<PAGE> 1
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
Commission file number 1-11803
-------
AMERICAN PAD & PAPER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 04-3164298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 Preston Road, Suite 700, Dallas, TX 75252-5613
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 733-6200
Commission file number 333-3006
--------
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1512956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 Preston Road, Suite 700, Dallas, TX 75252-5613
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 733-6200
Indicate by check mark whether each 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 each
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
American Pad & Paper Company Yes X No
--- ---
American Pad & Paper Company of Delaware, Inc. Yes X No
--- ---
As of August 12, 1997, American Pad & Paper Company has 27,435,839 shares
of Common Stock outstanding. As of August 12, 1997, American Pad & Paper
Company of Delaware, Inc. had 100 shares of Common Stock outstanding, all of
which are indirectly owned by American Pad & Paper Company.
==============================================================================
<PAGE> 2
AMERICAN PAD & PAPER COMPANY
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
QUARTERLY PERIOD ENDED JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Important Explanatory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 1997 and 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements (unaudited) . . . . . . . . . . . . 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . 17
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
PART I FINANCIAL INFORMATION
IMPORTANT EXPLANATORY NOTE
This integrated Form 10-Q is filed pursuant to the Securities Exchange Act
of 1934, as amended, for each of American Pad & Paper Company, a Delaware
corporation, and its wholly owned subsidiary, American Pad & Paper Company of
Delaware, Inc., a Delaware corporation. Unless the context requires otherwise,
references herein to the "Company" refer to both American Pad & Paper Company
and American Pad & Paper Company of Delaware, Inc. American Pad & Paper Company
is a holding company with no operations separate from its operating subsidiary,
American Pad & Paper Company of Delaware, Inc. No separate financial
information for American Pad & Paper Company of Delaware, Inc. has been
provided herein because management of the Company believes such information
would not be meaningful because (i) American Pad & Paper Company of Delaware,
Inc. is the only operating subsidiary of American Pad & Paper Company, which
has no operations other than those of American Pad & Paper Company of Delaware,
Inc. and its subsidiaries and (ii) all assets and liabilities of American Pad &
Paper Company are recorded on the books of American Pad & Paper Company of
Delaware, Inc. There is no material difference between American Pad & Paper
Company and American Pad & Paper Company of Delaware, Inc. for the disclosure
required by the instructions to Form 10-Q and therefore, unless otherwise
indicated, the responses set forth herein apply to each of American Pad & Paper
Company and American Pad & Paper of Delaware, Inc.
2
<PAGE> 3
AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
------
Current assets:
Cash $ 1,639 $ 2,290
Accounts receivable 68,268 57,054
Inventories 144,867 105,667
Prepaid expense and other current assets 3,487 4,739
Deferred income taxes 11,188 10,754
--------- ---------
Total current assets 229,449 180,504
Property, plant and equipment 146,768 133,090
Intangible assets 239,493 192,367
Other 4,625 3,456
--------- ---------
Total assets $ 620,335 $ 509,417
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,690 $ 2,171
Accounts payable 41,801 44,932
Accrued expenses 36,284 55,041
Income taxes payable 6,998 503
--------- ---------
Total current liabilities 86,773 102,647
Long-term debt 379,703 269,812
Deferred income taxes 38,433 30,981
Other 1,568 1,378
--------- ---------
Total liabilities 506,477 404,818
Commitments and contingencies
Stockholders' equity:
Preferred stock, 150 shares authorized,
no shares issued and outstanding -- --
Common stock, voting, $0.01 par value, 75,000
shares authorized, 27,436 and 27,400 issued and outstanding,
respectively 274 274
Additional paid-in capital 301,280 300,721
Accumulated deficit (187,696) (196,396)
--------- ---------
Total stockholders' equity 113,858 104,599
--------- ---------
Total liabilities and stockholders' equity $ 620,335 $ 509,417
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 167,160 $ 114,099 $ 316,994 $ 234,207
Cost of sales 134,339 89,168 253,173 185,748
--------- --------- --------- ---------
Gross profit 32,821 24,931 63,821 48,459
Operating expenses:
Selling and marketing 5,147 3,893 9,898 7,220
General and administrative 7,742 7,280 16,742 14,471
Management fees and services 1,837 552 3,692 1,059
--------- --------- --------- ---------
Income from operations 18,095 13,206 33,489 25,709
Other income (expense):
Interest (9,584) (12,491) (17,795) (25,033)
Other income, net 49 500 121 770
--------- --------- --------- ---------
Income before income taxes and 8,560 1,215 15,815 1,446
extraordinary item
Provision for income taxes 3,852 524 7,115 625
--------- --------- --------- ---------
Income before extraordinary item 4,708 691 8,700 821
Extraordinary loss from extinguishment of
debt (net of income tax benefit of $989) -- (1,300) -- (1,300)
--------- --------- --------- ---------
Net income (loss) $ 4,708 $ (609) $ 8,700 $ (479)
========= ========= ========= =========
Earnings per share:
Income before extraordinary item $ 0.16 $ 0.02 $ 0.30 $ 0.03
Extraordinary item -- (0.04) -- (0.04)
--------- --------- --------- ---------
Net income (loss) $ 0.16 $ (0.02) $ 0.30 $ (0.01)
========= ========= ========= =========
Weighted average common shares outstanding 29,316 29,607 29,369 29,607
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,700 $ (479)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 6,341 4,138
Amortization of goodwill and intangible assets 2,858 2,131
Extraordinary loss on extinguishment of debt -- 1,300
Amortization of debt issuance costs 1,265 2,520
Gain on sale of assets -- (49)
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable 11,371 11,178
Refundable income taxes -- 3,657
Inventories (33,440) (5,804)
Prepaid expenses and other (1,119) (1,413)
Deferred income tax asset, net 5,983 8,249
Accounts payable (10,003) (6,398)
Accrued expenses (25,628) (8,543)
Other assets 2,056 3,660
Other liabilities (861) 332
--------- --------
Net cash provided by (used in) operating activities (32,477) 14,479
--------- --------
Cash flows from investing activities:
Purchase of business, including acquisition costs (50,559) (52,376)
Purchases of property and equipment (9,578) (4,822)
Proceeds from sale of assets 4 913
Net cash generated from assets held for sale -- 45,375
--------- --------
Net cash used in investing activities (60,133) (10,910)
--------- --------
Cash flows from financing activities:
Borrowings on credit agreement and long-term debt 110,500 33,272
Repayment of long-term debt (1,091) (30,379)
Repayment of old accounts receivable financing -- (45,000)
Proceeds from new accounts receivable financing -- 35,000
Repayment of new accounts receivable financing (18,000) (10,000)
Debt issuance costs -- (1,662)
Other 550 --
--------- --------
Net cash provided by (used in) financing activities 91,959 (18,769)
--------- --------
Net decrease in cash (651) (15,200)
Cash, beginning of period 2,290 18,341
--------- --------
Cash, end of period $ 1,639 $ 3,141
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization and Basis of Presentation
American Pad & Paper Company (the "Company") is a holding company which
conducts its operations through American Pad & Paper Company of Delaware, Inc.
and its wholly owned subsidiaries.
The financial statements of the Company present the accounts and
operations of the Company and its wholly owned subsidiaries. Additionally, the
consolidated financial statements include the accounts of Notepad Funding
Corporation, a special purpose corporation utilized in the accounts receivable
facility. All significant intercompany balances have been eliminated. Certain
prior and current year amounts have been reclassified for comparative purposes.
Business
The Company is one of the largest manufacturers and marketers of
paper-based office products in North America. The Company operates in one
business segment, converting paper into office products, and offers a broad
assortment of products through two complementary divisions: Ampad (writing
pads, file folders, retail envelopes, machine papers, and other paper-based
office products) and Williamhouse (business envelopes and machine papers). The
Company's products are distributed through large mass merchant retailers,
office product superstores, warehouse clubs, major contract stationers, office
products wholesalers, paper merchants, and independent dealers. Substantially
all sales are to customers within the United States.
Interim Financial Information
The accompanying interim financial statements are unaudited. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted, although the Company believes the disclosures included herein are
adequate to make the information presented not misleading. These interim
financial statements should be read in conjunction with the Company's financial
statements for the year ended December 31, 1996.
The accompanying interim financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position at June 30, 1997, and the
results of its operations and its cash flows for the six and three month
periods ended June 30, 1997 and 1996. The results of operations for the
interim periods presented are not necessarily indicative of results to be
expected for the full fiscal year.
