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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 1-11803
AMERICAN PAD & PAPER COMPANY
(Exact name of registrant as specified in its charter)
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<S> <C>
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)
</TABLE>
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 [ ]
As of May 11, 1998, American Pad & Paper Company has 27,724,045 shares of
Common Stock outstanding.
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AMERICAN PAD & PAPER COMPANY
QUARTERLY PERIOD ENDED MARCH 31, 1998
INDEX
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<CAPTION>
PAGE NO.
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PART I -- FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of March 31,
1998 (unaudited) and December 31, 1997................ 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997
(unaudited)........................................... 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997
(unaudited)........................................... 5
Notes to Condensed Consolidated Financial Statements
(unaudited)........................................... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 9
PART II -- OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security
Holders........................................... 14
Item 6 Exhibits and Reports on Form 8-K.................. 14
</TABLE>
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PART I -- FINANCIAL INFORMATION
AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Current assets:
Cash...................................................... $ 18,356 $ 4,855
Accounts receivable....................................... 64,206 74,203
Inventories............................................... 157,115 154,359
Income taxes receivable................................... 758 4,059
Prepaid expenses and other current assets................. 1,785 1,402
Deferred income taxes..................................... 14,272 11,992
--------- ---------
Total current assets.............................. 256,492 250,870
Property, plant and equipment............................... 154,057 151,390
Intangible assets........................................... 233,187 233,698
Other....................................................... 3,925 2,443
--------- ---------
Total assets...................................... $ 647,661 $ 638,401
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1,540 $ 1,538
Accounts payable.......................................... 45,492 56,356
Accrued expenses.......................................... 34,905 40,157
Income taxes payable...................................... -- --
--------- ---------
Total current liabilities......................... 81,937 98,051
Long-term debt.............................................. 426,085 398,577
Deferred income taxes....................................... 39,477 39,477
Other....................................................... 1,570 1,630
--------- ---------
Total liabilities................................. 549,069 537,735
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 150 shares authorized, no shares issued
and outstanding........................................ -- --
Common stock, voting, $0.01 par value, 75,000 shares
authorized, 27,724 and 27,436 issued and outstanding,
respectively........................................... 277 274
Additional paid-in capital................................ 301,287 301,279
Accumulated deficit....................................... (202,972) (200,887)
--------- ---------
Total stockholders' equity........................ 98,592 100,666
--------- ---------
Total liabilities and stockholders' equity........ $ 647,661 $ 638,401
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales................................................... $161,595 $149,834
Cost of sales............................................... 142,173 121,126
-------- --------
Gross profit.............................................. 19,422 28,708
Operating expenses:
Selling and marketing..................................... 4,689 4,589
General and administrative................................ 5,432 4,724
Losses on sales of accounts receivable.................... 747 762
Amortization of goodwill and intangible assets............ 1,587 1,386
Management fees and services.............................. 530 1,855
-------- --------
Income from operations...................................... 6,437 15,392
Other income (expense):
Interest.................................................. (10,743) (8,214)
Other income, net......................................... 51 73
-------- --------
Income (loss) before income taxes........................... (4,255) 7,251
Provision for (benefit from) income taxes................... (2,170) 3,263
-------- --------
Net income (loss)........................................... $ (2,085) $ 3,988
======== ========
Basic earnings per share.................................... $ (.08) $ 0.15
======== ========
Diluted earnings per share.................................. $ 0.14
========
Weighted average common shares outstanding
Basic..................................................... 27,695 27,436
Diluted................................................... N/A 29,390
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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AMERICAN PAD & PAPER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
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Cash flows from operating activities:
Net income (loss)......................................... $ (2,085) $ 3,988
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 3,293 3,153
Amortization of goodwill and intangible assets......... 1,587 1,386
Amortization of debt issuance costs.................... 849 626
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable.................................. 32,997 21,569
Refundable income taxes.............................. 3,301 --
Inventories.......................................... (2,757) (21,564)
Prepaid expenses and other........................... (383) (1,498)
Income tax asset, net................................ (2,280) 2,449
Accounts payable..................................... (10,864) (8,881)
Accrued expenses..................................... (5,252) (16,749)
Other assets......................................... (2,014) 1,955
Other liabilities.................................... (58) (362)
-------- --------
Net cash provided by (used in) operating
activities...................................... 16,334 (13,928)
-------- --------
Cash flows from investing activities:
Purchase of business, including acquisition costs......... -- (50,520)
Purchases of property and equipment....................... (5,980) (4,036)
