10-K 1 a2032841z10-k.txt FORM 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------------------------------------------------- FORM 10-K FINANCIAL INFORMATION* FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 2000 (MARK ONE)* |_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 2000 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO __________________ COMMISSION FILE NUMBER - NOT APPLICABLE* S.D. WARREN COMPANY (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2366983 (State or other jurisdiction of (IRS Employer Identification incorporation or organization) No.) 225 FRANKLIN STREET, BOSTON, MA 02110 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 423-7300 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |_|* No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes |_|* No |_| The number of shares of Common Stock outstanding as of December 8, 2000 was 100 shares. ---------------------------------- * 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 by Section 13 or 15(d) of the Securities Exchange Act of 1934. The registrant is not required to file reports pursuant to Section 13 and 15(d) of the Securities Exchange Act of 1934. PART I ITEM 1. BUSINESS Intentionally Omitted. * ITEM 2. PROPERTIES Intentionally Omitted. * ITEM 3. LEGAL PROCEEDINGS Intentionally Omitted. * ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS Intentionally Omitted. * PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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 by Section 13 or 15(d) of the Securities Exchange Act of 1934. The registrant is not required to file reports pursuant to Section 13 and 15(d) of the Securities Exchange Act of 1934. 2 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth-selected consolidated statements of operations data, consolidated share data and consolidated balance sheet data for S.D.Warren and its subsidiaries (the "Company" or "Warren"). The selected financial data for the year ended October 2, 1996 (which includes 53 weeks) and the years ended October 1, 1997, September 30, 1998, September 29, 1999 and September 27, 2000 are derived from the audited consolidated financial statements of Warren. The following table should be read in conjunction with the consolidated financial statements and related footnotes included in Item 8 of this Form 10-K. CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The S.D. Warren Company is an indirect subsidiary of Sappi Ltd. ("Sappi") through S.D.W. Holdings ("Holdings"). The Company manufactures printing, publishing and specialty papers and has pulp operations vertically integrated with certain of its manufacturing facilities. The Company currently operates four paper mills with total annual production capacity of approximately 1.5 million tons of paper. The Company also owns a sheeting facility in Allentown, Pennsylvania, with annual sheeting capacity of approximately 95,000 tons, and has other sheeting capabilities located at its Muskegon, Michigan mill (226,000 tons annually) and Mobile, Alabama mill (144,000 tons annually). The Company also operates several regional distribution facilities. On November 12, 1998, the Company sold 905,000 acres of its timberlands in the state of Maine to Plum Creek Timber Company, L.P. ("Plum Creek"). (See "Other Items Evaluation and Sale of Noncore Assets.") On December 20, 1994, SDW Acquisition Corporation ("SDW Acquisition") acquired from Scott Paper Company ("Scott"), which has since been acquired by Kimberly-Clark, all of the outstanding capital stock of Warren. Warren's parent company is an indirect subsidiary of Sappi Ltd. ("Sappi"). The Company wishes to caution readers that this discussion and analysis contains certain "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. The words "believe," "anticipate," "intend," "estimate," "plan," "assume" and other similar expressions which are predictions of or indicate future events and future trends which do not relate to historical matters identify forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are in some cases beyond the control of the Company and may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Certain factors that may cause such differences include but are not limited to the following: global economic and market conditions; production and capacity in the United States, Europe and the Far East; production and pricing levels of pulp and paper; any major disruption in production at the Company's key facilities; alterations in trade conditions in the United States and between the United States and other countries where the Company does business and changes in environmental, tax and other laws and regulations. 4 SAPPI REORGANIZATION On April 27, 1998, Sappi announced the business integration of Warren and its subsidiaries, doing business as Sappi Fine Paper North America ("SFPNA"), with Sappi's four international fine paper operations (KNP Leykam, Hannover Papier, Sappi UK's Blackburn mill and Sappi Fine Paper in South Africa) to create Sappi Fine Paper plc ("Sappi Fine Paper"). Sappi Fine Paper has established a corporate head office in London. The purpose of the reorganization is to focus on Sappi's main business sectors - fine paper and forest products. Warren products are now being marketed under the name Sappi Fine Paper North America. The legal entities of Holdings, Warren and Warren's subsidiaries continue to remain in existence. MARKET OVERVIEW The market for coated paper has historically experienced price fluctuations driven by global supply-demand imbalances, inventory shifts and the availability and relative pricing of imported paper products. Coated free sheet industry shipments from U.S. producers declined during fiscal year 2000 versus fiscal year 1999. The Company set coated paper volume records in the fiscal year 2000. Increased coated free sheet imports, together with enhanced domestic production output levels, have over the past few years played a key role in placing downward pressure on coated free sheet industry pricing. During the first three quarters of the fiscal year, supply and demand were in relative balance, which allowed the Company to announce price increases for sheet and web papers. During the last quarter of fiscal year 2000, supply exceeded demand, which put downward pressure on prices. Uncoated and Technical Papers volume was down slightly in fiscal year 2000 vs. fiscal year 1999. Growth in the first half of the year was offset by a demand slow down in the second half, which led to increased inventories and depressed prices. Within this market, the Company successfully increased its sales of value added products. The Company's release papers products experienced 8% volume growth in fiscal year 2000 as compared to fiscal year 1999. The high end product line continues to benefit from continued product quality improvements and strong economic conditions in both Europe and South America. The commodity product line also grew due to the strong automotive market in the United States. Price increases were implemented in both lines but were somewhat offset by exchanges rate changes in the European market. Any failure of the industry to maintain its current levels of shipments and pricing or any prolonged or severe weakness in the market for any of the Company's products in the future may adversely affect the Company's consolidated financial position, results of operations and cash flow. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes thereto. FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999 NET SALES Net sales for fiscal year 2000 were $1,557.7 million compared to $1,424.7 million for fiscal year 1999, an increase of $133.0 million or 9.3%. This increase from the previous year was due to a 76,836-ton or 5.1% increase in volume, both paper and pulp, as well as a 4% increase in average net revenue per ton. 5 COSTS OF GOODS SOLD Cost of goods sold for fiscal year 2000 was $1,227.3 million, compared to $1,130.7 million for fiscal year 1999, an increase of $96.6 million or 8.5%. Cost of goods sold on a per paper ton basis increased to $795 per ton from $767 per ton for the prior fiscal year. This $28 per ton increase was primarily due to the impact of higher pulp and energy costs. RESTRUCTURINGS In October 1998, the Company announced a restructuring plan at the Westbrook, Maine mill, which included production and maintenance job consolidations and eliminations, as well as the decision to shut down one of its paper machines. This paper machine produced release liner paper and face sheets used for pressure sensitive papers. The Company recorded a charge of $3.7 million to cover costs relating to the restructuring which included $2.8 million of costs associated with the termination of 105 employees, or approximately 14% of the Westbrook mill workforce in force at that date, and an estimated loss of $0.9 million to dispose of the paper machine. All amounts were expended as of September 29, 1999. On April 13, 1999, the Company announced the closures at its facility in Westbrook, Maine of both the pulp mill and a paper machine which made coated base paper. Approximately 315 employees, both salaried and hourly, have been affected by the closures, or approximately 48% of the then remaining Westbrook mill workforce. The Company has recorded a pre-tax charge of approximately $35.9 million during the third quarter of fiscal year 1999. The restructuring costs associated with the above closures include $20.3 million of non-cash expenses relating to fixed asset write-offs and $15.6 million of accruals of one-time cash costs, primarily associated with the termination of employees. The closures are expected to improve future operating income. Of the $35.9 million charged, all amounts have been utilized as of September 27, 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense totaled $155.5 million for fiscal year 2000 compared to $151.4 million for fiscal year 1999, an increase of $4.1 million. The increase over the prior year results primarily from depreciation associated with recently installed integrated information system. EXTRAORDINARY ITEMS The premium paid of $10.5 million in connection with the purchase of $232.4 million face value of the Company's Senior Subordinated Notes (the "Notes"), together with the related $7.0 million of accelerated amortization of deferred financing fees and other costs, resulted in an extraordinary loss of $10.6 million (net of $6.9 million of tax benefits). OTHER INCOME, NET Other income, net totaling $7.7 million and $7.8 million includes interest income of $3.9 million and $5.9 million for fiscal years 2000 and 1999, respectively. Of the $7.7 million for fiscal year 2000, $1.5 million represented interest earned on the Notes Receivable received in exchange for the sale of the Company's timberlands (net of interest expense accrued on the SDW Timber III Notes Payable - see Note 4- Evaluation and Sale of Noncore Assets). INTEREST EXPENSE AND TAXES Interest expense for fiscal year 2000 was $57.6 million compared to $55.3 million for fiscal year 1999. Interest expense adjusted for $20.2 million and $6.0 million for fiscal years 2000 and 1999, respectively, for interest related to the 14% Subordinated Exchange Debentures issued on June 15, 1999 was $37.4 million for the fiscal year 2000, compared to $49.3 million for fiscal year 1999. The adjusted decrease was primarily due to lower levels of outstanding debt in the current year as well as lower rates obtained on the debt incurred in connection with the purchase of the 12% Senior Subordinated Notes. Interest expense includes the amortization of deferred financing fees, but excludes write-offs due to accelerated reductions in related financing. 