FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
(972) 733-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
As of November 13 , 1998, American Pad & Paper Company had 27,724,045
shares of Common Stock outstanding.
===============================================================================
<PAGE>
AMERICAN PAD & PAPER COMPANY
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 (unaudited) and December 31, 1997....................... 3
Statements of Operations for the three and nine months ended
September 30, 1998 and 1997 (unaudited).................................... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (unaudited).................................... 5
Notes to Consolidated Financial Statements (unaudited)..................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................... 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk......... 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings.................................................. 20
Item 2 Changes in Securities and Use of Proceeds.......................... 20
Item 3 Defaults Upon Senior Securities.................................... 20
Item 4 Submission of Matters to a Vote of Security Holders................ 20
Item 5 Other Information.................................................. 20
Item 6 Exhibits and Reports on Form 8-K................................... 20
<PAGE>
PART 1 - FINANCIAL INFORMATION
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ------------
<S> <C>............ <C>..........
ASSETS
Current assets:
Cash ............................................$ 33,228 $ 4,855
Accounts receivable, net ........................ 74,203 49,001
Inventories, net ................................ 154,359 129,607
Refundable income taxes ......................... 4,059 751
Prepaid expenses and other current assets ....... 1,402 1,704
Deferred income taxes ........................... 11,992 2,000
-------------- ------------
Total current assets .......................... 250,870 216,291
Property, plant and equipment, net ................ 151,390 152,181
Intangible assets, net ............................ 233,698 187,080
Other ............................................. 2,443 2,729
------------- ------------
Total assets ................................. $ 558,281 $ 638,401
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............... $ 1,021 $ 1,538
Accounts payable ................................ 56,356 42,674
Accrued expenses ................................ 40,157 53,329
Restructuring reserve ........................... 5,741 --
------------- ------------
Total current liabilities .................... 98,051 102,765
Long-term debt .................................... 398,577 412,348
Deferred income taxes ............................. 39,477 12,337
Other ............................................. 1,630 1,568
------------- ------------
Total liabilities .............................. 537,735 529,018
------------- ------------
Commitments and contingencies Stockholders' equity:
Preferred stock, 150 shares authorized,
no shares issued and outstanding, respectively
-- --
Common stock, voting, $.01 par value, 75,000 shares authorized, 27,724 and
27,436 shares issued
and outstanding, respectively ................. 274 277
Additional paid-in capital ...................... 301,279 301,287
Accumulated deficit ............................. (272,301 (200,887)
------------- ------------
Total stockholders' equity .................... 100,666 29,263
------------- ------------
Total liabilities and stockholders' equity .... $ 558,281 $ 638,401
============= ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------- --------- --------- ---------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C>....... <C>...... <C>...... <C>......
Net sales .............................$ 174,160 $ 176,462 $ 482,479 $ 493,455
Cost of sales ......................... 156,462 150,204 441,962 407,282
--------- --------- --------- ---------
Gross profit ....................... 17,698 26,258 40,517 86,173
Operating expenses:
Selling and marketing .............. 5,569 5,529 15,762 15,624
General and administrative ......... 9,608 6,338 24,313 14,716
Restructuring charges .............. 5,741 -- 5,741 --
Loss on sales of accounts receivable 858 656 2,319 2,049
Amortization of intangible assets .. 1,327 1,677 4,522 4,547
Write-down of intangible assets .... -- -- 41,000 --
Management fees and services ....... 595 593 1,655 4,284
--------- --------- --------- ---------
Income (loss) from operations ......... (6,000) 11,465 (54,795) 44,953
Other income (expense):
Interest ........................... (11,929 (9,848 (33,735 (27,646)
Other income, net .................. 192 112 207 233
--------- --------- --------- ---------
Income (loss) before income taxes ..... (17,737) 1,729 (88,323) 17,540
Provision for (benefit from) income tax (4,343) 778 (16,907) 7,893
--------- --------- --------- ---------
Net income (loss) .....................$ (13,394)$ 951 $ (71,416)$ 9,647
========= ========= ========= =========
Earnings (loss) per share (Basic) .....$ (.48)$ 0.03 $ (2.58)$ 0.35
========= ========= ========= =========
Earnings (loss) per share (Diluted) ...$ (.48)$ 0.03 $ (2.58)$ 0.35
========= ========= ========= =========
Weighted average number of
common shares (Basic) 27,724 27,436 27,713 27,429
========= ========= ========= =========
Weighted average number of
common shares (Diluted)
27,724 29,389 27,713 29,382
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
---------- ----------
<S> <C>........ <C>.......
Cash flows from operating activities:
Net income (loss) ..................................... $ (71,416)$ 9,647
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes................................ (17,148) --
Depreciation ........................................ 10,241 9,167
Amortization of goodwill and intangible assets ...... 4,522 4,528
Write-down of intangible assets ..................... 41,000 --
Restructuring charges ............................... 5,741 --
Amortization of debt issuance costs ................. 3,589 1,900
Loss on sale of assets .............................. 143 --
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable .............................. 27,202 (9,649)
Refundable income taxes 3,308 --
Inventories ...................................... 24,752 (47,703)
Prepaid expenses and other ....................... (301) (798)
Income tax liability, net ........................ -- 6,363
Accounts payable ................................. (13,682) 15,637
Accrued expenses ................................. 13,173 (20,332)
Other assets ..................................... (743) 2,139
Other liabilities ................................ (62) (1,215)
---------- ----------
Net cash provided by (used in) operating activities..... 30,319 (30,316)
---------- ----------
Cash flows from investing activities:
Purchase of business, including acquisition costs ..... -- (50,666)
Purchases of property and equipment ................... (11,343) (15,448)
Proceeds from sale of assets .......................... 21 3,286
Other ................................................. 148 --
---------- ----------
Net cash used in investing activities .......... (11,174) (62,828)
---------- ----------
Cash flows from financing activities:
Net borrowings on credit agreement and long-term debt . 14,400 99,400
Repayment of long-term debt ........................... (1,146) (1,179)
Repayment of accounts receivable financing ............ (2,000) (7,000)
Debt issuance costs (2,037) --
Other 11 307
---------- ----------
Net cash provided by financing activities .......... 9,228 91,528
---------- ----------
Net increase (decrease) in cash ......................... 28,373 (1,616)
Cash, beginning of period ............................... 4,855 2,290
---------- ----------
Cash, end of period ..................................... $ 33,228 $ 674
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Amounts in thousands, except share and 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 consolidated 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 used in connection with an accounts
receivable based credit facility. All significant intercompany balances have
been eliminated. Certain prior year amounts have been reclassified for
comparative purposes. The financial statements as of September 30, 1997 and for
the three and nine months ended have been restated to reflect certain
adjustments which should have been reported for the three months ended September
30, 1997. With out giving effect to the restatement, basic and diluted earnings
per share would have been .06 and .06 respectively for the three months ended
September 30, 1997 and .38 and .36 respectively for the nine months ended
September 30, 1997.
Business
The Company is a leading manufacturer and marketer 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, and other paper-based office products) and Williamhouse (business
envelopes and seasonal greeting cards). 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 September 30, 1998 and the
results of its operations and its cash flows for the three month and nine month
periods ended September 30, 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 those of AP&P
Delaware. The composition of AP&P Delaware's stockholder's equity at September
30, 1998 consists of one hundred shares of $0.01 par value common stock, paid in
capital of $202,370 and an accumulated deficit of $173,107 and, in total, is
equal to the stockholders' equity of the Company.
6
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1998
(Amounts in thousands, except share and per share amounts)
2. Accounts Receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -----------
<S> <C>.......... <C>........
Accounts receivable -- trade, excluding $58,000 and
$60,000, respectively, which are sold as part of a
accounts receivable financing facility ............ $ 48,933 $ 72,975
Accounts receivable - other ......................... 2,791 4,022
Less allowance for doubtful accounts and reserves for
customers deductions, returns and cash discounts ... (2,723) (2,794)
------------- -----------
$ 49,001 $ 74,203
============= ===========
</TABLE>
3. Inventories
Inventories consist of the following:
<TABLE>
September 30, December 31,
1998 1997
------------ ------------
<S> <C>..........<C>..........
Raw materials and semi-finished goods ................$ 37,910 $ 54,285
Work in process ...................................... 6,463 5,600
Finished goods ....................................... 87,945 100,480
------------ ------------
132,318 160,365
LIFO reserve ......................................... (2,711) (6,006)
------------ ------------
....................................................$ 129,607 $ 154,359
============ ============
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
September 30, December 31,
1998 1997
------------ ------------
<S> <C>..........<C>..........
Land .................................................$ 7,058 $ 7,035
Buildings and leasehold improvements ................. 34,306 30,308
Machinery and equipment .............................. 129,621 115,168
Office furniture and fixtures ........................ 11,266 9,818
Construction in progress ............................. 6,349 15,322
------------ ------------
188,600 177,651
Less accumulated depreciation and amortization ....... 36,419 26,261
------------ ------------
$ 152,181 $ 151,390
============ ============
</TABLE>
7
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1998
(Amounts in thousands, except share and per share amounts)
5. Intangible Assets
Intangible assets consist of the following:
<TABLE>
September 30, December 31,
1998 1997
------------ ------------
<S> <C>..........<C>..........
