facility, resulting in an unused borrowing capacity of
approximately $239.0 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.
The Credit Agreement, as presently written, requires an Excess Cash Flow
prepayment of approximately $77.0 million relating to fiscal year 1997 to be
paid on December 30, 1997. However, the Company is in the process of
renegotiating the Credit Agreement, and the terms of the new agreement are
expected to reduce or eliminate this Excess Cash Flow prepayment. In the event
that the new agreement is not in place before December 30, 1997 or that the
Excess Cash Flow prepayment is not entirely eliminated, the Company intends to
fund this prepayment from the Revolving Credit Facility. Accordingly, the
amount of the prepayment is included in long-term debt in the accompanying
consolidated balance sheet at October 1, 1997.
In addition, Warren had approximately $150.8 million and $170.5 million of
letters of credit outstanding under its letter of credit facility at October
1, 1997 and October 2, 1996, respectively. Warren pays a commission,
15
<PAGE>
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.
The Credit Agreement, as amended, contains restrictive covenants which limit
the Company with respect to certain matters including, among other things, the
ability to incur debt, pay dividends, make acquisitions, sell assets, merge,
grant or incur liens, guarantee obligations, make investments or loans, make
capital expenditures, create subsidiaries or change its line of business. The
Credit Agreement also restricts the Company from prepaying certain of its
indebtedness. Under the Credit Agreement, the Company is required to satisfy
certain financial covenants which will require the Company to maintain
specified financial ratios, including a minimum interest coverage ratio, a
maximum leverage ratio and a net worth test. The Company has obtained consent
from the lenders under the Credit Agreement to use a portion of the proceeds
of the sale/leaseback, including the payment from time to time of dividends to
Holdings on or prior to September 30, 1998 for the purpose of redeeming the
Preferred Stock (as defined in the Notes to Consolidated Financial
Statements), subject to certain conditions and limitations.
The Company is required by the terms of the Credit Agreement to enter into
fixed rate interest protection agreements on a portion of its outstanding
debt. At October 1, 1997 and October 2, 1996, $205.0 million of debt was
covered by such interest rate protection agreements. These agreements expire
at varying dates between December 1997 and January 2000.
Warren has successfully solicited the consent (the "Consent") of the holders
(the "Note Holders") of the Warren Series B Senior Subordinated Notes
("Notes") to the approval of a waiver under which the Note Holders have (a)
consented to the payment of a dividend (the "Dividend") to Holdings for the
purpose of redeeming (the "Redemption") all of the Preferred Stock and (b)
agreed that the consummation of each of such Dividend and such Redemption do
not violate the restricted payment covenant of the Indenture (the "Indenture")
governing the Notes. The approved Consent permits Warren to pay the Dividend
for the purpose of effecting the Redemption of all of the Preferred Stock. At
October 1, 1997, the redemption value of the Preferred Stock was $56.9
million.
The Company does not currently anticipate paying any cash dividends on the
Warren Series B Preferred Stock for any period ending on or prior to December
15, 1999. In addition, the terms of the Credit Agreement and the Indenture
relating to the Notes (as defined in the Notes to Consolidated Financial
Statements) limit the amount of cash dividends the Company may pay with
respect to preferred stock and other equity securities both before and after
that date. See the Notes to Consolidated Financial Statements.
Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and debt. The Company uses
interest rate caps and swaps to the degree indicated above as a means of
protection against a portion of interest rate risk associated with the current
debt balances.
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 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.
16
<PAGE>
In addition to conventional pollutants, minute quantities of dioxins and
other chlorinated organic compounds may be contained in the wastewater
effluent of the Company's bleached kraft pulp mills in Somerset and Westbrook,
Maine and Muskegon, Michigan. The most recent National Pollutant Discharge
Elimination System ("NPDES") wastewater permit limits proposed by the EPA
would limit dioxin discharges from the Company's Somerset and Westbrook mills
to less than the level of detectability. The Company is presently meeting the
EPA's proposed dioxin limits but it is not meeting the proposed limits for
other parameters (e.g. temperature), and 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 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 hearing the lawsuit 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 implement and enforce its
industrial pre-treatment operations associated with its operation of the
wastewater facility. The Company is uncertain as to the effects, if any, of
this action on its current dispute with the County which has raised the
industrial users' contractual rights as an issue in the EPA lawsuit. Recently
the group of industrial users and the municipalities filed motions to
intervene in the lawsuit. 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 before the end of calendar year 1997, with
compliance with the rules required beginning in 2000. The Company believes
that environmental compliance expenditures, the bulk of which are for the
cluster rules compliance, will require aggregate capital expenditures of
approximately $70.0 million to $112.0 million through 2000 of which $20.0
million has already been incurred. The ultimate financial impact to the
Company of compliance with the cluster rules will depend upon the cost and
availability of new technology.
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 $13.0
million, of which approximately $4.0 million will be spent 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
17
<PAGE>
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 the
Acquisition, including all damages and costs related to these seven sites.
Since the date of the Acquisition, Scott, and subsequently Kimberly-Clark, 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
$10.0 million, of which approximately $5.8 million had been spent as of
October 1, 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.
Employees and Labor Relations
As of October 1, 1997, the Company had 3,956 employees. Approximately 71% of
employees are represented by six international unions under ten different
contracts. By early February 1997, the Company had reached a settlement on a
new six-year labor agreement with its three major 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. By October 1, 1997, the
Company had reached settlement with both of its unions at Westbrook, with the
unions in each case ratifying a new five year agreement with more flexible
work rule provisions. The Company is engaged in negotiations with the two
unions at Mobile whose contracts expired on June 1, 1997. Those affected
employees are working under contract extensions which can be terminated upon
10 days notice. The Company's contracts with the two unions in Muskegon expire
in June 1998. 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.
Long-Term Contracts
In connection with the Acquisition, Warren entered into long-term (25 years
initially, subject to mill closures and certain force majeure events)
agreements with Scott for the supply of pulp and water and the treatment of
effluent at the Mobile mill. Wood pulp is supplied generally at market prices.
Pulp prices are discounted due to the elimination of freight costs associated
with delivering pulp to Warren's Mobile mill and 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. Warren has entered into a long-term agreement to
purchase electric power and steam for the Mobile mill at rates generally
comparable to market tariffs, including fuel cost and capital recovery
components. During the nine months ended September 27, 1995, fiscal year 1996
and fiscal year 1997, the Company purchased pulp and utilities under these
agreements aggregating $127.3 million, $148.0 million and $108.0 million,
respectively.
The Company's power requirements at its Somerset mill are currently
satisfied through a power purchase agreement whereby the mill cogenerates
electricity and sells the output to CMP at market rates. The CMP agreement
relating to the Somerset mill also provides that the mill purchase electricity
from CMP at the standard industrial tariff rate. The Somerset Agreement
expires in the year 2012. Warren's long-term agreement with CMP relating to
the Westbrook mill expired on October 31, 1997, and has been replaced by a
short-term agreement with CMP in which the mill cogenerates electricity and
sells the excess output not used by the mill to CMP at market rates. The
short-term agreement for the Westbrook mill expires on April 30, 1998 and may
be renewed monthly through October 1998. As of the date of the Acquisition of
the Company, the Company established a
18
<PAGE>
deferred asset of approximately $32.3 million to reflect the fair value of the
Somerset and now expired Westbrook agreements. For the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997, amortization
expense related to this asset approximated $10.8 million, $12.0 million, and
$9.5 million, respectively. As of October 1, 1997, the asset was fully
amortized.
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 have established new forestry standards
stricter than current law, but which would not have completely banned
clearcutting, received a plurality vote. This competing measure was
resubmitted to the voters under Maine law on November 4, 1997 and was
defeated. The consequences of the vote to the Company are not expected to be
material, because such proposed measure generally reflected sustainable
forestry initiatives already voluntarily adopted by the Company.
The Company is also involved in various other lawsuits and administrative
proceedings. The relief sought in such lawsuits and proceedings includes
injunctions, damages and penalties. Although the final results in these suits
and proceedings cannot be predicted with certainty, it is present opinion of
the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's consolidated financial position, results of
operations or cash flows.
Year 2000
The Company is addressing the millenium computer date ("Year 2000") issue by
contracting with a national consulting group specializing in Year 2000
initiatives. A company-wide systems assessment has identified the systems
requiring modification or replacement to become Year 2000 compliant. This
initiative is expected to be completed by March 31, 1999 and, for those
systems not currently being replaced in terms of an implementation of a
company-wide integrated application system, is estimated to aggregate
approximately $6.0 million in expenditures.
Control by Sappi
On May 27, 1997 Western Ventures Limited ("WVL"), an indirect, wholly owned
subsidiary of Sappi, acquired certain minority common equity interests
(including both Common Stock, and Class A Warrants and Class B Warrants (the
"Warrants")) in Holdings (the "Minority Acquisition") 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 in the
Minority Acquisition to Heritage Springer Limited ("HSL"), a British Virgin
Island company, and HSL pledged such Common Stock 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 also has been granted certain rights of first refusal by such
lenders in respect to such securities. (See also Subsequent Events.)
On September 5, 1997, Holdings consummated a merger (the "Merger") described
in a merger agreement with SDW Acquisition II Corporation which was executed
on July 30, 1997 (the "Merger Agreement"). As a result of the Merger, each
issued and outstanding shares of common stock of Holdings held by any party
other than Sappi and its affiliates or HSL was converted into the right to
receive $17.60 per share in cash. Each outstanding Class A Warrant became
exercisable solely for $5.2708 in cash, and each outstanding Class B Warrant
became 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
Preferred Stock remains outstanding, without amendment. As a result of the
Merger, Sappi owns 100% of the issued and outstanding voting common stock and
75.07% of the common equity of Holdings
19
<PAGE>
in the form of 75,065 shares of new Class A Common Stock, and HSL owns 24.93%
of the common equity of Holdings in the form of 24,935 shares 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 is
subject to the HSL Option Agreement and the aforementioned irrevocable proxy
in favor of Sappi. All of the shares of Holdings common stock held immediately
prior to the Merger have been cancelled and as a result of the Merger, the
authorized common stock of Holdings consists of 250,000 shares of Class A
Common Stock and 50,000 shares of Class B Common Stock, both classes at $0.01
per share par value. Each share of Class B Common Stock is convertible into
one share of Class A Common Stock at the election of the holder of the Class B
Common Stock. There was no change to total consolidated stockholders' equity
as a result of the Merger.