6 For fiscal year 2000, income tax expense, excluding the aggregate $6.9 million and $3.8 million of tax benefits attributable to the extraordinary losses for fiscal years 2000 and 1999, respectively, was $49.6 million compared to $54.4 million for fiscal year 1999 or 41.6% and 39.7% respectively. This reflects the change in the Company's earnings level including the impact of the $75.4 million gain from the timberlands sale, offset by the $39.6 million restructuring charge in fiscal year 1999. FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998 NET SALES Net sales for fiscal year 1999 were $1,424.7 million compared to $1,458.9 million for fiscal year 1998, a decrease of $34.2 million or 2.3%. This decrease from the previous year was primarily due to a 6.6% decrease in average net revenue per paper ton, which was partially offset by a 61,800 ton increase in paper shipment volume, primarily imports, which generally has a lower margin. COSTS OF GOODS SOLD Cost of goods sold for fiscal year 1999 was $1,130.7 million, compared to $1,118.4 million for fiscal year 1998, an increase of $12.3 million or 1.1%. Cost of goods sold on a per paper ton basis decreased to $767 per ton from $792 per ton for the prior fiscal year. This $25 per ton decrease was primarily due to the impact of lower pulp costs and specific efficiency improvements. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense totaled $151.4 million for fiscal year 1999 compared to $142.6 million for fiscal year 1998, an increase of $8.8 million. The increase is primarily attributable to an increase of $6.3 million in the management advisory fee charged by Sappi affiliates (see Note 20). EXTRAORDINARY ITEMS The premium of $7.3 million paid in connection with the purchase of $92.3 million face value of the Company's 12% Series B Senior Subordinated Notes due 2004 (the "Notes"), together with the accelerated amortization of deferred financing fees relating to the purchased Notes and the repayments of term loans during fiscal year 1999, resulted in extraordinary losses aggregating $5.3 million (net of $3.8 million of tax benefits). OTHER INCOME, NET Other income, net totaling $7.8 million and $3.0 million includes interest income of $5.9 million and $4.0 million for fiscal years 1999 and 1998, respectively. INTEREST EXPENSE AND TAXES Interest expense for fiscal year 1999 was $55.3 million compared to $71.3 million for fiscal year 1998. The $16.0 million reduction in interest expense was primarily due to lower levels of outstanding debt and improved bank margins. Interest expense for fiscal year 1999 includes $6.0 million of interest related to the 14% Subordinated Exchange Debentures issued on June 15, 1999. Interest expense includes the normal amortization of deferred financing fees but excludes write-offs due to accelerated reductions in related financing. For fiscal year 1999, income tax expense, excluding the aggregate $3.8 million of tax benefits attributable to the extraordinary losses, was $54.4 million compared to $66.5 million for fiscal year 1998. This reflects the change in the Company's earnings level including the impact of the $75.4 million gain from the timberlands sale, offset by the $39.6 million restructuring charge. 7 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $173.3 million for fiscal year 2000 as compared to $154.2 million for fiscal year 1999. This increase of $19.1 million is due mainly to an increase in net income, after adjusting for the gain in the sale of the Timberlands, offset by an unfavorable impact of a higher investment in working capital, compared to fiscal year 1999. The Company's operating working capital was $24.2 at September 27, 2000 compared to a deficit of $7.9 million at September 29, 1999. Operating working capital is defined as trade accounts receivable, other receivables and inventories less accounts payable and accrued and other current liabilities. This increase resulted primarily from an increase in inventories during the year ended September 27, 2000. Cash flows used for investing activities was $96.3 million of cash in fiscal year 2000 as compared to $54.2 million of cash flows provided by investing activities in fiscal year 1999. Fiscal year 1999 includes proceeds of $156.0 million received in connection with the monetization of a portion of the notes receivable received on the sale of the timberlands (see Note 4). Capital expenditures for fiscal year 2000 were $96.3 million, down from $107.3 million for fiscal year 1999. The reduction from last year is due to completion of the Company's new sheeting and warehouse facility at the Muskegon, Michigan mill and completion of the first phase of the company-wide integrated application system implementation. Of the $96.3 million, $20.0 million was related to environmental compliance expenditures at the Muskegon, Michigan mill. In addition, the Company believes that future environmental compliance expenditures, the bulk of which are for cluster rules compliance (environmental protection regulations - see Note 14), will aggregate approximately $30.0 million to $55.0 million through 2001. The Company believes that cash generated by operations and amounts available under its revolving credit facility will be sufficient to meet its ongoing operating and capital expenditure requirements. Net cash used in financing activities was $111.3 million for fiscal year 2000 compared to $169.3 million for the previous year. In fiscal year 2000, the Company made long term loan payments of $63.4 million, purchased $232.4 million face value of the Notes for cash of $242.9 million, and received long-term advances of $195.0 million. In fiscal year 1999, the Company made term loan payments of $54.2 million and purchased $92.3 million face value of the Notes for cash of $99.6 million. The current maturities of long-term debt balance of $14.8 million at September 27, 2000 consists primarily of the amounts payable in March 2001 and September 2001 under the Company's term loan facility pursuant to the Credit Agreement (as defined below). The Company may continue to purchase the Notes subject to opportune pricing. On March 29, 1999, the Company paid a $15.0 million cash dividend to its parent, Holdings. In turn, Holdings advanced $15.0 million to an affiliate of Sappi in the form of a promissory note due April 2002. The impact of inflation did not have a material effect on the Company's consolidated financial statements for fiscal years 2000, 1999 and 1998. LONG-TERM DEBT On March 6, 1998, Holdings and Warren modified Warren's credit arrangement with a group of domestic and international lenders by refinancing the $196.3 million aggregate balance outstanding under Warren's Tranche A and Tranche B term loans, and entering into the Second Amended and Restated Credit Agreement (the "Credit Agreement"). The Credit Agreement consists of (1) a seven-year amortizing Term Loan, originally in an aggregate amount of $185.0 million, (2) a $250.0 million Revolving Credit Facility and (3) a $136.3 million Letter of Credit Facility. See Note 11 - Long-Term Debt in the Notes to Consolidated Financial Statements included in this Form 10-K for further discussion of the Credit Agreement. 8 At September 27, 2000, long-term debt was $452.1 compared to $558.4 million at September 29, 1999, a decrease of $106.3 million. At September 27, 2000, Warren had borrowings outstanding of $140.0 million under the Revolving Credit Facility. At September 29, 1999, Warren did not have any borrowings outstanding under the Revolving Credit Facility. At September 27, 2000 and September 29, 1999, $15.2 million and $14.9 million, respectively, of the Revolving Credit facility availability was utilized to guarantee the issuance of letters of credit. At September 27, 2000 and September 29, 1999, availability under the Revolving Credit Facility was $94.8 million and $235.1 million, respectively. In addition, Warren had approximately $111.3 million and $120.2 million of letters of credit outstanding under its Letter of Credit Facility at September 27, 2000 and September 29, 1999, respectively. The Credit Agreement contains restrictive covenants which limit the Company with respect to certain matters including, among other things, the ability to incur debt, pay dividends, make acquisitions, sell assets, merge, grant or incur liens, guarantee obligations, make investments or loans, make capital expenditures, create subsidiaries or change its line of business. The Credit Agreement also restricts the Company from prepaying certain of its indebtedness. Under the Credit Agreement, the Company is required to satisfy certain financial covenants which will require the Company to maintain specified financial ratios, including a minimum interest coverage ratio, a maximum leverage ratio and a net worth test. As of September 27, 2000, the Company was in compliance with all debt covenants. Historically, the Company has entered into fixed rate interest protection agreements on a portion of its outstanding debt. No interest rate protection agreements were in place at September 27, 2000. Debt covered by such interest rate protection agreements was $25.0 million at September 29, 1999. On June 15, 1999 (the "Exchange Date"), the Company exchanged its 14% Series B Senior Exchangeable Preferred Stock due 2006 (the "Preferred Stock") into 14% Series B Subordinated Exchange Debentures