UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q FINANCIAL INFORMATION *
QUARTERLY REPORT
For the quarterly period ended April 3, 1996
Commission file number: 333-834 *
SDW HOLDINGS CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3795926
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 Westchester Avenue, Purchase, NY 10577-2554
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(914-696-0021)
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No Not Applicable X *
--- --- ---
This report consists of 19 sequentially numbered pages.
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- --------------------------------------------------------------------------------
* This report is being voluntarily filed with the Securities and Exchange
Commission (the "Commission") pursuant to the registrant's contractual
obligations to file with the Commission all financial information that would be
required to be filed on a Form 10-Q. The registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
1
SDW HOLDINGS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Condensed Statements of Operations for the three months
ended March 29, 1995 and April 3, 1996 3
Condensed Statements of Operations for the period
September 24, 1994 through December 20, 1994, December 21, 1994
through March 29, 1995 and the six months ended April 3, 1996 4
Condensed Balance Sheets at September 27, 1995 and April 3, 1996 5
Condensed Statements of Cash Flows for the period September 24, 1994
through December 20, 1994, December 21, 1994 through March 29, 1995
and the six months ended April 3, 1996 6
Notes to Condensed Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5 OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE 19
2
SDW HOLDINGS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 29, 1995 APRIL 3, 1996
------------------------- -------------------------
SDW HOLDINGS SDW HOLDINGS
CORPORATION AND CORPORATION AND
SUBSIDIARIES SUBSIDIARIES
------------------------- -------------------------
Sales $ 349.2 $ 365.5
Cost of goods sold 264.7 293.1
--------- ---------
Gross profit 84.5 72.4
Selling, general and administrative expense 28.6 32.6
--------- ---------
Income from operations 55.9 39.8
Other income (expense), net 0.7 (1.6)
Interest expense 32.0 30.0
--------- ---------
Income before income taxes and other items 24.6 8.2
Income tax expense 10.3 3.4
Dividends and accretion on Warren preferred stock 3.1 3.2
--------- ---------
Net income 11.2 1.6
Dividends on preferred stock 1.0 1.7
--------- ---------
Net income (loss) applicable to common stockholders $ 10.2 $ (0.1)
--------- ---------
--------- ---------
Net earnings per common share $ 0.28 $ (0.00)
--------- ---------
--------- ---------
Weighted average number of shares outstanding 35.9 35.9
--------- ---------
--------- ---------
See accompanying notes to condensed financial statements
3
SDW HOLDINGS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PERIOD SEPTEMBER PERIOD DECEMBER SIX MONTHS
25, 1994 THROUGH 21, 1994 THROUGH ENDED APRIL 3,
DECEMBER 20, 1994 MARCH 29, 1995 1996
----------------------- -------------------- --------------------
S. D. WARREN
COMPANY AND SDW HOLDINGS SDW HOLDINGS
CERTAIN RELATED CORPORATION AND CORPORATION AND
AFFILIATES SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
----------------------- -------------------- --------------------
Sales $ 313.6 $ 370.9 $ 720.4
Cost of goods sold 258.7 278.8 579.4
--------- --------- ---------
Gross profit 54.9 92.1 141.0
Selling, general and administrative expense 22.1 30.2 58.3
--------- --------- ---------
Income from operations 32.8 61.9 82.7
Other income (expense), net (0.5) 0.7 0.5
Interest expense 2.3 43.8 61.3
--------- --------- ---------
Income before income taxes and other items 30.0 18.8 21.9
Income tax expense 12.0 7.9 8.9
Dividends and accretion on Warren preferred stock --- 3.4 6.6
--------- --------- ---------
Net income $ 18.0 7.5 6.4
---------
---------
Dividends on preferred stock 1.1 3.4
--------- ---------
Net income applicable to common stockholders $ 6.4 $ 3.0
--------- ---------
--------- ---------
Net earnings per common share $ 0.18 $ 0.08
--------- ---------
--------- ---------
Weighted average number of shares outstanding 35.9 35.9
--------- ---------
--------- ---------
See accompanying notes to condensed financial statements
4
SDW HOLDINGS CORPORATION
CONDENSED BALANCE SHEETS
(IN MILLIONS, UNAUDITED)
SEPTEMBER 27, 1995 APRIL 3, 1996