2. SIGNIFICANT ACQUISITION - SHADE/ALLIED, INC.
Effective February 11, 1997, the Company acquired all of the outstanding
common and preferred stock of Shade/Allied, Inc., ("Shade/Allied") for
approximately $50,668, consisting of $49,477 in cash and $1,191 in direct
acquisition costs, financed by the Company's bank credit agreement. This
acquisition has been recorded following the purchase method of accounting and,
accordingly, the purchase price has been preliminarily allocated to the assets
and liabilities at their fair market values. The excess of the purchase price
over the fair market value of the net assets acquired was allocated to goodwill
and amortized on a straight-line basis over 40 years. The Company preliminarily
allocated the purchase price as follows: trade accounts receivable of $4,585,
inventories of $5,760, other current assets of $856, property, plant and
equipment of $14,825, identifiable intangible assets of $5,610, deferred income
tax liability of $7,316, current liabilities of $13,957, noncurrent liabilities
of $1,051 and goodwill of $41,356. The operating results of Shade/Allied have
been included in the accompanying condensed consolidated financial statements
since the date of acquisition.
6
<PAGE> 7
AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Accounts receivable - trade, excluding $36,000
and $54,000, respectively, which are sold as part
of a $60,000 accounts receivable financing
facility $ 64,399 $ 56,431
Accounts receivable - other 4,309 2,839
Less allowance for doubtful accounts and reserves for
customers deductions, returns and cash discounts (440) (2,216)
-------- --------
$ 68,268 $ 57,054
======== ========
</TABLE>
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Raw materials and semi-finished goods $ 53,551 $ 41,505
Work in process 6,921 4,695
Finished goods 81,036 58,607
-------- --------
141,508 104,807
LIFO reserve 3,359 860
-------- --------
$144,867 $105,667
======== ========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Land $ 7,138 $ 6,749
Buildings 30,886 30,532
Machinery and equipment 108,760 96,790
Office furniture and fixtures 9,391 8,263
Construction in progress 11,185 5,060
-------- --------
167,360 147,394
Less accumulated depreciation and amortization 20,592 14,304
-------- --------
$146,768 $133,090
======== ========
</TABLE>
7
<PAGE> 8
AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Goodwill $191,632 $146,006
Intangible assets, principally tradenames 43,779 38,169
Debt issuance costs 18,382 18,369
-------- --------
253,793 202,544
Less accumulated amortization 14,300 10,177
-------- --------
$239,493 $192,367
======== ========
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Acquisition integration costs $ 12,514 $ 12,695
Sales volume discounts 2,164 20,184
Salaries and wages 10,738 8,738
Interest 5,759 4,171
Other 5,109 9,253
-------- --------
$ 36,284 $ 55,041
======== ========
</TABLE>
8. EARNINGS PER SHARE
Effective December 15, 1997, the Company will report basic and diluted
earnings per share following the guidance provided in Statement of Financial
Accounting Standards Number 128, Earnings Per Share. Basic earnings per share
will be computed as the quotient of net income divided by the actual number of
outstanding shares of common stock at the end of a period. Diluted earnings per
share will be computed as the quotient of net income divided by the number of
outstanding shares of common stock as adjusted for common stock options. The
adjustment for common stock options will be calculated by assuming that all
dilutive options are exercised, that the proceeds from such exercise are used
to repurchase shares of the Company's stock at the average price of the common
stock during the period and that the Company will also generate proceeds and
repurchase shares from the tax benefits associated with the assumed exercise of
the common stock options. Early adoption of this new accounting standard is not
permitted nor is the Company permitted to present the earnings per share
information calculated following this guidance on the face of the Company's
income statement.
8
<PAGE> 9
AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
If the Company had determined its earnings per share under the new
accounting standard, the following earnings per share information would be
presented:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
----------------- -----------------
1997 1996 1997 1996
----- ------ ----- ------
<S> <C> <C> <C> <C>
Basic earnings per share $0.17 $(0.02) $0.32 $(0.02)
Diluted earnings per share $0.16 $(0.02) $0.30 $(0.02)
</TABLE>
The Company intends to adopt the new accounting standard effective
December 31, 1997 and will present the basic and diluted earnings per share
information as part of the quarterly financial data in the Company's annual
report to shareholders.
Given the changes in the Company's capital structure effected in
connection with the initial public offering of the Company's common stock,
historical earnings per share for 1996 are not presented in the condensed
consolidated statement of income as it is not considered to be meaningful. Pro
forma weighted average shares outstanding reflect conversion of the preferred
stock into common stock for the same periods outstanding as the underlying
common stock on which the preferred stock was issued and the initial public
offering of common stock.
The pro forma weighted average shares outstanding gives effect to the
8.1192-for-one stock split and has been adjusted to reflect as outstanding,
using the treasury stock method at the estimated initial public offering price,
all shares issuable upon the exercise of stock options granted subsequent to
April 25, 1995 (one year prior to the initial public offering filing date
pursuant to the Securities and Exchange Commission's rules).
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARY
The 13% senior subordinated notes are guaranteed by Shade/Allied, Inc., a
wholly owned subsidiary of American Pad & Paper Company of Delaware, Inc.
("Delaware"). The subsidiary guaranty is full, unconditional and joint and
several. The Company is not a guarantor of the senior subordinated notes.
Separate financial statements of the guarantor subsidiary are not presented
because management has determined that they would not be material to investors.
However, condensed consolidating financial information as of June 30, 1997 and
for the three and six months then ended is presented. Shade/Allied was acquired
by Delaware on February 11, 1997 and, as a result, the six month period ended
June 30, 1997 is the first period in which the Company's historical results
include the results of operations of Shade/Allied and is the first period where
Shade/Allied was a guarantor subsidiary. The condensed consolidating financial
information is as follows:
9
<PAGE> 10
AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
June 30, 1997
- --------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company subsidiary subsidiary Elimination total
--------- --------- --------- --------- ---------
Assets
------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash $ 1,636 $ 3 $ -- $ -- $ 1,639
Accounts receivable 8,068 5,623 54,577 -- 68,268
Intercompany receivable (payable) 20,006 (3,723) (16,283) -- --
Inventories 136,933 7,934 -- -- 144,867
Prepaid expenses and other current
assets 3,442 3 42 -- 3,487
Deferred income taxes 11,188 -- -- -- 11,188
--------- --------- --------- --------- ---------
Total current assets 181,273 9,840 38,336 -- 229,449
Property, plant and equipment, net 132,641 14,127 -- -- 146,768
Investment in subsidiaries 90,753 -- -- (90,753) --
Intangible assets, net 192,600 46,483 410 -- 239,493
Other 4,625 -- -- -- 4,625
--------- --------- --------- --------- ---------
Total assets $ 601,892 $ 70,450 $ 38,746 (90,753) $ 620,335
========= ========= ========= ========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,690 $ -- $ -- $ -- $ 1,690
Accounts payable 34,334 7,467 -- -- 41,801
Accrued expenses 33,803 2,419 62 -- 36,284
Income taxes payable 6,870 128 -- -- 6,998
--------- --------- --------- --------- ---------
Total current liabilities 76,697 10,014 62 -- 86,773
Long-term debt 379,703 -- -- -- 379,703
Deferred income taxes 31,117 7,316 -- -- 38,433
Other liabilities 517 1,051 -- -- 1,568
--------- --------- --------- --------- ---------
Total liabilities 488,034 18,381 62 -- 506,477
Stockholders' equity:
Common stock 274 30 10 (40) 274
Additional paid-in capital 301,280 50,531 35,399 (85,930) 301,280
Retained earnings (accumulated deficit) (187,696) 1,508 3,275 (4,783) (187,696)
--------- --------- --------- --------- ---------
Total stockholders' equity 113,858 52,069 38,684 (90,753) 113,858
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity $ 601,892 $ 70,450 $ 38,746 $ (90,753) $ 620,335
========= ========= ========= ========= =========
</TABLE>
10
<PAGE> 11
AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Condensed Consolidating Statement of Operations
<TABLE>
<CAPTION>
Three months ended June 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company Subsidiary subsidiary Eliminations total
--------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 149,191 $ 17,284 $ -- $ 685 $ 167,160
Cost of sales 118,635 15,019 -- 685 134,339
--------- --------- --------- --------- ---------
Gross profit 30,556 2,265 -- -- 32,821
Operating expenses:
Selling and marketing 4,447 700 -- -- 5,147
General and administrative 8,372 275 (905) -- 7,742
Management fees and services 1,837 -- -- -- 1,837
--------- --------- --------- --------- ---------
Income from operations 15,900 1,290 905 -- 18,095
Other income (expense)
Interest (9,582) 28 (30) -- (9,584)
Other income, net 49 -- -- -- 49
--------- --------- --------- --------- ---------