Proceeds from sale of assets.............................. 19 2
-------- --------
Net cash used in investing activities............. (5,961) (54,554)
-------- --------
Cash flows from financing activities:
Borrowings on credit agreement and long-term debt......... 27,600 79,800
Repayment of long-term debt............................... (90) (66)
Repayment of accounts receivable financing................ (23,000) (13,000)
Debt issuance costs....................................... (1,393) --
Other..................................................... 11 551
-------- --------
Net cash provided by financing activities......... 3,128 67,285
-------- --------
Net increase (decrease) in cash............................. 13,501 (1,197)
Cash, beginning of period................................... 4,855 2,290
-------- --------
Cash, end of period......................................... $ 18,356 $ 1,093
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization and Basis of Presentation
American Pad & Paper Company (the "Company") is a holding company, which
conducts its operations through American Pad & Paper Company of Delaware, Inc.
("AP&P Delaware") and its wholly owned subsidiaries.
The financial statements of the Company present the accounts and operations
of the Company and its wholly owned subsidiaries. Additionally, the consolidated
financial statements include the accounts of Notepad Funding Corporation, a
special purpose corporation utilized in the accounts receivable facility. All
significant intercompany balances have been eliminated. Certain prior year
amounts have been reclassified for comparative purposes.
Business
The Company is among the larger 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
Interim Financial Information
The accompanying interim financial statements are unaudited. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted, although the Company believes the disclosures included herein are
adequate to make the information presented not misleading. These interim
financial statements should be read in conjunction with the Company's financial
statements for the year ended December 31, 1997.
The accompanying interim financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position at March 31, 1998 and the
results of its operations and its cash flows for the three month periods ended
March 31, 1998 and 1997. The results of operations for the interim periods
presented are not necessarily indicative of results to be expected for the full
fiscal year.
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 notes. There are no material
differences between the financial statements of the Company and of AP&P
Delaware. The composition of AP&P Delaware's stockholder's equity at March 31,
1998 consists of one hundred shares of $0.01 par value common stock, paid in
capital of $202,368 and an accumulated deficit of $103,776 and, in total, is
equal to the stockholders' equity of the Company.
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
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MARCH 31, DECEMBER 31,
1998 1997
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Accounts receivable -- trade, excluding $37,000 and $60,000,
respectively, which are sold as part of a $60,000 accounts
receivable financing facility............................. $61,559 $72,975
Accounts receivable -- other................................ 3,427 4,022
Less allowance for doubtful accounts and reserves for
customers deductions, returns and cash discounts.......... (780) (2,794)
------- -------
$64,206 $74,203
======= =======
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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Raw materials and semi-finished goods....................... $ 46,258 $ 54,285
Work in process............................................. 8,493 5,600
Finished goods.............................................. 108,663 100,480
-------- --------
163,414 160,365
LIFO reserve................................................ (6,299) (6,006)
-------- --------
$157,115 $154,359
======== ========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
Land........................................................ $ 7,047 $ 7,035
Buildings................................................... 32,336 30,308
Machinery and equipment..................................... 119,010 115,168
Office furniture and fixtures............................... 10,642 9,818
Construction in progress.................................... 14,554 15,322
-------- --------
183,589 177,651
Less accumulated depreciation and amortization.............. 29,532 26,261
-------- --------
$154,057 $151,390
======== ========
</TABLE>
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AMERICAN PAD & PAPER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
Goodwill.................................................... $189,861 $189,861
Intangible assets, principally tradenames................... 44,817 44,284
Debt issuance costs......................................... 19,761 18,369
-------- --------
254,439 252,514
Less accumulated amortization............................... 21,252 18,816
-------- --------
$233,187 $233,698
======== ========
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
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<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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Acquisition integration costs............................... $ 7,795 $ 8,534
Sales volume discounts...................................... 2,351 11,634
Salaries and wages.......................................... 9,739 4,242
Interest.................................................... 10,450 5,927
Other....................................................... 4,570 9,820
------- -------
$34,905 $40,157
======= =======
</TABLE>
7. RELATED PARTY TRANSACTION
Effective March 31, 1998, the Company loaned $1.0 million to its Interim
Chief Financial Officer ("Officer") on an interest bearing note receivable. This
note accrues interest at 5.89%, compounded annually, and is due on March 31,
2001. This note is secured by all of the shares of the Company's common stock
owned by this Officer and the options not yet exercised by this Officer.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is one of the largest manufacturers and marketers of nationally
branded and private label paper-based office products (excluding copy paper) in
the $60 billion to $70 billion North American office products industry. The
Company offers a broad assortment of products including writing pads, file
folders, envelopes, machine papers and other paper-based products. Through its
Ampad division, the Company is among the largest 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. Certain factors, which have affected, and
may affect prospectively, the operating results of the Company are discussed
below.
