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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE YEAR ENDED DECEMBER 31, 1996
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
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American Pad & Paper Company of Delaware, Inc. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants' knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 4, 1997, the aggregate market value of the common stock of
American Pad & Paper Company held by non-affiliates was $221,056,000.
DOCUMENTS INCORPORATED BY REFERENCE
American Pad & Paper Company incorporates its 1997 Annual Proxy
Statement to Stockholders.
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NOTE - PAGES 2-13 ARE OMITTED AND ARE BLANK PAGES.
IMPORTANT NOTE - COMBINED FILING FOR AMERICAN PAD & PAPER COMPANY AND AMERICAN
PAD & PAPER COMPANY OF DELAWARE, INC.
American Pad & Paper Company (the "Company") and American Pad & Paper
Company of Delaware, Inc. (AP&P Delaware) are filing a combined Annual Report
on Form 10-K in accordance with general instruction J to Form 10-K. The Company
owns 100% of the outstanding common stock of AP&P Delaware. The Company has
27,435,839 shares of outstanding common stock and is listed on the New York
Stock Exchange. AP&P Delaware has issued $130 million of 13% Senior
Subordinated Notes ("Notes") which trade on the over the counter market. The
Company is a holding company with no operations and owns 100% of the
outstanding common shares of WR Acquisition, Inc. ("WR Acquisition"). WR
Acquisition is also a holding company with no operations which owns 100% of the
outstanding common shares of AP&P Delaware. AP&P Delaware is the operating
company in which all the operations of the Company take place. There are no
differences between the Company and AP&P Delaware except as just described. The
Company has followed full push-down accounting for the financial statements of
AP&P Delaware such that the only differences between the two registrants relate
to the capital structure just described. The management of the Company has
determined that it would not be meaningful to the holders of the Company's
common stock or to the holders of AP&P Delaware's Notes to receive Annual
Reports on Form 10-K which are different and, as a result, the Company has
elected to file only one Form 10-K and only one set of consolidated financial
statements for both registrants.
ITEM 1 BUSINESS
GENERAL
The Company is one of the largest manufacturers and marketers of
paper-based office products (excluding copy paper) in the $60 billion to $70
billion North American office products industry. The Company offers a broad
product line including nationally branded and private label writing pads, file
folders, envelopes, machine papers and other office 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. Established in 1888, the Company's Ampad division has been a
leading supplier of pads and other paper-based writing products throughout its
history. Acquired in October 1995, the Company's Williamhouse division is the
leading supplier of mill branded, specialty and commodity business envelopes
and machine papers to paper merchants/distributors. The Company maintains
several nationally-recognized brand names such as Ampad, Century, Embassy,
Evidence, Gold Fibre, Huxley, Karolton, Kent, Peel & Seel, SCM, Williamhouse
and World Fibre. The Company's strategy is to grow by focusing on the largest
and fastest growing office product distribution channels, making acquisitions,
introducing new product lines, broadening product distribution across its
channels and maintaining its position among the lowest-cost manufacturers in
the industry. As a result of this strategy, the Company's net sales have grown
at a compound annual rate of approximately 52.9% from 1992 to 1996.
Since the mid-1980s, the office products industry has experienced
significant changes in the channels through which office products are
distributed such as the emergence of new channels, including national office
products superstores, national contract stationers and mass merchandisers, and
consolidation within these and other channels. As a result of these changes,
approximately 6,800 office product distributors existed in 1994 compared with
approximately 13,300 in 1987. The channels through which office products are
distributed from the manufacturer to the end-user include retail channels such
as national office products superstores, mass merchandisers and warehouse
clubs; commercial channels such as national contract stationers; paper
merchants/distributors; and other channels such as regional distributors,
school campuses and direct mail. The Company believes that sales of office
products through retail channels are approximately $20 billion to $25 billion.
The three dominant national superstores (Office Depot,
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OfficeMax and Staples) have experienced significant growth over the past three
years. Principally through the acquisition of smaller, regional contract
stationers, national contract stationers (including Boise Cascade Office
Products, BT Office Products, Corporate Express, U.S. Office Products and the
contract stationer divisions of Office Depot and Staples) have grown more
rapidly than other commercial channels. Certain office products, particularly
envelopes, are sold predominantly through paper merchants/distributors or
directly to end users. Paper merchants/distributors currently account for
approximately 30% of the envelope market. The four largest paper merchants
(Nationwide, ResourceNet, Unisource and Zellerbach) have experienced
significant growth primarily through consolidation.
The Company has targeted and will continue to target those customers
driving consolidation in the retail, commercial and paper merchant distribution
channels and believes that it is uniquely positioned to meet the special
requirements of these customers. These customers seek suppliers, such as the
Company, who are able to offer broad product lines, higher value-added
innovative products, national distribution capabilities, low costs and reliable
service. Furthermore, as these customers continue to grow and as they
consolidate their supplier bases, the Company's ability to meet their special
requirements becomes an increasingly important competitive advantage.
Recognizing Ampad's potential for growth through the changing distribution
channels, Bain Capital, Inc. ("Bain Capital") and management formed the Company
and purchased Ampad from Mead Corporation ("Mead") in 1992. Since that time,
management has enhanced the Company's scale, broadened its product line,
expanded upon its national presence and strengthened its distribution
capabilities through acquisition and innovation while simultaneously delivering
higher customer service levels. As a result, the Company's net sales through
the most rapidly growing retail and commercial channels increased from $8.8
million in 1992 to $200.5 million in 1996.
HISTORY
From 1986 to 1992, Ampad operated as a subsidiary of Mead. On July 31,
1992, the Company acquired Ampad from Mead in an acquisition led by Bain
Capital and senior management. Since the acquisition, management has enhanced
the Company's scale, broadened its product line, expanded upon its national
presence and strengthened its distribution capabilities through acquisition and
innovation while simultaneously delivering higher customer service levels. In
July 1994, the Company acquired the assets and assumed certain liabilities of
SCM, one of the industry leaders in hanging files and writing products. In
August 1995, the Company acquired the file folder and file product lines of
American Trading and Production Corporation's ("Atapco") Globe-Weis office
products division. Prior to the acquisition, Atapco was one of the leading
providers of file folders and hanging files to office product superstores. The
acquisitions of the SCM and Globe-Weis product lines further strengthened the
Company's position in the filing supplies and writing products categories.
In October 1995, the Company acquired WR Acquisition and its wholly
owned subsidiary, Williamhouse-Regency of Delaware, Inc., collectively referred
to as "Williamhouse," for an aggregate purchase price (including assumption of
debt of approximately $152.9 million) of approximately $300.0 million, plus
reimbursement of certain expenses. Williamhouse is a leading supplier to many
of the largest and fastest growing paper merchants/distributors. The Company's
management identified the Regency Division of Williamhouse as a nonstrategic
asset following the Williamhouse acquisition and, on June 27, 1996, completed
the sale of the Regency Division for approximately $47.9 million in gross
proceeds.
On June 28, 1996, the Company acquired Niagara Envelope Company, Inc.
("Niagara") for an aggregate purchase price of approximately $48.2 million,
plus $5.0 million paid at closing under a one-year consulting services
agreement. Niagara supplies mill branded, specialty and commodity envelopes to
paper merchants/distributors through four manufacturing facilities located near
Buffalo, Chicago, Dallas and Denver. Niagara had 1995 net sales of
approximately $106.0 million and operating income of approximately $8.5
million. The Company believes that the Niagara acquisition will strengthen the
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Company's distribution capabilities in the Midwest, provide additional
manufacturing capacity and provide opportunities to achieve operating
improvements through the consolidation of Niagara's operations with those of
the Company.
On February 11, 1997, the Company acquired Shade/Allied, Inc.
("Shade/Allied") for an aggregate purchase price of $49.5 million. Shade/Allied
supplies continuous forms to paper merchants/distributors and retail customers
through four manufacturing facilities located near Green Bay, Seattle, Atlanta
and Philadelphia. Shade/Allied realized net sales of approximately $90 million
in 1996. The Company believes that the Shade/Allied acquisition will strengthen
its presence in a fourth major product category, machine papers.
Although the Company regularly engages in discussions with companies
regarding potential acquisitions, it currently does not have any agreements or
understandings relating to any future acquisitions.
The Company's principal executive offices are located at 17304 Preston
Road, Suite 700, Dallas, Texas 75252 and its telephone number is (972)
733-6200.
COMPETITIVE STRENGTHS
The combination of the Company's products and customers distinguishes
it as a leading manufacturer and marketer of paper-based office products
(excluding copy paper) in North America. The Company attributes this position
and its continued opportunities for growth and profitability to the following
competitive strengths:
o Market Leader. The Company has achieved market leadership in core products
sold to customers in the largest and fastest growing office products
channels by offering one of the broadest assortments of high quality
products in the industry. Furthermore, the Company enjoys national brand
awareness in many of its product lines, including Ampad, Century, Embassy,
Evidence, Gold Fibre, Huxley, Karolton, Kent, Peel & Seel, SCM, Williamhouse
and World Fibre.
o Well-Positioned and Diversified Customer Base. The Company has substantial
opportunities for growth within several distribution channels of the office
products industry. The Company has focused on the largest and fastest
growing office products channels. Several of the Company's largest
customers, such as Boise Cascade Office Products, BT Office Products,
Corporate Express, Office Depot, OfficeMax and Staples, are expected by
industry analysts to experience annual revenue growth of 15% to 35% over the
next five years. The Company's Williamhouse division maintains particularly
strong relationships with the largest and fastest growing paper
merchants/distributors in the market, including Nationwide, ResourceNet,
Unisource and Zellerbach. The Company also maintains strong customer
relationships across all of the other office products distribution channels,
including mass merchandisers, warehouse clubs, office products wholesalers
and independent dealers.
o National Scale and Service Capability. The Company's extensive product
line, multiple brands and broad price point coverage provide significant
advantages and economies of scale in selling to and servicing its customers.
The Company has become an increasingly important strategic partner to its
customers as they seek higher value-added products, simplify their
purchasing organizations and consolidate their relationships among selected
national suppliers. The Company's national presence and network of 21
strategically located manufacturing and distribution facilities have enabled
it to maintain rapid and efficient order fulfillment standards. In addition,
the Company's advanced EDI capabilities enable it to meet its customers' EDI
requirements, executing automated transactions rapidly, efficiently and
accurately.
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o Innovation/New Products. The Company has introduced several innovative
products as part of its marketing strategy to differentiate itself from
other suppliers and enhance profitability. Recent examples include Gold
Fibre classic and designer notebooks, Papers with a Purpose, World Fibre
ground-wood writing pads and Peel & Seel envelopes. Products introduced
since 1992 accounted for over $155 million of the Company's 1996 net sales.
The Company's brand recognition and presence with its national customers
allows it to more easily introduce new or acquired product lines to those
customers.
o Low-Cost Manufacturer. The Company believes it is among the lowest-cost
manufacturers of paper-based office products in the industry. The Company
ensures its low-cost manufacturing position through its paper purchasing and
distribution advantages as well as its maintenance of modern and efficient
manufacturing technology and a high quality work force. The Company has been
successful in reducing costs with each of its acquisitions in the last three
years by continually streamlining its manufacturing processes and overhead
structure. From 1992 to 1996, the Company reduced its fixed manufacturing
costs from 7.4% to 5.0% of net sales and its selling, general and
administrative expenses from 10.0% to 8.2% of net sales.
o Purchasing Advantages. The Company has strong relationships with most of
the country's largest paper mills, many of which have been conducting
business with the Company for more than 30 years. The Company is one of the
largest purchasers of the principal paper grades used in its manufacturing
operations. In addition, the Company has the largest number of designated
mill relationships which involve some of the largest and most recognized
paper mill brands such as Hammermill, Hopper, Neenah and Strathmore.
GROWTH STRATEGY
The Company's strategy is to maintain and strengthen its leadership
position by focusing on the following:
o Focus on Rapidly Growing Customers. The Company serves many of the largest
and best positioned customers in the office products market segment
including national office products superstores, mass merchandisers and
warehouse clubs, national contract stationers and national paper
merchants/distributors. Anticipating further consolidation in the office
products industry, the Company expects that its national scope and broad
product line will be increasingly important in meeting the needs of its
customers. The Company will continue to target those customers driving
consolidation in the office products industry.
o Continue to Introduce New Products. New, higher value-added products give
the Company a greater selection to offer its customers and improve product
line profitability for both the Company and its customers. The Company
plans to differentiate itself from other suppliers and improve
profitability through product innovation, differentiation and line
extensions.
o Pursue Complementary Product Line and Strategic Acquisitions. The office
products industry is highly fragmented despite continuing consolidation
among its manufacturers. The Company is leading consolidation among
manufacturers of writing products, filing supplies, envelopes and machine
papers. The SCM and Williamhouse acquisitions broadened the Company's
product line to include filing products and envelopes and enhanced its
presence in the growing distribution channels. The Globe-Weis acquisition
and the Niagara acquisition demonstrate its commitment to strengthening its
competitive and strategic position within its markets. The Company believes
that there are significant opportunities to acquire companies in both its
existing and complementary product lines. In addition, the Company intends
to enter new office products markets through acquisitions of established
companies in those markets.
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o Broaden Product Distribution. The Company's market presence and
distribution strengths uniquely position it to sell new or acquired product
lines across its distribution channels, including national office products
superstores, national contract stationers, office product wholesalers and
mass merchandisers. As an important part of its growth strategy, for
example, the Company has successfully introduced the envelope product lines
acquired in the Williamhouse and Niagara acquisitions, previously
distributed primarily through paper merchants/distributors, to the Ampad
division's distribution channels under the Ampad and private label names.
RECENT ACQUISITION
On February 11, 1997, the Company completed its acquisition of
Shade/Allied for approximately $49.5 million. Based in Green Bay, Wisconsin,
Shade/Allied manufactures machine paper, primarily continuous computer forms,
in facilities in four states. This acquisition signals entry into machine
papers, the Company's fourth product category.
PRODUCTS AND SERVICES
Pads and Other Paper-Based Writing Products. The Company believes is
one of the largest manufacturers and marketers of paper-based writing products
(excluding copy paper) in North America, offering more than 2,400 SKUs of
writing pads, notebooks and specialty papers. Many of the Company's writing
products are available in multiple sizes, grades of paper (including recycled),
and colors and with glued, perforated tops or wire binding. All writing
products are offered under the Ampad brand name or a retailer's private label.
During the past three years, the Company has focused on the introduction of new
and innovative products such as Gold Fibre classic and designer notebooks,
Papers with a Purpose and World Fibre ground-wood writing pads. The Company has
also created innovative packaging, especially for sale through warehouse clubs
(bulk and crate packaging), superstores and mass merchandisers.
Filing Supplies. The Company is one of the three largest manufacturers
of filing supplies in North America. The product line includes more than 800
SKUs of filing supplies including file folders, hanging files, index cards and
expandable folders under the SCM and Globe-Weis brand names. The Company has
been expanding its market share in filing supplies by focusing its sales
efforts on large retail customers and contract stationers, where its writing
products enjoy the leading market share position.
Envelopes. The Company is the largest manufacturer of envelopes
serving the paper merchant/distributor and office products superstore channels
and sold over 18 billion envelopes in 1996. The Company's broad envelope
product line includes products manufactured from mill branded paper, which is
paper unique in color and texture to a particular mill, typically with an
identifying watermark. The Company is the designated envelope manufacturer for
33 mill brands, which is approximately twice as many as its nearest competitor.
These brands include the Hammermill, Strathmore and Beckett divisions of
International Paper Company, the Hopper division of Georgia Pacific
Corporation, the Neenah division of Kimberly-Clark Corporation and the Gilbert
division of Mead.
The Company also produces a wide variety of standard size and
specialty envelopes made from commodity paper and Tyvek(R) (a high density
polyurethane based product made by Du Pont), including booklet and catalog
mailing envelopes, envelopes closable by metal clasp or button-and-string, Peel
& Seel (pressure sensitive adhesion) envelopes, and giant, X-ray and remittance
envelopes. The Company offers in excess of 30,000 SKUs of envelopes (which the
Company believes is more than any of its competitors), providing its customers
with a wide choice of paper grades, colors and sizes.
Machine Papers. The Company is among the leading manufacturers of
machine papers, a product category defined by the Company which includes inkjet
papers, printed formats, fine papers, such as cotton content and laid papers,
as well as continuous forms.
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Invitations and Announcements. The Company is among the largest
manufacturers of invitations and announcements, Christmas and holiday cards,
and presentation folders. These products are sold principally to paper
merchants/distributors, personalizing businesses (including the former Regency
Division), and other wholesale outlets throughout the United States. The
Company offers a wide variety of such products, primarily made from the same
mill branded grades of paper used in manufacturing envelopes.
The following chart illustrates the Company's principal products and
customers and selected brands in its primary business segments:
AMPAD DIVISION WILLIAMHOUSE DIVISION
Products
- - Pads and Notebooks - Business Envelopes
- - Filing Supplies - Invitations
- - Retail envelopes - Announcements
- - Machine Papers - Christmas and Holiday Cards
- Machine Papers
Customers
- - Office Products Superstores - Paper Merchants/Distributors
- - Contract Stationers - Jobbers
- - Wholesalers - Personalizing Businesses
- - Buying Groups
Selected Brands
- - Ampad(R) - Century(TM)
- - Embassy(R) - Huxley(TM)
- - Evidence(R) - Karolton(R)
- - Globe-Weis(R) - Kent(R)
- - SCM(TM) - Peel & Seel(R)
- - World Fibre(TM) - Williamhouse(TM)
SALES, DISTRIBUTION AND MARKETING
The Company markets its broad range of products to a wide variety of
customers. In 1996, one customer, Staples, Inc., accounted for 10.8% of the
Company's net sales.
The Company markets its writing products, filing supplies, retail
envelopes and machine papers through virtually every channel of distribution
for paper-based office products including the largest mass merchant retailers,
office product superstores, warehouse clubs, major contract stationers, paper
merchants/distributors and other traditional outlets for office supplies such
as office product wholesalers, independent dealers, buying groups and mail
order firms.
The Company sells its business envelopes and machine papers
principally to paper merchants/distributors and other wholesale outlets
throughout the United States, primarily through an in-house sales force. In
addition, mill branded products are sold directly to personalizing businesses
(including the former Regency Division). The Company currently employs sales
representatives throughout the United States and sells products to over 2,000
paper merchants/distributors in the United States and Canada. The Williamhouse
acquisition provided the Company with the ability to manufacture and distribute
retail envelopes directly to the Ampad division customers under the Ampad and
private label names.
The following chart illustrates some of the Company's key customers:
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KEY CUSTOMERS
Paper
Office Products Superstores: Mass Merchandisers: Merchants/Distributors:
Office Depot Wal-Mart Nationwide
Office Max ResourceNet
Staples Unisource
Zellerbach
Office Products
Contract Stationers: Wholesalers: Warehouse Clubs:
Boise Cascade Office Products S.P. Richards Sam's Warehouse Club
BT Office Products United Stationers
Corporate Express
Office Depot*
Staples*
U.S. Office Products
* Contract stationers division
The Company has targeted and will continue to target those customers
driving consolidation in the office products industry and believes that it is
uniquely positioned to meet the special requirements of these customers in the
growing distribution channels of the office products industry. These customers
seek suppliers, such as the Company, who are able to offer broad product lines,
higher value-added innovative products, national distribution capabilities, low
costs and reliable service. Furthermore, as these customers continue to grow
and they consolidate their supplier bases, the Company's ability to meet their
special requirements will be an increasingly important competitive advantage.
Recognizing Ampad's potential for growth through the changing distribution
channels, Bain Capital and management purchased the Company from Mead in 1992.
Since that time, management has enhanced the Company's scale, broadened its
product line, expanded upon its national presence and strengthened its
distribution capabilities through acquisition and innovation while
simultaneously delivering higher customer service levels. As a result, the
Company's sales through the most rapidly growing retail and commercial channels
increased from $8.8 million in 1992 to $200.6 million in 1996. For the same
period on a pro forma basis, the Company's sales to the four largest paper
merchants/distributors increased from $75.6 million to $118.4 million.
PAPER RAW MATERIAL
The Company's principal raw material is paper. While paper
prices have increased by an average of less than 1% annually since 1989,
certain commodity grades have shown considerable price volatility during the
period. This volatility negatively impacted the Company's earnings in 1994,
particularly in the fourth quarter, as a result of the Company's inability to
implement price changes in many of its product lines without giving its
customers advance notification. 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. To date, such policies have
been accepted by customers; however, no assurance can be given that the Company
will continue to be successful in maintaining such pricing policies or that
future price fluctuations in the price of paper will not have a material
adverse effect on the Company. Fluctuations in paper prices can have an effect
on quarterly comparisons of the results of operations and financial condition
of the Company.
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The Company has strong relationships with most of the country's
largest paper mills, many of which have been doing business with the Company
for more than 30 years. The Company is one of the largest purchasers of the
principal paper grades used in its manufacturing operations. In addition, the
Company has the largest number of designated mill relationships, which involve
some of the largest and most recognized paper mill brands such as Hammermill,
Hopper, Neenah and Strathmore. The Company believes that these relationships
afford it certain paper purchasing advantages, including stable supply and
favorable pricing arrangements. While these relationships are stable, all but
one of the designated manufacturer arrangements are oral and terminable at will
at the option of either party. There can be no assurance that any of the
supplier or designated manufacturer relationships will not be terminated in the
future. While the Company has been able to obtain sufficient paper supplies
during recent paper shortages and otherwise, the Company is subject to the risk
that it will be unable to purchase sufficient quantities of paper to meet its
production requirements during times of tight supply.
COMPETITION
The markets for the Company's products are highly competitive.
Competition is based largely on a company's ability to offer a broad range of
products on a regional or national scale at competitive prices and to deliver
these products on a timely basis. The Company has many local and regional
competitors. The markets in which the Company operates have become increasingly
characterized by a limited number of large companies selling under recognized
trade names. These larger companies, including the Company, have the economies
of scale, national presence, management information systems and breadth of
product line required by the major customers. In addition to branded product
lines, manufacturers also produce private-label products, especially in the
context of broader supply relationships with office product superstores and
contract stationers.
The writing products industry is fragmented, ranging from large
national manufacturers to localized jobbers and printers. A few manufacturers,
including the Company, have developed strong brand name recognition for a
limited number of product lines. Other national companies include Mead, the
Stuart Hall division of Newell Co., Pen-Tab Industries, and the Tops division
of Wallace Computer Services.
In the filing supplies segment, the Company's key domestic competitors
include Esselte AB and Smead Manufacturing.
In the machine papers segment, the Company's key domestic competitors
are CST/Bowater, Moore Business Forms and Willamette Industries.
Envelope manufacturers compete in three distinct channels. In the
paper merchant/distributor channel, where the Company competes, manufacturers
sell a wide variety of mill branded, specialty and commodity envelope products
to paper merchants/distributors. The Company's principal competitor in this
channel is New York/National Envelope Group of National Envelope Corporation, a
private company. Another competitor in this channel is Murray Envelope Corp. In
the direct channel, manufacturers sell customized envelopes directly to high
volume corporate users and mass mailers. Mail-Well is the leading company in
this channel. In the office products channel, manufacturers including Westvaco
and Quality Park produce commodity mailing envelopes for retail sale.
INTELLECTUAL PROPERTY
The Company registers some of its material trademarks,
tradenames and copyrights and has acquired patent protection for some of its
proprietary processes. In the opinion of management, the Company has current
trademark rights to conduct its business as now constituted. The Company has
the right to use the Globe-Weis(R) name on a non-exclusive basis through August
1998, pursuant to the
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Company's purchase of certain file folder and hanging file assets from Atapco.
The Company does not expect that the loss of the right to use the Globe-Weis(R)
name will have a material adverse effect on its results of operations.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 4,105
full-time persons, including 4,037 manufacturing, sales and administrative
personnel and 68 corporate staff members. The Company has added approximately
250 employees as a result of the Shade /Allied acquisition. All the Company's
operations are non-union except for the operations at the facilities located in
Scottdale, Pennsylvania; Miamisburg, Ohio; Appleton, Wisconsin and Holland, New
York which have, in total, approximately 1,100 union employees. The collective
bargaining contracts covering the Company's employees will expire as follows:
the Miamisburg contract expires May 31, 1997; the Appleton contract expires
March 31, 1997; the Scottdale contract expires April 30, 1998 and the Holland
contract expires December 7, 2000. With the exception of a strike at the
Company's Indiana plant, as described below, there have been no work stoppages
at any Company facility during the last five years. The Company believes that
its relations with its employees and unions are satisfactory.
In July 1994, the Company acquired the writing products and filing
supplies assets of SCM. Work rules and associated costs at SCM's plant in
Indiana were less favorable than those at other plants of the Company. As a
result of management's effort to bring the labor agreement at the Indiana plant
more in line with market labor agreements, a labor strike occurred on September
1, 1994. Consequently, the Company closed the Indiana plant on February 15,
1995 and moved the equipment to other facilities operated by the Company. By
July 1995, all machinery and equipment previously operated in Indiana was
available for production in other facilities of the Company.
BACKLOG
The Company does not consider backlog to be a significant factor is
its business. Customer orders are generally received between one week and three
months in advance of shipment dates and are satisfied with on hand finished
goods inventory or completed manufacturing within the customers delivery
deadlines.
SEASONALITY
The majority of the Company's business is not seasonal in nature. The
sale of invitations, announcements, Christmas and holiday cards and
presentation folders is directly affected by the timing of holidays and school
schedules. Sales of these products will typically be highest during the third
and fourth quarters of any year.
ITEM 2 PROPERTIES
PROPERTIES AND FACILITIES
As of February 28, 1997, the Company operated manufacturing,
distribution, office and warehouse space in the United States with a total
floor area of approximately 4,087,000 square feet. Of this footage,
approximately 849,000 square feet are leased and approximately 2,938,000 square
feet are owned. The Company has five facilities in Fresno, Kosciusko, New
Jersey, and New York City which aggregate approximately 300,000 square feet
which are being subleased to third parties. The Company's lease agreements for
these facilities expire from 1997 through 2009.
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To provide a cost efficient supply of products to its customers, the
Company maintains centralized management of nationwide manufacturing and
distribution facilities. Since 1992, the Company has consolidated 13
manufacturing and distribution facilities into 6 facilities. The Company's
management continually evaluates the potential consolidation of manufacturing
and distribution facilities. All of the Company's owned facilities are pledged
as collateral under the Company's bank credit agreement.
The Company believes that substantially all of its property and
equipment is in good condition and that it has sufficient capacity to meet its
current and projected manufacturing and distribution needs in the foreseeable
future. The following table describes the principal properties of the Company
as of February 28, 1997:
23
<PAGE> 12
<TABLE>
<CAPTION>
BUSINESS OWNED OR EXPIRATION OF SQUARE
LOCATION DIVISION(1) LEASED LEASE (2) FEET
- ---------------------------------- ----------- ------ ------------- ------
<S> <C> <C> <C> <C>
CALIFORNIA
City of Industry........ W Owned - 85,000
City of Industry........ W Leased 2008(a)(b) 105,000
West Sacramento......... W Leased 2000(b) 37,000
Rancho Cucamonga........ W Leased 1996(b) 12,800
COLORADO
Denver.................. W Leased 1997(b) 15,000
Denver.................. W Leased 1998 55,000
GEORGIA
Gainesville............. A Owned -
70,000
Moultrie................ W Owned - 50,000
ILLINOIS
Mattoon................. A Leased month-to-month 29,200
Mattoon................. A Owned - 261,800
Mattoon................. A Leased 3 month renewable term 25,200
Mattoon................. A Leased 1996(b) 58,900
Chicago................. W Leased 1996(b) 33,000
Chicago................. W Owned (c) 200,000
Chicago................. W Owned - 126,000
MASSACHUSETTS
Westfield............... A Owned - 128,000
Holyoke................. A Owned (c) 572,416
MISSISSIPPI
Kosciusko............... A Leased 1997(b)(d) 70,600
NEW JERSEY
Bloomfield.............. W Leased 2003 94,000
NEW YORK
New York City........... W Leased 1997 5,000
Holland................. W Owned - 168,000
OHIO
Miamisburg.............. W Leased 1998(b)(e) 177,000
PENNSYLVANIA
Scottdale............... W Owned - 400,000
Mt. Pleasant............ W Leased 1999(b) 11,000
Lancaster............... A Leased 2001 105,000
TENNESSEE
Morristown.............. W Owned - 255,000
TEXAS
Dallas.................. Corporate Leased 1998 30,000
Office
Dallas.................. W Owned - 105,000
Corsicana............... W Owned - 250,000
UTAH
North Salt Lake City.... A Owned - 110,000
North Salt Lake City.... A Leased 2001(f) 97,000
Clearfield.............. A Leased - 62,000
WASHINGTON
Kent.................... A Leased 1997 13,500
Kent.................... W Leased 1999 24,000
WISCONSIN
DePere.................. A Owned - 98,500
Green Bay............... A Leased 1997 17,000
Appleton................ W Owned - 313,000
</TABLE>
(1) "A" indicates operations associated with the Company's Ampad division and
"W" indicates operations associated with the Company's Williamhouse
division.
(2) (a) Lease contains option to purchase.
(b) Lease or sublease contains an extension or renewal option.
(c) Two properties owned at this location.
(d) Sublease contains option to assume prime lease.
(e) Lease contains a right of first refusal.
(f) Two leases at this location.
24
<PAGE> 13
ITEM 3 LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and regulations
impose limitations on the discharge of pollutants and establish standards for
management of waste. While there can be no assurance that the Company is at all
times in complete compliance with all such requirements, the Company has made
and will continue to make capital and other expenditures to comply with such
requirements. The Company spent approximately $7,000 and $100,000 in 1995 and
1996, respectively, on environmental capital projects. The Company estimates
that its environmental capital expenditures will be approximately $50,000 to
$100,000 in each of 1997 and 1998. Thereafter, the Company expects to incur
moderate environmental capital expenditures, which will be higher than
historical levels as a result of the Company's increased size. As is the case
with manufacturers in general, if a release of hazardous substances occurs on
or from the Company's properties or any associated offsite disposal location,
or if contamination from prior activities is discovered at any of the Company's
properties, the Company may be held liable and the amount of such liability
could be material.
The City of Industry, California facility of the Company's
Williamhouse division is located within an area of regional groundwater
contamination designated as the San Gabriel Valley National Priority List Area.
The Company does not believe its operations have contributed to the
contamination and to date the Company has not received a notice of potential
liability with respect to that site.
The Company is aware that one of Niagara's and two of Shade/Allied's
facilities has been the subject of certain soil and groundwater investigations
and that the prior owner of the Niagara and the prior owner of one of the
Shade/Allied facilities have indemnified the Company for certain environmental
liabilities associated with historical use of the property. The Company
currently believes that any environmental liabilities associated with such
facilities would not be material or have been adequately covered by agreements
with the former owners.
The Company's Ampad division has been named a potentially responsible
party ("PRP") under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), at five waste
disposal sites. The Company settled its liability at four of these sites as a
de minimis party. At the Spectron site in Elkton, Maryland, the Company paid
approximately $1,300 in 1989 as a de minimis settlement for an initial removal
action at the site. In 1995, the Company received a notice of a remedial action
at the site, and based upon its allocation in 1989, expects to be eligible for
a de minimis or de micromis settlement. The Company is aware that Niagara has
been named a PRP at the Envirotek II site in Tonawanda, New York with respect
to which Niagara expects to be eligible for a de minimis settlement. Although
the Company endeavors to manage its wastes carefully, because CERCLA liability
is strict and retroactive, it is possible that in the future the Company may be
identified as a PRP with respect to other waste disposal sites.
25
<PAGE> 14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders of the
Company during the quarter ended December 31, 1996.
PART II
ITEM 5 MARKET FOR THE REGISTRANTS' COMMON STOCK AND DEBT SECURITIES
The common stock of the Company is listed on the New York Stock
Exchange under the symbol "AGP". The quarterly high and low prices for the
common stock since the Company's initial public offering of common stock on
July 2, 1996 is shown below.
<TABLE>
<CAPTION>
Quarter Ended Low Price High Price
- ------------- --------- ----------
<S> <C> <C>
September 30, 1996 $ 14.375 $ 24.75
December 31, 1996 $ 18.375 $ 22.625
</TABLE>
As of March 4, 1997, there were approximately 3,140 holders of common
stock. The Company has not sold any unregistered securities during the last
fiscal year.
DIVIDEND POLICY
Except as described below, the Company has not declared or paid any
cash or other dividends on its Common Stock and does not expect to pay
dividends for the foreseeable future. Instead, the Company currently intends to
retain earnings to support its growth strategy and reduce indebtedness. As a
holding company, the ability of the Company to pay dividends in the future is
dependent upon the receipt of dividends or other payments from its principal
operating subsidiary, AP&P Delaware. The payment of dividends by AP&P Delaware
to the Company for purposes of paying dividends to holders of Common Stock is
prohibited by the bank credit agreement and restricted by the indenture related
to the Notes. Any future determination to pay dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among
other factors, the Company's results of operations, financial condition,
capital requirements and contractual restrictions.
In October 1995, the Company declared a stock dividend on its
outstanding capital stock of one share of preferred stock for each ten shares
of Class P common stock and common stock (the "Preferred Stock Dividend"). In
December 1995, the Company paid a cash dividend on its then outstanding Class P
common stock equal to approximately $6.11 per share (after giving effect to the
recapitalization of the Company). Immediately thereafter, all outstanding
shares of Class P common stock were converted on a share-for-share basis into
shares of existing common stock. Prior to such conversion, the Class P common
stock was entitled to a preferential payment upon any distribution by the
Company to its holders of capital stock (whether by dividend, liquidating
distribution or otherwise) equal to the original cost of such shares plus an
amount which accrued on a daily basis at a rate of 15.0% per annum on such cost
and the amount so accrued in prior quarters (the "Preference Amount"). The cash
dividend returned such Preference Amount to the holders of the Class P common
stock.
26
<PAGE> 15
ITEM 6 SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data set forth below
for the years ended December 31, 1994, 1995 and 1996 have been derived from,
and are qualified by reference to, the audited consolidated financial
statements of the Company included elsewhere in this Form 10-K. The selected
historical consolidated financial data set forth for the period August 1, 1992
to December 31, 1992 and for the year ended December 31, 1993 have been derived
from the Company's audited financial statements not included in this Form 10-K.
Effective July 31, 1992, the Company acquired Ampad Corporation (the
"Predecessor") from Mead. As such, the selected historical consolidated
financial data set forth below for the period from January 1, 1992 through July
31, 1992 have been derived from the Predecessor's unaudited financial
statements, not included herein, and include all adjustments, consisting only
of normal recurring adjustments, which management considers necessary for a
fair presentation of the results of the Predecessor for such periods. The
selected historical consolidated financial data for the Predecessor are not
comparable in certain respects to the selected historical consolidated
financial data of the Company due to the effects of the acquisition of the
assets of the Predecessor described in the notes hereto. The selected
historical consolidated financial data set forth below should be read in
conjunction with, and is qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the audited
consolidated financial statements and accompanying notes thereto included
elsewhere in this Form 10-K.