Goodwill .............................................$ 148,460 $ 189,861
Intangible assets, principally tradenames ............ 43,665 44,284
Debt issuance costs .................................. 20,398 18,369
------------ ------------
212,523 252,514
Less accumulated amortization ........................ 25,443 18,816
------------ ------------
$ 187,080 $ 233,698
============ ============
</TABLE>
At June 30, 1998, the Company wrote-down certain long-lived assets, primarily
goodwill and tradenames associated with its forms business (principally
Shade/Allied) by $41,000 to their net realizable value, as a result of the
Company's decision to exit this business in its current form.
6. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
September 30, December 31,
1998 1997
------------ ------------
<S> <C>..........<C>..........
Acquisition integration costs ........................$ 6,522 $ 8,534
Sales volume discounts ............................... 16,861 11,634
Salaries and wages ................................... 5,927 4,242
Interest ............................................. 10,046 5,927
Other ................................................ 13,973 9,820
------------ ------------
$ 53,329 $ 40,157
============ ============
</TABLE>
7. Borrowings
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 was to be reduced to $300.0 million. In December
1997, February 1998 and April 1998, certain covenants in the credit agreement
were also modified as of the end of 1997 and for a period to end in February
1999. In June and July 1998, the Company obtained amendments to its credit
agreement waiving all defaults of its financial covenants through September 30,
1998. The Company paid fees and expenses of $1.7 million to its banking group
and lawyers in connection with the amendments to the credit agreement.
On September 30, 1998, the Company amended its credit agreement. The
seventh amendment eliminated all prior defaults and reinstated the original $300
million limit under the credit facility. The amendment allows the Company to
once again classify the underlying debt as long-term debt in the balance sheet.
The restated credit agreement provides for permanent reductions in availability
under the facility of $25 million in December 1998, $25 million in December
1999, and $50 million in July 2000. The amended facility matures in July 2001.
Fees of $.9 million were paid in conjunction with this amendment and will be
amortized over the remaining life of the debt, beginning October 1, 1998. The
interest rate incurred by the Company will vary each quarter through July 2001
depending on the Company's consolidated debt to EBITDA (earnings before
8
<PAGE>
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1998
(Amounts in thousands, except share and per share amounts)
interest, taxes, depreciation, amortization, and certain noncash charges, as
defined in the agreement) ratio at the beginning of each quarter. The new bank
credit amendment requires the Company to meet certain financial tests including
minimum EBITDA levels, minimum interest coverage ratios and maximum leverage
ratios. The Company posted a positive EBITDA performance of $6.1 million in the
quarter, as measured by the bank agreement. The new agreement limits capital
expenditures to $3.6 million for the remainder of 1998; $15.0 million for 1999;
$15.0 million for 2000; and $7.5 million for the first half of 2001.
8. Related Party Transactions
Effective March 31, 1998, the Company loaned $1.0 million to one of its
Directors on an interest bearing note receivable. This note accrues interest at
5.89%, compounded annually, and is due on March 31, 2001. Options not yet
exercised and 546,385 shares of the Company's common stock owned by this
Director secure this note.
9. Restructuring Charges
The third quarter restructuring charge of $5.7 million represents part
of the previously announced major rationalization plan of the Company's
manufacturing operations. The plan includes plant consolidations, equipment
rationalization moves, plant/product changes, warehouse consolidations, as well
as new distribution centers. The rationalization is expected to result in an 18%
reduction in manufacturing space and a net 7% reduction (250 employees,
primarily in plant manufacturing) in the workforce. Employee termination costs,
including severance and benefits totaled $1.8 million. Additionally, the
restructuring reserve includes closing costs to exit facilities of $2.5 million,
lease termination costs of $0.5 million, and property taxes after ceasing
operations of $0.9 million. As of September 30, 1998, there have been no charges
to the restructuring reserve.
Estimated additional costs of $7.5 million associated with the plan do
not qualify for current recognition but will be recorded primarily in 1999. Such
costs include equipment and inventory transfer costs, employee retention and
relocation, recruiting costs, interim warehouse costs, and other training and
efficiency costs. The major undertakings of the rationalization plan are
expected to be completed in 1999.
9
<PAGE>
AMERICAN PAD & PAPER COMPANY
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company is a leading manufacturer and marketer 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 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, 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 past and may affect future operating results of the
Company are discussed below.
Purchase Accounting Effects. The Company's acquisitions have been
accounted for using the purchase accounting method. 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 significantly in
cost. 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 price increases during the first half of
1998. Since October 1997, the key commodity grades of paper utilized by the
Company substantially decreased in cost. Recently, the competitive market
conditions have necessitated that sales pricing for certain products follow the
downward trend in raw material prices. 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.
Recent developments
Management Changes. The Company appointed James W. Swent, III as Executive
Vice President and Chief Financial Officer on June 2, respectively. Mr. Swent
was previously Chief Executive Officer of Cyrix Corporation, a manufacturer of
microprocessors for the PC industry, until its merger with National
Semiconductor. In addition, he has held operations and financial executive
positions with companies, including Northern Telecom, Rodime PLC and Memorex. On
July 8, 1998, the Company appointed Mr. Swent as Chief Executive Officer and a
member of its Board of Directors ("Board"). Mr. Swent replaced Charles G. Hanson
III who retired from his position as Chairman and Chief Executive Officer and
director of the Company. Also, Russel M. Gard stepped down as President and
Chief Operating Officer, but will continue his duties as Vice Chairman and a
member of the Board. On July 20, 1998, the Company appointed William L. Morgan
as Executive Vice President, Operations. Mr. Morgan has 35 years of
manufacturing experience ranging from entrepreneurial start-ups to large scale
multi-national corporations including Northern Telecom, Texas Instruments,
Memorex and Fujitsu. John H. Rodgers has been appointed to the position of
Senior Vice President, General Counsel and Secretary.
On October 14, 1998, the Company announced the resignation of Timothy
Needham, President and Chief Operating Officer.
Company Initiatives/Restructuring. Under the leadership of new
management, the Company has begun a review of all operations with the challenge
of rebuilding market share, reducing debt and returning the company to
profitability. On July 15, 1998, the Board approved the Company's exit from the
forms business in its current form which has produced unfavorable margins. As
part of the review process, the Company retained the management consulting firm
of Bain & Company and the investment banking firm of Goldman, Sachs & Company to
assist the Company in evaluating its current position in the marketplace and in
setting the Company's long term strategic direction. Goldman Sachs will explore
10
<PAGE>
AMERICAN PAD & PAPER COMPANY
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
external strategic and financial alternatives to maximize shareholder value.
Bain & Company will work closely with the Company's customers and suppliers to
evaluate core strengths and identify opportunities for improvement and assist
the Company to restructure manufacturing to best serve each of the Company's
markets.
The third quarter restructuring charge of $5.7 million represents part
of the previously announced major rationalization plan of the Company's
manufacturing operations. The plan includes plant consolidations, equipment
rationalization moves, plant/product changes, warehouse consolidations, as well
as new distribution centers. The rationalization is expected to result in an 18%
reduction in manufacturing space and a net 7% reduction (250 employees,
primarily in plant manufacturing) in the workforce. Employee termination costs,
including severance and benefits totaled $1.8 million. Additionally, the
restructuring reserve includes closing costs to exit facilities of $2.5 million,
lease termination costs of $0.5 million, and property taxes after ceasing
operations of $0.9 million. Estimated capital costs of $2.8 million and one-time
implementation costs of $7.5 million that do not qualify for current recognition
will be recorded primarily in 1999. Such costs include equipment and inventory
transfer costs, employee retention and relocation, recruiting costs, interim
warehouse costs, and other training and efficiency costs. The major undertakings
of the rationalization plan are expected to be completed in 1999. Upon full
implementation, the plan is expected to have a significant positive effect on
the Company's financial performance, resulting in an estimated annualized
increase in operating income of $10-12 million.
Covenant Violations/ Negotiation to Modify Agreement. On September 30,
1998, the Company amended its credit agreement. The seventh amendment eliminated
all prior defaults and reinstated the original $300 million limit under the
credit facility. The amendment allows the Company to once again classify the
underlying debt as long-term debt in the balance sheet. The restated credit
agreement provides for permanent reductions in availability under the facility
of $25 million in December 1998, $25 million in December 1999, and $50 million
in July 2000. The amended facility matures in July 2001. Fees of $.9 million
were paid in conjunction with this amendment and will be amortized over the
remaining life of the debt, beginning October 1, 1998. The interest rate
incurred by the Company will vary each quarter through July 2001 depending on
the Company's consolidated debt to EBITDA (earnings before interest, taxes,
depreciation, amortization, and certain noncash charges, as defined in the
agreement) ratio at the beginning of each quarter. The new bank credit amendment
requires the Company to meet certain financial tests including minimum EBITDA
levels, minimum interest coverage ratios and maximum leverage ratios. The
Company posted a positive EBITDA performance of $6.1 million in the quarter, as
measured by the bank agreement. The new agreement limits capital expenditures to
$3.6 million for the remainder of 1998; $15.0 million for 1999; $15.0 million
for 2000; and $7.5 million for the first half of 2001.
11
<PAGE>
AMERICAN PAD & PAPER COMPANY
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Results of Operations
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the three months and nine months
ended September 30, 1998 and 1997. The Company's historical results of
operations for each of these periods are significantly affected by the results
of Shade/Allied, which was acquired on February 11, 1997.