Income before income taxes 6,367 1,318 875 -- 8,560
Provision for income taxes 2,866 593 393 -- 3,852
--------- --------- --------- --------- ---------
Income before equity in
earnings of subsidiaries 3,501 725 482 -- 4,708
Equity in earnings of subsidiaries 1,207 -- -- $ (1,207) --
--------- --------- --------- --------- ---------
Net income $ 4,708 $ 725 $ 482 $ (1,207) $ 4,708
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company Subsidiary subsidiary Eliminations total
--------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 288,693 $ 28,301 $ -- $ -- $ 316,994
Cost of sales 228,236 24,937 -- -- 253,173
--------- --------- --------- --------- ---------
Gross profit 60,457 3,364 -- -- 63,821
Operating expenses:
Selling and marketing 8,793 1,105 -- -- 9,898
General and administrative 17,795 752 (1,805) -- 16,742
Management fees and services 3,692 -- -- -- 3,692
--------- --------- --------- --------- ---------
Income from operations 30,177 1,507 1,805 -- 33,489
Other income (expense)
Interest (17,735) -- (60) -- (17,795)
Other income, net 121 -- -- -- 121
--------- --------- --------- --------- ---------
Income before income taxes 12,563 1,507 1,745 -- 15,815
Provision for income taxes 5,652 678 785 -- 7,115
--------- --------- --------- --------- ---------
Income before equity in
earnings of subsidiaries 6,911 829 960 -- 8,700
Equity in earnings of subsidiaries 1,789 -- -- (1,789) --
--------- --------- --------- --------- ---------
Net income $ 8,700 $ 829 $ 960 $ (1,789) $ 8,700
========= ========= ========= ========= =========
</TABLE>
11
<PAGE> 12
AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
Six months ended June 30, 1997
- ----------------------------------------------------------------------------------------------------------------------------
The Guarantor Nonguarantor Consolidated
Company Subsidiary subsidiary Eliminations total
--------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $ (32,505) $ 20 $ 8 $ -- $ (32,477)
Investing activities
Purchase of business, including
acquisition costs (50,559) -- -- -- (50,559)
Purchases of property, plant and equipment (9,559) (19) -- -- (9,578)
Proceeds from sale of assets 4 -- -- -- 4
--------- ------- ------- ------- ---------
Net cash used in investing activities (60,114) (19) -- -- (60,133)
========= ======= ======= ======= =========
Financing activities
Proceeds from long-term debt 110,500 -- -- -- 110,500
Repayment of long-term debt (1,091) -- -- -- (1,091)
Repayment of new accounts receivable
facility (18,000) -- -- -- (18,000)
Other 558 -- (8) -- 550
--------- ------- ------- ------- ---------
Net cash provided by
(used in) financing activities 91,967 -- (8) -- 91,959
--------- ------- ------- ------- ---------
Increase (decrease) in cash (652) 1 -- -- (651)
Cash, beginning of period 2,288 2 -- -- 2,290
--------- ------- ------- ------- ---------
Cash, end of period $ 1,636 $ 3 $ -- $ -- $ 1,639
========= ======= ======= ======= =========
</TABLE>
12
<PAGE> 13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company is one of the largest manufacturers and marketers of nationally
branded and private label paper-based office products (excluding copy paper) in
the $60 billion to $70 billion North American office products industry. The
Company offers a broad assortment of products including writing pads, file
folders, envelopes, machine papers and other paper-based products. Through its
Ampad division, the Company is among the largest and most important suppliers
of pads and other paper-based writing products, filing supplies, machine papers
and retail envelopes to many of the largest and fastest growing office products
distributors. Through its Williamhouse division, the Company is the leading
supplier of mill branded, specialty and commodity business envelopes to paper
merchants and distributors. The Company believes that its future operating
results will not be directly comparable to its historical operating results
because of its strategic acquisitions and the expected cost savings from
integration of its acquisitions. The Company's business has not generally been
seasonal in nature. Certain factors which have affected, and may affect
prospectively, the operating results of the Company are discussed below.
Strategic Acquisition. On February 11, 1997, the Company acquired
Shade/Allied, a national supplier of machine papers, principally continuous
computer forms. The purchase price of $50.7 million was financed with
borrowings under the Company's bank credit agreement. Shade/Allied's products
are distributed by both the Ampad and Williamhouse divisions and the
manufacturing plants are integrated into the Ampad division. This acquisition
provided the Company with a more significant position in a fourth product
category.
Purchase Accounting Effects. The Company's acquisitions have been
accounted for using the purchase accounting method. The acquisitions have
currently affected, and will prospectively affect, the Company's results of
operations in certain significant respects. The aggregate acquisition costs
(including assumption of debt) are allocated to the net assets acquired based
on the fair market value of such net assets. The allocations of the purchase
price result in an increase in the historical book value of certain assets such
as property, plant and equipment and intangible assets, including goodwill,
which results in incremental annual depreciation and amortization expense each
year.
Paper Prices. Paper represents a majority of the Company's cost of goods
sold. While paper prices have increased by an average of less than 1% annually
since 1989, certain commodity grades have shown considerable price volatility
during that period. Beginning in January 1995, the Company adopted new pricing
policies enabling it to set product prices consistent with the Company's cost
of paper at the time of shipment. The Company believes that it is able to
price its products so as to minimize the impact of price volatility on dollar
margins. Paper price volatility has and is expected to continue to have an
effect on net sales and cost of sales.
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the three and six months ended June
30, 1997 and 1996. The Company's historical results of operations for each of
these periods are significantly affected by the results for the following
business acquired by the Company: (i) Niagara which was acquired on June 28,
1996 and (ii) Shade/Allied which was acquired on February 11, 1997.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
Income Statement Data 1997 1996 1997 1996
--------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Gross profit 19.6 21.9 20.1 20.7
Selling, general and administrative
expenses (7.7) (9.8) (8.4) (9.3)
Management fees and services (1.1) (0.5) (1.1) (0.4)
----- ----- ----- -----
Income from operations 10.8 11.6 10.6 11.0
Interest expense, net (5.7) (10.9) (5.6) (10.7)
Other income -- 0.4 -- 0.3
----- ----- ----- -----
Income before income taxes and
extraordinary item 5.1 1.1 5.0 0.6
Provision for income taxes (2.3) (0.5) (2.3) (0.3)
----- ----- ----- -----
Income before extraordinary item 2.8 0.6 2.7 0.3
Extraordinary loss from extinguishment
of debt -- (1.1) -- (0.5)
----- ----- ----- -----
Net income (loss) 2.8% (0.5)% 2.7% (0.2)%
===== ===== ===== =====
</TABLE>
13
<PAGE> 14
AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net Sales for the three months ended June 30, 1997 increased by $53.1
million, or 46.5%, to $167.2 million from $114.1 million for the three months
ended June 30, 1996. Of this net sales increase, $26.2 million is related to
the acquisition of Niagara and $17.3 million is related to the acquisition of
Shade/Allied. Net sales from existing operations increased by approximately
$9.6 million primarily as the result of strong sales in the superstores and
contract stationers customer channels.
Gross Profit for the three months ended June 30, 1997 increased by $7.9
million, or 31.6%, to $32.8 million from $24.9 million for the three months
ended June 30, 1996. Approximately $4.0 million of the increase in gross
profit is attributable to the acquisition of Niagara and $2.3 million is
attributable to the Shade/Allied acquisition. The remaining increase in gross
profit of approximately $1.6 million is attributable to the increased sales
from existing operations. Gross profit margin decreased to 19.6% for the three
months ended June 30, 1997 from 21.9% for the three months ended June 30, 1996.
The decrease in gross profit margin is primarily attributable to increases in
sales of relatively lower margin products, including those of Shade/Allied, in
the second quarter of 1997.
SG&A expenses for the three months ended June 30, 1997 increased $1.7
million, or 15.2%, to $12.9 million from $11.2 million for the three months
ended June 30, 1996. The acquisitions of Niagara and Shade/Allied resulted in
additional expense for the three months ended June 30, 1997 of approximately
$2.0 million which was partially offset by increased efficiencies. Management
fees and services expense for the second quarter of 1997 increased by
approximately $1.3 million as compared to the same quarter of 1996 due
primarily to a one year non-recurring consulting agreement with the former
president of Niagara.
Interest expense for the three months ended June 30, 1997 decreased $2.9
million to $9.6 million from $12.5 million for the three months ended June 30,
1996. The decrease is primarily attributable to the reduction in long-term
debt which resulted from the Company's initial public offering of common stock
in the third quarter of 1996. This decrease in indebtedness was partially
offset by increased borrowings required for the Shade/Allied acquisition and
for the increase in working capital.