27
<PAGE> 16
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR -------------------------------------------------------
PERIOD PERIOD YEAR ENDED
FROM FROM DECEMBER 31,
1/1/92- 8/1/92- -------------------------------------------
INCOME STATEMENT DATA (1) (2) (3) (4) 7/31/92 12/31/92 1993 1994 1995 1996
------- -------- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net sales ............................ $ 63,238 $ 43,526 $ 109,095 $ 127,744 $ 257,160 $ 583,859
Cost of sales (5) .................... 55,737 37,610 93,309 120,695 209,633 458,449
--------- --------- --------- --------- --------- ---------
Gross profit ......................... 7,501 5,916 15,786 7,049 47,527 125,410
Selling, general and administrative
expenses .......................... 5,838 4,351 10,160 10,040 18,003 47,649
Management fees and services ......... -- 210 605 575 542 3,880
Nonrecurring compensation charge (6) . -- -- -- -- 27,632 --
--------- --------- --------- --------- --------- ---------
Income (loss) from operations ........ 1,663 1,355 5,021 (3,566) 1,350 73,881
Interest expense ..................... 1,337 1,311 3,320 4,560 13,657 42,968
Other (income) expense ............... -- -- (167) (90) (735) (1,153)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes .... 326 44 1,868 (8,036) (11,572) 32,066
Provision for (benefit from)
income taxes ...................... 130 33 64 (488) (6,538) 13,852
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary
item .............................. 196 11 1,804 (7,548) (5,034) 18,214
Extraordinary loss from
extinguishment of debt, net of
income tax benefit ................. -- -- -- -- (9,652) (19,995)
--------- --------- --------- --------- --------- ---------
Net income (loss) .................... $ 196 $ 11 $ 1,804 $ (7,548) $ (14,686) $ (1,781)
========= ========= ========= ========= ========= =========
Net income (loss) per share:
Before extraordinary item ......... $ (.17) $ .62
Extraordinary item ................ (.33) (.68)
--------- ---------
Net income (loss) ................. $ (.50) $ (.06)
========= =========
Pro forma weighted average number
of common shares and common
share equivalents outstanding (7) .. 29,607 29,607
========= =========
OTHER DATA:
Depreciation and amortization ........ $ 1,936 $ 79 $ 159 $ 942 $ 4,248 $ 14,253
Capital expenditures ................. $ 647 $ 948 $ 1,656 $ 942 $ 5,640 $ 15,109
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
BALANCE SHEET DATA: 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital ....................... $ 8,774 $ 8,248 $ 1,170 $ 108,845 $ 77,857
Total assets .......................... $ 42,305 $ 47,893 $ 68,233 $ 504,356 $ 509,417
Long-term debt, less current maturities $ 11,301 $ 10,806 $ 19,889 $ 443,794 $ 269,812
Stockholders' equity (deficit) (8) .... $ 3,011 $ 4,815 $ (2,733) $ (66,421) $ 104,599
</TABLE>
28
<PAGE> 17
(1) Effective July 5, 1994, the Company acquired the assets and assumed
certain liabilities of SCM. The acquisition has been accounted for under
the purchase method of accounting and, accordingly, the operating results
have been included with the Company's results since the date of
acquisition.
(2) Effective August 16, 1995, the Company acquired the inventory and certain
equipment of the file folder and hanging file product lines of the
Globe-Weis office products division of Atapco. The acquisition has been
accounted for under the purchase method of accounting and, accordingly,
the operating results have been included in the Company's results since
the date of acquisition.
(3) Effective October 31, 1995, the Company acquired Williamhouse. The
acquisition has been accounted for under the purchase method and,
accordingly, the operating results of Williamhouse, except for the Regency
Division, have been included in the Company's results since the date of
acquisition. The Regency Division was identified as a non-strategic asset
at the date of the acquisition of Williamhouse and was reflected as an
asset held for sale in the consolidated balance sheet through June 27,
1996, when it was sold. As such, the operating results of the Regency
Division are excluded from the results of operations from the date of the
Williamhouse acquisition.
(4) Effective June 28, 1996, the Company acquired Niagara. The acquisition has
been accounted for under the purchase method and, accordingly, the
operating results of Niagara for the six-month period ended December 31,
1996 have been included in the Company's results for the year ended
December 31, 1996.
(5) Inventory cost is determined using the LIFO method of valuation. Gross
profit in the fourth quarter of 1994 was adversely impacted by a
significant increase in paper prices resulting in a $5.4 million charge
for LIFO in advance of the Company's raising selling prices in the first
quarter of 1995. 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 now able to price its products so as to minimize the impact of price
volatility on dollar margins.
(6) Includes non-cash stock option compensation charges of $24.3 million
directly related to the Williamhouse acquisition as well as other
non-recurring cash and non-cash charges aggregating $3.3 million.
(7) Pro forma earnings (loss) per share and pro forma weighted average number
of shares and share equivalents outstanding have been adjusted to give
effect to the recapitalization of the Company which occurred concurrent
with its initial public offering of common stock and to give effect to the
issuance of 12.5 million shares of common stock in the initial public
offering. Common stock equivalents have been determined using the treasury
stock method.
(8) For 1995, includes $4.5 million to pay the liquidation preference,
including the return of original cost, of the Company's Class P common
stock and $70.6 million to redeem a portion of its preferred stock.
<PAGE> 18
ITEM 7 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 Acquisitions. On October 31, 1995, the Company acquired
Williamhouse, a leading supplier of envelopes to many of the largest and
fastest growing distributors, for an aggregate purchase price (including
assumption of debt) of approximately $300 million plus reimbursement of certain
expenses to the sellers. On June 28, 1996, the Company acquired Niagara, a
national supplier of envelopes to fast growing distributors, for an aggregate
purchase price of approximately $53.2 million, including costs of the
acquisition and a $5 million one year consulting agreement with Niagara's
former president. With these acquisitions, the Company became the largest
supplier of envelopes to the national paper merchants. The Williamhouse
acquisition was financed through the Company's old bank credit agreement and
the assumption of senior subordinated notes. The Niagara acquisition was
financed with proceeds from the sale of the Regency Division of Williamhouse.
On July 5, 1994, the Company acquired the assets and assumed certain
liabilities of SCM, one of the industry leaders in hanging files and writing
products. The aggregate acquisition consideration of $14.4 million, including
fees and expenses, was financed through the incurrence of bank debt. On August
16, 1995, the Company acquired the file folder and hanging file product lines
of Atapco's Globe-Weis office products division. Atapco was one of the leading
providers of file folders and hanging files to office products superstores. The
aggregate acquisition consideration of $19.9 million, including fees and
expenses, was financed through the incurrence of bank debt and seller notes.
The SCM acquisition and the Globe-Weis acquisition further strengthened the
Company's position in the filing supplies and writing products categories.
On February 11, 1997, the Company acquired Shade/Allied, a national
supplier of machine papers, principally continuous computer forms. The purchase
price of $49.5 million was financed with borrowings under the Company's new
bank credit agreement. The Company expects that Shade/Allied's products will be
distributed by both the Ampad and Williamhouse divisions and that the
manufacturing plants will be 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
30
<PAGE> 19
assets such as property, plant and equipment and intangible assets, including
goodwill, which results in incremental annual depreciation and amortization
expense each year.
Potential Operating Improvements. The Company has identified and is in
the process of implementing cost reductions in connection with the
acquisitions. In addition, management plans to implement further identified
cost reductions which are expected to improve operations beyond 1996. The most
significant cost reduction actions involve closing Williamhouse's New York City
and Niagara's Buffalo headquarters, contractual changes in employee benefit and
other insurance plans and the consolidation of sales and marketing and other
administrative functions to eliminate duplicative functions, sales programs and
sales personnel, and the consolidation and integration of manufacturing and
distribution facilities. These improvements were being implemented during 1996
and, except for the integration of certain manufacturing and distribution
facilities, were completed by the end of 1996. However, because Williamhouse's
and Niagara's selling, general and administrative ("SG&A") expenses were
historically higher than the SG&A expenses of the Company. SG&A expenses as a
percentage of net sales in 1996 were higher than the SG&A expenses to net sales
percentage relationship in 1995 and 1994.
Sale of Regency Division. The Company's management identified the
Regency Division of Williamhouse as a nonstrategic asset following the
acquisition of Williamhouse and, on June 27, 1996, sold the Regency Division
for approximately $47.9 million in net proceeds. As a result, the financial
statements of the Company included elsewhere herein reflect the Regency
Division as "Assets Held for Sale" as of December 31, 1995. The Company used
the net proceeds from the sale of the Regency Division to fund substantially
all of the Niagara acquisition.
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. This volatility negatively impacted the
Company's earnings in 1994, particularly in the fourth quarter, as a result of
the Company's inability to implement price changes in many of its product lines
without giving its customers advance notification. 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 now able to price its products so as to minimize
the impact of price volatility on dollar margins.
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the years ended December 31, 1994,
1995, and 1996. The results of operations for the year ended December 31, 1994
reflect the historical results of the Company and the results of SCM for the
period from July 5, 1994 through December 31, 1994. The results of operations
for the year ended December 31, 1995 reflect the historical results of the
Company, the results of Globe-Weis from August 18, 1995 through December 31,
1995 and the results of Williamhouse for the two-month period ended December
31, 1995. The results of operations for the year ended December 31, 1996
include the results of operations of Niagara from June 28, 1996 through
December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
INCOME STATEMENT DATA: 1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales ....................................... 100.0 100.0 100.0
===== ===== =====
Gross profit .................................... 5.5 18.5 21.5
Selling, general and administrative expenses .... 7.9 7.0 8.2
Management fees and services .................... 0.4 0.2 0.6
Non-recurring compensation charge ............... -- 10.7 --
----- ----- -----
Income (loss) from operations ................... (2.8) 0.6 12.7
</TABLE>
31
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
Interest expense, net ........................... 3.6 5.3 7.4
Other income .................................... (0.1) (0.3) (0.2)
----- ----- -----
Income (loss) before taxes ...................... (6.3) (4.4) 5.5
Provision for (benefit from) income taxes ....... (0.4) (2.5) 2.4
----- ----- -----
Income (loss) before extraordinary item ......... (5.9) (1.9) 3.1
Extraordinary loss from extinguishment of debt,
net of income tax benefit .................... -- (3.8) (3.4)
----- ----- -----
Net loss ........................................ (5.9) (5.7) (0.3)
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 increased by $326.7
million, or 127.0%, to $583.9 million from $257.2 million for the year ended
December 31, 1995. Of this net sales increase, $274.8 million is related to the
acquisition of Williamhouse and Niagara and $35.2 million is related to the
acquisition of Globe-Weis. Ampad division net sales increased by $16.7 million
during 1996 compared to 1995 due to higher sales to the fast growing customer
channels such as superstores, mass merchant stores and contract stationers.
Gross profit for the year ended December 31, 1996 increased by $77.9
million, or 164.0%, to $125.4 million from $47.5 million for the year ended
December 31, 1995. Approximately $69.5 million of the increase in gross profit
is attributable to the acquisition of Williamhouse and Niagara. Gross profit
margin increased to 21.5% for the year ended December 31, 1996 from 18.5% for
the year ended December 31, 1995. The increase in gross profit margin is
primarily attributable to higher margins of the Williamhouse division.
SG&A expenses for the year ended December 31, 1996 increased $29.6
million, or 164.4%, to $47.6 million from $18.0 million for the year ended
December 31, 1995. Approximately $20.2 million is attributable to the
acquisition of Williamhouse and Niagara and $3.6 million to amortization of
goodwill and intangibles related to the acquisitions. The remainder of the
increase is due primarily to costs associated with the support of a
significantly larger corporation.
Management fees and services increased $3.3 million in 1996 due to the
amortization of a consulting agreement with a former shareholder of Niagara and
an increase in Bain Capital's management fees.
Interest expense for the year ended December 31, 1996 increased $29.3
million to $43.0 million from $13.7 million for the year ended December 31,
1995. The increase is attributable primarily to higher levels of outstanding
debt for a full year as a result of the acquisition of Williamhouse and
Globe-Weis. The increase in interest expense was partially offset by a
reduction of approximately $3.4 million in interest expense following the
redemption of $70 million of the Notes in August 1996.
The income tax provision for year ended December 31, 1996 reflects an
effective tax rate of 43.2% versus an effective tax benefit rate of 56.5% for
the year ended December 31, 1995. The effective tax rate for 1996 reflects a
40% combined statutory federal and state income tax rate adjusted for
nondeductible expenses, primarily goodwill amortization. The effective tax rate
for the year ended December 31, 1995 differs from the federal statutory income
tax rate of 35% due to state income taxes and the reversal of a valuation
allowance on deferred tax assets relating to the realizability of the Company's
net operating loss carryforward.
Extraordinary item represents an after tax loss on extinguishment of
debt of $20.0 million ($33.0 million pretax) recognized as a result of the
redemption of $70.0 million of senior subordinated
32
<PAGE> 21
notes with a portion of the net proceeds from the initial public offering and
the write off of a portion of the unamortized deferred financing costs related
to the Notes and all of the deferred financing costs associated with the old
bank credit agreement and the old accounts receivable facility.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales for the year ended December 31, 1995 increased by $129.5
million, or 101.4%, to $257.2 million from $127.7 million for the year ended
December 31, 1994. Of this net sales increase, $45.8 million, or 35.4%, is
related to the Williamhouse acquisition and $29.1 million, or 22.4%, is related
to the Globe-Weis acquisition. The remaining increase of $54.6 million, or
42.2%, is related to increased net sales in the base business, primarily as a
result of price increases and, to a lesser extent, a change in product mix,
partially offset by a decline in sales through non-strategic channels,
particularly independent dealers. Net sales to independent dealers declined to
less than 3.0% of net sales in the year ended December 31, 1995, compared to
8.6% in 1994.
Gross profit for the year ended December 31, 1995 increased by $40.5
million, or 579%, to $47.5 million, from $7.0 million for the year ended
December 31, 1994. Approximately $13.6 million of the increase in gross profit
is attributable to the Williamhouse acquisition and an estimated $3.8 million
increase is due to the Globe-Weis acquisition. The remainder of the increase in
gross profit is due to (i) higher variable margins associated with the gains in
unit sales, product mix and pricing; (ii) lower fixed manufacturing costs
primarily as a result of the SCM plant closure; (iii) the Company's ability to
pass along paper price increases to its customers beginning in 1995, and (iv)
lower LIFO charges of approximately $2.5 million in 1995. Fixed manufacturing
costs as a percentage of net sales declined as a result of the successful
integration of the Globe-Weis manufacturing operations and the closing of the
Indiana facility.
Gross profit margin increased in the year ended December 31, 1995 to
18.5% from 5.5% in 1994. The increase is principally a result of higher
variable margins, lower fixed manufacturing costs and lower LIFO charges.
Excluding acquisitions, gross profit margin would have increased to 16.4% for
the period ended December 31, 1995.
SG&A expenses for the year ended December 31, 1995 increased by $8.0
million, 80.0%, to $18.0 million, from $10.0 million for the year ended
December 31, 1994. Approximately $5.9 million of this increase related to the
acquisitions. The balance of such increase related to higher amortization costs
as a result of the acquisitions and the costs associated with the accounts
receivable facility.
The non-recurring compensation charge of $27.6 million for the year
ended December 31, 1995 was primarily the result of the issuance of options for
preferred stock granted to existing option holders in order to maintain such
holders' economic value in previously issued options for Common Stock as a
result of the preferred stock dividend and the grant of additional options in
December 1995 at an exercise price below the fair market value at the date of
grant.
Income (loss) from operations for the year ended December 31, 1995
increased by $4.9 million to $1.3 million from ($3.6) million in 1994, for the
reasons stated above. Income (loss) from operations as a percentage of net
sales for the year ended December 31, 1995 increased to 0.6% from (2.8)% for
the year ended December 31, 1994.
Interest expense for the year ended December 31, 1995 increased $9.1
million, or 198%, to $13.7 million from $4.6 million for the year ended
December 31, 1994. The increase is attributable primarily to increased
borrowings as a result of the Williamhouse and the Globe-Weis acquisitions.
33
<PAGE> 22
Income tax benefit for the year ended December 31, 1995 reflects an
effective tax rate of 56.5%, versus a 6.1% effective tax rate in 1994. The
difference between the effective rate and the statutory rate in 1995 is due to
a reduction in the deferred tax valuation allowance resulting from improved
operating results.
Extraordinary item represents an after tax loss on extinguishment of
debt of $9.7 million ($16.2 million pretax) recognized as a result of $10.8
million of redemption premiums and prepayment penalties associated with the
repurchase of the old debentures and the Company's bank debt and the write off
of $5.3 million of unamortized deferred financing costs in connection with the
redemption of the old debentures and the Company's debt refinancings.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the year ended December 31,
1996 was $23.2 million compared to cash provided by operating activities of
$4.7 million for the year ended December 31, 1995. The increase in cash
provided by operating activities is primarily due to higher net sales and
earnings of the Company in 1996. The net cash provided for the year ended
December 31, 1995 resulted primarily from an increase of $5.0 million in
accounts payable, an increase in accrued expenses of $4.9 million, a decrease
in inventories and increased margins on sales. Cash used by operations for the
years ended December 31, 1994 was $1.9 million. The use of cash for the year
ended December 31, 1994 was primarily due to an increase in inventories offset
by an increased LIFO charge due to rising paper prices, and a decrease in
accrued expenses, offset by an increase in accounts payable.
Cash used in investing activities for the year ended December 31, 1996
and 1995 was $16.2 million and $131.3 million, respectively. The use of cash
for the year ended December 31, 1996 was principally due to the Niagara
acquisition ($53.0 million, net of cash received) and purchases of equipment
($14.6 million), offset by proceeds from the sale of the Regency Division and
other assets held for sale ($49.3 million). The use of cash for the year ended
December 31, 1995, was due to the Williamhouse acquisition ($122.7 million),
the Globe-Weis acquisition ($7.0 million) and purchase of equipment ($3.9
million). The use of cash for the year ended December 31, 1994, was due
primarily to the SCM acquisition ($13.7 million).
Cash used in financing activities for the year ended December 31, 1996
was $23.0 million as compared to a cash provision from financing activities of
$144.9 million for the year ended December 31, 1995. During the year ended
December 31, 1996, the Company (i) completed its initial public offering of
12.5 million shares of common stock for $172.8 million in net proceeds after
deducting offering fees and expenses, (ii) refinanced its accounts receivable
facility with a new $60.0 million facility, (iii) refinanced its bank credit
agreement, (iv) redeemed $70.0 million of senior subordinated notes, (v) repaid
$95.8 million of debt incurred under the old bank credit agreement, (vi) paid
$7.7 million in redemption premiums on the Notes, (vii) repaid $10 million
under the new accounts receivable facility with proceeds from the sale of the
Regency Division, (viii) borrowed $54 million under the new accounts receivable
facility and (ix) repaid WR seller notes for $25 million. Cash provided by
financing activities for the years ended December 31, 1995 and 1994 was $144.9
million and $16.5 million, respectively, primarily due to periodic financings
incurred in connection with the various acquisitions.
Capital expenditures, excluding acquisitions, in the years ended
December 31, 1996, 1995 and 1994 were $14.6 million, $3.9 million and $0.9
million, respectively. The Company expects that combined capital expenditure
requirements will be approximately $18 million for 1997. The Company believes
these capital expenditure levels will be sufficient to maintain competitiveness
and to provide sufficient manufacturing capacity. The Company expects to fund
capital expenditures primarily from cash generated from operating activities.
34
<PAGE> 23
Contemporaneously with the initial public offering, the Company
refinanced and retired all remaining indebtedness under the old bank credit
agreement with the proceeds of the loans under the new bank credit agreement.
As a result of the refinancing, effective July 8, 1996, the Company borrowed
$162.0 million in revolving loans and $6.5 million in swingline loans. The
proceeds of these loans were used to (i) pay off the remaining $145.0 million
in term loans, $5.0 million in revolver loans and $7.7 million in swingline
loans outstanding under the old bank credit agreement and (ii) pay
approximately $8.1 million in fees associated with the new bank credit
agreement. The new bank credit agreement provides a revolving credit facility
of $300 million . As of December 31, 1996, the Company had $155 million
available for borrowing under its bank credit agreement. Loans made under the
new bank credit agreement bear interest at a rate per annum equal to, at the
Company's option, (i) a base rate plus an applicable margin or (ii) the LIBOR
rate plus an applicable margin (as each term is defined in the new bank credit
agreement). The applicable margin varies from 0% to 1.75%, based on the
Company's level of debt as compared to earnings ("leverage ratio"). The
Company's margin is currently 1.50%.
Availability under the new bank credit agreement is subject to an
unused commitment fee which, like the applicable margin, varies from 0.3% to
0.5% based on the Company's leverage ratio. The Company's current rate is 0.5%.
Availability under the new bank credit agreement will be reduced to the extent
of the net proceeds of a sale of assets by the Company, the net proceeds of an
issuance of debt by the Company or 50% of the net proceeds of an issuance of
equity by the Company. Availability will also be reduced by $50 million in 1999
and $50 million in 2000. The new bank credit agreement will terminate in 2001.
The Company will be permitted to make acquisitions under the new bank credit
agreement up to an aggregate of $25 million without consent of the agent bank
and up to $50 million if, on a pro forma basis giving effect to such
acquisition, the Company's leverage ratio is less than 3.0:1.0. As a result of
the new bank credit agreement, the Company's effective interest rate under its
senior credit facility was reduced by 189 basis points contemporaneously with
the initial public offering. The bank credit agreement and the indenture impose
certain restrictions on the Company, including restrictions on its ability to
incur indebtedness, pay dividends, make investments, grant liens, sell its
assets and engage in certain other activities. In addition, the indebtedness of
the Company under the bank credit agreement is secured by substantially all of
the assets of the Company, including the Company's real and personal property,
inventory, accounts receivable, intellectual property and other intangibles.
On May 29, 1996, the Company refinanced its $45 million accounts
receivable facility with a new $60 million accounts receivable facility. Under
the new facility the Company may sell, on a revolving basis, an undivided
interest in a designated pool of trade accounts receivable. At December 31,
1996, $54 million of accounts receivable were sold under the program. The
agreement expires in 2000.
On February 11, 1997, the Company acquired Shade/Allied for
approximately $49.5 million, including acquisition costs, using proceeds from
borrowings under its bank credit agreement.
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 new bank credit
agreement and available cash on hand at December 31, 1996, 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 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.
35
<PAGE> 24
The Company has entered into an interest rate protection agreement to minimize
the impact from a rise in interest rates.
INFLATION
The Company believes that inflation has not had a material impact on
its results of operations for the three years ended December 31,
1996.
CERTAIN FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) relating to
the Company that are based on the beliefs of the management of the Company, as
well as assumptions and estimates made by and information currently available
to the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend" and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current view of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions relating to the operations and results of operations of the Company
as well as its customers and suppliers, including as a result of competitive
factors and pricing pressures, shifts in market demand, general economic
conditions and other factors, including those that affect wholesale and retail
office products and the business activities of the Company's customers and
suppliers. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions or estimates prove incorrect, actual results may
vary materially from those described herein as anticipated, believed,
estimated, expected or intended.
CHANGES IN ACCOUNTING STANDARDS
The Company elected in 1996 to adopt the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation," which adoption did not have any effect on its financial
condition or results of operations.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) of the Exhibit Index for a listing of the Company's
financial statements included with this Form 10-K. The Company is not required
to provide the supplementary financial information required by Item 302 of
Regulation S-K.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This section is not applicable as there were no changes in or
disagreements with the Company's independent accountants on accounting and
financial disclosure for the period covered by this Form 10-K.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This item is incorporated by reference from the Company's 1997 Annual
Proxy Statement to Stockholders where the information can be found on pages 1
to 9.
36
<PAGE> 25
ITEM 11 EXECUTIVE COMPENSATION
This item is incorporated by reference from the Company's 1997 Annual
Proxy Statement to Stockholders where the information can be found on pages 9
to 11.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated by reference from the Company's 1997 Annual
Proxy Statement to Stockholders where the information can be found on pages 7
to 8.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference from the Company's 1997 Annual
Proxy Statement to Stockholders where the information can be found on pages 5
to 6.
37
<PAGE> 26
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(a) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AMERICAN PAD & PAPER COMPANY AND SUBSIDIARIES PAGE
----
<S> <C>
Report of Independent Accountants .............................. 43
Consolidated Balance Sheets at December 31, 1995 and 1996 ...... 44
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 ........................... 45
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 ........................... 46
Consolidated Statements of Stockholders' Equity (Deficit)
years ended December 31, 1994, 1995, and 1996 .............. 48
Notes to Consolidated Financial Statements ..................... 49
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC
AND SUBSIDIARY
Report of Independent Accountants .............................. 67
Consolidated Balance Sheets at December 31, 1995 and 1996 ...... 68
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 ........................... 69
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 ........................... 70
Consolidated Statements of Stockholder's Equity (Deficit)
years ended December 31, 1994, 1995, and 1996 .............. 72
Notes to Consolidated Financial Statements ..................... 73
</TABLE>
ITEM 14(a)(2) FINANCIAL STATEMENT SCHEDULES
The information required by this item is included in the
consolidated financial statements or is omitted because the schedules are not
applicable to the Company.
ITEM 14(b) REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K
during the fourth quarter of 1996.
ITEM 14(b) EXHIBITS
See Exhibit Index which follows on pages 40 and 41.
38
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrants have duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, as of March 14,
1997.
AMERICAN PAD & PAPER COMPANY
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
as Registrants
/s/ Charles G. Hanson III
- ------------------------------------
Charles G. Hanson III
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below as of March 14, 1997 by the following persons on
behalf of the registrants and in the capacities indicated.
/s/ Russell M. Gard
- ----------------------------------
Russell M. Gard
President, Chief Operating Officer
and Director
/s/ Robert C. Gay /s/ Jonathan S. Lavine
- --------------------------------- -----------------------------------
Robert C. Gay Jonathan S. Lavine
Director. Director
/s/ Marc B. Wolpow /s/ Gregory M. Benson
- --------------------------------- -----------------------------------
Marc B. Wolpow Gregory M. Benson
Director. Director
/s/ Scott R. Watterson /s/ Herbert M. Kohn
- --------------------------------- -----------------------------------
Scott R. Watterson Herbert M. Kohn
Director. Director
/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
39
<PAGE> 28
EXHIBIT EXHIBIT INDEX
NO. DESCRIPTION
- ------- ---------------
2.1 Stock Purchase Agreement, dated May 29, 1996, by and among American
Pad & Paper Company of Delaware, Inc., Niagara Envelope
Company, Inc. and the person named therein.(1)
3.1 (i) Restated Certificate of Incorporation of the Company (3)
3.1 (ii) Amended and Restricted By-laws of the Company. (3)
4.1 Indenture, dated as of December 1, 1995, among American Pad & Paper
Company of Delaware, Inc., the Subsidiary Guarantors and the
Trustee (including Form of Note). (2)
4.2 Purchase Agreement, dated as of November 17, 1994, among American
Pad & Paper Company of Delaware, Inc.., the Subsidiary
Guarantors and the Initial Purchasers. (1)
4.3 Registration Rights Agreement dated as of December 1, 1995, among
American Pad & Paper Company of Delaware, Inc., the Subsidiary
Guarantors and the Initial Purchasers named therein. (1)
4.7 Notepad Funding Receivables Master Trust Pooling and Servicing
Agreement, dated October 31, 1995, among APPC, Notepad Funding
Corporation and Manufacturers and Traders Trust Company (the
"Pooling and Service Agreement"). (1)+
4.8 Series 1995-1 Supplement to the Pooling and Service Agreement,
dated October 31, 1995. (1)+
4.9 Revolving Certificate Purchase Agreement, dated October 31, 1995
among APPC, Notepad Funding Corporation, Bankers Trust Company
and the Purchasers described therein. (1)+
4.10 Receivables Purchase Agreement, dated October 31, 1995, among APP.,
Notepad Funding Corporation and certain subsidiaries. (1)+
4.11 Credit Agreement, dated as of July 8, 1996, among the Company,
WR Acquisition, Inc., American Pad & Paper Company of
Delaware, Inc., various Lending Institutions, Bank of
Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The
Bank of Nova Scotia and the First National Bank of Boston, as
Co-Agents and Bankers Trust Company, as Agent (3)
4.12 Security Agreement, dated as of July 8, 1996, among the
Company, WR Acquisition, Inc., American Pad & Paper Company of
Delaware, Inc., certain other subsidiaries of American Pad &
Paper Company, and Bankers Trust Company, as Collateral Agent.
(3)
4.13 Pledge Agreement, dated as of July 8, 1996, among the Company,
WR Acquisition, Inc., American Pad & Paper Company of
Delaware, Inc., the Lenders from time to time party thereto,
and Bankers Trust Company, as Agent. (3)
4.14 Form of Revolving and Swingline Note of American Pad & Paper
Company of Delaware, Inc. (3)
4.15 Subsidiary Guaranty, dated as of July 8, 1996, among each of
the Company's subsidiaries named therein and Bankers Trust
Company, as Agent for the Bank. (3)
10.1 Agreement and Plan of Merger, dated as of October 3, 1995, among
the
40
<PAGE> 29
Company, WHR Acquisition, Inc. and WR Acquisition, Inc. (1)
10.2 Amendment No. 1 to WHR Merger Agreement, dated as of October 31,
1995, among the Company, WHR Acquisition, Inc. and WR
Acquisition, Inc. (1)
10.3 Stock Purchase Agreement, dated as of October 30, 1995, among WR
Acquisition, Inc. and the Company (1)
10.4 Tax Sharing Agreement, dated as of October 30, 1995, among American
Pad & Paper Company of Delaware, Inc. and the Subsidiary
Guarantors. (1)
10.5 Agreement and Plan of Merger, dated as of October 31, 1995, among
Williamhouse Regency of Delaware, Inc. and Ampad Corporation.
(1)
10.6 Amended and Restricted Advisory Agreement, dated as of October 31,
1995, among American Pad & Paper Company of Delaware, Inc. and
Bain Capital, Inc. (4)
10.7 Ampad Holding Corporation 1992 Key Employees Stock Option Plan. (1)
10.12 Asset Purchase Agreement, dated as of June 29, 1994, by and between
Huxley Envelope corp., The Kent Paper Co., Inc. and
Williamhouse of California, Inc. (2)+
10.13 Lease Agreement for City of Industry, California. (1)
10.14 Lease Agreement for Dubuque, Iowa (1)
10.15 Lease Agreement for Miamisburg, Ohio. (1)
10.16 Lease Agreement for North Salt Lake City, Utah. (1)
10.17 Lease Agreement for Tacoma, Washington. (1)
10.18 Change of Control Agreement between WR Acquisition, Inc. and
certain officers of American Pad & Paper Company of Delaware,
Inc. (1)
10.19 Registration Rights Agreement, dated as of July 31, 1992, between
the Company and the stockholders named therein. (2)
10.20 1996 Key Employee Stock Incentive Plan (3)
10.21 1996 Non-Employee Director Stock Option Plan. (3)
10.22 Employment Agreement between the Company and Charles Hanson
III. (2)
10.23 Employment Agreement between the Company and Russell Gard. (2)
10.24 Amended and Restated Advisory Agreement between American Pad &
Paper Company and Bain Capital, Inc. (2)
10.25 Management Stock Purchase Plan .(3)
10.26 Employment Agreement between the Company and Timothy Needham.
10.27 Agreement and Plan of Merger by and between Shade/Allied, Inc. and
American Pad & Paper Company of Delaware, Inc.
21.1 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule.
- -----------------
(1) Incorporated by reference to the same-numbered exhibit to the Registration
Statement on Form S-1 of American Pad & Paper of Delaware, Inc. (File No.
333-3006).
(2) Incorporated by reference to the same-numbered exhibit to the Registration
Statement on Form S-1 of American Pad & Paper Company (File No. 333-4000).
(3) Incorporated by reference to the exhibits to the Quarterly Report on Form
10-Q of the registrants for the quarter ended June 30, 1996.
(4) Incorporated by reference to the exhibits to the Quarterly Report on Form
10-Q of the registrants for the quarter ended September 30, 1996.
41
<PAGE> 30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AMERICAN PAD & PAPER COMPANY
AND SUBSIDIARIES
PAGE NO.
--------
<S> <C>
Responsibility for the Consolidated Financial Reports 43
Report of Independent Accountants 43
Consolidated Balance Sheets at December 31, 1995 and 1996 44
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 45
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 46
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1994, 1995 and 1996 48
Notes to Consolidated Financial Statements 49
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC
AND SUBSIDIARY
Report of Independent Accountants 67
Consolidated Balance Sheets at December 31, 1995 and 1996 68
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 69
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 70
Consolidated Statements of Changes in Stockholder's Equity (Deficit)
for the years ended December 31, 1994, 1995 and 1996 72
Notes to Consolidated Financial Statements 73
</TABLE>
42
<PAGE> 31
RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL REPORTS
Company management is responsible for the preparation, accuracy and
integrity of the consolidated financial statements and other financial
information included in this Annual Report. This responsibility includes
preparing the statements in accordance with generally accepted accounting
principles and necessarily includes estimates that are based on management's
best judgments.
To help ensure the accuracy and integrity of Company financial data,
management maintains internal controls which are designed to provide reasonable
assurance that transactions are executed as authorized, that they are
accurately recorded and that assets are properly safeguarded. These controls
are monitored by internal financial and operations management. It is essential
for all Company employees to conduct their business affairs in keeping with the
highest ethical standards as outlined in our code of conduct policy. Careful
selection of employees, and appropriate divisions of responsibility, also help
us to achieve our control objectives.
The financial statements have been audited by the Company's
independent accountants, Price Waterhouse LLP. Their report is also shown on
this page.
The Board of Directors, acting through its Audit Committee composed
entirely of outside directors, oversees the adequacy of the Company's control
environment. The Audit Committee meets periodically with representatives of
Price Waterhouse LLP and internal financial management to review accounting,
control, auditing and financial reporting matters. The independent auditors
also have full and free access to meet privately with the Audit Committee.
