FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION B OR 15(d) OF THE SECURITEIS
EXCHANGE ACTO OF 1934.
For the transition period from _______ to _______.
Commissiion File: 333-88017
AMERICAN TISSUE INC.
(Exact name of registrant as specified in its charter)
Delaware 22-360876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 Engineers Road, Hauppauge, New York 11788
(Address of principal executive office) (zip code)
(516) 435-9000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [_] No [X]
Indicate number of shares outstanding of each of the issuer's classes of capital
stock as of December 31, 1999: 200 shares of common stock, no par value.
<PAGE>
AMERICAN TISSUE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
INDEX
PART I: Financial Information
Item 1. Financial Statements
o Condensed Consolidated Statements of Operations - Three Months
Ended December 31, 1999 and December 31, 1998.
o Condensed Consolidated Balance Sheets - December 31, 1999 and
September 30, 1999.
o Condensed Consolidated Statements of Cash Flows - Three Months
Ended December 31, 1999 and December 31, 1998.
o Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
PART II: Other Information
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN TISSUE INC.
Condensed Consolidated Statements of Operations
(In Thousands)
For the Three Months Ended
December 31,
-----------------------------
1999 1998
-------- --------
(Unaudited) (Unaudited)
Revenues $110,315 $ 60,400
Cost of sales 81,796 48,536
-------- --------
Gross profit 28,519 11,864
Selling, general and administrative
expenses 12,738 7,464
-------- --------
Operating profit 15,781 4,400
Interest expense 6,949 3,249
-------- --------
Net income $ 8,832 $ 1,151
======== ========
See accompanying notes to condensed consolidated financial statements.
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AMERICAN TISSUE INC.
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 818 $ 1,806
Accounts receivable,
net of allowance of $717 and $613, respectively 45,883 52,555
Inventories 120,920 94,664
Equipment held for sale 6,088 7,825
Prepaid expenses and other current assets 5,432 3,866
-------- --------
Total Current Assets 179,141 160,716
Property plant & equipment, net 220,820 212,530
Due from related parties 23,713 23,054
Deferred costs, net 10,032 9,876
Other assets 295 155
-------- --------
Total Assets $434,001 $406,331
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Revolving credit debt $ 67,839 $ 50,054
Current portion of long term debt and capital lease obligations 1,512 1,206
Accounts payable and accrued expenses 61,464 63,550
-------- --------
Total Current Liabilities 130,815 114,810
Senior secured notes payable 159,689 159,562
Long term debt and capital lease obligations 24,698 22,247
Other long term liabilities 11,745 11,490
Stockholder's equity:
Common stock 1,605 1,605
Additional paid in capital 57,125 57,125
Retained earnings 48,324 39,492
-------- --------
Total Stockholder's Equity 107,054 98,222
-------- --------
Total Liabilities and Stockholder's Equity $434,001 $406,331
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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AMERICAN TISSUE INC.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
----------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net earnings $ 8,832 $ 1,151
Adjustments:
Depreciation & amortization 5,121 3,053
Bad debt expense 165 --
Changes in operating assets & liabilities:
Increase (decrease) in operating assets & liabilities:
Accounts receivable 6,507 (4)
Inventories (26,256) (6,327)
Equipment held for sale 1,737 393
Prepaid expenses and other current assets (1,566) (657)
Other assets (140) --
Accounts payable and accrued expenses (1,896) 6,164
-------- --------
Net cash used in operating activities: (7,496) 3,773
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (10,152) (3,170)
-------- --------
Net cash used in investing activities (10,152) (3,170)
-------- --------
Cash Flows From Financing Activities:
Net proceeds from borrowings under revolving credit facility 17,785 (7,065)
Proceeds from long term debt and capital lease obligations 9 2,907
Increase in deferred costs (475) 671
Advances and repayments to affiliates, net (659) 587
Proceeds from real estate financing -- 1,000
Debt forgiveness -- (183)
-------- --------
Net cash provided by financing activities 16,660 (2,083)
-------- --------
Net Decrease in Cash and Cash Equivalents (988) (1,480)
Cash and Cash Equivalents, Beginning of Period $ 1,806 $ 1,480
-------- --------
Cash and Cash Equivalents, End of Period $ 818 $ --
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
AMERICAN TISSUE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1999
1. BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements include the
accounts of American Tissue Inc. and its subsidiaries (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results of operations of any interim period are not necessarily
indicative of the results of operations to be expected for the fiscal year.