-------------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 62.2 $ ---
Trade accounts receivable, net 129.4 128.4
Other receivables 24.2 28.8
Inventories 226.5 238.1
Other current assets 11.8 12.2
----------- -----------
Total current assets 454.1 407.5
Plant assets, net 1,150.7 1,123.2
Timber resources, net 98.4 98.1
Goodwill, net 114.0 111.6
Deferred financing fees, net 53.1 49.1
Other assets, net 24.7 22.4
----------- -----------
Total assets $ 1,895.0 $ 1,811.9
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 78.6 $ 121.6
Accounts payable 112.2 89.0
Accrued and other current liabilities 107.6 106.0
----------- -----------
Total current liabilities 298.4 316.6
----------- -----------
Long-term debt:
Term loans 553.8 436.1
Senior subordinated notes 375.0 375.0
Other 120.0 119.5
----------- -----------
1,048.8 930.6
----------- -----------
Other liabilities 103.8 107.7
----------- -----------
Total liabilities 1,451.0 1,354.9
----------- -----------
Commitments and contingencies (Note 5)
Warren series B redeemable exchangeable preferred stock (liquidation 74.5 81.1
value, $83.5 and $89.7, respectively) ----------- -----------
Stockholders' equity:
Preferred stock, at liquidation value 42.1 45.5
Common stock --- ---
Capital in excess of par value 294.3 294.3
Retained earnings 33.1 36.1
----------- -----------
Total stockholders' equity 369.5 375.9
----------- -----------
Total liabilities and stockholders' equity $ 1,895.0 $1,811.9
----------- -----------
----------- -----------
See accompanying notes to condensed financial statements
5
SDW HOLDINGS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS, UNAUDITED)
PERIOD SEPTEMBER PERIOD DECEMBER SIX MONTHS
25, 1994 THROUGH 21, 1994 THROUGH ENDED APRIL 3,
DECEMBER 20, 1994 MARCH 29, 1995 1996
----------------- ---------------- ---------------
S. D. WARREN
COMPANY AND SDW HOLDINGS SDW HOLDINGS
CERTAIN RELATED CORPORATION AND CORPORATION AND
AFFILIATES SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
----------------- ---------------- ---------------
Cash Flows from Operating Activities:
Net income $ 18.0 $ 7.5 $ 6.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, cost of timber harvested and 28.8 28.4 57.2
amortization
Dividends and accretion on Warren preferred stock --- 3.4 6.6
Other 11.6 --- 5.9
Changes in assets and liabilities:
Trade accounts receivable, net (1.7) (15.3) 1.0
Inventories 3.7 (30.8) (11.6)
Accounts payable, accrued and other current 6.0 51.8 (35.5)
liabilities
Accruals for restructuring programs (12.7) --- ---
Other assets and liabilities (15.6) 9.1 (4.9)
--------- ---------- ---------
Net cash provided by operating activities 38.1 54.1 25.1
--------- ---------- ---------
Cash Flows from Investing Activities:
Acquisition, net of related financing costs --- (1,493.7) ---
Proceeds from disposals of plant assets --- --- 2.1
Investments in plant assets and timber resources (14.5) (4.2) (18.3)
--------- ---------- ---------
Net cash used in investing activities (14.5) (1,497.9) (16.2)
--------- ---------- ---------
Cash Flows from Financing Activities:
Proceeds from debt --- 1,105.0 ---
Repayments of debt (0.5) (138.2) (75.0)
Proceeds from issuance of common stock --- 294.3 ---
Proceeds from issuance of series B preferred stock, net --- 65.4 ---
of expenses
Proceeds from issuance of preferred stock --- 37.5 ---
Bank overdraft --- 4.8 3.9
Predecessor Corporation's parent company capital 47.2 --- ---
infusions, net
--------- ---------- ---------
Net cash provided by (used in) financing activities 46.7 1,368.8 (71.1)
--------- ---------- ---------
Net change in cash and cash equivalents 70.3 (75.0) (62.2)
Cash and cash equivalents, at beginning of period 4.7 75.0 62.2
--------- ---------- ---------
Cash and cash equivalents, at end of period $ 75.0 $ --- $ ---
--------- ---------- ---------
--------- ---------- ---------
See accompanying notes to condensed financial statements
6
SDW HOLDINGS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements include the accounts
of SDW Holdings Corporation ("Holdings"). Holdings, a holding company that was
organized and incorporated in Delaware on October 5, 1994, owns all of the
outstanding common stock of S.D. Warren Company ("S.D. Warren" or "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." Intercompany balances and transactions have been
eliminated in the preparation of the accompanying unaudited condensed financial
statements.
