UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A FINANCIAL INFORMATION *
QUARTERLY REPORT
For the quarterly period ended July 3, 1996
Commission file number: 333-834 *
SDW HOLDINGS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3795926
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 Westchester Avenue, Purchase, NY 10577-2554
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(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 *
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This report consists of 20 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 June 28, 1995 and July 3, 1996 3
Condensed Statements of Operations for the period
September 25, 1994 through December 20, 1994,
the period December 21, 1994 through June 28, 1995
and the nine months ended July 3, 1996 4
Condensed Balance Sheets at September 27, 1995
and July 3, 1996 5
Condensed Statements of Cash Flows for the period
September 25, 1994 through December 20, 1994,
the period December 21, 1994 through June 28, 1995
and the nine months ended July 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 19
ITEM 2. CHANGES IN SECURITIES 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5 OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE 20
2
SDW HOLDINGS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 28, 1995 JULY 3, 1996
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SDW HOLDINGS SDW HOLDINGS
CORPORATION AND CORPORATION AND
SUBSIDIARIES SUBSIDIARIES
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Sales $ 393.4 $ 346.4
Cost of goods sold 305.9 305.6
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Gross profit 87.5 40.8
Selling, general and
administrative expense 29.5 28.0
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Income from operations 58.0 12.8
Other income (expense), net 1.5 (1.8)
Interest expense 30.2 23.0
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Income (loss) before income taxes,
an extraordinary item and other
charges 29.3 (12.0)
Income tax expense (benefit) 11.3 (4.9)
Dividends and accretion on
Warren preferred stock 2.3 3.4
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Income (loss) before
extraordinary item 15.7 (10.5)
Extraordinary item, net of
tax (Note 5) -- (2.0)
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Net income (loss) 15.7 (12.5)
Dividends on preferred stock 1.4 1.7
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Net income (loss) applicable to
common stockholders $ 14.3 $ (14.2)
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Earnings (loss) per common share:
Income (loss) before
extraordinary item $ 0.44 $ (0.29)
------ ------
------ ------
Net income (loss) $ 0.44 $ (0.35)
------ ------
------ ------
Net income (loss) applicable
to common stockholders $ 0.40 $ (0.40)
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Weighted average number of
shares outstanding 35.9 35.9
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See accompanying notes to condensed financial statements.
3
SDW HOLDINGS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PERIOD SEPTEMBER
25, 1994 THROUGH PERIOD DECEMBER NINE MONTHS
DECEMBER 20, 21, 1994 THROUGH ENDED JULY 3,
1994 JUNE 28, 1995 1996
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S. D. WARREN
COMPANY AND SDW HOLDINGS SDW HOLDINGS
CERTAIN RELATED CORPORATION AND CORPORATION AND
AFFILIATES SUBSIDIARIES SUBSIDIARIES
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
--------------- -------------- --------------
Sales $ 313.6 $ 764.3 $ 1,066.8
Cost of goods sold 258.7 584.7 885.0
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Gross profit 54.9 179.6 181.8
Selling, general and administrative expense 22.1 59.7 86.3
------ ------- -------
Income from operations 32.8 119.9 95.5
Other income (expense), net (0.5) 2.2 (1.3)
Interest expense 2.3 74.0 84.3
------ ------- -------
Income before income taxes, an extraordinary item
and other charges 30.0 48.1 9.9
Income tax expense 12.0 19.2 4.0
Dividends and accretion on Warren preferred stock --- 5.7 10.0
------ ------- -------
Income (loss) before extraordinary item $ 18.0 23.2 (4.1)
------
------
Extraordinary item, net of tax (Note 5) --- (2.0)
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Net income (loss) 23.2 (6.1)
Dividends on preferred stock 3.0 5.1
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Net income (loss) applicable to common stockholders $ 20.2 $ (11.2)
------- -------
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Earnings (loss) per common share:
Income (loss) before extraordinary item $ 0.65 $ (0.11)
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Net income (loss) $ 0.65 $ (0.17)
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Net income (loss) applicable to common stockholders $ 0.56 $ (0.31)
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Weighted average number of shares outstanding 35.9 35.9
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See accompanying notes to condensed financial statements
4
SDW HOLDINGS CORPORATION
CONDENSED BALANCE SHEETS