The income tax provision for the three month period ended June 30, 1997
reflects an effective tax rate of 45.0% versus an effective tax rate of 43.1%
for the three month period ended June 30, 1996. The increase is attributable
primarily to the nondeductible goodwill amortization resulting from the Niagara
and Shade/Allied acquisitions.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net Sales for the six months ended June 30, 1997 increased by $82.8
million, or 35.3%, to $317.0 million from $234.2 million for the six months
ended June 30, 1996. Of this net sales increase, $52.7 million is related to
the acquisition of Niagara and $28.3 million is related to the acquisition of
Shade/Allied. The remaining increase of approximately $1.8 million is
attributable to existing operations.
Gross Profit for the six months ended June 30, 1997 increased by $15.3
million, or 31.6%, to $63.8 million from $48.5 million for the six months ended
June 30, 1996. Approximately $7.5 million of the increase in gross profit is
attributable to the acquisition of Niagara and $3.4 million is attributable to
the Shade/Allied acquisition. The remaining increase in gross profit of
approximately $4.5 million is primarily attributable to increased sales of
higher margin proprietary products from existing operations, particularly in
the first quarter of 1997. Gross profit margin decreased to 20.1% for the six
months ended June 30, 1997 from 20.7% for the six months ended June 30, 1996.
The decrease in gross profit margin is primarily attributable to the addition
of sales of the relatively lower margin Shade/Allied products during the first
half of 1997.
14
<PAGE> 15
AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
SG&A expenses for the six months ended June 30, 1997 increased $4.9
million, or 22.6%, to $26.6 million from $21.7 million for the six months ended
June 30, 1996. The acquisitions of Niagara and Shade/Allied resulted in
additional expense for the six months ended June 30, 1997 of approximately $4.3
million. Management fees and services expense for the first half of 1997
increased by approximately $2.6 million as compared to the first half of 1996
due primarily to a one year non-recurring consulting agreement with the former
president of Niagara.
Interest expense for the six months ended June 30, 1997 decreased $7.2
million to $17.8 million from $25.0 million for the six months ended June 30,
1996. The decrease is primarily attributable to the reduction in long-term
debt which resulted from the Company's initial public offering of common stock
in the third quarter of 1996. This decrease in indebtedness was partially
offset by increased borrowings required for the Shade/Allied acquisition and
for the increase in working capital.
The income tax provision for the six month period ended June 30, 1997
reflects an effective tax rate of 45.0% versus an effective tax rate of 43.2%
for the six month period ended June 30, 1996. The increase is attributable
primarily to the nondeductible goodwill amortization resulting from the Niagara
and Shade/Allied acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities for the six months ended June 30,
1997 of $32.5 million was primarily the net result of the following: (i) a
reduction of accounts receivable of $11.4 million as seasonal accounts
receivable were collected during the first part of the year, (ii) an increase
in inventories of $33.4 million due to a buildup in anticipation of seasonal,
promotional and new product sales in the second half of the year and (iii) a
reduction in accrued expenses of $25.6 million as annual customer volume
rebates and incentive compensation were paid during the first half of 1997.
Cash used in investing activities for the six months ended June 30, 1997 of
$60.1 million was due to the acquisition of Shade/Allied and purchases of
equipment.
Net cash provided by financing activities during the first half of 1997 was
$92.0 million and primarily resulted from repayment of $18.0 million in
financing outstanding under the accounts receivable credit facility and
borrowings of $110.5 million under the bank credit agreement to finance: (i)
such repayment, (ii) the acquisition of Shade/Allied, (iii) the purchases of
equipment and (iv) growth in working capital.
Management believes that based on current levels of operations and
anticipated internal growth, cash flow from operations, together with other
available sources of funds including borrowings under the bank credit agreement
and the accounts receivable facility and available cash on hand at June 30,
1997 of $1.6 million, will be adequate for the foreseeable future to make
required payments of principal and interest on the Company's indebtedness, to
fund anticipated capital expenditures, including anticipated capital
expenditures of approximately $8 million during the remainder of 1997, and
working capital requirements, and to enable the Company and its subsidiaries to
comply with the terms of their debt agreements. However, actual capital
requirements may change, particularly as a result of any acquisitions which the
Company may make. The ability of the Company to meet its debt service
obligations and reduce its total debt will be dependent, however, upon the
future performance of the Company and its subsidiaries which, in turn, will be
subject to general economic conditions and to financial, business and other
factors, including factors beyond the Company's control. A portion of the
consolidated debt of the Company bears interest at floating rates; therefore,
its financial condition is and will continue to be affected by changes in
prevailing interest rates. The Company has entered into an interest rate
protection agreement to minimize the impact from a rise in interest rates.
15
<PAGE> 16
AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three and six months ended June 30, 1997 and
1996.
NEWLY ISSUED ACCOUNTING STANDARD
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share, which is effective
December 15, 1997 and which prescribes a new presentation of earnings per share
amounts as either "basic" or "diluted." Basic earnings per share is to be
calculated as net income divided by the number of outstanding shares of common
stock. Diluted earnings per share is to be calculated in a manner similar to
the "primary" earnings per share currently presented by the Company. Diluted
earnings per share is calculated as net income divided the number of
outstanding shares of common stock, as adjusted for common stock options. The
Company intends to implement the new accounting at the end of 1997 and, as part
of its 1997 annual report to shareholders and Form 10-K, will restate its
quarterly earnings per share following the guidelines in the new accounting
standard. If the new standard had been implemented during the second quarter
of 1997, earnings per share would have been presented as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share $0.17 $(0.02) $0.32 $(0.02)
Diluted earnings per share $0.16 $(0.02) $0.30 $(0.02)
</TABLE>
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form
10-Q to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which
are other than statements of historical facts. From time to time, the Company
may publish or otherwise make available forward-looking statements of this
nature. All such subsequent forward-looking statements, whether written or
oral and whether made by or on behalf of the Company, are also expressly
qualified by these cautionary statements. Certain statements contained herein
are forward-looking statements and accordingly involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. The forward-looking statements
contained herein are based on various assumptions, many of which are based, in
turn, upon further assumptions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there can be no assurance that
management's expectation, beliefs or projections will result or be achieved or
accomplished. In addition to the other factors and matters discussed elsewhere
herein, the following are important factors that, in the view of the Company,
could cause actual results to differ materially from those discussed in the
forward-looking statements:
1. Changes in economic conditions, in particular those which affect the
retail and wholesale office product markets.
2. Changes in the availability and/or price of paper, in particular if
increases in the price of paper are not passed along to the Company's
customers.
3. Changes in senior management or control of the Company.
4. Inability to obtain new customers or retain existing ones.
5. Significant changes in competitive factors, including product pricing
conditions, affecting the Company.
6. Governmental/regulatory actions and initiatives, including, those
affecting financings.
7. Significant changes from expectations in actual capital expenditures
and operating expenses.
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and
other investments.
16
<PAGE> 17
AMERICAN PAD & PAPER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
9. Significant changes in rates of interest, inflation or taxes.
10. Significant changes in the Company's relationship with its employees
and the potential adverse effects if labor disputes or grievance were
to occur.
11. Changes in accounting principles and/or the application of such
principles to the Company.
The foregoing factors could affect the Company's actual results and could
cause the Company's actual results during 1997 and beyond to be materially
different from any anticipated results expressed in any forward-looking
statement made by or on behalf of the Company.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after date hereof.
===============================================================================
PART II OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on April 22, 1997. The
following matters were submitted to a vote of shareholders of the Company's
common stock with the results indicated below:
<TABLE>
<CAPTION>
Withheld, Against
Matter Approved or Abstained
------ ---------- -----------------
<S> <C> <C>
Election of Class I Directors - Jonathan Lavine
and Gregory M. Benson ..................... 22,461,798 577,320
Ratification of Price Waterhouse LLP as
independent auditors for the Company....... 23,031,223 3,895
</TABLE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a
part hereof:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
10.1 Change of Control Agreement by and between the Company
and Kevin W. McAleer
10.2 Indemnification Agreement by and between the Company and
its officers and directors
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
The following report on Form 8-K, which pertains to the acquisition of
Shade/Allied, was filed during the second quarter of 1997:
Current Report on Form 8-K/A filed April 24, 1997 relating to the
Company's pro forma financial statements and Shade/Allied's historical
financial statements.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, American
Pad & Paper Company and American Pad & Paper Company of Delaware, Inc. have
duly caused this report to be signed on August 14, 1997 on their behalf by the
undersigned thereunto duly authorized.
/s/ Kevin W. McAleer /s/ William W. Solomon, Jr.
- ---------------------------- -------------------------------
Kevin W. McAleer William W. Solomon, Jr.