Reference is made to the consolidated financial statements for the fiscal year
ended September 30, 1999, and the notes thereto, included in the Company's
registration statement on Form S-4 which was declared effective on February 7,
2000 (SEC file number 333-88017).
2. COMPREHENSIVE INCOME:
The Company observes the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires
companies to report all changes in equity during the period in which they are
recognized, except those resulting from investments by owners and distributions
to owners. Comprehensive income is the total of net income and all other
non-owner changes in equity (or other comprehensive income), such as unrealized
gains/losses on securities classified as available for sale, foreign currency
translation adjustments and minimum pension liability adjustments. Other
comprehensive income must be reported on the face of annual financial statements
or in the case of interim reporting, the footnote approach may be utilized. For
the quarters ended December 31, 1999 and 1998, the Company's operations did not
give rise to material items includible in comprehensive income which were not
already included in net income. Accordingly, the Company's comprehensive income
is the same as its net income for all periods presented.
3. RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative
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instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000 (as amended by SFAS No. 137) and will not require retroactive
restatement of prior period financial statements. The Company currently does not
use derivative instruments or engage in hedging activities and, accordingly,
does not expect that this statement will have an impact on its consolidated
financial statements when adopted.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are an integrated manufacturer of tissue and uncoated freesheet paper
products, with a comprehensive product line that includes finished tissue
products, jumbo tissue rolls used in the manufacture of finished tissue products
and uncoated freesheet paper products for printing, writing and publishing
applications. We recently entered the uncoated freesheet paper business through
the acquisition of our pulp and paper mills located in Berlin and Gorham New
Hampshire on July 9, 1999. We refer to these mills as the "Berlin-Gorham Mills"
in this report. Our finished tissue products are sold in the commercial,
"away-from-home," market and the consumer, "at-home," market, and our jumbo
tissue rolls are used internally by us for the manufacture of finished tissue
products and are sold to other manufacturers of finished tissue products. Our
uncoated freesheet paper products are sold through merchants and distributors to
users of these products. Wood pulp is used internally for the manufacture of
tissue and freesheet paper products, with excess production being sold
commercially as market pulp. A substantial portion of our revenues are derived
from the manufacture and sale of finished tissue products, jumbo tissue rolls,
uncoated freesheet paper and wood pulp. We also generate a small portion of our
revenues from the sale of wood equipment for the manufacture of finished tissue
products.
Results of Operations
The following table sets forth information as to our revenues for the
fiscal quarters indicated (dollars in millions):
Quarters Ended
December 31,
--------------------------
1999 1998
------- -------
Tissue products .. $ 58.1 $ 60.1
Uncoated freesheet 32.4 0.0*
Wood pulp ........ 15.2 0.0*
Equipment sales .. 4.3 0.0
Rental income .... 0.3 0.3
------- -------
Total revenues ... $ 110.3 $ 60.4
======= =======
*We had no sales of uncoated freesheet or woodpulp for the quarter ended
December 31, 1998, because these products are produced at the Berlin-Gorham
Mills, which we purchased on July 9, 1999.
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Three Months Ended December 31, 1999 Compared To The Three Months Ended December
31, 1998.
Revenues. Revenues increased approximately $49.9 million, or 82.6%, from
approximately $60.4 million for the first quarter of fiscal 1999 to
approximately $110.3 million for the first quarter of fiscal 2000.
Net sales of tissue products decreased approximately $2.0 million, or 3.3%,
from appoximately $60.1 million for the first quarter of fiscal 1999 to
approximately $58.1 million for the first quarter of fiscal 2000. This decrease
was primarily due to the rebuild of our tissue machine at St. Helens, Oregon,
which decreased our production of jumbo tissue rolls by approximately 1,500 tons
during the first quarter of fiscal 2000, as compared to the first quarter of
fiscal 1999.
Net sales of uncoated freesheet paper products were approximately $32.4
million for the first quarter of fiscal 2000. Net sales of woodpulp were
approximately $15.2 million for the same period. We have no comparable sales
figures for the first quarter of fiscal 1999, as these products are produced by
our subsidiary, Pulp & Paper of America, at the Berlin-Gorham Mills, which we
acquired on July 9, 1999. However, for comparison purposes only, sales of
uncoated freesheet and woodpulp for the first quarter of fiscal 1999 for the
Berlin-Gorham Mills, as a business unit of Crown Paper Co., were approximately
$30.6 million and approximately $12.5 million, respectively.
Net sales of converting equipment were approximately $4.3 million for the
first quarter of fiscal 2000. We had no sales of converting equipment in the
first quarter of fiscal 1999.