(IN MILLIONS, UNAUDITED)
SEPTEMBER 27, 1995 JULY 3, 1996
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ASSETS
Current Assets:
Cash and cash equivalents $ 62.2 $ 1.8
Trade accounts receivable, net 129.4 37.8
Other receivables 24.2 21.0
Inventories 226.5 220.6
Other current assets 11.8 11.1
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Total current assets 454.1 292.3
Plant assets, net 1,150.7 1,115.7
Timber resources, net 98.4 98.3
Goodwill, net 114.0 110.5
Deferred financing fees, net 53.1 46.3
Other assets, net 24.7 21.8
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Total assets $ 1,895.0 $ 1,684.9
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 78.6 $ 46.6
Accounts payable 112.2 87.8
Accrued and other current liabilities 107.6 92.5
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Total current liabilities 298.4 226.9
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Long-term debt:
Term loans 553.8 411.4
Senior subordinated notes 375.0 375.0
Other 120.0 116.4
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1,048.8 902.8
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Other liabilities 103.8 107.3
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Total liabilities 1,451.0 1,237.0
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Commitments and contingencies (Note 7)
Warren series B redeemable exchangeable
preferred stock (liquidation value, $83.5
and $92.9, respectively) 74.5 84.5
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Stockholders' equity:
Preferred stock, at liquidation value 42.1 47.2
Common stock --- ---
Capital in excess of par value 294.3 294.3
Retained earnings 33.1 21.9
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Total stockholders' equity 369.5 363.4
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Total liabilities and stockholders' equity $ 1,895.0 $ 1,684.9
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See accompanying notes to condensed financial statements
5
SDW HOLDINGS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS, UNAUDITED)
PERIOD SEPTEMBER
25, 1994 THROUGH PERIOD DECEMBER NINE MONTHS
DECEMBER 20, 21, 1994 THROUGH ENDED JULY 3,
1994 JUNE 28, 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 $ 23.2 $ (6.1)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, cost of timber harvested and
amortization 28.8 56.6 86.9
Dividends and accretion on Warren preferred stock --- 5.7 10.0
Inventory market value adjustments --- --- 10.5
Other 11.6 3.6 2.0
Changes in assets and liabilities:
Trade accounts receivable, net (1.7) (22.0) 91.6
Inventories 3.7 (48.7) (4.6)
Accounts payable, accrued and other current
liabilities 6.0 34.2 (42.6)
Accruals for restructuring programs (12.7) --- ---
Other assets and liabilities (15.6) 1.8 (0.3)
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Net cash provided by operating activities 38.1 54.4 147.4
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Cash Flows from Investing Activities:
Acquisition, net of related costs --- (1,493.7) ---
Proceeds from disposals of plant assets --- 0.6 2.2
Investments in plant assets and timber resources (14.5) (14.9) (32.2)
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Net cash used in investing activities (14.5) (1,508.0) (30.0)
------ ------- --------
Cash Flows from Financing Activities:
Proceeds from debt --- 1,130.1 ---
Repayments of debt (0.5) (161.7) (177.8)
Proceeds from issuance of common stock --- 294.3 ---
Proceeds from issuance of Warren series B preferred
stock, net of expenses --- 65.4 ---
Proceeds from issuance of preferred stock --- 37.5 ---
Bank overdraft --- 13.0 ---
Predecessor Corporation's parent company capital
infusions, net 47.2 --- ---
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Net cash provided by (used in) financing activities 46.7 1,378.6 (177.8)
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Net change in cash and cash equivalents 70.3 (75.0) (60.4)
Cash and cash equivalents, at beginning of period 4.7 75.0 62.2
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Cash and cash equivalents, at end of period $ 75.0 $ --- $ 1.8
------ ------- --------
------ ------- --------
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 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
On 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 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 the periods subsequent to
the Acquisition date 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 Holdings' 1995 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 only 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 Corporation should be read in conjunction with the audited
financial statements included in Holdings' Form 10-K Financial Information and
the previously issued Quarterly Reports on Form 10-Q Financial Information for
the quarters ended January 3, 1996 and April 3, 1996. The unaudited condensed
results of operations for the three months and nine months ended July 3, 1996
are not necessarily indicative of results that could be expected for a full
year.