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 Company's
credit agreement) and all of the operations of Holdings (other than the
management of its investment in Warren) are currently conducted through Warren
and its subsidiaries, Holdings' ability to meet its cash obligations is
dependent upon the earnings of Warren and its subsidiaries and the
distribution or other provision of those earnings to Holdings. Holdings has no
material indebtedness outstanding (other than advances that may be owed from
time to time to Warren and guarantees in respect of indebtedness of Warren and
its subsidiaries) and preferred stock, which was issued in connection with the
acquisition of the Company from Scott, 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 in
respect of registration rights granted by Holdings) that have required and are
likely to continue to require cash expenditures by Holdings. The Company
believes that the Credit Agreement, the Indenture 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.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 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 consolidated 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
1999. 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 is not
expected to have a material effect on the Company's consolidated financial
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are
included at pages 33 through 66 of this Annual Report on Form 10-K.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
THE COMPANY
Set forth below are the names, ages (at October 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.............. 62 Director, Vice President, Treasurer and
Assistant Secretary
Andries G.J. Vlok.............. 61 Director, Vice President and Secretary
Monte R. Haymon................ 59 Director, President and Chief Executive
Officer, S.D. Warren Company
Neil S. Thomas................. 48 Director
J. Richard Leaman, Jr.......... 62 Director
Henry L. Mollenhauer........... 53 Vice President and General Manager of
Printing and Publishing, S.D. Warren
Company
Trevor L. Larkan............... 42 Vice President and Chief Financial Officer,
S.D. Warren Company
O. Harley Wood................. 55 Vice President, Productivity and Quality,
S.D. Warren Company
E. Dannis Herring.............. 45 Vice President, Procurement and
Distribution, S.D. Warren Company
</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.
21
<PAGE>
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 Packaging. 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.
Neil S. Thomas has been a Director of Holdings since January 25, 1995. Mr.
Thomas joined Arthur Andersen & Co. in 1970, worked in their Johannesburg,
London and Houston offices and was made an international partner in 1980. In
1983 he was appointed executive director of Finansbank, a South African
merchant bank. In 1986 he formed Neil Thomas & Associates, which acts as
financial advisors to various leading companies. He has advised Sappi on all
their major plant expansions and corporate acquisitions since 1979.
J. Richard Leaman, Jr. became a Director of Holdings on January 25, 1995 and
was re-appointed to that position on October 1, 1995. Mr. Leaman joined Scott
in 1960. In 1978, he was named Senior Vice President and given the
responsibility for the consumer and commercial division's sales and marketing
functions. In October 1986, he was elected to the board of directors and in
November 1986 was named President of Scott Worldwide. He is also on the board
of directors of The Pep Boys, Manny, Mo & Jack and Church & Dwight Co., Inc.
Mr. Leaman resigned from the board of directors of Scott in October 1994 and
from his executive positions with Scott as of December 20, 1994. Mr. Leaman
served as President and Chief Executive Officer of Warren from April of 1991
until April 30, 1995.
Henry L. Mollenhauer has served as Vice President and General Manager of
Printing and Publishing of Warren since October 1996 and Vice President of
Marketing since August 31, 1992. Prior to that time, he served in various
positions with the Company beginning on June 4, 1969.
O. Harley Wood became Vice President--Manufacturing of Warren in March 1991
and Vice President, Productivity and Quality in October 1996 and Vice
President, Technology, and Engineering in October 1997. Mr. Wood joined Scott
in January 1989 as Vice President of Manufacturing Development for its U.S.
tissue businesses. Prior to joining Scott, Mr. Wood had held various positions
with Procter and Gamble since 1964. Mr. Wood is a director of Warren.
Trevor L. Larkan, having previously been Financial Director for Sappi
Southern Africa, a division of Sappi Limited, transferred to Warren as Vice
President and Treasurer with effect from January 1, 1995. In May 1995, Mr.
Larkan was also appointed Chief Financial Officer of the Company. A chartered
accountant and certified public accountant, he specialized in treasury
management during the early and mid-1980's, joining Saiccor, the dissolving
pulp subsidiary of Courtaulds Plc in 1986. Soon after the acquisition of
Saiccor by Sappi in 1988, he was appointed Financial and Commercial Director
of that division. Mr. Larkan is a director of Warren.
E. Dannis Herring became Vice President--Procurement and Distribution in May
of 1995. Prior to such time, Mr. Herring held various positions with the
Company, including serving as Controller from 1992 to 1994 and as Chief
Financial Officer from March 1994 to May 1995. Mr. Herring began his career
with Scott in 1974 in Warren's Mobile, Alabama mill.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
As the officers of Holdings do not receive any significant compensation, 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 1997 (the "Named
Executive Officers"). All references to shares, options and stock appreciation
rights ("SARs") therein refer to shares of Sappi. S.D. Warren has not granted
shares, options or SARs to its employees prior to or during fiscal year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
AWARDS
------------------------------
ANNUAL COMPENSATION
----------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS/ COMPENSATION
(1) ($) ($) ($) ($)(2) SARS(#)(3) ($)(4)
---- -------- -------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Monte R. Haymon......... 1997 $618,298 $300,000 $35,002(6) 0(7) -- $ 2,762
Chief Executive Officer 1996 600,565 -- -- 0(7) -- --
and President(5)
Henry L. Mollenhauer.... 1997 181,537 25,000 -- 0(8) -- 5,216
Vice President, General 1996 135,588 59,000 -- -- -- --
Manager Printing and 1995 123,593 -- -- -- -- --
Publishing
Trevor L. Larkan........ 1997 182,647 15,000 57,656(9) 0(10) 12,000 4,535
Chief Financial 1996 169,801 90,000 49,826(9) -- -- 4,535
Officer,
Vice President and 1995 116,607 -- 67,076(9) -- -- --
Treasurer
O. Harley Wood.......... 1997 199,014 20,000 -- 0(11) 10,000 4,928
Vice President- 1996 189,843 85,000 -- -- -- --
Technology and 1995 134,601 -- -- -- -- 157,803
Engineering
E. Dannis Herring....... 1997 182,101 17,000 -- 0(12) -- 4,860
Vice President- 1996 172,808 85,000 -- -- -- --
Procurement and 1995 121,745 -- -- -- -- --
Distribution
</TABLE>
- --------
(1) Compensation for 1997, 1996 and 1995 is for the fiscal year ended October
1, 1997, October 2, 1996 and the fiscal period December 21, 1994 through
September 27, 1995.
(2) All restricted stock awards were granted by Sappi under the Sappi Limited
Share Incentive Scheme (the "Sappi Plan"). Under the Sappi Plan, Sappi
offers an executive the right to purchase a certain number of shares of
common stock of Sappi at the market price on the date of the offer, and
the executive is granted a loan to cover the purchase price of the shares.
The shares are then issued and registered in the name of the executive,
but held by the trust that administers the Plan. Interest accrues on the
loan at the lower of 6% or any cash dividends paid on the shares. The
right to repay the loan and acquire possession of the shares vests as
follows: 25% beginning three years from the date of grant and an
additional 25% on each of the fourth, fifth and sixth anniversaries of the
date of grant. The executive must repay the loan in full no later than the
tenth anniversary of the date of grant, or with respect to the portion of
the loan covering the shares that have vested on the date of such
executive's resignation from the Company.
(3) All options were granted by Sappi under the Sappi Plan and represent the
right to acquire shares of common stock of Sappi.
(4) 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
$13,310 in 1995
23
<PAGE>
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 $140,000 paid by Scott to Mr. Wood in 1995 under a supplemental
retirement plan.
(5) Mr. Haymon was appointed President and Chief Executive Officer of Warren
as of October 1, 1995.
(6) The amount shown includes moving expenses for Mr. Haymon.
(7) Mr. Haymon purchased 15,200 shares of restricted stock of Sappi on
November 29, 1995 under the Sappi Plan at a purchase price of R56,75
($12.15, based upon an exchange rate of R4,67 per dollar on October 1,
1997) per share. The shares had no value to Mr. Haymon on the date of
grant, net of the loan by Sappi to Mr. Haymon in an amount equal to the
purchase price of the shares. The shares had no value to Mr. Haymon on
October 1, 1997, net of the loan by Sappi to Mr. Haymon. The loan on the
shares of restricted stock becomes due and payable on the tenth
anniversary of the date of grant. As a result of stock dividends, Mr.
Haymon received an additional (i) 241 shares on July 19, 1996 and (ii) 273
shares on February 12, 1997, each at no additional cost to Mr. Haymon. 25%
of the shares vest beginning on the third anniversary of the date of grant
and an additional 25% vest on each of the fourth, fifth and sixth
anniversaries of the date of grant. Cash dividends will be paid on the
shares of restricted stock as interest on the loan.
(8) Mr. Mollenhauer purchased 25,000 shares of restricted stock of Sappi on
March 3, 1997 under the Sappi Plan at a purchase price of R34,90 ($7.47
based upon an exchange rate of R4,67 per dollar on October 1, 1997) per
share. The shares had no value to Mr. Mollenhauer on the date of grant,
net of the loan by Sappi to Mr. Mollenhauer in an amount equal to the
purchase price of the shares. The shares had a value of $16,750 on October
1, 1997, net of the loan by Sappi to Mr. Mollenhauer. The loan on the
shares of restricted stock becomes due and payable on the tenth
anniversary of the date of grant. 25% of the shares vest beginning on the
third anniversary of the date of grant and an additional 25% vest on each
of the fourth, fifth and sixth anniversaries of the date of grant. Cash
dividends will be paid on the shares of restricted stock as interest on
the loan.
(9) The amounts shown include $42,000, $42,000 and $31,500 of housing
allowance payments in 1997, 1996 and 1995, respectively, and $27,577 of
relocation payments in 1995 for Mr. Larkan.
(10) Mr. Larkan purchased 5,000 shares of restricted stock of Sappi on March 3,
1997 under the Sappi Plan at a purchase price of R34,90 ($7.47 based upon
an exchange rate of R4,67 per dollar on October 1, 1997) per share. The
shares had no value to Mr. Larkan on the date of grant, net of the loan by
Sappi to Mr. Larkan in an amount equal to the purchase price of the
shares. The shares had a value of $3,350 on October 1, 1997, net of the
loan by Sappi to Mr. Larkan. The loan on the shares of restricted stock
becomes due and payable on the tenth anniversary of the date of grant. 25%
of the shares vest beginning on the third anniversary of the date of grant
and an additional 25% vest on each of the fourth, fifth and sixth
anniversaries of the date of grant. Cash dividends will be paid on the
shares of restricted stock as interest on the loan.
(11) Mr. Wood purchased 16,000 shares of restricted stock of Sappi on March 3,
1997 under the Sappi Plan at a purchase price of R34,90 ($7.47 based upon
an exchange rate of R4,67 per dollar on October 1, 1997) per share. The
shares had no value to Mr. Wood on the date of grant net of the loan by
Sappi to Mr. Wood in an amount equal to the purchase price of the shares.
The shares had a value of $10,720 on October 1, 1997, net of the loan by
Sappi to Mr. Wood. The loan on the shares of restricted stock becomes due
and payable on the tenth anniversary of the date of grant. 25% of the
shares vest beginning on the third anniversary of the date of grant and an
additional 25% vest on each of the fourth, fifth and sixth anniversaries
of the date of grant. Cash dividends will be paid on the shares of
restricted stock as interest on the loan.