<TABLE>
Three months ended Nine months ended
September 30, September 30,
Income Statement Data ...... 1998 1997 1998 1997
------- ------- ------- -------
<S> <C>..... <C>..... <C>..... <C>.....
Net sales ............................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................... 89.8% 85.1% 91.6% 82.5%
------- ------- ------- -------
Gross profit ......................... 10.2% 14.9% 8.4% 17.5%
Operating expenses:
Selling and marketing ................ 3.2% 3.1% 3.3% 3.2%
General and administrative ........... 5.5% 3.6% 5.0% 3.0%
Loss on sale of accounts receivable .. 0.5% 0.4% 0.5% 0.4%
Amortization of intangible assets .... 0.8% 1.0% 0.9% 0.9%
Restructuring charges ................ 3.3% 0.0% 1.2% 0.0%
Write-down of intangible assets ...... 0.0% 0.0% 8.5% 0.0%
Management fees and services ......... 0.3% 0.3% 0.3% 0.9%
------- ------- ------- -------
Income (loss) from operations ....... -3.4% 6.5% -11.3% 9.1%
Other income (expense):
Interest ............................. -6.8% -5.6% -7.0% -5.6%
------- ------- ------- -------
Income (loss) before income taxes ....... -10.2% 0.9% -18.3% 3.5%
Provision for (benefit from) income taxes -2.5% 0.4% -3.5% 1.6%
------- ------- ------- -------
Net income (loss) ....................... -7.7% 0.5% -14.8% 1.9%
======= ======= ======= =======
</TABLE>
12
<PAGE>
AMERICAN PAD & PAPER COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Three months ended September 30, 1998 compared to three months ended September
30, 1997
Net Sales for the three months ended September 30, 1998 decreased by
$2.3 million, or 1.3%, to $174.2 million from $176.5 million for the three
months ended September 30, 1997. The net sales decrease is comprised of a $2.0
million increase in sales, principally due to favorable mix, partially offset by
an unfavorable volume variance. The increased sales were primarily in the
contract stationer and superstore channels. This increase was more than offset
by a $4.3 million increase in customer incentives. The increased customer
incentives are due to additional rebate programs caused by more competitive
pricing, changing product mix, higher volumes resulting in certain customers
reaching the next incentive tier level and write-offs related to the loss of
certain unprofitable forms business and a major customer.
Gross Profit for the three months ended September 30, 1998 decreased by
$8.6 million, or 32.7%, to $17.7 million from $26.3 million for the three months
ended September 30, 1997. Gross profit margin decreased to 10.2% for the three
months ended September 30, 1998 from 14.9% for the three months ended September
30,1997. The decrease in gross profit margin is primarily attributable to higher
unit production costs due to underutilized capacity resulting from the Company's
efforts to reduce its inventory, a reduction in selling margins due to
competitive pricing pressures, and the lower sales. In addition, the third
quarter of 1998 includes approximately $2.9 million of charges for additional
obsolescence reserves.
Selling and marketing expenses for the three months ended September 30,
1998 increased to $5.6 million, or 3.2% of sales from $5.5 million or 3.1% for
the three months ended September 30, 1997.
General and administrative expenses for the three months ended
September 30, 1998 increased to $9.6 million from $6.3 million for the three
months ended September 30, 1997, an increase of $3.3 million. This increase is
primarily attributable to $2.2 million of severance and consulting costs paid to
certain former executives of the company and $1.4 million of Bain & Company
consulting fees related to work on the Company's restructuring.
Restructuring charges for the three months ended September 30, 1998 of
$5.7 million represents part of the previously described major rationalization
plan of the Company's manufacturing operations.
Losses on sales of accounts receivable for the three months ended
September 30, 1998 increased to $0.9 million from $0.7 million for the three
months ended September 30, 1997 due primarily to a higher average level of
accounts receivable sold to the third party trust in the third quarter of 1998.
Goodwill and intangible asset amortization expense for the three months
ended September 30, 1998 decreased to $1.3 million from $1.7 million for the
three months ended September 30, 1997, an decrease of $0.4 million primarily due
to the write-off of the Shade/Allied goodwill in the second quarter of 1998.
Management fees and services expense for the three months ended September
30, 1998 amounted to $0.6 million as compared to $.6 million for the three
months ended September 30,1997.
Interest expense for the three months ended September 30, 1998
increased to $11.9 million from $9.8 million for the three months ended
September 30, 1997, an increase of $2.1 million. Of this increase, $0.2 million
is attributable to increased debt levels, $0.8 million is attributable to
increased interest rates and $1.1 million is attributable to the amortization of
fees paid in connection with amendments to the credit agreement obtained in
February and July 1998 and other costs.
The income tax provision for the three month period ended September 30,
1998 reflects an effective tax rate of 24.5% versus an effective tax rate of
45.0% for the three month period ended September 30, 1997. Due to the expected
lower operating results for 1998 and higher non-deductible expenses as a result
of the write-down of intangible assets associated with the decision to exit the
Shade/Allied continuous forms business, the Company lowered its effective income
tax rate in 1998.
13
<PAGE>
AMERICAN PAD & PAPER COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Nine months ended September 30, 1998 compared to nine months ended September 30,
1997
Net Sales for the nine months ended September 30, 1998 decreased by
$11.0 million, or 2.2%, to $482.5 million from $493.5 million for the nine
months ended September 30, 1997. This net sales decrease is comprised of a $6.2
million increase in sales offset by a $16.9 million increase in customer
incentives and a $0.3 million increase in cash discounts. The net sales increase
is primarily attributable to favorable mix and price variances and owning
Shade/Allied ($3.3 million) for nine months of 1998 versus only seven and a half
months in the same period in 1997, partially offset by unfavorable volumes
variance. The sales increase occurred primarily in the contract stationer and
mass market channels. The increased customer incentives are due to additional
rebate programs caused by more competitive pricing, changing product mix, higher
volumes resulting in certain customers reaching the next incentive tier level
and write-offs related to the loss of certain unprofitable forms business and a
major customer.
Gross Profit for the nine months ended September 30, 1998 decreased by
$45.7 million, or 53.0%, to $40.5 million from $86.2 million for the nine months
ended September 30, 1997. Gross profit margin decreased to 8.4% for the nine
months ended September 30, 1998 from 17.5% for the nine months ended September
30, 1997. The decrease in gross profit margin is primarily attributable to
higher unit production costs due to underutilized capacity resulting from the
Company's efforts to reduce its inventory, a reduction in selling margins due to
competitive pricing pressures, and the lower sales. In addition, the second
quarter of 1998 included approximately $7.5 million of charges resulting from
reevaluating certain inventories based on changes in current market conditions
and accruals for workers' compensation and property tax and the third quarter of
1998 includes approximately $2.9 million of charges for additional obsolescence
reserves.
Selling and marketing expenses for the nine months ended September 30,
1998 increased to $15.8 million, or 3.3% of sales, from $15.6 million, or 3.2%
of sales, for the nine months ended September 30, 1997. The increase of $0.2
million, or 0.1% of sales was comprised primarily of severance costs and
increased commissions related to the higher gross sales.
General and administrative expenses for the nine months ended September
30, 1998 increased to $24.3 million from $14.7 million for the nine months ended
September 30,1997, an increase of $9.6 million. This increase is primarily
attributable to $2.2 million of severance and consulting costs paid to certain
former executives of the company, $1.9 million of Bain & Company consulting fees
related to work on the Company's restructuring, the Company's second quarter
reevaluation of certain assets which resulted in $1.7 million of current charges
for additional allowance for doubtful accounts stemming from customer deductions
and one time severance and litigation costs of $1.3 million. Of the remainder of
the increase, $0.1 million is attributable to owning Shade/Allied for the full
first half of 1998 versus only four and a half months in the same period in 1997
and one time charges associated with centralizing certain functions in Dallas.
Restructuring charges for the nine months ended September 30, 1998 of
$5.7 million represents part of the previously announced major rationalization
plan of the Company's manufacturing operations.
Losses on sales of accounts receivable for the nine months ended
September 30, 1998 increased to $2.3 million from $2.0 million for the nine
months ended September 30, 1997 due primarily to a higher average level of
accounts receivable sold to the third party trust in 1998 and slightly higher
average interest rates.
Goodwill and intangible asset amortization expense for the nine months
ended September 30, 1998 of $4.5 million remained unchanged from the nine months
ended September 30, 1997.
Write-down of Intangible Assets expense of $41.0 million for the nine
months ended September 30,1998 reflects a write-off of goodwill and a write-down
of intangible assets associated with the Shade/Allied continuous forms business
resulting from the Company's decision to exit the forms business in its current
form.
14
<PAGE>
AMERICAN PAD & PAPER COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Management fees and services expense for the nine months ended
September 30, 1998 amounted to $1.7 million as compared to $4.3 million for the
nine months ended September 30, 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 nine months ended September 30,1998 increased
to $33.7 million from $27.6 million for the nine months ended September 30,
1997, an increase of $6.1 million. Of this increase, $3.0 million is
attributable to increased debt levels, $1.4 million is attributable to increased
interest rates and $1.7 million is attributable to amortization of fees paid in
connection with amendments to the credit agreement obtained in February and July
1998 and other costs.