Strategic Acquisition. On February 11, 1997, the Company acquired
Shade/Allied, a national supplier of machine papers, principally continuous
computer forms. The purchase price of $50.7 million was financed with borrowings
under the Company's bank credit agreement. Both the Ampad and Williamhouse
divisions distribute Shade/Allied's products and the manufacturing plants are
integrated into the Ampad division. This acquisition provided the Company with a
more significant position in a fourth product category.
Purchase Accounting Effects. The Company's acquisitions have been accounted
for using the purchase accounting method. The acquisitions have currently
affected, and will prospectively affect, the Company's results of operations in
certain significant respects. The aggregate acquisition costs (including
assumption of debt) are allocated to the net assets acquired based on the fair
market value of such net assets. The allocations of the purchase price result in
an increase in the historical book value of certain assets such as property,
plant and equipment and intangible assets, including goodwill, which results in
incremental annual depreciation and amortization expense each year.
Raw Material. The Company's principal raw material is paper. Certain
commodity grades utilized by the Company have shown considerable price
volatility since 1992. From May 1997 through October 1997, all but one of the
key commodity grades of paper utilized by the Company increased in cost between
6% and 18%. Due to strategic customer considerations and competitive market
conditions, the Company did not begin to recover a significant portion of the
increases in paper costs affecting both its divisions until December 1997. The
Company continued to implement sales pricing increases during the first quarter
of 1998. Paper price volatility is expected to continue to have an effect on net
sales and cost of sales and there is no assurance that the Company will not be
materially affected by future fluctuations in the price of paper. 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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RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the three months ended March 31,
1998 and 1997. The Company's historical results of operations for each of these
periods are significantly affected by the results for Shade/Allied, which was
acquired on February 11, 1997.
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<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
INCOME STATEMENT DATA 1998 1997
--------------------- ------ ------
<S> <C> <C>
Net sales................................................... 100.0% 100.0%
===== =====
Gross profit................................................ 12.0% 19.2%
Selling and marketing....................................... (2.9) (3.1)
General and administrative.................................. (3.4) (3.2)
Losses on sales of accounts receivable...................... (.5) (.5)
Amortization of intangible assets........................... (1.0) (.9)
Management fees and services................................ (.3) (1.2)
----- -----
Income from operations...................................... 3.9 10.3
Interest expense, net....................................... (6.6) (5.5)
Other income................................................ -- --
----- -----
Income before income taxes.................................. (2.7) 4.8
Provision for income taxes.................................. (1.3) 2.2
----- -----
Net income (loss)........................................... (1.4)% 2.6%
===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net Sales for the three months ended March 31, 1998 increased by $11.8
million, or 7.9%, to $161.6 million from $149.8 million for the three months
ended March 31, 1997. Of this net sales increase, $3.3 million is attributable
to owning Shade/Allied for the full first quarter of 1998 versus only one and a
half months in the same period in 1997. The remaining $8.5 million of the net
sales increase is due to higher sales at Ampad's existing operations, primarily
sales to the fast growing customer channels, such as contract stationers, mass
market and superstores.