Chief Financial Officer Vice President - Controller
Principal Financial Officer Principal Accounting Officer
18
<PAGE> 19
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Change of Control Agreement by and between the Company
and Kevin W. McAleer
10.2 Indemnification Agreement by and between the Company and
its officers and directors
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
AMERICAN PAD & PAPER COMPANY
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement ("Agreement") is made and effective as of
the 15th day of July, 1997, by and between American Pad & Paper Company, a
Delaware corporation (the "Company"), and Kevin W. McAleer ("Executive").
RECITALS
The Board of Directors of the Company (the "Board") has determined that it
is in the best interest of the Company to assure that the Company will have the
continued dedication of the Executive, notwithstanding the possibility, threat
or occurrence of a Change of Control (as defined below). The Board believes it
is imperative to diminish the inevitable distraction of the Executive by virtue
of the personal uncertainties and risks created by a pending or threatened
Change of Control, to encourage the Executive's full attention and dedication
to the Company currently and in the event of any threatened or pending Change
of Control, and to provide Executive with compensation and benefit arrangements
upon a Change of Control which insures that such compensation and benefits are
competitive with other corporations.
AGREEMENT
Now, therefore, in consideration of Executive's continued employment by
the Company, as well as the promises, covenants and obligations contained
herein, the Company and Executive agree as follows:
1. Payment of Severance Amount. Upon the occurrence of a Termination
Event (as defined in paragraph 2), the Company shall:
(a) pay Executive an amount equal to (i) Executive's Base Annual
Salary (as defined in paragraph 2) multiplied by a factor of three (3.0),
payable as a lump sum cash payment within ten (10) days following the date of
the termination constituting such Termination Event (the "Termination Date";
(b) provide Executive with life, disability and medical insurance at
the level provided at either the date of the occurrence of a Change of Control
(as defined in paragraph 2) or the Termination Date, as Executive shall in his
sole discretion elect by providing written notice hereof to the Company for a
period of time equal to twelve (12) months following the Termination Date or
such shorter period until Executive shall obtain substantially equivalent
insurance coverage from a subsequent employer, if any, in the same manner as if
Executive's employment had not been terminated until the end of such period.
Executive shall immediately notify the Company upon obtaining any insurance
from a subsequent employer and shall provide all information required by the
Company regarding such insurance to enable the Company to make a determination
of whether such insurance is substantially equivalent; and
<PAGE> 2
(c) pay all reasonable legal fees and expenses incurred by Executive
in seeking to obtain or enforce any right or benefit provided by the Agreement.
2. Definitions.
(a) A "Termination Event" shall be deemed to have occurred if:
(i) At any time within three years after a Change of Control, the
Company or any successor thereto shall terminate Executive's employment
for any reason other than for (A) Cause, (B) incapacity due to physical or
mental illness or (C) death; or
(ii) The Executive shall voluntarily terminate his employment
with the Company within one (1) year of a Change of Control for any reason
whatsoever.
(b) A "Change of Control" shall be deemed to have occurred if:
(i) individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least
fifty-one percent (51%) of the Board, provided that any person becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board shall be,
for purposes of this Agreement, considered as though such person were a
member of the Incumbent Board;
(ii) the stockholders of the Company shall approve a
reorganization, merger or consolidation, in each case, with respect to
which persons who were the stockholders of the Company immediately prior
to such reorganization, merger or consolidation do not, immediately
thereafter, own more than fifty percent (50%) of the combined voting power
entitled to vote generally in the election of directors ("Voting
Securities") of the reorganized, merged or consolidated company's then
outstanding voting securities; sale of all or substantially all of the
assets of the Company;
(iii) the stockholders of the Company shall approve a liquidation
or dissolution of the Company or a sale of all or substantially all of the
assets of the Company; or
(iv) any "person," as that term is defined in Section 3(a)(9) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, any of its subsidiaries, any employee benefit
plan of the Company or any of its subsidiaries, any entity organized,
appointed or established by the Company for or pursuant to the terms of
such plan or Bain Capital Funds), together with all "affiliates" and
"associates" (as such terms are defined in Rule 12b-2 under the Exchange
Act) of such person (as well as any "Person" or "group" as those terms are
used in Sections 13(d) and 14(d) of the Exchange Act), shall become the
"beneficial owner" or "beneficial owners" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act), directly or
-2-
<PAGE> 3
indirectly, of securities of the Company representing in the aggregate 50%
or more of either (A) the then outstanding shares of common stock, par
value $.01 per share, of the Company ("Common Stock") or (B) the Voting
Securities of the Company, in either such case other than as a result of
acquisitions of such securities directly from the Company.
Notwithstanding the foregoing, a "Change in Control" of the Company
shall not be deemed to have occurred for purposes of subparagraph (iv) of
this paragraph 2(a) solely as the result of an acquisition of securities
by the Company which, by reducing the number of shares of Common Stock or
other Voting Securities of the Company outstanding, increases (i) the
proportionate number of shares of Common Stock beneficially owned by any
person to 50% or more of the shares of Common Stock then outstanding or
(ii) the proportionate voting power represented by the Voting Securities
of the Company beneficially owned by any person to 50% or more of the
combined voting power of all then outstanding Voting Securities; provided,
however, that if any person referred to in clause (i) or (ii) of this
sentence shall thereafter become the beneficial owner of any additional
shares of Common Stock or other Voting Securities of the Company (other
than a result of a stock split, stock dividend or similar transaction),
then a "Change in Control" of the Company shall be deemed to have occurred
for purposes of subparagraph (iv) of this paragraph 2(a).
(c) "Base Annual Salary" shall, as determined on the Termination Date, be
equal to the greater of (i) Executive's annual salary on the date of the
earliest Change of Control to occur during the eighteen month period prior to
the Termination Date plus any bonuses or special incentive payments received in
the twelve months prior to such Change of Control or (ii) Executive's annual
salary on the Termination Date plus any bonuses or special incentive payments
received in the prior twelve months.
(d) For purposes of this Agreement, "Cause" shall mean (i) the willful and
continued failure by Executive to perform his duties as Chief Financial Officer
of the Company or any of its Subsidiaries or his continued failure to perform
duties reasonably requested or reasonably prescribed by the Board (other than
as a result of Executive's death or disability), (ii) the engaging by Executive
in conduct which is materially monetarily injurious to the Company or any of
its Subsidiaries, (iii) gross negligence or willful misconduct by Executive in
the performance of his duties which results in, or causes, material monetary
harm to the Company or any of its Subsidiaries, or (iv) Executive's commission
of a felony or other civil or criminal offense involving moral turpitude. In
the case of (i), (ii) and (iii) above, finding of Cause for termination shall
be made only after reasonable notice to Executive and an opportunity for
Executive, together with counsel, to be heard before the Board. A determination
of Cause by the Board shall be effective only if agreed upon by a majority of
the directors, which shall include at least one director who is not an employee
of the Company or its Subsidiaries and is not employed by Bain Capital, Inc.
("Bain").
3. Adjustments. Any provision of this Agreement to the contrary
notwithstanding, if, in the Company's determination, the total sum of (i) the
payments and benefits to be paid or provided to (or with respect to) Executive
under this Agreement which are considered to be "parachute payments" within the
meaning of Section 280G of the Internal Revenue Code of 1986,
-3-
<PAGE> 4
as amended (the "Code") and (ii) any other payments and benefits which are
considered to be "parachute payments," as so defined, to be paid or provided to
(or with respect to) Executive by the Company or a member of the Company's
affiliated group (within the meaning of Section 280G(d)(5) of the Code) (the
"Total Amount") exceeds the amount Executive can receive without having to pay
excise tax with respect to all or any portion of such payments or benefits
under Section 4999 of the Code (the "Reduced Amount"), then the amount payable
to Executive pursuant to paragraphs 1(a) and 1(b) of this Agreement shall be
reduced to the greater of zero or the highest amount which will not result in
Executive having to pay excise tax with respect to any payments and benefits
under Section 4999 of the Code; provided, however, that in the event that the
Reduced Amount minus any and all applicable federal, state and local taxes
(including but not limited to income and employment taxes imposed by the Code)
is less than the Total Amount minus any and all applicable federal, state and
local taxes (including but not limited to income and employment taxes imposed
by the Code and excise taxes applicable to such payments under Section 4999 of
the Code), then the reduction of the amount payable to Executive under
paragraphs 1(a) and 1(b) of this Agreement provided for in the preceding
provisions of this paragraph 3 shall not be made.
4. Notices. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Company to: American Pad & Paper Company
17304 Preston Road, Suite 700
Dallas, Texas 75252
Attention: Chairman of the Board
If to Executive to: Kevin W. McAleer
17516 Oak Mount Place
Dallas, Texas 75287
or to such other address as either party may furnish to the other in writing in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
5. Applicable Law. This contract is entered into under, and shall be
governed for all purposes by, the laws of the State of Texas.