The Company's income before income taxes, an extraordinary item and other
charges for the three months ended June 28, 1995 and the period December 21,
1994 through June 28, 1995 have been increased by $3.5 million and $13.2
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. ACCOUNTS RECEIVABLE
On April 23, 1996, in conjunction with an amendment to Warren's credit facility,
Warren entered into a five year agreement which provides for the sale of all of
Warren's trade accounts receivable, net of all related allowances, through a
bankruptcy remote subsidiary to an unrelated financial institution (the "A/R
facility"). The cash proceeds from the sale are based upon a computation of
eligible trade accounts receivable and the subsidiary retains an undivided
interest in the remaining "ineligible" trade accounts receivable. As
collections reduce the trade accounts receivable sold, participating interests
in new trade accounts receivable are sold. As of July 3, 1996, $130.9 million
of trade accounts receivable had been sold to the unrelated financial
institution and the Company's subsidiary retained an undivided interest in $37.8
million of trade accounts receivable, net. The sale is reflected as a reduction
in accounts receivable in the accompanying Condensed Balance Sheet and as
operating cash flows in the accompanying Condensed Statement of Cash Flows.
Fees associated with this transaction are recorded in other income (expense) in
the Company's Condensed Statement of Operations.
NOTE 3. RELATED PARTY TRANSACTIONS
During the three and nine months ended July 3, 1996, the Company sold products
to certain subsidiaries of Sappi ("affiliates") at market prices primarily in
U.S. Dollars. These affiliates then sold the Company's products to external
customers. Proceeds from sales to affiliates are remitted to the Company net of
sales commissions. The Company sold approximately $28.9 million and $71.1
million to affiliates and incurred fees of approximately $1.6 million and $4.3
million relating to these sales for the three and nine months ended July 3,
8
1996, respectively. Trade accounts receivable from affiliates at July 3, 1996,
including amounts sold (see Note 2), were approximately $24.3 million. The
Company expects to finalize the written agreements for transactions with
these affiliates in the near future.
During the third fiscal quarter, the Company commenced transacting business in
currencies other than the U. S. Dollar, primarily the Japanese Yen. The Company
manages the potential exposure associated with transacting in foreign currencies
through the use of foreign currency forward contracts. These contracts are used
to offset the effects of exchange rate fluctuations on a portion of the
underlying Yen denominated exposure. These exposures include firm intercompany
trade accounts receivable. Realized and unrealized gains and losses on these
contracts at July 3, 1996 were immaterial.
During fiscal year 1996, the Company began purchasing products from certain
affiliates in U.S. Dollars primarily for sale to external customers. The
Company receives commissions from the affiliates on such sales. These
transactions to date have not been material.
NOTE 4. INVENTORIES (IN MILLIONS)
SEPTEMBER 27, 1995 JULY 3, 1996
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Finished products $ 89.8 $ 111.3
Work in process 51.0 38.4
Pulp, logs and pulpwood 33.2 20.8
Maintenance parts and other supplies 52.5 50.1
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$ 226.5 $ 220.6
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NOTE 5. LONG-TERM DEBT
Warren amended its credit agreement in April 1996 and changed certain provisions
relating to restrictive covenants including, among other things, the ability to
incur additional debt, pay dividends and sell certain assets. In addition,
certain provisions relating to interest rates, fees, collateral, prepayments and
affirmative covenants were also amended.
In April 1996, the proceeds from the A/R facility along with $10.0 million of
available cash on hand were used to prepay $100.0 million of the term loans
under Warren's credit agreement. Approximately $3.3 million of financing fees
that had previously been deferred were written off as a result of this
prepayment and recorded as an extraordinary item in the accompanying Condensed
Statement of Operations net of a $1.3 million tax effect. In addition, during
the nine months ended July 3, 1996, payments totaling approximately $74.9
million were made pursuant to an excess cash flow requirement, as defined.
Amounts paid pursuant to the excess cash flow requirement during the nine months
ended July 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. The current maturities of long-term debt
balance of $46.6 million at July 3, 1996 primarily represents the amounts
payable in December 1996 and June 1997 under Warren's term loan facilities.