due 2006 (the "Exchange Debentures") pursuant to its option in the Preferred Stock agreement. The Company exchanged all of the Preferred Stock at the liquidation value of $139.0 million, representing $25.00 per share plus accrued and unpaid dividends for Exchange Debentures with a principal amount of $139.0 million. The difference between the Preferred Stock's liquidation value of $139.0 million and the carrying value of $132.9 million as of the Exchange Date has been recorded as a discount on the Exchange Debentures and is being amortized as interest expense, using the effective interest rate method, over the remaining term of the Exchange Debentures. On the Exchange Date, all rights with respect to the Preferred Stock were terminated, and dividends on the Preferred Stock ceased to accrue on and after the Exchange Date. FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and debt. The Company has used interest rate swaps to the degree indicated above as a means of protection against a portion of interest rate risk associated with the current debt balances. The Company does not hold derivative financial instruments for trading purposes. OTHER ITEMS EVALUATION AND SALE OF NONCORE ASSETS On March 18, 1998, the Company sold its pressure sensitive business located at the Westbrook, Maine mill to Spinnaker Industries, Inc. ("Spinnaker"). Proceeds of the sale consisted of $44.8 million of cash and a subordinated note (the "Spinnaker Note") for $7.0 million. On March 31, 1998, the Company sold the Spinnaker Note to a third party for $6.7 million, which was received in cash on May 1, 1998. The Company recognized a pretax gain from the sale of the business unit (net of the loss on the sale of the Spinnaker Note) of $30.9 million. 9 On November 12, 1998, the Company sold its interests in approximately 905,000 acres of timberlands located in Maine and certain machinery and equipment to Plum Creek in exchange for notes receivable (the "Notes Receivable") with a fair market value of $177.1 million and cash of approximately $3.3 million. The Notes Receivable have an aggregate face amount of $171.4 million and original maturities ranging from 8.25 years to 12.25 years. Interest rates on the Notes Receivable (originally ranging from 7.17% to 7.23% per annum) were reset on February 12, 1999 and now range from 7.62% to 7.83% per annum. To consummate the sale, the Company transferred all of its timberlands and related machinery and equipment to a wholly owned limited liability company, all of the membership interest of which was then sold to Plum Creek. The Company recognized a pre-tax gain from the sale of the timberlands of $75.4 million. The Company and Plum Creek executed a fiber supply agreement (the "Supply Agreement"), with an initial term of 25 years and with three five-year renewal options. Under the Supply Agreement, the Company will purchase hardwood pulpwood at an annual minimum of 300,000 to 375,000 tons, or approximately 13% of the Company's annual requirements, at market prices. On January 21, 1999, the Notes Receivable were contributed to a wholly owned bankruptcy remote subsidiary, SDW Timber III LLC ("SDW III"). On February 12, 1999, SDW III issued an aggregate of $156.0 million of SDW III Notes Payable using the Notes Receivable as a pledge of security. The SDW III Notes Payable mature in three installments ranging from 8 to 12 years and bear interest payable semiannually at rates ranging from 7.16% to 7.36% per annum. The earnings of SDW III, which consist of interest income earned on the Notes Receivable, net of interest expense incurred on the SDW III Notes Payable, are included in other income in the accompanying consolidated statement of operations for the years ended September 27, 2000 and September 29, 1999. The Company's investment in the undivided interest in SDW III of approximately $25.3 million and $24.5 million is included in the accompanying consolidated balance sheets as of September 27, 2000 and September 29, 1999 respectively. FORCE MAJEURE EVENTS On November 2, 1999, a paper machine malfunction caused a fire at the Muskegon, Michigan mill. The fire resulted in the temporary closure of the mill, but operations were restored at the mill, excluding the affected paper machine, within 24 hours of the incident. The Company commenced producing paper on the affected paper machine during the second week of December 1999. Total losses are not expected to exceed the Company's insurance coverage limits, net of deductibles, which include both business interruption and property loss coverage. During fiscal year 2000, the Company recorded a receivable from its insurance company for property damage of $26.9 million, of which $23.0 million has been collected as of September 27, 2000. In addition, the Company has recorded a $8.0 million recovery for the business interruption claim caused by damages incurred with respect to the Muskegon fire all of which has been approved by the insurance carrier and $4.0 million of which has been received. ENVIRONMENTAL AND SAFETY MATTERS The Company is subject to a wide variety of environmental laws and regulations relating to, among other matters, air emissions, wastewater discharges, past and present landfill operations and hazardous waste management. See Note 14 - Environmental and Safety Matters in the Notes to Consolidated Financial Statements included in this Form 10-K for a discussion of these matters. LABOR RELATIONS The Company has long-term labor contracts that reflect flexible work rule provisions at each of its production sites. The current labor contracts for Somerset, Muskegon, Mobile and Westbrook expire in 2002, 2004, 2003 and 2002, respectively. The Company has experienced no work stoppage in the U.S. in the past nine years and believes that its relationship with its employees is satisfactory. 10 LONG-TERM CONTRACTS See Note 15 - Commitments and Contingencies in the Notes to Consolidated Financial Statements included in this Form 10-K for a discussion of certain long-term contracts. CONTROL BY SAPPI The Company is a wholly owned subsidiary of SDW Holdings Corporation ("Holdings"). On March 30, 2000, Sappi acquired through an indirect wholly-owned subsidiary the 24.93% equity interest in Holdings previously held by Heritage Springer Limited, a British Virgin Islands company. Sappi now indirectly owns 100% of the issued and outstanding common stock of Holdings. Considerations Relating to Holdings' Cash Obligations The Company expects that it may make certain cash payments to Holdings or other affiliates during fiscal 2001 to the extent cash is available and to the extent it is permitted to do so under the terms of the Credit Agreement and the Indentures relating to the Notes and Exchange Debentures. Such payments may include, among other things, (i) amounts under a tax sharing agreement between the Company and Holdings necessary to enable Holdings to pay the Company's taxes, (ii) an administrative fee to Holdings and amounts to cover specified costs and expenses of Holdings, (iii) an annual advisory fee for management advisory services to Sappi and/or its affiliates, the payment of which is limited to $1.0 million in any one year and (iv) any dividends that might be paid to Sappi. The accompanying consolidated balance sheets at September 27, 2000 and September 29, 1999, respectively, include an accrual of $14.4 million and $6.3 million in relation to the above annual advisory fee, the payment of which is subject to the above mentioned limitations under the terms of its current debt covenants. Because Holdings has no material assets other than the outstanding common stock of Warren (all of which is pledged to the lenders under the Company's Credit Agreement) and all of the operations of Holdings (other than the management of its investment in Warren) are currently conducted through Warren and its subsidiaries, Holdings' ability to meet its cash obligations is dependent upon the earnings of Warren and its subsidiaries and the distribution or other provision of those earnings to Holdings. Holdings has no material indebtedness outstanding (other than advances that may be owed from time to time to Warren and guarantees in respect of indebtedness of Warren and its subsidiaries). Holdings does, however, have various obligations with respect to its equity securities (including in respect of registration rights granted by Holdings) that have required and are likely to continue to require cash expenditures by Holdings. The Company believes that the Credit Agreement, the Indenture relating to the Notes and the Exchange Debentures 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 maintains specified financial ratios and complies with certain financial tests. New Accounting Pronouncements See Note 2 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K for a discussion of the Company's plans for the implementation of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk associated with changes in interest rates. The Company's objective in managing its exposure to interest rate change is to limit the impact of interest rate changes on earnings and cash flow and to lower its overall borrowings costs. Short-term borrowings, if required, are used to 11 meet working capital requirements and long-term borrowings are generally used to finance long-term investments. The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable and debt. In addition, the Company uses interest rate swaps as a means of managing interest rate risk associated with relevant outstanding debt receivables. The carrying amounts of cash, cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments. The Company's Credit Facility bears interest at rates, which fluctuate with changes in the eurodollar rate. The majority of the Company's long-term debt, approximately $244.5 million at September 27, 2000, is at fixed interest rates. The Company's interest expense on its Credit Facility and the fair value of its fixed long-term debt is sensitive to changes in market interest rates. The effect of a 10% adverse change in market interest rates on the Company's interest expense and the fair value of its long-term debt would be $1.2 million and $4.0 million, respectively. During the fiscal year ended September 27, 2000, the Company did not engage in foreign currency hedging activities. The currency exchange impact from the Company's transactions with its affiliates was immaterial. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA S.D. WARREN COMPANY AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