(12) Mr. Herring purchased 24,000 shares of restricted stock of Sappi on March
3, 1997 under the Sappi Plan at a purchase price of R34,90 ($7.47 based
upon an exchange rate of R4,67 per dollar on October 1, 1997) per share.
The shares had no value to Mr. Herring on the date of grant net of the
loan by Sappi to Mr. Herring. The shares had a value of $16,080 on October
1, 1997, net of the loan by Sappi to Mr. Herring in an amount equal to the
purchase price of the shares. The loan on the shares of restricted stock
becomes due and payable on the tenth anniversary of the date of grant. 25%
of the shares vest beginning on the third anniversary of the date of grant
and an additional 25% vest on each of the fourth, fifth and sixth
anniversaries of the date of grant. Cash dividends will be paid on the
shares of restricted stock as interest on the loan.
24
<PAGE>
STOCK OPTIONS
The following table provides information concerning the grant of stock
options under the Sappi Limited Share Incentive Scheme to the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
POTENTIAL REALIZED
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION STOCK
OPTIONS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME (#)(1) FISCAL YEAR ($/SH)(2) DATE 5% ($) 10% ($)
---- --------------- ------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Monte R. Haymon......... -- -- -- -- -- --
Henry L. Mollenhauer.... -- -- -- -- -- --
Trevor L. Larkan........ 12,000 5.2 7.47 3/3/07 56,374 142,863
O. Harley Wood.......... 10,000 4.3 7.47 3/3/07 46,978 119,053
E. Dannis Herring....... -- -- -- -- -- --
</TABLE>
- --------
(1) These options become exercisable with respect to 25% of the shares of
Sappi common stock subject to such options on each of the third, fourth,
fifth and sixth anniversaries of the date of grant, and expire on the
tenth anniversary of the date of grant.
(2) Each of these options has an exercise price of R 34,90 which has been
converted to dollars based on an exchange rate of R4,67 per dollar as of
October 1, 1997.
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
25
<PAGE>
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 1995 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 1, 1997: Messrs. Wood, 8;
and Herring, 23. 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.
ITEM 12. 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 hereof.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------
NAME AND ADDRESS OF NUMBER OF PERCENT OF CLASS
BENEFICIAL OWNER SHARES OUTSTANDING(1)
------------------- --------- ----------------
<S> <C> <C>
Sappi Limited...................................... 100,000(2) 100.00%
48 Ameshoff Street
Braamfontein 2001
Republic of South Africa
Heritage Springer Limited ("HSL").................. 24,935(3) 24.935%
c/o Royal Bank of Canada Trust Company (Jersey)
Limited
P.O. Box 194/St. Helier
Jersey JE48RR
Channel Islands
</TABLE>
- --------
(1) Percentages have been calculated and beneficial ownership determined under
Rule 13d-3 under the Securities Exchange Act of 1934 assuming, in the case
of each person or group listed, the exercise of all options owned (which
are exercisable within 60 days following November 7, 1997) by each such
person or group, respectively, but without the exercise of any options
owned by any other person or group.
(2) Includes 75,065 shares of Class A Common Stock held through a subsidiary.
Also includes 24,935 shares of Class B Common Stock 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.
(3) Consists of 24,935 shares of Class B Common Stock, which 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.
26
<PAGE>
ITEM 13. 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 is supplied
generally at market prices. Pulp prices are 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 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 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 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 merged with Kimberly-
Clark in December 1995. The surviving entity, Kimberly-Clark, is bound by the
terms of the above-mentioned agreements.
SHAREHOLDERS AGREEMENT
In connection with the Acquisition, Sappi, an affiliate of Sappi, DLJMB,
UBSC, Holdings and 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 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. The following is
a summary of the surviving terms of the Shareholders Agreement. Capitalized
terms used below and not otherwise defined have the meanings assigned thereto
in the Shareholders Agreement.
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.
Piggyback Rights
Under certain circumstances, if Holdings registers Common Stock under the
Securities Act of 1933 (the "Act"), each member of the Sappi Group has the
right, subject to certain limitations, to require Holdings to include such
member's (or transferee's) Registrable Stock in such registration.
Miscellaneous Provisions
If certain of Sappi's foreign operations intend to sell products into the
United States that are the same as or substantially similar to, or compete
with, the Company's products, they will, subject to certain exceptions, be
required to enter into an arms' length marketing agreement with the Company,
and if the Company intends to
27
<PAGE>
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.
TRANSACTIONS WITH RELATED PARTIES
Pursuant to the limitations on restricted payments outlined in the Credit
Agreement, the Indenture and the agreement governing the Warren Series B
Preferred Stock, Warren may make cash payments to Holdings, including, among
other things, (i) for 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) for 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 nine months ended September 27, 1995,
fiscal year 1996 and fiscal year 1997, was approximately $0.8 million, $1.0
million and $1.0 million, respectively.
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. These agreements, which may be terminated by either party with six
months written notice, are based upon cost reimbursement plus a profit markup
of 10%. For the nine months ended September 27, 1995, fiscal year 1996 and
fiscal year 1997, the Company incurred such a management fee of approximately
$0.8 million, $1.0 million and $1.0 million, respectively.
Warren has also entered into a cross licensing agreement with Sappi
Deutschland, the worldwide holding company for all European and U.S. business
operations of the Sappi group, and Hannover Papier AG ("Hannover"), a
subsidiary of Sappi. Pursuant to this agreement, Warren and Hannover have
agreed to enter into specific written agreements to share paper processing
techniques and have also agreed to enter into specific distribution agreements
whereby Warren has agreed to use its distribution network in the United States
to facilitate and increase Hannover's exports. Sappi Deutschland will
facilitate the licensing process. No specific agreements have been entered
into in connection with this cross-licensing agreement as of October 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 remit the
proceeds from such sales to Warren, net of a sales commission. Warren shipped
$19.2 million, $102.8 million and $126.2 million of products to Sappi
subsidiaries and expensed fees of approximately $1.1 million, $7.2 million and
$8.7 million relating to these sales for the nine months ended September 27,
1995, fiscal year 1996 and fiscal year 1997, respectively. Trade accounts
receivable at October 2, 1996 and October 1, 1997 includes approximately $37.1
million and $24.5 million, respectively, due from subsidiaries of Sappi.
Warren has formalized certain of these agreements and is in the process of
formalizing the remainder.
Warren also imports products from certain Sappi affiliates (Sappi UK, Ltd
and Hannover Papier) for sale to Warren's domestic customers. Warren sells
these products at market prices and remits the proceeds, net of sales
commissions, to the Sappi affiliates. Warren imported approximately $10.6
million and $21.9 million of such products, and earned commissions of $0.2
million and $1.4 million for fiscal years 1996 and 1997, respectively.
MINORITY ACQUISITION AND MERGER
On May 27, 1997, WVL acquired certain 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
28
<PAGE>
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 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.
On September 5, 1997, Holdings consummated the Merger with Acquisition II.
As a result of the Merger, each issued and outstanding share of common stock
of Holdings held by any party other than Sappi and its affiliates or HSL was
converted into the right to receive $17.60 per share in cash. Each outstanding
Class A Warrant became exercisable solely for $5.2708 in cash, and each
outstanding Class B Warrant became 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 Preferred Stock remains outstanding, without
amendment. As a result of the Merger, Sappi owns 100% of the issued and
outstanding voting common stock and 75.07% of the common equity of Holdings in
the form of 75,065 new Class A Common Stock, and HSL will own 24.93% of the
common equity of Holdings in the form of 24,935 shares 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 is subject to
the HSL Option Agreement and the aforementioned irrevocable proxy in favor of
Sappi. All of the shares of Holdings common stock held immediately prior to
the Merger have been canceled, and as a result of the Merger, the authorized
shares of Holdings consists of 250,000 shares of Class A Common Stock and
50,000 shares of Class B Common Stock, both classes at $0.01 per shares par
value.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation of the
Registrant.*
3.2 By-laws of the Registrant.*
10.1 Credit and Guarantee Agreement dated as of December 20,
1994, as amended and restated as of April 26, 1996, among
SDW Holdings Corporation, S.D. Warren Company, the Lenders
(as defined therein) and Chemical Bank, as Agent.**
10.2 Receivables Purchase Agreement dated as of April 19, 1996,
among S.D. Warren Finance Co., S.D. Warren Company, Bank of
Montreal and Nesbitt Burns Securities Inc.***
10.2(a) Purchase and Contribution Agreement dated as of April 19,
1996, between S.D. Warren Company and S.D. Warren Finance
Co.***
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 December 20, 1994, 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.**
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.**
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
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.**
10.26 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.***
10.27+ Agreement among S.D. Warren Company, SDW Holdings
Corporation, Sappi Limited and Monte R. Haymon dated
September 1, 1995.***
10.28 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.***
10.29 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.***
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
10.30 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.***
10.31 Lease Agreement dated July 29, 1997 between S.D. Warren
Company and State Street Bank and Trust Company of
Connecticut, National Association.***
10.32 Agreement and Plan of Merger dated as of July 30, 1997
between SDW Acquisition II Corporation and SDW Holdings
Corporation.***
10.33 Second Amendment and Consent, dated as of July 25, 1997 to
the Amended and Restated Credit and Guarantee Agreement,
dated as April 26, 1996.***
10.34+ Sappi Limited Share Incentive Scheme.****
12.1 Statement regarding the computation ratio of earnings to
fixed charges and ratio of earnings to fixed charges and
preferred stock dividends.
21 Subsidiaries of the Registrant.
27 Financial Data Schedules.
</TABLE>
- --------
* Incorporated by Reference to Registration Statement 33-88496 on Form S-4
under the Securities Act of 1933 of S.D. Warren Company.
** Incorporated by Reference to Amendment No. 1 to Registration Statement 33-
88496 on Form S-4 under the Securities Act of 1933 of S.D. Warren Company.
*** Incorporated by Reference to Post-Effective Amendment No. 1 to
Registration Statement 333-834 on Form S-1 under the Securities Act of
1933 of SDW Holdings Corporation.
**** Incorporated by Reference to Form 10-K of S.D. Warren Company filed on
November 10, 1997.
+ Compensation plan or agreement required to be filed or incorporated by
reference as an exhibit pursuant to Item 14(c) of Form 10-K.