Gross Profit for the three months ended March 31, 1998 decreased by $9.3
million, or 32.4%, to $19.4 million from $28.7 million for the three months
ended March 31, 1997. Gross profit margin decreased to 12.0% for the three
months ended March 31, 1998 from 19.2% for the three months ended March 31,
1997. The decrease in gross profit margin is primarily attributable to a change
in product mix, particularly the ongoing sales of continuous forms at
unfavorable margins, a reduction in selling margins due to higher paper cost and
competitive pricing pressures, and higher unit production costs due to
underutilized capacity resulting from the Company's efforts to reduce its
inventory.
Selling and marketing expenses for the three months ended March 31, 1998
increased to $4.7 million from $4.6 million for the three months ended March 31,
1997, an increase of $0.1 million. However, selling and marketing expenses as a
percent of net sales decreased from 3.1% for the 1997 first quarter to 2.9% for
the 1998 first quarter, reflecting the successful efforts in 1998 to control
expenses.
General and administrative expenses for the three months ended March 31,
1998 increased to $5.4 million from $4.7 million for the three months ended
March 31, 1997, an increase of $0.7 million. Of this increase, $0.1 million is
attributable to owning Shade/Allied for the full first quarter of 1998 versus
only one and a half months in the same period in 1997 and the remainder is
attributable to increases in corporate expenses associated with the
centralization of certain functions in Dallas.
Losses on sales of accounts receivable for the three months ended March 31,
1998 decreased to $0.7 million from $0.8 million for the three months ended
March 31, 1997 due to a lower average level of
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accounts receivable sold to the third party trust in the first quarter of 1998,
partially offset by slightly higher average effective interest rates.
Goodwill and intangible asset amortization expense for the three months
ended March 31, 1998 increased to $1.6 million from $1.4 million for the three
months ended March 31, 1997, an increase of $0.2 million, due primarily to a
full quarter of amortization of goodwill associated with the acquisition of
Shade/Allied.
Management fees and services expense for the three months ended March 31,
1998 amounted to $0.5 million as compared to $1.9 million for the three months
ended March 31, 1997. The change in management fees is due primarily to a one
year non-recurring consulting agreement with the former president of Niagara,
which expired June 30, 1997.
Interest expense for the three months ended March 31, 1998 increased to
$10.7 million from $8.2 million for the three months ended March 31, 1997, an
increase of $2.5 million. Of this increase, $2.1 million of this increase is
attributable to increased debt levels, $0.2 million is attributable increased
interest rates and $0.2 million is attributable to an increase in financing fees
amortization expense associated with the amended credit agreement.
The income tax provision for the three month period ended March 31, 1998
reflects an effective tax rate of 51.0% versus an effective tax rate of 45.0%
for the three month period ended March 31, 1997. Due to the expected effect of
nondeductible expenses during 1998, primarily goodwill amortization, the Company
raised its effective income tax rate in 1998.
KNOWN TRENDS AND SEASONALITY
The Company does experience some seasonality in its business operations,
primarily during the third and fourth quarters of each year. During those
quarters, net sales tend to be higher than in the first and second quarters due
to higher product sales of back-to-school, seasonal greeting card and tax filing
products.
The Company's Ampad division sells primarily to fast growing customers such
as office products superstores, mass merchants and national contract stationers.
Such customers periodically adjust the levels of inventory in the retail
distribution channels, either in retail stores or in distribution centers. The
Company has determined that lower than expected sales will occur during the
quarters in which such adjustments are made. The Company is not able to predict
the future effect of such adjustments; however, it is likely that its retail
customers will continue to adjust inventory levels in future quarters.