The income tax provision for the nine month period ended September 30, 1998
reflects an effective tax rate of 19.1% versus an effective tax rate of 45.0%
for the nine month period ended September 30, 1997. Due to the expected lower
operating results for 1998 and higher non-deductible expenses as a result of the
write-down of intangible assets associated with the decision to exit the
Shade/Allied continuous forms business, the Company lowered its effective income
tax rate in 1998.
Known Trends and Seasonality
The Company experiences some seasonality in its business operations.
During the Company's third and fourth quarters, net sales tend to be higher than
in the first and second quarters due to 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 downward 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 nine months ended
September 30, 1998 was $30.3 million as compared to net cash used by operating
activities for the nine months ended September 30, 1997 of $30.3 million. This
increase is primarily the net result of the following: (i) cash used by the net
loss of $23.3 million after adjustment for non-cash expenses, (ii) a decrease in
accounts receivable of $27.2 million as a result of improving days sales
outstanding in receivables, (iii) a decrease in inventories of $24.8 million,
(iv) a reduction of accounts payable of $13.7 million, and (v) a net change in
all other assets and liabilities of $15.3 million.
Cash used in investing activities for the nine months ended September
30, 1998 and 1997 was $11.2 million and $62.8 million, respectively. The nine
months ended September 30, 1998 use was due to the purchase of equipment,
principally production equipment. The nine months ended September 30, 1997 use
was due to the Shade/Allied acquisition of $50.7 million and purchases of
equipment of $15.4 million.
Net cash provided by financing activities during the first nine months
of 1998 and 1997 was $9.2 million and $91.5 million, respectively. Net cash
provided during the nine months ended September 30, 1998 resulted from the net
of the repayment of $2.0 million in financing outstanding under the accounts
receivable credit facility, $1.1 million of repayment of long-term debt, payment
of fees in connection with amendments to the bank credit agreement of $2.0
million and borrowings of $14.4 million under the bank credit agreement. During
the nine months ended September 30, 1997, the Company borrowed $99.4 million to
finance (i) repayment of $7.0 million in financing outstanding under its
accounts receivable credit facility, (ii) the acquisition of Shade/Allied, (iii)
the purchases of equipment and (iv) its working capital needs.
15
<PAGE>
AMERICAN PAD & PAPER COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
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 cap to reduce the impact from a rise in interest rates.
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 was to be reduced to $300.0 million. In
December 1997, February 1998 and April 1998, certain covenants in the credit
agreement were also modified as of the end of 1997 and for a period to end in
February 1999. In June and July 1998, the Company obtained amendments to its
credit agreement waiving all defaults of it financial covenants through
September 30, 1998. The Company paid fees and expenses of $1.7 million to its
banking group and lawyers in connection with the amendments to the credit
agreement.
On September 30, 1998, the Company amended its credit agreement. The
seventh amendment eliminated all prior defaults and reinstated the original $300
million limit under the credit facility. The amendment allows the Company to
once again classify the underlying debt as long-term debt in the balance sheet.
The restated credit agreement provides for permanent reductions in availability
under the facility of $25 million in December 1998, $25 million in December
1999, and $50 million in July 2000. The amended facility matures in July 2001.
Fees of $.9 million were paid in conjunction with this amendment and will be
amortized over the remaining life of the debt, beginning October 1, 1998. The
interest rate incurred by the Company will vary each quarter through July 2001
depending on the Company's consolidated debt to EBITDA (earnings before
interest, taxes, depreciation, amortization, and certain noncash charges, as
defined in the agreement) ratio at the beginning of each quarter. The new bank
credit amendment requires the Company to meet certain financial tests including
minimum EBITDA levels, minimum interest coverage ratios and maximum leverage
ratios. The Company posted a positive EBITDA performance of $6.1 million in the
quarter, as measured by the bank agreement. The new agreement limits capital
expenditures to $3.6 million the remainder of 1998; $15.0 million for 1999;
$15.0 million for 2000; and $7.5 million for the first half of 2001.
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. In turn, such performance will be subject to
general economic conditions and to financial, business and other factors,
including factors beyond the Company's control.
Although there can be no assurance, management believes that, based upon
cash on hand of $33.2 million at September 30, 1998, estimates of current and
future operations, and other available sources of funds, including availability
under the bank credit agreement and the accounts receivable facility at
September 30, 1998 of $15.7 million, its finances will be adequate for 1998 and
1999 to make required payments of principal and interest on the Company's
indebtedness, to fund anticipated capital expenditures of approximately $3.6
million during the remainder of 1998, and to meet working capital requirements.
Year 2000 Issue
The Year 2000 issue is the result of date-sensitive devices, systems
and computer programs which were deployed using only two digits, rather than
four, to represent the applicable year. Any such technologies may recognize a
year containing "00" as the year 1900 rather than the year 2000. If not
corrected, many computer applications could fail or create erroneous results.
The Company recognizes the need to ensure that its operations and
relationships with vendors, customers and other parties will not be adversely
impacted by software or other processing errors arising from calculations using
the year 2000 and beyond. Like many companies, a significant number of the
Company's computer applications and systems require modification in order to
render these systems Year 2000 compliant. Failure by the Company to timely
resolve Year 2000 issues could result, in the worst case, in an inability of the
Company to manufacture and distribute its product to customers and process its
daily business for some period of time. However, based on the progress made to
16
<PAGE>
AMERICAN PAD & PAPER COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
date in its Year 2000 remediation plan, the Company believes the worst case
scenario is unlikely. Failure to address Year 2000 issues by one or more third
party service providers on whom the Company relies could also result, in a worst
case scenario, in some business interruption. The amount of lost revenues, if
any, resulting from a worst case scenario such as those examples described above
would depend on the period of time over which the failure goes uncorrected and
the breadth of its impact.
The Company has recently purchased a new certified Year 2000 compliant
version of its existing software to upgrade critical manufacturing,
distribution, and financial applications. The upgrade is scheduled for
completion and full installation by December 31, 1999. While the primary purpose
of the software upgrade is to modernize and improve the Company's operations, it
is also expected to resolve any Year 2000 issues in these critical computer
systems. Costs to acquire the software and related hardware are being
capitalized in accordance with SOP 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Costs to implement the upgrade
and other costs relating to Year 2000 readiness are being expensed as incurred
as required by generally accepted accounting principles. Through September 30,
1998, capital expenditures to purchase software and related hardware total $1.5
million and non-capital expenditures for Year 2000 readiness are approximately
$140,000. To complete Year 2000 readiness, $.5 million of capital expenditures
will be incurred to complete the purchase of the software and related hardware
and approximately $1.5 -2.0 million is expected to be spent through 1999 for
implementation of the upgraded software, consultant costs and other Year 2000
readiness costs. The Company will fund these expenditures through its operating
cash flow. At this time, other than the cost of implementing its new information
system, the Company does not believe that the costs of addressing the Year 2000
issue will be material. The Company has increased its overall information
systems budget to accommodate the implementation of the upgraded software and
Year 2000 compliance projects and has not delayed other critical information
systems work due to its Year 2000 efforts.
In addition to the software upgrade, a Company-wide committee of senior
executives representing all functional areas has been established to identify,
evaluate and initiate corrective actions in order to achieve Year 2000
readiness. The committee has completed the process of taking the relevant
inventory, assessing risk and assigning priorities to various tasks and
performing limited internal tests relative to the Company's critical functions.
The committee determined that the Company's primary hardware and operating
systems, which were installed in 1997, and the program supporting the Company's
electronic data interchange are already Year 2000 compliant. With regard to the
Company's manufacturing and other non-IT readiness for Year 2000, the Committee
has not identified any issues that would have a material, adverse impact on the
Company's operations' processes. The committee has developed contingency plans
for the Company's critical information system which primarily consist of making
its existing information system Year 2000 compliant in the event that the
software upgrade is not completed by the scheduled date. In addition,
contingency plans have included the development of manual intervention processes
for critical functions. The committee's expectation is that the remedial tasks
relative to the Company's critical functions will be completed by June 30, 1999
and that full integrated testing will be completed by December 31, 1999. In
addition, the committee has requested and received documentation from all key
customers, suppliers and other business partners that their organizations will
be ready for the year 2000. While the Company cannot warrant that all the
systems of our business partners will be Year 2000 compliant, based on currently
available information, the Company expects no business interruptions due to
non-compliance by any particular entity.
There can be no assurance that the Company will be able to complete the
installation of the upgraded software and all of the remedial tasks in the
required time frame, that unanticipated events will not occur, that the Company
will be able to identify all Year 2000 issues before the problems manifest
themselves, that third party systems will be Year 2000 compliant and that
Company's estimate of Year 2000 costs will not require revision if unanticipated
adverse developments occur. However, management believes the Company is taking
adequate action to address Year 2000 issues. Based on a current assessment of
risks relating to its Year 2000 readiness, the Company does not believe Year
2000 issues will materially affect future financial results or operating
performance.
17
<PAGE>
AMERICAN PAD & PAPER COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Inflation
The Company believes that inflation has not had a material impact on
its results of operations for the nine months ended September 30,1998 and 1997.