Charles G. Hanson III Kevin W. McAleer
Chief Executive Officer Chief Financial Officer
---------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
American Pad & Paper Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) on page 38 present fairly, in all material respects,
the financial position of American Pad & Paper Company and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
February 18, 1997
43
<PAGE> 32
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ASSETS 1995 1996
------ --------- ---------
<S> <C> <C>
Current assets:
Cash $ 18,341 $ 2,290
Accounts receivable 29,483 57,054
Refundable income taxes 3,657 --
Inventories 93,061 105,667
Prepaid expenses and other current assets 927 4,739
Assets held for sale 42,578 --
Deferred income taxes 15,009 10,754
--------- ---------
Total current assets 203,056 180,504
Property and equipment 106,768 133,090
Intangible assets 191,012 192,367
Other 3,520 3,456
--------- ---------
Total assets $ 504,356 $ 509,417
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current portion of long-term debt $ 11,834 $ 2,171
Accounts payable 37,048 44,932
Accrued expenses 44,835 55,041
Income taxes payable 494 503
--------- ---------
Total current liabilities 94,211 102,647
Long-term debt 443,794 269,812
Deferred income taxes 30,070 30,981
Other 2,702 1,378
--------- ---------
Total liabilities 570,777 404,818
--------- ---------
Commitments and contingencies Stockholders' equity (deficit):
Preferred stock, 150 shares authorized, 58
shares and no shares issued and outstanding,
respectively 113,887 --
Common stock, voting, $.01 par value, 75,000
shares authorized, 7,307 shares and 27,400
shares issued and outstanding, respectively 73 274
Additional paid-in capital 14,234 300,721
Accumulated deficit (194,615) (196,396)
--------- ---------
Total stockholders' equity (deficit) (66,421) 104,599
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 504,356 $ 509,417
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
44
<PAGE> 33
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 127,744 $ 257,160 $ 583,859
Cost of sales 120,695 209,633 458,449
--------- --------- ---------
Gross profit 7,049 47,527 125,410
--------- --------- ---------
Operating expenses:
Selling and marketing 5,059 6,254 16,964
General and administrative 4,981 11,749 30,685
Management fees and services 575 542 3,880
Nonrecurring compensation charge -- 27,632 --
--------- --------- ---------
10,615 46,177 51,529
--------- --------- ---------
Income (loss) from operations (3,566) 1,350 73,881
Other income (expense):
Interest (4,560) (13,657) (42,968)
Other income, net 90 735 1,153
--------- --------- ---------
Income (loss) before income taxes (8,036) (11,572) 32,066
and extraordinary item
Provision (benefit) for income taxes (488) (6,538) 13,852
--------- --------- ---------
Income (loss) before extraordinary item (7,548) (5,034) 18,214
Extraordinary loss from extinguishment of debt
(net of income tax benefits of $6,434 and
$13,009, respectively) -- (9,652) (19,995)
--------- --------- ---------
Net loss $ (7,548) $ (14,686) $ (1,781)
========= ========= =========
Pro forma income (loss) per share:
Income (loss) before extraordinary item $ (.17) $ .62
Extraordinary item (.33) (.68)
--------- ---------
Net loss $ (.50) $ (.06)
========= =========
Pro forma weighted average shares outstanding 29,607 29,607
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
45
<PAGE> 34
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,548) $ (14,686) $ (1,781)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 828 3,369 9,765
Amortization of goodwill and intangible
assets 114 879 4,488
Noncash portion of nonrecurring
compensation charge -- 25,998 --
Extraordinary loss on extinguishment of -- 9,652 19,995
debt
Noncash interest expense and accretion of 135 -- --
discount
Amortization of debt issuance costs 696 1,538 3,790
Gain on sale of assets (83) (140) (94)
Changes in assets and liabilities, net of effects
of acquisitions:
Accounts receivable 2,445 (22,025) (25,625)
Refundable income taxes -- 101 3,657
Inventories 1,655 2,256 (2,030)
Prepaid expenses and other (302) 905 1,721
Deferred tax asset, net (488) (13,141) 13,361
Accounts payable 3,433 4,979 1,819
Accrued expenses (2,782) 4,877 (4,294)
Other assets and liabilities 11 147 (1,556)
--------- --------- ---------
Net cash provided by (used in) operating
activities (1,886) 4,709 23,216
--------- --------- ---------
Cash flows from investing activities:
Purchase of stock and net assets of businesses,
including acquisition costs (13,744) (129,701) (52,964)
Purchases of property and equipment (942) (3,919) (14,609)
Proceeds from sale of assets 83 140 2,056
Net cash generated from assets held for sale -- 2,213 49,277
--------- --------- ---------
Net cash used in investing activities (14,603) (131,267) (16,240)
--------- --------- ---------
</TABLE>
(continued on next page)
The accompanying notes are an integral part of these consolidated
financial statements.
46
<PAGE> 35
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowings (repayments) under line of credit 7,057 (22,767) --
Proceeds from long-term debt 11,252 430,052 192,773
Repayment of long-term debt (1,192) (186,546) (380,317)
Redemption premiums and penalties included in
extraordinary loss -- (10,812) (7,700)
Debt issuance costs (628) (35,032) (9,584)
Redemption of preferred stock -- (61,478) --
Redemption of Class P common stock -- (4,464) --
Redemption of preferred stock options -- (9,188) --
Proceeds from old accounts receivable facility -- 45,000 --
Repayment of old accounts receivable facility -- -- (45,000)
Net proceeds from net new accounts
receivable facility -- -- 54,000
Proceeds from exercise of preferred stock options -- 130 --
Proceeds from initial public offering, net -- -- 172,801
--------- --------- ---------
Net cash provided by (used in) financing
activities 16,489 144,895 (23,027)
--------- --------- ---------
Net increase (decrease) in cash -- 18,337 (16,051)
Cash, beginning of year 4 4 18,341
--------- --------- ---------
Cash, end of year $ 4 $ 18,341 $ 2,290
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 3,575 $ 9,127 $ 38,785
========= ========= =========
Income taxes $ 29 $ 99 $ 470
========= ========= =========
Supplemental disclosure of noncash investing activity:
Notes payable issued in consideration of purchase
price $ -- $ 36,115 $ --
========= ========= =========
Notes payable issued to purchase equipment $ -- $ 1,721 $ 500
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
47
<PAGE> 36
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED COMMON RETAINED
STOCK STOCK EARNINGS
-------------------- ------------------ PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993 -- $ -- 6,667 $ 67 $ 2,933 $ 1,815 $ 4,815
Net loss -- -- -- -- -- (7,548) (7,548)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31,
1994 -- -- 6,667 67 2,933 (5,733) (2,733)
Preferred stock dividend 90 175,365 -- -- (2,933) (172,432) --
Grant of stock options -- -- -- -- 25,998 -- 25,998
Redemption of preferred
stock (32) (61,478) -- -- -- --
(61,478)
Accrual of preferential
distribution on Class P
common stock -- -- -- -- 1,764 (1,764) --
Redemption of Class P
common stock -- -- 640 6 (4,470) -- (4,464)
Redemption of preferred
stock options -- -- -- (9,188) -- (9,188)
Proceeds from exercise of
preferred stock options -- -- -- -- 130 -- 130
Net loss -- -- -- -- -- (14,686) (14,686)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31,
1995 58 113,887 7,307 73 14,234 (194,615) (66,421)
Conversion of preferred
stock to common stock (58) (113,887) 7,593 76 113,811 -- --
Proceeds from initial public
offering of common stock -- -- 12,500 125 172,676 -- 172,801
Net loss -- -- -- -- -- (1,781) (1,781)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31,
1996 -- $ -- 27,400 $ 274 $ 300,721 $(196,396) $ 104,599
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
48
<PAGE> 37
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS
Organization and Basis of Presentation
American Pad & Paper Company (formerly Ampad Holding Corporation and
referred to hereafter as the "Company") was incorporated on June 2, 1992 as a
holding company to acquire all of the outstanding stock of Ampad Corporation
("Ampad"), the surviving entity from the merger between Ampad Acquisition
Corporation and Ampad. The Company had no operations through July 31, 1992.
On October 3, 1995, the Company agreed to acquire in a merger
transaction all of the outstanding stock of WR Acquisition, Inc. ("WR"). In a
series of transactions, the Company exchanged 100% of the stock of its wholly
owned subsidiary, Ampad, for newly issued shares of WR. WR then contributed
Ampad to its wholly owned subsidiary, Williamhouse-Regency of Delaware, Inc.,
renamed American Pad & Paper Company of Delaware, Inc. (referred to hereafter
on a pre-October 31, 1995 basis as "Williamhouse-Regency" and on a post-October
31, 1995 basis as "AP&P Delaware") in exchange for a right to receive $140
million of merger consideration. The Company, principally using bank borrowings
by AP&P Delaware aggregating $245 million, funded WR's right to receive the
merger consideration and WR in turn repurchased 100% of the WR shares not owned
by the Company. The transaction was accounted for as a purchase of the stock of
WR by the Company. As a result of the transactions, the Company now owns 100%
of WR which in turn owns 100% of AP&P Delaware.
The financial statements of the Company include the historical
accounts and operations of the Company and AP&P Delaware. Included in the
historical accounts and operations of AP&P Delaware are the accounts and
operations of Ampad and of the envelope operations of Williamhouse and Niagara
since their respective dates of acquisition. Additionally, the consolidated
financial statements include the accounts of Notepad Funding Corporation
("Notepad"), a special purpose corporation utilized in the accounts receivable
facility. All significant intercompany balances have been eliminated.
American Pad & Paper Company of Delaware, Inc.
The Company's wholly owned subsidiary, AP&P Delaware, is the issuer of
13% Senior Subordinated Notes ("Notes"). Terms of the Notes require, among
other matters, that AP&P Delaware provide annual audited and quarterly
unaudited financial statements to the holders of the publicly traded notes. The
Company is providing the holders of the Notes with its quarterly and annual
consolidated financial statements as well as its periodic reports as filed with
the Securities and Exchange Commission. The Company believes that the financial
information and debt compliance reporting needs of the holders of the Notes are
satisfied by providing such consolidated financial statements.
There are no material differences between the financial statements of
the Company and of AP&P Delaware. The composition of the AP&P Delaware's
stockholder's equity at December 31, 1996 consists of 100 shares of common
stock, paid in capital of $201,799 and an accumulated deficit of $97,200 and,
in total, is equal to the stockholders' equity of the Company.
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.
49
<PAGE> 38
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
Pro Forma Information
The pro forma information included in these financial statements and
notes is unaudited.
Quarterly Financial Information
The quarterly financial information included in these financial
statements is unaudited and includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position, its results of operations and its cash flows. Operating
results for any particular quarter are not necessarily indicative of results
for the full fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
consolidated financial statements are as follows:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly-liquid, interest-bearing instruments
with an original maturity of three months or less to be cash equivalents.
Revenue Recognition
The Company recognizes revenue upon shipment of the product. All risks
and rewards of ownership pass to the customer upon shipment. Damaged or
defective products may be returned to the Company for replacement or credit.
The Company also offers sales volume rebates to customers based on their level
of sales activity. The effects of returns and discounts are estimated and
recorded at the time of shipment. Volume rebates are estimated and recorded
based on sales activity.
Concentration of Credit Risk
The Company sells its products into various wholesale and retail
channels, primarily for the commercial office products marketplace. Management
believes its credit policies are prudent and reflect normal industry terms and
business risks. The Company performs periodic credit evaluations of its
customers and does not require collateral. Historically, the Company has not
experienced significant losses related to individual customers or groups of
customers in any particular industry or geographic area. An allowance is
maintained at a level which management believes is sufficient to cover
potential credit losses including potential losses on receivables sold.
50
<PAGE> 39
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
Inventories
Inventories, which consist primarily of paper and converted paper
products, are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method. Costs include material, labor and overhead.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
individual assets. Significant repairs or betterments which extend the useful
life of an asset are capitalized and depreciated over the asset's remaining
useful life.
Goodwill and Intangible Assets
Goodwill represents the cost in excess of fair value of the net assets
of companies acquired in purchase transactions. Goodwill is amortized using the
straight-line method over periods ranging from 20 to 40 years. Intangible
assets represent trade names acquired in the WR acquisition and are amortized
using the straight-line method. Trade names in the aggregate gross amount of
$31,700 and $6,200 are amortized over 40 years and 15 years, respectively. The
Company periodically reviews goodwill and other intangible assets to assess
recoverability. Potential impairment is measured based on the expected
undiscounted pre-tax and pre-interest cash flows of the operations giving rise
to the goodwill and other intangible assets compared to the carrying cost of
the related assets including goodwill and other intangible assets. Based upon
its most recent analysis, the Company believes that no impairment of goodwill
or intangible assets exists at December 31, 1996. Amortization expense was $114
in 1994, $879 in 1995 and $4,488 in 1996.
Debt Issuance Costs
Costs associated with debt issuances are capitalized and amortized to
interest expense using the effective interest method over the terms of the
related debt agreements.
Income Taxes
The Company accounts for income taxes following the liability method,
which prescribes an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Deferred tax assets are recognized, net of any valuation allowance,
for deductible temporary differences and tax operating loss and credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances. The Company periodically reviews the realizability
of its deferred tax assets and, as needed, records valuation allowances when
realizability of the deferred tax asset is not likely.
Derivatives
Premiums paid for interest rate cap agreements are amortized as
interest expense over the term of the agreement. Amounts receivable under
interest rate cap agreements are recorded as a reduction of interest expense.
Fair Value of Financial Instruments
Carrying values of cash, accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short-term maturities of
these assets and liabilities. The carrying value of senior bank debt bearing
interest at floating rates approximates fair value. The carrying value at
December 31, 1996 of the Notes of $130,000 compares to the Notes' fair value of
$153,400 based on quoted market rates, as determined at the end of 1996.
51
<PAGE> 40
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
Pro Forma Earnings Per Share
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 common share amounts are not presented in the
consolidated financial statements as they are 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).
Reclassifications
Certain amounts in the 1994 and 1995 consolidated financial
statements, none of which have an effect on net income (loss), have been
reclassified to conform with the presentation in the 1996 consolidated
financial statements.
3. ACQUISITIONS
WR Acquisition, Inc./Williamhouse-Regency
The Company acquired WR Acquisition, Inc. and its wholly owned
subsidiary Williamhouse-Regency of Delaware, Inc. through a merger transaction
effective October 31, 1995. The transaction was accounted for under the
purchase method of accounting. Accordingly, the aggregate acquisition cost was
allocated to the net assets acquired based on the fair market value of such net
assets. The aggregate acquisition cost totaled $147,853 and consisted of cash
of $140,000 and direct acquisition costs of $7,853. The acquisition was
entirely financed through the Company's bank credit agreement and an
off-balance sheet accounts receivable facility. The aggregate acquisition costs
have been allocated to the assets acquired and liabilities assumed as follows:
accounts receivable of $39,174; inventories of $49,496; prepaid expenses and
other assets of $8,699; net assets held for sale of $39,252; property and
equipment of $86,063; identifiable intangible assets of $37,900; deferred
income tax liability of $24,340; accounts payable of $17,518; accrued expenses
of $40,518; noncurrent liabilities of $2,019 and assumed debt of $152,905. The
aggregate acquisition costs exceeded fair market value of the net assets
acquired by $124,569. Accordingly, goodwill was recorded and is being amortized
over 40 years. The operating results of AP&P Delaware have been included in the
accompanying consolidated financial statements since the date of acquisition.
The businesses acquired included the Williamhouse division, a manufacturer of a
wide range of mill branded, specialty and commodity envelopes; and the Regency
division, which provides custom imprinting services.
The Regency personalized stationery and invitations division (the
"Regency Division") acquired in the acquisition was identified by management at
the date of acquisition as a nonstrategic asset held for sale. The purchase
price allocated to the net assets acquired included the expected proceeds from
sale plus the net cash flows expected to be generated from the Regency division
from the date of acquisition through the expected date of sale (the holding
period), offset by interest expense incurred during the holding period on debt
incurred to finance the purchase of the Regency Division. On June 27, 1996, the
Regency Division was sold for net proceeds of $47,890. The net proceeds from
the sale exceeded the carrying amount of the asset held for sale at December
31, 1996 by $1,599. As such, the preliminary purchase price allocation was
adjusted resulting in a $959 addition to goodwill. During the six month period
ended June 30, 1996, the
52
<PAGE> 41
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
Regency division had operating income of $2,369 and
interest carrying costs of $1,884, which have been excluded from the condensed
consolidated statement of operations and included as adjustments to the
carrying amount of the net assets held for sale through the date of sale.
Niagara Envelope Company, Inc.
Effective June 28, 1996, the Company acquired the stock of Niagara
Envelope Company, Inc. ("Niagara"). This acquisition was accounted for under
the purchase method of accounting. Accordingly, the aggregate acquisition cost
was allocated to the net assets acquired based on the fair value of such net
assets. The aggregate acquisition costs totaled $48,202 and consisted of cash
of $45,175 and direct acquisition costs of $3,027. Additionally, the Company
paid $5,000 at closing under a one-year consulting services agreement. The
Company principally financed the acquisition through proceeds from the sale of
the Regency division described above. The aggregate acquisition cost has been
allocated to the assets acquired and liabilities assumed as follows: cash of
$238, accounts receivable of $10,946, inventories of $11,878, prepaid and other
assets of $1,572, management services agreement of $5,000, property and
equipment of $26,824, deferred income tax liability of $2,227, accounts payable
of $6,064, accrued expenses of $10,464, other noncurrent liabilities of $381
and assumed debt of $3,900. The aggregate acquisition costs exceeded fair
market value of the net assets acquired by $19,780. Accordingly, goodwill was
recorded and is being amortized over 40 years. The operating results of this
acquisition have been included in the accompanying consolidated financial
statements since the date of acquisition. In 1996, the Company recorded $2,500
as management fees and services for the amortization of the consulting services
agreement.
Certain costs are expected to be incurred in connection with the Company's
separate strategic plans to integrate and consolidate certain plant,
administrative and sales functions of Williamhouse and Niagara the closure of
Williamhouse's and Niagara's corporate headquarters and the associated net
reduction of approximately 250 employees. Such costs, aggregating $23,500,
include lease termination expenses, severance and contractual change of control
benefits, the liabilities for which were included in the purchase price
allocation within accrued expenses. Substantially all such actions are expected
to be completed prior to June 30, 1997, except for the consolidation of certain
plants which is not expected to be completed until December 31, 1998.
Globe-Weis
Effective August 16, 1995, the Company acquired the inventories and
certain equipment of the file folder and hanging file folder product lines of
Globe-Weis's ("Globe") office products division from Globe's parent. For
financial reporting purposes, this acquisition was accounted for under the
purchase method of accounting. Accordingly, the aggregate acquisition cost was
allocated to the net assets acquired based on the fair value of such net
assets. The aggregate acquisition costs totaled $19,958 and consisted of cash
and seller issued notes of $17,869 and direct acquisition and financing costs
of $2,089. The Company principally financed the acquisition through its
financing arrangement with a commercial lender and notes issued to the seller.
The allocation of the aggregate acquisition costs was as follows: inventories
of $11,546, equipment of $6,747, and debt issuance costs of $1,665. The
operating results of this acquisition have been included in the accompanying
consolidated financial statements since the date of acquisition.
SCM Office Supplies
Effective July 5, 1994, the Company acquired the assets and assumed
certain liabilities of SCM Office Supplies, Inc. For financial reporting
purposes, this acquisition was accounted for under the purchase method of
accounting. Accordingly, the aggregate acquisition cost was allocated among the
net assets acquired based on the fair market value of such net assets. The
aggregate acquisition cost totaled $14,372 and consisted of cash of $12,880 and
direct acquisition and financing costs of $1,492. The company principally
financed the acquisition through its financing arrangement with a commercial
lender. The allocation of the aggregate acquisition cost to the assets acquired
and liabilities assumed was as follows:
53
<PAGE> 42
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
accounts receivable of $7,922, inventories of $6,857, prepaid expenses and
other assets of $16, debt issuance costs of $628, property and equipment of
$5,441, net deferred income tax assets of $1,553, accounts payable of $4,235,
and accrued liabilities of $6,333. The aggregate acquisition cost exceeded fair
market value of the net assets acquired by approximately $2,523. Accordingly,
goodwill was recorded and is being amortized over 20 years. The operating
results of this acquisition have been included in the accompanying consolidated
financial statements since the date of acquisition.
Pro Forma Results of Operations
The following summary presents the results of operations for the years
ended December 31, 1995 and 1996 on a pro forma basis, as if the Niagara, WR
and Globe acquisitions had occurred as of January 1, 1995 (with appropriate
adjustments for amortization of intangible assets, interest expense,
elimination of duplicate selling and administrative expenses and the related
income tax effects). The pro forma operating results are for illustrative
purposes only and do not purport to be indicative of the actual results which
would have occurred had the transaction been consummated as of those earlier
dates, nor are they indicative of results of operations which may occur in the
future.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net sales $ 617,869 $ 638,389
=========== ===========
Income before income taxes $ 5,758 $ 38,180
=========== ===========
Net income $ 3,678 $ 21,686
=========== ===========
Net income per share $ 0.12 $ 0.73
========== ===========
</TABLE>
The following summary presents the results of operations shown above
adjusted for the Company's initial public offering, and for the repayment of
$70,000 in Notes and for the new bank credit agreement.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net sales $ 617,869 $ 638,389
=========== ===========
Income before income taxes $ 34,253 $ 51,914
=========== ===========
Net income $ 21,482 $ 29,903
=========== ===========
Net income per share $ 0.73 $ 1.01
========== ===========
</TABLE>
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 $49,500 in cash financed by the Company's bank credit
agreement. This acquisition will be recorded following the purchase method of
accounting and, accordingly, the purchase price will be 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 will be allocated to
goodwill and amortized on a straight-line basis over 40 years. The Company
preliminarily expects that the purchase price will be allocated as follows:
trade accounts receivable of $4,584, inventories of $5,941,
54
<PAGE> 43
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
other current assets of $929, property, plant and equipment of $10,685, current
liabilities of $13,877, long-term liabilities of $3,323 and goodwill of
$44,561.
The following summary presents the results of operations for the year
ended December 31, 1996, on a pro forma unaudited basis, as if the Shade/Allied
and Niagara acquisitions had occurred as of January 1, 1996 (with appropriate
adjustments for amortization of intangible assets, interest expense,
elimination of duplicate selling and administrative expenses and the related
income tax effects). The pro forma results are for illustrative purposes only
and do not purport to be indicative of actual results which would have occurred
had the transactions been consummated as of those earlier dates, nor are they
indicative of the results which may occur in the future.
<TABLE>
<S> <C>
Net sales $730,801
========
Income before income taxes $ 41,257
========
Net income $ 23,434
========
Net income per share $ 0.79
========
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Accounts receivable--trade $ 29,981 $ 56,431
Accounts receivable--other 2,013 2,839
Less allowance for doubtful accounts and
reserves for customer deductions, returns
and cash discounts (2,511) (2,216)
-------- --------
$ 29,483 $ 57,054
======== ========
</TABLE>
The Company originally sold an undivided ownership interest in a revolving pool
of trade accounts receivable for $45,000 in October 1995. On May 24, 1996, the
Company entered into a new $60,000 accounts receivable facility with similar
terms. At December 31, 1996, $54,000 of accounts receivable were sold under
this facility. The accompanying balance sheets exclude the sold accounts
receivable. The full amount of the allowance for doubtful accounts has been
retained because the Company has retained substantially the same risk of credit
loss as if the receivables had not been sold through the recourse provision of
the receivable sale agreement. Under the agreement, the maximum amount of the
purchaser's investment is subject to change based on the level of eligible
receivables and restrictions on concentrations of receivables.
The total cost of the program was $423 in 1995 and $1,823 in 1996 and
is included in general and administrative expenses in the consolidated
statement of operations. The agreement expires in 2000.
Bad debt expense for 1994, 1995 and 1996 was immaterial.
55
<PAGE> 44
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1996
--------- ---------
<S> <C> <C>
Raw material and semi-finished goods $ 36,129 $ 41,505
Work in process 7,114 4,695
Finished goods 60,266 58,607
--------- ---------
103,509 104,807
LIFO reserve (10,448) 860
--------- ---------
$ 93,061 $ 105,667
========= =========
</TABLE>
In connection with the WR and Niagara acquisitions, total inventories
for financial accounting purposes were written up by $15,825 to fair market
value including reversal of $7,339 related to historical LIFO reserves. Since
the Company is on the LIFO method of accounting, such write-up formed the
historical base year cost for the acquired inventories and will not impact the
statement of operations unless a decrement of base inventory quantities occurs.
There were no liquidations of LIFO inventories in 1994. liquidation of LIFO
layers in 1995 and 1996 was not material.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated December 31,
useful lives in -------------------
years 1995 1996
--------------- -------- --------
<S> <C> <C> <C>
Land $ 4,949 $ 6,749
Buildings 40 22,997 30,532
Machinery and equipment 10-12 71,094 96,790
Office furniture and fixtures 3-5 5,747 8,263
Construction in progress 6,560 5,060
-------- --------
111,347 147,394
Less accumulated depreciation and
amortization 4,579 14,304
-------- --------
$106,768 $133,090
======== ========
</TABLE>
In connection with the WR and Niagara acquisitions, acquired
property, plant and equipment was appraised at $39,016 in excess of (less than)
historical book value including $1,298, $(541) and $32,903 allocated to land,
buildings and machinery and equipment in 1995, respectively, and $(1,328) and
$6,684 allocated to buildings and machinery and equipment in 1996,
respectively.
56
<PAGE> 45
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Goodwill $121,176 $146,006
Intangible assets, principally tradenames 37,900 38,169
Debt issuance costs 33,775 18,369
-------- --------
192,851 202,544
Less accumulated amortization 1,839 10,177
-------- --------
$191,012 $192,367
======== ========
</TABLE>
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Acquisition integration costs $17,567 $12,695
Sales volume discounts 11,414 20,184
Salaries and wages 6,682 8,738
Interest 3,748 4,171
Other 5,424 9,253
------- -------
$44,835 $55,041
======= =======
</TABLE>
9. BORROWINGS
Long-term debt of the Company, which was incurred entirely by AP&P
Delaware, consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Senior bank debt $219,843 $129,000
13% Senior Subordinated Notes due 2005 200,000 130,000
WR seller notes repaid in January 1996 25,157 --
Industrial revenue bonds 8,049 10,140
Capitalized lease obligations 2,579 2,843
-------- --------
455,628 271,983
Less current portion 11,834 2,171
-------- --------
$443,794 $269,812
======== ========
</TABLE>
Future maturities of long-term debt at December 31, 1996 are $1,561
in 1998, $1,046 in 1999, $1,057 in 2000, $130,016 in 2001 and $136,132
thereafter.
Senior Bank Debt
Contemporaneously with the Company's initial public offering of common
stock, the Company refinanced and retired all remaining indebtedness under the
old bank credit agreement and entered into a new bank credit agreement. The new
bank credit agreement is a revolving credit facility with a maximum
availability of $300,000 with the following principal terms: Loans are made
directly to AP&P Delaware
57
<PAGE> 46
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
and are guaranteed by the Company and each of its subsidiaries, other than
Notepad. Loans made under the new bank credit agreement bear interest at a rate
per annum, equal to, at the Company's option, the base rate, plus an applicable
margin, or a Eurodollar rate plus an applicable margin, as such terms are
defined in the agreement. The applicable margin for base rate loans varies from
0% to .75% and the applicable margin for Eurodollar rate loans varies from .75%
to 1.75%, each based on the Company's leverage ratio and the type of loan.
Availability under the new bank credit agreement is subject to an unused
commitment fee which is a percentage of the unutilized revolving loan
commitment. The percentage varies from .3% to .5% based on the Company's
leverage ratio.
Availability under the new bank credit agreement is reduced to the
extent of the net proceeds of sales of assets by the Company, the net proceeds
of an issuance of debt by the Company or 50% of the net proceeds of an issuance
of equity by the Company. Availability will be reduced by $50,000 in 1999 and
$50,000 in 2000. The new bank credit agreement terminates in 2001. The Company
is permitted to make acquisitions under the new bank credit agreement up to
$25,000 per acquisition without the consent of the participating banks and up
to $50,000 per acquisition if, on a pro forma basis giving effect to such
acquisition, the Company's leverage ratio is less than 3.0 to 1.0.
The new bank credit agreement requires the Company to meet certain
financial tests, including minimum levels of EBITDA (earnings before interest,
taxes, depreciation, amortization and noncash charges, as defined in the
agreement), minimum interest coverage and maximum leverage ratio. The agreement
also contains covenants which, among other things, limit the incurrence of
additional indebtedness, dividends, transactions with affiliates, asset sales,
acquisitions, mergers, and other matters customarily restricted in such
agreements. The new bank credit agreement contains customary events of default,
including payment defaults, breach of representations and warranties, covenant
defaults, cross-defaults to certain other indebtedness, certain events of
bankruptcy and insolvency, ERISA, judgment defaults, failure of any guaranty or
security agreement supporting the bank credit agreement to be in full force and
effect, and change of control.
The new bank credit agreement requires the Company to continue its
interest rate cap covering a portion of the outstanding balance under the
agreement. In January 1996, the Company entered into a four-year agreement that
entitles the Company to receive from the counterparty on a quarterly basis the
amount, if any, by which LIBOR exceeds 6.5% for the first two years of the
agreement and 7.5% for the last two years on a notional principal amount of
$100,000. The counterparty to this agreement is a large financial institution.
The new bank credit agreement is guaranteed by the Company and all its
subsidiaries, except for Notepad, and is secured by substantially all assets of
AP&P Delaware and a pledge of all capital stock of AP&P Delaware and its
subsidiaries.
Senior Subordinated Notes
AP&P Delaware issued $200,000 of 13% Senior Subordinated Notes
("Notes") through a private placement in December 1995. In June 1996, AP&P
Delaware completed an exchange of the privately-held notes for publicly-held
notes with substantially identical terms. The Notes are unsecured and
subordinated to all senior bank debt. Interest is payable semi-annually on May
15 and November 15. The Notes are redeemable on and after November 15, 2000, at
AP&P Delaware's option, at redemption prices ranging from 106.5% of the face
value of the notes in 2000 to 100% of the face value of the notes in 2003 or
thereafter. Additionally, at any time on or prior to November 15, 1998,
Delaware may, at its option, use the proceeds of public equity offerings of the
Company or AP&P Delaware to redeem up to 35% of the Notes at redemption prices
ranging from 111% to 113% of the face value of the Notes. Subsequent to the
Company's initial public offering of common stock in July 1996, AP&P Delaware
repaid $70,000 of the Notes.
58
<PAGE> 47
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
The Notes are fully and unconditionally guaranteed by all subsidiaries
of AP&P Delaware, except for Notepad, on a joint and several and senior
subordinated basis, however, no guarantee from the Company exists. At December
31, 1996 there were no guarantor subsidiaries. The Notes contain restrictive
covenants which, among other things, limit dividends, repurchase of capital
stock and investments, incurrence of additional indebtedness, transactions with
affiliates and other matters customarily restricted in such agreements.
On December 1, 1995, $200,000 of proceeds were received from the Notes
were used to repurchase $100,000 of publicly-held notes of Williamhouse-Regency
assumed in the WR Acquisition and redeem preferred stock, preferred stock
equivalents, and Class P common stock in the aggregate amount of $75,000.
Other
WR seller notes in the amount of $25,157 outstanding at December 31,
1995, were repaid in January 1996 from the proceeds of the remaining borrowings
issuable under a term loan from the old bank credit agreement. The WR seller
notes bore interest at 1% and were classified as long term in the consolidated
balance sheet at December 31, 1995 since such debt was refinanced with
long-term debt.
At December 31, 1996, the Company had outstanding various industrial
revenue bonds in the aggregate amount of $10,140. The industrial revenue bonds
bear interest at rates ranging from 2.65% to 5.25%. Aggregate annual principal
payments ranging from $300 to $700 are due through 2010. Payment of principal
and interest on the industrial revenue bonds are guaranteed by the Company. The
industrial revenue bonds are secured by letters of credit.
At December 31, 1995 and 1996, letters of credit in the aggregate
amount of $15,800 and $15,826, respectively, were outstanding.
The Company incurred fees related to the financing transactions of
approximately $33,200 and $8,620 in 1995 and 1996, respectively, which have
been deferred and are being amortized using the effective interest method over
the respective lives of the agreements.
An extraordinary after-tax loss on extinguishment of debt of $19,995
($33,004 pre-tax) is reflected in the consolidated statement of operations for
the year ended December 31, 1996 as a result of $7,700 of prepayment penalties
associated with the repayment of $70,000 of Notes and the write off of $25,304
of unamortized deferred financing costs in connection with such Notes and with
the Company's old bank credit agreement. An extraordinary after-tax loss on
extinguishment of debt of $9,652 ($16,086 pretax) is reflected in the
consolidated statement of operations for the year ended December 31, 1995 as a
result of $10,812 of prepayment penalties associated with the repurchase of
Williamhouse-Regency's $100,000 of notes and Ampad's bank debt and the
write-off of $5,274 of unamortized deferred financing costs in connection with
Williamhouse-Regency's notes redemption and Ampad's debt refinancings.
10. STOCKHOLDERS' EQUITY, STOCK OPTIONS AND NONRECURRING COMPENSATION CHARGE
Effective July 2, 1996, the Company sold 12,500 shares of common stock
in an initial public offering. The net proceeds to the Company from the
offering, which were received on July 8, 1996, amounted to $172,801 after
deducting underwriting discounts, legal and accounting fees, registration and
travel expenses. The Company used proceeds from the initial public offering and
working capital to: (i) repay $95,800 on the indebtedness incurred under the
old bank credit agreement, (ii) redeem $70,000 principal amount of the 13%
Notes from the holders thereof on a pro rata basis, and (iii) pay $7,700 in
redemption premium on such Notes.
Prior to the completion of the initial public offering, the Company's
shareholders approved an 8.1192-for-one stock split for all of the then
outstanding common stock shares and common stock options.
59
<PAGE> 48
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
Concurrently with the stock split, all of the outstanding preferred stock and
preferred stock options were converted into shares of common stock and common
stock options, respectively, using a conversion price determined by dividing
the preferred stock liquidation value of $1,948.50 per share by the initial
public offering price per share of $15. All common stock share amounts have
been restated to reflect the stock split.
The preferred stock has no dividend rights and, except as required by
law, is nonvoting. As of December 31, 1995, after giving effect to satisfaction
of its preferred redemption values, the Company's Class P common stock was also
converted on a share-for-share basis into common stock.
At January 1, 1995, options for 1,026 shares of common stock had been
issued to certain members of the Company's management under the 1992 Key
Employee Stock Option Plan (the "1992 Plan") in two separate tranches--"Core"
stock options for 758 shares and "Performance" stock options for 268 shares.
The exercise price of all options equaled or exceeded the fair market value at
date of grant. In connection with the WR acquisition effective October 31,
1995, the Company's equity was recapitalized via a stock dividend of one share
of preferred stock for every ten shares of common stock and Class P common
stock and options to purchase common stock. Concurrently, preferred stock
options were granted to holders of common stock options and the respective
exercise prices were adjusted to maintain option holders' pro rata economic
interests pursuant to antidilution provisions included in the existing stock
option plans.
The issuance of the preferred stock options was considered additional
consideration to restore the option holders' economic position as a result of
the recapitalization, which was directly related to the WR acquisition. Receipt
of such consideration resulted in a nonrecurring, noncash compensation charge
equal to the excess of fair market value over the exercise price of the
preferred stock options of $24,265 with a corresponding credit being recorded
to additional paid-in capital. The adjustment to the underlying common stock
option's prices did not result in additional compensation expense in accordance
with generally accepted accounting principles.