The Company's gross profit is directly affected by, among other factors,
the mix of products sold. Based on the Company's current product categories, the
Company's gross profit will be negatively or positively affected as the actual
product sales mix changes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the three months ended March
31, 1998 was $16.3 million as compared to net cash used by operating activities
for the three months ended March 31, 1997 of $13.9 million. This increase is
primarily the net result of the following: (i) cash provided from net income of
$3.6 million after adjustment for non-cash expenses, (ii) a decrease in accounts
receivable of $33 million as a result of collection of year end receivable
balances and improving days sales outstanding in receivables, (iii) an increase
in inventories of $2.8 million, (iv) a reduction in accrued expenses of $5.3
million as annual customer volume rebates were paid early in 1998, (v) a
reduction of accounts payable of $10.8 million, (vi) receipt of tax refunds of
$3.3 million, and (vii) an increase in deferred tax assets and other assets of
$4.7 million.
Cash used in investing activities for the three months ended March 31, 1998
and 1997 was $6.0 million and $54.5 million, respectively. The first quarter
1998 use was due to the purchase of equipment. The first quarter 1997 use was
due to the Shade/Allied acquisition of $50.5 million and purchases of equipment
of $4.0 million.
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Net cash provided by financing activities during the first three months of
1998 and 1997 was $3.1 million and $67.3 million, respectively. The first
quarter 1998 cash provided primarily resulted from repayment of $23.0 million in
financing outstanding under the accounts receivable credit facility, payment of
financing fees of $1.4 million and borrowings of $27.6 million under the bank
credit agreement to finance: (i) repayment of the accounts receivable facility,
(ii) the purchases of equipment and (iii) its working capital needs, including
the accumulation of cash on the balance sheet. Assuming that the $18.4 million
of cash at March 31, 1998 was used to repay outstanding debt, the Company would
have reduced its balance sheet and off balance sheet debt by approximately $9.0
million. During the first quarter of 1997, the Company repaid $13.0 million in
notes outstanding under its accounts receivable credit facility and borrowed
$79.8 million to finance (i) such repayment, (ii) the acquisition of
Shade/Allied, (iii) the purchases of equipment and (iv) its working capital
needs.
In February 1998, the Company and its banking group agreed to an increase
in the size of the revolving credit agreement from $300.0 million to $330.0
million for a period of one year. After such time, the level of debt available
under such credit agreement will be reduced to $300.0 million. In December 1997,
February 1998 and April 1998, certain covenants in the credit agreement were
also modified at the end of 1997 and for a one year period ending in February
1999. Unless approved by the banking group, the Company will be restricted to
$15.0 million in net capital expenditures for 1998 and will be restricted from
any acquisitions. The interest cost incurred by the Company will vary each
quarter in 1998 depending on the Company's consolidated debt to EBITDA ratio at
the beginning of each quarter. The Company paid fees and expenses of $1.4
million to its banking group and lawyers as part of the amendments to the credit
agreement.
The ability of the Company to meet its debt service obligations and reduce
its total debt will be dependent upon the future performance of the Company and
its subsidiaries which, in turn, will be subject to general economic conditions
and to financial, business and other factors, including factors beyond the
Company's control. A portion of the consolidated debt of the Company bears
interest at floating rates; therefore, its financial condition is and will
continue to be affected by changes in prevailing interest rates. The Company has
entered into an interest rate protection agreement to minimize the impact from a
rise in interest rates.
Management believes that based on current levels of operations and
anticipated internal growth, cash flow from operations, together with other
available sources of funds including borrowings under the bank credit agreement
and the accounts receivable facility and available cash on hand at March 31,
1998 of $18.4 million, will be adequate for 1998 to make required payments of
principal and interest on the Company's indebtedness, to fund anticipated
capital expenditures, including anticipated capital expenditures of
approximately $9 million during the remainder of 1998, and to meet working
capital requirements.
The amount of debt available under the Company's current credit agreement
decreases by $30.0 million in February 1999 and by an additional $50.0 million
in July 1999. Based on the Company's current level of operating results and the
expected operating results in 1998 and 1999, the Company expects that the
reduction of $30.0 million in February 1999 will not have a significant effect
on its operations. However, the reduction in available borrowing of $50.0
million in mid-1999 may require the Company to explore other financing
alternatives, including but not limited to a refinancing of its bank debt,
raising new private or public debt, raising additional public equity capital,
reducing the level of capital expenditures, reducing operating costs and selling
certain assets. In the event that the Company is not able to successfully
complete the financing alternatives just described the Company and its banking
group would be required to negotiate revisions to the terms of the credit
agreement.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three months ended March 31, 1998 and 1997.