6. Severability. If a court of competent jurisdiction determines that any
provision of this Agreement is invalid or unenforceable, then the invalidity or
unenforceability of that provision shall not affect the validity or
enforceability of any other provision of this Agreement, and all other
provisions shall remain in full force and effect.
7. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.
-4-
<PAGE> 5
8. Withholding of Taxes. Company may withhold from any benefits payable
under this Agreement all federal, state, city or other taxes as may be required
pursuant to any law or governmental regulation or ruling.
9. No Employment Agreement. Nothing in this Agreement shall give Executive
any rights (or impose any obligations) to continued employment by the Company
or any subsidiary thereof or successor thereto, nor shall it give the Company
any rights (or impose any obligations) with respect to continued performance of
duties by Executive for the Company or any subsidiary thereof or successor
thereto.
10. Assignment.
(a) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign or transfer this
Agreement or any rights or obligations hereunder, except as provided in the
remainder of this paragraph 10. Without limiting the foregoing, Executive's
right to receive payments hereunder shall not be assignable or transferable,
whether by pledge, creation of a security interest or otherwise, other than a
transfer by his will or by the laws of descent or distribution, and in the
event of any attempted assignment or transfer contrary to this paragraph 10 the
Company shall have no liability to pay any amount so attempted to be assigned
or transferred. This Agreement shall inure to the benefit of and be enforceable
by Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
(b) The Company may: (i) as long as it remains obligated with respect
to this Agreement, cause its obligations hereunder to be performed by a
subsidiary or subsidiaries for which Executive performs services, in whole or
in part; (ii) assign this Agreement and its rights hereunder in whole, but not
in part, to any corporation with or into which it may hereafter merge or
consolidate or to which it may transfer all or substantially all of its assets,
if said corporation shall by operation of law or expressly in writing assume to
the reasonable satisfaction of Executive all liabilities of the Company
hereunder as fully as if it has been originally named the Company herein; but
may not otherwise assign this Agreement or its rights hereunder. Subject to the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
the Company's successors and assigns.
11. Modifications. This Agreement shall not be varied, altered, modified,
canceled, changed or in any way amended except by mutual agreement of the
parties in a written instrument executed by the parties hereto or their legal
representatives.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the day and year first above written.
AMERICAN PAD & PAPER COMPANY
By: /s/ Charles G. Hanson III
------------------------------
Name: Charles G. Hanson III
Title: Chief Executive Officer
EXECUTIVE
/s/ Kevin W. McAleer
----------------------------------
Kevin W. McAleer
<PAGE> 1
EXHIBIT 10.2
INDEMNIFICATION AGREEMENT
This Agreement, dated as of June 17, 1997, is made by and
between American Pad & Paper Company, a Delaware corporation (the "Company"),
and William W. Solomon, Jr. who is currently serving as an officer of the
Company (the "Indemnitee").
WHEREAS, the Indemnitee is currently serving in the capacity
or capacities described above;
WHEREAS, the Company recently completed an initial public
offering of its common stock (the "Offering"), which will likely increase the
risk of litigation and other claims being asserted against the directors and
officers of the Company;
WHEREAS, at the time of the Offering the Company determined
that it was in the best interests of the Company to enter into indemnification
agreements with its current officers and/or directors of the Company;
WHEREAS, the Company wishes the Indemnitee to continue to
serve in such capacity or capacities and the Indemnitee is willing, under
certain circumstances, to continue in such capacity or capacities;
WHEREAS, damages sought and sometimes paid in many claims made
against corporate directors and officers and the expenses required to defend
such claims, whether or not the allegations are meritorious, may not bear a
reasonable relationship to the amount of compensation received by and may be
beyond the financial resources of the Indemnitee;
WHEREAS, the Indemnitee is currently entitled to
indemnification under Delaware General Corporation Law and the Certificate of
Incorporation of the Company, which the Indemnitee does not regard to be
adequate protection against the risks associated with his service to or at the
request of the Company;
WHEREAS, the Indemnitee and the Company have concluded that
the exposure to risk of personal liability and payment of damages out of the
Indemnitee's personal assets may result in overly conservative direction and
supervision of the Company's affairs, which is detrimental to the best
interests of the Company and its stockholders; and
WHEREAS, the Company has concluded that additional protection
is necessary for its directors and elected officers.
NOW, THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
<PAGE> 2
1. Definitions.
(a) Agent. For the purposes of this Agreement, "agent"
of the Company means any person who is or was a director, officer, employee,
agent or fiduciary of the Company or a subsidiary of the Company, or is or was
serving at the request of, for the convenience of, or to represent the
interests of the Company or a subsidiary of the Company as a director, officer,
employee, agent or fiduciary of another corporation, partnership, joint
venture, trust or other enterprise or entity, including service with respect to
an employee benefit plan.
(b) Disinterested Director. For purposes of this
Agreement, "Disinterested Director" of the Company means a director of the
Company who is not and was not a party to the proceeding for which
indemnification is being sought by the claimant.
(c) Expenses. For purposes of this Agreement, "expenses"
includes all direct and indirect costs of any type or nature whatsoever
(including, without limitation, all attorneys' fees and related disbursements,
other out- of-pocket costs and reasonable compensation for time spent by the
Indemnitee for which he is not otherwise compensated by the Company or any
third party) actually and reasonably incurred by the Indemnitee in connection
with either the investigation, defense or appeal of a proceeding or
establishing or enforcing a right to indemnification under this Agreement,
Section 145 of the General Corporation Law of Delaware or otherwise; provided,
however, that expenses shall not include any judgments, fines, excise taxes or
penalties under the Employee Retirement Income Security Act of 1974 ("ERISA"),
or amounts paid in settlement of a proceeding.
(d) Independent Legal Counsel. For purposes of this
Agreement, "Independent Legal Counsel" means a law firm, a member of a law
firm, or an independent practitioner, that is experienced in matters of
corporation law and shall include any person who, under the applicable
standards of professional conduct then prevailing, would not have a conflict of
interest in representing either the Company or the Indemnitee in an action to
determine the Indemnitee's rights under this Agreement.
(e) Proceeding. For the purposes of this Agreement,
"proceeding" means any threatened, pending, or completed action, suit or other
proceeding, whether civil, criminal, administrative, investigative or any other
type whatsoever.
(f) Subsidiary. For purposes of this Agreement,
"subsidiary" means any corporation, partnership, joint venture or other
enterprise, a majority of whose equity interests are owned by the Company,
directly or through one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve
as an agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the By-Laws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided,
- 2 -
<PAGE> 3
however, that nothing contained in this Agreement is intended to create any
right to continued employment of the Indemnitee.
3. Mandatory Indemnification. Subject to the
limitations set forth in Section 7, if the Indemnitee is a person who was or is
a party or is threatened to be made a party to or is involved, including
involvement as a witness, in any proceeding, including any action by or in the
right of the Company, by reason of the fact that he is or was or has agreed to
become an agent, or by reason of any action alleged to have been taken or
omitted by him in any such capacity, the Company shall indemnify the Indemnitee
against all expense, liability and loss (including but not limited to
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be
paid in settlement), actually and reasonably incurred by him in connection with
the investigation, defense, settlement or appeal of such proceeding; provided,
however, that except as provided in Section 7(c) of this Agreement with respect
to proceedings seeking to enforce rights to indemnification, the Company shall
indemnify the Indemnitee in connection with a proceeding (or part thereof)
initiated by the Indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Company.
4. Mandatory Advancement of Expenses. The Company shall
advance all expenses incurred by the Indemnitee in connection with the
investigation, defense, settlement or appeal of any proceeding referred to in
Section 3 to which the Indemnitee is a party or is threatened to be made a
party or with respect to which the Indemnitee is otherwise involved (including
involvement as a witness) as an agent of the Company. The Indemnitee hereby
undertakes to repay such amounts advanced if, but only if and to the extent
that, it shall ultimately be determined pursuant to the provisions hereof that
the Indemnitee is not entitled to be indemnified by the Company as authorized
hereby. The advances to be made hereunder shall be paid by the Company to the
Indemnitee within twenty (20) days following delivery of a written request
therefor by the Indemnitee to the Company; provided, however, that, if and to
the extent that the Delaware General Corporation Law requires, an advancement
of expenses incurred by the Indemnitee in his capacity as a director or officer
shall be made only upon delivery of an undertaking by or on behalf of the
Indemnitee to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that the Indemnitee is not entitled to be indemnified for such expenses
under this Agreement or otherwise.