Additionally, options for 66 shares of common stock and 105 shares of
preferred stock were granted to certain members of management in December 1995.
The exercise prices of $0.007 per common share and $.028 per preferred share
were below the fair market value of the respective classes of stock at date of
grant, resulting in a noncash compensation charge equal to the aggregate excess
of fair market value over the exercise price, or $1,733, with a corresponding
credit being recorded to additional paid-in capital.
The Company awarded additional compensation to executives and
nonexecutives of $1,634 in 1995 in recognition of the significant transactions
consummated during the year. The Company does not expect this additional
compensation to be awarded in future years.
STOCK OPTIONS
1992 Key Employees Stock Option Plan. On July 31, 1992, the Board of
Directors of the Company adopted the Ampad Holding Corporation 1992 Key
Employees Stock Option Plan, which authorizes grants of stock options and the
sale of common stock to current or future employees, directors, consultants or
advisers of the Company or its subsidiaries. During 1992, 1994 and 1995, the
Company granted options to purchase 2,839 shares of common stock to three of
its officers, who were also stockholders, at weighted average purchase prices
ranging from $.007 to $1.65 per share. Currently, all options granted pursuant
to the 1992 Stock Plan are exercisable and expire 15 months after the
termination of the option holder's employment with the Company or any of its
subsidiaries. On June 22, 1996 the 1992 Stock Plan was terminated by the Board
of Directors.
1996 Stock Plan. On June 22, 1996, the Company adopted the 1996 Key
Employees Stock Incentive Plan. The 1996 Stock Plan provides for the granting
to employees and other key individuals who perform services for the Company the
following types of incentive awards: options to purchase common stock, stock
60
<PAGE> 49
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
appreciation rights with respect to the common stock, restricted shares of
common stock, performance grants and other types of awards that the
Compensation Committee deems to be consistent with the purposes of the 1996
Stock Plan. The 1996 Stock Plan affords the Company flexibility in tailoring
incentive compensation to support corporate and business objectives, and to
anticipate and respond to changing business environments and competitive
compensation practices.
An aggregate of 1,500 shares of common stock of the Company have been
reserved for issuance under the 1996 Stock Plan. Except for any other
adjustments made by the Board of Directors relating to a stock split or certain
other changes in the number of shares of common stock, or to reflect
extraordinary corporate transactions, further increases in the number of shares
authorized for issuance under the 1996 Stock Plan must be approved by the
stockholders of the Company. Stock options granted during 1996 under the Stock
Plan generally have a maximum term of ten years and vest over four years. The
Company granted options to purchase 742 shares of common stock at a weighted
average purchase price of $15 per share.
Non-Employee Director Plan. On June 22, 1996, the Company adopted the
Non-Employee Director Stock Option Plan. Pursuant to the Non-Employee Director
Plan, each director (other than directors who are employees of the Company)
will receive a one-time option grant to purchase 25 shares of common stock upon
effectiveness of the Non-Employee Director Plan or, for new directors, upon
initial election or appointment to the Board. In addition, each director will
receive an annual grant of options to purchase two thousand shares of common
stock beginning on the latter of the date of such director's fourth anniversary
of being elected to the Board or four years from the initial public offering
date. The initial one-time grants will vest over three years with 50% vesting
in the first year and 25% in the remaining two years. The annual grants will
vest in three equal installments. The exercise price for all options granted
under the Non-Employee Director plan will be at fair market value as of the
time of such grant. Options granted under the non-Employee Director plan will
generally terminate ten years after the date such options become exercisable.
An aggregate of 350 shares of common stock have been reserved for issuance
under the non-Employee Director Plan. During 1996, the Company granted options
to purchase 125 shares of common stock to the Company's non-employee directors
at a weighted average purchase price of $17.38 per share.
Stock Purchase Plan. On June 22, 1996, the Company adopted the
Management Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan is
designed to provide equity incentives to selected members of the Company's
management, including employee Directors and executive officers. The eligible
participants will be selected by the Compensation Committee upon the
recommendation of the Company's Chief Executive Officer. Under the Purchase
Plan, eligible participants will be able to elect to purchase shares of common
stock in lieu of up to 25% of their annual incentive bonuses. The common stock
will be sold under the Purchase Plan at a 25% discount from the fair market
value on the date of purchase. An aggregate of 250 shares of common stock have
been reserved and 36 shares were issued in February 1997.
For the three years ended December 31, 1996, stock option activity is
as follows:
<TABLE>
<CAPTION>
Shares Subject Average Exercise Average Fair
to Option Price Price
-------------- ---------------- ------------
<S> <C> <C> <C>
Balance, January 1, 1994 903 $ 0.070 $ 0.070
Stock options granted 123 $ 0.440 $ 0.440
-------
Balance, December 31, 1994 1,026 $ 0.114 $ 1.735
Stock options granted 1,813 $ 0.141 $ 15.000
Redemption of preferred stock options (612) $ 0.028 $ 15.000
-------
Balance, December 31, 1995 2,227 $ 0.160 $ 9.330
Stock options granted 867 $ 15.343 $ 23.848
-------
Balance, December 31, 1996 3,094 $ 4.413 $ 13.397
=======
</TABLE>
61
<PAGE> 50
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
As of December 31, 1996, the following information is presented for stock
options outstanding.
<TABLE>
<CAPTION>
Stock Options
----------------------------------------------------------------------
Outstanding Exercisable
------------------------------------- --------------------------
Exercise Price Average Average Exercise Average Exercise
Range Shares Life Price Shares Price
- --------------- ------ ------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
$.0072 to $1.65 2,227 5.5 $ 0.13 2,227 $ 0.13
$ 15 742 9.6 $ 15.00 -- --
$15 to $21.375 125 9.7 $ 17.38 -- --
</TABLE>
The average life is the average contractual life of the outstanding
options in years.
In 1996, the Company adopted the disclosure-only option under Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("SFAS No. 123").
On a pro forma basis, if the Company had recorded compensation expense
in 1996 for the stock options granted in accordance with the accounting
provisions of SFAS No. 123, the pro forma net income before extraordinary item
would have been $17,820 and the pro forma net income per share before
extraordinary item would have been $.60. There would have been no pro forma
effect in 1995 as the Company recorded a compensation charge based on the fair
value of the stock options granted.
The significant assumptions used to estimate the fair value of the
stock options granted in 1996 include a risk free rate of return ranging from
6.5% to 6.75%, an expected option life of 10 years, an expected volatility of
27% and no expected dividend payments.
11. PENSION PLAN AND 401(K) PLAN
The Company is a sponsor of two qualified defined benefit pension
plans and a supplemental non- qualified benefit pension plan which were assumed
as part of its acquisitions. The Company's liabilities under such plans are
included in other liabilities in the consolidated balance sheet.
The Company maintains retirement plans (401(k) plan) for the benefit
of all employees who meet minimum age and service requirements. Company
contributions to the plans may be made at the discretion of the board of
directors. Contributions to the plans were approximately $557, $568, $1,239 for
the years ended December 31, 1994, 1995 and 1996, respectively.
12. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current
Federal $ -- $ -- $ --
State -- 169 491
-------- -------- --------
-- 169 491
Deferred provision (benefit) (488) (6,707) 13,361
-------- -------- --------
Provision (benefit) for income taxes before
extraordinary item (488) (6,538) 13,852
Deferred benefit relating to
extraordinary item -- (6,434) (13,009)
-------- -------- --------
Provision (benefit) for income taxes $ (488) $(12,972) $ 843
======== ======== ========
</TABLE>
62
<PAGE> 51
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
A reconciliation between the statutory U.S. federal income tax rate and the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate (35.0)% (35.0)% 35.0%
Adjustment to valuation allowance 14.7 (15.3) --
Change in enacted rates .4 -- --
Effect of acquisition 19.3 -- --
Goodwill and intangible amortization -- .2 3.3
State taxes, net (5.2) (5.0) 4.9
Other, net (.3) (1.4) --
---- ---- ----
Effective tax rate (6.1)% (56.5)% 43.2%
==== ==== ====
</TABLE>
For the year ended December 31, 1996, the Company's statutory income
tax benefit rate of 35.0% differed from the Company's effective income tax
rate, including extraordinary item, of 89.8% due to the following reasons:
goodwill and intangible asset amortization accounted for 113.6%; other
nondeductible expenses accounted for 11.8%; state income taxes accounted for
(5.0)% and other items accounted for 4.4%. For the year ended December 31,
1995, the Company's statutory income tax benefit rate of 35.0% differed from
the Company's effective income tax benefit rate, including extraordinary item,
of 46.9% due to the following reasons: state income taxes accounted for (5.0)%;
release of a deferred tax asset valuation allowance accounted for (6.4)% and
other items accounted for (0.5)%
Temporary tax differences affected and categorized by financial
statement line item are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
-------- --------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accrued expenses $ 10,523 $ 9,066
Accounts receivable and allowances 900 361
Inventory valuation (7,608) (7,763)
Net operating losses and tax credits 11,194 9,090
-------- --------
Current deferred tax asset, net $ 15,009 $ 10,754
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
-------- --------
<S> <C> <C>
Noncurrent deferred tax assets (liabilities):
Tradenames and intangibles $(15,009) $(14,609)
Property and equipment, net (21,291) (24,405)
Noncash compensation expense credited to paid-in-capital 6,776 6,776
Other accrued liabilities 254 1,257
State income tax effect and other, net (800) --
-------- --------
Noncurrent deferred tax liability, net $(30,070) $(30,981)
======== ========
</TABLE>
The effect on the income tax provision related to the valuation
allowance was a benefit of $1,769 for the year ended December 31, 1995.
Deferred tax assets valuation allowances recorded in prior years were reversed
in 1995 as a result of management's assessment of future realizability of
deferred tax assets. For the year ended December 31, 1994, the effect on the
income tax provision related to the valuation allowance was a charge of $1,180.
No benefit was recognized in 1994 for operating losses carried forward.
63
<PAGE> 52
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
At December 31, 1996, the Company had net operating losses available
to reduce future taxable income of approximately $19,319. These net operating
losses expire in the years 2007 through 2011. If certain substantial changes in
the Company's ownership should occur, there would be an annual limitation on
the amount of the carryforwards which can be utilized. In addition, the Company
has approximately $1,363 of alternative minimum tax credit carried forward. The
acquisition of WR resulted in a change in control of WR. Consequently the
utilization of these credits in future periods are subject to limitation.
12. COMMITMENTS AND CONTINGENCIES
Commitments
The Company is obligated under noncancelable operating leases for
office space and machinery and equipment which expire at various times through
1997. Annual minimum lease commitments under these leases amount to $3,206 in
1997, $1,989 in 1998, $1,347 in 1999, $1,011 in 2000, $622 in 2001 and $1,386
thereafter for an aggregate of $9,561.
Total rent expense was approximately $853, $1,888, $3,551 for 1994,
1995 and 1996 respectively.
Litigation
There are various outstanding claims against the Company arising in
the normal course of business. The Company believes that the claims are without
merit and that any losses which might ultimately be sustained by the Company
would not be material to the financial position, results of operations, or cash
flows of the Company.
Environmental Matters
The Company is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and regulations
impose limitations on the discharge of pollutants and establish standards for
management of waste. While there can be no assurance that the Company is at all
times in complete compliance with all such requirements, the Company has made
and will continue to make capital and other expenditures to comply with such
requirements.
The Company had been named a potentially responsible party under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, at five waste disposal sites. The Company settled its
liability at four of these sites as a de minimis party. The Company expects to
be eligible for a de minimis settlement at the remaining site.
13. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1994, 1995 and 1996, the Company
incurred $575, $542 and $1,380, respectively, for management and directors'
fees and out of pocket expenses to the principal shareholders (Bain Capital).
Unpaid fees of $500 are included in accrued expenses in the consolidated
balance sheets at December 31, 1996. There were no unpaid fees at December 31,
1995. In June 1996 the Company revised its management services agreement with
Bain Capital, pursuant to which, for four years, the Company will pay Bain
Capital an aggregate annual fee of no less than $2,250 plus a fee of 1% for
completed acquisition transactions.
In 1996, the Company paid Bain Capital $3,000 in fees in connection
with the new bank credit agreement, which were included in debt issuance costs
paid, $550 and $750, respectively, in fees in connection with the acquisition
of Niagara and Shade/Allied, which were included as part of the purchase price,
and $2,091 in connection with the Company's initial public offering of common
stock. In 1995, the
64
<PAGE> 53
AMERICAN PAD & PAPER COMPANY
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------
Company paid $7,000 to Bain Capital for services relating to the WR acquisition
and the related financing of the transaction. Of this amount, $4,300 was
included in deferred financing fees and $2,700 was a direct acquisition expense
allocated to the net assets acquired. The Company also paid $450 to Bain
Capital relating to the Globe-Weis acquisition which was included in deferred
financing fees. The Company paid Bain Capital $225 for services related to the
SCM acquisition and the related financing of the transaction.
At December 31, 1995, the Company had an outstanding note receivable
for $112 from its chairman which was repaid in June 1996. At December 31, 1996,
the Company had an outstanding note receivable of $324 from its executive vice
president which is due in 1998, of which $53 was repaid in February 1997.
14. OTHER INFORMATION
Substantially all of the Company's operations are conducted within the
United States.
Two customers accounted for 27% and one customer accounted for 11% of
the Company's total net sales for the year ended December 31, 1995 and 1996,
respectively.
15. QUARTERLY RESULTS OF OPERATIONS
The Company's historical unaudited quarterly results of operations for
each of the years ended December 31, 1995 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1995 - Quarter Ended
---------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 47,450 $ 44,772 $ 53,787 $ 111,151
Gross profit 5,296 7,924 10,258 24,049
Net income (loss) before
extraordinary item 589 1,875 4,850 (12,348)
Net income (loss) 589 1,875 4,850 (22,000)
Net income (loss) per share
before extraordinary item $ 0.02 $ 0.06 $ 0.16 $ (0.42)
Net income (loss) per share 0.02 0.06 0.16 (0.74)
</TABLE>
<TABLE>
<CAPTION>
1996 - Quarter Ended
---------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 120,108 $ 114,099 $ 173,606 $ 176,046
Gross profit 23,528 24,931 36,037 40,914
Net income (loss) before
extraordinary item 133 691 6,925 10,465
Net income (loss) 133 (609) (11,770) 10,465
Net income (loss) per share
before extraordinary item $ -- $ 0.02 $ 0.24 $ 0.36
Net income (loss) per share -- (0.02) (0.40) 0.36
</TABLE>
65
<PAGE> 54
66
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
American Pad & Paper Company of Delaware, Inc.
(a wholly owned subsidiary of American Pad & Paper Company)
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) on page 38 present fairly, in all material respects,
the financial position of American Pad & Paper Company of Delaware, Inc. and
its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
February 18, 1997
67
<PAGE> 56
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ASSETS 1995 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash $ 18,341 $ 2,290
Accounts receivable 29,483 57,054
Income taxes receivable from AP&P 3,657 --
Inventories 93,061 105,667
Prepaid expenses and other current assets 927 4,739
Assets held for sale 42,578 --
Deferred income taxes 15,009 10,754
--------- ---------
Total current assets 203,056 180,504
Property and equipment 106,768 133,090
Intangible assets 191,012 192,367
Other 3,520 3,456
--------- ---------
Total assets $ 504,356 $ 509,417
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 11,834 $ 2,171
Accounts payable 37,048 44,932
Accrued expenses 44,835 55,041
Income taxes payable to AP&P 494 503
--------- ---------
Total current liabilities 94,211 102,647
Long-term debt 443,794 269,812
Deferred income taxes 30,070 30,981
Other 2,702 1,378
--------- ---------
Total liabilities 570,777 404,818
--------- ---------
Commitments and contingencies Stockholder's equity (deficit):
Common stock, voting, $.01 par value, 1000
shares authorized; 100 shares issued and outstanding -- --
Additional paid-in capital 28,998 201,799
Accumulated deficit (95,419) (97,200)
--------- ---------
Total stockholder's equity (deficit) (66,421) 104,599
--------- ---------
Total liabilities and stockholder's equity (deficit) $ 504,356 $ 509,417
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
68
<PAGE> 57
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 127,744 $ 257,160 $ 583,859
Cost of sales 120,695 209,633 458,449
--------- --------- ---------
Gross profit 7,049 47,527 125,410
--------- --------- ---------
Operating expenses:
Selling and marketing 5,059 6,254 16,964
General and administrative 4,981 11,749 30,685
Management fees and services 575 542 3,880
Nonrecurring compensation charge -- 27,632 --
--------- --------- ---------
10,615 46,177 51,529
--------- --------- ---------
Income (loss) from operations (3,566) 1,350 73,881
Other income (expense):
Interest (4,560) (13,657) (42,968)
Other income, net 90 735 1,153
--------- --------- ---------
Income (loss) before income taxes (8,036) (11,572) 32,066
and extraordinary item
Provision (benefit) for income taxes (488) (6,538) 13,852
--------- --------- ---------
Income (loss) before extraordinary item (7,548) (5,034) 18,214
Extraordinary loss from extinguishment of debt
(net of income tax benefits of $6,434 and
$13,009, respectively) -- (9,652) (19,995)
--------- --------- ---------
Net loss $ (7,548) $ (14,686) $ (1,781)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
69
<PAGE> 58
AMERICAN PAD & PAPER COMPANYOF DELAWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,548) $ (14,686) $ (1,781)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 828 3,369 9,765
Amortization of goodwill and intangible
assets 114 879 4,488
Noncash portion of nonrecurring
compensation charge -- 25,998 --
Extraordinary loss on extinguishment of -- 9,652 19,995
debt
Noncash interest expense and accretion of 135 -- --
discount
Amortization of debt issuance 696 1,538 3,790
costs
Gain on sale of assets (83) (140) (94)
Changes in assets and liabilities, net of effects
of acquisitions:
Accounts receivable 2,445 (22,025) (25,625)
Income taxes receivable from AP&P -- 101 3,657
Inventories 1,655 2,256 (2,030)
Prepaid expenses and other (302) 905 1,721
Deferred tax asset, net (488) (13,141) 13,361
Accounts payable 3,433 4,979 1,819
Accrued expenses (2,782) 4,877 (4,294)
Other assets and liabilities 11 147 (1,556)
--------- --------- ---------
Net cash provided by (used in) operating
activities (1,886) 4,709 23,216
--------- --------- ---------
Cash flows from investing activities:
Purchase of stock and net assets of businesses,
including acquisition costs (13,744) (129,701) (52,964)
Purchases of property and equipment (942) (3,919) (14,609)
Proceeds from sale of assets 83 140 2,056
Net cash generated from assets held for sale -- 2,213 49,277
--------- --------- ---------
Net cash used in investing activities (14,603) (131,267) (16,240)
--------- --------- ---------
</TABLE>
(continued on next page)
The accompanying notes are an integral part of these consolidated
financial statements.
70
<PAGE> 59
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowings (repayments) under line of credit 7,057 (22,767) --
Proceeds from long-term debt 11,252 430,052 192,773
Repayment of long-term debt (1,192) (186,546) (380,317)
Redemption premiums and penalties included in
extraordinary loss -- (10,812) (7,700)
Debt issuance costs (628) (35,032) (9,584)
Proceeds from old accounts receivable facility -- 45,000 --
Repayment of old accounts receivable facility -- -- (45,000)
Net proceeds from net new accounts
receivable facility -- -- 54,000
Capital contribution by (distribution to) AP&P -- (75,000) 172,801
--------- --------- ---------
Net cash provided by (used in) financing
activities 16,489 144,895 (23,027)
--------- --------- ---------
Net increase (decrease) in cash -- 18,337 (16,051)
Cash, beginning of year 4 4 18,341
--------- --------- ---------
Cash, end of year $ 4 $ 18,341 $ 2,290
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 3,575 $ 9,127 $ 38,785
========= ========= =========
Income taxes $ 29 $ 99 $ 470
========= ========= =========
Supplemental disclosure of noncash investing activity:
Notes payable issued in consideration of purchase
price $ -- $ 36,115 $ --
========= ========= =========
Notes payable issued to purchase equipment $ -- $ 1,721 $ 500
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
71
<PAGE> 60
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS
STOCK PAID-IN (ACCUMULATED
AMOUNT CAPITAL DEFICIT) TOTAL
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ -- $ 3,000 $ 1,815 $ 4,815
Net loss -- -- (7,548) (7,548)
--------- --------- --------- ---------
Balance at December 31, 1994 -- 3,000 (5,733) (2,733)
Grant of AP&P stock
options to management 25,998 -- 25,998
Dividend to AP&P -- -- (75,000) (75,000)
Net loss -- -- (14,686) (14,686)
--------- --------- --------- ---------
Balance at December 31, 1995 -- 28,998 (95,419) (66,421)
Capital contribution by AP&P -- 172,801 -- 172,801
Net loss -- -- (1,781) (1,781)
--------- --------- --------- ---------
Balance at December 31, 1996 $ -- $ 201,799 $ (97,200) $ 104,599
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
72
<PAGE> 61
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS
Organization and Basis of Presentation
American Pad & Paper Company of Delaware, Inc. ("Delaware") is a
wholly owned subsidiary of American Pad & Paper Company ("AP&P") (formerly
Ampad Holding Corporation). AP&P was incorporated on June 2, 1992 as a holding
company to acquire all of the outstanding stock of Ampad Corporation ("Ampad"),
the surviving entity from the merger between Ampad Acquisition Corporation and
Ampad. AP&P had no operations through July 31, 1992.
On October 3, 1995, AP&P agreed to acquire in a merger transaction all
of the outstanding stock of WR Acquisition, Inc. ("WR"). In a series of
transactions, AP&P exchanged 100% of the stock of its wholly owned subsidiary,
Ampad, for newly issued shares of WR. WR then contributed Ampad to its wholly
owned subsidiary, Williamhouse-Regency of Delaware, Inc., renamed American Pad
& Paper Company of Delaware, Inc. (referred to hereafter on a pre-October 31,
1995 basis as "Williamhouse-Regency" and on a post-October 31, 1995 basis as
"Delaware") in exchange for a right to receive $140 million of merger
consideration. AP&P, principally using bank borrowings by Delaware aggregating
$245 million, funded WR's right to receive the merger consideration and WR in
turn repurchased 100% of the WR shares not owned by AP&P. The transaction was
accounted for as a purchase of the stock of WR by AP&P. As a result of the
transactions, AP&P now owns 100% of WR which in turn owns 100% of AP&P
Delaware.
The financial statements of Delaware include the historical accounts
and operations of Delaware and the accounts and operations of Ampad and of the
envelope operations of Williamhouse and Niagara since their respective dates of
acquisition. Additionally, the consolidated financial statements include the
accounts of Notepad Funding Corporation ("Notepad"), a special purpose
corporation utilized in the accounts receivable facility. All significant
intercompany balances have been eliminated.
American Pad & Paper Company
AP&P is a holding company whose common stock is publicly traded on the
New York Stock Exchange under the symbol "AGP" with no operations other than
its investment in Delaware. Except for the preferred and common stock shares of
AP&P issued, authorized and outstanding, and the related capital contributions
by AP&P and dividends to AP&P, there are no material differences between the
financial statements of AP&P and Delaware. AP&P has followed full push-down
accounting in the presentation of the consolidated financial statements of
Delaware.
Business
Delaware is one of the largest manufacturers and marketers of
paper-based office products in North America. Delaware 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). Delaware'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.
Pro Forma Information
The pro forma information included in these financial statements and
notes is unaudited.
73
<PAGE> 62
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
consolidated financial statements are as follows:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Delaware considers all highly-liquid, interest-bearing instruments
with an original maturity of three months or less to be cash equivalents.
Revenue Recognition
Delaware recognizes revenue upon shipment of the product. All risks
and rewards of ownership pass to the customer upon shipment. Damaged or
defective products may be returned to Delaware for replacement or credit.
Delaware also offers sales volume rebates to customers based on their level of
sales activity. The effects of returns and discounts are estimated and recorded
at the time of shipment. Volume rebates are estimated and recorded based on
sales activity.
Concentration of Credit Risk
Delaware sells its products into various wholesale and retail
channels, primarily for the commercial office products marketplace. Management
believes its credit policies are prudent and reflect normal industry terms and
business risks. Delaware performs periodic credit evaluations of its customers
and does not require collateral. Historically, Delaware has not experienced
significant losses related to individual customers or groups of customers in
any particular industry or geographic area. An allowance is maintained at a
level which management believes is sufficient to cover potential credit losses
including potential losses on receivables sold.
Inventories
Inventories, which consist primarily of paper and converted paper
products, are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method. Costs include material, labor and overhead.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
individual assets. Significant repairs or betterments which extend the useful
life of an asset are capitalized and depreciated over the asset's remaining
useful life.
Goodwill and Intangible Assets
Goodwill represents the cost in excess of fair value of the net assets
of companies acquired in purchase transactions. Goodwill is amortized using the
straight-line method over periods ranging from 20 to 40 years. Intangible
assets represent trade names acquired in the WR acquisition and are amortized
using
74
<PAGE> 63
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
the straight-line method. Trade names in the aggregate gross amount of $31,700
and $6,200 are amortized over 40 years and 15 years, respectively. Delaware
periodically reviews goodwill and other intangible assets to assess
recoverability. Potential impairment is measured based on the expected
undiscounted pre-tax and pre-interest cash flows of the operations giving rise
to the goodwill and other intangible assets compared to the carrying cost of
the related assets including goodwill and other intangible assets. Based upon
its most recent analysis, Delaware believes that no impairment of goodwill or
intangible assets exists at December 31, 1996. Amortization expense was $114 in
1994, $879 in 1995 and $4,488 in 1996.
Debt Issuance Costs
Costs associated with debt issuances are capitalized and amortized to
interest expense using the effective interest method over the terms of the
related debt agreements.
Income Taxes
Delaware accounts for income taxes as if it were a separately
reporting company for tax purposes. Delaware follows the liability method,
which prescribes an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the future tax consequences of
events that have been recognized in Delaware's financial statements or tax
returns. Deferred tax assets are recognized, net of any valuation allowance,
for deductible temporary differences and tax operating loss and credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances. Delaware periodically reviews the realizability of
its deferred tax assets and, as needed, records valuation allowances when
realizability of the deferred tax asset is not likely.
Derivatives
Premiums paid for interest rate cap agreements are amortized as
interest expense over the term of the agreement. Amounts receivable under
interest rate cap agreements are recorded as a reduction of interest expense.
Fair Value of Financial Instruments
Carrying values of cash, accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short-term maturities of
these assets and liabilities. The carrying value of senior bank debt bearing
interest at floating rates approximates fair value. The carrying value at
December 31, 1996 of the Notes of $130,000 compares to the Notes' fair value of
$153,400 based on quoted market rates, as determined at the end of 1996.
Reclassifications
Certain amounts in the 1994 and 1995 consolidated financial
statements, none of which have an effect on net income (loss), have been
reclassified to conform with the presentation in the 1996 consolidated
financial statements.
Earnings per share
Earnings per share are not presented because Delaware's common stock
is not publicly traded.
75
<PAGE> 64
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
3. ACQUISITIONS
WR Acquisition, Inc./Williamhouse-Regency
AP&P acquired WR Acquisition, Inc. and its wholly owned subsidiary
Williamhouse-Regency of Delaware, Inc. through a merger transaction effective
October 31, 1995. The transaction was accounted for under the purchase method
of accounting. Accordingly, the aggregate acquisition cost was allocated to the
net assets acquired based on the fair market value of such net assets. The
aggregate acquisition cost totaled $147,853 and consisted of cash of $140,000
and direct acquisition costs of $7,853. The acquisition was entirely financed
through the Company's bank credit agreement and an off-balance sheet accounts
receivable facility. The aggregate acquisition costs have been allocated to the
assets acquired and liabilities assumed as follows: accounts receivable of
$39,174; inventories of $49,496; prepaid expenses and other assets of $8,699;
net assets held for sale of $39,252; property and equipment of $86,063;
identifiable intangible assets of $37,900; deferred income tax liability of
$24,340; accounts payable of $17,518; accrued expenses of $40,518; noncurrent
liabilities of $2,019 and assumed debt of $152,905. The aggregate acquisition
costs exceeded fair market value of the net assets acquired by $124,569.
Accordingly, goodwill was recorded and is being amortized over 40 years. The
operating results of Delaware have been included in the accompanying
consolidated financial statements since the date of acquisition. The businesses
acquired included the Williamhouse division, a manufacturer of a wide range of
mill branded, specialty and commodity envelopes; and the Regency division,
which provides custom imprinting services.
The Regency personalized stationery and invitations division (the
"Regency Division") acquired in the acquisition was identified by management at
the date of acquisition as a nonstrategic asset held for sale. The purchase
price allocated to the net assets acquired included the expected proceeds from
sale plus the net cash flows expected to be generated from the Regency division
from the date of acquisition through the expected date of sale (the holding
period), offset by interest expense incurred during the holding period on debt
incurred to finance the purchase of the Regency Division. On June 27, 1996, the
Regency Division was sold for net proceeds of $47,890. The net proceeds from
the sale exceeded the carrying amount of the asset held for sale at December
31, 1996 by $1,599. As such, the preliminary purchase price allocation was
adjusted resulting in a $959 addition to goodwill. During the six month period
ended June 30, 1996, the Regency division had operating income of $2,369 and
interest carrying costs of $1,884, which have been excluded from the condensed
consolidated statement of operations and included as adjustments to the
carrying amount of the net assets held for sale through the date of sale.
Niagara Envelope Company, Inc.
Effective June 28, 1996, Delaware acquired the stock of Niagara
Envelope Company, Inc. ("Niagara"). This acquisition was accounted for under
the purchase method of accounting. Accordingly, the aggregate acquisition cost
was allocated to the net assets acquired based on the fair value of such net
assets. The aggregate acquisition costs totaled $48,202 and consisted of cash
of $45,175 and direct acquisition costs of $3,027. Additionally, Delaware paid
$5,000 at closing under a one-year consulting services agreement. Delaware
principally financed the acquisition through proceeds from the sale of the
Regency division described above. The aggregate acquisition cost has been
allocated to the assets acquired and liabilities assumed as follows: cash of
$238, accounts receivable of $10,946, inventories of $11,878, prepaid and other
assets of $1,572, management services agreement of $5,000, property and
equipment of $26,824, deferred income tax liability of $2,227, accounts payable
of $6,064, accrued expenses of $10,464, other noncurrent liabilities of $381
and assumed debt of $3,900. The aggregate acquisition costs exceeded fair
market value of the net assets acquired by $19,780. Accordingly, goodwill was
recorded and is being amortized over 40 years. The operating results of this
acquisition have been included in the accompanying consolidated financial
statements since the date of acquisition. In 1996, Delaware recorded $2,500 as
management fees and services for the amortization of the consulting services
agreement.
76
<PAGE> 65
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
Certain costs are expected to be incurred in connection with
Delaware's separate strategic plans to integrate and consolidate certain plant,
administrative and sales functions of Williamhouse and Niagara the closure of
Williamhouse's and Niagara's corporate headquarters and the associated net
reduction of approximately 250 employees. Such costs, aggregating $23,500,
include lease termination expenses, severance and contractual change of control
benefits, the liabilities for which were included in the purchase price
allocation within accrued expenses. Substantially all such actions are expected
to be completed prior to June 30, 1997, except for the consolidation of certain
plants which is not expected to be completed until December 31, 1998.
Globe-Weis
Effective August 16, 1995, Delaware acquired the inventories and
certain equipment of the file folder and hanging file folder product lines of
Globe-Weis's ("Globe") office products division from Globe's parent. For
financial reporting purposes, this acquisition was accounted for under the
purchase method of accounting. Accordingly, the aggregate acquisition cost was
allocated to the net assets acquired based on the fair value of such net
assets. The aggregate acquisition costs totaled $19,958 and consisted of cash
and seller issued notes of $17,869 and direct acquisition and financing costs
of $2,089. Delaware principally financed the acquisition through its financing
arrangement with a commercial lender and notes issued to the seller. The
allocation of the aggregate acquisition costs was as follows: inventories of
$11,546, equipment of $6,747, and debt issuance costs of $1,665. The operating
results of this acquisition have been included in the accompanying consolidated
financial statements since the date of acquisition.
SCM Office Supplies
Effective July 5, 1994, Delaware acquired the assets and assumed
certain liabilities of SCM Office Supplies, Inc. For financial reporting
purposes, this acquisition was accounted for under the purchase method of
accounting. Accordingly, the aggregate acquisition cost was allocated among the
net assets acquired based on the fair market value of such net assets. The
aggregate acquisition cost totaled $14,372 and consisted of cash of $12,880 and
direct acquisition and financing costs of $1,492. Delaware principally financed
the acquisition through its financing arrangement with a commercial lender. The
allocation of the aggregate acquisition cost to the assets acquired and
liabilities assumed was as follows: accounts receivable of $7,922, inventories
of $6,857, prepaid expenses and other assets of $16, debt issuance costs of
$628, property and equipment of $5,441, net deferred income tax assets of
$1,553, accounts payable of $4,235, and accrued liabilities of $6,333. The
aggregate acquisition cost exceeded fair market value of the net assets
acquired by approximately $2,523. Accordingly, goodwill was recorded and is
being amortized over 20 years. The operating results of this acquisition have
been included in the accompanying consolidated financial statements since the
date of acquisition.
Pro Forma Results of Operations
The following summary presents the results of operations for the years
ended December 31, 1995 and 1996 on a pro forma basis, as if the Niagara, WR
and Globe acquisitions had occurred as of January 1, 1995 (with appropriate
adjustments for amortization of intangible assets, interest expense,
elimination of duplicate selling and administrative expenses and the related
income tax effects). The pro forma operating results are for illustrative
purposes only and do not purport to be indicative of the actual results which
would have occurred had the transaction been consummated as of those earlier
dates, nor are they indicative of results of operations which may occur in the
future.
77
<PAGE> 66
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1995 1996
-------- --------
<S> <C> <C>
Net sales $617,869 $638,389
======== ========
Income before income taxes $ 5,758 $ 38,180
======== ========
Net income $ 3,678 $ 21,686
======== ========
</TABLE>
The following unaudited pro forma summary presents the results of
operations shown above adjusted for the capital contribution by AP&P following
AP&P's initial public offering of common stock, Delaware's repayment of $70,000
in Notes and Delaware's new bank credit agreement.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1995 1996
-------- --------
<S> <C> <C>
Net sales $617,869 $638,389
======== ========
Income before income taxes $ 34,253 $ 51,914
======== ========
Net income $ 21,482 $ 29,903
======== ========
</TABLE>
Shade/Allied, Inc.
Effective February 11, 1997, Delaware acquired all of the outstanding
common and preferred stock of Shade/Allied, Inc., ("Shade/Allied") for
approximately $49,500 in cash financed by Delaware's bank credit agreement.