The Company manufactures printing, publishing and specialty papers and has pulp
and timberland operations vertically integrated with certain of its
manufacturing facilities. The Company currently operates four paper mills, a
sheeting and distribution facility and owns approximately 911,000 acres of
timberlands in the state of Maine.
FORMATION AND ACQUISITION
As of October 8, 1994, SDW Acquisition Corporation ("SDW Acquisition"), a direct
wholly-owned subsidiary of Holdings, entered into a definitive agreement
pursuant to which, on December 20, 1994, SDW Acquisition acquired (the
"Acquisition") from Scott Paper Company ("Scott") all of the outstanding capital
stock of Warren, then a wholly owned subsidiary of Scott, and certain related
affiliates of Scott (referred to herein as the "Predecessor Corporation").
Immediately following the Acquisition, SDW Acquisition merged with and into
Warren, with Warren (the "Successor Corporation") surviving. As a result of the
Merger, Holdings owns all of the outstanding common stock of S.D. Warren. Prior
to the date of the Acquisition, there was no significant activity, revenues
received or expenditures incurred by either Holdings or SDW Acquisition.
The largest investor in Holdings is Sappi Limited ("Sappi"). Sappi, a South
African company, is the largest forest products company in Africa, the third
largest producer of coated free paper in Europe and one of the world's leading
pulp, paper and timber exporters. Following the Acquisition, Sappi became the
largest coated free paper manufacturer in the world. The other shareholders of
Holdings are DLJ Merchant Banking Partners, L.P. and certain of its affiliates
("DLJMB") and UBS Capital Corporation ("UBSCC").
The Acquisition has resulted in a new basis of accounting, the adoption of
certain accounting policies which differ from the accounting policies of the
Predecessor Corporation and increases to certain manufacturing costs (purchased
pulp and energy within the Company's Mobile, Alabama facility) resulting from
obtaining these manufacturing resources on a third party versus affiliate basis.
As a result, the Company's financial statements for periods subsequent to the
Acquisition are not comparable to the Predecessor Corporation's financial
statements for periods prior to the Acquisition.
7
PREDECESSOR CORPORATION
The unaudited interim condensed combined financial information for the period
September 25, 1994 through December 20, 1994 refers to the Predecessor
Corporation. The unaudited condensed combined financial information for such
period of the Predecessor Corporation is derived from the audited financial
statements for such period included in the Company's 1995 Annual Report on Form
10-K Financial Information. The unaudited condensed combined financial
statements of the Predecessor Corporation are based upon financial information
made available to the Company by Scott, which until December 20, 1994 owned
Warren and accounted for Warren as part of Scott's consolidated financial
statements.
UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed financial
statements include all adjustments, consisting of normal recurring adjustments,
necessary for the fair presentation of the Company's financial position and
results of operations. The accompanying unaudited condensed financial
statements together with the interim condensed financial statements of the
Predecessor should be read in conjunction with the audited financial statements
included in the Company's Form 10-K Financial Information and the previously
issued Quarterly Report on Form 10-Q Financial Information for the quarter ended
January 3, 1996. The unaudited condensed results of operations for the three
months and six months ended April 3, 1996 are not necessarily indicative of
results that could be expected for a full year.
The Company's income before income taxes and other items for the period December
21, 1994 through March 29, 1995 and the three months ended March 29, 1995 have
been increased by $9.7 million and $9.9 million, respectively, from amounts
previously reported as a result of the finalization of purchase accounting
adjustments made in the last quarter of fiscal 1995. In addition, certain prior
period amounts have been reclassified to conform to their current presentation.
NOTE 2. RELATED PARTY RECEIVABLE
During the three and six months ended April 3, 1996, Warren sold products to
certain subsidiaries of Sappi ("affiliates") at market rates (in U.S. Dollars).
These affiliates then sold Warren's products to external customers. Proceeds
from sales to affiliates are remitted to Warren net of sales commissions.
Warren sold approximately $26.6 million and $42.2 million to affiliates and
incurred fees of approximately $1.6 million and $2.7 million relating to these
sales for the three and six months ended April 3, 1996, respectively. Trade
accounts receivable at April 3, 1996 includes approximately $22.8 million due
from affiliates. Warren is in the process of finalizing the written agreements
for transactions with these affiliates.