5. Maintenance of D&O Insurance.
(a) So long as the Indemnitee shall continue to serve in
any capacity described in Section 2 and thereafter so long as there is any
reasonable possibility that the Indemnitee shall be subject to any proceeding
by reason of the fact that the indemnitee served in any of such capacities, the
Company will use reasonable efforts to purchase and maintain in effect for the
benefit of the Indemnitee one or more valid, binding and enforceable policies
of directors' and officers' liability insurance ("D&O Insurance") providing, in
all respects, coverage and amounts as reasonably determined by the Board of
Directors.
(b) Notwithstanding Section 5(a), the Company shall not
be required to maintain D&O Insurance if such is not reasonably available or
if, in the reasonable business judgment of the
- 3 -
<PAGE> 4
Board of Directors of the Company as it may exist from time to time, either (i)
the premium cost for such insurance is substantially disproportionate to the
amount of insurance or (ii) the coverage is so limited by exclusions that there
is insufficient benefit provided by such insurance.
6. Notice and Other Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of notice of
the commencement of or the threat of commencement of any proceeding, the
Indemnitee shall, if the Indemnitee believes that the indemnification with
respect thereto properly may be sought from the Company under this Agreement,
notify the Company of the commencement or threat of commencement thereof. The
failure to notify or promptly notify the Company shall not relieve the Company
from any liability which it may have to the Indemnitee otherwise than under
this Agreement, and shall relieve the Company from liability hereunder only to
the extent the Company has been prejudiced.
(b) If, at the time of the receipt of a notice of the
commencement of a proceeding pursuant to Section 6(a), the Company has D&O
Insurance in effect, the Company shall give prompt notice of the commencement
of such proceeding to the insurers in accordance with the procedures set forth
in the D&O Insurance policy. The Company shall thereafter take all necessary
or desirable action to cause such insurers to pay, to or on behalf of the
Indemnitee, all amounts payable as a result of such proceeding in accordance
with the terms of such policy.
(c) In the event the Company shall be obligated to pay
the expenses of the Indemnitee in connection with any proceeding, the Company
shall be entitled to assume the defense of such proceeding, with counsel
approved by the Indemnitee, upon the delivery to the Indemnitee of written
notice of its election to do so. After delivery of such notice, approval of
such counsel by the Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to the Indemnitee under this Agreement
for any fees of counsel or other expenses subsequently incurred by the
Indemnitee with respect to the same proceeding; provided that (i) the
Indemnitee shall have the right to employ his own counsel in any such
proceeding at the Indemnitee's expense and (ii) if (A) the employment of
counsel by the Indemnitee has been previously authorized by the Company, or (B)
the Indemnitee shall have reasonably concluded that there is a conflict of
interest between the Company and the Indemnitee in the conduct of any such
defense, or (C) the Company shall not, in fact, have employed counsel to assume
the defense of such proceeding, the fees and expenses of the Indemnitee's
counsel shall be paid by the Company; and provided further that the Company
shall not be required to pay the expenses of more than one such separate
counsel for persons it is indemnifying in any one proceeding.
- 4 -
<PAGE> 5
7. Determination of Right to Indemnification.
(a) To the extent the Indemnitee has been successful on
the merits or otherwise in defense of any proceeding referred to in Section 3
or in the defense of any claim, issue or matter described therein, the Company
shall indemnify the Indemnitee pursuant to Section 3 against expenses actually
and reasonably incurred by him in connection with the investigation, defense,
or appeal of such proceeding. If the Indemnitee has not been successful on the
merits or otherwise in any such defense, the Company also shall indemnify the
Indemnitee pursuant to Section 3 unless, and only to the extent that, the
Indemnitee has not met the applicable standard of conduct under the Delaware
General Corporation Law as it now exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Company to provide broader indemnification rights than said law permitted
the Company to provide prior to such amendment).
(b) Subject to the provisions of Section 8 relating to a
Change in Control (as defined therein), the determination as to whether the
Indemnitee is entitled to indemnification shall be made as follows: (1) if
requested by the Indemnitee, by Independent Legal Counsel selected by the
Indemnitee with the consent of the Company (which consent shall not be
unreasonably withheld) or (2) if no request is made by the Indemnitee for a
determination by Independent Legal Counsel, (i) by a quorum of the Board of
Directors consisting of Disinterested Directors or (ii) if such quorum is not
obtainable or, even if obtainable, if a quorum of Disinterested Directors so
directs, by Independent Legal Counsel in a written opinion. If Independent
Legal Counsel shall make such determination, the Company agrees to pay the
reasonable fees of such counsel and to indemnify such counsel fully against any
and all expenses (including attorneys' fees), claims, liabilities and damages
arising out of or relating to this Agreement or counsel's engagement pursuant
hereto.
(c) Notwithstanding a determination that the Indemnitee
is not entitled to indemnification with respect to a specific proceeding, the
Indemnitee shall have the right to apply to the court of Chancery of Delaware,
the court in which that proceeding is or was pending or any other court of
competent jurisdiction, for the purpose of enforcing the Indemnitee's right to
indemnification or the advance payment of expenses pursuant to this Agreement.
The burden of proof shall be on the Company in any such suit to demonstrate by
the weight of the evidence that the Indemnitee is not entitled to
indemnification or advance payment of expenses. The Indemnitee's expenses
incurred in successfully establishing his right to indemnification or
advancement of expenses, in whole or in part, in any such action (or settlement
thereof) shall be paid by the Company.
(d) Notwithstanding anything in Sections 3 or 4 to the
contrary, the Company shall not be liable under this Agreement to make any
indemnity payment or advancement of expenses in connection with any proceeding
(i) to the extent that payment is actually made, or for which payment is
available, to or on behalf of the Indemnitee under an insurance policy, except
in respect of any amount in excess of the limits of liability of such policy or
any applicable deductible under such policy; (ii) to the extent that payment
has been or will be made to the Indemnitee by the Company otherwise than
pursuant to this Agreement; or (iii) to the extent that there was a final
adjunction by a court of competent jurisdiction that the Indemnitee has not met
the applicable standard of conduct required to entitle the Indemnitee to
indemnification under the Delaware General Corporation Law as it now exists or
may hereafter be amended (but, in the case of any such amendment, only to the
- 5 -
<PAGE> 6
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment).
8. Change In Control.
(a) The Company agrees that if there is a Change in
Control, as defined below, of the Company (other than a Change in Control which
has been approved by a majority of the members of the Board of Directors who
were directors immediately prior to such Change in Control), then with respect
to all matters thereafter arising concerning the rights of the Indemnitee to
indemnity payments and advance payments of expenses under this Agreement, the
Company shall seek legal advice only from Independent Legal Counsel selected by
the Indemnitee with the consent of the Company (which shall not be unreasonably
withheld). Such counsel, among other things, shall render a written opinion to
the Company and the Indemnitee as to whether and to what extent the Indemnitee
would be permitted to be indemnified under this Agreement and applicable law.
The Company agrees to pay the reasonable fees of the Independent Legal Counsel
and to indemnify such counsel fully against any and all expenses (including
attorneys' fees), claims, liabilities and damages arising out of or relating to
this Agreement or counsel's engagement pursuant hereto.
(b) Alternatively, the Indemnitee may choose to submit
all matters arising concerning his rights to indemnity payments and advance
payments of expenses under this Agreement to a panel of three arbitrators, one
of whom is selected by the Company, another of whom is selected by the
Indemnitee and the third of whom is selected by the first two arbitrators so
selected. Any such submission shall be governed by the Commercial Arbitration
Rules of the American Arbitration Association and shall be deemed to be a
submission within the meaning of the Federal Arbitration Act or any statutory
modification or re-enactments thereof. Arbitration proceedings shall take
place in Dallas, Texas, unless otherwise agreed to by the parties.
(c) "Change in Control" for purposes of this Agreement
shall be deemed to have occurred if (a) any "person" (as such term is used in
Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 20% or more
of the total voting power represented by the Company's then outstanding voting
securities, except that a person who as of the date of this Agreement owns 20%
or more of the total voting power represented by the Company's outstanding
voting securities shall not be deemed to have caused a Change in Control, or
(b) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors and any new director
whose election by the Board of Directors or nomination for election by the
Company's stockholders was approved by a vote of at least two-third (2/3) of
the directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof, or (c) the
stockholders of the Company approve a merger, plan of complete liquidation of
the Company, an agreement for the sale or disposition by
- 6 -
<PAGE> 7
the Company of all or any substantial part of the Company's assets, or other
business combination of the Company with any other corporation, other than a
business combination which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 80% of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such business combination.