This acquisition will be recorded following the purchase method of accounting
and, accordingly, the purchase price will be 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 will be allocated to goodwill
and amortized on a straight-line basis over 40 years. Delaware preliminarily
expects that the purchase price will be allocated as follows: trade accounts
receivable of $4,584, inventories of $5,941, other current assets of $929,
property, plant and equipment of $10,685, current liabilities of $13,877,
long-term liabilities of $3,323 and goodwill of $44,561.
The following summary presents the results of operations for the year
ended December 31, 1996, on a pro forma unaudited basis, as if the Shade/Allied
and Niagara acquisitions had occurred as of January 1, 1996 (with appropriate
adjustments for amortization of intangible assets, interest expense,
elimination of duplicate selling and administrative expenses and the related
income tax effects). The pro forma results are for illustrative purposes only
and do not purport to be indicative of actual results which would have occurred
had the transactions been consummated as of those earlier dates, nor are they
indicative of the results which may occur in the future.
<TABLE>
<S> <C>
Net sales $730,801
========
Income before income taxes $ 41,257
========
Net income $ 23,434
========
</TABLE>
78
<PAGE> 67
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Accounts receivable--trade $ 29,981 $ 56,431
Accounts receivable--other 2,013 2,839
Less allowance for doubtful accounts and
reserves for customer deductions, returns
and cash discounts (2,511) (2,216)
-------- --------
$ 29,483 $ 57,054
======== ========
</TABLE>
Delaware originally sold an undivided ownership interest in a
revolving pool of trade accounts receivable for $45,000 in October 1995. On May
24, 1996, Delaware entered into a new $60,000 accounts receivable facility with
similar terms. At December 31, 1996, $54,000 of accounts receivable were sold
under this facility. The accompanying balance sheets exclude the sold accounts
receivable. The full amount of the allowance for doubtful accounts has been
retained because Delaware has retained substantially the same risk of credit
loss as if the receivables had not been sold through the recourse provision of
the receivable sale agreement. Under the agreement, the maximum amount of the
purchaser's investment is subject to change based on the level of eligible
receivables and restrictions on concentrations of receivables.
The total cost of the program was $423 in 1995 and $1,823 in 1996 and
is included in general and administrative expenses in the consolidated
statement of operations. The agreement expires in 2000.
Bad debt expense for 1994, 1995 and 1996 was immaterial.
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1996
--------- ---------
<S> <C> <C>
Raw material and semi-finished goods $ 36,129 $ 41,505
Work in process 7,114 4,695
Finished goods 60,266 58,607
--------- ---------
103,509 104,807
LIFO reserve (10,448) 860
--------- ---------
$ 93,061 $ 105,667
========= =========
</TABLE>
In connection with the WR and Niagara acquisitions, total inventories
for financial accounting purposes were written up by $15,825 to fair market
value including reversal of $7,339 related to historical LIFO reserves. Since
Delaware is on the LIFO method of accounting, such write-up formed the
historical base year cost for the acquired inventories and will not impact the
statement of operations unless a decrement of base inventory quantities occurs.
There were no liquidations of LIFO inventories in 1994. Liquidation of LIFO
layers in 1995 and 1996 was not material.
79
<PAGE> 68
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated December 31,
useful lives in ------------------------------
years 1995 1996
--------------- ----------- ------------
<S> <C> <C> <C>
Land $ 4,949 $ 6,749
Buildings 40 22,997 30,532
Machinery and equipment 10-12 71,094 96,790
Office furniture and fixtures 3-5 5,747 8,263
Construction in progress 6,560 5,060
----------- ------------
111,347 147,394
Less accumulated depreciation and amortization
4,579 14,304
----------- ------------
$ 106,768 $ 133,090
=========== ============
</TABLE>
In connection with the WR and Niagara acquisitions, acquired property,
plant and equipment was appraised at $39,016 in excess of (less than)
historical book value including $1,298, $(541) and $32,903 allocated to land,
buildings and machinery and equipment in 1995, respectively, and $(1,328) and
$6,684 allocated to buildings and machinery and equipment in 1996,
respectively.
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Goodwill $121,176 $146,006
Intangible assets, principally tradenames 37,900 38,169
Debt issuance costs 33,775 18,369
-------- --------
192,851 202,544
Less accumulated amortization 1,839 10,177
-------- --------
$191,012 $192,367
======== ========
</TABLE>
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
------- -------
<S> <C> <C>
Acquisition integration costs $17,567 $12,695
Sales volume discounts 11,414 20,184
Salaries and wages 6,682 8,738
Interest 3,748 4,171
Other 5,424 9,253
------- -------
$44,835 $55,041
======= =======
</TABLE>
80
<PAGE> 69
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
9. BORROWINGS
Long-term debt of Delaware, which was incurred entirely by Delaware,
consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Senior bank debt $219,843 $129,000
13% Senior Subordinated Notes due 2005 200,000 130,000
WR seller notes repaid in January 1996 25,157 --
Industrial revenue bonds 8,049 10,140
Capitalized lease obligations 2,579 2,843
-------- --------
455,628 271,983
Less current portion 11,834 2,171
-------- --------
$443,794 $269,812
======== ========
</TABLE>
Future maturities of long-term debt at December 31, 1996 are $1,561 in
1998, $1,046 in 1999, $1,057 in 2000, $130,016 in 2001 and $136,132 thereafter.
Senior Bank Debt
Contemporaneously with AP&P's initial public offering of common stock,
Delaware refinanced and retired all remaining indebtedness under the old bank
credit agreement and entered into a new bank credit agreement. The new bank
credit agreement is a revolving credit facility with a maximum availability of
$300,000 with the following principal terms: Loans are made directly to
Delaware and are guaranteed by AP&P and each of its subsidiaries, other than
Notepad. Loans made under the new bank credit agreement bear interest at a rate
per annum, equal to, at Delaware's option, the base rate, plus an applicable
margin, or a Eurodollar rate plus an applicable margin, as such terms are
defined in the agreement. The applicable margin for base rate loans varies from
0% to .75% and the applicable margin for Eurodollar rate loans varies from .75%
to 1.75%, each based on Delaware's leverage ratio and the type of loan.
Availability under the new bank credit agreement is subject to an unused
commitment fee which is a percentage of the unutilized revolving loan
commitment. The percentage varies from .3% to .5% based on Delaware's leverage
ratio.
Availability under the new bank credit agreement is reduced to the
extent of the net proceeds of sales of assets by Delaware, the net proceeds of
an issuance of debt by Delaware or 50% of the net proceeds of an issuance of
equity by AP&P or Delaware. Availability will be reduced by $50,000 in 1999 and
$50,000 in 2000. The new bank credit agreement terminates in 2001. Delaware is
permitted to make acquisitions under the new bank credit agreement up to
$25,000 per acquisition without the consent of the participating banks and up
to $50,000 per acquisition if, on a pro forma basis giving effect to such
acquisition, Delaware's leverage ratio is less than 3.0 to 1.0.
The new bank credit agreement requires Delaware to meet certain
financial tests, including minimum levels of EBITDA (earnings before interest,
taxes, depreciation, amortization and noncash charges, as defined in the
agreement), minimum interest coverage and maximum leverage ratio. The agreement
also contains covenants which, among other things, limit the incurrence of
additional indebtedness, dividends, transactions with affiliates, asset sales,
acquisitions, mergers, and other matters customarily restricted in such
agreements. The new bank credit agreement contains customary events of default,
including payment defaults, breach of representations and warranties, covenant
defaults, cross-defaults to certain other indebtedness, certain events of
bankruptcy and insolvency, ERISA, judgment
81
<PAGE> 70
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
defaults, failure of any guaranty or security agreement supporting the bank
credit agreement to be in full force and effect, and change of control.
The new bank credit agreement requires Delaware to continue its
interest rate cap covering a portion of the outstanding balance under the
agreement. In January 1996, Delaware entered into a four-year agreement that
entitles Delaware to receive from the counterparty on a quarterly basis the
amount, if any, by which LIBOR exceeds 6.5% for the first two years of the
agreement and 7.5% for the last two years on a notional principal amount of
$100,000. The counterparty to this agreement is a large financial institution.
The new bank credit agreement is guaranteed by AP&P and all its
subsidiaries, except for Notepad, and is secured by substantially all assets of
Delaware and a pledge of all capital stock of Delaware and its subsidiaries.
Senior Subordinated Notes
Delaware issued $200,000 of 13% Senior Subordinated Notes ("Notes")
through a private placement in December 1995. In June 1996, Delaware completed
an exchange of the privately-held notes for publicly-held notes with
substantially identical terms. The Notes are unsecured and subordinated to all
senior bank debt. Interest is payable semi-annually on May 15 and November 15.
The Notes are redeemable on and after November 15, 2000, at Delaware's option,
at redemption prices ranging from 106.5% of the face value of the notes in 2000
to 100% of the face value of the notes in 2003 or thereafter. Additionally, at
any time on or prior to November 15, 1998, Delaware may, at its option, use the
proceeds of public equity offerings of AP&P or Delaware to redeem up to 35% of
the Notes at redemption prices ranging from 111% to 113% of the face value of
the Notes. Subsequent to AP&P's initial public offering of common stock in July
1996, Delaware repaid $70,000 of the Notes.
The Notes are fully and unconditionally guaranteed by all subsidiaries
of Delaware, except for Notepad, on a joint and several and senior subordinated
basis, however, no guarantee from AP&P exists. At December 31, 1996, there were
no guarantor subsidiaries. The Notes contain restrictive covenants which, among
other things, limit dividends, repurchase of capital stock and investments,
incurrence of additional indebtedness, transactions with affiliates and other
matters customarily restricted in such agreements.
On December 1, 1995, $200,000 of proceeds were received from the Notes
were used to repurchase $100,000 of publicly-held notes of Williamhouse-Regency
assumed in the WR Acquisition and provide a dividend to AP&P of $75,000.
Other
WR seller notes in the amount of $25,157 outstanding at December 31,
1995, were repaid in January 1996 from the proceeds of the remaining borrowings
issuable under a term loan from the old bank credit agreement. The WR seller
notes bore interest at 1% and were classified as long term in the consolidated
balance sheet at December 31, 1995 since such debt was refinanced with
long-term debt.
At December 31, 1996, Delaware had outstanding various industrial
revenue bonds in the aggregate amount of $10,140. The industrial revenue bonds
bear interest at rates ranging from 2.65% to 5.25%. Aggregate annual principal
payments ranging from $300 to $700 are due through 2010. Payment of principal
and interest on the industrial revenue bonds are guaranteed by Delaware. The
industrial revenue bonds are secured by letters of credit.
At December 31, 1995 and 1996, letters of credit in the aggregate
amount of $15,800 and $15,826, respectively, were outstanding.
82
<PAGE> 71
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
Delaware incurred fees related to the financing transactions of
approximately $33,200 and $8,620 in 1995 and 1996, respectively, which have
been deferred and are being amortized using the effective interest method over
the respective lives of the agreements.
An extraordinary after-tax loss on extinguishment of debt of $19,995
($33,004 pre-tax) is reflected in the consolidated statement of operations for
the year ended December 31, 1996 as a result of $7,700 of prepayment penalties
associated with the repayment of $70,000 of Notes and the write off of $25,304
of unamortized deferred financing costs in connection with such Notes and with
Delaware's old bank credit agreement. An extraordinary after-tax loss on
extinguishment of debt of $9,652 ($16,086 pretax) is reflected in the
consolidated statement of operations for the year ended December 31, 1995 as a
result of $10,812 of prepayment penalties associated with the repurchase of
Williamhouse-Regency's $100,000 of notes and Ampad's bank debt and the
write-off of $5,274 of unamortized deferred financing costs in connection with
Williamhouse-Regency's notes redemption and Ampad's debt refinancings.
10. CAPITAL CONTRIBUTION AND NONRECURRING COMPENSATION CHARGE
Effective July 2, 1996, AP&P sold 12,500 shares of common stock in an
initial public offering. The net proceeds to AP&P from the offering, which were
received on July 8, 1996 and contributed to Delaware, amounted to $172,801
after deducting underwriting discounts, legal and accounting fees, registration
and travel expenses. Delaware used proceeds from the initial public offering
and working capital to: (i) repay $95,800 on the indebtedness incurred under
the old bank credit agreement, (ii) redeem $70,000 principal amount of the 13%
Notes from the holders thereof on a pro rata basis, and (iii) pay $7,700 in
redemption premium on such Notes.
In 1995, AP&P issued preferred stock options to management and such
issuance of the preferred stock options by AP&P was considered additional
consideration to the option holders , which was directly related to the WR
acquisition. Delaware recorded a nonrecurring, noncash compensation charge
equal to the excess of fair market value over the exercise price of the
preferred stock options of AP&P of $24,265 with a corresponding credit being
recorded to additional paid-in capital. Additionally, options for 66 shares of
common stock of AP&P and 105 shares of preferred stock of AP&P were granted to
certain members of management in December 1995. The exercise prices of each
common share and each preferred share were below the fair market value of the
respective classes of stock at date of grant, resulting in a noncash
compensation charge equal to the aggregate excess of fair market value over the
exercise price, or $1,733, with a corresponding credit being recorded to
additional paid-in capital.
Delaware awarded additional compensation to executives and
nonexecutives of $1,634 in 1995 in recognition of the significant transactions
consummated during the year. Delaware does not expect this additional
compensation to be awarded in future years.
11. PENSION PLAN AND 401(K) PLAN
Delaware is a sponsor of two qualified defined benefit pension plans
and a supplemental non-qualified benefit pension plan which were assumed as
part of its acquisitions. Delaware's liabilities under such plans are included
in other liabilities in the consolidated balance sheet.
Delaware maintains retirement plans (401(k) plan) for the benefit of
all employees who meet minimum age and service requirements. Delaware
contributions to the plans may be made at the discretion of the board of
directors. Contributions to the plans were approximately $557, $568, $1,239 for
the years ended December 31, 1994, 1995 and 1996, respectively.
83
<PAGE> 72
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
12. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current
Federal $ -- $ -- $ --
State -- 169 491
-------- -------- --------
-- 169 491
Deferred provision (benefit) (488) (6,707) 13,361
-------- -------- --------
Provision (benefit) for income taxes before
extraordinary item (488) (6,538) 13,852
Deferred benefit relating to
extraordinary item -- (6,434) (13,009)
-------- -------- --------
Provision (benefit) for income taxes $ (488) $(12,972) $ 843
======== ======== ========
</TABLE>
Delaware is included in AP&P's consolidated income tax returns.
A reconciliation between the statutory U.S. federal income tax rate and
the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate (35.0)% (35.0)% 35.0%
Adjustment to valuation allowance 14.7 (15.3) --
Change in enacted rates .4 -- --
Effect of acquisition 19.3 -- --
Goodwill and intangible amortization -- .2 3.3
State taxes, net (5.2) (5.0) 4.9
Other, net (.3) (1.4) --
----- ---- ----
Effective tax rate (6.1)% (56.5)% 43.2%
===== ==== ====
</TABLE>
For the year ended December 31, 1996, Delaware's statutory income tax
benefit rate of 35.0% differed from Delaware's effective income tax rate,
including extraordinary item, of 89.8% due to the following reasons: goodwill
and intangible asset amortization accounted for 113.6%; other nondeductible
expenses accounted for 11.8%; state income taxes accounted for (5.0)% and other
items accounted for 4.4%. For the year ended December 31, 1995, Delaware's
statutory income tax benefit rate of 35.0% differed from Delaware's effective
income tax benefit rate, including extraordinary item, of 46.9% due to the
following reasons: state income taxes accounted for (5.0)%; release of a
deferred tax asset valuation allowance accounted for (6.4)% and other items
accounted for (0.5)%.
Temporary tax differences affected and categorized by financial
statement line item are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accrued expenses $ 10,523 $ 9,066
Accounts receivable and allowances 900 361
Inventory valuation (7,608) (7,763)
Net operating losses and tax credits 11,194 9,090
-------- --------
Current deferred tax asset, net $ 15,009 $ 10,754
======== ========
</TABLE>
84
<PAGE> 73
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Noncurrent deferred tax assets (liabilities):
Tradenames and intangibles $(15,009) $(14,609)
Property and equipment, net (21,291) (24,405)
Noncash compensation expense credited to paid-in-capital 6,776 6,776
Other accrued liabilities 254 1,257
State income tax effect and other, net (800) --
-------- --------
Noncurrent deferred tax liability, net $(30,070) $(30,981)
======== ========
</TABLE>
The effect on the income tax provision related to the valuation
allowance was a benefit of $1,769 for the year ended December 31, 1995.
Deferred tax assets valuation allowances recorded in prior years were reversed
in 1995 as a result of management's assessment of future realizability of
deferred tax assets. For the year ended December 31, 1994, the effect on the
income tax provision related to the valuation allowance was a charge of $1,180.
No benefit was recognized in 1994 for operating losses carried forward.
At December 31, 1996, Delaware had net operating losses available to
reduce future taxable income of approximately $19,319. These net operating
losses expire in the years 2007 through 2011. If certain substantial changes in
Delaware's ownership should occur, there would be an annual limitation on the
amount of the carryforwards which can be utilized. In addition, Delaware has
approximately $1,363 of alternative minimum tax credit carried forward. The
acquisition of WR resulted in a change in control of WR. Consequently the
utilization of these credits in future periods are subject to limitation.
12. COMMITMENTS AND CONTINGENCIES
Commitments
Delaware is obligated under noncancelable operating leases for office
space and machinery and equipment which expire at various times through 1997.
Annual minimum lease commitments under these leases amount to $3,206 in 1997,
$1,989 in 1998, $1,347 in 1999, $1,011 in 2000, $622 in 2001 and $1,386
thereafter for an aggregate of $9,561.
Total rent expense was approximately $853, $1,888, $3,551 for 1994,
1995 and 1996 respectively.
Litigation
There are various outstanding claims against Delaware arising in the
normal course of business. Delaware believes that the claims are without merit
and that any losses which might ultimately be sustained by Delaware would not
be material to the financial position, results of operations, or cash flows of
Delaware.
Environmental Matters
Delaware is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and regulations
impose limitations on the discharge of pollutants and establish standards for
management of waste. While there can be no assurance that Delaware is at all
times in complete compliance with all such requirements, Delaware has made and
will continue to make capital and other expenditures to comply with such
requirements.
Delaware had been named a potentially responsible party under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, at five waste disposal sites.
85
<PAGE> 74
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
Delaware settled its liability at four of these sites as a de minimis party.
Delaware expects to be eligible for a de minimis settlement at the remaining
site.
13. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1994, 1995 and 1996, Delaware
expensed $575, $542 and $1,380, respectively, for management and directors'
fees and out of pocket expenses to the principal shareholders of AP&P (Bain
Capital). Unpaid fees of $500 are included in accrued expenses in the
consolidated balance sheets at December 31, 1996. There were no unpaid fees at
December 31, 1995. In June 1996 AP&P and Delaware revised its management
services agreement with Bain Capital, pursuant to which, for four years,
Delaware will pay Bain Capital an aggregate annual fee of no less than $2,250
plus a fee of 1% for completed acquisition transactions.
In 1996, Delaware paid Bain Capital $3,000 in fees in connection with
the new bank credit agreement, which were included in debt issuance costs paid,
$550 and $750, respectively, in fees in connection with the acquisition of
Niagara and Shade/Allied, which were included as part of the purchase price,
and $2,091 in connection with the Company's initial public offering of common
stock. In 1995, Delaware paid $7,000 to Bain Capital for services relating to
the WR acquisition and the related financing of the transaction. Of this
amount, $4,300 was included in deferred financing fees and $2,700 was a direct
acquisition expense allocated to the net assets acquired. The Company also paid
$450 to Bain Capital relating to the Globe-Weis acquisition which was included
in deferred financing fees. Delaware paid Bain Capital $225 for services
related to the SCM acquisition and the related financing of the transaction.
At December 31, 1995, Delaware had an outstanding note receivable for
$112 from its chairman which was repaid in June 1996. At December 31, 1996, the
Company had an outstanding note receivable of $324 from its executive vice
president which is due in 1998, of which $53 was repaid in February 1997.
Substantially all of Delaware's operations are conducted within the
United States.
Two customers accounted for 27% and one customer accounted for 11% of
Delaware's total net sales for the year ended December 31, 1995 and 1996,
respectively.
86
<PAGE> 75
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
- --------------------------------------------------------------------------------
14. QUARTERLY RESULTS OF OPERATIONS
Delaware's historical unaudited quarterly results of operations for
each of the years ended December 31, 1995 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1995 - Quarter Ended
-----------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 47,450 $ 44,772 $ 53,787 $ 111,151
Gross profit 5,296 7,924 10,258 24,049
Net income (loss) before
extraordinary item 589 1,875 4,850 (12,348)
Net income (loss) 589 1,875 4,850 (22,000)
</TABLE>
<TABLE>
<CAPTION>
1996 - Quarter Ended
-----------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 120,108 $ 114,099 $ 173,606 $ 176,046
Gross profit 23,528 24,931 36,037 40,914
Net income (loss) before
extraordinary item 133 691 6,925 10,465
Net income (loss) 133 (609) (11,770) 10,465
</TABLE>
87
<PAGE> 76
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO.
2.1 Stock Purchase Agreement, dated May 29, 1996, by and among American
Pad & Paper Company of Delaware, Inc., Niagara Envelope
Company, Inc. and the person named therein.(1)
3.1 (i) Restated Certificate of Incorporation of the Company (3)
3.1 (ii) Amended and Restricted By-laws of the Company. (3)
4.1 Indenture, dated as of December 1, 1995, among American Pad & Paper
Company of Delaware, Inc., the Subsidiary Guarantors and the
Trustee (including Form of Note). (2)
4.2 Purchase Agreement, dated as of November 17, 1994, among American
Pad & Paper Company of Delaware, Inc.., the Subsidiary
Guarantors and the Initial Purchasers. (1)
4.3 Registration Rights Agreement dated as of December 1, 1995, among
American Pad & Paper Company of Delaware, Inc., the Subsidiary
Guarantors and the Initial Purchasers named therein. (1)
4.7 Notepad Funding Receivables Master Trust Pooling and Servicing
Agreement, dated October 31, 1995, among APPC, Notepad Funding
Corporation and Manufacturers and Traders Trust Company (the
"Pooling and Service Agreement"). (1)+
4.8 Series 1995-1 Supplement to the Pooling and Service Agreement,
dated October 31, 1995. (1)+
4.9 Revolving Certificate Purchase Agreement, dated October 31, 1995
among APPC, Notepad Funding Corporation, Bankers Trust Company
and the Purchasers described therein. (1)+
4.10 Receivables Purchase Agreement, dated October 31, 1995, among APP.,
Notepad Funding Corporation and certain subsidiaries. (1)+
4.11 Credit Agreement, dated as of July 8, 1996, among the Company,
WR Acquisition, Inc., American Pad & Paper Company of
Delaware, Inc., various Lending Institutions, Bank of
Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The
Bank of Nova Scotia and the First National Bank of Boston, as
Co-Agents and Bankers Trust Company, as Agent (3)
4.12 Security Agreement, dated as of July 8, 1996, among the
Company, WR Acquisition, Inc., American Pad & Paper Company of
Delaware, Inc., certain other subsidiaries of American Pad &
Paper Company, and Bankers Trust Company, as Collateral Agent.
(3)
4.13 Pledge Agreement, dated as of July 8, 1996, among the Company,
WR Acquisition, Inc., American Pad & Paper Company of
Delaware, Inc., the Lenders from time to time party thereto,
and Bankers Trust Company, as Agent. (3)
4.14 Form of Revolving and Swingline Note of American Pad & Paper
Company of Delaware, Inc. (3)
4.15 Subsidiary Guaranty, dated as of July 8, 1996, among each of
the Company's subsidiaries named therein and Bankers Trust
Company, as Agent for the Bank. (3)
10.1 Agreement and Plan of Merger, dated as of October 3, 1995, among
the
88
<PAGE> 77
Company, WHR Acquisition, Inc. and WR Acquisition, Inc. (1)
10.2 Amendment No. 1 to WHR Merger Agreement, dated as of October 31,
1995, among the Company, WHR Acquisition, Inc. and WR
Acquisition, Inc. (1)
10.3 Stock Purchase Agreement, dated as of October 30, 1995, among WR
Acquisition, Inc. and the Company (1)
10.4 Tax Sharing Agreement, dated as of October 30, 1995, among American
Pad & Paper Company of Delaware, Inc. and the Subsidiary
Guarantors. (1)
10.5 Agreement and Plan of Merger, dated as of October 31, 1995, among
Williamhouse Regency of Delaware, Inc. and Ampad Corporation.
(1)
10.6 Amended and Restricted Advisory Agreement, dated as of October 31,
1995, among American Pad & Paper Company of Delaware, Inc. and
Bain Capital, Inc. (4)
10.7 Ampad Holding Corporation 1992 Key Employees Stock Option Plan. (1)
10.12 Asset Purchase Agreement, dated as of June 29, 1994, by and between
Huxley Envelope corp., The Kent Paper Co., Inc. and
Williamhouse of California, Inc. (2)+
10.13 Lease Agreement for City of Industry, California. (1)
10.14 Lease Agreement for Dubuque, Iowa (1)
10.15 Lease Agreement for Miamisburg, Ohio. (1)
10.16 Lease Agreement for North Salt Lake City, Utah. (1)
10.17 Lease Agreement for Tacoma, Washington. (1)
10.18 Change of Control Agreement between WR Acquisition, Inc. and
certain officers of American Pad & Paper Company of Delaware,
Inc. (1)
10.19 Registration Rights Agreement, dated as of July 31, 1992, between
the Company and the stockholders named therein. (2)
10.20 1996 Key Employee Stock Incentive Plan (3)
10.21 1996 Non-Employee Director Stock Option Plan. (3)
10.22 Employment Agreement between the Company and Charles Hanson,
III. (2)
10.23 Employment Agreement between the Company and Russell Gard. (2)
10.24 Amended and Restated Advisory Agreement between American Pad &
Paper Company and Bain Capital, Inc. (2)
10.25 Management Stock Purchase Plan .(3)
10.26 Employment Agreement between the Company and Timothy Needham.
10.27 Agreement and Plan of Merger by and between Shade/Allied, Inc. and
American Pad & Paper Company of Delaware, Inc.
21.1 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule.
- -----------------
(1) Incorporated by reference to the same-numbered exhibit to the Registration
Statement on Form S-1 of American Pad & Paper of Delaware, Inc. (File No.
333-3006).
(2) Incorporated by reference to the same-numbered exhibit to the Registration
Statement on Form S-1 of American Pad & Paper Company (File No. 333-4000).
(3) Incorporated by reference to the exhibits to the Quarterly Report on Form
10-Q of the registrants for the quarter ended June 30, 1996.
(4) Incorporated by reference to the exhibits to the Quarterly Report on Form
10-Q of the registrants for the quarter ended September 30, 1996.
89
<PAGE> 1
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of July 2, 1996 between American Pad &
Paper Company, a Delaware corporation (the "Company"), and Timothy Needham
("Executive").
In consideration of the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
I. Employment. The Company shall employ Executive, and
Executive hereby accepts employment with the Company, upon the terms and
conditions set forth in this Agreement for the period beginning on the date
hereof and ending as provided in paragraph 4 hereof (the "Employment Period").
I. Position and Duties.
A. During the Employment Period, Executive shall serve as an
Executive Vice President of the Company and shall have the normal duties,
responsibilities and authority of an Executive Vice President, which shall
consist of, among other things, coordinating the Company's sales and marketing
efforts.
A. Executive shall report to the Company's board of directors
(the "Board") and the Company's chief executive officer, and Executive shall
devote his best efforts and his full business time and attention (except for
permitted vacation periods and reasonable periods of illness or other
incapacity) to the business and affairs of the Company and its Subsidiaries.
Executive shall perform his duties and responsibilities to the best of his
abilities in a diligent, trustworthy, businesslike and efficient manner.
A. For purposes of this Agreement, "Subsidiaries" shall mean
any corporation of which the securities having a majority of the voting power
in electing directors are, at the time of determination, owned by the Company,
directly or through one of more Subsidiaries.
<PAGE> 2
I. Base Salary and Benefits.
A. During the first three years of the Employment Period,
Executive's base salary shall be $300,000 per annum (the "Base Salary"), which
salary shall be payable in regular installments in accordance with the
Company's general payroll practices and shall be subject to customary
withholding. Thereafter, the Base Salary shall be such higher rate as the
Board may designate from time to time. The Company represents and warrants
that, as of the date hereof, Executive has the third highest salary in the
Company. In addition, during the Employment Period, Executive shall be
entitled to participate in all of the Company's employee benefit programs for
which senior executive employees of the Company and its Subsidiaries are
generally eligible (including the Company's stock option program).
A. In addition to the Base Salary, the Board will award a
bonus to Executive following the end of each fiscal year during the Employment
Period based upon a formula on Exhibit I attached hereto. In addition to the
Base Salary and any bonuses payable to Executive pursuant to this paragraph,
Executive shall be entitled to the following benefits during the Employment
Period:
1. a maximum of three weeks vacation each year with salary,
subject to additional weeks upon Board approval;
1. reimbursement for travel, entertainment and other business
expenses reasonably incurred by Executive;
1. an automobile allowance of $500 per month;
1. reimbursement for all reasonable expenses relating to
Executive's moving to Dallas, Texas area, purchasing a new residence in
Dallas, Texas, and selling his New York residence, including all closing
costs, inspection fees, packing and unpacking costs, but excluding any
"points" paid to a broker or mortgage lender;
1. reimbursement for all reasonable costs relating to
Executive's living in the Dallas, Texas area incurred during the first
year following the date of this Agreement;
<PAGE> 3
(vi) reimbursement for the cost of an annual physical,
examination by a physician of Executive's choice; and
(vii) reimbursement for the reasonable expenses of preparation
of Executive's annual tax returns.
A. Termination. The Employment Period shall continue
until Executive's resignation, death or disability or other incapacity (as
determined by the Board in its good faith judgment) or until the Board
determines in its good faith judgment that termination of Executive's
employment is in the best interests of the Company. In the event of
Executive's resignation (other than due to a material breach by the Company of
this Agreement) or termination for Cause, Executive shall not be entitled to
receive his Base Salary or any fringe benefits or bonuses for periods after the
termination of the Employment Period. Upon any other termination of the
Employment Period, Executive shall be entitled to receive (i) his Base Salary,
the health and disability benefits described in paragraph 3(a) and the fringe
benefits described in paragraph 3(b) for a period of 12 months thereafter, and
(ii) following the end of the fiscal year in which Executive's employment is
terminated and the determination of the amount of bonus which Executive would
have been entitled if he remained employed by the Company or its Subsidiaries
for the entire fiscal year (the "Bonus Amount"), (A) 50% of the Bonus Amount if
such termination occurs in the first six months of such fiscal year, or (B)
100% of the Bonus Amount if such termination occurs in the second six months of
such fiscal year.
A. For purposes of this Agreement, "Cause" shall mean (i) the
willful and continued failure by Executive to perform his duties as an
Executive Vice President 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
<PAGE> 4
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").
I. Confidential Information. Executive acknowledges that the
information, observations and data obtained by him while employed by the
Company and its Subsidiaries concerning the business or affairs of the Company
or any other Subsidiary ("Confidential Information") are the property of the
Company or such Subsidiary. Therefore, Executive agrees that he shall not
disclose to any unauthorized person or use for his own purposes any
Confidential Information without the prior written consent of the Board, unless
and to the extent that the aforementioned matters become generally known to and
available for use by the public other than as a result of Executive's acts or
omissions. Executive shall deliver to the Company at the termination of the
Employment Period, or at any other time the Company may request, all memoranda,
notes, plans, records, reports, computer tapes, printouts and software and
other documents and data (and copies thereof) relating to the Confidential
Information, Work Product (as defined below) or the business of the Company or
any Subsidiary which he may then possess or have under his control.
I. Inventions and Patents. Executive acknowledges that all
inventions, innovations, improvements, developments, methods, designs,
analyses, drawings, reports and all similar or related information (whether or
not patentable) which relate to the Company's or any of its Subsidiaries'
actual or anticipated business, research and development or existing or future
products or services and which are conceived, developed or made by Executive
while employed by the Company and its Subsidiaries ("Work Product") belong to
the Company or such Subsidiary. Executive shall promptly disclose such Work
Product to the Board and perform all actions reasonably requested by the Board
(whether during or after the Employment Period) to establish and confirm such
ownership (including, without limitation, assignments, consents, powers of
attorney and other instruments).
<PAGE> 5
I. Non-Compete, Non-Solicitation.
A. In further consideration of the compensation to be paid to
Executive hereunder, Executive acknowledges that in the course of his
employment with the Company he shall become familiar with the Company's trade
secrets and with other Confidential Information concerning the Company and its
Subsidiaries and that his services shall be of special, unique and
extraordinary value to the Company and its Subsidiaries. Therefore, Executive
agrees that, during the Employment Period and for one year thereafter (the
"Noncompete Period"), he shall not directly or indirectly own any interest in,
manage, control, participate in, consult with, render services for, or in any
manner engage in any business competing with the businesses of the Company or
its Subsidiaries, as such businesses exist or are in process on the date of the
termination of Executive's employment, within any geographical area in which
the Company or its Subsidiaries engage or plan to engage in such businesses.
Nothing herein shall prohibit Executive from being a passive owner of not more
than 2% of the outstanding stock of any class of a corporation which is
publicly traded, so long as Executive has no active participation in the
business of such corporation.
A. During the Noncompete Period, Executive shall not directly
or indirectly through another entity (i) hire any person who was an employee of
the Company or any Subsidiary at any time during the three-month period prior
to the expiration of the Employment Period or (ii) induce or attempt to induce
any customer, supplier, licensee, licensor, franchisee or other business
relation of the Company or any Subsidiary to cease doing business with the
Company or such Subsidiary, or in any way interfere with the relationship
between any such customer, supplier, licensee or business relation and the
Company or any Subsidiary (including, without limitation, making any negative
statements or communications about the Company or its Subsidiaries) which
interference causes material monetary damage to the Company or its
Subsidiaries.
I. Enforcement. If, at the time of enforcement of paragraph
5, 6 or 7 of this Agreement, a court holds that the restrictions stated herein
are unreasonable under circumstances then existing, the parties hereto agree
that the maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area.
Because Executive's services are unique and because Executive has access to
Confidential Information and Work Product, the
<PAGE> 6
parties hereto agree that money damages would not be an adequate remedy for any
breach of this Agreement. Therefore, in the event a breach or threatened
breach of this Agreement, the Company or its successors or assigns may, in
addition to other rights and remedies existing in their favor, apply to any
court of competent jurisdiction for specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
hereof (without posting a bond or other security). In addition, in the event
of an alleged breach or violation by Executive of paragraph 7, the Noncompete
Period shall be tolled until such breach or violation has been duly cured.