18
<PAGE>
AMERICAN PAD & PAPER COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Recently Issued Accounting Standards
The Accounting Standards Executive Committee (AcSEC) issued Statement
of Position (SOP) 98-5, which is effective for fiscal years commencing after
December 15, 1998. SOP 98-5, Reporting on the Costs of Start-up Activities,
prescribes that start-up costs, including organization costs, should be expensed
as incurred. The SOP states that initial application should be reported as a
cumulative effect of a change in accounting principle. The Company will adopt
this SOP for its fiscal year ending December 31, 1999. Assuming an effective tax
rate of 42.5% for the fiscal year ending December 31, 1999, the Company will
report a charge of $.4 million (net of tax benefit of $.3 million) in the first
quarter of 1999.
Forward-Looking Statements
The Company is including the following cautionary statement in this
Form 10-Q to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which
(including the Company's restructuring plan) 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 grievances were to occur.
11. Changes in accounting principles and/or the application of such principles
to the Company.
12. Timely resolution of Year 2000 issues by the Company and its customers and
suppliers.
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.
19
<PAGE>
AMERICAN PAD & PAPER COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk
As part of its Bank Credit Agreement, the Company was required to purchase an
interest rate cap of $100 million for a nominal rate. The premium paid for the
interest rate cap agreement is amortized as interest expense over the term of
the agreement. The amounts concerned are immaterial to both the financial
position and operations of the Company.
20
<PAGE>
AMERICAN PAD & PAPER COMPANY
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
As reported in the Company's Form 10-Q for the quarter ended June 30,
1998, between March 10, 1998 and April 11, 1998, three complaints were filed in
the United States District Court for the Northern District of Texas naming as
defendants the Company, certain of its officers and directors and certain of the
underwriters and other related entities involved in the Company's initial public
offering. The plaintiffs in the first two complaints purport to represent a
class of stockholders who acquired shares of the Company's common stock between
July 2, 1996 and December 17, 1997. The complaints seek unspecified damages and
other relief under the federal securities laws based on allegations that the
Company made omissions and misleading disclosures in public reports and press
releases and to securities analysts during 1996 and 1997 concerning the
Company's financial condition, its future business prospects and the impact of
various acquisitions. These two lawsuits were consolidated on July 2, 1998. The
third complaint was dismissed without prejudice by the plaintiffs on June 29,
1998. Motions to dismiss have been filed in the consolidated cases but briefing
will not be concluded until January 1999. Pending a ruling on the motions to
dismiss, all proceedings in the consolidated action have been stayed. To the
extent that the motions to dismiss are denied in whole or in part, the Company
believes that it has meritorious defenses to plaintiff's claims and intends to
vigorously defend the action.
ITEM 2 Changes in Securities and Use of Proceeds
During the period, in partial consideration for their agreement to
serve as employees and executive officers of the Company, three newly hired
executives were granted options, with effective dates of September 3, 1998 and
September 21, 1998 to purchase an aggregate of 900,000 shares of the Company's
common stock, par value $.01, at a weighted average price of approximately $2.05
per share. The above described transactions were exempt from registration under
the Securities Act pursuant to Section 4 (2) of the Securities Act as
transactions not involving any public offering.
ITEM 3 Defaults Upon Senior Securities
None
ITEM 4 Submission of Matters to a Vote of Security Holders
None
ITEM 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part hereof:
Exhibit No. Description of Exhibit
4.21 Seventh Amendment to the Credit Agreement, dated as of
September 30, 1998 among the Company, WR Acquisition, Inc., AP
& P Delaware, 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.
27.03 Financial Data Schedule
99.017 Press release on November 10, 1998 announced that the Company
will close its plant in Kosciusko, Mississippi.
21
<PAGE>
AMERICAN PAD & PAPER COMPANY
PART II OTHER INFORMATION
(continued)
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the third quarter
of 1998 and through the date of the filing of this report:
(1) Current Report on Form 8-K filed September 1,1998 relating to
the Company's August 17 and August 18, 1998 press releases. A
press release on August 17, 1998 announced the Company's first
step in its restructuring plan. A press release on August 18,
1998 announced the Company's appointment of John Hill to the
position of Vice President of the Ampad Division.
(2) Current Report on Form 8-K filed October 15, 1998 relating to
the Company's September 30, October 7, and October 14, 1998
press releases. A press release on September 30, 1998
announced that the Company's lending group amended the
original lending agreement. A press release on October 7, 1998
announced an update of the Company's restructuring plans. A
press release on October 14, 1998 announced the resignation of
Timothy Needham, President and Chief Operating Officer.
(3) Current Report on Form 8-K filed October 26, 1998 relating to
the Company's October 15 and October 16, 1998 press releases.
A press release on October 15, 1998 announced the Company's
third quarter and year-to-date results. A press release on
October 16, 1998 announced the Company's appointments of John
H. Rodgers to Senior Vice President, General Counsel and
Secretary, Mark S. Lipscomb to Vice President Corporate
Communications, Patrick D. "Dan" Lane to Treasurer, Robert D.
Dunn to Vice President, Corporate Development and Planning,
and Deborah A. Garrett to Vice President, Human Resources.
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 November 13,
1998 on their behalf by the undersigned thereunto duly authorized.
<TABLE>
<S> <C>
/s/ James W. Swent, III /s/ David N. Pilotte
- ---------------------------- ----------------------------------------
James W. Swent, III David N. Pilotte
Chief Executive Officer and Vice President and Corporate Controller
Chief Financial Officer Principal Accounting Officer
Principal Financial Officer
</TABLE>
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBT NO DESCRIPTION OF EXHIBIT
- ---------- -----------------------------------------------------------------
<C> ...... <S>
4.21 Seventh Amendment to the Credit Agreement, dated as of September
30, 1998 among the Company, WR Acquisition, Inc., AP & P Delaware,
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.
27.03 Financial Data Schedule
99.017 Press release on November 10, 1998 announced that the Company will
close its plant in Kosciusko, Mississippi.
</TABLE>
23
<PAGE>
Exhibit 4.21
SEVENTH AMENDMENT
SEVENTH AMENDMENT (this "Amendment"), dated as of September 30, 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");
WHEREAS, Holdings, WR Acquisition, the Borrower, the Banks, the Co-Agents and
the Agent are party to a number of amendments, modifications and waivers in
connection with the Credit Agreement, including without limitation the Third
Amendment, dated as of February 6, 1998 (the "Third Amendment"); and WHEREAS,
the Borrower has requested that the Banks provide the amendments, waivers,
consents and agreements provided for herein and the Banks have agreed to provide
such amendments, waivers, consents and agreements on the terms and conditions
set forth herein;
NOW, THEREFORE, it is agreed:
A. Amendments
1. Section 3.03(b) of the Credit Agreement is hereby amended to read in its
entirety as follows:
(b) In addition to any other mandatory commitment reductions pursuant to this
Section 3.03 (but subject to the last sentence of each of Section 3.03(c) and
Section 3.03(g)), the Total Revolving Loan Commitment shall be permanently
reduced on the dates set forth below by the amounts set forth opposite such
dates below:
Date Amount
December 31, 1998 $25,000,000
December 31, 1999 $25,000,000
July 8, 2000 $50,000,000
24
<PAGE>
Exhibit 4.21
2. Section 3.03(c) of the Credit Agreement is hereby amended to read in its
entirety as follows:
"(c) In addition to any other mandatory commitment reductions pursuant to this
Section 3.03, on the third Business Day after each date on or after the Initial
Borrowing Date on which Holdings or any of its Subsidiaries receives Cash
Proceeds from any Asset Sale (or, in the case of an Asset Sale in which payments
to Holdings or any of its Subsidiaries originate from outside the United States,
within five Business Days after the date of receipt of such Cash Proceeds), the
Total Revolving Loan Commitment shall be permanently reduced by an amount equal
to 100% of the Net Cash Proceeds from such Asset Sale. Each mandatory reduction
pursuant to this Section 3.03(c) shall be applied to reduce future scheduled
reductions pursuant to Section 3.03(b) as follows: (i) first, to reduce in full
the scheduled reduction on July 8, 2000, and (ii) second, in inverse order of
maturity."
3. Section 3.03(d) of the Credit Agreement is hereby amended by deleting the
first parenthetical phrase appearing therein and by inserting in lieu thereof
the following new parenthetical phrase:
"(other than Indebtedness permitted to be incurred pursuant to Section 8.04 as
in effect on the Effective Date, except for Indebtedness incurred under Section
8.04(p) the net cash proceeds of which will be required to be applied to reduce
the Total Revolving Loan Commitment pursuant to this Section 3.03(d))".
4. Section 3.03(e) of the Credit Agreement is hereby amended by deleting the
reference to "50%" contained therein and inserting "100%" in lieu thereof.
5. Section 3.03 of the Credit Agreement is hereby further amended by (a)
redesignating clauses (g) and (h) thereof as clauses (h) and (i), respectively,
and (b) inserting therein immediately following clause (f) thereof the following
new clause (g):
(g) In addition to any other mandatory commitment reductions pursuant to this
Section 3.03, on the 90th day following each fiscal year of Holdings (commencing
with the fiscal year ended December 31, 1999), the Total Revolving Loan
Commitment shall be permanently reduced by an amount equal to 100% of Excess
Cash Flow for such fiscal year. Each mandatory reduction pursuant to this
Section 3.03(g) shall be applied to reduce future scheduled reductions pursuant
to Section 3.03(b) in inverse order of maturity.