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form
10-Q to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any
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forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance, and underlying assumptions and
other statements which are other than statements of historical facts. From time
to time, the Company may publish or otherwise make available forward-looking
statements of this nature. All such subsequent forward-looking statements,
whether written or oral and whether made by or on behalf of the Company, are
also expressly qualified by these cautionary statements. Certain statements
contained herein are forward-looking statements and accordingly involve risks
and uncertainties, which could cause actual results, or outcomes to differ
materially from those expressed in the forward-looking statements. The
forward-looking statements contained herein are based on various assumptions,
many of which are based, in turn, upon further assumptions. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. In addition to the other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statements:
1. Changes in economic conditions, in particular those, which affect
the retail and wholesale office product markets.
2. Changes in the availability and/or price of paper, in particular if
increases in the price of paper are not passed along to the Company's
customers.
3. Changes in senior management or control of the Company.
4. Inability to obtain new customers or retain existing ones.
5. Significant changes in competitive factors, including product
pricing conditions, affecting the Company.
6. Governmental/regulatory actions and initiatives, including, those
affecting financings.
7. Significant changes from expectations in actual capital
expenditures and operating expenses.
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and other
investments.
9. Significant changes in rates of interest, inflation or taxes.
10. Significant changes in the Company's relationship with its
employees and the potential adverse effects if labor disputes or grievance
were to occur.
11. Changes in accounting principles and/or the application of such
principles to the Company.
The foregoing factors could affect the Company's actual results and could
cause the Company's actual results during 1998 and beyond to be materially
different from any anticipated results expressed in any forward-looking
statement made by or on behalf of the Company.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after date hereof.
13
<PAGE> 14
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on April 28, 1998. The
following matters were submitted to a vote of shareholders of the Company's
common stock with the results indicated below:
<TABLE>
<CAPTION>
WITHHELD, AGAINST
MATTER APPROVED OR ABSTAINED
------ ---------- -----------------
<S> <C> <C>
Election of Class I Directors -- Russell M. Gard,
Herbert M. Kohn, and Marc B. Walpow................... 23,012,364 1,981,633
Ratification of Price Waterhouse LLP as independent
auditors for the Company.............................. 24,947,250 46,747
</TABLE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
4.18 -- Fourth Amendment to the Credit Agreement, dated as of
April 6, 1998, 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.
27.1 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the first quarter of 1998 and
through the date of the filing of this report.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
American Pad & Paper Company has duly caused this report to be signed on May 11,
1998 on their behalf by the undersigned thereunto duly authorized.
<TABLE>
<S> <C>
/s/ GREGORY M. BENSON /s/ WILLIAM W. SOLOMON, JR.
- ----------------------------------------------------- -----------------------------------------------------
Gregory M. Benson William W. Solomon, Jr.
Director, Interim Chief Financial Officer Vice President -- Controller
Principal Financial Officer Principal Accounting Officer
</TABLE>
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
4.18 -- Fourth Amendment to the Credit Agreement, dated as of
April 6, 1998, 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.