NOTE 6. ENVIRONMENTAL AND SAFETY MATTERS
The Company is subject to a wide variety of increasingly stringent environmental
laws and regulations relating to, among other matters, air emissions, wastewater
discharges, past and present landfill operations and hazardous waste management.
These laws include the Federal Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act and their respective state counterparts. The
Company will
9
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, are 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 County's 1994 ordinance governing its industrial
wastewater pretreatment program. The lawsuit challenges, among other things,
the treatment capacity availability and local effluent limit provisions of the
ordinance. In July 1996, the Court rendered a decision substantially in favor
of the Company and the other plaintiffs, but the County is expected to appeal
the Court's decision. If the Company and the other plaintiffs do not prevail in
that appeal, the Company may not be able to obtain additional treatment capacity
for future expansions and the County could impose stricter permit limits. In
the meantime, the County has issued a permit with effluent limits that the
Company is able to meet without additional pretreatment. The imposition of
currently proposed permit limits or the failure of the Muskegon lawsuit could
require substantial additional expenditures, including short-term expenditures,
and may lead to substantial fines for any noncompliance.
In November 1993, the EPA announced proposed regulations that would impose new
air and water quality standards aimed at further reductions of pollutants from
pulp and paper mills, particularly those conducting bleaching operations
(generally referred to as the "cluster rules"). Although the EPA has not made
any commitments, final promulgation of the cluster rules may occur 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
wastewater 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
10
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 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 the Company's aggregate exposure for
these matters will not be material. Moreover, in accordance with the agreement
pursuant to which Warren was acquired, Warren's former parent, Scott, agreed to
indemnify and defend the Company for and against, among other things, the full
amount of any damages or costs resulting from the off-site disposal of hazardous
substances occurring prior to the date of closing, including all damages and
costs related to these seven sites. Since the date of closing of the
acquisition agreement, Scott, or its successor, 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, are
expected to have a material adverse effect on the Company's financial position,
results of operations or cash flows.
The Company does not believe that it will have any liability under emergency
legislation enacted in 1995 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.
NOTE 7. COMMITMENTS AND CONTINGENCIES
In November 1996, a ballot initiative in the State of Maine will include a
binding referendum measure that, if approved by voters, will impose restrictions
on the harvesting of timberlands in unincorporated areas in the State of Maine,
which includes all of the Company's timberlands. Although the outcome of the
proposed referendum cannot be predicted with any certainty, the effect of
complying with the provisions of the referendum, if approved, may have a
material adverse effect on the Company's financial condition, results of
operations and cash flows.
Warren's contract, covering approximately 750 employees, at the Somerset
facility expired September 30, 1995. While negotiations are in process for a
new contract, the Somerset employees are continuing to work under the terms of
the expired agreement. The Company anticipates reaching agreement on a new
contract and does not expect a work stoppage to occur. However, in the event an
agreement cannot be reached and a prolonged work stoppage that results in a
curtailment of output ensues, the Company's financial position, results of
operations and cash flows could be adversely affected.
Discussions are currently in process between the Company and the Securities and
Exchange Commission related to the appropriate accounting treatment of certain
transactions primarily related to prior periods. Although the outcome of these
discussions cannot be predicted with any certainty, the financial statements of
the Company may be amended as a result.
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
11
consulting with legal counsel, that they will not have a material effect on the
Company's financial position, results of operations or cash flows.
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
Corporation (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 the periods
prior to the Acquisition.
The Company wishes to caution readers that this discussion and analysis contains
forward-looking statements which, at the time made, speak about the future and
are based upon management's interpretation of what it believes are significant
factors affecting the Company's business. The Company believes that various
factors, among others, could affect the Company's actual results and could cause
the Company's actual results for 1996 and beyond, to differ materially from
those expressed in any forward-looking statement made by or on behalf of the
Company. Such factors include, but are not limited to: global economic and
market conditions, production and capacity in the United States and Europe;
production and pricing levels of pulp and paper; any major disruption in
production at key facilities; alterations in trade conditions in and between the
United States and other countries where the Company does business; and changes
in environmental, tax and other laws and regulations.
The following discussion and analysis should be read in conjunction with the
accompanying Condensed Financial Statements and the Notes thereto, Holdings'
Form 10-K Financial Information and the previously issued Quarterly Reports
on Form 10-Q Financial Information for the quarters ended January 3, 1996 and
April 3, 1996.