6. Section 8.02(d) of the Credit Agreement is hereby amended to read in its
entirety as follows:
(d) the Borrower and its Subsidiaries may sell assets, provided that (x) the
aggregate sale proceeds from all assets subject to such sales pursuant to this
clause (d) shall not exceed $10,000,000 in any fiscal year of the Borrower, (y)
each such asset sale is for at least 85% cash and at fair market value (as
determined in good faith by the Borrower) and (z) the Net Cash Proceeds
therefrom are applied to reduce the Total Revolving Loan Commitment as provided
in Section 3.03(c);.
25
<PAGE>
Exhibit 4.21
7. Section 8.02(e) of the Credit Agreement is hereby amended to read in its
entirety as follows:
"(e) the Borrower and its Subsidiaries may sell other assets, provided, that the
aggregate sale proceeds from all such asset sales pursuant to this clause (e)
are reinvested within one year following such sale in assets which, in the
reasonable judgment of the Borrower, are useful to the Borrower's business and
do not exceed $250,000 in any fiscal year of the Borrower;".
8. Section 8.02(q) of the Credit Agreement is hereby amended to read in its
entirety as follows:
(q) so long as no Default or Event of Default then exists or would result
therefrom, the Borrower and its Wholly-Owned Subsidiaries may acquire assets or
the capital stock of any Person (any such acquisition permitted by this clause
(q), a (Permitted Acquisition), provided, that(i)no such Permitted Acquisition
shall be consummated without the prior written consent of the Required Banks,
(ii) such Person (or the assets so acquired)was, immediately prior to such
acquisition, engaged(or used) primarily in the business permitted pursuant to
Section 8.01(a),(iii)if such acquisition is structured as a stock acquisition,
then either(A)the Person so acquired becomes a Wholly-Owned Subsidiary of the
Borrower or (B)such Person is merged with and into the Borrower or a
Wholly-Owned Subsidiary of the Borrower(with the Borrower or such Wholly-Owned
Subsidiary being the surviving corporation of such merger), and in any case, all
of the provisions of Section 8.15 have been complied with in respect of such
Person and (iv) any Liens or Indebtedness assumed or issued in connection with
such acquisition are otherwise permitted under Section 8.03 or 8.04, as the case
may be.
9. Section 8.02(u) of the Credit Agreement is hereby amended to read in its
entirety as follows:
"(u) the Permitted Sale-Leaseback Transactions shall be permitted so long as (i)
the Net Cash Proceeds therefrom are applied to reduce the Total Revolving Loan
Commitment as provided in Section 3.03(c) and (ii) the lease obligations created
thereby are otherwise permitted under this Agreement;".
10. Section 8.02 of the Credit Agreement is hereby further amended by (a)
deleting the word "and" appearing at the end of clause (x) thereof, (b) deleting
the period at the end of clause (y) thereof and inserting "; and" in lieu
thereof, and (c) inserting at the end thereof the following new clause (z):
"(z) the Borrower and its Subsidiaries may sell the assets listed on Annex X
hereto, in each case provided that (x) each such sale is for at least 85% cash
and at fair market value (as determined in good faith by the Borrower) and (y)
the Net Cash Proceeds therefrom are applied to reduce the Total Revolving Loan
Commitment as provided in Section 3.03(c)."
26
<PAGE>
Exhibit 4.21
11. Section 8.04(e) of the Credit Agreement is hereby amended by deleting clause
(ii) (B) contained therein in its entirety and inserting the following clause
(ii) (B) in lieu thereof:
"(B) during any fiscal year of the Borrower thereafter shall not exceed
$15,000,000;".
12. Section 8.04(o) of the Credit Agreement is hereby amended to read in its
entirety as follows:
(o) Indebtedness of Holdings incurred under Permitted Holdings PIK Securities,
provided that (i) such PermittedHoldings PIK Securities are issued in connection
with and asconsideration for a Permitted Acquisition and (ii) the aggregate
outstanding principal amount of Permitted Holdings PIK Securities constituting
Indebtedness, when added to the liquidation preference of Permitted Holdings PIK
Securities constituting preferred stock, shall not exceed $10,000,000 (plus the
amount of interest or accrued dividends, as the case may be, on such Permitted
Holdings PIK Securities paid in kind or through accretion); and". 13. Section
8.06(f) of the Credit Agreement is hereby amended by adding the following phrase
at the end thereof:
", provided, that no loan may be made pursuant to this clause (ii) after
September 15, 1998".
14. Section 8.06(i) of the Credit Agreement is hereby amended by deleting the
reference to "$2,500,000" contained therein and inserting "$500,000" in lieu
thereof.
15. Section 8.06(u) of the Credit Agreement is hereby amended by deleting the
reference to "$7,500,000" contained therein and by inserting in lieu thereof a
reference to "$250,000".
16. Section 8.07(ii) of the Credit Agreement is hereby amended to read in its
entirety as follows:
"(ii) Intentionally Omitted;".
17. Section 8.07(iii) of the Credit Agreement is hereby amended to read in its
entirety as follows:
"(iii) Intentionally Omitted;".
27
<PAGE>
Exhibit 4.21
18. Section 8.07(vi) of the Credit Agreement is hereby amended to read in its
entirety as follows:
"(vi) Intentionally Omitted; and".
19. Notwithstanding anything to the contrary contained in Section 8.08 of the
Credit Agreement, neither Holdings nor any of its Subsidiaries may make any
payments pursuant to clause (iii) or (viii) of such Section, provided that such
amounts may accrue and may be payable when the Credit Agreement has been
terminated and all Obligations have been paid in full or otherwise when
permitted to be paid by the Required Banks.
20. Section 8.09(a) of the Credit Agreement is hereby amended by deleting clause
(y) contained therein in its entirety and inserting the following new clause (y)
in lieu thereof:
"(y) the Borrower and its Subsidiaries may make Capital Expenditures (i) during
the fiscal quarter ended September 30, 1998, in an amount not to exceed
$3,000,000, (ii) during the two fiscal quarter period ended December 31, 1998,
in an amount not to exceed $8,500,000 (and so long as the aggregate amount of
Capital Expenditures made by the Borrower and its Subsidiaries in fiscal year
1998 does not exceed $15,000,000) and (iii) during each fiscal year thereafter,
for the period from the first day of such fiscal year to the end of each fiscal
quarter occurring in such fiscal year set forth below (on a cumulative basis),
in an amount not to exceed the amount set forth opposite such fiscal quarter
below:
Fiscal Year Fiscal Quarter Ending Amount
1999 March 31, 1999 $ 5,500,000
June 30, 1999 $ 9,500,000
September 30, 1999 $13,500,000
December 31, 1999 $15,000,000
2000 March 31, 2000 $ 3,750,000
June 30, 2000 $ 7,500,000
September 30, 2000 $11,250,000
December 31, 2000 $15,000,000
2001 March 31, 2001 $ 3,750,000
June 30, 2001 $ 7,500,000
28
<PAGE>
Exhibit 4.21
21. Section 8.09(b) of the Credit Agreement is hereby amended to read in its
entirety as follows:
"(b) Intentionally Omitted."
22. Section 8.09(c) of the Credit Agreement is hereby amended to read in its
entirety as follows:
"(c) Intentionally Omitted."
23. Section 8.09(f) of the Credit Agreement is hereby deleted in its entirety.
24. Section 8.10 of the Credit Agreement is hereby amended to read in its
entirety as follows:
"8.10 Minimum Consolidated EBITDA. (a) The Borrower will not permit Consolidated
EBITDA for any Test Period ending on the last day of a fiscal quarter set forth
below to be less than the amount set forth opposite such fiscal quarter below:
Fiscal Quarter Ending .................................. Minimum Consolidated
EBITDA
September 30, 1998 ......................................... $ 5,500,000
December 31, 1998 .......................................... $18,825,000
March 31, 1999 ........................................... $24,400,000
June 30, 1999 ........................................... $35,200,000
September 30, 1999 ......................................... $44,800,000
December 31, 1999 .......................................... $52,600,000
March 31, 2000 ........................................... $53,500,000
June 30, 2000 ............................................ $55,800,000
September 30, 2000 ......................................... $61,300,000
December 30, 2000 .......................................... $72,400,000
March 31, 2001 ........................................... $73,900,000
June 30, 2001 ............................................ $76,700,000"
29
<PAGE>
Exhibit 4.21
(b) The Borrower will not permit Consolidated EBITDA for the period from and
including July 1, 1998 to and including February 28, 1999 (taken as one
accounting period) to be less than $22,100,000.