Executive agrees that the restrictions contained in paragraph 7 are reasonable.
I. Executive's Representations. Executive hereby represents
and warrants to the Company that (i) the execution, delivery and performance of
this Agreement by Executive do not and shall not conflict with, breach, violate
or cause a default under any contract, agreement, instrument, order, judgment
or decree to which Executive is a party or by which he is bound, (ii) Executive
is not a party to or bound by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity and (iii) upon the
execution and delivery of this Agreement by the Company, this Agreement shall
be the valid and binding obligation of Executive, enforceable in accordance
with its terms. Executive hereby acknowledges and represents that he has
consulted with independent legal counsel regarding his rights and obligations
under this Agreement and that he fully understands the terms and conditions
contained herein.
I. Survival. Paragraphs 4, 5, 6 and 7 and paragraphs 10
through 18 shall survive and continue in full force in accordance with their
terms notwithstanding any termination of the Employment Period.
I. Notices. Any notice provided for in this Agreement shall
be in writing and shall be either personally delivered, or mailed by first
class mail, return receipt requested, to the recipient at the address below
indicated:
Notices to Executive:
Timothy Needham
154 West 18th St., Apt. 5B
New York, NY 10011
<PAGE> 7
with a copy to:
Eric Wallach
Rosenman & Colin
575 Madison Avenue
New York, NY 10022
Notices to the Company:
American Pad & Paper Company
17304 Preston Road, Suite 700
Dallas, TX 75252-5613
Attn.: Board of Directors
with a copy to:
Kirkland & Ellis
200 E. Randolph Drive
Chicago, IL 60601
Attn.: James L. Learner
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so
delivered or mailed.
I. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision or any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
I. Complete Agreement; Amendments. This Agreement, the Stock
Option Agreement dated the date hereof between the Company and Executive, those
documents expressly referred to herein and other documents of even date
herewith embody the complete agreement and understanding among the parties and
supersede and preempt any prior understandings, agreements or representations
by or among the parties, written or oral, which may have related to the subject
matter hereof in any way.
<PAGE> 8
I. No Strict Construction. The language used in this
Agreement shall be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction shall be
applied against any party.
I. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
I. Successors and Assigns. This Agreement is intended to
bind and inure to the benefit of and be enforceable by Executive, the Company
and their respective heirs, successors and assigns, except that Executive may
not assign his rights or delegate his obligations hereunder without the prior
written consent of the Company.
I. CHOICE OF LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND
THE EXHIBITS AND SCHEDULES HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
ANY CHOICE OF LAW OR CONFLICT OF LAW RULES OR PROVISIONS (WHETHER OF THE STATE
OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE
LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
I. Amendment and Waiver. The provisions of this Agreement
may be amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
I. Stock Transfers. Executive hereby agrees that he will not
sell, pledge or otherwise transfer any interest in the 66,667 shares of the
Company's common stock which Executive purchased in connection with the
Company's initial public offering of its common stock before July 2, 1997,
except pursuant to (a) a Sale of the Company (as defined in that certain Stock
Option Agreement dated the date hereof between the Company and Executive), or
(b) that certain Pledge Agreement date the date hereof between the Company and
Executive.
20. Change of Control Payment. Executive hereby acknowledges
that the $1,156,500 payment received on the date hereof constitutes payment in
full of the Company's
<PAGE> 9
obligation pursuant to that certain Change of Control Agreement between WR
Acquisition, Inc. and the Executive.
* * * * *
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
AMERICAN PAD & PAPER COMPANY
By
--------------------------
Its
-------------------------
-----------------------------
TIMOTHY NEEDHAM
<PAGE> 11
EXHIBIT I
1996 BONUS PROGRAM
<TABLE>
<CAPTION>
Amount Target
- ------ ------
<S> <C>
100% of Base Salary Company achieving $100 million of consolidated
earnings before interest, taxes, depreciation and
amortization, determined in accordance with GAAP
("EBITDA"), after giving effect to the sale of the
------
Regency business but not giving effect to the
acquisition of Niagara Envelope or the bonuses under
this Bonus Program.
60% of Base Salary Company achieving $89.2 million of EBITDA, after
giving effect to the sale of the Regency business and
the bonuses under this Bonus Program but not giving
effect to the acquisition of Niagara Envelope.
</TABLE>
Bonus amounts above 100% of Base Salary, below 60% of Base Salary and the
determination of the allocation between 60% and 100% of Base Salary will be
determined mutually between the Compensation Committee of the Board and
Executive. The bonus for fiscal 1997 and 1998 will be defined mutually between
the Compensation Committee of the Board and Executive.
<PAGE> 1
EXHIBIT 10.27
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
SHADE/ALLIED INC.
AND
AMERICAN PAD AND PAPER COMPANY OF DELAWARE, INC.
DATED AS OF JANUARY 6, 1997
-1-
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE MERGER 1
1.1 The Merger 1
1.2 Effective Time of the Merger 1
1.3 Effect of Merger 1
1.4 Stockholders' Meeting 2
ARTICLE II THE SURVIVING CORPORATION 2
2.1 Certificate of Incorporation 2
2.2 By-Laws 2
2.3 Directors 2
2.4 Officers 2
ARTICLE III CONVERSION OF SHARES 3
3.1 Conversion of Shares 3
3.2 No Further Transfers 3
ARTICLE IV PAYMENT OF PURCHASE PRICE 3
4.1 Definitions 3
4.2 Certain Transactions 5
(a) Indebtedness 5
(b) Stay Bonus Costs 5
(c) Transaction Costs 5
(d) Mechanics of Payments 5
(e) Transaction Price 6
(f) Investor Documents 6
(g) Employment Agreement 6
4.3 Dissenting Common Shares 6
ARTICLE V CLOSING 7
5.1 Closing Transactions 7
(a) Closing; Delayed Closing 7
(b) Closing Transactions 7
5.2 Conditions to Parent's Obligations 7
5.3 Conditions to the Company's Obligations 9
ARTICLE VI PRE-CLOSING COVENANTS 11
6.1 Operation and Maintenance of the Business 11
6.2 Negative Covenants of the Company 12
6.3 Information 13
(a) Interim Reports 13
(b) Access 13
(c) Exclusivity 13
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
6.4 Consents Generally 14
6.5 Notice and Cooperation Generally 14
(a) Notice of Breach 14
(b) Efforts to Close 14
6.6 Real Estate Matters 14
(a) Title Insurance. 14
(b) Surveys. 15
(c) Lease-Related Materials. 15
(d) Costs and Expenses. 15
6.7 Copies of New Contracts 16
6.8 HSR Act 16
6.9 Schedules 16
(a) Delivery of Schedules 16
(b) Disclosure on Schedules 16
6.10 Tax Settlements 16
6.11 Sierra Employees 16
6.12 Closing Agreement 17
6.13 Credit Agreement 17
6.14 Acquisition 17
ARTICLE VIIREPRESENTATIONS AND WARRANTIES OF THE COMPANY 18
7.1 Corporate Organization, Power and Authorizations 18
7.2 Authorization of Transactions 18
7.3 Capital Stock and Related Matters 18
7.4 Absence of Conflicts 19
7.5 Subsidiaries 19
7.6 Financial Statements 19
7.7 Certain Developments 19
7.8 Title to, Condition and Sufficiency of Assets 20
(a) Owned Properties 20
(b) Leased Properties 20
(c) Leasehold Improvements. 21
(d) Real Property Used in The Business. 21
(e) No Proceedings 21
(f) Current Use 21
(g) Condition and Operation of Improvements 21
(h) Ownership of Assets 22
(i) Condition of the Assets 22
7.9 Taxes 22
7.10 Contracts and Commitments 23
(a) Listing 23
(b) Absence of Breach, Cancellation or Repudiation 24
(c) Copies 24
7.11 Proprietary Rights 25
(a) Listing. 25
(b) Ownership; Infringement 25
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
7.12 Litigation; Proceedings 25
7.13 Brokerage 25
7.14 Governmental Licenses and Permits 25
7.15 Employees 26
7.16 Employee Benefit Plans 26
7.17 Affiliate Transactions 27
7.18 Compliance with Laws 27
7.19 Environmental Matters. 27
(a) Compliance Generally 27
(b) Permits 27
(c) Claims 27
(d) Storage Tanks, Asbestos, PCBs, Disposal Areas. 28
(e) Hazardous Substance Liabilities. 28
(f) Other Environmental Liabilities 28
(g) Transaction-Triggered Requirements 28
(h) Assumption of Liabilities 28
(i) Environmental Liens 28
7.20 Absence of Undisclosed Liabilities 29
7.21 Disclosure 29
7.22 Sierra Assets. 29
ARTICLE VIIIREPRESENTATIONS AND WARRANTIES OF PARENT 29
8.1 Organization and Power 29
8.2 Authorization of Transaction 29
8.3 Absence of Conflicts 30
8.4 Brokerage 30
8.5 Litigation 30
8.6 Disclosure 30
ARTICLE IXTERMINATION 31
9.1 Termination 31
9.2 Effect of Termination 31
ARTICLE XADDITIONAL AGREEMENTS 32
10.1 Press Releases and Announcements 32
10.2 Expenses 32
10.3 Directors, Officers and Fiduciary Indemnification 32
10.4 Tax Treatment 33
10.5 Attorneys' Fees 33
10.6 Specific Performance 33
10.7 Severance Policy 33
ARTICLE XI MISCELLANEOUS 33
11.1 Non-Survival of Representations and Warranties 33
11.2 Amendment and Waiver 34
11.3 Notices 34
11.4 Binding Agreement; Assignment 35
11.5 Severability 35
11.6 No Strict Construction 35
11.7 Captions 35
11.8 Entire Agreement 36
11.9 Counterparts 36
11.10 Governing Law 36
11.11 Parties in Interest 36
11.12 Other Definitional Provisions 36
</TABLE>
<PAGE> 5
INDEX OF DEFINED TERMS
Acquisition 1
Additional Bonus 4
Agreement 1
Alternative Transaction 13
Approval Date 2
Authorizations 25
Basic Price 3
Board 1
Bonus Plan 4
Certificate of Merger 1
CIT 4
Closing Date 7
Closing Transactions 7
Common Stock A-1
Company 1
Consent A-1
Constituent Corporations 1
Contract A-1
Controlled Group 27
Credit Agreement 17
closing agreement 23
Dissenting Common Shares 3
DOJ 16
defined benefit plan 26
defined contribution plan 26
Effective Time 1
Employment Agreement 4
Environmental and Safety Requirements A-1
Environmental Lien A-1
ERISA 17
Excludable Contract A-1
Financial Statements 19
Finova 4
FTC 16
GAAP A-2
Governmental Entity A-2
HLE 4
hereunder 36
hereof 36
herein 36
HSR Act 8
Improvements 21
Insider A-2
Investigating Parties 13
including 36
<PAGE> 6
Investors 4
Knowledge A-2
Lancaster Property 14
Latest Balance Sheet 19
Leased Real Property A-2
Leasehold Improvements A-2
Leases 20
Legal Requirement A-2
Lien A-2
multiemployer plan 26
Mandatory Consent A-2
Material Adverse Effect A-3
Merger 1
Options A-3
Owned Real Property A-3
Parent 1
Parties A-3
Paying Agent 5
PBGC 27
Per Share Price 4
Permitted Liens A-3
Person A-3
Plans 26
Preferred Price 4
Preferred Share Price 4
Preferred Stock 3
Priority Agreement 6
Proprietary Rights A-3
qualifying event 17
Real Property 21
Sale Bonuses 4
Senior Debt 4
Sierra 12
Sierra Closing Date 16
Sierra Employees 16
Sierra Proceeds 4
Sierra Transactions 12
Special Bonus 4
Stay Bonus Costs 4
Stockholders A-4
Stockholders' Meeting 2
Subordinated Debt 4
Surveys 15
Surviving Corporation 1
Tax A-4
Tax Code A-4
Tax Return A-4
<PAGE> 7
Taxable A-4
Taxes A-4
Taxing A-4
Termination Date 31
Title Commitments 14
Title Company 14
Title Policies 14
transaction-triggered 28
Transaction Costs 5
Transaction Documents A-4
Transaction Price 4
Unanimous Consent 2
Warrants A-4
WBCL 1
Welfare Plans 17
<PAGE> 8
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this Agreement") is entered
into as of January 6, 1997, by and between Shade/Allied Inc., a Wisconsin
corporation ( Company"), and American Pad & Paper Company of Delaware, Inc., a
Delaware corporation ( Parent"). Unless defined herein, capitalized terms used
in this Agreement are defined in Exhibit A attached hereto.
WITNESSETH
The boards of directors of the Company (the Board") and Parent
deem advisable and in their best interests to consummate the merger of Shade
Acquisition, Inc., a Wisconsin corporation to be formed by Parent (
Acquisition"), with and into the Company (the Merger") upon the terms and
conditions set forth herein and in accordance with the provisions of the
Wisconsin Business Corporation Law ("WBCL"). At the Effective Time (as defined
below), Parent shall own all of the issued and outstanding shares of capital
stock of Acquisition. Acquisition and the Company are sometimes collectively
referred to herein as the Constituent Corporations" and the Company, following
the effectiveness of the Merger, is sometimes referred to herein as the
Surviving Corporation."
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants, agreements and conditions contained
herein, and in order to set forth the terms and conditions of the Merger and
the mode of carrying the same into effect, the parties hereby agree as follows:
ARTICLE 1.
THE MERGER
1. The Merger. Subject to the terms and conditions hereof,
at the Effective Time (as defined below), Acquisition shall be merged with and
into the Company and the separate existence of Acquisition shall thereupon
cease, and the Company shall be the surviving corporation in the Merger.
2. Effective Time of the Merger. The Merger shall become
effective as of the time and date of the filing of the articles of merger
attached hereto as Exhibit B (the Certificate of Merger") with the Wisconsin
Department of Financial Institutions in accordance with the provisions of the
WBCL, or at the time specified in the Certificate of Merger, if later than the
time of filing. The Certificate of Merger shall be filed as soon as
practicable after the Closing. The date and time when the Merger shall become
effective is herein referred to as the Effective Time."
3. Effect of Merger. At the Effective Time, the Constituent
Corporations shall become a single corporation which shall be the Surviving
Corporation. At such time, the separate existence of the Constituent
Corporations shall cease and the Surviving Corporation shall have all the
rights, privileges, immunities and powers and shall be subject to all the
duties and liabilities of a corporation organized under the WBCL. The
Surviving Corporation shall thereupon and thereafter possess all liabilities of
the Constituent Corporations. The title to all property owned by the
Constituent Corporations shall henceforth be vested in the Surviving
Corporation without reversion or impairment.
-1-
<PAGE> 9
4. Stockholders' Meeting. If required by applicable law in
order to consummate the Merger, the Company, acting through the Board, shall,
in accordance with applicable law, duly call, give notice of, convene and hold
a special meeting of its Stockholders (a Stockholders' Meeting") as soon as
practicable following the date hereof for the purpose of considering and taking
action upon this Agreement. The Company shall, following the date of this
Agreement, attempt to obtain the unanimous written consent of the Stockholders
of the Company to the approval and adoption of the Merger, this Agreement and
the transactions described in this Agreement (the Unanimous Consent"). The
date on which the Stockholders of the Company approve the Merger, this
Agreement and the transactions described in this Agreement by Unanimous Consent
or at the Stockholders Meeting is hereinafter referred to as the Approval
Date."
ARTICLE 1.
THE SURVIVING CORPORATION
5. Certificate of Incorporation. The Fourth Amended and
Restated Articles of Incorporation of the Company, as in effect at the
Effective Time, shall be the Articles of Incorporation of the Surviving
Corporation after the consummation of the Merger until amended in accordance
with law.
6. By-Laws. The By-laws of the Company, as in effect at the
Effective Time, shall be the By-laws of the Surviving Corporation immediately
after the consummation of the Merger.
7. Directors. The directors of Acquisition, as in effect at
the Effective Time, shall be the directors of the Surviving Corporation
immediately after the consummation of the Merger.
8. Officers. The officers of Acquisition, as in effect at
the Effective Time, will be the officers of the Surviving Corporation
immediately after the consummation of the Merger.
ARTICLE 1.
CONVERSION OF SHARES
9. Conversion of Shares. As of the Effective Time, by virtue
of the Merger and without any action on the part of any holder:
10. Each issued and outstanding share of Acquisition's common
stock, par value $.01 per share, shall be converted into one share of the
Surviving Corporation's common stock, par value $.01 per share.
11. Each issued and outstanding share of Common Stock (other
than shares pursuant to which dissenter's rights have been exercised in
accordance with the WBCL ( Dissenting Common Shares")), excluding any such
shares held in the treasury of the Company, shall be converted into the right
to receive an amount equal to the Per Share Price (as defined below).
12. Each share of Common Stock and Preferred Stock which is
held in the Company's treasury shall be cancelled, and no payment shall be made
in respect thereof.
<PAGE> 10
(d) Each issued and outstanding Option and Warrant to purchase
shares of Common Stock shall be converted into the right to receive an amount
equal to the Per Share Price multiplied by the number of shares of Common Stock
covered by such Option or Warrant and the Options and Warrants shall be
canceled.
(e) Each issued and outstanding share of the Company's 1993
Cumulative Preferred Stock, par value $.01 per share (the "Preferred Stock"),
shall be converted into the right to receive an amount equal to the Preferred
Share Price and the Preferred Stock shall be cancelled.
13. No Further Transfers. At the Effective Time, the stock
transfer books of the Company shall be closed and no transfer of Common Stock
or Preferred Stock shall thereafter be made.
ARTICLE 1.
PAYMENT OF PURCHASE PRICE
14. Definitions.
As used in this Agreement, the following terms shall have the
meanings specified:
15. The Basic Price" shall be that amount equal to
$10,089,337.22.
16. The "Transaction Price" shall be that amount equal to: (i)
the Basic Price; plus (ii) the amount of the Sierra Proceeds; minus (iii) the
amount of the Transaction Costs; minus (iv) the amount of the Stay Bonus Costs.
17. The "Sierra Proceeds" shall be the proceeds received by
the Company net of all costs incurred or to be incurred (including, without
limitation, any tax costs) by the Company in the Sierra Transactions described
in Section 6.1(i) hereof.
18. The Per Share Price" shall be that amount equal to the
Transaction Price dividend by 322,072.962.
19. The Senior Debt" means the amount of all of the
outstanding and unpaid principal, accrued interest, accrued fees and other
charges relating to all outstanding senior indebtedness of the Company for
borrowed money to The CIT Group/Business Credit, Inc. ("CIT") and FINOVA
Capital Corporation ("Finova") and any prepayment premium or penalties due upon
payment of such indebtedness at Closing.
20. The Subordinated Debt" means the outstanding and unpaid
principal, accrued interest, accrued fees and other charges relating to all
outstanding subordinated indebtedness of the Company for borrowed money to
those persons listed and identified on Schedule 4.1(f) to this Agreement (the
Investors") and any prepayment premium or penalties due upon payment of such
indebtedness at Closing.
21. The Preferred Price" shall be that amount equal to
$10,009,550 plus the aggregate amount of all accrued and unpaid dividends on
the Preferred Stock as of the Effective Time.
22. The Preferred Share Price" shall be that amount equal to
the Preferred Price divided by 10,009.550.
<PAGE> 11
23. The Stay Bonus Costs" shall mean the amount representing
the following:
1. the amounts payable by the Company to Harold L.
Ellsworth ("HLE") as a Special Bonus" and an Additional Bonus" pursuant to
Section 12 of the Employment and Noncompetition Agreement between the Company
and HLE dated as of September 1, 1994, as amended on January 3, 1997 (the
Employment Agreement"); plus
2. all costs associated with the termination of the
Employment Agreement as of the Closing; plus
3. the amounts payable by the Company to employees
of the Company as Sale Bonuses" pursuant to the Company's Key Employee Sale
Incentive Plan adopted by the Board of Directors of the Company on November 8,
1996 (the "Bonus Plan").
24. The Transaction Costs" shall be the amount representing
the sum of all fees and expenses incurred by the Company and the Investors in
connection with the Merger, this Agreement and the transactions contemplated by
this Agreement, including the fees and expenses of counsel, investment bankers,
brokers, accountants and other experts incident to the negotiation and
preparation of this Agreement and the consummation of the Merger, the Sierra
Transactions and the other transactions described in this Agreement.
Transaction Costs shall be evidenced by invoices delivered to Parent on or
prior to the Closing Date.
25. Certain Transactions.
26. Indebtedness. At the Closing, the Company shall prepay
the Senior Debt and the Subordinated Debt in full. Parent and Acquisition will
provide to the Company the amounts necessary to fund the payments required of
the Company under this Section 4.2(a) of this Agreement.
27. Stay Bonus Costs. At the Closing, the Company shall pay
the Stay Bonus Costs in full. Parent and Acquisition will provide to the
Company the amounts necessary to fund the payments required of the Company
under this Section 4.2(b) of this Agreement.
28. Transaction Costs. At the Closing, the Company shall pay
the Transaction Costs in full. Parent and Acquisition will provide to the
Company the amounts necessary to fund the payments required of the Company
under this Section 4.2(c) of this Agreement.
29. Mechanics of Payments. At the Closing, the Parent and
Acquisition shall pay the Transaction Price and the Preferred Price to, or at
the direction of, the Company. All payments under or pursuant to this
Agreement shall be made by wire transfer of immediately available funds to an
account designated by the recipient of such payment or by certified check if
requested by the Company. At or prior to the Closing, the Company may
designate Firstar Trust Company, or some other bank or trust company mutually
acceptable to the Parent and the Company, to act as the "Paying Agent" for the
receipt and disbursement of the Transaction Price and the Preferred Price and,
in such event, the Parent, the Company and Acquisition shall execute a typical
Paying Agent Agreement. All disbursements to the Stockholders shall be made:
(i) only after delivery by such Person of executed stock certificates, Option
Agreements, Warrants, stock powers and other documents as are reasonably
satisfactory to Parent and the Company; and (ii) using the information
contained on Schedule 4.2(d)-1 to this Agreement for the number of shares of
Common Stock, and the number of shares of Common Stock covered by Options and
Warrants, owned by each Stockholder; and (iii) using the information contained
on Schedule 4.2(d)-2 to this Agreement for the number of shares of Preferred
Stock owned by each Stockholder. Prior to the Closing Date, the Company may
update the information on Schedules 4.1(f), 4.2(d)-1 and 4.2(d)-2 by written
notice to the
<PAGE> 12
Parent to reflect any changes which occur from and after the date of this
Agreement in the information set forth in such Schedules; provided that, except
as set forth in this Agreement, prior to the Closing Date, the Company shall
not issue, authorize or sell any shares of its capital stock, or rights to
acquire shares of its capital stock or enter into any agreement providing for
the issuance or sale of its capital stock, except upon the exercise of any of
the Options or Warrants listed on Schedule 4.2(d)-1 to this Agreement.
30. Transaction Price. The Transaction Price shall be paid as
follows:
(i) each holder of Common Stock shall receive that
amount equal to the Per Share Price multiplied by the number of shares of
Common Stock owned by such holder; and
(ii) each holder of an Option or a Warrant shall
receive that amount equal to the Per Share Price multiplied by the number of
shares of Common Stock purchasable pursuant to the terms of such Option or
Warrant, provided that for these purposes: (A) there shall be no deduction for
the Option or Warrant exercise price and the Company shall be deemed to fully
and irrevocably waive its rights to such exercise prices; and (B) all Options
and Warrants shall be deemed to be fully vested and exercisable in full.
31. Investor Documents. At the Closing, the Company and the
Investors shall execute such documents and materials as are necessary or
appropriate to terminate the Priority and Amendment Agreement dated as of
August 5, 1994 (the Priority Agreement"), the Subordinated Loan Agreements
described in the Priority Agreement, all Shareholder Agreements in force and
effect among the Investors and the Company and such other documents and
agreements relating to loans to, and investments in, the Company by the
Investors.
32. Employment Agreement. At the Closing, the Company and HLE
shall execute such documents and materials as are necessary or appropriate to
terminate the Employment Agreement.
33. Dissenting Common Shares. Notwithstanding anything to the
contrary in this Agreement, Dissenting Common Shares shall not be converted
into the right to receive the Per Share Price as provided in this Agreement but
shall become the right to receive such consideration as may be determined to be
due to the holder of the Dissenting Common Shares pursuant to the WBCL. If any
holder of Dissenting Common Shares shall, after the Effective Time, withdraw or
otherwise lose the rights of appraisal provided in the WBCL, the Dissenting
Common Shares shall be deemed to be converted, as of the Effective Time, into
the Per Share Price as is set forth in this Agreement without any interest
thereon.
<PAGE> 13
ARTICLE 1.
CLOSING
34. Closing Transactions.
35. Closing; Delayed Closing. The Closing will occur at the
offices of Quarles and Brady, 411 East Wisconsin Avenue, Milwaukee, Wisconsin
at 10:00 a.m. on that date which is the earliest of: (i) that date which is
five business days after the date on which the Company notifies the Parent that
the Unanimous Consent has been obtained; or (ii) that date which is the date on
which the Stockholders Meeting occurs; or (iii) that date which is agreed to by
the Company and the Parent; provided that, the Closing shall occur no earlier
than January 15, 1997. Notwithstanding the foregoing, if, on any date for the
Closing described in the preceding sentence, any condition of Parent or the
Company specified in Section 5.2 or Section 5.3 has not been satisfied (and
will not be satisfied by the delivery of documents or actions taken by the
parties at the Closing) or waived by Parent or the Company, as the case may be,
then the date for the Closing will be extended to any date specified by Parent
to the Company, or by the Company to Parent, with not less than five business
days' prior notice (subject to Parent's and the Company's respective conditions
to Closing being satisfied or waived on such specified date). The date upon
which the Closing actually occurs is referred to as the Closing Date".
36. Closing Transactions. Subject to the conditions set forth
in Sections 5.2 and 5.3, the parties will consummate the following transactions
at the Closing (the Closing Transactions"):
37. there will be delivered to Parent, Acquisition and the
Company, as applicable, the opinions, certificates and other documents and
instruments required to be delivered to such parties under Sections 5.2 and
5.3;
38. the Parent, Acquisition and the Company shall cause the
Certificate of Merger to be filed in accordance with the WBCL, and shall take
any and all other lawful actions, and do any and all lawful other things
necessary to effect the Merger and to enable the Merger to become effective;
and
39. the Parties shall complete the transactions described in
Section 4.2 of this Agreement.
40. Conditions to Parent's Obligations. The obligation of
Parent to consummate the Closing Transactions is subject to the satisfaction
(or waiver by Parent in writing) of the following conditions as of the time of
the Closing:
41. The representations and warranties set forth in Article
VII will be true and correct in all material respects at and as of the time of
the Closing as if the Closing Date were substituted for the date of this
Agreement throughout such representations and warranties;
42. The Company will have performed and complied in all
material respects with all of the covenants and agreements required to be
performed under this Agreement at or prior to the Closing;
43. No action or proceeding before any Governmental Entity
will be pending or threatened wherein an unfavorable judgment, decree,
injunction or order could prevent the consummation of the Closing Transactions
or result in the Closing Transactions being declared unlawful or rescinded, or
have a Material Adverse Effect;
44. There will have occurred no Material Adverse Effect;
45. All Mandatory Consents will have been obtained and be in
full force and effect;
<PAGE> 14
46. All filings (if any) required by the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the HSR Act"), in connection
with the Closing Transactions will have been made, and any waiting period
required by the HSR Act in connection with the Closing Transactions will have
expired or been terminated;
47. Parent will have received opinions, dated the Closing
Date, of Quarles & Brady, legal counsel to the Company, in a form reasonably
satisfactory to Parent;
48. Prior to Closing, no more than 155 shares of the
outstanding Common Stock will have become Dissenting Shares in accordance with
the requirements of the WBCL;
49. Parent will have obtained consent of the requisite lenders
pursuant to the Credit Agreement;
50. On or prior to the Closing Date, the Company will have
delivered to Parent all of the following (dated as of the Closing Date, except
as otherwise indicated):
51. Copies of all Consents which have been obtained prior to
the Closing;
52. A release and termination of each Lien on any asset which
is not a Permitted Lien;
53. A certificate, dated not earlier than the third day prior
to the Closing Date, of the secretary of state or similar governmental agency
of the state under the laws of which Company is organized and each state in
which Company is required to be qualified to do business stating that Company
is in good standing or has comparable active status in such state;
54. A certificate from the Company certifying that each of the
conditions set forth in Sections 5.2(a) and 5.2(b) have been and are satisfied
as of the time of the Closing;
55. A certificate from the Secretary or an Assistant Secretary
of the Company certifying that, in accordance with the Company's Articles of
Incorporation, the holders of at least 67% of the issued and outstanding shares
of Common Stock (on a fully diluted basis) have approved the Merger;
56. An agreement with each holder of Senior Debt and
Subordinated Debt certifying that such holder will raise no objections and will
agree to the retirement of their indebtedness pursuant to Section 4.2 of this
Agreement;
1. Invoices evidencing the Transaction Costs;
57. Certificates from James Haggerty, Robert Wilson, Glen
Yurjevich, Robert Krueger, Robert Rupp and Timothy Vanness certifying that each
such Person shall release the Company (and all of its successors and assigns)
from all obligations and liabilities in connection with or arising out of the
Bonus Plan, upon the payment of the Stay Bonus Costs at the Closing;
<PAGE> 15
58. A certificate from HLE certifying that the Employment
Agreement shall automatically terminate upon the payment of the Stay Bonus
Costs at the Closing; and
59. Such other documents or instruments as Parent reasonably
requests and are reasonably necessary to effect the transactions contemplated
by this Agreement.
60. The Sierra Transactions (as defined below) shall have been
completed in accordance with Section 6.1(i) hereof.
61. All proceedings to be taken by the Company in connection
with the consummation of the Closing Transactions and the other transactions
contemplated by this Agreement and all certificates, opinions, instruments and
other documents required to be delivered to Parent to effect the transactions
contemplated by this Agreement will be reasonably satisfactory in form and
substance to Parent.
62. Conditions to the Company's Obligations. The obligation
of the Company to consummate the Closing Transactions is subject to the
satisfaction (or waiver by the Company in writing) of the following conditions
as of the Closing Date:
63. The representations and warranties set forth in Article
VIII will be true and correct in all material respects at and as of the time of
the Closing as if the Closing Date were substituted for the date of this
Agreement throughout such representations and warranties;
64. Parent and Acquisition will have performed and complied :
(i) in all respects with the obligations of Acquisition and the Parent under
Section 4.2 of this Agreement; and (ii) in all material respects with all of
the other covenants and agreements required to be performed by Parent and
Acquisition under this Agreement at or prior to the Closing;
65. All filings (if any) required by the HSR Act in connection
with the Closing Transactions will have been made, and any waiting period
required by the HSR Act in connection with the Closing Transactions will have
expired or been terminated;
66. No action or proceeding before any Governmental Entity
will be pending or threatened wherein an unfavorable judgment, decree,
injunction or order could prevent the consummation of the Closing Transactions
or result in the Closing Transactions being declared unlawful or rescinded;
67. The Company will have received opinions, dated the Closing
Date, of Kirkland & Ellis, legal counsel to Parent and Acquisition, in a form
reasonably satisfactory to the Company;
68. On or prior to the Closing Date, Parent will have
delivered to the Company all of the following:
69. Certificates, each dated not earlier than the third
business day prior to the Closing Date, of the secretary of state or similar
governmental agency of the state under the laws of which Parent and Acquisition
are organized and each state in which Parent and Acquisition are required to be
qualified to do business stating that Parent and Acquisition are in good
standing or have comparable active status in such state;
<PAGE> 16
70. A certificate of Parent and Acquisition dated as of the
Closing Date certifying that each of the conditions set forth in Sections
5.3(a) and 5.3(b) has been and is satisfied as of the time of the Closing; and
71. Such other documents or instruments as the Company
reasonably request and are reasonably necessary to effect the transactions
contemplated by this Agreement; and
72. The Sierra Transactions shall have been completed in
accordance with Section 6.1(i) hereof;
73. In accordance with the Company's Articles of
Incorporation, the holders of at least 67% of the issued and outstanding shares
of Common Stock (on a fully diluted basis) shall have approved the Merger; and
74. All proceedings to be taken by Parent and Acquisition in
connection with the consummation of the Closing Transactions and the other
transactions contemplated by this Agreement and all certificates, opinions,
instruments and other documents required to be delivered to the Company to
effect the transactions contemplated by this Agreement will be reasonably
satisfactory in form and substance to the Company.
ARTICLE 1.
PRE-CLOSING COVENANTS
75. Operation and Maintenance of the Business. Prior to the
Closing, unless disclosed on Schedule 6.1 or unless the Parent otherwise
consents in writing, the Company will:
76. conduct its business and operations only in the ordinary
course of business consistent with past practice (including with respect to
maintenance of working capital balances, collection of accounts receivable and
payment of accounts payable);
77. cause its current insurance (or reinsurance) policies not
to be cancelled or terminated or any of the coverage thereunder to lapse,
unless simultaneously with such termination, cancellation or lapse, replacement
policies providing coverage equal to or greater than the coverage under the
cancelled, terminated or lapsed policies are in full force and effect;
78. use commercially reasonable efforts, consistent with sound
business practice, to keep in full force and effect its existence and all
material rights, franchises, Proprietary Rights and contractual rights relating
or pertaining to its business;
79. carry on its business in a manner consistent with the
Company's past practices and, consistent with such past practices and to the
extent prudent, use reasonable efforts to keep intact its present business
organization, including the present business operations, physical facilities,
working conditions and employees and its present relationships with lessors,
licensors, suppliers, customers, independent contractors and others having
business relations with it;
80. maintain its assets in such general state of repair as is
reasonably necessary for the conduct of its business consistent with
then-present needs and past practices, including replacement in accordance with
reasonably prudent business practices of any inoperable, worn out or obsolete
assets with assets of quality consistent with reasonably prudent business
practices and then-current needs and, in the event of a
<PAGE> 17
condemnation, casualty, loss or other material damage to any of the assets
prior to the Closing Date, whether or not the Company is insured, use
commercially reasonable efforts either to repair or replace such condemned or
damaged property or to use the proceeds of such condemnation or insurance in
such other manner as mutually agreed upon by Acquisition and the Company;
81. make capital and promotional expenditures in accordance
with its past custom and practice;
82. maintain its books, accounts and records in accordance
with past custom and practice as used in the preparation of the Latest Balance
Sheet and the accompanying interim financial statements;
83. comply in all material respects with all applicable Legal
Requirements, and all contractual obligations, applicable to its operations and
business, and pay all applicable Taxes which are due and payable (other than
any such Taxes which are being contested in good faith).