12 INDEPENDENT AUDITORS' REPORT To the Board of Directors of S.D. Warren Company and subsidiaries: We have audited the accompanying consolidated balance sheets of S.D. Warren Company and subsidiaries (the "Company") as of September 27, 2000 and September 29, 1999, and the related consolidated statements of operations, changes in stockholder's equity, and cash flows for each of the three years in the period ended September 27, 2000. Our audits also included the financial statement schedule listed in the Index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 27, 2000 and September 29, 1999, and the results of its operations, and its cash flows for each of the three years in the period ended September 27, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts October 13, 2000 13 S.D. WARREN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS)

See accompanying notes to consolidated financial statements 14 S.D. WARREN COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS)

See accompanying notes to consolidated financial statements 15 S.D. WARREN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)

See accompanying notes to consolidated financial statements 16 S.D. WARREN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (IN MILLIONS, EXCEPT SHARE DATA)

See accompanying notes to consolidated financial statements 17 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BUSINESS S.D. Warren Company and subsidiaries (the "Company" or "Warren") manufactures printing, publishing and specialty papers and has pulp operations vertically integrated with certain of its manufacturing facilities. Together these represent the Company's single line of business. The Company currently operates four paper mills, a sheeting facility and several distribution facilities. Prior to November 12, 1998, the Company also owned approximately 905,000 acres of timberlands in the state of Maine. On November 12, 1998, the Company sold its timberlands (see Note 4). The Company is a direct wholly owned subsidiary of SDW Holdings Corporation ("Holdings"). Holdings is an indirect subsidiary of Sappi Limited ("Sappi"). SAPPI REORGANIZATION On April 27, 1998, Sappi announced the business integration of Warren and its subsidiaries, doing business as Sappi Fine Paper North America ("SFPNA"), with Sappi's four international fine paper operations (KNP Leykam, Hannover Papier, Sappi UK's Blackburn mill and Sappi Fine Paper in South Africa) to create Sappi Fine Paper plc. The Sappi Fine Paper Division has established a corporate head office in London. The purpose of the reorganization is to focus on Sappi's main business sectors - fine paper and forest products. Warren products are now being marketed under the name Sappi Fine Paper North America. The legal entities of Holdings, Warren and Warren's subsidiaries continue to remain in existence. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements of the Company have been prepared on the accrual basis of accounting and include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by management include realization of certain assets such as trade and other accounts receivable, inventory, goodwill and deferred tax assets, as well as estimates of exposure and certain liabilities of the Company. Actual results could differ from those estimates. 18 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED FISCAL YEAR The Company and its subsidiaries' fiscal year ends on the Wednesday closest to the last day of September. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist primarily of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at the date of acquisition. Similar investments with original maturities beyond three months are considered short-term marketable securities. At September 27, 2000 and September 29, 1999, the Company had no short-term marketable securities. OTHER RECEIVABLES Other receivables primarily represent amounts due from the sale of energy produced by the Company's cogeneration facilities, certain outstanding insurance claims, income taxes receivable and sundry other receivables. INVENTORIES Inventories are valued at the lower of cost or market, using the first-in, first-out ("FIFO") cost method. Inventories of maintenance parts and other supplies are recorded at purchase cost. PLANT ASSETS Plant assets are recorded at cost. For financial accounting purposes, depreciation is principally calculated by the straight-line method over the estimated useful lives of the assets, which range from three to twenty years. Expenditures for renewals and improvements, which increase the useful life or capacity of plant assets, are capitalized. For retirements or sales of assets, which have not been fully depreciated, the cost of plant assets and the related accumulated depreciation are removed from the asset account. The Company records gains and losses on the retirement or sale of plant assets when realized. The Company periodically evaluates the recoverability of plant assets and goodwill and intangible assets discussed below based on the undiscounted cash flows that are anticipated to be generated at centers of cash flows as defined. Interest expense is capitalized on major construction projects to the extent that such timber has not yet matured. For fiscal years 1998, 1999 and 2000, the Company capitalized interest of approximately $4.1 million, $3.9 million and $0.4 million, respectively. On November 12, 1998, the Company sold its interests in the timberlands, located in Maine. As of September 27, 2000, there are no assets remaining on the balance sheet related to the timberland investment (see Note 4). COSTS OF COMPUTER SOFTWARE DEVELOPED FOR INTERNAL USE The Company capitalizes direct costs of developing internal-use computer software, including costs of external materials and services, and payroll and related costs for employees directly associated with the project to the extent their time is spent directly on the project. The costs are being amortized over the estimated useful life of the completed software. As of September 27, 2000 and September 29, 1999, $49.9 million and $49.6 million of costs have been incurred which are directly related to the Company's implementation of a company-wide integrated application system. These costs have been included in plant assets. 19 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED GOODWILL Goodwill, which resulted from Sappi's 1994 acquisition of the Company, is being amortized for financial statement purposes on a straight-line basis over 25 years. On an ongoing basis, the carrying value of goodwill is evaluated on the basis of whether anticipated operating cash flows generated by the acquired businesses are adequate to recover the recorded asset balance over its estimated useful life. The goodwill balance at September 29, 1999 and September 27, 2000 was approximately $79.0 million and $75.0 million, respectively, net of accumulated amortization of approximately $20.0 million and $24.0 million, respectively. DEFERRED FINANCING FEES The deferred financing balance at September 27, 2000 and September 29, 1999 was $12.9 million and $22.6 million, respectively, net of accumulated amortization of $53.7 million and $40.6 million, respectively. Deferred financing fees are being amortized over the life of the related debt. As a result of the partial early extinguishment of debt during fiscal years 2000 and 1999, the Company recorded pre-tax extraordinary losses of $7.0 million and $1.8 million, respectively, related to the write-off of deferred financing fees and other costs which were partially offset by a deferred tax benefit of $2.8 million and $0.7 million in fiscal years 2000 and 1999, respectively. OTHER ASSETS Other assets include intangible assets aggregating $11.0 million and $12.5 million at September 27, 2000 and September 29, 1999, respectively. These intangible assets are being amortized over their average estimated useful lives of approximately 10 years. Intangibles are stated net of accumulated amortization of approximately $10.1 million and $8.5 million at September 27, 2000 and September 29, 1999, respectively. The remaining balance of other assets at September 27, 2000 and September 29, 1999 consisted primarily of deposits and the Company's investment in SDW III, respectively. FINANCIAL INSTRUMENTS The Company uses interest rate swap agreements ("Swaps") as a means of managing interest-rate risk associated with debt balances. These instruments are matched with either fixed or variable rate debt and are recorded on a settlement basis as an adjustment to interest expense. Cash flows from Swaps are classified in the consolidated statements of cash flows in the same category as the items being hedged or on a basis consistent with the nature of the investment. No interest rate protection agreements were in place as of September 27, 2000. The Company does not hold derivative financial instruments for trading purposes. INCOME TAXES The Company uses an asset and liability approach to computing deferred income taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this approach, deferred income taxes are determined based on the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. WORKERS' COMPENSATION INSURANCE The Company has a combination of self-insured and insured workers' compensation programs. The self-insurance claim liability for workers' compensation is based on claims reported and actuarial estimates of adverse developments and claims incurred but not reported. The Company's workers' compensation liability is 20 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED discounted to reflect the passage of several years before the claims related to a particular year are paid in full. The liability has been determined based on an actuarial valuation, as the timing of payments associated therewith is reasonably estimable. The present value of such claims was determined using a discount rate of 7.75% and 5.5% for fiscal years 2000 and 1999. The gross liability was $16.5 million and $25.8 million at September 27, 2000 and September 29, 1999, respectively. RESEARCH AND DEVELOPMENT EXPENDITURES Expenditures for research and development are charged to expense as incurred. Research and development costs were $13.5 million, $13.9 million and $14.0 million for fiscal years 1998, 1999, and 2000 respectively. These expenditures are included in selling, general and administrative expense in the accompanying consolidated statements of operations. ENVIRONMENTAL EXPENDITURES Environmental expenditures that pertain to current operations or relate to future revenues are expensed or capitalized consistent with the Company's capitalization policy. Expenditures that result from the remediation of an existing condition caused by past operations, and do not contribute to current or future revenues, are expensed. Environmental accruals are recorded based on current interpretations of environmental laws and regulations when it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated. Amounts accrued are not discounted and do not include third-party recoveries. Liabilities are recognized for remedial activities when the clean up is probable and the cost can be reasonably estimated. All available information is considered including the results of remedial investigation/feasibility studies ("RI/FS"). In evaluating any disposal site environmental exposure, an assessment is made of the Company's potential share of the remediation costs by reference to the known or estimated volume of the Company's waste that was sent to the site and the range of costs to treat similar waste at other sites if a RI/FS is not available. OTHER INCOME, NET AND OTHER COMPREHENSIVE INCOME Other income, net, represents interest income on cash and cash equivalents and other non-operating income and expense items. Net Income is the only item which meets the definition of other comprehensive income. CASH PAID FOR INCOME TAXES Cash paid for income taxes for fiscal years 2000, 1999 and 1998 was $15.4 million, $28.0 million and $35.5 million, respectively. Cash received for income tax refunds in fiscal years 2000, 1999 and 1998 was $11.2 million, $9.4 million and $0.8 million, respectively. CASH PAID FOR INTEREST Cash paid for interest during fiscal years 2000, 1999 and 1998 was $68.2 million, $55.5 million and $75.8 million, respectively. SEGMENT REPORTING The Company reports segment and other information in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires disclosure of segmented information about the Company's operations based upon how management oversees and evaluates the results of such operations. The Company's segments have been aggregated into a single reportable segment, as permitted under SFAS No. 131, since they have similar economic characteristics, products, production processes, and types of customers and distribution methods. 21 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and is effective for the Company in the first quarter of fiscal year 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. The Company does not believe that the implementation of SFAS No. 133 will result in a material impact on financial position or earnings. RECLASSIFICATIONS Certain reclassifications have been made to prior year amounts to conform with the current year presentation. NOTE 3 - RESTRUCTURINGS In October 1998, the Company announced a restructuring plan at the Westbrook, Maine mill, which included production and maintenance job consolidations and eliminations, as well as the decision to shut down one of its paper machines. This paper machine produced release liner paper and face sheets used for pressure sensitive papers. The Company recorded a charge of $3.7 million to cover costs relating to the restructuring which included $2.8 million of costs associated with the termination of 105 employees, or approximately 14% of the Westbrook mill workforce in force at that date, and an estimated loss of $0.9 million to dispose of the paper machine. All amounts have been utilized as of September 29, 1999. On April 13, 1999, the Company announced the closures at its facility in Westbrook, Maine of both the pulp mill and a paper machine, which made coated base paper. The closures, or approximately 48% of the then remaining Westbrook mill workforce have affected approximately 315 employees, both salaried and hourly. The Company recorded a pre-tax charge of approximately $35.9 million during fiscal year 1999. The restructuring costs associated with the above closures include $20.3 million of non-cash expenses relating to fixed asset write-offs and $15.6 million of accruals of one-time cash costs, primarily associated with the termination of employees. All amounts were utilized as of September 27, 2000. The components of the above restructuring charges are as follows (in millions): Write-down of long-lived assets.................... $ 21.2 Employee severance, termination benefits, and other......................................... 18.4 ---------------- $ 39.6 ================ NOTE 4 - EVALUATION AND SALE OF NONCORE ASSETS On March 18, 1998, the Company sold its pressure sensitive business located at the Westbrook, Maine mill to Spinnaker Industries, Inc. ("Spinnaker"). Proceeds of the sale consisted of $44.8 million of cash and a subordinated note (the "Spinnaker Note") for $7.0 million. On March 31, 1998, the Company sold the Spinnaker Note to a third party for $6.7 million, which was received, in cash on May 1, 1998. The Company recognized a pretax gain from the sale of the business unit (net of the loss on the sale of the Spinnaker Note) of $30.9 million. On November 12, 1998, the Company sold its interests in approximately 905,000 acres of timberlands located in Maine and certain machinery and equipment to Plum Creek Timber Company, L.P. ("Plum Creek") in exchange for notes receivable (the "Notes Receivable") with a fair market value of $177.1 million and cash of approximately $3.3 million. The Notes Receivable have an aggregate face amount of $171.4 million and original 22 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED maturities ranging from 8.25 years to 12.25 years. Interest rates on the Notes Receivable (originally ranging from 7.17% to 7.23% per annum) were reset on February 12, 1999 and now range from 7.62% to 7.83% per annum. To consummate the sale, the Company transferred all of its timberlands and related machinery and equipment to a wholly owned limited liability company, all of the membership interest of which was then sold to Plum Creek. The Company recognized a pre-tax gain from the sale of the timberlands of $75.4 million. The Company and Plum Creek executed a fiber supply agreement (the "Supply Agreement"), with an initial term of 25 years and with three five-year renewal options. Under the Supply Agreement, the Company will purchase hardwood pulpwood at an annual minimum of 300,000 to 375,000 tons, or approximately 13% of the Company's annual requirements, at market prices. On January 21, 1999, the Notes Receivable were contributed to a wholly owned bankruptcy remote subsidiary, SDW Timber III LLC ("SDW III"). On February 12, 1999, SDW III issued an aggregate of $156.0 million of SDW III Notes Payable using the Notes Receivable as a pledge of security. The SDW III Notes Payable mature in three installments ranging from 8 to 12 years and bear interest payable semiannually at rates ranging from 7.16% to 7.36% per annum. The earnings of SDW III, which consist of interest income earned on the Notes Receivable, net of interest expense incurred on the SDW III Notes Payable, are included in other income in the accompanying consolidated statement of operations for the years ended September 27, 2000 and September 29, 1999. The Company's investment in the undivided interest in SDW III of approximately $25.3 million and $24.5 million is included in the assets or consolidated balance sheets as of September 27, 2000 and September 29, 1999, respectively. NOTE 5 - FORCE MAJEURE EVENT On November 2, 1999, a paper machine malfunction caused a fire at the Muskegon, Michigan mill. The fire resulted in the temporary closure of the mill, but operations were restored at the mill, excluding the affected paper machine, within 24 hours of the incident. The Company commenced producing paper on the affected paper machine during the second week of December 1999. Total losses are not expected to exceed the Company's insurance coverage limits, net of deductibles, which include both business interruption and property loss coverage. During fiscal year 2000, the Company recorded a receivable from its insurance company for property damage of $26.9 million, of which $23.0 million has been collected as of September 27, 2000. In addition, the Company has recorded a $8.0 million recovery for the business interruption claim caused by damages incurred with respect to the Muskegon fire all, of which has been approved by the insurance carrier and $4.0 million of which has been received. NOTE 6 - TRADE ACCOUNTS RECEIVABLE