MARKET CONDITIONS
Demand for the Company's products decreased during the nine months ended July 3,
1996 as compared to demand levels during the second half of fiscal 1995. This
decrease is 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. Accordingly, the Company
realized lower net selling prices per ton during the first nine months of fiscal
year 1996 as compared to prices realized during the second half of fiscal year
1995. However, because the impact of the increase in prices in 1995 was not
realized until the latter half of fiscal year 1995, net selling prices realized
during the nine months ended July 3, 1996 remained relatively flat as compared
to those prices realized during the same period last year. In addition, the
cost of raw materials decreased during the nine months ended July 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 requirements which reduces its exposure to fluctuations in the market
price for pulp.
As a result of the weaker market conditions, the Company temporarily reduced
production levels at certain of its manufacturing facilities during the first
quarter of this fiscal year. The reduction of inventory levels by the Company's
customers and the weaker market conditions continued into the summer months
which are typically strong due to increased demand from catalog printers. In
addition, new capacity commencing later this year in
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the United States and overseas is expected to increase competition for market
share and may delay any improvement in market conditions. The paper market is
highly cyclical and to the extent that the weaker market trend does not reverse
or becomes more pervasive within the Company's existing product lines, the
Company's sales, gross margins and cash flows will continue to be adversely
effected.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 3, 1996 COMPARED TO THE THREE MONTHS ENDED JUNE 28, 1995
SALES
The Company's sales for the three months ended July 3, 1996 were $346.4 million
compared to $393.4 million for the three months ended June 28, 1995, a decrease
of $47.0 million or 11.9%. The decrease is primarily due to a decrease in
average net revenue per ton partially offset by a 1.8% increase in shipment
volume during such period.
COST OF GOODS SOLD
The Company's cost of goods sold for the three months ended July 3, 1996 was
$305.6 million compared to $305.9 million for the three months ended June 28,
1995. A decrease in the cost of purchased pulp was offset primarily by
unplanned maintenance costs and adjustments to the carrying value of certain
inventories to net realizable value.
The decrease in sales of $47.0 million for the three months ended July 3, 1996
as compared to the corresponding period in 1995 resulted in a decrease in gross
profit as a percent of sales to 11.8% during the third fiscal quarter of 1996
from 22.2% during the same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $28.0 million for the three
months ended July 3, 1996 compared to $29.5 million for the three months ended
June 28, 1995, a decrease of $1.5 million. Selling, general and administrative
expenses as a percent of sales increased to 8.1% for the three months ended July
3, 1996 compared to 7.5% for the three months ended June 28, 1995.
INTEREST EXPENSE
The Company's interest expense for the three months ended July 3, 1996 was
$23.0 million compared to $30.2 million for the three months ended June 28,
1995. The reduction in interest expense for the three months ended July 3, 1996
as compared to the same period last year is primarily due to lower levels of
outstanding debt and a reduction in applicable interest rates. Interest expense
includes the amortization of deferred financing fees.
NINE MONTHS ENDED JULY 3, 1996 COMPARED TO THE NINE MONTHS ENDED JUNE 28, 1995
The following discussion compares the nine months ended July 3, 1996 with the
nine months ended June 28, 1995. As used herein, the nine months ended June 28,
1995 refers to the Predecessor Corporation for the period September 25, 1994
through December 20, 1994 combined with the Successor Corporation for the period
December 21, 1994 through June 28, 1995.
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SALES
The Company's sales for the nine months ended July 3, 1996 were $1,066.8 million
compared to $1,077.9 million for the nine months ended June 28, 1995. Both
average net revenue per ton and shipment volume were relatively flat during the
nine months ended July 3, 1996 as compared to the same period last year.
COST OF GOODS SOLD
The Company's cost of goods sold for the nine months ended July 3, 1996 was
$885.0 million compared to $843.4 million for the nine months ended June 28,
1995, an increase of $41.6 million or 4.9%. This increase is primarily
attributable to costs related to lower production during the first fiscal
quarter, the net effect of a power outage which resulted in a loss of
production for approximately 24 days during the second fiscal quarter,
unplanned maintenance costs and inventory valuation adjustments.