25. Section 8.11 of the Credit Agreement is hereby amended to read in its
entirety as follows:
"8.11 Interest Coverage Ratio. The Borrower will not permit the Interest
Coverage Ratio for any Test Period ending on the last day of a fiscal quarter
set forth below to be less than the ratio set forth opposite such fiscal quarter
below:
Fiscal Quarter Ending ........................ Interest Coverage Ratio
September 30, 1998 .......................... 0.45:1.00
December 31, 1998 .......................... 0.85:1.00
March 31, 1999 ............................ 0.75:1.00
June 30, 1999 ............................ 0.80:1.00
September 30, 1999 .......................... 1.00:1.00
December 31, 1999 .......................... 1.20:1.00
March 31, 2000 ............................ 1.25:1.00
June 30, 2000 ............................ 1.25:1.00
September 30, 2000 .......................... 1.40:1.00
December 30, 2000 .......................... 1.70:1.00
March 31, 2001 ............................ 1.80:1.00
June 30, 2001 ............................ 1.90:1.00"
26. Section 8.12 of the Credit Agreement (as amended) is hereby amended to read
in its entirety as follows:
"8.12 Leverage Ratio. The Borrower will not permit the Leverage Ratio at any
time during a period set forth below to be more than the ratio set forth
opposite such period below:
30
<PAGE>
Exhibit 4.21
Period ................................ Leverage Ratio
June 30, 1999 through September 29, 1999 .................. 11.35:1.00
September 30, 1999 through December 30, 1999 .............. 9.00:1.00
December 31, 1999 through March 30, 2000 .................. 6.90:1.00
March 31, 2000 through June 29, 2000 ...................... 6.75:1.00
June 30, 2000 through September 29, 2000 .................. 6.50:1.00
September 30, 2000 through December 30, 2000 .............. 5.90:1.00
December 31, 2000 through March 30, 2001 .................. 4.95:1.00
March 31, 2001 through June 29, 2001 ...................... 4.30:1.00
Thereafter ................................................ 4.15:1.00"
27. Section 8.13(i) of the Credit Agreement is hereby amended to read in its
entirety as follows:
"(i) make (or give any notice in respect of) any voluntary or optional payment
or prepayment on or redemption or acquisition for value of (including, without
limitation, by way of depositing with the trustee with respect thereto or any
other Person money or securities before due for the purpose of paying when due)
any Senior Subordinated Note or any Permitted Holdings PIK Security."
28. Section 8 of the Credit Agreement is hereby amended by inserting at the end
thereof the following new Section 8.16:
"8.16 Quick Ratio. The Borrower will not permit the Quick Ratio as of any date
set forth below to be more than the ratio set forth opposite such date below:
31
<PAGE>
Exhibit 4.21
Date ................................. Quick Ratio
September 30, 1998 .................................... 1.40:1.00
December 31, 1998 ..................................... 1.25:1.00
March 31, 1999 ........................................ 1.45:1.00
June 30, 1999 ......................................... 1.35:1.00
September 30, 1999 .................................... 1.30:1.00
December 31, 1999 ..................................... 1.00:1.00
March 31, 2000 ........................................ 1.20:1.00
June 30, 2000 ......................................... 1.20:1.00
September 30, 2000 .................................... 1.20:1.00
December 31, 2000 ..................................... 1.20:1.00
March 31, 2001 ........................................ 1.20:1.00
June 30, 2001 ......................................... 1.20:1.00"
29. The definitions of "Applicable Base Rate Margin", "Applicable Commitment Fee
Percentage", "Applicable Eurodollar Margin" and "Interest Reduction Discount"
contained in Section 10 of the Credit Agreement are hereby amended to read in
their entirety as follows:
"Applicable Base Rate Margin" shall mean a percentage per annum equal to 3.00%,
less the then applicable Interest Reduction Discount, if any.
"Applicable Commitment Fee Percentage" shall mean a percentage per annum equal
to .50%, provided, that from and after any Start Date to and including the
corresponding End Date, the Applicable Commitment Fee Percentage shall be the
respective percentage per annum set forth in clause (A), (B), (C) or (D) below
if, but only if, as of the Test Date for such Start Date the applicable
conditions set forth in clause (A), (B), (C) or (D) below, as the case may be,
are met:
(A) .45% if, but only if, as of the Test Date for such Start Date the Leverage
Ratio for the Test Period ended on such Test Date shall be less than 3.5:1.0 and
none of the conditions set forth in clause (B), (C) or (D) below are satisfied;
32
<PAGE>
Exhibit 4.21
(B) .40% if, but only if, as of the Test Date for such Start Date the Leverage
Ratio for the Test Period ended on such Test Date shall be less than 3.0:1.0 and
neither of the conditions set forth in clause (C) or (D) below, as the case may
be, are satisfied;
(C) .35% if, but only if, as of the Test Date for such Start Date the Leverage
Ratio for the Test Period ended on such Test Date shall be less than 2.5:1.0 and
the condition set forth in clause (D) below is not met; or
(D) .30% if, but only if, as of the Test Date for such Start Date the Leverage
Ratio for the Test Period ended on such Test Date shall be less than 2.0:1.0.
Notwithstanding anything to the contrary contained above in this definition, the
Applicable Commitment Fee Percentage shall be .50% at all times (i) prior to the
delivery of the June 30, 1999 financial statements pursuant to Section 7.01(b),
(ii) when the Leverage Ratio shall be more than 3.50:1.00 and (iii) when an
Event of Default shall exist.
"Applicable Eurodollar Margin" shall mean a percentage per annum equal to 4.00%,
less the then applicable Interest Reduction Discount, if any.
"Interest Reduction Discount" shall mean zero, provided that from and after the
first day of any Margin Reduction Period (the "Start Date") to and including the
last day of such Margin Reduction Period (the "End Date"), the Interest
Reduction Discount shall be the respective percentage per annum set forth in
clause (A), (B), (C), (D), (E), (F) or (G) below if, but only if, as of the last
day of the most recent fiscal quarter or year, as the case may be, ended
immediately prior to such Start Day (the "Test Date"), the applicable conditions
set forth in clause (A), (B), (C), (D), (E), (F) or (G) below, as the case may
be, are met:
(A) .50% if, but only if, as of the Test Date for such Start Date, the Leverage
Ratio for the Test Period ended on such Test Date shall be less than 8.00:1.00
and none of the conditions set forth in clause (B), (C), (D), (E), (F) or (G)
below, as the case may be, are satisfied;
(B) 1.00% if, but only if, as of the Test Date for such Start Date, the Leverage
Ratio for the Test Period ended on such Test Date shall be less than 7.00:1.00
and none of the conditions set forth in clause (C), (D), (E), (F) or (G) below,
as the case may be, are satisfied;
(C) 1.50% if, but not only if, as of the Test Date for such Start Date, the
Leverage Ratio for the Test Period ended on such Test Date shall be less than
6.50:1.00 and none of the conditions set forth in clause (D), (E), (F) or (G)
below, as the case may be, are satisfied;
33
<PAGE>
Exhibit 4.21
(D) 1.75% if, but only if, as of the Test Date for such Start Date, the Leverage
Ratio for the Test Period ended on such Test Date shall be less than 6.00:1.00
and none of the conditions set forth in clause (E), (F) or (G) below, as the
case may be, are satisfied;
(E) 2.00% if, but only if, as of the Test Date for such Start Date, the Leverage
Ratio for the Test Period ended on such Test Date shall be less than 5.00:1.00
and none of the conditions set forth in clause (F) or (G) below, as the case may
be, are satisfied;
(F) 2.25% if, but only if, as of the Test Date for such Start Date, the Leverage
Ratio for the Test Period ended on such Test Date shall be less than 4.00:1.00
and the condition set forth in clause (G) below is not satisfied; or
(G) 2.50% if, but only if, as of the Test Date for such Start Date, the Leverage
Ratio for the Test Period ended on such Test Date shall be less than 3.50:1.00.
Notwithstanding anything contained above in this definition, the Interest
Reduction Discount shall be zero at all times (i) prior to the delivery of the
June 30, 1999 financial statements pursuant to Section 7.01(b), (ii) when the
Leverage Ratio shall be more than 8.00:1.00 and (iii) when an Event of Default
shall exist.
30. The definition of "Consolidated EBITDA" contained in Section 10 of the
Credit Agreement is hereby amended to read in its entirety as follows:
"Consolidated EBITDA" shall mean, for any period, Consolidated EBIT, adjusted by
adding thereto the amount of all depreciation expense and amortization expense
that were deducted in determining Consolidated EBIT for such period, it being
understood and agreed, however, that Consolidated EBITDA shall be determined
without giving effect to any Restructuring Charges otherwise deducted in
determining Consolidated EBITDA for such period.
31. The definition of "Cumulative Income Amount" contained in Section 10 of the
Credit Agreement is hereby deleted in its entirety.
32. The definition of "Test Period" contained in Section 10 of the Credit
Agreement is hereby amended to read in its entirety as follows:
"Test Period" shall mean the four consecutive fiscal quarters of the Borrower
then last ended (taken as one period), or, if shorter, the period from July 1,
1998 to the last day of the fiscal quarter then last ended.
33. The following new definitions are hereby inserted into Section 10 of the
Credit Agreement in appropriate alphabetical order:
34
<PAGE>
Exhibit 4.21
"Consolidated Current Assets" shall mean, at any time, the current assets (other
than cash, Cash Equivalents and deferred income taxes to the extent included in
current assets) of the Borrower and its Subsidiaries (including, without
limitation, the interest in accounts receivable represented by the transferor
certificate held by the Receivables Entity) at such time determined on a
consolidated basis.
"Consolidated Current Liabilities" shall mean, at any time, the current
liabilities of the Borrower and its Subsidiaries determined on a consolidated
basis, but excluding deferred income taxes and the current portion of and
accrued but unpaid interest on any Indebtedness under this Agreement and any
other long-term Indebtedness which would otherwise be included therein.