In April 1996, the Company, through a bankruptcy remote subsidiary, S.D. Warren Finance Co. ("SDWF"), entered into a receivables sales agreement that provides the Company with a five-year $110 million revolving accounts receivable securitization facility (the "A/R Facility"). Under this facility and pursuant to a purchase and contribution agreement between the Company and SDWF, the Company sells to SDWF, on a non-recourse basis, all rights and interests in its accounts receivable. Pursuant to the receivables purchase agreement, SDWF, in turn, securitizes certain interests in the accounts receivable pool owned by SDWF under similar terms to a third party purchaser. 23 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The A/R Facility also contains restrictive covenants which limit SDWF with respect to certain matters including, among other things, the maintenance of a certain net worth and the ability to incur liens, extend credit terms beyond their stated maturity, change its credit policy, create subsidiaries or change its line of business. The A/R Facility also limits SDWF's ability to pay dividends, incur indebtedness or amend other agreements related to the A/R Facility without the consent of the third-party purchaser. In addition, the A/R Facility requires that SDWF maintain certain ratios related to the performance of the underlying accounts receivable, including a delinquency ratio, a default ratio and a loss-to-liquidation ratio. The Company's trade accounts receivable, shown in the table above, are net of $72.0 million and $87.0 million at September 29, 1999 and September 27, 2000, respectively, which represents accounts receivable that were securitized and sold under the A/R Facility. NOTE 7 - INVENTORIES, NET (IN MILLIONS)

NOTE 8 - PLANT ASSETS (IN MILLIONS)

NOTE 9 - INCOME TAXES Income before income taxes and extraordinary items for fiscal years 1998, 1999 and 2000 were from domestic and foreign sources. The components of the tax provisions before extraordinary items are as follows (in millions): 24 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The components of the deferred tax provisions before extraordinary items are as follows (in millions):

The components of the deferred tax assets and (liabilities) are as follows (in millions):

25 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The differences between the U.S. statutory income tax rate and the Company's effective income tax rate before extraordinary items are as follows:

As of September 27, 2000, the Company had available state tax net operating loss carryforwards of approximately $4.4 million. For state tax purposes, the loss carryforwards will expire between the years 2001 and 2011. The Company also has available federal and state alternative minimum tax credit carryforwards for tax return purposes of $80.8 million, which will carry forward to future taxable years indefinitely. NOTE 10 - ACCRUED AND OTHER CURRENT LIABILITIES (IN MILLIONS)