The increase in pulp costs which occurred during the first fiscal quarter as
compared to the same period last year was offset by a decrease in the market
price of pulp during the third quarter as compared to the same period in fiscal
year 1995. The Company expects the lower pulp costs to continue through the
remainder of the fiscal year.
The increase in cost of goods sold resulted in gross profit as a percent of
sales decreasing to 17.0% for the nine months ending July 3, 1996 from 21.8% for
the same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $86.3 million for the nine
months ended July 3, 1996 compared to $81.8 million for the nine months ended
June 28, 1995, an increase of $4.5 million. Selling, general and administrative
expenses as a percent of sales increased to 8.1% for the nine months ended July
3, 1996 as compared to 7.6% for the nine months ended June 28, 1995. This
increase is primarily due to an increase in administrative expenses primarily
resulting from the costs incurred to maintain the appropriate level of
administrative 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 nine months ended July 3, 1996 was
$84.3 million compared to $76.3 million for the nine months ended June 28, 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 nine months ended June 28, 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
participated in Scott's cash management system. Accordingly, cash received from
the Predecessor Corporation's domestic operations was administered centrally
along with the financing of working capital requirements and capital
expenditures.
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The Company's net cash provided by operating activities was $147.4 million
for the nine months ended July 3, 1996 as compared to $92.5 million for the
nine months ended June 28, 1995. This increase is primarily due to $90.0
million of proceeds received resulting from the sale of the Company's
accounts receivable as indicated in the Notes to Condensed Financial
Statements. This increase was partially offset by the decrease in net
income, accounts payable and accrued and other current liabilities.
Inventory tons increased at July 3, 1996 as compared to September 27, 1995
primarily due to a decline in demand as a result of weakened market conditions.
Although inventory tons increased, the inventories balance reflected on the
Condensed Balance Sheet indicates a decrease during such period due to
adjustments to the carrying value of certain inventories to net realizable
value. The decrease in accounts payable at July 3, 1996 compared to September
27, 1995 was primarily attributable to declining pulp prices when compared to
the end of fiscal year 1995. Accrued and other current liabilities decreased
during the nine months ended July 3, 1996 as compared to the balance at
September 27, 1995 primarily as a result of a significant semi-annual interest
payment made in June 1996.
The Company's operating working capital decreased to $99.1 million at July 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. This decrease
primarily resulted from the sale of the Company's receivables.
The Company's ratio of current assets to current liabilities was 1.3 at July 3,
1996 compared to 1.5 at September 27, 1995. This decrease reflects the effect of
the sale of the Company's accounts receivable, partially offset by a decrease in
the current maturities of long-term debt, accounts payable and accrued and other
current liabilities.
Net cash used in investing activities for the nine months ended July 3, 1996 was
$30.0 million compared to $1,522.5 million for the nine months ended June 28,
1995. Net cash used in investing activities for the nine months ended June 28,
1995 includes the effect of the cash outflows related to the Acquisition of
approximately $1,493.7 million.
Capital expenditures for the nine months ended July 3, 1996 were $32.2 million
compared to $29.4 million for the nine months ended June 28, 1995. Capital
spending for the nine months ended July 3, 1996 and June 28, 1995 was primarily
for improvements to the Company's manufacturing and distribution facilities.