84. contribute its Sierra Coating Technologies Division (with
the assets of such division described on Schedule 7.23A and Schedule 7.23B), to
the capital of a subsidiary of the Company ( Sierra") and shall (no later than
as of the close of the Company's business on the day immediately preceding the
Closing Date) (A) spin off to the Company's stockholders the capital stock of
Sierra; or (B) sell the capital stock or assets of Sierra to a group controlled
by the stockholders of the Company or to a third party; or (C) shut down the
business operations of Sierra and sell the assets of Sierra to a third party
(collectively, the Sierra Transactions"); provided that, prior to such spin
off or sale, Parent shall have the opportunity to review and approve such spin
off or sale (such approval not to be unreasonably withheld).
85. Negative Covenants of the Company. Prior to the Closing,
without Parent's prior written consent, the Company will not:
86. take any action that would require disclosure under
Section 7.7(b), 7.7(c), 7.7(d) or 7.7(e);
87. enter into any contract, agreement or transaction, except
for any Excludable Contract;
88. directly or indirectly declare or pay any dividends or
make any distributions upon any of its capital stock or other equity securities
except for dividends on the Preferred Stock; and
89. directly or indirectly redeem, purchase or otherwise
acquire any of the Company's capital stock or other securities (including,
without limitation, warrants, options and other rights to acquire such capital
stock or other equity securities) except as set forth in this Agreement.
90. Information.
91. Interim Reports. The Company will provide to Parent
copies of all financial statements, budgets or other summaries of actual
financial information, if any, as and when the same are prepared on a monthly,
quarterly, annual or other basis by the Company for internal management or
reporting purposes.
92. Access. Without limiting the foregoing, from time to time
at Parent's request upon reasonable prior notice and at reasonable times, the
Company will provide to representatives of Parent and its financing parties and
each of their agents, employees and accounting, tax, legal and other advisors
(collectively, the Investigating Parties"):
93. access to the assets of the Company;
<PAGE> 18
94. access to all records of account, insurance policies, Tax
Returns, Contracts, and other books and records concerning the Company and its
business and operations (except employee medical records) and such other
relevant information and materials as may be reasonably requested (including
the ability to make copies and abstracts thereof); and
95. the opportunity to discuss the affairs, finances and
accounts of the Company with those directors (or equivalent officials), senior
management employees, key sales representatives and present and former
independent accountants of the Company which would reasonably be presumed to
have information which would be relevant for the purposes of preparing for the
financing and consummation of the Closing Transactions and the conduct of the
Company's business and operations thereafter or the performance of such
person's duty and responsibilities to the Company.
All information derived by Parent or any of the Investigating Parties as a
result of the above shall be governed by the terms and conditions of that
certain Confidentiality Agreement between the Company and American Pad & Paper
Company dated August 19, 1996, by which Parent agrees to be bound in the same
manner as if it were an original party thereto.
96. Exclusivity. Until this Agreement is terminated by its
terms and other than with respect to any Sierra Transaction, the Company will
not (and the Company will not cause or permit any affiliate, director, officer,
employee, stockholder or agent of the Company to) (collectively, Alternative
Transaction"):
1. solicit, initiate or encourage the submission of any proposal or
offer from any Person (including any of them) relating to any (A) liquidation,
dissolution or recapitalization of, (B) merger or consolidation with or into,
(C) acquisition or purchase of any material asset (or any material portion of
the assets) of, or any equity interest in, or (D) similar transaction or
business combination involving, the Company; or
2. participate in any discussions or negotiations regarding, furnish
any information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any other Person to do or seek any of the
foregoing.
1. Consents Generally. The Company will use commercially
reasonable efforts to (a) obtain or cause to be obtained prior to the Closing
Date all Mandatory Consents, and (b) cause each such Mandatory Consent to be
effective as of the Closing Date (whether it is granted or entered into prior
to or after the Closing), and Acquisition will use commercially reasonable
efforts not to interfere with such efforts.
2. Notice and Cooperation Generally.
3. Notice of Breach. Promptly after it obtains Knowledge
thereof, but in all events prior to the Closing, Parent will inform the
Company, and the Company will inform Parent, of any fact or circumstance which,
if it existed on the Closing Date, would constitute a breach of any
representation or warranty of itself set forth in this Agreement or any breach
of any of its covenants or agreements set forth in this Agreement, or any
threatened or instituted proceeding of a type described in Section 5.2(c) or
Section 5.3(d).
4. Efforts to Close. Each Party will use commercially
reasonable efforts to cause the conditions to Parent's and the Company's
obligations to consummate the Closing Transactions to be satisfied
<PAGE> 19
(including the preparation, execution and delivery of all agreements and
instruments contemplated hereunder to be executed and delivered by such Party
in connection with or prior to the Closing).
5. Real Estate Matters.
6. Title Insurance. Parent acknowledges receipt of a
commitment for an ALTA Owner's Title Insurance Policy for each parcel of Owned
Real Property and the Leased Real Property located in Lancaster, Pennsylvania
(the "Lancaster Property") (collectively, the Title Commitments"), issued by
Commonwealth Land Title Insurance Company (the Title Company"). At the
Closing, the Company shall cause the Title Company to issue title insurance
policies (which may be in the form of a mark-up of the Title Commitments) in
accordance with the Title Commitments, insuring the Company's fee simple or
lease-hold interest in each such parcel of Owned Real Property or the Lancaster
Property as of the Closing Date (including all recorded easements benefitting
such parcel) with gap coverage through the date of recording, subject only to
the Permitted Liens, in such amount as Parent determines to be the fair market
value (including all Improvements thereon) of such Owned Real Property or
Lancaster Property insured thereunder (collectively, the Title Policies").
Each of the Title Policies shall include the following
endorsements (to the extent available in the respective jurisdiction, but
regardless of whether any additional fee is charged for such endorsements): (a)
an extended coverage endorsement (insuring over the general or standard
exceptions) to the extent permitted by the Title Company; (b) an ALTA Form 3.1
zoning endorsement (with parking); (c) a survey endorsement (insuring that the
parcel described therein is the same parcel shown on the Survey with respect to
such parcel and that such Survey is an accurate survey thereof); (d) an access
endorsement (insuring that such parcel has direct and unencumbered pedestrian
and vehicular access to a public street); (e) if the Real Property covered by
such policy includes two or more adjacent parcels, a contiguity endorsement
(insuring that all of such adjacent parcels are contiguous to one another); (f)
a tax parcel number endorsement (insuring the tax parcel number in the
endorsement includes all of the Real Property insured thereunder and no other
real property); (g) an ALTA Form 9 owner's comprehensive endorsement; (h) a
non-imputation endorsement (insuring that coverage will not be defined to the
Company on the basis of any knowledge imputed to the Company by any of its
shareholders, directors, officers or employees prior to the Closing Date) and
(i) such other endorsements as reasonably requested by Parent or Parent's
lender (if any). The Company agrees to execute and deliver all affidavits,
indemnities and such other agreements reasonably requested by the Title Company
to obtain the Title Policies as set forth above.
7. Surveys. The Company shall obtain and deliver to Parent
no later than ten (10) days prior to Closing, an update of the Company's most
recent survey or if there is no existing survey, a new survey for each parcel
of Owned Real Property and the Lancaster Property dated no earlier than the
date of this Agreement for which a Title Policy is required, prepared by the
previous surveyor, or if there is no existing survey, by Bock & Clark National
Surveyors Network or other licensed surveyor satisfactory to Acquisition, and
conforming to 1992 ALTA/ACSM Minimum Detail Requirements for Urban Land Title
Surveys, including Table A Items Nos. 1 through 4 and 6 through 13, and such
other standards as the Title Company requires as a condition to the removal of
any survey exceptions from the Title Policies, and certified to the Company,
Parent, Parent's lender (if any) and the Title Company, in a form satisfactory
to such parties (collectively, the Surveys"). The Surveys shall not disclose
any material survey defect or encroachment from or onto any of the Real
Property which has not been cured or insured over prior to the Closing. Parent
shall notify the Company of such survey defects or encroachment within five
business days after delivery of the Surveys to Parent and Parent's counsel.
8. Lease-Related Materials. Prior to the Closing, the
Company will obtain, with respect to each parcel of Leased Real Property other
than the executive offices listed as items 5 through 8 on Schedule 7.8B, the
following documents, in such forms as Acquisition may reasonably request: (i)
estoppel letters
<PAGE> 20
and memoranda of lease in recordable form from the lessor and/or sublessor(s)
thereof, and (ii) non-disturbance agreements from the lender(s) of any such
lessor and/or sublessor(s).
9. Costs and Expenses. All costs and expenses incurred
pursuant to this Section 6.6 of this Agreement shall be the responsibility of
the Parent and shall not be Transaction Costs for any purposes of this
Agreement.
10. Copies of New Contracts. Promptly after it is entered
into, the Company will deliver to Acquisition a true and correct copy of any
written Contract (other than any Excludable Contract), and a complete and
correct summary of the material terms and conditions of any oral Contract
(other than any Excludable Contract), which is entered into by the Company
after the date of this Agreement and prior to the Closing, whether or not
Parent's consent to the entry into such Contract is required pursuant to
Section 6.1 or Section 6.2.
11. HSR Act. Each party will use reasonable best efforts to
prepare and, at such time as Acquisition designates, file with the United
States Federal Trade Commission (the _FTC") and the Antitrust Division of the
United States Department of Justice (the _DOJ"), any materials and information
required to be filed with or provided to the FTC or the DOJ pursuant to the HSR
Act with respect to the transactions contemplated by this Agreement. Parent
shall cause Acquisition to pay the filing fees associated with any such filing.
Parent, Acquisition and Company each will promptly supply any additional
information which reasonably may be required or requested by the FTC or the
DOJ. Parent, Acquisition and Company each will take all such actions and will
file and use reasonable best efforts to have declared effective or approved,
all documents and notifications with any governmental or regulatory bodies, as
may be necessary or may reasonably be requested under federal antitrust laws
for the consummation of the transactions contemplated by this Agreement.
12. Schedules.
13. Delivery of Schedules. Contemporaneously with the
execution and delivery of this Agreement, the Company is delivering to the
Parent the Schedules (other than Schedule 8.3) described in this Agreement,
which are accompanied by a certificate signed by the President of the Company
stating the Schedules are being delivered pursuant to this Agreement and are
the Schedules referred to in this Agreement. The Schedules are deemed to
constitute an integral part of this Agreement and to modify the
representations, warranties, covenants or agreements of the Company contained
in this Agreement.
14. Disclosure on Schedules. If a document or matter is
disclosed in any Schedule to this Agreement, it shall be deemed to be disclosed
for all purposes of this Agreement without necessity of specific repetition or
cross- reference. All capitalized terms used in any Schedule shall have the
definitions specified in this Agreement.
15. Tax Settlements. Prior to the Closing, the Company shall
not enter into any Tax settlements, arrangements, agreements or resolutions
with any Person without the prior written approval of Parent.
16. Sierra Employees. Effective as of the closing of the
Sierra Transactions (the Sierra Closing Date"), employees of Sierra (the
Sierra Employees") shall cease being covered under the Plans (as defined in
Section 7.16 of this Agreement). On and after the Sierra Closing Date, Sierra
shall assume and have sole responsibility for: (i) all liabilities under the
Plans that are employee welfare benefit plans" (as such term is defined in
Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended
( ERISA")) (the Welfare Plans") for any unpaid claims incurred but not
reported thereunder prior to the Sierra Closing Date by the Sierra Employees
(and the dependents thereof); (ii) all liabilities, obligations and commitments
arising under Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the
Tax Code relating to any qualifying event" (as such term is defined in Section
603 of ERISA) occurring with respect to any Sierra Employee at any time after
the Sierra Closing Date; (iii) all liabilities, obligations and commitments for
any post-retirement medical, dental or life insurance coverage for any
individuals (and the dependents of such individuals) who are or have been
Sierra
<PAGE> 21
Employees and participants in the Welfare Plans at any time on or prior to the
Sierra Closing Date to the extent such individuals (or dependents thereof) are
entitled thereto under the terms of the Welfare Plans; and (iv) all
liabilities, obligations and commitments for the payment of any life and
disability insurance benefits to all employees and former employees of Sierra
(other than the Sierra Employees) who, immediately prior to the Closing Date,
are receiving or entitled to receive any such benefits under the Welfare Plans.
17. Closing Agreement. The Company has this day executed a
Closing Agreement with certain of the Stockholders relating to the transactions
described in this Agreement and has delivered a copy of the Closing Agreement
to Parent. Prior to the Effective Time, the Company will comply with the
Closing Agreement in all respects and will enforce any of its rights thereunder
with respect to any of the Investors, Employees and Trusts (as such terms are
defined in the Closing Agreement).
18. Credit Agreement. The Parent is a party to a Credit
Agreement, dated July 8, 1996, with American Pad & Paper Company, WR
Acquisition, Inc., Bankers Trust Company, Bank of Tokyo-Mitsubishi Trust
Company, Bank One Texas, N.A., the Bank of Nova Scotia, the First National Bank
of Boston and the lending institutions party thereto (the "Credit Agreement").
The Parent hereby represents and warrants to the Company, and agrees with the
Company, that: (i) the Parent has, and will maintain at all times from and
after the date hereof up to and including the Closing Date, sufficient
borrowing availability under the Credit Agreement to close the Merger and the
transactions described in this Agreement; and (ii) promptly after the date of
this Agreement, Parent will use its reasonable best efforts to obtain all
consents required under the Credit Agreement to the consummation of the Merger
and the other transactions described in this Agreement.
19. Acquisition. Insofar as this Agreement purports to create
any obligations or duties on the part of Acquisition (which is not a party
hereto), Parent agrees to cause Acquisition to fully perform, satisfy and
comply with all such obligations and duties.
20. Certain Employees. Prior to the Closing, the Company will
use reasonable efforts to obtain a Certificate from each of Michael Domanik,
Fred Haas and Pamela Swanson certifying that each such Person shall release the
Company (and all of its successors and assigns) from all obligations and
liabilities in connection with or arising out of the Bonus Plan upon the
payment of the Stay Bonus Costs at the Closing.
ARTICLE 1.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As a material inducement to Parent to enter into this Agreement,
the Company hereby makes the representations and warranties set forth in this
Article VII.
21. Corporate Organization, Power and Authorizations.
22. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Wisconsin and is
qualified to do business in every jurisdiction in which the nature of its
business or its ownership of property requires it to be qualified. (All such
jurisdictions in which the Company is qualified are set forth on Schedule 7.1A
attached hereto). The Company has all requisite corporate power and authority
and all licenses, permits and authorizations necessary to own and operate its
properties, to carry on its business as now conducted and to carry out the
transactions contemplated by this Agreement.
23. The Company has previously delivered to Parent's counsel
complete and correct copies of the Company's Articles of Incorporation and
By-laws, as are presently in effect and with all amendments thereto, and
complete and current copies of all minutes of meetings of the Board and
Stockholders of the past five years. The Company is not in default in the
performance, observation or fulfillment of either of its Articles of
Incorporation or By-laws.
<PAGE> 22
24. Authorization of Transactions. Except for obtaining
stockholder approval as contemplated by Section 1.4 and in accordance with the
applicable provisions of the WBCL, (i) the Company has full power and authority
to execute and deliver this Agreement and all other Transaction Documents to
which the Company is a party and to perform its obligations hereunder and
thereunder, and (ii) no other proceeding or action on the part of the Company
is necessary to approve and authorize the Company's execution and delivery of
this Agreement or any other Transaction Document to which the Company is a
party or the performance of the Company's obligations hereunder or thereunder.
This Agreement and all other Transaction Documents to which the Company is a
party have been, or will be at Closing, duly executed and delivered by the
Company and, assuming the due authorization, execution and delivery hereof and
thereof by the parties other than the Company, constitute the valid and binding
agreements of the Company, enforceable against the Company in accordance with
their terms, except as enforceability hereof or thereof may be limited by
bankruptcy, insolvency or other laws affecting creditors' rights generally and
limitations on the availability of equitable remedies.
25. Capital Stock and Related Matters. The authorized capital
stock of the Company consists of (a) 9,975,000 shares of Common Stock, of which
2,497.002 shares are issued and outstanding, and (b) 25,000 shares of Preferred
Stock, of which 10,009.55 shares are issued and outstanding. All of the issued
and outstanding shares of Common Stock and Preferred Stock are owned of record
and beneficially by the individuals or entities set forth on Schedules 4.2(d)-1
and 4.2(d)-2, with the number and type of stock owned set across their name.
Except for the Options and Warrants set forth in Schedule 4.2(d)-1, the Company
does not have outstanding any stock or securities convertible into or
exchangeable for any shares of its capital stock, nor does it have outstanding
any rights or options to subscribe for or to purchase its capital stock or any
stock or securities convertible into or exchangeable into its capital stock.
Except as set forth on Schedule 7.3, the Company is not subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock. All of the outstanding shares of the
Common Stock and Preferred Stock are validly issued, fully paid and
nonassessable, and such shares are not subject to, nor were they issued in
violation of, any preemptive rights.
26. Absence of Conflicts. Except for Consents required under
the HSR Act, or as set forth in Schedule 7.4, neither the execution, delivery
and performance of this Agreement or any other Transaction Document by the
Company nor the consummation by the Company of the transactions contemplated
hereby or thereby (a) does or will (i) conflict with or result in any breach of
any of the provisions of, (ii) constitute a default under, (iii) result in a
violation of, (iv) give any third party the right to terminate or to accelerate
any obligation under, or (v) result in the creation of any Lien upon any asset,
in each case under the provisions of any indenture, mortgage, lease, loan
agreement or other agreement, instrument or Contract or any Legal Requirement
by which the Company is bound or by which Stockholders or any asset may be
affected, or to which the Company or any asset is subject, or (b) without
limiting the foregoing, requires any Consent of any Governmental Entity or any
other Person.
27. Subsidiaries. Except as set forth on Schedule 7.5 and as
may result from the Sierra Transactions, the Company does not own, directly or
indirectly, any stock, partnership interest or joint venture interest in, or
any security issued by, any other corporation, organization or entity.
28. Financial Statements. Attached to this Agreement as
Schedule 7.6 are the following (collectively, the Financial Statements"):
29. the audited balance sheets of the Company and the related
statements of income and cash flows for its fiscal years ending March 31 for
each of 1994, 1995 and 1996; and
30. the November 30, 1996 unaudited balance sheet of the
Company (the Latest Balance Sheet") and the related statements of income and
cash flows for the eight-month period ending on November 30, 1996.
Each such financial statement (in each case including the notes thereto, if
any) has been prepared in accordance with GAAP subject (in the case of the
statements described in clause (b) above) to
<PAGE> 23
the lack of footnote disclosure and changes resulting from normal year-end
adjustments, none of which changes would, if properly presented, in the
aggregate, reflect a Material Adverse Effect.
31. Certain Developments. Other than pursuant to this
Agreement, since the date of the Latest Balance Sheet, the Company has not:
32. suffered any theft, damage, destruction or casualty loss
to any material asset or any material portion of the assets, or any substantial
destruction of the Company's books and records (in each case whether or not
covered by insurance);
33. sold, leased, assigned or transferred any material asset
or any material portion of the assets (other than dispositions of obsolete or
worn-out assets disposed of in the ordinary course of business and dispositions
of assets which have been replaced with assets of equal or greater value and
utility);
34. waived any right of material value;
35. entered into any other material transaction other than in
the ordinary course of business, or materially changed any material business
practice; or
36. made or granted any bonus or any wage, salary or
compensation increase in excess of 4% of the immediately preceding bonus, wage,
salary or other level of compensation paid to any employee or independent
contractor, except pursuant to the express terms of any written Contract which
is described on Schedule 7.10A or as otherwise described on Schedule 7.10A
under any oral Contract, or except in the case of a promotion, in which case
the increase may not be to an amount in excess of the top of the range of the
position to which the employee has been promoted.
37. Title to, Condition and Sufficiency of Assets.
38. Owned Properties. Schedule 7.8A sets forth the
address of all Owned Real Property, together with a true, correct and complete
legal description of the land for each Owned Real Property. With respect to
each parcel of Owned Real Property: (i) the Company has good and marketable
fee simple title to such parcel, free and clear of all Liens as of the Closing
Date, except Permitted Liens; (ii) except as set forth in Schedule 7.8A, there
are no leases, subleases, licenses, concessions, or other agreements, written
or oral, granting to any Person the right of use or occupancy of any portion of
such parcel; and (iii) there are no outstanding options or rights of first
refusal to purchase such parcel or any portion thereof or interest therein.
39. Leased Properties. Schedule 7.8B sets forth the address
and a list of all leases, subleases, licenses, concessions and other agreements
(written or oral) (collectively, the Leases") for all Leased Real Property.
The Company has furnished to the Parent true, correct and complete copies of
each written Lease (including all amendments, extensions, renewals, guaranties
and other documents with respect thereto), and in the case of any oral Leases a
written summary of the basic terms thereof.
With respect to each Lease: (i) such Lease is in full force and
effect; (ii) subject to obtaining any Consent described on Schedule 7.4, the
consummation of the Closing Transactions will not cause a breach or default
under such Lease or otherwise cause such Lease to cease to be in full force and
effect on substantially the same terms as are presently in effect; (iii) the
Company is not in breach or default in any material respect under, and no event
has occurred which, with notice and/or lapse of time, would constitute such a
<PAGE> 24
breach or default of the Company or permit lessor's unilateral termination,
modification or acceleration of, such Lease; (iv) to the Company's Knowledge,
no other party to such Lease is in breach or default in any material respect
under such Lease, and no event has occurred which, with notice and/or lapse of
time, would constitute such a breach or default or permit the Company's
unilateral termination, modification or acceleration of such Lease; (v) the
Company has not (and, to the Company's Knowledge, no other party to such Lease
has) repudiated any provision thereof; (vi) there are no disputes, oral
agreements, or forbearances in effect as to such Lease; (vii) such Lease has
not been modified in any respect, except to the extent that such modifications
are disclosed by the documents delivered to Acquisition; and (viii) the Company
has not assigned, transferred, conveyed, mortgaged, deeded in trust or caused
any Lien (other than any Permitted Lien) to exist with respect to any interest
of the Company in such Lease, except for such Liens which shall be satisfied or
released on or before the Closing Date.
40. Leasehold Improvements. Except as set forth in Schedule
7.8C, the Company has good title to the Leasehold Improvements, which shall be
free and clear of all Liens as of the Closing Date, except Permitted Liens.
41. Real Property Used in The Business. Except as set forth
in Schedule 7.8D, the Owned Real Property, Leased Real Property and Leasehold
Improvements (collectively, the Real Property") include all of the real
property used by the Company in the operation of the Business.
42. No Proceedings. There is no proceeding in eminent domain
or any similar proceeding pending, or (to the Company's Knowledge) threatened,
affecting the Company's interest in any Owned Real Property or Leased Real
Property. There exists no writ, injunction, decree, order or judgment
outstanding, nor any litigation, pending, or (to the Company's Knowledge)
threatened, relating to the ownership, lease, use, occupancy or operation by
the Company of any Owned Real Property or Leased Real Property.
43. Current Use. Except as set forth on Schedule 7.8F, to the
Company's Knowledge: (i) the current use by the Company of the Real Property
does not violate in any material respect any Legal Requirement, instrument of
record or agreement affecting any Owned Real Property or Leased Real Property,
and (ii) there is no violation in any material respect of any applicable
covenant, condition, restriction, easement or agreement, in each case in any
manner which could reasonably be likely to have a Material Adverse Effect.
44. Condition and Operation of Improvements. To the Company's
knowledge, as to each parcel of Owned Real Property and, to the Company's
Knowledge, as to each parcel of Leased Real Property: (i) all components of
all buildings, fixtures and other improvements included upon or within such
Owned Real Property or Leased Real Property and the Leasehold Improvements (the
Improvements"), are in reasonably adequate condition to use, occupy or operate
such facilities in the ordinary course of the Company's business, and there are
no facts or conditions affecting any of the Improvements which would,
individually or in the aggregate, interfere in any significant respect with the
use, occupancy or operation thereof in the ordinary course of the Company's
business and (ii) there are no material structural deficiencies in any
Improvements.
45. Ownership of Assets. Other than with respect to the Real
Property (which is addressed above), except as set forth on Schedule 7.8H, the
Company owns good title in and to, or a valid leasehold interest in, all of the
assets (as defined in Section 7.8(i) below), free and clear of all Liens (other
than Permitted Liens).
46. Condition of the Assets. Other than with respect to the
Real Property (which is addressed above), the Company's assets (other than
assets, if any, that are not necessary for or material to the business or
operation of the Company) are in a condition which is reasonably sufficient for
the conduct of the business and operations of the Company in the ordinary
course and there are no known latent defects with respect thereto. The assets
include all non- affixed machinery, equipment and other tangible assets and
property interests, intangible assets and other assets, rights and properties
reasonably necessary for or material to the conduct of the business and
operation of the Company as currently conducted.
<PAGE> 25
47. Taxes. Except as set forth in Schedule 7.9 for each
clause in this Section 7.9: the Company has timely filed all federal, state,
local and foreign income, information and other Tax Returns which are required
to be filed by it with respect to Taxes; all such Tax Returns have been
prepared in compliance with all applicable Legal Requirements and are true,
complete and accurate in all respects; all Taxes imposed upon the Company or
upon any of the assets, income or franchises of the Company have been timely
paid (or are being contested in good faith, in which case the Company has
disclosed the same to Parent in writing) or, if not yet due and payable, did
not, as of the date of the Latest Balance Sheet, exceed the reserve for Tax
liability set forth on the Latest Balance Sheet, and do not exceed that reserve
as adjusted for the passage of time through the Closing Date in accordance with
the practice adopted by the Company in preparing its Financial Statements; the
Company has withheld and paid all Taxes required to have been withheld and paid
in connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder, or other third party; the Company has
delivered to Parent correct and complete copies of all federal income Tax
Returns, examination reports, and statements of deficiencies assessed against
or agreed to by the Company since March 31, 1992; the Company has disclosed on
such Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of Section
6662 of the Code; there are no actual or proposed Tax deficiencies, assessments
or adjustments with respect to the Company or any assets or operations of the
Company; no consent has been given with respect to the Company to extend the
time in which any Tax may be assessed or collected by any Taxing authority; the
Company has not extended the date on which any Tax Return was or is to be
filed; there are no ongoing or pending Tax audits by any Taxing authority
against the Company; the Company is not and, since November 4, 1988, has not
been a member of an affiliated group (as defined in Section 1504(a) of the Tax
Code) which files a consolidated return; since July 21, 1993, no material
written claim has ever been received by the Company from a Taxing authority in
a jurisdiction where the Company does not pay Taxes or file Tax Returns to the
effect that the Company is or may be subject to Taxes assessed by such
jurisdiction; the Company is not party to or bound by any agreement relating to
the allocation or payment of Taxes with any Person who, to the Company's
knowledge, has any current or potential contractual or other obligation to
indemnify any other Person with Taxes; the Company has not made any payments,
and is not and shall not become obligated (under any contract entered into on
or before the Closing Date) to make any payments, that shall be non-deductible
under Section 280G of the Code (or any corresponding provision of state, local
or foreign income Tax law); and the Company will not be required (A) as a
result of a change in method of accounting for a taxable year ending on or
prior to the Closing Date, to include any adjustment in taxable income for any
taxable year or portion thereof beginning after the Closing Date, (B) as a
result of any closing agreement," as described in Section 7121 of the Code (or
any corresponding provision of state, local or foreign income Tax law), to
include any item of income in, or exclude any item of deduction from, taxable
income for any taxable year or portion thereof beginning after the Closing Date
or (C) as a result of any deferred intercompany gain described in Treasury
Regulation Sections 1.1502-13 or any excess loss account described in Treasury
Regulation Sections 1.1502-19 (or any corresponding or similar provision or
administrative rule of federal, state, local or foreign income tax law), to
include any item of income in taxable income for any taxable year or portion
thereof beginning after the Closing Date.
48. Contracts and Commitments.
49. Listing. Except for the Transaction Documents, any
Contract described on Schedule 7.10A and any Excludable Contract, the Company
is not a party to or bound by, and the Company is not subject to, any Contract,
including any:
3. collective bargaining agreement or contract with any
labor union or any bonus, pension, profit sharing, retirement or any other form
of deferred compensation plan or any hospitalization insurance or similar plan
or practice;
4. contract for the employment or engagement of any
individual employee or other Person (including as an independent contractor or
on a consulting basis) other than at the will of the Company, or any agreement
to provide severance benefits upon any termination of employment or other
engagement;
<PAGE> 26
5. agreement, indenture or other Contract placing a Lien
(other than any Permitted Lien) on any asset;
6. agreement with respect to the lending or investing of
funds by the Company;
7. affiliation, license or royalty agreement;
8. guaranty of any obligation of any other Person, other
than endorsements made for collection made in the ordinary course of business;
9. sales representation agreement;
10. agreement with any rating service or intellectual
property licensing organization;
11. lease or agreement under which it is lessee of, or
holds or operates, any personal property owned by any other party calling for
payments in excess of $25,000 annually or entered into outside of the ordinary
course of business;
12. lease or agreement under which it is lessor of or
permits any third party to hold or operate any property, real or personal,
owned or controlled by it;
13. agreement, contract or understanding pursuant to
which the Company subcontracts work to third parties;
14. Contract relating to environmental, health or safety
matters, including any relating to the treatment, storage, disposal, or
handling of toxic or otherwise hazardous materials, substances or wastes; or
15. other agreement material to the business or operation
of the Company, whether or not entered into in the ordinary course of business.
1. Absence of Breach, Cancellation or Repudiation.
Except for any Leases (the breach, cancellation or repudiation of which is
addressed in Section 7.8(d)), each of the items which is described or required
to be described on Schedule 7.10A is in full force and effect; no item which is
described or required to be described on Schedule 7.10A has been breached,
cancelled or repudiated by the Company or (to the Company's Knowledge) by any
other party thereto; no such other party has indicated in writing or orally to
the Company that it will stop or decrease the rate of business done with the
Company or that it desires to renegotiate its arrangements with the Company;
the Company has performed all material obligations required to be performed by
it in connection with the items which are described or required to be described
on Schedule 7.10A and is not in receipt of any claim of default under any such
item; and the Company has no present expectation or intention of not fully
performing any obligation pursuant to any item which is described or required
to be described on Schedule 7.10A.
2. Copies. The Company has furnished to the Parent
access to a true and correct copies of all written contracts and other items
which are described or required to be described on Schedule 7.10A, in each case
together with all amendments, waivers or other changes thereto.
3. Proprietary Rights.
<PAGE> 27
4. Listing. Schedule 7.11A sets forth a complete and
correct list of: (i) all registered Proprietary Rights and all pending
applications for registration of Proprietary Rights owned, filed or used by the
Company and (ii) all other licenses or similar agreements or arrangements to
which the Company is a party either as licensee or licensor for the Proprietary
Rights.
5. Ownership; Infringement. Except as set forth on
Schedule 7.11B, (i) the Company owns and possesses all right, title and
interest in and to, or has a valid and enforceable right to use, each of the
registered Proprietary Rights described or required to be described on Schedule
7.11A, free and clear of all Liens (other than Permitted Liens), and no claim
by any third party contesting the validity, enforceability, use or ownership of
any of the foregoing has been made since July 21, 1993, is currently
outstanding or, to the Company's Knowledge, is threatened, (ii) no loss or
expiration of any Proprietary Right of any such type or group of such
Proprietary Rights is pending, reasonably foreseeable or, to the Company's
Knowledge, threatened, (iii) the Company has not received any notice of, nor is
the Company aware of any facts which indicate a likelihood of, any infringement
or misappropriation by, or any conflict with, any third party with respect to
any such Proprietary Right, including any demand or request that the Company
license rights from a third party, (iv) the Company has not knowingly
infringed, misappropriated or otherwise conflicted with any rights of any third
party and the Company is not aware of any infringement, misappropriation or
conflict which will occur as a result of the continued operation of the
Company's business as currently conducted, and (vi) to the Company's Knowledge,
the Proprietary Rights described or required to be described on Schedule 7.11A
have not been infringed, misappropriated or conflicted by any third party.
6. Litigation; Proceedings. Except as set forth in
Schedule 7.12 there are no actions, suits, proceedings, orders, judgments,
decrees or investigations pending or threatened against or affecting the
Company at law or in equity, or before or by any Governmental Entity, and there
is no known basis for any of the foregoing.
7. Brokerage. Following the Closing, there will be no
claims for brokerage commissions, finders' fees or similar compensation for
which the Company shall be liable in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of the Company.
8. Governmental Licenses and Permits. Schedule 7.14
contains a complete listing and summary description of all permits, licenses,
franchises, certificates, approvals and other authorizations of foreign,
federal, state and local governments or other similar rights (collectively, the
Authorizations"), owned or possessed by the Company or used by the Company in
the conduct of its business. The Company owns or possesses all right, title
and interest in and to all of the Authorizations which are necessary to conduct
its business as currently conducted. No loss or expiration of any
Authorization is pending, reasonably foreseeable or, to the Company's
Knowledge, threatened (including as a result of the transactions contemplated
by this Agreement).
9. Employees. Except as set forth in Schedule 7.15, to
the Company's Knowledge, no key executive employee and no group of employees or
independent contractors of the Company has any plans to terminate his, her or
its employment or relationship as an independent contractor with the Company.
The Company has complied with all material applicable Legal Requirements
relating to the employment of personnel and labor, including provisions thereof
relating to wages, hours, equal opportunity, collective bargaining and the
payment of social security and other taxes, the Worker Adjustment and
Retraining Act (other than in connection with the transactions contemplated
herein), and the Immigration Reform and Control Act of 1986. Since July 21,
1993, the Company has not experienced any strike, unfair labor practice claim
or other material employee or labor dispute except as set forth in Schedule
7.15. The Company has not engaged in any unfair labor practice. To the
Company's Knowledge, there is no organizational effort presently being made or
threatened by or on behalf of any labor union with respect to employees of the
Company. Schedule 7.15 sets forth the name and the annual or, as the case may
be, hourly rate of compensation (including salary, bonuses and commissions) as
of the date of this Agreement for each Person engaged by the Company (including
independent contractors) who received
<PAGE> 28
in calendar 1995 or who will receive in calendar 1996 taxable compensation from
the Company in excess of $50,000 per year.
10. Employee Benefit Plans. Except as set forth on
Schedule 7.16, the Company has no obligation to contribute to (or any other
liability, including current or potential withdrawal liability, with respect
to) (a) any multiemployer plan" (as that term is defined in Section 3(37) of
ERISA), (b) any plan or arrangement, whether or not terminated, which provides
medical, health, life insurance or other welfare-type benefits for current
employees or current or future retired or terminated employees (except for
limited continued medical benefit coverage required to be provided under
Section 4980B of the Tax Code or as required under applicable state law), (c)
any employee plan which is a defined benefit plan" (as that term is defined in
Section 3(35) of ERISA), whether or not terminated, or (d) any employee plan
which is defined contribution plan" (as that term is defined in Section 3(34)
of ERISA), whether or not terminated. All such plans set forth on Schedule
7.16 shall be referred to herein collectively as the Plans". All Plans (and
related trusts and insurance contracts) comply in form and in operation in all
material respects with the applicable requirements of ERISA and the Tax Code.