32
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. 34
Consolidated Financial Statements:
Consolidated Statements of Operations for the period December 21, 1994
through September 27, 1995 and the years ended October 2, 1996 and
October 1, 1997.......................................................... 35
Consolidated Balance Sheets as of October 2, 1996 and October 1, 1997..... 36
Consolidated Statements of Cash Flows for the period December 21, 1994
through September 27, 1995 and the years ended October 2, 1996 and
October 1, 1997.......................................................... 37
Consolidated Statements of Changes in Stockholders' Equity for the period
December 21, 1994 through September 27, 1995 and the years ended October
2, 1996 and October 1, 1997.............................................. 38
Notes to Consolidated Financial Statements................................ 39
Financial Statement Schedules:
I--Condensed Financial Information of Parent............................ 62
II--Valuation and Qualifying Accounts................................... 66
</TABLE>
33
<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 1, 1997 and October 2, 1996 and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years then ended, and for the period from
December 21, 1994 through September 27, 1995. 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 the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of October 1,
1997 and October 2, 1996 and the results of its operations and its cash flows
for the years then ended, and for the period from December 21, 1994 through
September 27, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 22, 1997
34
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD DECEMBER 21, YEAR YEAR
1994 THROUGH ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------- --------------- ---------------
<S> <C> <C> <C>
Sales...................... $1,155.8 $1,441.6 $1,405.6
Cost of goods sold......... 886.0 1,186.6 1,115.4
-------- --------- --------
Gross profit............... 269.8 255.0 290.2
Selling, general and
administrative expense.... 96.2 134.0 137.9
Restructuring.............. -- -- 10.0
-------- --------- --------
Income from operations..... 173.6 121.0 142.3
Other income (expense),
net....................... 3.2 (0.1) 4.1
Interest expense........... 106.0 108.9 99.0
-------- --------- --------
Income before income taxes,
dividends and accretion on
Warren Series B redeemable
exchangeable preferred
stock and extraordinary
item...................... 70.8 12.0 47.4
Income tax expense......... 28.4 5.1 19.2
Dividends and accretion on
Warren Series B redeemable
exchangeable preferred
stock..................... 9.1 13.5 15.2
-------- --------- --------
Income (loss) before
extraordinary item........ 33.3 (6.6) 13.0
Extraordinary item, net of
tax....................... -- (2.0) --
-------- --------- --------
Net income (loss).......... 33.3 (8.6) 13.0
Dividends on preferred
stock..................... 4.6 6.9 7.9
-------- --------- --------
Net income (loss)
applicable to common
stockholders.............. $ 28.7 $ (15.5) $ 5.1
======== ========= ========
Earnings (loss) per common
share:
Income (loss) before
extraordinary item
applicable to common
stockholders ........... $ 279.35 $ (153.68) $ 49.74
======== ========= ========
Net income (loss)
applicable to common
stockholders............ $ 279.35 $ (176.45) $ 49.74
======== ========= ========
Weighted average number of
shares outstanding........ 102,740 87,843 102,537
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 2, 1996 OCTOBER 1, 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 49.0 $ 180.7
Trade accounts receivable, net.............. 49.1 40.3
Other receivables........................... 34.2 14.8
Inventories, net............................ 195.7 163.4
Deferred income taxes....................... 18.0 28.3
Other current assets........................ 9.4 9.8
-------- --------
Total current assets...................... 355.4 437.3
Plant assets, net............................. 1,114.7 951.1
Timber resources, net......................... 95.3 95.6
Goodwill, net................................. 94.1 90.1
Deferred financing fees, net.................. 44.8 35.4
Other assets, net............................. 21.1 22.5
-------- --------
Total assets.............................. $1,725.4 $1,632.0
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........ $ 46.4 $ 27.3
Accounts payable............................ 101.6 121.0
Accrued and other current liabilities....... 97.6 109.5
-------- --------
Total current liabilities................. 245.6 257.8
-------- --------
Long-term debt:
Term loans.................................. 411.4 251.5
Senior subordinated notes................... 375.0 375.0
Other....................................... 116.1 113.3
-------- --------
Total long-term debt...................... 902.5 739.8
-------- --------
Deferred income taxes......................... 34.6 48.7
-------- --------
Other liabilities............................. 98.2 113.6
-------- --------
Total liabilities......................... 1,280.9 1,159.9
-------- --------
Commitments and contingencies (Notes 13, 14
and 15)
Warren Series B redeemable exchangeable
preferred stock (liquidation value, $96.2 and
$110.6, respectively)........................ 88.0 103.2
-------- --------
Stockholders' equity:
Preferred stock (at liquidation value)...... 49.0 56.9
Class A common stock ($.01 par value;
250,000 shares authorized; 75,065 shares
issued and outstanding at October 1,
1997)...................................... -- --
Class B common stock ($.01 par value; 50,000
shares authorized;
24,935 shares issued and outstanding at
October 1, 1997)........................... -- --
Common stock ($.01 par value; 100,000,000
shares authorized; 30,726,561 shares issued
and outstanding at October 2, 1996)........ 0.3 --
Capital in excess of par value.............. 294.0 293.7
Retained earnings........................... 13.2 18.3
-------- --------
Total stockholders' equity................ 356.5 368.9
-------- --------
Total liabilities and stockholders'
equity................................... $1,725.4 $1,632.0
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD DECEMBER 21, YEAR YEAR
1994 THROUGH ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------- --------------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income (loss)......... $ 33.3 $ (8.6) $ 13.0
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation............. 65.5 86.8 86.6
Cost of timber harvested
and amortization of
logging roads........... 1.3 0.9 2.1
Amortization of
intangibles............. 23.0 27.5 26.6
Loss on force majeure
event................... -- -- 0.6
Deferred income taxes.... 12.3 5.6 3.8
Dividends and accretion
on Warren Series B
redeemable exchangeable
preferred stock......... 9.1 13.5 15.2
Extraordinary item....... -- 2.0 --
Other ................... -- -- (3.6)
Changes in assets and
liabilities net of the
effect of the
Acquisition:
Trade and other accounts
receivable, net......... (23.0) 80.3 28.2
Inventories, net......... (57.6) 30.8 32.3
Accounts payable,
accrued and other
current liabilities..... 66.0 (6.6) 28.2
Other assets and
liabilities............. 6.1 (15.6) (10.4)
--------- ------- -------
Net cash provided by
operating activities.. 136.0 216.6 222.6
--------- ------- -------
Cash Flows from Investing
Activities:
Acquisition, net of
related costs............ (1,455.9) -- --
Investments in plant
assets and timber
resources................ (33.7) (51.3) (61.0)
Proceeds from disposals of
plant assets and timber
resources................ -- -- 151.0
Refurbishment of plant
assets................... -- -- (40.1)
Insurance proceeds to
refurbish plant assets... -- -- 40.9
Other investing
activities............... -- 2.7 (4.4)
--------- ------- -------
Net cash provided by
(used in) investing
activities............ (1,489.6) (48.6) 86.4
--------- ------- -------
Cash Flows from Financing
Activities:
Proceeds from issuance of
long-term debt........... 1,105.7 -- 38.1
Repayments of long-term
debt..................... (162.1) (178.2) (214.0)
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 -- --
Other financing
activities............... -- (3.0) (1.4)
--------- ------- -------
Net cash provided by
(used in) financing
activities............ 1,340.8 (181.2) (177.3)
--------- ------- -------
Net change in cash and cash
equivalents............... (12.8) (13.2) 131.7
Cash and cash equivalents:
Beginning of period....... 75.0 62.2 49.0
--------- ------- -------
End of period............. $ 62.2 $ 49.0 $ 180.7
========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
CLASSES A AND B
COMMON STOCK COMMON STOCK CAPITAL IN
------------- -------------- EXCESS OF PREFERRED RETAINED
SHARES AMOUNT SHARES AMOUNT PAR VALUE STOCK EARNINGS TOTAL
------ ------ ------ ------ ---------- --------- -------- ------
<S> <C> <C> <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
Net income.............. -- -- -- -- -- -- 13.0 13.0
Dividends accrued on
preferred stock........ -- -- -- -- -- 7.9 (7.9) --
Recapitalization ....... 0.1 -- (30.7) (0.3) 0.3 -- -- --
Registration costs...... -- -- -- -- (0.6) -- -- (0.6)
--- ---- ----- ---- ------ ----- ----- ------
Balance, October 1,
1997................... 0.1 $-- -- $-- $293.7 $56.9 $18.3 $368.9
=== ==== ===== ==== ====== ===== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED 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 ("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. Holdings and its subsidiary, Warren, are referred to
herein as the "Company." Holdings is an indirect majority owned subsidiary of
Sappi Limited ("Sappi").
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 facility
and several distribution facilities, and owns approximately 911,000 acres of
timberlands in the State of Maine.
NOTE 2--FORMATION AND ACQUISITION
On December 20, 1994, SDW Acquisition Corporation ("SDW Acquisition"), a
direct wholly owned subsidiary of Holdings, acquired (the "Acquisition") from
Scott Paper Company ("Scott") all of the outstanding capital stock of Warren,
and certain related affiliates of Scott. Immediately following the
Acquisition, SDW Acquisition merged with and into Warren (the "Acquisition
Merger"), with Warren 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. The total purchase cost of
approximately $1.9 billion, including the effect of liabilities assumed of
$345.4 million, 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>
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.
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.
39
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fiscal Year
The Company and its subsidiary's fiscal year ends on the Wednesday closest
to the last day of September. The year ended October 2, 1996 ("fiscal year
1996") included 53 weeks. The period December 21, 1994 through September 27,
1995 (the "nine months ended September 27, 1995") included 40 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 October 2, 1996 and October 1, 1997, 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 27, 1995, fiscal year 1996 and
fiscal year 1997, the Company capitalized interest of approximately $0.9
million, $1.9 million and $3.7 million, respectively.
Timber Resources
Timber resources are recorded at cost less timber harvested and amortization
of logging roads. Cost of timber resources includes original costs, road
construction costs and reforestation costs such as site preparation and
planting costs. Timber harvested is computed on the units-of-production
method. Property taxes, surveying, fire control and other forest management
expenses are charged to expense as incurred.
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 October 2, 1996 and October 1, 1997 was
approximately $94.1 million and $90.1 million, respectively, net of
accumulated amortization of approximately $7.1 million and $11.1 million,
respectively.
40
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $15.3 million
and $25.5 million at October 2, 1996 and October 1, 1997, respectively. As a
result of the partial early extinguishment of debt during fiscal year 1996,
the Company recorded an extraordinary loss of $3.3 million related to the
write-off of deferred financing fees which was partially offset by a deferred
tax benefit of $1.3 million. The Company also extinguished certain debt during
fiscal year 1997. The net gain/(loss) on such extinguishments was not
significant. (See Note 11).
Other Assets
Other assets include intangible assets, primarily patents, arising as part
of the Acquisition purchase price allocation, of $19.6 million and $17.7
million at October 2, 1996 and October 1, 1997, 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 $3.4 million and $5.3 million at October 2, 1996 and October 1,
1997, 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 Consolidated Statements of Cash Flows in
the same category as the items being hedged or on a basis consistent with the
nature of the investment.
The Company does not hold derivative financial instruments for trading
purposes.
Income Taxes
The Company uses an asset and liability approach to computing deferred
income taxes, which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this approach,
deferred income taxes are determined based on the difference between the
financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Workers' Compensation Insurance
The Company has a combination of self-insured and insured workers'
compensation programs. The self-insurance claim liability for workers'
compensation is based on claims reported and actuarial estimates of adverse
developments and claims incurred but not reported. The Company's workers'
compensation liability is discounted to reflect the passage of several years
before the claims related to a particular year are paid in full. The liability
has been determined based on an actuarial valuation as the timing of payments
associated therewith are reasonably estimable. The present value of such
claims was determined using a discount rate of 5.5% for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997. The gross liability
was $46.0 million and $39.9 million at October 2, 1996 and October 1, 1997,
respectively.