NOTE 11 - LONG-TERM DEBT

26 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED WARREN SERIES B SENIOR SUBORDINATED NOTES The Warren 12% Series B Senior Subordinated Notes due 2004 (the "Notes") are unsecured, subordinated obligations of Warren. CREDIT AGREEMENT On March 6, 1998, Holdings and Warren entered into the Second Amended and Restated Credit Agreement (the "Credit Agreement"), with a group of domestic and international lenders. The Credit Agreement consists of (1) a seven-year amortizing Term Loan, originally in an aggregate amount of $185.0 million, (2) a $250.0 million Revolving Credit Facility and (3) a $136.3 million Letter of Credit Facility (together collectively referred to herein as the "Credit Facilities"). Loans under the Credit Agreement bear interest at a rate equal to, at the Company's option (1) the ABR Rate plus the Applicable Margin ("ABR Loans") or (2) the Eurodollar Rate (adjusted for reserves) for the respective interest period plus the Applicable Margin ("Eurodollar Loans"). Applicable Margin means a percentage annum rate ranging (a) in the case of ABR Loans, from 0% to 1.00% and (b) in the case of Eurodollar loans, from 0.75% to 2.00%, in each case determined by the Company's achievement of a certain financial ratio determined from the most recent financial statements of the Company calculated as of the last day of each fiscal quarter on a rolling four quarters basis. ABR Rate means the highest of (1) the prime rate, (2) the secondary market rate for three-month certificates of deposit (adjusted for reserves) plus 1.00%, and (3) the federal funds rate in effect from time to time plus 0.5%. The Credit Facilities are guaranteed by Holdings and the Company. The Credit Facilities and such guarantees are secured by security interests (subject to other liens permitted by the terms of the Credit Facilities), to the extent permissible under the applicable laws and regulations, in (a) all of the capital stock of Warren and each of its U.S. subsidiaries and 65% of the common stock and 100% of the preferred stock of each foreign subsidiary and (b) all assets (subject to certain limitations), except certain trade accounts receivable, owned by Warren and its subsidiaries. The Credit Agreement contains restrictive covenants which limit Holdings, Warren and their subsidiaries with respect to certain matters including, among other things, the ability to incur debt, pay dividends, make acquisitions, sell assets, merge, grant or incur liens, guarantee obligations, make investments or loans, make capital expenditures, create subsidiaries or change its line of business. The Credit Agreement also restricts Warren from prepaying certain of its indebtedness. Under the Credit Agreement, Warren is required to satisfy certain financial covenants which require Warren to maintain specified financial ratios and comply with certain financial tests, including a minimum interest coverage ratio, a maximum leverage ratio, and a net worth test. Such covenants are not considered by the Company to be of a restrictive nature in conducting its business activities. As of September 27, 2000, management believes the Company is in compliance with all covenants. TERM LOAN Pursuant to the Credit Agreement as originally written, the Term Loan was payable in semiannual installments beginning in September 1998 with a final maturity in March 2005. Subsequent to the $40.0 million prepayment in fiscal 1998, the payment schedule was revised to commence semiannual installments in September 1999. At September 27, 2000, the Term Loan was a Eurodollar loan with a weighted-average interest rate of 7.39%. Warren is required to prepay the Term Loan with (1) 50% of the net cash proceeds of certain aggregate asset sales in excess of $50.0 million and (2) 100% of the net proceeds of incurrences of indebtedness, to the extent that the aggregate exceeds $20.0 million. Unless the Company achieves a certain financial ratio, as defined, Warren will be required to prepay the Term Loan annually in an amount equal to 50% of the Excess Cash Flow (as defined) of Warren and its subsidiaries for the prior fiscal year. Excess Cash Flow prepayments relating to fiscal years 1998, 1999 and 2000 were not required. 27 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The Company may also make optional prepayments without premium or penalty at any time (subject to payments of certain termination costs if other than on the last day of an interest period under certain circumstances). REVOLVING CREDIT FACILITY Under the Revolving Credit Facility, which expires in March 2005, Warren can borrow up to $250.0 million. In addition, $75.0 million of the Revolving Credit Facility is available to Warren for letters of credit. At September 29,1999, Warren had no loans outstanding under the Revolving Credit Facility. At September 27, 2000, Warren had Eurodollar Loans outstanding of $140 million with a weighted average interest rate of 7.43%. At September 29, 1999 and September 27, 2000, $14.9 million and $15.2 million, respectively, of the Revolving Credit Facility availability was utilized to guarantee the issuance of letters of credit. At September 29, 1999 and September 27, 2000, availability under the Revolving Credit Facility was $235.1 million and $94.8 million, respectively. In addition, Warren pays a quarterly commitment fee between 0.20% and 0.50% per annum on the unused portion of the Revolving Credit Facility based on the achievement of a certain financial ratio. LETTER OF CREDIT FACILITY Warren had approximately $120.2 million and $111.3 million of letters of credit outstanding under the Letter of Credit Facility at September 29, 1999 and September 27, 2000, respectively, in support of its ongoing obligations under tax-exempt bond financing and certain leases. Warren pays a commission, which is based on the achievement of a certain financial ratio, of between 0.75% and 2.00% on outstanding letters of credit and an issuance fee of 0.125% per annum on letters of credit issued. WARREN SERIES B SUBORDINATED EXCHANGE DEBENTURES The Warren 14% Series B Subordinated Exchange Debentures due 2006 (the "Exchange Debentures") (see Note 19), are unsecured, subordinated obligations of Warren. The Exchange Debentures rank (i) junior in right of payment to all existing and future Senior Debt (as defined for purposes of the Notes), including obligations of Warren under the Credit Agreement and (ii) senior in right of payment to or PARI PASSU in right of payment with all existing and future subordinated indebtedness. REVENUE BONDS On March 5, 1997, pursuant to a loan agreement with the Town of Skowhegan, Maine, the Company expanded and refinanced certain environmental and solid waste projects at its Somerset, Maine mill by redeeming, refunding or defeasing revenue bonds aggregating $28.1 million, and issuing new bonds aggregating $38.1 million. The extraordinary gain resulting from the extinguishment of the original bonds was not significant. At September 27, 2000, the Company is obligated under revenue bonds aggregating $110.5 million which are due from 2000 to 2022 and bear interest from 5.90% to 8.000%. LONG-TERM DEBT PREPAYMENTS During fiscal year 1999, Warren made prepayments on its term loans under the Credit Agreement for aggregate amounts of $50.0 million (including amounts repaid pursuant to the modification of the credit arrangement). Also in fiscal year 1999, the Company purchased $92.3 million face value of the Notes for $99.6 million of cash. The premium paid of $7.3 million to purchase the Notes, together with the accelerated amortization of deferred financing fees of $1.8 million (as discussed in Note 2) relating to the purchased Notes and the repayments of term loans, resulted in an aggregate extraordinary loss of $5.3 million (net of a $3.8 million tax benefit). 28 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED During fiscal year 2000, Warren purchased $232.4 million face value of the Warren 12% Series B Senior Subordinated Notes ("Notes") for $242.9 million. These Notes are unsecured, subordinated obligations of Warren. The premium paid of $10.5 million to purchase the Notes, together with the accelerated amortization of deferred financing fees and other costs of $7.0 million (as discussed in Note 2) relating to purchased Notes and the repayments of term loans, resulted in an aggregate extraordinary loss of $10.6 million (net of a $6.9 million tax benefit). Increasing the indebtedness under the revolver portion of the Credit Facility by $195.0 million, increasing the accounts receivable securitization facility by $15 million and utilizing $40.0 million of cash financed the Notes purchase. During the remainder of fiscal year 2000, the indebtedness under the revolver portion of the credit facility was reduced by $55.0 million. FUTURE MATURITIES OF LONG-TERM DEBT Scheduled maturities of long-term debt, including sinking fund payments, at September 27, 2000 are as follows (in millions): 2001.................................................. $ 14.8 2002.................................................. 15.3 2003.................................................. 18.1 2004.................................................. 24.4 2005.................................................. 154.0 Thereafter............................................ 240.3 -------------------- $ 466.9 ==================== NOTE 12 - FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable and debt. In addition, the Company uses interest rate swaps as a means of managing interest rate risk associated with outstanding debt. Summarized below are the carrying values and fair values of the Company's financial instruments. The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the table below:

The fair values of the Notes, Exchange Debentures and revenue bonds were estimated by the Company based upon quotations provided by a nationally recognized pricing service. The principal amounts of the Term Loans approximate market value since they are variable rate instruments, which reprice as often as monthly. The Company's off-balance sheet financial instruments include the letters of credit under the Revolving Credit Facility and the Letter of Credit Facility, interest rate swaps, and the A/R Facility. Unrealized losses related to the interest rate swaps approximated $0.2 million at September 29, 1999. The total carrying amounts of accounts receivable reflect $72.0 million and $87.0 million at September 29, 1999 and September 27, 2000, respectively, of reductions related to the A/R Facility. There are no unrealized losses on the A/R Facility at September 29, 1999 or September 27, 2000. 29 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The fair value of interest rate swaps is the estimated amount that the Company would pay to terminate the swap agreement at the balance sheet date, taking into account current interest rates and the current credit worthiness of the swap counterparties. A significant portion of the Company's sales and accounts receivable are from major customers (see Note 21). None of the Company's other financial instruments represent a concentration of credit risk because the Company has dealings with a variety of major banks and customers worldwide. None of the Company's off-balance sheet financial instruments would result in a significant loss to the Company if the other party failed to perform according to the terms of its agreement, as any such loss would generally be limited to the unrealized gain in any contract. NOTE 13 - LEASES On July 29, 1997, the Company entered into a sale/leaseback arrangement involving the sale of one of the paper machines at its Somerset, Maine mill for $150.4 million. In connection with the transaction, the Company entered into a 15-year agreement to lease back the paper machine. Rental payments of approximately $7.6 million are made semiannually in arrears in January and July. The sale/leaseback arrangement is being accounted for as an operating lease. The gain on the transaction of approximately $17.4 million was deferred and is being amortized as an adjustment to future rent payments. The Company used approximately $100.3 million of the proceeds from the sale to make a mandatory prepayment on its Term Loans in July 1997. Rental expense relating to this lease, net of amortization of deferred gain, was $14.0 million, $14.1 million and $14.1 million for fiscal years 1998, 1999 and 2000, respectively. The Company also leases office and warehouse space and various office and other manufacturing equipment under operating leases. Unexpired lease terms for operating leases range from one to six years. Most leases contain renewal options and options to purchase such equipment at fair market value. Rental expense relating to these leases was $6.6 million, $9.3 million and $10.8 million for fiscal years 1998, 1999 and 2000, respectively. Additionally, the Company has other commitments, which expire in 2008, to operate a biomass cogeneration facility adjacent to its Westbrook mill and to purchase its steam and electricity output on a take-or-pay basis (the "Cogeneration Obligation"). Under the Cogeneration Obligation, the Company paid approximately $7.7 million, $7.3 million and $7.4 million for fiscal years 1998, 1999 and 2000, respectively. The future minimum obligations under leases (including the Somerset paper machine lease) and other commitments as of September 27, 2000 are as follows (in millions):