9. Limitation of Actions and Release of Claims. No
proceeding shall be brought and no cause of action shall be asserted by the
Company or any subsidiary or by any stockholder on behalf of the Company or any
subsidiary against the Indemnitee, his spouse, heirs, estate, executors or
administrators after the expiration of one year from the act or omission of the
Indemnitee upon which such proceeding is based; provided, however, that in the
event that the Indemnitee has fraudulently concealed the facts underlying such
cause of action, no proceeding shall be brought and no cause of action shall be
asserted after the expiration of one year from the earlier of (i) the date the
Company or any subsidiary of the Company discovers such facts or (ii) the date
the Company or any subsidiary of the Company could have discovered such facts
by the exercise of reasonable diligence. Any claim or cause of action of the
Company or any subsidiary of the Company, including claims predicated upon the
negligent act or omission of the Indemnitee, shall be extinguished and deemed
released unless asserted by filing of a legal action within such period. This
Section 9 shall not apply to any cause of action which has accrued on the date
hereof and of which the Indemnitee is aware on the date hereof but as to which
the Company has no actual knowledge apart from the Indemnitee's knowledge.
10. Non-exclusivity. The provisions for indemnification
and advancement of expenses set forth in this Agreement shall not be deemed
exclusive of any other rights which the Indemnitee may have under any provision
of law, the Company's Certificate of Incorporation or By-Laws, the vote of the
Company's stockholders or Disinterested Directors, other agreements, or
otherwise, both as to administrators in his official capacity and to action in
another capacity while occupying his position as an agent of the Company, and
the Indemnitee's rights hereunder shall continue after the Indemnitee has
ceased acting as an agent of the Company and shall inure to the benefit of the
heirs, executors and administrators of the Indemnitee.
11. Settlement. The Company shall not be liable to
indemnify the Indemnitee under this Agreement for any amounts paid in
settlement of any proceeding without its written consent, which consent shall
not be unreasonably withheld. The Company shall not settle any proceeding
which would impose any penalty or limitation on the Indemnitee without the
Indemnitee's written consent, which consent shall not be unreasonably withheld.
In the event that consent is not given and the parties hereto are unable to
agree on a proposed settlement, Independent Legal Counsel shall be retained by
the Company, at its expense, with the consent of the Indemnitee, which consent
shall not be unreasonably withheld, for the purpose of determining whether or
not the proposed settlement is reasonable under all the circumstances; and if
Independent Legal Counsel determines the proposed settlement is reasonable
under all the circumstances, the settlement may be consummated without the
consent of the other party.
- 7 -
<PAGE> 8
12. Subrogation Rights. In the event of any payment
under this Agreement, the Company shall be subrogated to the extent of such
payment to all of the rights of recovery of the Indemnitee against any person
or organization and the Indemnitee shall execute all papers required and shall
do everything that may be reasonably necessary to secure such rights.
13. Allowance for Compliance with Commission
Requirements. Indemnitee acknowledges that the Securities and Exchange
Commission (the "Commission") has expressed the opinion that indemnification of
directors and officers from liabilities under the Securities Act of 1933 (the
"Act") is against public policy as expressed in the Act and is, therefore,
unenforceable. Indemnitee hereby acknowledges and agrees that it will not be a
breach of this Agreement for the Company to undertake with the Commission in
connection with the registration for sale of any shares or other securities of
the Company from time to time that, in the event a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director or officer of the Company in the successful
defense of any action, suit or proceeding) is asserted in connection with such
shares or other securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of competent jurisdiction the question of whether or not such
indemnification by the Company is against public policy as expressed in the Act
and the Company will be governed by the final adjudication of such issue.
Indemnitee further agrees that such submission to a court of competent
jurisdiction shall not be a breach of this Agreement.
14. Interpretation of Agreement. It is understood that
the parties hereto intend this Agreement to be interpreted and enforced so as
to provide indemnification and payments for Expenses to the Indemnitee to the
fullest extent permitted by applicable law and to waive or render inapplicable
to the fullest extent permitted by applicable law which would impose any
condition or limitation upon, or otherwise impair or prohibit the enforcement
of, any provision in this Agreement. Indemnitee's rights hereunder shall apply
to claims made against Indemnitee arising out of acts or omissions which
occurred prior to the date hereof as well as those which occur after the date
hereof.
15. Severability. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, (i) the validity, legality and enforceability of the remaining
provisions of this Agreement (including, without limitation, all portions of
any paragraph of this Agreement containing any such provision held to be
invalid, illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby and (ii) to
the fullest extent possible, the provisions of this Agreement (including,
without limitation, all portions of any paragraph of this Agreement containing
any such provision held to be invalid, illegal or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable and to give effect to Section 14.
16. Modification and Waiver. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this
agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
- 8 -
<PAGE> 9
17. Successors and Assigns. The terms of this Agreement
shall bind, and shall inure to the benefit of, the successors and assigns of
the parties hereto.
18. Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed
duly given (i) on the date of delivery if delivered by hand or via telecopy or
(ii) on the second business day after being deposited in the U.S. mail
(registered or express), postage prepaid. Addresses for notice to either party
are as shown on the signature page of this Agreement, or as subsequently
modified by written notice. Each party agrees to receipt for any notice
received promptly upon request.
19. Governing Law. This Agreement shall be governed
exclusively by and construed according to the laws of the State of Delaware, as
applied to contracts between Delaware residents entered into and to be
performed entirely within Delaware.
20. Consent to Jurisdiction. The Company and the
Indemnitee each hereby irrevocably consents to the jurisdiction of the courts
of the State of Delaware and the Company irrevocably consents to the
jurisdiction of any court in which an Indemnitee brings action pursuant to
Section 7(c), for all purposes in connection with any proceeding which arises
out of or relates to this Agreement. The Company agrees not to initiate any
such action or proceeding in any state other than Delaware.
21. Effectiveness. This Agreement shall be deemed
effective as of: (i) July 1, 1996, in the event that the Indemnitee was
serving as an officer and/or director of the Company as of that date or (ii) if
the Indemnitee was not serving as an officer and/or director of the Company on
July 1, 1996, the date the Indemnitee was first elected or appointed, as the
case may be, to serve as an officer and/or director of the Company.
* * * * *
- 9 -
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have entered into this
Indemnification Agreement effective as of the date first above written.
American Pad & Paper Company
17304 Preston Road, Suite 700
Dallas, Texas 75252-5613
Telecopy No.: (972) 733-6298
By: /s/ Kevin W. McAleer
---------------------------------
Kevin W. McAleer
Its: Chief Financial Officer
---------------------------------
INDEMNITEE:
/s/ William W. Solomon, Jr.
------------------------------------------
Name: William W. Solomon, Jr.
Title: Vice President - Controller
Address: 4404 Southgate Drive
--------------------------------
Plano, Texas 75024-3469
--------------------------------
Telecopy No.: 972-733-6260
---------------------------
- 10 -
<PAGE> 11
EXHIBIT 10.2 - SUPPLEMENTAL SCHEDULE
In addition to the Indemnification Agreement by and between American Pad and
Paper Company (the "Company") and William W. Solomon, Jr., Vice President -
Controller, included herewith as Exhibit 10.2, the following officers and
directors of the Company have entered into Indemnification Agreements with the
Company which are substantially identical in all material respects to the copy
included herewith:
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Gregory M. Benson Director
Russell M. Gard Chief Operating Officer, Vice-Chairman and Director
Robert C. Gay Director
Charles G. Hanson III Chief Executive Officer, Chairman and Director
Herbert M. Kohn Director
Jonathan Lavine Director
Kevin W. McAleer Chief Financial Officer
Timothy E. Needham Executive Vice President
Scott R. Watterson Director
Marc B. Wolpow Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CIK> 0000005588
<NAME> AMERICAN PAD & PAPER COMPANY
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 1,639 1,639
<SECURITIES> 0 0
<RECEIVABLES> 68,708 68,708
<ALLOWANCES> (440) (440)
<INVENTORY> 144,867 144,867
<CURRENT-ASSETS> 229,449 229,449
<PP&E> 167,360 167,360
<DEPRECIATION> (20,592) (20,592)
<TOTAL-ASSETS> 620,335 620,335
<CURRENT-LIABILITIES> 86,773 86,773
<BONDS> 379,703 379,703
0 0
0 0
<COMMON> 274 274
<OTHER-SE> 113,584 113,584
<TOTAL-LIABILITY-AND-EQUITY> 620,335 620,335
<SALES> 167,160 316,994
<TOTAL-REVENUES> 167,160 316,994
<CGS> 134,339 253,173
<TOTAL-COSTS> 149,065 283,505
<OTHER-EXPENSES> (49) (121)
<LOSS-PROVISION> 168 322
<INTEREST-EXPENSE> 9,584 17,795
<INCOME-PRETAX> 8,560 15,815
<INCOME-TAX> 3,852 7,115
<INCOME-CONTINUING> 4,708 8,700
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,708 8,700
<EPS-PRIMARY> .16 .30
<EPS-DILUTED> 0 0
</TABLE>