41
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Research and Development Expenditures
Expenditures for research and development are charged to expense as
incurred. Research and development costs were $10.7 million, $15.6 million,
and $13.6 million for the nine months ended September 27, 1995, fiscal year
1996 and fiscal year 1997, 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
Earnings per common share for all periods has been computed to give effect
to the recapitalization of Holdings which occurred on September 5, 1997 using
a ratio of 35.0 million shares of common stock before the recapitalization to
0.1 million shares of common stock after the recapitalization (See Note 21).
Earnings per common share is computed using the weighted average number of
common shares outstanding during the period and dilutive common equivalent
shares. Warrants exercisable for common shares of Holdings are included as
common stock equivalents in the computation of weighted average shares
outstanding for the nine months ended September 27, 1995 and fiscal year 1997.
During fiscal year 1996, such warrants were antidilutive and, accordingly,
were not included in weighted average shares outstanding. For purposes of
computing income (loss) per share applicable to common stockholders, the
Company's net income (loss) before extraordinary item and net income (loss)
have been reduced by preferred stock dividends.
Cash Paid for Income Taxes
Cash paid for income taxes for the nine months ended September 27, 1995,
fiscal year 1996 and fiscal year 1997 was $20.6 million, $4.7 million and
$10.6 million, respectively. Cash received for income tax refunds in fiscal
year 1997 was $4.9 million.
Cash Paid for Interest
Cash paid for interest during the nine months ended September 27, 1995,
fiscal year 1996 and fiscal year 1997 was $75.6 million, $112.3 million and
$92.0 million, respectively.
Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings per
Share", and FAS No. 129, "Disclosure of Information
42
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 consolidated
financial statements.
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income",
and FAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", both of which will be effective for the Company in fiscal year
1999. 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 is not
expected to have a material effect on the Company's consolidated financial
statements.
NOTE 4--RESTRUCTURING
In October 1996, the Company commenced a restructuring plan which resulted
in a charge of $10.0 million to cover the costs related to the reduction of
approximately 200 salaried positions, or approximately 14% of the Company's
salaried work force.
NOTE 5--FORCE MAJEURE EVENT
Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. Damage to mill equipment has since been repaired and
normal operating mill conditions have been restored. In connection with the
flood, the Company incurred $45.9 million of costs to refurbish the mill, of
which $4.0 million was capitalized representing improvements to existing plant
assets. The Company received, net of deductibles of $3.5 million, insurance
proceeds totaling $52.7 million of which $40.9 million related to the
refurbishment and $11.8 million related to business interruption claims. All
claims were submitted and finalized as of October 1, 1997.
NOTE 6--TRADE ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Trade accounts receivable.............................. $54.4 $45.3
Allowance for doubtful accounts........................ (5.3) (5.0)
----- -----
$49.1 $40.3
===== =====
</TABLE>
In April 1996, the Company, through a bankruptcy remote subsidiary, S.D.
Warren Finance Co. ("SDWF"), entered into a receivables sales agreement that
provides the Company with a five-year $110 million revolving accounts
receivable securitization facility (the "A/R Facility"). Under this facility
and pursuant to a purchase and contribution agreement between the Company and
SDWF, the Company sells to SDWF, on a non-recourse basis, all rights and
interests in its accounts receivable. Pursuant to the receivables purchase
agreement, SDWF, in turn, sells certain interests in the accounts receivable
pool owned by SDWF under similar terms to a third party purchaser.
The A/R Facility also contains restrictive covenants which limit SDWF with
respect to certain matters including, among other things, the maintenance of a
certain net worth and the ability to incur liens, extend credit terms beyond
their stated maturity, change its credit policy, create subsidiaries or change
its line of business.
43
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The A/R Facility also limits SDWF's ability to pay dividends, incur
indebtedness or amend other agreements related to the A/R Facility without the
consent of the third party purchaser. In addition, the A/R Facility requires
that SDWF maintain certain ratios related to the performance of the underlying
accounts receivable, including a delinquency ratio, a default ratio and a
loss-to-liquidation ratio.
The Company's trade accounts receivable, shown in the table above, are net
of $90.0 million and $93.2 million at October 2, 1996 and October 1, 1997,
respectively, which represent accounts receivable that were securitized and
sold under the A/R Facility.
The Company had sales to customers outside of the United States ("Export
Sales") of $83.1 million, $179.1 million and $186.2 million, for the nine
months ended September 27, 1995, fiscal year 1996 and fiscal year 1997,
respectively. Export sales are primarily to Canada, Europe, Australia, Latin
America and the Far East. Export sales do not exceed 10% of total sales for
any geographic region. Sales outside North America are primarily handled by
the Company's affiliates under the common control of Sappi (see Note 22).
Sales to unaffiliated customers which individually exceed 10% of total sales
amounted to approximately 54.0%, 52.5% and 51.9% of sales for the nine months
ended September 27, 1995, fiscal year 1996, and fiscal year 1997,
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>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
1......................... $292.4 $355.0 $360.3
2......................... 163.0 201.9 169.9
3......................... 168.7 199.8 199.6
</TABLE>
At October 2, 1996 and October 1, 1997, approximately 35% and 42%,
respectively, of the Company's net trade receivables, including those
receivables which are securitized and sold, were concentrated in these three
customers.
NOTE 7--INVENTORIES, NET (IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Finished products...................................... $ 92.8 $ 76.7
Work in process........................................ 34.5 21.4
Pulp, logs and pulpwood................................ 25.8 23.9
Maintenance parts and other supplies................... 42.6 41.4
------ ------
$195.7 $163.4
====== ======
</TABLE>
NOTE 8--PLANT ASSETS (IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Plant assets, at cost:
Land and buildings................................... $ 172.7 $ 174.4
Plant and equipment.................................. 1,095.5 991.3
-------- --------
1,268.2 1,165.7
Accumulated depreciation............................. (153.5) (214.6)
-------- --------
$1,114.7 $ 951.1
======== ========
</TABLE>
44
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Domestic................ $ 68.4 $ 12.0 $ 47.4
Foreign................. 2.4 -- --
------ ------ ------
$ 70.8 $ 12.0 $ 47.4
====== ====== ======
The components of the tax provisions before extraordinary item are as
follows (in millions):
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Current:
Federal............... $ 15.1 $ (1.1) $ 13.4
Foreign............... 0.1 (1.2) --
State and local....... 0.9 1.8 2.0
------ ------ ------
Total current....... 16.1 (0.5) 15.4
------ ------ ------
Deferred:
Federal............... 8.1 5.3 1.9
Foreign............... -- 1.2 --
State and local....... 4.2 (0.9) 1.9
------ ------ ------
Total deferred...... 12.3 5.6 3.8
------ ------ ------
$ 28.4 $ 5.1 $ 19.2
====== ====== ======
The components of the deferred tax provisions before extraordinary item are
as follows (in millions):
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Inventory............... $ 5.3 $ (0.1) $ 1.2
Plant assets............ 16.4 93.0 28.3
Accrued and other
liabilities............ (0.1) (35.5) (15.6)
AMT credit
carryforwards.......... (9.3) (3.7) (14.9)
Tax loss carryforwards.. -- (41.7) 4.8
Other credits........... -- (6.4) --
------ ------ ------
Deferred tax provision.. $ 12.3 $ 5.6 $ 3.8
====== ====== ======
</TABLE>
45
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred tax assets and (liabilities) are as follows
(in millions):
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Current:
Deferred tax assets:
Restructuring reserves............................... $ 0.3 $ 1.3
Accrued and other liabilities........................ 18.5 30.5
Inventory............................................ 1.4 0.2
------- -------
Total current deferred tax assets.................. 20.2 32.0
Deferred tax liabilities:
Accrued and other liabilities and prepaids........... (2.2) (3.7)
------- -------
Net current deferred tax asset......................... 18.0 28.3
------- -------
Noncurrent:
Deferred tax assets:
Alternative minimum tax credit carryforwards......... 13.0 27.9
Tax loss carryforwards............................... 41.7 36.9
Accrued and other liabilities........................ 46.0 73.7
Other................................................ 7.7 --
------- -------
Total noncurrent deferred tax assets............... 108.4 138.5
------- -------
Deferred tax liabilities:
Property, plant and equipment........................ (106.0) (134.3)
Other................................................ (37.0) (52.9)
------- -------
Total noncurrent deferred tax liability............ (143.0) (187.2)
------- -------
Net noncurrent deferred tax liability.................. (34.6) (48.7)
------- -------
Net deferred tax liability........................... $ (16.6) $ (20.4)
======= =======
</TABLE>
The differences between the U.S. statutory income tax rate and the Company's
effective income tax rate before extraordinary item are as follows:
<TABLE>
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
U.S. statutory income
tax rate............... 35.0% 35.0% 35.0%
State income taxes, net
of federal benefit..... 4.9 5.2 5.3
Foreign................. 0.1 -- --
Other factors........... 0.1 2.3 0.2
---- ---- ----
Effective tax rate...... 40.1% 42.5% 40.5%
==== ==== ====
</TABLE>
As of October 1, 1997, the Company had available federal and state tax net
operating loss carryforwards of approximately $181.0 million. For federal tax
purposes, the loss carryforwards will begin to expire in the year 2011. For
state tax purposes, the loss carryforwards will expire between the years 2001
and 2011. The Company also has available federal and state alternative minimum
tax credit carryforwards for tax return purposes of $27.9 million which will
carry forward to future taxable years indefinitely.
46
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--ACCRUED AND OTHER CURRENT LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Accrued salaries, wages and employee benefits.......... $ 47.5 $ 48.0
Accrued interest....................................... 15.2 23.5
Accrued workers' compensation.......................... 7.4 3.6
Accrued restructuring.................................. -- 3.3
Other accrued expenses................................. 27.5 31.1
------ -------
$ 97.6 $ 109.5
====== =======
</TABLE>
NOTE 11--LONG-TERM DEBT
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Credit Agreement:
Term Loan, Tranche A................................. $ 268.7 $ 151.2
Term Loan, Tranche B................................. 185.0 120.1
Warren Series B Senior Subordinated Notes.............. 375.0 375.0
Revenue bonds.......................................... 119.5 119.5
Capital leases......................................... 0.7 1.3
------- -------
948.9 767.1
Current maturities of long-term debt................... 46.4 27.3
------- -------
Long-term debt......................................... $ 902.5 $ 739.8
======= =======
</TABLE>
Credit Agreement
On December 20, 1994, Holdings and Warren entered into an agreement (the
"Credit Agreement") with a group of domestic and international lenders. The
Credit Agreement, as amended, consists of (i) the Term Loan Facilities,
comprised of a seven-year senior secured 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").