Certain lease obligations and the Cogeneration Obligation contain scheduled payment increases. The Company is recognizing expenses associated with these contracts on a straight-line basis over the terms of the related contracts. 30 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 14 - ENVIRONMENTAL AND SAFETY MATTERS The Company is subject to a wide variety of environmental laws and regulations relating to, among other matters, air emissions, wastewater discharges past and present landfill operations and hazardous waste management. These laws include the Federal Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and their respective state counterparts. The Company will continue to incur significant capital and operating expenditures to maintain compliance with applicable federal and state environmental laws. These expenditures include costs of compliance with federal worker safety laws, landfill expansions and wastewater treatment system upgrades. In 1995, the Company, as one of several industrial plaintiffs, initiated litigation in state court against the County of Muskegon (the "County") challenging an Ordinance governing the County's industrial wastewater pretreatment program. The lawsuit challenged, among other things, the treatment capacity availability and local effluent limit provisions of the Ordinance. In 1996, the state trial court ruled substantially in favor of the Company. In 1998, a state appeals court affirmed the lower court's ruling. However, in February 1999, the County passed a similar ordinance in connection with a federal consent decree. If the Company and other plaintiffs do not prevail in any future appeal regarding the consent decree or are not successful in ongoing negotiations with government authorities, the Company may not be able to obtain additional treatment capacity for future expansions and the County could impose stricter permit limits. In June 1997, the United States and Environmental Protection Agency ("EPA") sued the County in federal court for failure (a) to meet its discharge permit limits for the wastewater facility and (b) to develop and enforce an industrial pretreatment program. A group of industrial users, including the Company and a group of municipalities filed motions to intervene in the EPA lawsuit to protect the earlier state court ruling. In December 1998, however, the federal court approved a motion filed by the County to terminate the industrial users' rights to discharge certain pollutant loadings, but not the right to discharge certain volumes of wastewater to the system. The court also authorized the County to readopt the Ordinance previously invalidated by the state courts. The Company has appealed the federal ruling, and the appeal is pending. The Company also believes that under Michigan contract law, related contracts and county bond resolutions, the County does not have the authority to unilaterally terminate the service agreements and may pursue litigation on these issues. If the Company and other plaintiffs do not prevail on their appeal, or in any future litigation regarding the Ordinance, or are not successful in ongoing negotiations with government authorities, the Company may not be able to obtain additional treatment capacity for future expansions and the County could impose stricter permit limits. This, in turn, could result in substantial expenditures to add pretreatment at the Muskegon facility or potential fines being levied by the County. In April 1998, the EPA issued final regulations that 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"). Compliance with the cluster rules will be required beginning in 2001 for the Somerset, Maine and Muskegon, Michigan mills. The Company believes that future environmental compliance expenditures, the bulk of which are for the cluster rules compliance, will require aggregate capital expenditures of approximately $20.0 million to $45.0 million through 2001. Approximately $35.0 million has already been incurred, primarily for required improvements at the Somerset mill, which has installed elemental chlorine free ("ECF") technology and is in compliance with the effluent guidelines of the cluster rules. The Company believes that none of these matters, individually or in the aggregate, is expected to have a material adverse effect on its consolidated financial position, results of operations or cash flows. 31 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 15 - COMMITMENTS AND CONTINGENCIES In connection with the Acquisition of Warren by Sappi, the Company entered into long-term (25 years initially, subject to mill closures and certain FORCE MAJEURE events) agreements with Scott Paper Company (now Kimberly-Clark) for the supply of pulp and water and the treatment of effluent at the Mobile mill. Under the pulp supply agreement, wood pulp is generally supplied at market prices. On May 4, 1998, the Company announced an agreement with Kimberly-Clark to terminate the long-term pulp supply contract effective September 1, 1999. The cancellation of the pulp contract did not materially impact the Company's earnings for the year ended September 27, 2000. Prices for other services provided by Kimberly-Clark are generally based on cost. The Company has a long-term agreement (the "Energy Agreement") with Mobile Energy Services Corporation ("MESC") to buy electric power and steam for the Mobile paper mill at rates that provide for MESC to recover fuel and capital costs. Kimberly-Clark has closed their pulp mill at the Mobile site effective September 1999. The closure of the Kimberly-Clark pulp mill may result in a MESC default under certain bond indentures. On January 24, 2000, the bankruptcy court granted motions filed by MESC, its bondholders and others to proceed with the development of a new cogeneration facility at the Mobile, Alabama site. The Company is currently evaluating the impact on continued MESC operations of both the closure of the Kimberly-Clark pulp mill and MESC's proposed cogeneration facility. Loss of biomass and black liquor fuels historically provided to MESC by the pulp mill resulted in increased energy rates in Mobile during fiscal year 2000. A substantial majority of the Company's electricity requirements are satisfied through its own generation or cogeneration agreements. The Company's power requirements at its Somerset mill are currently satisfied through a cogeneration agreement whereby the mill cogenerates electricity and sells the output to Central Maine Power ("CMP") at market rates. The CMP agreement relating to the Somerset mill historically also provided, but did not require, that the mill purchase electricity from CMP at the same rate. The Somerset agreement expires in the year 2012. Commencing March 1, 2000, as a result of deregulation of the Maine power industry, CMP was no longer permitted to sell power to its customers. Accordingly, the Company has entered into a new one-year agreement with a third party to purchase all of Somerset's power needs through March 23, 2001. The Company is currently evaluating the impact of deregulation on its energy rates at Somerset. The Company also has a one-year agreement expiring March 21, 2001 with the same third party pursuant to which the Westbrook mill cogenerates electricity and sells any excess output not used by the mill to the third party. Power sales revenue is recognized by the Company at the time that power is provided to or used by CMP based on fixed rates per kilowatt-hour in the case of the Westbrook agreement and variable rates per kilowatt-hour in the case of the Somerset agreement. The Company has the Supply Agreement with Plum Creek, with an initial term of 25 years and with three five-year renewal options. Under the supply agreement, the Company will purchase hardwood pulpwood at an annual minimum of 300,000 to 375,000 tons, or approximately 13% of the Company's annual requirements, at market prices. In April 2000, the Lemelson Medical, Educational and Research Foundation, Limited Partnership ("Lemelson") filed a lawsuit against Sappi and over 70 other companies in the United States Court for the District of Arizona. The lawsuit alleges that the defendants have infringed upon various machine vision and automatic identification patents held by Lemelson. Lemelson seeks to enjoin the defendants from further alleged acts of infringement and to collect unspecified damages. Sappi was formally served with a summons with respect to this lawsuit in September 2000. Lemelson has offered to license the patents alleged to be infringed to the defendants, and based on the Company's understanding of the terms that Lemelson has made available to other licensees, the Company believes that obtaining the same or similar terms would not have a material adverse effect upon the Company's operating results or financial position. However, there can be no assurance either that, if sought, Sappi would be offered similar terms to those made available to other licensees, or that, if defended, this matter will not have a material adverse effect on the Company's operating results or financial position. In April 2000, 18 individuals filed a lawsuit against the Company, Kimberly-Clark and several other defendants in Somerset County Court, Maine. The plaintiffs allege that they suffered personal injury as a result of hazardous waste from various sources, which was allegedly transported to and stored at a local landfill during the period from 1976 through 1986. In terms of Sappi's purchase of the Company from Scott Paper Company in 1994, the Company is indemnified for monitoring, clean up and any other costs relating to or arising out of the affected landfill. 32 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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 and the items discussed above cannot be predicted with certainty, it is the present opinion of the Company, after consulting with legal counsel, that they will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. NOTE 16 - RETIREMENT BENEFITS PENSION PLANS The Company has four defined-benefit, trusteed pension plans that provide retirement benefits for substantially all employees. Benefits provided are primarily based on employees' years of service and compensation. The Company's funding policy complies with the requirements of Federal law and regulations. Plan assets consist of equity securities, bonds and short-term investments. The current portion of the net pension liability, detailed below, was $10.6 million and $8.0 million at September 29, 1999 and September 27, 2000, respectively. The following schedule provides the funded status and amounts recognized for the Company's defined benefit pension plans (in millions):