Gross Profit. Gross profit increased approximately $16.6 million, or
139.5%, from approximately $11.9 million for the first quarter of fiscal 1999 to
approximately $28.5 million for the first quarter of fiscal 2000. Gross profit,
as a percentage of net sales, increased from approximately 19.6% for the first
quarter of fiscal 1999 to approximately 25.9% for the first quarter of fiscal
2000. This increase in gross profit, as a percentage of net sales, was a result
of higher sales volumes without a commensurate increase in fixed costs and
increased production and sales of jumbo tissue rolls, which lowered per unit
costs of finished tissue products. Additionally, sales for the Berlin-Gorham
Mills, provided higher gross profit, as a percentage of net sales, relative to
historical rates prior to our acquisition of the Berlin-Gorham Mills.
Selling, General and Administrative Expenses. A significant portion of our
selling expenses are freight expenses incurred in shipping products to our
customers. It is our policy to include freight expense in this category as
selling expense. Selling, general and administrative expenses, exclusive of
freight, increased approximately $3.4 million, or 81.0%, from approximately $4.2
million for the first quarter of fiscal 1999 to approximately $7.6 million for
the first quarter of fiscal 2000. Selling, general and administrative expenses,
excluding freight, were approximately 7.0% of net sales for the first quarter of
fiscal 1999, as compared to approximately 6.9% for the first quarter of fiscal
2000. This percentage decrease was due to net sales increasing at a faster rate
than selling, general and administrative expenses, excluding freight, between
the first quarter of fiscal 1999 and the first quarter of fiscal 2000. Freight
expense increased approximately $1.8 million, or 54.5%, from approximately $3.3
million in the first quarter of fiscal 1999 to approximately $5.1 million for
the first quarter of fiscal 2000. This increase was a result of increased
shipments of uncoated freesheet, woodpulp and jumbo rolls during this period.
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Operating Income. Operating income increased approximately $11.4 million,
or 259.1%, from approximately $4.4 million for the first quarter of fiscal 1999
to approximately $15.8 million for the first quarter of fiscal 2000. Operating
income, as a percentage of net sales, was approximately 14.3% for the first
quarter of fiscal 2000, as compared to approximately 7.3% for the first quarter
of fiscal 1999. This increase was due to the reasons stated above.
Interest Expense. Interest expense increased approximately $3.7 million, or
115.6%, from approximately $3.2 million in the first quarter of fiscal 1999 to
approximately $6.9 million for the first quarter of fiscal 2000. This increase
reflects higher debt levels during the first quarter of fiscal 2000, as compared
to the first quarter of fiscal 1999.
EBITDA. EBITDA is defined as operating income plus depreciation and
amortization. EBITDA increased approximately $13.4 million, or 178.7%, from
approximately $7.5 million for the first quarter of fiscal 1999 to approximately
$20.9 million for the first quarter of fiscal 2000. This increase in EBITDA was
due primarily to the realization of synergies resulting from the integration of
the Berlin-Gorham Mills, favorable operating conditions that allowed us to run
at near full capacity in our tissue business and price increases in uncoated
freesheet products, woodpulp and jumbo rolls of tissue.
Information regarding EBITDA is presented because management believes that
some investors use EBITDA as one measure of an issuer's ability to service its
debt. EBITDA should not be considered an alternative to, or more meaningful
than, operating income, net income or cash flow as defined by generally accepted
accounting principles, or as an indicator of an issuer's operating performance.
In addition, caution should be used in comparing EBITDA to similarly titled
measures of other companies as the definitions of these measures may vary.
Liquidity and Capital Resources
Cash provided by operations in the first quarter of fiscal 2000 decreased
by approximately $11.3 million, as compared to the first quarter of fiscal 1999.
There was a significant increase in net income for the first quarter of fiscal
2000, as compared to the first quarter of fiscal 1999. This increase was offset
by increases in inventories during the first quarter of fiscal 2000, as compared
to the first quarter of fiscal 1999, due to increases in sales levels during
fiscal 2000. Cash used for capital expenditures in the first quarter of fiscal
2000 was approximately $10.1 million, as compared to approximately $3.2 million
for the first quarter of fiscal 1999. All of the above necessitated the need for
additional net borrowings of approximately $17.8 million under our revolving
credit facility in the first quarter of fiscal 2000.
At December 31, 1999, our total consolidated debt was approximately $253.7
million.