All required reports and descriptions (including Form 5500 Annual Reports,
summary annual reports, PBGC-1s and summary plan descriptions) with respect to
all Plans have been properly filed with the appropriate government agency or
distributed to participants, and the Company has complied with the requirements
of Section 4980B of the Tax Code. With respect to each Plan, all
contributions, premiums or payments which are due on or before the Closing Date
have been paid to such Plan. The assets of each Plan which is a defined
benefit or defined contribution Plan exceed the liabilities accrued under each
such Plan as of the Closing Date, determined as though the Plan was terminated
on the Closing Date, or in the event the liabilities exceed the assets, the
shortfall is recorded on the Latest Balance Sheet. The Company has not
incurred any liability to the Pension Benefit Guaranty Corporation ( PBGC"),
the Internal Revenue Service, any multiemployer plan or otherwise with respect
to any employee pension benefit plan or with respect to any employee pension
benefit plan currently or previously maintained by members of the controlled
group of companies (as defined in Sections 414 of the Tax Code) that includes
the Company (the Controlled Group") that has not been satisfied in full, and no
condition exists that presents a material risk to the Company or any member of
the Controlled Group of incurring such a liability, other than liability for
premiums due the PBGC. With respect to any Plan that is a defined benefit
plan" (as defined above) that has been frozen, notice has been provided as
specified in and in accordance with Section 204(h) of ERISA.
11. Affiliate Transactions. Other than as described on
Schedule 7.17, no Insider (a) is a party to any agreement, contract, commitment
or transaction with the Company or which pertains to the business or operation
of the Company (other than (i) in such Insider's capacity as an employee of the
Company, the compensation for which is reflected on Schedule 7.17, and (ii) in
connection with the sale of stock forms by the Company to such Insider in the
ordinary course of business on commercially reasonable terms), or (b) has any
interest in any asset of the Company.
12. Compliance with Laws. Except as set forth on
Schedules 7.18 and 7.19, the Company and, to the Company's Knowledge, each of
its independent contractors, agents and employees have complied with all
applicable Legal Requirements which affect the business or operations of the
Company or any assets of the Company (except Real Property, as to which
compliance with laws is addressed in Section 7.8(f))and to which the Company is
subject, and no claim has been filed against the Company since July 21, 1993
alleging a violation of any such Legal Requirement. Except as set forth on
Schedules 7.18 and 7.19, the Company is not now subject (nor has the Company
been subject since July 21, 1993) to any investigation, penalty assessment, or
audit (in each case of which the Company has been made or became aware) by any
Governmental Entity or to any other allegation that the Company (including any
agent, representative or broker acting on behalf of the Company) violated the
regulations of any such Governmental Entity or made a material false statement
or omission to any Governmental Entity.
13. Environmental Matters. Except as set forth on
Schedule 7.19:
14. Compliance Generally. To the Company's Knowledge,
the Company has complied and is in material compliance with all Environmental
and Safety Requirements.
<PAGE> 29
15. Permits. To the Company's Knowledge, the Company has
obtained and is in material compliance with, all permits, licenses and other
authorizations that are required pursuant to Environmental and Safety
Requirements for the occupation of its facilities and the operation of its
business (all of which are listed on Schedule 7.19 hereto).
16. Claims. The Company has not received any claim,
complaint, citation, report or other notice regarding any liabilities or
potential liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise), including any investigatory, remedial or corrective obligations,
arising under Environmental and Safety Requirements.
17. Storage Tanks, Asbestos, PCBs, Disposal Areas. To
the Company's Knowledge, no above-ground or underground storage tank, asbestos
in any form or condition, polychlorinated biphenyls (PCBs) above 50 parts per
million in electrical equipment owned by the Company, or landfill, surface or
other disposal areas exists at any property currently or formerly owned, leased
operated or occupied by the Company (although a comprehensive analysis for
asbestos containing material has not been undertaken).
18. Hazardous Substance Liabilities. To the Company's
Knowledge, the Company has not stored, disposed of, arranged for or permitted
the disposal of, transported, handled or released any substance, including
without limitation any hazardous substance, pollutant, contaminant or waste, or
owned or operated any facility or property (and no such facility or property is
contaminated by any such substance), in a fashion not otherwise in material
compliance with Environmental and Safety Requirements so as to give rise to
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise)
of the Company pursuant to the Environmental and Safety Requirements, including
without limitation any liability for response costs, corrective action, natural
resources damages, personal injury, property damage or attorneys fees.
19. Other Environmental Liabilities. To the Company's
Knowledge, no facts, events or conditions relating to the past or present
facilities, properties or operations of the Company will prevent, hinder or
limit continued compliance with Environmental and Safety Requirements, give
rise to any material investigatory, remedial or corrective obligations pursuant
to Environmental and Safety Requirements, or give rise to any other material
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise)
pursuant to Environmental and Safety Requirements, including any Environmental
and Safety Requirement relating to onsite or offsite releases or threatened
releases of hazardous or otherwise regulated materials, substances or wastes,
personal injury, property damage or natural resources damage.
20. Transaction-Triggered Requirements. To the Company's
Knowledge, neither the execution and delivery of this Agreement nor the
consummation of the Closing Transactions imposes any obligations for site
investigation or cleanup, or notification to or consent of a Governmental
Entity or any other Person, pursuant to any transaction-triggered"
Environmental and Safety Requirement.
21. Assumption of Liabilities. To the Company's
Knowledge, the Company has not, either expressly or by operation of law,
assumed or undertaken any liability or corrective or remedial obligation of any
other Person relating to Environmental and Safety Requirements.
22. Environmental Liens. To the Company's Knowledge, no
Environmental Lien has attached to any property owned, leased or operated by
the Company arising out of any action or omission of the Company or any other
Person.
23. Absence of Undisclosed Liabilities. As of the
Closing, the Company will not have any known obligations or liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise, or whether
due or to become due, regardless of when asserted) arising out of transactions
entered into at or prior to the Closing, or any action or inaction at or prior
to the Closing, or any state of facts existing at or prior to the Closing,
except (a) obligations under contracts or commitments described on Schedule
7.10A or under contracts or commitments which are not required to be disclosed
thereon (but not liabilities for breaches thereof), (b) liabilities reflected
on the Latest Balance Sheet, (c) liabilities which have arisen after the date
of the Latest Balance Sheet in the ordinary course of business (none of which
is a material and uninsured liability for breach of contract, breach of
warranty, tort, infringement, claim or lawsuit), and (d) obligations or
liabilities otherwise disclosed on Schedule 7.20.
<PAGE> 30
24. Disclosure. With respect to the Company, neither
this Agreement, nor any of the Schedules or Exhibits hereto, contains any
untrue statement of a material fact or, when considered as a whole, omits a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances in which they were made, not misleading.
25. Sierra Assets. Schedule 7.22A lists all of the
assets (having a value greater than $5,000) which have been or shall be
contributed to Sierra by the Company. Schedule 7.22B lists all other assets
(having a value greater than $5,000) of Sierra not described in Schedule 7.22A.
ARTICLE 1.
REPRESENTATIONS AND WARRANTIES OF PARENT
As a material inducement to the Company to enter into this
Agreement, Parent hereby makes the representations and warranties set forth in
this Article VIII.
26. Organization and Power. Parent (i) is a corporation
which is validly existing and in good standing (or has comparable active
status) under the laws of the State of Delaware, (ii) shall own as of the
Closing all of the outstanding capital stock of Acquisition, and (iii) is
qualified to do business in every jurisdiction in which the execution, delivery
and performance of its obligations under this Agreement require it to be so
qualified. Parent has full power and authority to execute, deliver and perform
its obligations under this Agreement and the other Transaction Documents to
which it is a party. Acquisition will be, at the time of Closing, (i) a
corporation which has been duly organized, is validly existing and is in active
status under the laws of the State of Wisconsin; and (ii) qualified to do
business in every jurisdiction which the performance of its obligations
described in this Agreement require it to be so qualified.
27. Authorization of Transaction. Parent has full power
and authority to execute and deliver this Agreement and all other Transaction
Documents to which it is a party and to perform its obligations hereunder and
thereunder. No other proceedings or actions on the part of Parent are
necessary to approve and authorize Parent's execution and delivery of this
Agreement or any other Transaction Documents to which it is a party or the
performance of Parent's obligations hereunder or thereunder. This Agreement
constitutes, and each of the other Transaction Documents to which Parent is a
party will when executed constitute, a valid and binding obligation of Parent,
enforceable in accordance with their terms, except as enforceability hereof or
thereof may be limited by bankruptcy, insolvency or other laws affecting
creditors' rights generally and limitations on the availability of equitable
remedies. Acquisition will have full power and authority to execute and
deliver any Transaction Documents to which it may be a party and to perform its
obligations thereunder. Any such Transaction Documents to which Acquisition
may be a party will when executed constitute a valid and binding obligation of
Acquisition, enforceable against Acquisition in accordance with its terms,
except as enforceability thereof may be limited by bankruptcy, insolvency or
other laws affecting creditors' rights generally and limitations on the
availability or equitable remedies.
28. Absence of Conflicts. Except under the HSR Act,
neither the execution, delivery and performance of this Agreement or any other
Transaction Document by Parent or Acquisition, as the case may be, nor the
consummation by Parent or Acquisition, as the case may be, of the transactions
contemplated hereby or thereby, (a) does or will (i) materially conflict with
or result in a breach of any of the provisions of, (ii) constitute a material
default under, (iii) result in the violation of, (iv) give any third party the
right to terminate or to accelerate any obligation under, or (v) require any
consent, order, approval, authorization or other action of, or any filing with
or notice to, any Governmental Entity or other Person, in each case under the
certificate of incorporation or by-laws of Parent or Acquisition, as the case
may be, or under the provisions of any indenture, mortgage, lease, loan
agreement or other agreement or instrument to which Parent or Acquisition is
bound or by
<PAGE> 31
which either Parent or Acquisition or any of their respective assets are
affected, or any Legal Requirement to which Parent or Acquisition or any of
their respective assets is subject, or (b) without limiting the foregoing,
require any Consent of any Governmental Entity or any other Person other than
as described on Schedule 8.3.
29. Brokerage. There are no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of Parent or Acquisition.
30. Litigation. There are no actions, suits,
proceedings, orders or investigations pending (or, to Parent's Knowledge,
threatened) against or affecting Parent or Acquisition at law or in equity, or
before or by any Governmental Entity, which could reasonably be expected to
adversely affect Parent's performance under this Agreement or the other
agreements contemplated hereby to which Parent is a party or the consummation
of the transactions contemplated hereby or thereby.
31. Disclosure. With respect to Parent and Acquisition,
neither this Agreement nor any of the Schedules or Exhibits hereto, contains
any untrue statement of a material fact or, when considered as a whole, omits a
material fact necessary to make the statements contained herein, in light of
the circumstances in which they were made, not misleading.
ARTICLE 1.
TERMINATION
32. Termination. This Agreement may be terminated at any
time prior to the Closing:
33. by mutual written agreement of the Company and
Parent;
34. by either the Company or Parent if (i) the
transactions contemplated by this Agreement have not been consummated by
February 15, 1997 (the Termination Date") or (ii) there has been a material
misrepresentation or breach on the part of the other party in the
representations and warranties set forth in this Agreement, or (iii) events
have occurred which have made it impossible to satisfy a condition precedent to
the terminating party's obligations to consummate the transactions contemplated
hereby (unless such terminating party's willful breach of this Agreement has
caused the condition to be unsatisfied);
35. by the Company, by written notice to Parent, on any
date determined for the Closing in accordance with Section 5.1(a) if each
condition set forth in Section 5.2 and Section 5.3 has been satisfied (or will
be satisfied by the delivery of documents or actions taken by the parties at
the Closing) or waived in writing on such date and Parent has nonetheless
refused to consummate the Closing Transactions; and
36. by Parent, by written notice to the Company, on any
date determined for the Closing in accordance with Section 5.1(a) if each
condition set forth in Section 5.2 and Section 5.3 has been satisfied (or will
be satisfied by the delivery of documents or actions taken by the parties at
the Closing) or waived in writing on such date and the Company has nonetheless
refused to consummate the Closing Transactions.
Notwithstanding the foregoing, (i) Parent may not rely on the failure of any
condition precedent set forth in Section 5.2 to be satisfied if such failure
was caused by Parent's failure to act in good faith or a breach of or failure
to perform any of its representations, warranties, covenants or other
obligations in accordance with the terms of this Agreement and (ii) the Company
may not rely on the failure of any condition precedent set forth in Section 5.3
to be satisfied if such failure was caused by the Company's failure to act in
good faith or a breach of or failure to perform any of its representations,
warranties, covenants or other obligations in accordance with the terms of this
Agreement.
<PAGE> 32
37. Effect of Termination. If this Agreement is
terminated as provided in Section 9.1, then this Agreement will forthwith
become void and there will be no liability on the part of any Party to any
other Party or any other Person in respect thereof; provided that
38. the obligations of the parties described in Sections
6.6(d), 9.2(d), 10.1, 10.2 and 10.5 will survive any such termination,
39. no such termination will relieve Parent from
liability for any misrepresentation or breach of any representation, warranty,
covenant or agreement set forth in this Agreement prior to such termination,
and
40. no such termination of this Agreement will relieve
the Company from liability for any misrepresentation or breach of any
representation, warranty, covenant or agreement set forth in this Agreement
prior to such termination.
41. if this Agreement is terminated pursuant to Section
9.1(c) or 9.1(d) hereof based on the failure of the condition specified in
Section 5.2(i) hereof, the Parent shall promptly pay to the Company all
Transaction Costs incurred by the Company, provided that the maximum amount
payable by the Parent pursuant to this Section 9.2(d) of this Agreement shall
be $200,000.00.
ARTICLE 1.
ADDITIONAL AGREEMENTS
42. Press Releases and Announcements. Except for any
public disclosure which any Party in good faith believes is required by any
Legal Requirement (in which case, if practicable, the disclosing Party will
give the other Parties an opportunity to review and comment upon such
disclosure before it is made):
43. prior to the Closing, no press releases related to
this Agreement or any Closing Transaction will be issued or made without the
mutual approval of the Company and Parent; and
44. after the Closing, the Investors will not make any
press release or other public announcement of or with respect to the Company,
the Surviving Corporation, this Agreement or any Closing Transaction without
the Surviving Corporation's consent.
45. Expenses. Except as otherwise expressly provided
herein, the Company, Parent and Acquisition each will pay all of their own
fees, costs and expenses (including fees, costs and expenses of legal counsel,
investment bankers, accountants, brokers or other representatives and
consultants and appraisal fees, costs and expenses) incurred in connection with
the preparation, negotiation, execution and delivery of this Agreement and the
other Transaction Documents, the performance of its obligations hereunder and
thereunder, and the consummation of the transactions contemplated hereby and
thereby.
46. Directors, Officers and Fiduciary Indemnification.
For a period of at least eight (8) years after the Effective Time, the Parent
will, and will cause the Surviving Corporation to, maintain in effect (which in
each case shall cover the same matters and be on terms (including without
limitation, limits of liability in insurance policies) no less favorable than
such articles of incorporation, bylaws or agreements and insurance policies of
the Company as are in effect at the Effective Time):
<PAGE> 33
47. bylaw provisions, articles of incorporation
provisions, or other agreements indemnifying present or former directors and
officers of the Company and its subsidiaries who serve or served as such at or
prior to the Effective Time and former, present or future fiduciaries of any
employee benefit plan of the Company who serve or served as such at or prior to
the Effective Time; and
48. policies of insurance: (i) insuring such officers
and directors of the Company and its subsidiaries against certain matters which
arose at or prior to the Effective Time; and (ii) insuring such fiduciaries
against certain matters which arose at or prior to, or which arise after, the
Effective Time.
49. Tax Treatment. The Parties agree that for federal
and state tax purposes they will treat the Merger as a sale of the Common Stock
by the Stockholders to the Parent.
50. Attorneys' Fees. In the event of litigation between
the Parties to enforce any provision of this Agreement, or for breach thereof,
the Party obtaining a final nonappealable judgment in its favor shall be
entitled to an award of its reasonable attorneys' fees and other expenses
incurred in prosecuting or defending such action, as the case may be.
51. Specific Performance. The Parties agree that the
assets and business of the Company as a going concern constitute unique
property. There is no adequate remedy at law for the damage which any Party
might sustain for failure of the other Parties to consummate the transactions
contemplated by this Agreement, and accordingly, each Party shall be entitled,
at its option, to the remedy of specific performance to enforce the
consummation of the transactions described in this Agreement.
52. Severance Policy. Any Person who is an employee of
the Company immediately prior to the Effective Time and whose employment with
the Surviving Corporation is terminated by the Surviving Corporation on or
prior to December 31, 1997 shall receive severance benefits from the Surviving
Corporation which shall be not less than those calculated in accordance with
the policies of the Company as in effect on December 1, 1996 and described in
the Schedules attached to this Agreement.
ARTICLE 1.
MISCELLANEOUS
53. Non-Survival of Representations and Warranties. The
representations and warranties made in this Agreement shall terminate at the
Effective Time and shall have no further force or effect, and shall not be
relied upon by any person, in any manner or for any reason, after the Effective
Time and the Parties shall have no liability or obligation of any kind with
respect to such representations and warranties from and after the Effective
Time.
54. Amendment and Waiver. This Agreement may only be
amended if such amendment is set forth in writing executed by the Company, the
Parent, and the Surviving Corporation (if so existing at such time) before or
after the Approval Date, but after the Approval Date, no amendment may be made
which materially adversely affects the Stockholders without prior approval of
the requisite Stockholders. No waiver of any provision of this Agreement shall
be binding unless such waiver is in writing and signed by the party against
whom such waiver is to be enforced. No failure by any Party to insist upon the
strict performance of any covenant, duty, agreement or condition of this
Agreement or to exercise any right or remedy consequent upon a breach thereof
will constitute a waiver of any such breach or any other covenant, duty,
agreement or condition.
55. Notices. All notices, demands and other
communications given or delivered under this Agreement will be in writing and
will be deemed to have been given when personally delivered or delivered by
express courier service or telephonic facsimile transmission. Notices, demands
and communications
<PAGE> 34
to the Company, Parent or Surviving Corporation will, unless another address is
specified in writing, be sent to the address indicated below:
to Company prior to Closing:
Shade/Allied Inc.
P.O. Box 19730
Green Bay, WI 54307-9730
Attention: Robert M. Wilson
Fax No. (414) 436-2365
with a copy (which copy will
not constitute notice to Company) to:
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, WI 53202-4497
Attention: Patrick M. Ryan
Fax. No.: (414) 271-3552
to the Parent and the Surviving Corporation:
American Pad & Paper Company of Delaware, Inc.
17304 Preston Road, Suite 700
Dallas, TX 75252
Attention: Kevin W. McAleer
Fax No.: (972) 733-6260
with copies (which copies will not constitute
notice to Parent and Surviving Corporation) to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Attention: James L. Learner
Fax No.: (312) 861-2200
56. Binding Agreement; Assignment. This Agreement and
all of the provisions hereof will be binding upon and inure to the benefit of
the parties and their respective successors and permitted assigns; provided
that
(i) prior to the Effective Time, neither this Agreement
nor any of the rights, interests or obligations
hereunder may be assigned by the Company without the
prior written consent of Parent (which consent will
not be unreasonably withheld) and
(ii) without the prior written consent of the Company
(which consent will not be unreasonably withheld),
neither this Agreement nor any
<PAGE> 35
of the rights, interests or obligations hereunder may
be assigned by Parent prior to the Closing; provided
that, Parent may assign its rights under this
Agreement and any of the provisions hereof (but not
its obligations) to any affiliate of Parent
(including, without limitation, Acquisition) or to
any lenders providing financing to Parent (or their
permitted assigns) without the consent of the
Company.
57. Severability. Whenever possible, each provision of
this Agreement will be interpreted in such a manner as to be effective and
valid under applicable law, but if any provision of this Agreement is held to
be prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provisions or the remaining provisions of
this Agreement.
58. No Strict Construction. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent. In the event an ambiguity or question of intent or
interpretation arises, this Agreement will be construed as if drafted jointly
by the parties, and no presumption or burden of proof will arise favoring or
disfavoring any Person by virtue of the authorship of any of the provisions of
this Agreement.
59. Captions. The captions used in this Agreement are
for convenience of reference only and do not constitute a part of this
Agreement and will not be deemed to limit, characterize or in any way affect
any provision of this Agreement, and all provisions of this Agreement will be
enforced and construed as if no caption had been used in this Agreement.
60. Entire Agreement. This Agreement and the documents
referred to herein contain the entire agreement between the parties and
supersede any prior understandings, agreements or representations by or between
the parties, written or oral, which may have related to the subject matter
hereof in any way.
61. Counterparts. This Agreement may be executed in one
or more counterparts, each of which will be deemed an original but all of which
taken together will constitute one and the same instrument.
62. Governing Law. ALL QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL
BE GOVERNED BY THE INTERNAL LAW OF THE STATE OF WISCONSIN, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF
THE STATE OF WISCONSIN OR ANY OTHER JURISDICTIONS) THAT WOULD CAUSE THE
APPLICATION OF THE LAWS OF ANY JURISDICTIONS OTHER THAN THE STATE OF WISCONSIN.
63. Parties in Interest. Nothing in this Agreement,
express or implied, is intended to confer on any Person other than the parties
and their respective successors and assigns any rights or remedies under or by
virtue of this Agreement, provided that the provisions of Sections 10.3 and
10.7 of this Agreement may be enforced by the Company, the Stockholders or any
affected director, officer, fiduciary or employee of the Company or of the
Surviving Corporation.
64. Other Definitional Provisions. The terms hereof,"
herein" and hereunder" and terms of similar import will refer to this
Agreement as a whole and not to any particular provision of this Agreement.
Section, clause, Exhibit and Schedule references contained in this Agreement
are references to Sections, clauses, Exhibits and Schedules in or attached to
this Agreement, unless otherwise specified. Each defined term used in this
Agreement has a comparable meaning when used in its plural or singular form.
Each gender-specific term used in this Agreement has a comparable meaning
whether used in a masculine, feminine or
<PAGE> 36
gender-neutral form. Whenever the term including" is used in this Agreement
(whether or not that term is followed by the phrase but not limited to" or
without limitation" or words of similar effect) in connection with a listing of
items within a particular classification, that listing will be interpreted to
be illustrative only and will not be interpreted as a limitation on, or an
exclusive listing of, the items within that classification. Each reference in
this Agreement to any Legal Requirement will be deemed to include such Legal
Requirement as it hereafter may be amended, supplemented or modified from time
to time and any successor thereto, unless such treatment would be contrary to
the express terms of this Agreement. Any term used but not defined in this
Agreement shall have the meaning given to such term in Exhibit A to this
Agreement, which Exhibit A is hereby incorporated herein by reference.
* * * *
<PAGE> 37
IN WITNESS WHEREOF, the parties have executed this Agreement
and Plan of Merger as of the date first written above.
SHADE/ALLIED INC.
-------------------------------------
Harold L. Ellsworth
President and Chief Executive Officer
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
-------------------------------------
Kevin W. McAleer
Chief Financial Officer
<PAGE> 38
Exhibit A
DEFINED TERMS
As used in the Agreement and Plan of Merger to which this
Exhibit A is attached, the following terms will have the following respective
meanings:
"Common Stock" means the Company's common stock, par value
$.01 per share.
"Consent" means any consent, order, approval, authorization or
other action of, or any filing with or notice to or other action with respect
to, any Governmental Entity or any other Person which is required for any of
the execution, delivery or performance of this Agreement or any other
Transaction Document, the consummation of any Closing Transaction or other
transaction contemplated hereby or thereby, or the conduct of the business or
operation of the Company after the Effective Time, whether such requirement
arises pursuant to any Legal Requirement or Contract, including any of the
foregoing which is required in order to prevent a breach of or a default under
or a termination or modification of any Contract, which right of breach,
default, termination or modification results from the consummation of the
Closing Transactions.
"Contract" means any oral or written agreement, instrument,
document, lease, employee benefit or welfare plan or other business or
commercial arrangement (in each case, including any extension, renewal,
amendment or other modification thereof) to which the Company is a party or by
which it is bound or to which it is subject or which pertains to the business
or properties of the Company.
"Environmental and Safety Requirements" means all Legal
Requirements concerning public health and safety, worker health and safety, or
pollution or protection of the environment, including all those relating to the
presence, use, production, generation, handling, transport, treatment, storage,
disposal, distribution, labeling, testing, processing, discharge, release,
threatened release, control, or cleanup of any hazardous or otherwise regulated
materials, substances or wastes, chemical substances or mixtures, pesticides,
pollutants, contaminants, toxic chemicals, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation.
"Environmental Lien" means any Lien, either recorded or
unrecorded, in favor of any Governmental Entity and relating to any liability
arising under Environmental and Safety Requirements.
"Excludable Contract" means any customer or supplier purchase
order and any other Contract entered into in the ordinary course of business
with a Person who is unrelated to the Company or any Insider and under which
the Company has monetary or in kind obligations which in the aggregate do not
exceed $10,000 (or equivalent value) so long as the termination of such
Contract could not reasonably be expected to have a Material Adverse Effect.
<PAGE> 39
"GAAP" means generally accepted accounting principles applied
in a manner consistent with those principles applied in preparing the March 31,
1996 audited balance sheet of the Company.
"Governmental Entity" means any government, agency,
governmental department, commission, board, bureau, court, arbitration panel or
instrumentality of the United States of America or any state or other political
subdivision thereof (whether now or hereafter constituted and/or existing) and
any entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Insider" means any officer or director (or similar official)
or Stockholder of the Company, any affiliate or natural or adoptive member of
the immediate family of any of the foregoing Persons, or any Person in which
any of the foregoing Persons directly or indirectly owns any material
beneficial interest. The immediate family" of any individual means such
individual's (and such individual's present or former spouse's) grandparents,
parents, spouse, siblings, children and grandchildren.
"Knowledge" (and any derivation thereof, whether or not
capitalized) means only the current, actual knowledge and awareness (and shall
not include any deemed or constructive knowledge or awareness) of the
individuals specified in clause (i) or (ii) below, as the case may be, (i) in
the case of Acquisition and the Parent, Charles G. Hanson, III, Russell M.
Gard and Gregory M. Benson, and (ii) in the case of the Company, Harold L.
Ellsworth, James Haggerty, Robert E. Krueger, Robert Rupp, Pamela Swanson,
Timothy Vanness, Robert M. Wilson and Glen S. Yurjevich.
"Leasehold Improvements" means all buildings, fixtures and
other improvements located on each Leased Real Property which are owned by the
Company under the terms and conditions of the Lease for such Leased Real
Property.
"Leased Real Property" means all real property for which the
Company has the right of use or occupancy pursuant to any leasehold,
subleasehold, license, concession or other similar real property interest which
are held by the Company.
"Legal Requirement" means all federal, state, foreign and
local laws, statutes, codes, rules, regulations, ordinances, judgments, orders,
decrees and the like of any Governmental Entity, including common law.
"Lien" means any mortgage, pledge, hypothecation, lien
(statutory or otherwise), preference, priority, security agreement, easement,
covenant, restriction or other encumbrance of any kind or nature whatsoever
(including any conditional sale or other title retention agreement and any
lease having substantially the same effect as any of the foregoing and any
assignment or deposit arrangement in the nature of a security device).
"Mandatory Consent" means any Consent listed on Schedule 7.4
and identified with an asterisk.
<PAGE> 40
"Material Adverse Effect" means a material adverse effect on:
(i) business, operations, financial condition, prospects or results of
operations of the Company, taken as a whole, other than any such matters that
may arise as a result of the transactions described in this Agreement or the
announcement of the transactions described in this Agreement; or (ii) on the
ability of Stockholders and the Company to perform their material obligations
under this Agreement or any other Transaction Document.
"Options" means outstanding options to acquire Common Stock.
"Owned Real Property" means all land and all buildings,
fixtures and other improvements located thereon (including, without limitation,
all electrical, mechanical, plumbing and other building systems; fire
protection, security and surveillance systems; telecommunications, computer,
wiring and cable installations; irrigation and other water distribution
systems; and all landscaping), and all easements, rights of way, tenements,
hereditaments, appurtenances, privileges and other rights with respect thereto
which are owned by the Company.
"Parties" means Parent and the Company
"Permitted Liens" means (i) Liens for Taxes, assessments or
government charges or levies not yet delinquent, (ii) statutory and contractual
Liens granted by the Company to any landlord, lessor or licensor, (iii) Liens
reflected in the Financial Statements, (iv) those Liens reflected on Schedule
7.8H as of Closing and (v) with respect to any Real Property, in addition to
(i) - (iv), (A) zoning, entitlement, building and other land use and similar
laws or regulations imposed by any Governmental Entity having jurisdiction over
such Real Property which are not violated by the current use, occupancy or
operation thereof and any agreements entered into with respect to the same but
only to the extent copies of such agreements have been provided to Parent, (B)
easements, covenants, conditions, restrictions and other similar matters of
record affecting title to the Real Property which would not impair the use or
occupancy of such Real Property in the operation of the Company's business and
(C) such other Liens as may be designated on Schedule 7.8H.
"Person" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization or any Governmental
Entity.
"Proprietary Rights" means all of the following items owned
by, issued to or licensed to, the Company, along with all income, royalties,
damages and payments due or payable at the Closing or thereafter, including
damages and payments for past, present or future infringements or
misappropriations thereof, the right to sue and recover for past infringements
or misappropriations thereof and any and all corresponding rights that, now or
hereafter, may be secured throughout the world: patents, patent applications,
patent disclosures and inventions (whether or not patentable and whether or not
reduced to practice) and any reissue, continuation, continuation-in-part,
division, revision, extension or reexamination thereof; trademarks, service
marks, trade dress, logos, trade names and corporate names together with all
goodwill associated therewith, copyrights registered or unregistered and
copyrightable works; mask works; and all registrations, applications and
renewals for any of the foregoing; trade secrets and confidential information
(including ideas, know-how, research and development information, drawings,
<PAGE> 41
specifications, designs, plans, proposals, technical data, financial, business
and marketing plans, and customer and supplier lists and related information if
known to the Company); computer software and software systems (including data,
databases and related documentation); other proprietary rights; licenses or
other agreements to or from third parties regarding the foregoing; and all
copies and tangible embodiments of the foregoing (in whatever form or medium),
in each case including the items set forth on Schedule 7.11A.
"Stockholders" shall mean all holders of Common Stock,
Preferred Stock, Options and Warrants.
"Tax" (and, with correlative meaning, Taxes", Taxable" and
Taxing") means any (A) federal, state, local or foreign income, gross receipts,
franchise, estimated, alternative minimum, add-on minimum, sales, use,
transfer, registration, value added, excise, natural resources, severance,
stamp, occupation, premium, windfall profits, environmental (including under
Section 59A of the Tax Code), customs, duties, real property, real property
gains, personal property, capital stock, social security, unemployment,
disability, payroll, license, employee or other tax of any kind whatsoever,
including any interest, penalties or additions to tax or additional amounts in
respect of the foregoing; (B) liability of any corporation for the payment of
any amounts of the type described in clause (A) arising as a result of being
(or ceasing to be) a member of any affiliated group" (as that term is defined
in Section 1504(a) of the Tax Code) (or being included in any Tax Return
relating thereto); and (C) liability for the payment of any amounts of the type
described in clause (A) or (B) as a result of any express or implied obligation
to indemnify or otherwise assume or succeed to the liability of any other
Person.
"Tax Code" means the Internal Revenue Code of 1986, as amended
(including, where applicable, the Internal Revenue Code of 1954, as amended).
"Tax Return" means any return, declaration, report, claim for
refund, information return or other document (including any related or
supporting schedules, statements or information) filed or required to be filed
in connection with the determination, assessment or collection of Taxes of any
Person or the administration of any Legal Requirement relating to any Taxes.
"Transaction Documents" means the agreements and instruments
delivered pursuant hereto or thereto.
"Warrants" means outstanding warrants to acquire Common Stock.
<PAGE> 42
Exhibit B
CERTIFICATE OF MERGER
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANTS
<TABLE>
<CAPTION>
STATE OF
DESCRIPTION INCORPORATION
----------- -------------
<S> <C>
Subsidiary of American Pad & Paper Company
(Registrant)
WR Acquisition, Inc. Delaware
Subsidiary of WR Acquisition, Inc. (not a Registrant)
American Pad & Paper Company of Delaware, Inc. Delaware
Subsidiaries of American Pad & Paper Company of
Delaware, Inc. Delaware
Shade/Allied, Inc. Wisconsin
Notepad Funding Corporation Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (N0. 333-17617) of American Pad & Paper Company of our
report dated February 18, 1997 appearing on page 43 of this Form 10-K.
PRICE WATERHOUSE LLP
Dallas, Texas
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000005588
<NAME> AMERICAN PAD & PAPER COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,290
<SECURITIES> 0
<RECEIVABLES> 59,270
<ALLOWANCES> (2,216)
<INVENTORY> 105,667
<CURRENT-ASSETS> 180,504
<PP&E> 147,394
<DEPRECIATION> (14,304)
<TOTAL-ASSETS> 509,417
<CURRENT-LIABILITIES> 102,647
<BONDS> 269,812
0
0
<COMMON> 274
<OTHER-SE> 104,325
<TOTAL-LIABILITY-AND-EQUITY> 509,417
<SALES> 583,859
<TOTAL-REVENUES> 583,859
<CGS> 458,449
<TOTAL-COSTS> 509,978
<OTHER-EXPENSES> 1,153
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,968
<INCOME-PRETAX> 32,066
<INCOME-TAX> 13,852
<INCOME-CONTINUING> 18,214
<DISCONTINUED> 0
<EXTRAORDINARY> 19,995
<CHANGES> 0
<NET-INCOME> (1,781)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000817647
<NAME> AMERICAN PAD & PAPER OF DELAWARE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,290
<SECURITIES> 0
<RECEIVABLES> 59,270
<ALLOWANCES> (2,216)
<INVENTORY> 105,667
<CURRENT-ASSETS> 180,504
<PP&E> 147,394
<DEPRECIATION> (14,304)
<TOTAL-ASSETS> 509,417
<CURRENT-LIABILITIES> 102,647
<BONDS> 269,812
0
0
<COMMON> 0
<OTHER-SE> 104,559
<TOTAL-LIABILITY-AND-EQUITY> 509,417
<SALES> 583,859
<TOTAL-REVENUES> 583,859
<CGS> 458,449
<TOTAL-COSTS> 509,978
<OTHER-EXPENSES> 1,153
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,968
<INCOME-PRETAX> 32,066
<INCOME-TAX> 13,852
<INCOME-CONTINUING> 18,214
<DISCONTINUED> 0
<EXTRAORDINARY> 19,995
<CHANGES> 0
<NET-INCOME> (1,781)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