Estimated capital expenditures are expected to approximate $50.0 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 aggregate capital expenditures related to environmental compliance will be
approximately $85.0 million to $95.0 million through fiscal year 1999, assuming
the cluster rules are adopted. 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 for the nine months ended July 3, 1996 was
$177.8 million compared to net cash provided of $1,425.3 million for the nine
months ended June 28, 1995. During the nine months ended July 3, 1996, Warren
borrowed and repaid $56.1 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. In addition, in April 1996 the Company
utilized the cash received from the aforementioned sale of the Company's
accounts receivable and amounts on hand to repay $100 million of Warren's
outstanding long term debt (see Notes to Condensed Financial Statements). Cash
provided by
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financing activities for the nine months ended June 28, 1995 includes proceeds
from long-term debt of $1,130.1 million. During the nine months ended June 28,
1995, Warren repaid $162.2 million of amounts primarily borrowed under its
revolving credit facility. In 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 nine months
ended June 28, 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 July 3, 1996, the Company's long-term debt was $902.8 million compared to
$1,048.8 million at September 27, 1995, a decrease of $146.0 million. The
current maturities of long-term debt balance of $46.6 million at July 3, 1996
primarily represents the amounts payable in December 1996 and June 1997 under
Warren's term loan facilities. The current maturities of long-term debt balance
as of September 27, 1995 primarily reflects payments totaling $74.9 million made
during the first quarter of fiscal year 1996 pursuant to an excess cash flow
requirement as indicated in the Notes to Condensed Financial Statements. In
addition, the Company paid $100.0 million in April 1996 on amounts outstanding
under Warren's credit facility obligations. The funds used for this debt
payment were provided by the aforementioned sale of Warren's accounts
receivable. Approximately $3.3 million of financing fees that had previously
been deferred were written off in the third fiscal quarter as a result of this
prepayment. This write-off of $3.3 million has been recorded as an
extraordinary item in the Company's Condensed Statement of Operations net of a
$1.3 million tax effect as indicated in the Notes to Condensed Financial
Statements.
Warren has a $250.0 million revolving credit facility to finance working capital
needs. At July 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 each of July 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 between 0.125% and 0.25% 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
indebtedness. 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.
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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 Company may
pay with respect to the senior preferred stock and other equity securities both
before and after that date.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and debt. During the third
fiscal quarter, the Company commenced transacting in Japanese Yen and entered
into foreign currency forward contracts to manage the currency fluctuation risk
associated with such transactions as indicated in the Notes to Condensed
Financial Statements. In addition, the Company uses interest rate caps and
swaps, which are required by the terms of the Credit Agreement, as a means of
managing interest rate risk associated with the current debt balances. The
Company adopted Statement of Financial Accounting Standards No. 119 ("FAS 119")
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments" in 1995.
OTHER ITEMS
In November 1996, a ballot initiative in the State of Maine will include a
binding referendum measure that, if approved by voters, will impose restrictions
on the harvesting of timberlands in unincorporated areas in the State of Maine,
which includes all of the Company's timberlands. Although the outcome of the
proposed referendum cannot be predicted with any certainty, the effect of
complying with the provisions of the referendum, if approved, may have a
material adverse effect on the Company's financial condition, results of
operations and cash flows.
Warren's contract, covering approximately 750 employees, at the Somerset
facility expired September 30, 1995. While negotiations are in process for a
new contract, the Somerset employees are continuing to work under the terms of
the expired agreement. The Company anticipates reaching agreement on a new
contract and does not expect a work stoppage to occur. However, in the event an
agreement cannot be reached and a prolonged work stoppage that results in a
curtailment of output ensues, the Company's financial position, results of
operations and cash flows could be adversely affected.
Discussions are currently in process between the Company and the Securities and
Exchange Commission related to the appropriate accounting treatment of certain
transactions primarily related to prior periods. Although the outcome of these
discussions cannot be predicted with any certainty, the financial statements of
the Company may be amended as a result.
CONSIDERATIONS RELATING TO HOLDINGS' CASH OBLIGATIONS
Because Holdings has no material assets other than the outstanding common stock
of Warren (all of which is pledged to the lenders under the credit agreement)
and all of the operations of Holdings (other than the management of its
investment in Warren) are currently conducted through Warren and its
subsidiaries, Holdings' ability to meet its cash obligations is dependent upon
the earnings of Warren and its subsidiaries and the distribution or other
provision of those earnings to Holdings. Holdings has no material indebtedness
outstanding (other than advances that may be owed from time to time to Warren
and guarantees in respect of indebtedness of Warren and its subsidiaries) and
preferred stock, which was issued in connection with the Acquisition, is not
mandatorily redeemable (except upon the occurrence of certain specified events)
and provides that dividends need not be paid in cash until the year 2000.
Holdings does, however, have various
17
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 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
Intentionally omitted. *
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Intentionally omitted. *
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* This report is being voluntarily filed with the Commission pursuant to the
registrant's contractual obligations to file with the Commission all financial
information that would be required to be filed 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: August 16, 1996 By: /s/ WILLIAM E. HEWITT
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William E. Hewitt
Vice President, Treasurer and Director
(Principal Financial and Accounting Officer)
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