33 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Amounts recognized in the balance sheet consist of:

The projected benefit obligation at September 29, 1999 and September 27, 2000 was determined using assumed discount rates of 7.5% and 7.75%, respectively, and assumed long-term rates of compensation increases of 4.0% for both years. The assumed rate of return on plan assets (on an annualized basis) was 9.25% for fiscal years 1999 and 2000, respectively. The projected benefit obligations and fair value of plan assets for pension plans with benefit obligations in excess of plan assets were $135.2 million and $121.7 million, respectively, as of September 29, 1999 and $101.3 million and $94.1 million, respectively, as of September 27, 2000. The components of the net pension cost are as follows (in millions):

SAVINGS PLANS Warren currently sponsors two 401(k) defined contribution plans covering substantially all Warren employees pursuant to which Warren is obligated to match employee contributions, up to specified amounts. Warren contributions to these plans totaled $5.3 million, $5.2 million and $4.9 million for fiscal years 1998, 1999 and 2000, respectively. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Warren has a Supplemental Executive Retirement Plan for which key executives are eligible to participate provided such individuals meet specified criteria upon retirement. Payments pursuant to the plan are made at the time key executives' retire. The related expense is recorded in each fiscal year based on actuarially determined amounts. To date, payments made and expenses incurred pursuant to the plan have not been material to Warren's consolidated results of operations or cash flows. NOTE 17 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Warren sponsors a defined benefit postretirement plan that provides health care and life insurance benefits to eligible retired employees. Employees are generally eligible for benefits upon retirement and completion of a specified number of years of service. The current portion of Warren's net postretirement liability was $1.3 million and $2.3 million at September 29, 1999 and September 27, 2000, respectively. 34 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The following schedule provides the plan's funded status and net accrued postretirement benefit cost recognized in the Company's consolidated balance sheets at year-end (in millions):

The discount rates used to estimate the benefit obligations as of September 29, 1999 and September 27, 2000 were 7.5% and 7.5%, respectively. The initial health care cost trend rates used to value the benefit obligation were 6.0%, 6.5% and 6.5% at September 30, 1998, September 29, 1999 and September 27, 2000, respectively, decreasing gradually to an ultimate rate of 4.75%, 4.0% and 4.5% in the year 2008. A one-percentage point increase in the assumed health care trend rate for each future year would increase the APBO by approximately 6.5% at September 27, 2000 and would increase the sum of the benefits earned and interest cost components of net postretirement benefit cost for 2000 by approximately 8.8%. NOTE 18 - OTHER LIABILITIES (IN MILLIONS)

35 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 19 - WARREN SERIES B REDEEMABLE EXCHANGEABLE PREFERRED STOCK Warren has 10.0 million authorized shares of 14% Series B redeemable exchangeable preferred stock ("Preferred Stock"), of which 3.0 million shares were issued and outstanding through June 14, 1999. On June 15, 1999 (the "Exchange Date"), the Company exchanged, pursuant to its option in the Preferred Stock agreement, all of the issued and outstanding Preferred Stock at the liquidation value of $139.0 million, representing $25.00 per share plus accrued and unpaid dividends, for 14% Series B Subordinated Exchange Debentures due 2006 (the "Exchange Debentures") with a principal amount of $139.0 million. The difference between the Preferred Stock's liquidation value of $139.0 million and the carrying value of $132.9 million as of the Exchange Date has been recorded as a discount on the Exchange Debentures and is being amortized as interest expense, using the effective interest rate method, over the remaining term of the Exchange Debentures. On the Exchange Date, all rights with respect to the Preferred Stock were terminated, and dividends on the Preferred Stock ceased to accrue on and after the Exchange Date. The following table indicates the dividend, accretion and redemption activity on the Preferred Stock for fiscal years 1998 and 1999 (in millions):

NOTE 20 - RELATED PARTY TRANSACTIONS Pursuant to the limitations on restricted payments outlined in the Credit Agreement, the indenture relating to the Notes and the Exchange Debentures, the Company may make cash payments to Holdings, including, among other things, (i) amounts under a tax sharing agreement to be entered into between the Company and Holdings necessary to enable Holdings to pay the Company's taxes and (ii) administrative fees to Holdings and amounts to cover various specified costs and expenses of Holdings. The associated administrative fee expensed was $1.0 million, $1.0 million, and $0 million for each of the fiscal years 1998, 1999 and 2000, respectively. In addition to the above, Warren has contracted through a management services agreement with Sappi Fine Paper plc ("SFP") to provide management advisory services. The aggregate fee paid by Warren is limited to an annual amount of $1.0 million. The aggregate fees charged to Warren by Sappi Fine Paper were $1.0 million, $7.3 million and $9.1 million in fiscal years 1998, 1999 and 2000, respectively, of which $14.4 million is accrued as a liability in the accompanying balance sheet at September 27, 2000. Warren sells products to certain Sappi subsidiaries (Sappi Europe, Sappi UK, Sappi South Africa, Specialty Pulp Services and U.S. Paper). These subsidiaries then resell Warren products to external customers at market prices. Net of a 5% commission, Warren shipped $114.9 million, $118.1 million and $138.2 million of products to Sappi subsidiaries for fiscal years 1998, 1999 and 2000, respectively. Trade accounts receivable at September 29, 1999 and September 27, 2000 included approximately $24.9 million and $35.6 million, respectively, due from subsidiaries of Sappi. Amounts as of September 29, 1999 and September 27, 2000 are included in the pool of receivables securitized under the A/R Facility (see Note 6). Warren also imports products from certain Sappi affiliates (Sappi UK, Hannover Papier, and KNP Leykam) for sale to its North American customers. Warren resells these products at market prices and remits the proceeds, net 36 S.D. WARREN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED of a 5% sales commission, to the Sappi affiliates. Net of commissions, Warren imported approximately $26.8 million, $74.6 million and $110.6 million of products from certain Sappi affiliates for fiscal years 1998, 1999 and 2000, respectively. Accounts payable at September 29, 1999 and September 27, 2000 included $16.8 million and $28.3 million, respectively, due to subsidiaries of Sappi. On March 29, 1999, the Company paid a $15.0 million cash dividend to its parent, Holdings. In turn, Holdings advanced $15.0 million to an affiliate of Sappi in the form of a promissory note due April 2002. NOTE 21 - SEGMENTS AND OTHER RELATED INFORMATION As discussed in Note 2, the Company's operations have been aggregated into a single reportable segment, as permitted under SFAS No. 131, since they have similar economic characteristics, products, production processes, types of customers and distribution methods. Net sales information by the Company's product groups are as follows (in millions):

Net sales to unaffiliated customers which individually exceed 10% of total net sales amounted to approximately 53.8%, 57.1% and 60.6% of net sales for fiscal years 1998, 1999 and 2000, respectively. Each of these customers is a merchant that resells the Company's paper products to a wide range of users. The loss of any of these customers could have a material effect on the Company's business and consolidated results of operations. Net sales to each customer are indicated below (in millions):

At September 29, 1999 and September 27, 2000, approximately 44.2% and 51.2%, respectively, of the Company's net trade receivables, including those receivables which are securitized and sold, were concentrated in these three customers. The Company had net sales to customers outside the United States ("Export Sales") of $185.0 million, $181.3 million and $210.8 million for fiscal years 1998, 1999 and 2000, respectively. Export Sales are primarily to Canada, Europe, Australia, Latin America, and the Far East. Export Sales do not exceed 10% of total net sales for any geographic region. Net sales outside North America are primarily handled by the Company's affiliates under the common control of Sappi. 37 SCHEDULE II S.D. WARREN COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS)

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Intentionally Omitted. * PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Intentionally Omitted.* ITEM 11. EXECUTIVE COMPENSATION Intentionally Omitted.* ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Intentionally Omitted.* ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Intentionally Omitted.* PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Intentionally Omitted. -------- * 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 by Section 13 or 15(d) of the Securities Exchange Act of 1934. The registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. S.D WARREN COMPANY By: /S/ MONTE R. HAYMON -------------------- Monte R. Haymon PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: December 4, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

WARREN S D CO /PA/ 10-K