27.1 -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 4.18
FOURTH AMENDMENT
FOURTH AMENDMENT (this "Amendment"), dated as of April 6, 1998, among
American Pad & Paper Company ("Holdings"), WR Acquisition, Inc. ("WR
Acquisition"), American Pad & Paper Company of Delaware, Inc. (the "Borrower"),
the lending institutions party to the Credit Agreement referred to below (each a
"Bank" and, collectively, the "Banks"), 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 (the "Co-Agents"), and Bankers Trust Company, as Agent (the
"Agent"). All capitalized terms used herein and not otherwise defined herein
shall have the respective meanings provided such terms in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, Holdings, WR Acquisition, the Borrower, the Banks, the
Co-Agents and the Agent are party to a Credit Agreement, dated as of July 8,
1996 (as amended, modified and supplemented prior to the date hereof, the
"Credit Agreement"); and
WHEREAS, the Borrower has requested that the Banks provide the
amendment provided for herein and the Banks have agreed to provide such
amendment on the terms and conditions set forth herein;
NOW, THEREFORE, it is agreed:
1. Section 8.10 of the Credit Agreement is hereby amended to read in
its entirety as follows:
8.10 Minimum Consolidated EBITDA. The Borrower will not permit
Consolidated EBITDA (i) for the fiscal quarter ending March 31, 1998, to be
less than $11,300,000, (ii) for the two fiscal quarters ending June 30,
1998 (taken as one accounting period), to be less than $28,000,000, (iii)
for the three fiscal quarters ending September 30, 1998 (taken as one
accounting period), to be less than $48,000,000, (iv) for the fiscal year
ending December 31, 1998, to be less than $72,000,000 and (v) for any Test
Period ending on or after March 31, 1999, to be less than $75,000,000.
2. In order to induce the Banks to enter into this Amendment, each
of Holdings, WR Acquisition and the Borrower hereby represents and warrants that
(i) no Default or Event of Default exists as of the Amendment Effective Date (as
defined below) after giving effect to this Amendment and (ii) on the Amendment
Effective Date, both before and after giving effect to this Amendment, all
representations and warranties contained in the Credit Agreement and in the
other Credit Documents are true and correct in all material respects.
3. This Amendment shall become effective on the date (the "Amendment
Effective Date") when the Required Banks, Holdings, WR Acquisition and the
Borrower shall have signed a counterpart hereof (whether the same or different
counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Agent at its Notice Office;
1
<PAGE> 2
4. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
5. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Agent.
THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK.
* * *
2
<PAGE> 3
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Amendment to be duly executed and delivered as of the date hereof.
AMERICAN PAD & PAPER COMPANY
By:
------------------------------------
Name:
Title:
WR ACQUISITION, INC.
By:
------------------------------------
Name:
Title:
AMERICAN PAD & PAPER COMPANY OF
DELAWARE, INC.
By:
------------------------------------
Name:
Title:
BANKERS TRUST COMPANY, individually
and as Agent
By:
------------------------------------
Name:
Title:
3
<PAGE> 4
ABN AMRO BANK
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
BANK LEUMI TRUST CO. OF NEW YORK
By:
------------------------------------
Name:
Title:
THE BANK OF NEW YORK
By:
------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By:
------------------------------------
Name:
Title:
4
<PAGE> 5
BANK OF SCOTLAND
By:
------------------------------------
Name:
Title:
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
By:
------------------------------------
Name:
Title:
BANK ONE TEXAS
By:
------------------------------------
Name:
Title:
BANQUE PARIBAS
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
5
<PAGE> 6
CHRISTIANIA BANK OG KREDITKASSE,
NEW YORK BRANCH
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
CIBC INC.
By:
------------------------------------
Name:
Title:
BANKBOSTON, N.A.
By:
------------------------------------
Name:
Title:
GUARANTY FEDERAL BANK, F.S.B.
By:
------------------------------------
Name:
Title:
6
<PAGE> 7
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By:
------------------------------------
Name:
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN, LIMITED, NEW YORK BRANCH
By:
------------------------------------
Name:
Title:
SANWA BUSINESS CREDIT
CORPORATION
By:
------------------------------------
Name:
Title:
SOCIETE GENERALE
By:
------------------------------------
Name:
Title:
7
<PAGE> 8
LEHMAN COMMERCIAL PAPER, INC.
By:
------------------------------------
Name:
Title:
8
<TABLE> <S> <C>
<ARTICLE> CT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<TOTAL-ASSETS> 647,661
0
0
<COMMON> 277
<OTHER-SE> 98,315
<TOTAL-LIABILITY-AND-EQUITY> 647,661
<TOTAL-REVENUES> 161,595
<INCOME-TAX> (2,170)
<INCOME-CONTINUING> (2,085)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,085)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> 0
</TABLE>