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) 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 achievement of a
certain financial ratio determined from the most recent financial statements
of the Company calculated as of the last day of each fiscal quarter on a
rolling four quarter basis. "Base Rate" means the highest of (1) the prime
rate, (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
47
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
foreign subsidiary and (b) all assets (subject to certain limitations), except
certain trade accounts receivable, owned by Warren and its subsidiaries.
The Credit Agreement contains restrictive covenants which limit Holdings,
Warren and their subsidiaries with respect to certain matters including, among
other things, the ability to incur debt, pay dividends, make acquisitions,
sell assets, merge, grant or incur liens, guarantee obligations, make
investments or loans, make capital expenditures, create subsidiaries or change
its line of business. The Credit Agreement also restricts Warren from
prepaying certain of its indebtedness. Under the Credit Agreement, Warren is
required to satisfy certain financial covenants which require Warren to
maintain specified financial ratios and comply with certain financial tests,
including a minimum interest coverage ratio, a maximum leverage ratio, and a
net worth test. Such covenants are not considered by the Company to be of a
restrictive nature in conducting its business activities. As of October 1,
1997, management believes the Company is in compliance with all covenants.
Under the terms of the Credit Agreement, Warren is required to enter into
interest rate protection agreements, primarily interest rate swap and interest
rate cap agreements. At October 2, 1996 and October 1, 1997, 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 $75.0 million of
notional principal amount of debt. Warren also has two interest rate cap
agreements outstanding with respect to $130.0 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 with a final
maturity in December 2001. The Tranche B Term Loan is payable in semi-annual
installments 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 1, 1997, both the Tranche A Term Loan and the Tranche B Term Loan were
Eurodollar loans. At October 2, 1996 and October 1, 1997, the weighted average
interest rate on the Tranche A Term Loan was 7.19% and 8.32%, respectively;
and the interest rate on the Tranche B Term Loan was 7.69% and 8.84%,
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 prepayments relating
to the nine months ended September 27, 1995, during the first quarter of
fiscal year 1996. Excess Cash Flow prepayments relating to fiscal year 1996
were not required. The Credit Agreement, as presently written, requires an
Excess Cash Flow prepayment of approximately $77.0 million relating to fiscal
year 1997 to be paid on December 30, 1997. However, the Company is in the
process of renegotiating the Credit Agreement, and the terms of the new
agreement are expected to reduce or eliminate this Excess Cash Flow
prepayment. In the event that the new agreement is not in place before
December 30, 1997 or that the Excess Cash Flow prepayment is not entirely
eliminated, the Company intends to fund this prepayment from the Revolving
Credit Facility. Accordingly, the amount of the prepayment is included in
long-term debt in the accompanying consolidated balance sheet.
48
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company may also make optional prepayments without premium or penalty at
any time (subject to payments of certain termination costs if other than on
the last day of an interest period under certain circumstances). 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 except that,
at the Company's option such amounts may be applied to Tranche A and Tranche B
term loans as is necessary to pay in whole or in part the next scheduled
principal installment and shall be applied to installments thereof on a pro
rata basis, and may not be reborrowed.
Revolving Credit Facility
Under the Revolving Credit Facility, which expires in April 2003, 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 October 2, 1996 and October 1, 1997, $1.0
million and $11.0 million, respectively, of the Revolving Credit Facility was
utilized to guarantee the issuance of letters of credit. At October 2, 1996
and October 1, 1997, availability under the Revolving Credit Facility was
$249.0 million and $239.0 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 and
October 1, 1997, 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 on Revolving Credit Facility letters of credit. In
addition, Warren pays a quarterly commitment fee between 0.375% and 0.50% per
annum on the unused portion of the Revolving Credit Facility based on the
achievement of a certain financial ratio.
Warren Series B Senior Subordinated Notes
The 12% Series B Senior Subordinated Notes due 2004 ("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
In connection with the Acquisition, Warren assumed from Scott $119.3 million
of revenue bonds comprised of nine separate tax exempt municipal bond issues
(the "Issues"). Warren assumed responsibility for Scott's obligations under
the Issues, but with respect to each Issue (other than bonds aggregating $44.0
million bearing variable interest rates that were re-marketed on August 21,
1995 as fixed interest rate bonds, and the Skowhegan, Maine Issues as
described below), Scott remains either contingently liable as a guarantor or
directly liable as the original obligor.
On March 5, 1997, pursuant to a loan agreement with the Town of Skowhegan,
Maine, the Company expanded and refinanced certain environmental and solid
waste projects at its Somerset, Maine mill by redeeming, refunding or
defeasing revenue bonds aggregating $28.1 million, and issuing new bonds
aggregating $38.1 million. The extraordinary gain resulting from the
extinguishment of the original bonds was not significant.
At both October 2, 1996 and October 1, 1997, the Company is obligated under
revenue bonds aggregating $119.5 million which are due from 1998 to 2022 and
bear interest from 5.75% to 9.375% per annum.
49
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future Maturities of Long-term Debt
Scheduled maturities of long-term debt, including capital leases and sinking
fund payments, at October 1, 1997 are as follows (in millions):
<TABLE>
<S> <C>
1998............................................ $ 27.3
1999............................................ 40.1
2000............................................ 43.5
2001............................................ 55.7
2002............................................ 73.4
Thereafter...................................... 527.1
------
$767.1
======
</TABLE>
Letter of Credit Facility
The Company has issued letters of credit in an aggregate principal amount of
$170.5 million and $150.8 million at October 2, 1996 and October 1, 1997,
respectively, in support of its ongoing obligations under nine separate tax-
exempt bond financings and certain leases assumed in the Acquisition.
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 are 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, accounts receivable and accounts payable approximate fair
value due to the short-term nature of these instruments. Accordingly, these
items have been excluded from the table below:
<TABLE>
<CAPTION>
OCTOBER 2, 1996 OCTOBER 1, 1997
--------------- ---------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
BALANCE SHEET FINANCIAL INSTRUMENTS (IN
MILLIONS):
Term Loans, Tranche A and B............... $453.7 $453.7 $271.3 $271.3
Notes..................................... 375.0 405.0 375.0 422.1
Revenue bonds and capital leases.......... 120.2 119.2 120.8 126.6
Interest rate caps and swaps.............. 0.9 (2.1) 0.0 (1.1)
</TABLE>
The fair values of the Notes, revenue bonds and capital leases were
estimated by the Company based upon quotations from 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 letters of
credit under both the Revolving Credit Facility and the Letter of Credit
Facility, interest rate caps and swaps, and the A/R Facility. At October 2,
1996, the total carrying amount of the premium associated with the interest
rate caps was $0.9 million. At October 1, 1997, the premium carrying amount
had been fully amortized. Unrealized losses related to the interest rate caps
and swaps approximated $3.0 million and $1.1 million, at these two dates,
respectively. At October 2, 1996 and October 1, 1997, the total carrying
amounts of accounts receivable reflect $90.0 million and $93.2 million,
respectively, of reductions related to the A/R Facility. There are no
unrealized losses on the A/R Facility at October 2, 1996 and October 1, 1997.
50
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 6). None of the Company's other financial
instruments represent a concentration of credit risk because the Company has
dealings with a variety of major banks and customers worldwide. None of the
Company's off-balance sheet financial instruments would result in a
significant loss to the Company if the other party failed to perform according
to the terms of its agreement, as any such loss would generally be limited to
the unrealized gain in any contract.
NOTE 13--LEASES
On July 29, 1997, the Company entered into a sale/leaseback arrangement
involving the sale of one of the paper machines at its Somerset mill for
$150.4 million. In connection with the transaction, the Company entered into a
15 year agreement to lease back the paper machine. Rental payments of
approximately $7.6 million will be made semi-annually in arrears in January
and July. The sale/leaseback arrangement is being accounted for as an
operating lease. The gain on the transaction of approximately $17.4 million
was deferred and is being amortized as an adjustment to future rent payments.
The Company used approximately $100.3 million of the proceeds from the sale to
make a mandatory prepayment on its term loans. The extraordinary loss on the
prepayment was not significant. In addition, Warren obtained consent from the
lenders under the Credit Agreement for the payment of dividends to Holdings
from the proceeds of such sale/leaseback for the purpose of redeeming the
Preferred Stock, subject to certain conditions and limitations (See Note 20).
The Company also leases office and warehouse space and various office and
other manufacturing equipment under operating leases. Unexpired lease terms
for operating leases range from one to six years. Most leases contain renewal
options and options to purchase such equipment at fair market value. Rental
expense relating to these leases was $2.4 million, $3.5 million, and $4.7
million for the nine months ended September 27, 1995, fiscal year 1996, and
fiscal year 1997, 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 in both the nine months ended September 27,
1995 and fiscal year 1996, and $7.5 million for fiscal year 1997.
The future minimum obligations under leases (including the Somerset paper
machine lease) and other commitments as of October 1, 1997 are as follows (in
millions):
<TABLE>
<CAPTION>
OPERATING OTHER
YEAR ENDING SEPTEMBER LEASES COMMITMENTS
--------------------- --------- -----------
<S> <C> <C>
1998................................................... $ 20.4 $ 7.8
1999................................................... 18.7 7.3
2000................................................... 18.0 7.4
2001................................................... 16.7 8.8
2002................................................... 15.4 12.1
Thereafter............................................. 162.6 50.3
------ -----
$251.8 $93.7
====== =====
</TABLE>
51
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 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 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 hearing the lawsuit 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 implement and enforce its
industrial pre-treatment operations associated with its operation of the
wastewater facility. The Company is uncertain as to the effects, if any, of
this action on its current dispute with the County which has raised the
industrial users' contractual rights as an issue in the EPA lawsuit. Recently
the group of industrial users and the municipalities filed motions to
intervene in the lawsuit. 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 before the end of calendar year 1997, with
compliance with the rules required beginning in 2000. The Company believes
that environmental compliance expenditures, the bulk of which are for the
cluster rules compliance, will require aggregate capital expenditures of
approximately $70.0 million to $112.0 million through 2000, of which $20.0
million has already been incurred. The ultimate financial impact to the
Company of compliance with the cluster rules will depend upon the cost and
availability of new technology.
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 $13.0
million, of which approximately $4.0 million will be spent prior to the year
2000 with the remainder being spent subsequent to 2004.
52
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, Compensations 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, 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 the Acquisition, including all damages and costs related to
these seven sites. Since the date of the Acquisition, Scott, and subsequently
Kimberly-Clark, 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
$10.0 million, of which approximately $5.8 million had been spent as of
October 1, 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 consolidated
financial position, results of operations or cash flows.
NOTE 15--COMMITMENTS AND CONTINGENCIES
In connection with the Acquisition, Warren entered into long-term (25 years
initially, subject to mill closures and certain force majeure events)
agreements with Scott for the supply of pulp and water and the treatment of
effluent at the Mobile mill. Wood pulp is supplied generally at market prices.