NOTE 3. INVENTORIES (IN MILLIONS)
SEPTEMBER 27, 1995 APRIL 3, 1996
------------------ -------------
Finished products $ 89.8 $ 114.4
Work in process 51.0 46.7
Pulp, logs and pulpwood 33.2 27.4
Maintenance parts and other supplies 52.5 49.6
-------- -------
$ 226.5 $ 238.1
-------- -------
-------- -------
8
NOTE 4. LONG-TERM DEBT
On April 23, 1996 Warren entered into an agreement with the Bank of Montreal
("BMO") whereby BMO, through its securities unit, Nesbitt Burns Securities, as
agent, will provide Warren with a five-year, $110.0 million revolving accounts
receivable securitization facility (the "A/R facility") subject to certain terms
and conditions. Under this facility, Warren established a new subsidiary, S. D.
Warren Finance Co. ("SDWF"), into which Warren will sell, on a non-recourse
basis, all of its rights and interest in its accounts receivable. SDWF in turn
will sell certain accounts receivable to an unrelated financial institution
under similar terms.
The A/R facility was entered into in conjunction with an amendment to Warren's
credit facility under which the proceeds from the A/R facility were used to
prepay $100.0 million of the term loans under the credit facility.
Approximately $3.0 million of financing fees that had previously been deferred
will be written off in the third fiscal quarter as a result of this prepayment.
The amendments to Warren's credit facility included changes to certain
provisions relating to restrictive covenants including, among other things, the
ability to incur debt, pay dividends and sell certain assets. In addition,
certain provisions relating to interest rates, fees, collateral, prepayments and
affirmative covenants have also been amended.
The current maturities of long-term debt balance of $121.6 million at April 3,
1996 primarily represents the aforementioned prepayment and amounts payable in
December 1996 under Warren's term loan facilities. Warren has certain
prepayment requirements based upon excess cash flow, as defined. During the six
months ended April 3, 1996 payments totaling approximately $74.9 million were
made pursuant to the excess cash flow requirement. Amounts paid pursuant to the
excess cash flow requirement during the six months ended April 3, 1996 fulfill
the majority of the term loan payments that otherwise would have been required
to be paid in June 1996 and reduce future semi-annual installments on a pro rata
basis.
NOTE 5. ENVIRONMENTAL MATTERS AND LITIGATION
The Company is subject to a wide variety of increasingly stringent environmental
laws and regulations relating to, among other matters, air emissions, wastewater
discharges, past and present landfill operations and hazardous waste management.
These laws include the Federal Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act and their respective state counterparts. The
Company will continue to incur significant capital and operating expenditures to
maintain compliance with applicable federal and state environmental laws. These
expenditures include costs of compliance with federal worker safety laws,
landfill expansions and wastewater treatment system upgrades. None of these
expenditures, individually or in the aggregate, is expected to have a material
adverse effect on the Company's business or financial condition.
In addition to conventional pollutants, minute quantities of dioxins and other
chlorinated organic compounds may be contained in the wastewater effluent of the
Company's bleached kraft pulp mills in Somerset and Westbrook, Maine and
Muskegon, Michigan. The most recent National Pollutant Discharge Elimination
System ("NPDES") wastewater permit limits proposed by the EPA would limit dioxin
discharges from the Company's Somerset and Westbrook mills to less than the
level of detectability. The Company is presently meeting the EPA's proposed
dioxin limits but it is not meeting the proposed limits for other parameters
(e.g. temperature and color) and is pursuing efforts to revise these other
wastewater permit limits for its facilities. While the permit limitations at
these two facilities are being challenged, the Company continues to operate
under existing EPA permits, which have technically expired, in accordance with
accepted administrative practice. In addition, the Muskegon mill is involved,
as one of various industrial plaintiffs, in litigation with the County of
Muskegon regarding the mill's wastewater treatment permit. The lawsuit chal-
lenges the permit's
9
effluent limits imposed by local ordinance as arbitrary and unreasonable. In
the meantime, the mill has received approval from the Muskegon Department of
Natural Resources ("DNR") for alternative effluent limits which are now reflect-
ed in the local limits. Although the Company believes that it will continue to
be successful in its various administrative and judicial challenges to more
restrictive limits and in any negotiations of such limits with environmental
regulatory authorities, the imposition of more restrictive limits could require
substantial additional expenditures, including short-term expenditures, and may
lead to substantial fines for any noncompliance.