We believe, based on cash flows from operating and financing activities,
anticipated internal growth, price increases, and anticipated capital
expenditures, that liquidity will be adequate for the foreseeable future to make
required payments of interest on indebtedness, to fund anticipated capital
expenditures and for working capital
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requirements. The ability to meet debt service obligations and reduce total debt
will be dependent, however, upon our future performance, which, in turn, will be
subject to general economic conditions and to financial, business and other
factors, including factors beyond our control. A portion of our debt bears
interest at floating rates. Therefore, our financial condition is, and will
continue to be, affected by changes in prevailing interest rates.
Inflation and Cyclicality
Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had, or is likely in the
foreseeable future to have, a material impact on our results of operations.
The markets for tissue and uncoated freesheet paper products are
characterized by periods of supply and demand imbalance, with supply being added
in large blocks and demand fluctuating with changes in industry capacity,
economic conditions, including, in the case of our uncoated freesheet paper
products, the overall level of domestic economic activity, and competitive
conditions, including, in the case of our uncoated freesheet paper products,
intensified competition from overseas producers responding to favorable exchange
rate fluctuations and/or unfavorable overseas market conditions. All of such
conditions, are beyond our control.
Seasonality
Historically, our net sales have been somewhat stronger during our third
and fourth fiscal quarters, due to increased seasonal usage by consumers in the
at-home business and inventory and usage patterns in the away-from-home finished
tissue products business.
Year 2000
As of the date of this report, we have not experienced any material
computer system or other Year 2000 failures. Based upon the completion of our
comprehensive Year 2000 remediation plan, and the lack of any significant
failures in our computer systems resulting from Year 2000 issues, we do not
anticipate any significant lost revenues or other adverse effects in the future
resulting from Year 2000 issues. Incremental out-of-pocket costs incurred
through this date in remediating Year 2000 issues have not been material.
Forward Looking Statements
Except for historical information and report discussions contained in this
report, statements contained in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Any such forward looking statements involve a number of known and
unknown risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Company to differ materially from any future
results, performance or achievements, expressed or implied in such forward
looking statements.
9
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The words "believe," "demonstrate," "intend," "expect," "estimate,"
"anticipate," "likely," and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on those
forward-looking statements, which speak only as of the date the statement was
made.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, which include changes in U.S.
interest rates and commodity prices. During fiscal 1999, we restructured our
debt, through a private sale of our senior secured notes, so that it is
predominantly fixed-rate. Our revolving credit facility permits us to elect to
pay interest on borrowings at a spread above the LIBOR rate or at the bank's
prime lending rate. A significant rise in either of these rates could adversely
affect our results of operations, depending upon the level of borrowings under
our revolving credit facility at the time of any rate changes. We do not
currently utilize derivative financial instruments to hedge against changes in
interest rates or commodity prices. Additionally, substantially all of our
transactions are denominated in U.S. dollars.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, we are subject to a number of legal proceedings and
other claims arising in the ordinary course of our business which we do not
believe will have, individually or in the aggregate, a material adverse effect
on our financial condition or results of operations.
Item 5. OTHER INFORMATION
On February 7, 2000, our registration statement on Form S-4, SEC file
number 333-88017, relating to an offer to exchange $165 million principal amount
of our Series B Senior Secured Notes due 2006 for the outstanding $165 million
principal amount of our Series A Senior Secured Notes due 2006, was declared
effective by the Securities and Exchange Commission.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 -- Financial Data Schedule.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN TISSUE, INC.
(registrant)
February 11, 2000 By /s/ Edward I. Stein
- ----------------- -------------------
Date Edward I. Stein
Executive Vice President and
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-END> Dec-31-1999
<CASH> 818
<SECURITIES> 0
<RECEIVABLES> 46,600
<ALLOWANCES> 717
<INVENTORY> 120,920
<CURRENT-ASSETS> 179,141
<PP&E> 267,739
<DEPRECIATION> 46,919
<TOTAL-ASSETS> 434,001
<CURRENT-LIABILITIES> 130,815
<BONDS> 0
0
0
<COMMON> 1,605
<OTHER-SE> 105,449
<TOTAL-LIABILITY-AND-EQUITY> 434,001
<SALES> 110,315
<TOTAL-REVENUES> 110,315
<CGS> 81,796
<TOTAL-COSTS> 81,796
<OTHER-EXPENSES> 12,738
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,949
<INCOME-PRETAX> 8,832
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,832
<EPS-BASIC> 44,160
<EPS-DILUTED> 44,160
</TABLE>