Pulp prices are discounted due to the elimination of freight costs associated
with delivering pulp to Warren's Mobile mill and 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. Warren has entered into a long-term agreement to
purchase electric power and steam for the Mobile mill at rates generally
comparable to market tariffs, including fuel cost and capital recovery
components. During the nine months ended September 27, 1995, fiscal year 1996
and fiscal year 1997, the Company purchased pulp and utilities under these
agreements aggregating $127.3 million, $148.0 million and $108.0 million,
respectively.
The Company's power requirements at its Somerset mill are currently
satisfied through a power purchase agreement whereby the mill cogenerates
electricity and sells the output to CMP at market rates. The CMP agreement
relating to the Somerset mill also provides that the mill purchase electricity
from CMP at the standard
53
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
industrial tariff rate. The Somerset Agreement expires in the year 2012.
Warren's long-term agreement with CMP relating to the Westbrook mill expired
on October 31, 1997, and has been replaced by a short-term agreement with CMP
in which the mill cogenerates electricity and sells the excess output not used
by the mill to CMP at market rates. The short-term agreement for the Westbrook
mill expires on April 30, 1998 and may be renewed monthly through October
1998. As of the date of the Acquisition of the Company, the Company
established a deferred asset of approximately $32.3 million to reflect the
fair value of the Somerset and now expired Westbrook agreements. For the nine
months ended September 27, 1995, fiscal year 1996 and fiscal year 1997,
amortization expense related to this asset approximated $10.8 million, $12.0
million, and $9.5 million, respectively. As of October 1, 1997, the asset was
fully amortized.
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 have established new forestry standards
stricter than current law, but which would not have completely banned
clearcutting, received a plurality vote. This competing measure was
resubmitted to the voters under Maine law on November 4, 1997 and was
defeated. The consequences of the vote to the Company are not expected to be
material, because such proposed measure generally reflected sustainable
forestry initiatives already voluntarily adopted by the Company.
The Company is also involved in various other lawsuits and administrative
proceedings. The relief sought in such lawsuits and proceedings includes
injunctions, damages and penalties. Although the final results in these suits
and proceedings cannot be predicted with certainty, it is the present opinion
of the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's consolidated financial position, results of
operations or cash flows.
NOTE 16--RETIREMENT BENEFITS
Pension Plans
The Company has four defined-benefit, trusteed pension plans that provide
retirement benefits for substantially all employees. Benefits provided are
primarily based on employees' years of service and compensation. The Company's
funding policy complies with the requirements of Federal law and regulations.
Plan assets consist of equity securities, bonds and short-term investments.
The current portion of the net pension liability, detailed below, was $3.0
million and $9.8 million at October 2, 1996 and October 1, 1997, respectively.
The funded status of the pension plans is shown below (in millions):
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested............................................. $ 82.4 $102.9
Nonvested.......................................... 16.5 20.1
------ ------
Accumulated benefit obligation..................... 98.9 123.0
Additional obligation for future salary increases.... 21.0 34.6
------ ------
Projected benefit obligation......................... 119.9 157.6
Plan assets at fair value............................ 116.2 147.5
------ ------
Projected benefit obligation in excess of plan assets
.................................................... (3.7) (10.1)
Unrecognized components.............................. (27.7) (19.3)
------ ------
Accrued pension cost................................. (31.4) (29.4)
Contributions........................................ 7.1 3.5
------ ------
Net pension liability................................ $(24.3) $(25.9)
====== ======
</TABLE>
54
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net pension cost for the plans includes the following components (in
millions):
<TABLE>
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Service cost-benefits
earned during the
period................. $ 4.5 $ 6.3 $ 6.0
Interest cost on
projected benefit
obligation............. 6.9 9.8 10.5
Actual return on plan
assets................. (10.4) (14.1) (13.4)
Net deferral............ 4.2 4.9 2.0
------ ------ ------
Net pension cost........ $ 5.2 $ 6.9 $ 5.1
====== ====== ======
</TABLE>
The projected benefit obligation at October 2, 1996 and October 1, 1997 was
determined using assumed discount rates of 8.25% and 7.75%, respectively, and
assumed long-term rates of compensation increases of 4.75% and 4.5%,
respectively. The assumed rate of return on plan assets (on an annualized
basis) was 9.0% for both fiscal years 1996 and 1997.
Savings Plans
Warren currently sponsors two 401(k) deferred contribution plans covering
substantially all Warren employees pursuant to which Warren is obligated to
match employee contributions, up to specified amounts. Warren contributions to
these plans totaled $3.8 million, $5.3 million and $5.5 million for the nine
months ended September 27, 1995, fiscal year 1996 and fiscal year 1997,
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 and $0.2 million at October 2,
1996 and October 1, 1997, respectively.
The following schedule provides the plan's funded status and obligations (in
millions):
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Accumulated postretirement
benefit obligation
(APBO):
Retirees................ $ 0.6 $ 3.4
Active participants..... 30.6 30.8
------- ------
Total APBO.............. 31.2 34.2
Plan assets at fair
value.................... -- --
------- ------
APBO in excess of plan
assets .................. (31.2) (34.2)
Unrecognized prior service
cost..................... -- (0.9)
Unrecognized net actuarial
gain..................... (1.1) (1.8)
------- ------
Net postretirement
liability................ $ (32.3) $(36.9)
======= ======
</TABLE>
55
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Components of the net periodic postretirement benefit expense are as follows
(in millions):
<TABLE>
<CAPTION>
YEAR YEAR
NINE MONTHS ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Service cost............ $ 2.0 $ 2.6 $ 2.5
Interest cost on APBO... 1.6 2.3 2.4
----- ----- -----
Net postretirement
benefit cost........... $ 3.6 $ 4.9 $ 4.9
===== ===== =====
</TABLE>
The discount rates used to estimate the accumulated benefit obligations as
of October 2, 1996 and October 1, 1997 were 8.25% and 7.75%, respectively. The
initial health care cost trend rates used to value the APBO were 9.0%, 9.0%
and 6.75% at September 27, 1995, October 2, 1996 and October 1, 1997,
respectively, decreasing gradually to an ultimate rate of 5.0%, 5.25%, and
4.75% 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
8.4% at October 1, 1997 and would increase the sum of the benefits earned and
interest cost components of net postretirement benefit cost for 1997 by
approximately 10.8%.
NOTE 18--OTHER LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Accrued workers' compensation......................... $29.7 $ 29.6
Accrued pension and other postretirement benefits..... 53.5 52.8
Deferred gain on sale/leaseback....................... -- 15.9
Other accrued liabilities............................. 15.0 15.3
----- ------
$98.2 $113.6
===== ======
</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"), of which
3.0 million shares were previously issued and exchanged for currently
outstanding shares. 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 is
recorded net of issuance costs and excludes approximately $6.9 million related
to Class A warrants of Holdings issued in connection with such 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' consolidated
financial statements.
56
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company 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 Warren Series B Preferred Stock upon which
dividends must be paid. 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"). In
addition, the terms of the Credit Agreement and the Indenture relating to the
Notes limit the amount of cash dividends the Company may pay with respect to
the Warren Series B Preferred Stock both before and after that date.
Cumulative dividends on Warren Series B Preferred Stock that have not been
paid at October 2, 1996 and October 1, 1997 are $21.2 million and $35.6
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
issuance)......................................................... $ 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
Accretion to redemption value..................................... 0.8
Dividends on Warren Series B Preferred Stock...................... 14.4
------
Balance, October 1, 1997........................................... $103.2
======
</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 redemption
prices (expressed as a percentage of the Specified Amount) set forth below
plus all accrued and unpaid liquidated damages and dividends (excluding any
Accumulated Dividends), if any, if redeemed during the year ended 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.
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 and
subject to the approval of the lenders under the Credit Agreement, 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.
57
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Cumulative dividends on the Preferred Stock that have not been paid
at October 2, 1996 and October 1, 1997 are $11.5 million and $19.4 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
Dividends on Preferred Stock.......................................... 7.9
-----
Balance, October 1, 1997.............................................. $56.9
=====
</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.
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.
58
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Proposed Redemption
Warren has successfully solicited the consent (the "Consent") of the holders
(the "Note Holders") of the Notes to the approval of a waiver under which the
Note Holders have (a) consented to the payment of a dividend (the "Dividend")
to Holdings for the purpose of redeeming (the "Redemption") all of the
Preferred Stock and (b) agreed that the consummation of each of such Dividend
and such Redemption does not violate the restricted payment covenant of the
Indenture governing the Notes. The approved Consent permits Warren to pay the
Dividend for the purpose of effecting the Redemption of all of the Preferred
Stock. At October 1, 1997, the redemption value of the Preferred Stock was
$56.9 million.
Registration
Holdings 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 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 shelf registration statement and a post-effective amendment have
been filed with and declared effective by the Commission on May 9, 1997 and
August 8, 1997, respectively.
NOTE 21--COMMON STOCK
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.
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.
On May 27, 1997 Western Ventures Limited ("WVL"), an indirect, wholly-owned
subsidiary of Sappi, acquired certain minority common equity interests
(including both Common Stock, and Class A Warrants and Class B Warrants (the
"Warrants")) in Holdings (the "Minority Acquisition") 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 in the
Minority Acquisition to Heritage Springer Limited ("HSL"), a British Virgin
Island company, and HSL pledged such Common Stock to certain lenders. The
securities acquired by HSL are subject to an agreement (the "HSL
59
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 also has been granted certain rights of first
refusal by such lenders in respect to such securities.
On September 5, 1997, Holdings consummated a merger (the "Merger") described
in a merger agreement with SDW Acquisition II Corporation which was executed
on July 30, 1997 (the "Merger Agreement"). As a result of the Merger, each
issued and outstanding share of common stock of Holdings held by any party
other than Sappi and its affiliates or HSL was converted into the right to
receive $17.60 per share in cash. Each outstanding Class A Warrant became
exercisable solely for $5.2708 in cash, and each outstanding Class B Warrant
became 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
Preferred Stock remains outstanding, without amendment. As a result of the
Merger, Sappi owns 100% of the issued and outstanding voting common stock and
75.07% of the common equity of Holdings in the form of 75,065 shares of New
Class A Common Stock, and HSL will own 24.93% of the common equity of Holdings
in the form of 24,935 shares 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 is subject to the HSL Option Agreement and
the aforementioned irrevocable proxy in favor of Sappi. All of the shares of
Holdings common stock held immediately prior to the Merger have been cancelled
and as a result of the Merger, the authorized Common Stock of Holdings
consists of 250,000 shares of Class A Common Stock and 50,000 shares of Class
B Common Stock, both classes at $0.01 per share par value. Each share of Class
B Common Stock is convertible into one share of Class A Common Stock at the
election of the holder of the Class B Common Stock. There was no change to
Holdings' total consolidated stockholders' equity as a result of the Merger.
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. These agreements, which may be terminated by either party with six
months written notice, are based upon cost reimbursement plus a profit markup
of 10%. For the nine months ended September 27, 1995, fiscal year 1996, and
fiscal year 1997, Warren incurred such a management fee of approximately $0.8
million, $1.0 million, and $1.0 million, respectively.