In November 1993, the EPA announced proposed regulations that would impose new
air and water quality standards aimed at further reductions of pollutants from
pulp and paper mills, particularly those conducting bleaching operations
(generally referred to as the "cluster rules"). Although the EPA has not made
any commitments, final promulgation of the cluster rules may occur in 1996 and
compliance with the rules may be required beginning in 1998. The Company
believes that compliance with the cluster rules, as proposed, may require
aggregate capital expenditures of approximately $76.0 million through 1999. The
ultimate financial impact to the Company of compliance with the cluster rules
will depend upon the nature of the final regulations, the timing of required
implementation and the cost and availability of new technology. The Company
also anticipates that it will incur an estimated $10.0 million to $20.0 million
of capital expenditures through 1999 related to environmental compliance other
than as a result of the cluster rules.
The Company's mills generate substantial quantities of solid wastes and by-
products that are disposed of at permitted landfills and solid waste management
units at the mills. The Company is currently planning to expand the landfill at
the Somerset mill at a projected total cost of approximately $12.0 million, of
which approximately $5.0 million will be spent between 1996 and 1997.
The Muskegon mill has had discussions with the Michigan DNR regarding a wastewa-
ter surge pond adjacent to the Muskegon Lake. The DNR is presently considering
whether the surge pond is in compliance with Michigan Act 245 (Water Resources
Commission Act) regarding potential discharges from that pond. The matter is
now subject to the results of a pending engineering investigation. There is a
possibility that, as a result of DNR requirements, the surge pond may be closed
in the future. The Company estimates the cost of closure would 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 preliminari-
ly 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 costs at each site, its calculation of Warren's 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, in accordance with the agreement
pursuant to which the Company was acquired, the Company's former parent, Scott,
agreed to indemnify and defend the Company for and against, among other things,
the full amount of any damages or costs resulting from the off-site disposal of
hazardous substances occurring prior to the date of closing, including all
damages and costs related to these seven sites. Since the date of closing of
the acquisition agreement, Scott has been performing under the terms of this
environmental indemnity and defense provision and, therefore, the Company has
not expended any funds with respect to these seven sites.
None of these environmental matters, individually or in the aggregate, is
expected to have a material adverse effect on the Company's financial position,
results of operations or cash flows.
10
The Company does not believe that it will have any liability under recent
emergency legislation enacted in 1995 by the State of Maine to cover a signifi-
cant 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 is also involved in various other lawsuits and administrative
proceedings. The relief sought in such lawsuits and proceedings include
injunctions, damages and penalties. Although the final results in these suits
and proceedings cannot be predicted with certainty, it is the present opinion of
the Company, after consulting with legal counsel, that they will not have a
material effect on the Company's financial position, results of operations or
cash flows.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The Acquisition (as defined in the Notes to Condensed Financial Statements) has
resulted in a new basis of accounting, the adoption of certain accounting
policies which differ from the accounting policies of the Predecessor Corpora-
tion (as defined in the Notes to Condensed Financial Statements) and increases
to certain manufacturing costs (purchased pulp and energy within the Company's
Mobile, Alabama facility) resulting from obtaining these manufacturing resources
on a third party versus affiliate basis. As a result, the Company's financial
statements for periods subsequent to the Acquisition date are not comparable to
the Predecessor Corporation's financial statements for periods prior to the
Acquisition.
This discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements.
The following discussion and analysis should be read in conjunction with the
accompanying Condensed Financial Statements and the Notes thereto, the Company's
Annual Report on Form 10-K Financial Information and the previously issued
Quarterly Report on Form 10-Q Financial Information for the quarter ended
January 3, 1996.
MARKET CONDITIONS
The Company's sales volumes decreased during the six months ended April 3, 1996
due to a softening in orders experienced by the industry across certain product
lines primarily resulting from merchants, printers and other converters reducing
their inventory levels which had increased above normal levels. The decline in
apparent demand resulted in reduced prices, with discounting occurring on
certain paper product grades. Although the Company realized lower net selling
prices as a result of discounting during the first half of fiscal year 1996 as
compared to the prices realized at the end of fiscal year 1995, net selling
prices realized during the three and six months ended April 3, 1996 are higher
than those realized during the same periods last year. In addition, the cost of
raw materials decreased during the six months ended April 3, 1996 as compared to
prices at the end of fiscal year 1995 due to the decrease in the market price of
pulp. However, the Company manufactures approximately 65% of its pulp require-
ments which reduces the Company's exposure to fluctuations in the market price
for pulp.