"Excess Cash Flow" shall mean, for any period (i) the sum of (A) Consolidated
Net Income for such period, plus (B) the amount of all non-cash charges
(including, without limitation or duplication, depreciation, amortization,
non-cash interest expense and Restructuring Charges) included in determining
Consolidated Net Income for such period plus (C) the decrease, if any, in
Working Capital from the first day to the last day of such period (except to the
extent that such decrease occurs as a result of an increase in the Accounts
Receivable Facility), minus (ii) the sum (without duplication) of (A) any
non-cash credits (including from sales of assets) included in determining
Consolidated Net Income for such period, (B) gains from sales of assets (other
than sales of inventory in the ordinary course of business) included in
determining Consolidated Net Income for such period, (C) all Capital
Expenditures (excluding Capital Expenditures made during such period that are
financed by Indebtedness, including Capitalized Lease Obligations but excluding
Loans hereunder), (D) the amount expended in respect of Permitted Acquisitions
during such period, except to the extent constituting Capital Expenditures or
financed with Indebtedness, (E) the aggregate principal amount of permanent
principal payments of Indebtedness for borrowed money of the Borrower and its
Subsidiaries (other than (1) repayments of Indebtedness with proceeds of
issuance of other Indebtedness or with proceeds Recovery Events and (2)
repayments of Loans or other Obligations, provided that repayments of Loans
shall be deducted in determining Excess Cash Flow if such repayments were (x)
required as a result of a mandatory commitment reduction under Section 3.03(b)
or (y) made as a voluntary prepayment with internally generated funds (but in
the case of a voluntary prepayment of Revolving Loans or Swingline Loans, only
to the extent accompanied by a voluntary reduction to the Total Revolving Loan
Commitment)) during such period, (F) non-cash charges added back in a previous
period pursuant to clause (i)(B) above to the extent any such charge has become
a cash item in the current period, (G) the increase, if any, in Working Capital
from the first day to the last day of such period, (H) costs incurred by
Holdings during such period and paid for with the proceeds of dividends paid by
the Borrower pursuant to Section 8.07(iv) to the extent not deducted in
determining Consolidated Net Income for such period and (I) any cash
disbursements made against noncurrent liabilities (such as transition reserves
and deferred taxes) to the extent not deducted in determining Consolidated Net
Income for such period.
35
<PAGE>
Exhibit 4.21
"Restructuring Charges" shall mean restructuring charges taken by Holdings and
its Subsidiaries relating to plant rationalization and obsolete inventory,
provided that such restructuring charges shall only constitute Restructuring
Charges hereunder if taken on or after July 1, 1998 and on or before December
31, 2000, and the aggregate amount of Restructuring Charges shall not exceed (i)
in the case of the plant rationalization program, $13,300,000 and (ii) in the
case of obsolete inventory, $2,900,000.
"Quick Ratio" shall mean, at any time, the ratio of (i) inventory of the
Borrower and its Subsidiaries at such time to (ii) the accounts payable and
accrued expenses (other than expenses accrued under Sections 8.08(iii) and
(viii) of this Agreement) of the Borrower and its Subsidiaries at such time.
"Working Capital" shall mean the excess of Consolidated Current Assets (but
excluding therefrom all cash and Cash Equivalents, and deferred income taxes to
the extent included in current assets) over Consolidated Current Liabilities.
34. The Credit Agreement is hereby further amended by adding thereto a new Annex
X in the form of Annex X attached hereto.
B. Consents, Waivers and Agreement
1. Section 1(b) of the Third Amendment is hereby amended by (i) deleting the
references to "January 31, 1999" contained therein and inserting "September 30,
1998" in lieu thereof and (ii) deleting the references to "Scheduled 1/31/99
Reduction" contained therein and inserting "Scheduled September 30, 1998
Reduction" in lieu thereof.
2. The Banks hereby waive compliance with Sections 8.10 and 8.11 of the Credit
Agreement for the Test Period ended June 30, 1998. The Banks hereby waive
compliance with Section 8.12 of the Credit Agreement for the period from and
including July 1, 1998 to but excluding September 30, 1998.
3. The Banks hereby agree that Section 6.03(ii) of the Credit Agreement is
deemed amended to exclude from the scope of such representation and warrant any
conflict that exists between Section 8.08 of the Credit Agreement (as modified
by Section A(19) of this Amendment) and any management or similar agreement
between Holdings or any of its Subsidiaries and Bain Capital and/or any Bain
Affiliate.
4. In order to induce the Banks to enter into this Amendment, the Borrower
hereby agrees to pay to each Bank which executes and delivers a counterpart of
this Amendment on or before 12:.00 noon (New York time) on September 30, 1998, a
fee equal to 1/4 of 1% of such Bank's Revolving Loan Commitment immediately
after giving effect to this Amendment, such fee to be earned and payable on the
Amendment Effective Date.
36
<PAGE>
Exhibit 4.21
C. Miscellaneous Provisions
1. 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, 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.
2. 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.
3. 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.
4. 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.
5. All references in the Credit Agreement and each of the Credit Documents to
the Credit Agreement shall be deemed to be references to such Credit Agreement
after giving effect to this Amendment.
6. 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.
* * *
37
<PAGE>
Exhibit 4.21
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:
38
<PAGE>
Exhibit 4.21
BANKBOSTON, N.A.
By:
Name:
Title:
BANK LEUMI USA
By:
Name:
Title:
THE BANK OF NEW YORK
By:
Name:
Title:
THE BANK OF NOVA SCOTIA
By:
Name:
Title:
BANK OF SCOTLAND
By:
Name:
Title:
39
<PAGE>
Exhibit 4.21
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
By:
Name:
Title:
BANK ONE TEXAS
By:
Name:
Title:
BANK POLSKA KASA OPIEKI, S.A.
By:
Name:
Title:
BEAR, STEARNS & CO. INC.
By:
Name:
Title:
CHASE SECURITIES, INC., as agent for CHASE MANHATTAN BANK
By:
Name:
Title:
40
<PAGE>
Exhibit 4.21
CHRISTIANIA BANK OG KREDITKASSE, NEW YORK BRANCH
By:
Name:
Title:
By:
Name:
Title:
CIBC INC.
By:
Name:
Title:
ERSTE BANK DER OESTERREICHISCHEN SPARKASSEN AG
By:
Name:
Title:
FIRST UNION CORP.
By:
Name:
Title:
GUARANTY FEDERAL BANK, F.S.B.
By:
Name:
Title:
41
<PAGE>
Exhibit 4.21
NATIONS BANK, N.A.
By:
Name:
Title:
PAM CAPITAL FUNDING, L.P., by HIGHLAND CAPITAL MANAGEMENT, L.P., as collateral
manager
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:
42
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
historical financial statements of American Pad & Paper Company's September 30,
1998 10-Q and is qualified in its entirety by reference to such financial
statements. </LEGEND>
<CIK>0000005588
<NAME>American Pad & Paper Company
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 558,281
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 277
<OTHER-SE> 28,986
<TOTAL-LIABILITY-AND-EQUITY> 558,281
<SALES> 0
<TOTAL-REVENUES> 482,479
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> (16,907)
<INCOME-CONTINUING> (71,416)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71,416)
<EPS-PRIMARY> (2.58)
<EPS-DILUTED> (2.58)
</TABLE>
CONTACT:Mark Lipscomb
Vice President, Corporate Communications
American Pad & Paper Co.
(972) 733-5415
For immediate Release
Theresa Schillero
Media: Leslie Feldman/Eileen King
(212) 850-5600
Ken Pieper
(972) 663-9390
Morgen-Walke Associates
American Pad & Paper ANNOUNCES PLANT CLOSING
DALLAS, Texas, November 10, 1998, -- American Pad & Paper Company
(NYSE:AGP) (AP&P) announced that its plant in Kosciusko, Mississippi will be
closed as part of a previously announced restructuring plan, which is designed
to improve customer service, better balance manufacturing capacity to market
demands and reduce overall manufacturing costs.
The Kosciusko plant is an AMPAD operation and will be transferring its
production capability to other American Pad & Paper sites. This plant, which
employees approximately 175 people, will continue operations at reduced levels
through the end of May 1999. Eligible employees affected will be provided a
severance package, and the Company will be working with the Mississippi
Employment Training Division to provide a career transition program.
Commenting on the plant closure, James W. Swent III, Chief Executive
Officer of American Pad & Paper said, "I sincerely regret that some employee
reductions are necessary, but the future of our Company depends on a strategy
that provides greater efficiency and a return to profitable growth. These
actions are necessary to improve both service to our customers, and move us
closer to our goal of being the lowest cost manufacturer in our industry."
American Pad & Paper Company is a leading manufacturer and marketer of
paper-based office products in North America. Product offerings include
envelopes, writing pads, file folders, machine papers, greeting cards and other
office products. The key operating divisions of the company are Williamhouse,
AMPAD, and Creative Card which market principally under the following Name
Brands: AMPAD, Century, Embassy, Gold Fibre, Huxley, Karolton, Kent, Peel &
Seel, SCM, Williamhouse and World Fibre. Company revenues in 1997 were $687
million.
This release contains forward-looking statements relating to future
results. Actual results may differ significantly as a result of factors over
which the Company has no control, including the strength of domestic and foreign
economies, slower than anticipated sales growth, price and product competition
and changes in raw material costs. Additional information which could affect the
Company's financial results is included in the Company's prospectus on file with
the Securities and Exchange Commission.
###
44
<PAGE>