Warren has also entered into a cross licensing agreement with Sappi
Deutschland, the worldwide holding company for all European and U.S. business
operations of the Sappi group, and Hannover Papier AG ("Hannover"), a
subsidiary of Sappi. Pursuant to this agreement, Warren and Hannover have
agreed to enter into specific written agreements to share paper processing
techniques and have also agreed to enter into specific distribution agreements
whereby Warren has agreed to use its distribution network in the United States
to facilitate and increase Hannover's exports. Sappi Deutschland will
facilitate the licensing process. No specific agreements have been entered
into in connection with this cross licensing agreement as of October 1, 1997.
Warren ships products to certain Sappi subsidiaries (Sappi Europe, SA,
Specialty Pulp Services and U.S. Paper). These subsidiaries then sell Warren's
products to external customers at market prices and remit the proceeds from
such sales to Warren, net of a sales commission. Warren shipped $19.2 million,
$102.8 million
60
<PAGE>
SDW HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and $126.2 million of products to Sappi subsidiaries and expensed fees of
approximately $1.1 million, $7.2 million and $8.7 million relating to these
sales for the nine months ended September 27, 1995, fiscal year 1996 and
fiscal year 1997, respectively. Trade accounts receivable at October 2, 1996
and October 1, 1997 included approximately $37.1 million and $24.5 million,
respectively, due from subsidiaries of Sappi. Amounts as of October 2, 1996
and October 1, 1997 are included in the pool of receivables securitized under
the A/R Facility (Note 6). The Company has formalized certain of these
agreements and is in the process of formalizing the remainder.
Warren also imports products from certain Sappi affiliates (Sappi UK, Ltd.
and Hannover Papier) for sale to Warren's domestic customers. Warren sells
these products at market prices and remits the proceeds, net of sales
commissions, to the Sappi affiliates. Warren imported approximately $10.6
million and $21.9 million of products from certain Sappi affiliates, and
earned commissions of $0.2 million and $1.4 million for fiscal years 1996 and
1997, respectively.
61
<PAGE>
SCHEDULE I
SDW HOLDINGS CORPORATION
CONDENSED FINANCIAL INFORMATION OF PARENT
CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Management fee.............. $ 0.8 $ 1.0 $1.0
Administrative expense...... (0.3) (0.9) (1.2)
Equity in earnings (loss) 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, $13.5
and $15.2, respectively.... 33.0 (8.7) 13.2
------ ------- ----
Income (loss) before income
taxes...................... 33.5 (8.6) 13.0
Income tax expense.......... 0.2 -- --
------ ------- ----
Net income (loss)........... 33.3 (8.6) 13.0
Dividends on preferred
stock...................... 4.6 6.9 7.9
------ ------- ----
Net income (loss) applicable
to common stockholders..... $ 28.7 $ (15.5) $5.1
====== ======= ====
</TABLE>
See accompanying notes to the condensed financial statements.
62
<PAGE>
SCHEDULE I
SDW HOLDINGS CORPORATION
CONDENSED FINANCIAL INFORMATION OF PARENT
CONDENSED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ----------
<S> <C> <C>
Assets:
Due from S.D. Warren Company........................... $ 1.0 $ 1.0
Investment in S.D. Warren Company...................... 356.1 369.3
------ ------
Total Assets......................................... $357.1 $370.3
====== ======
Liabilities and Stockholders' Equity:
Current liabilities--accrued and other current
liabilities........................................... $ 0.6 $ 1.4
------ ------
Stockholders' Equity:
Preferred stock (at liquidation value)................ 49.0 56.9
Common stock.......................................... 0.3 --
Capital in excess of par value........................ 294.0 293.7
Retained earnings..................................... 13.2 18.3
------ ------
Total Stockholders' Equity........................... 356.5 368.9
------ ------
Total Liabilities and Stockholders' Equity........... $357.1 $370.3
====== ======
</TABLE>
See accompanying notes to the condensed financial statements.
63
<PAGE>
SCHEDULE I
SDW HOLDINGS CORPORATION
CONDENSED FINANCIAL INFORMATION OF PARENT
STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, 1995 OCTOBER 2, 1996 OCTOBER 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
Cash provided by operating
activities:
Net income (loss)........ $ 33.3 $(8.6) $ 13.0
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 (13.2)
Change in working
capital............... (0.3) (0.1) 0.2
------ ----- ------
Net cash provided by
operating
activities.......... 0.0 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
preferred stock......... 331.8 -- --
------ ----- ------
Net change in cash and cash
equivalents............... 0.0 0.0 0.0
------ ----- ------
Cash and cash equivalents
at beginning and end of
period.................... $ 0.0 $ 0.0 $ 0.0
====== ===== ======
</TABLE>
See accompanying notes to the condensed financial statements.
64
<PAGE>
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
These condensed financial statements should be read in conjunction with SDW
Holdings Corporation's consolidated financial statements and notes thereto.
Basis of Presentation:
Investment in S.D. Warren Company is accounted for using the equity method of
accounting.
65
<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:
Year ended October 1, 1997....... $5.3 $ 1.3 $ 1.6 $5.0
Year ended October 2, 1996....... 5.6 -- 0.3 5.3
Nine months ended September 27,
1995............................ 5.4 0.2 -- 5.6
</TABLE>
66
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SDW Holdings Corporation
/s/ William E. Hewitt
By: _________________________________
WILLIAM E. HEWITT VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
Date: November 10, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
/s/ Eugene van As Director (Principal November 10,
- ------------------------------------- Executive Officer) 1997
EUGENE VAN AS
/s/ Monte R. Haymon Director November 10,
- ------------------------------------- 1997
MONTE R. HAYMON
/s/ William E. Hewitt Director, Vice November 10,
- ------------------------------------- President and 1997
WILLIAM E. HEWITT Treasurer
(Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Andries J. G. Vlok Director, Vice November 10,
- ------------------------------------- President and 1997
ANDRIES J. G. VLOK Secretary
/s/ Neil S. Thomas Director November 10,
- ------------------------------------- 1997
NEIL S. THOMAS
/s/ J. Richard Leaman, Jr. Director November 10,
- ------------------------------------- 1997
J. RICHARD LEAMAN
67
<PAGE>
Exhibit 12.1
SDW HOLDINGS CORPORATION AND SUBSIDIARY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 21,
YEAR NINE MONTHS 1994 1994 YEAR YEAR
ENDED ENDED THROUGH THROUGH ENDED ENDED
DECEMBER 25, SEPTEMBER 24, DECEMBER 20, SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1993 1994 1994 1995 1996 1997
--------------- --------------- --------------- ------------- ------------- -------------
S.D. WARREN S.D. WARREN S.D. WARREN
COMPANY AND COMPANY AND COMPANY AND CONSOLIDATED CONSOLIDATED CONSOLIDATED
CERTAIN RELATED CERTAIN RELATED CERTAIN RELATED SDW HOLDINGS SDW HOLDINGS SDW HOLDINGS
AFFILIATES AFFILIATES AFFILIATES CORPORATION CORPORATION CORPORATION
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
--------------- --------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss)
before taxes
and other
items.......... $ 1.9 $28.0 $24.9 $ 70.8 $ 12.0 $ 47.4
Adjustments:
Capitalized
interest...... -- (1.4) -- (0.9) (1.9) (3.7)
Dividends and
accretion on
subsidiary's
preferred
stock......... -- -- -- (15.8) (23.5) (25.5)
Total fixed
charges, net.. 15.8 12.5 3.4 125.8 138.1 131.6
----- ----- ----- ------ ------ ------
Excess of
earnings to
cover fixed
charges and
preferred stock
dividends...... $17.7 $39.1 $28.3 $179.9 $124.7 $149.8
===== ===== ===== ====== ====== ======
Ratio of
earnings to
cover fixed
charges and
preferred stock
dividends...... 1.1x 3.1x 8.3x 1.4x * 1.1x
===== ===== ===== ====== ====== ======
Fixed charges
and preferred
stock
dividends:
Interest
expense....... $ 8.5 $ 6.4 $ 2.3 $106.0 $108.9 $ 99.0
Interest
portion of
Biomass
contract...... 4.6 3.2 0.9 2.4 2.7 2.0
Interest
portion of
rent(1)....... 2.7 1.5 0.2 0.7 1.1 1.4
Dividends and
accretion on
subsidiary's
preferred
stock......... -- -- -- 15.8 23.5 25.5
Capitalized
interest...... -- 1.4 -- 0.9 1.9 3.7
----- ----- ----- ------ ------ ------
Total fixed
charges and
preferred stock
dividends...... $15.8 $12.5 $ 3.4 $125.8 $138.1 $131.6
===== ===== ===== ====== ====== ======
</TABLE>
- ------------
* Ratio is less than 1 to 1 for period presented.
(1) Interest expense component of rent is 30% of rental expense.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
SDW Holdings Corporation ("Holdings") was incorporated under the laws of the
State of Delaware and owns or controls the following corporation by means of
owning the indicated percent of its voting securities:
Percent
Voting Securities State or Province
Owned by Holdings Subsidiary of Incorporation
- ----------------- ---------- -----------------
100% S.D. Warren Company Pennsylvania
In addition, S.D. Warren Company owns or controls the following corporations by
means of owning the indicated percents of their voting securities:
Percent
Voting Securities
Owned by State or Province
S.D. Warren Company Subsidiary of Incorporation
------------------- ---------- -----------------
100% Skylark, Inc. Maine
100% Presumpscott Water Maine
Power Company
100% S.D. Warren Finance Co. Delaware
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
S.D.W HOLDINGS CORPORATION'S (THE "COMPANY") CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 1, 1997 AND BALANCE SHEET AS OF OCTOBER 1, 1997 FOUND
IN PAGE 35 AND 36, RESPECTIVELY, OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FINANCIAL INFORMATION FOR THE YEAR ENDED OCTOBER 1, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-01-1997
<PERIOD-START> OCT-03-1996
<PERIOD-END> OCT-01-1997
<CASH> 180,700
<SECURITIES> 0
<RECEIVABLES> 45,300
<ALLOWANCES> 5,000
<INVENTORY> 163,400
<CURRENT-ASSETS> 437,300
<PP&E> 1,165,700
<DEPRECIATION> 214,600
<TOTAL-ASSETS> 1,632,000
<CURRENT-LIABILITIES> 257,800
<BONDS> 739,800
103,200
56,900
<COMMON> 0
<OTHER-SE> 312,000
<TOTAL-LIABILITY-AND-EQUITY> 1,632,000
<SALES> 1,405,600
<TOTAL-REVENUES> 1,405,600
<CGS> 1,115,400
<TOTAL-COSTS> 1,263,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99,000
<INCOME-PRETAX> 47,400
<INCOME-TAX> 19,200
<INCOME-CONTINUING> 13,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,000
<EPS-PRIMARY> 49.74
<EPS-DILUTED> 49.74
</TABLE>