As a result of the weaker market conditions, the Company temporarily reduced
production levels at certain of its manufacturing facilities during the first
quarter of this fiscal year. The reduction of inventory levels by the Company's
customers and the weaker market conditions continued through the second fiscal
quarter. The Company expects that this weaker trend will reverse by the end of
the third fiscal quarter and is forecasting an increase in demand during the
final fiscal quarter. To the extent that the weaker market trend does not
reverse or becomes more pervasive within the Company's existing product lines,
the Company's sales, gross margins and cash flows will continue to be adversely
effected.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 3, 1996 COMPARED TO THE THREE MONTHS ENDED
MARCH 29, 1995
SALES
The Company's sales for the three months ended April 3, 1996 were $365.5 million
compared to $349.2 million for the three months ended March 29, 1995, an
increase of $16.3 million or 4.7%. The increase is primarily due to a 2.8%
increase in average net revenue per ton and a 1.9% increase in shipment volume
during such period.
COST OF GOODS SOLD
The Company's costs of goods sold for the three months ended April 3, 1996 were
$293.1 million compared to $264.7 million for the three months ended March 29,
1995, an increase of $28.4 million or 10.7%. This increase primarily resulted
from lower levels of production at certain of its manufacturing facilities and
the effect of a power outage at one of the Company's principal manufacturing
facilities. The power outage resulted in a loss of production for approximately
24 days. The effect of the power outage was partially offset by the deferral of
approximately $5.5 million of manufacturing costs that were covered by the
Company's business interruption insurance. The Company also adjusted the
carrying value of certain inventories to net realizable value during this
quarter. These increases were partially offset by a net reduction in labor
costs.
The increase in cost of goods sold resulted in gross profit as a percent of
sales decreasing to 19.8% for the three months ended April 3, 1996 from 24.2%
for the same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $32.6 million for the three
months ended April 3, 1996 compared to $28.6 million for the three months ended
March 29, 1995, an increase of $4.0 million. Selling, general and administra-
tive expenses as a percent of sales increased to 8.9% for the three months ended
April 3, 1996 compared to 8.2% for the three months ended March 29, 1995. This
increase is primarily due to an increase in administrative expenses primarily
resulting from costs incurred to maintain the appropriate level of administra-
tive services that were previously performed by Scott.
INTEREST EXPENSE
The Company's interest expense for the three months ended April 3, 1996 was
$30.0 million compared to $32.0 million for the three months ended March 29,
1995. Interest expense includes the amortization of deferred financing fees.
SIX MONTHS ENDED APRIL 3, 1996 COMPARED TO THE SIX MONTHS ENDED MARCH 29, 1995
The following discussion compares the six months ended April 3, 1996 with the
six months ended March 29, 1995. As used herein, the six months ended March 29,
1995 refers to the Predecessor Corporation for the period September 24, 1994
through December 20, 1994 combined with the Successor Corporation for the period
December 21, 1994 through March 29, 1995.
13
SALES
The Company's sales for the six months ended April 3, 1996 were $720.4 million
compared to $684.5 million for the six months ended March 29, 1995, an increase
of $35.9 million or 5.2%. The increase is primarily due to a 9.6% increase in
average net revenue per ton partially offset by a 4.0% decrease in shipment
volume during such period.
COST OF GOODS SOLD
The Company's costs of goods sold for the six months ended April 3, 1996 were
$579.4 million compared to $537.5 million for the six months ended March 29,
1995, an increase of $41.9 million or 7.8%. This increase is attributable to the
increase in raw material cost for purchased pulp during the first quarter and
the aforementioned lower production levels, a power outage and inventory
valuation adjustments experienced during the second quarter. These increases
were partially offset by a net reduction in labor costs.
The increase in pulp costs during the first quarter primarily resulted from
higher prices on purchased pulp, as compared to the same period last year, and
the effect of the Company's market-based long-term pulp supply contract at the
Company's Mobile, Alabama facility which was entered into with Scott at the time
of the Acquisition. Prior to the Acquisition, pulp purchases for the Company's
Mobile operations were on a shared cost basis with other Scott operations
located at the Mobile facility.
The increase in cost of goods sold resulted in gross profit as a percent of
sales decreasing to 19.6% for the six months ended April 3, 1996 from 21.5% for
the same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $58.3 million for the six
months ended April 3, 1996 compared to $52.3 million for the six months ended
March 29, 1995, an increase of $6.0 million. Selling, general and administra-
tive expenses as a percent of sales increased to 8.1% for the six months ended
April 3, 1996 as compared to 7.6% for the six months ended March 29, 1995. This
increase is primarily due to an increase in administrative expenses primarily
resulting from costs incurred to maintain the appropriate level of administra-
tive services that were previously performed by Scott.
INTEREST EXPENSE AND TAXES
Following the Acquisition, the Company's capitalization and tax basis of
accounting changed significantly. As a result, interest and tax expense prior to
the Acquisition are not comparable to results following the Acquisition.
The Company's interest expense for the six months ended April 3, 1996 was
$61.3 million compared to $46.1 million for the six months ended March 29, 1995.
This increase reflects the incremental interest costs associated with the
financing of the Acquisition. For all periods subsequent to the Acquisition
date, interest expense includes the amortization of deferred financing fees and,
for the six months ended March 29, 1995, fees associated with a bridge loan made
available to the Company at the time of the Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Effective with the Acquisition, the Company began managing its own funding
requirements. Prior to the Acquisition, the Predecessor Corporation participat-
ed in Scott's cash management system. Accordingly, cash
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received from the Predecessor Corporation's domestic operations was administered
centrally along with the financing of working capital requirements and capital
expenditures.
The Company's net cash provided by operating activities was $25.1 million for
the six months ended April 3, 1996 as compared to $92.2 million for the six
months ended March 29, 1995. This decrease is primarily due to decreases in net
income, accounts payable and accrued and other current liabilities and an
increase in inventories.
The increase in inventories at April 3, 1996 as compared to the balance at
September 27, 1995 is primarily due to the aforementioned decline in demand due
to the weakening in market conditions during the six months ended April 3, 1996
partially offset by the adjustments to the carrying value of certain inventories
to net realizable value during the three months ended April 3, 1996. The
decrease in accounts payable at April 3, 1996 compared to September 27, 1995 was
primarily attributable to a decrease in purchasing volume resulting from
decreased production levels and declining pulp prices when compared to the end
of the fiscal year 1995.
The Company's operating working capital increased to $200.3 million at April 3,
1996 compared to $160.3 million at September 27, 1995. Operating working capital
is defined as trade accounts receivable, other receivables and inventories less
accounts payable and accrued and other current liabilities.
The Company's ratio of current assets to current liabilities was 1.3 at April 3,
1996 compared to 1.5 at September 27, 1995. This decrease is primarily due to
the increase in current maturities of long-term debt partially offset by the
increase in operating working capital for such period.
Net cash used in investing activities for the six months ended April 3, 1996 was
$16.2 million compared to $1,512.4 million for the six months ended March 29,
1995. Net cash used in investing activities for the six months ended March 29,
1995 includes the effect of the cash outflows related to the Acquisition of
approximately $1,493.7 million.
Capital expenditures for the six months ended April 3, 1996 were $18.3 million
compared to $18.7 million for the six months ended March 29, 1995. Capital
spending for the six months ended April 3, 1996 and March 29, 1995 was primarily
for improvements to the Company's manufacturing and distribution facilities.
Estimated capital expenditures are expected to approximate $70.0 million during
fiscal year 1996. In addition, due to a wide variety of increasingly stringent
environmental laws and regulations, including compliance with the cluster
rules (see the Notes to Condensed Financial Statements), the Company anticipates
that capital expenditures related to environmental compliance will be approxi-
mately $85.0 million to $95.0 million through fiscal year 1999, assuming the
cluster rules are adopted. The Company believes that cash generated by opera-
tions and amounts available under its revolving credit facility will be suffi-
cient to meet its ongoing operating and capital expenditure requirements.
Net cash used in financing activities for the six months ended April 3, 1996 was
$71.1 million compared to net cash provided of $1,415.5 million for the six
months ended March 29, 1995. During the six months ended April 3, 1996, Warren
borrowed and repaid $53.5 million under its revolving credit facility and paid
approximately $74.9 million of outstanding borrowings under its term loan
facilities in compliance with an excess cash flow payment requirement. Amounts
paid in compliance with the excess cash flow requirement fulfill the majority of
payments otherwise required to be paid in June 1996 and reduce future semi-
annual installments on a pro rata basis. Cash provided by financing activities
for the six months ended March 29, 1995 includes proceeds from long-term debt of
$1,105.0 million. During the six months ended March 29, 1995, Warren repaid
$138.7 million of amounts primarily borrowed under its revolving credit
facility. In
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addition, Holdings received net proceeds from the issuance of preferred and
common stock of $37.5 million and $294.3 million, respectively, all of which was
distributed to Warren. In addition, Warren received net proceeds of
approximately $65.4 million from the issuance of preferred stock. Cash provided
by financing activities for the six months ended March 29, 1995 was primarily
utilized for the Acquisition. During the period from September 25, 1994 through
December 20, 1994, the Predecessor Corporation received a net capital infusion
from the Predecessor Corporation's parent company of approximately $47.2
million.
OTHER ITEMS
DEBT AND PREFERRED STOCK
At April 3, 1996, the Company's long-term debt was $930.6 million compared to
$1,048.8 million at September 27, 1995, a decrease of $118.2 million. Current
maturities of long-term debt increased from $78.6 million at September 27, 1995
to $121.6 million at April 3, 1996. This increase results from $100.0 million
paid in April 1996 on amounts outstanding under Warren's credit facility
obligations. The funds used for this debt payment were provided by the sale of
Warren's accounts receivable which was done in conjunction with an amendment to
Warren's credit facility as indicated in the Notes to Condensed Financial
Statements. Approximately $3.0 million of financing fees that had previously
been deferred will be written off in the third fiscal quarter as a result of
this prepayment. The excess cash balance at September 27, 1995 was primarily
used to meet Warren's credit facility obligations during the first quarter of
fiscal 1996 (see the Notes to Condensed Financial Statements).
Warren has a $250.0 million revolving credit facility to finance working capital
needs. At April 3, 1996, Warren did not have any borrowings outstanding under
this facility, resulting in an unused borrowing capacity of approximately $249.0
million, after giving effect to outstanding letters of credit, which may be used
to finance working capital needs. Warren is required to pay a commitment fee,
which is based on the achievement of a certain financial ratio, of between
0.375% and 0.5% per annum on the average daily unused commitment available under
the revolving credit facility.
In addition, Warren has a letter of credit facility to support certain of its
obligations. Warren had approximately $170.5 million of letters of credit
outstanding under its letter of credit facility at April 3, 1996 and September
27, 1995. Warren pays a commission, which is based on the achievement of a
certain financial ratio, of between 1.0% and 2.5% on outstanding letters of
credit and an issuance fee of 0.125% per annum on letters of credit issued.
Warren's credit agreement, which was amended in April 1996 as indicated in the
Notes to Condensed Financial Statements, contains restrictive covenants which
limit the Company with respect to certain matters including, among other things,
the ability to incur debt, pay dividends, make acquisitions, sell assets, merge,
grant or incur liens, guarantee obligations, make investments or loans, make
capital expenditures, create subsidiaries or change its line of business. The
credit agreement also restricts Warren from prepaying certain of its indebted-
ness. Under the credit agreement, Warren is required to satisfy certain
financial covenants which will require Warren to maintain specified financial
ratios, including a minimum interest coverage ratio, a minimum debt service
ratio and a net worth test.
The Company does not anticipate paying cash dividends on the Warren senior
preferred stock or the Holdings preferred stock for any period ending on or
prior to December 15, 1999. The Company intends to retain future earnings, if
any, for use in its business and does not anticipate paying any cash dividends
on the senior preferred stock prior to such date. In addition, the terms of the
credit agreement and the indenture (the "Indenture") relating to Warren's series
B senior subordinated notes limit the amount of cash dividends the
16
Company may pay with respect to such preferred stock and other equity securities
both before and after that date.
CONSIDERATIONS RELATING TO HOLDINGS' CASH OBLIGATIONS
Because Holdings has no material assets other than the outstanding common stock
of Warren (all of which is pledged to the lenders under the credit agreement)
and all of the operations of Holdings (other than the management of its invest-
ment 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, is not mandatorily redeem-
able (except upon the occurrence of certain specified events) and provides that
dividends need not be paid in cash until the year 2000. Holdings does, however,
have various obligations with respect to its equity securities (including
registration rights granted by Holdings) that are likely to require cash
expenditures by Holdings. The Company believes that the credit agreement, the
Indenture and the Warren senior 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Intentionally omitted. *
ITEM 2. CHANGES IN SECURITIES
Intentionally omitted. *
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Intentionally omitted. *
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Intentionally omitted. *
ITEM 5. OTHER INFORMATION
In February 1996, the Company filed a Registration Statement on Form
S-1 with the Commission. On April 5, 1996, the Company filed an
amendment to such Registration Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Intentionally omitted. *
- --------------------------------------------------------------------------------
* This report is being voluntarily filed with the Commission pursuant to the
registrant's contractual obligations to file with the Commission all financial
information that would be required to be filed on a Form 10-Q. The registrant
is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
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SIGNATURE
The registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SDW Holdings Corporation
Date: May 16, 1996 By: /s/ WILLIAM E. HEWITT
------------- -----------------------------------------
William E. Hewitt
Vice President, Treasurer and Director
(Principal Financial and Accounting
Officer)
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