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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED
DECEMBER 31, 1997
COMMISSION FILE NUMBER 1-11803
AMERICAN PAD & PAPER COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-3164298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 PRESTON ROAD, SUITE 700, DALLAS, TX 75252-5613
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (972) 733-6200
COMMISSION FILE NUMBER 333-3006
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 25-1512956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 PRESTON ROAD, SUITE 700, DALLAS, TX 75252-5613
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (972) 733-6200
Indicate by check mark whether each Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that each
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
<TABLE>
<S> <C>
American Pad & Paper Company Yes X No ____
American Pad & Paper Company of Delaware, Inc. Yes X No ____
</TABLE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 10, 1998, there were 27,724,045 outstanding shares of American
Pad & Paper Company common stock and the aggregate market value of the common
stock of American Pad & Paper Company held by non-affiliates was approximately
$81,918,821.
DOCUMENTS INCORPORATED BY REFERENCE
American Pad & Paper Company incorporates its 1998 Annual Proxy Statement
to Stockholders.
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IMPORTANT NOTE -- COMBINED FILING FOR AMERICAN PAD & PAPER COMPANY AND AMERICAN
PAD & PAPER COMPANY OF DELAWARE, INC.
American Pad & Paper Company (the "Company") and American Pad & Paper
Company of Delaware, Inc. ("AP&P Delaware") are filing a combined Annual Report
on Form 10-K in accordance with general instruction J to Form 10-K. The Company
owns 100% of the outstanding common stock of AP&P Delaware. The Company has
27,724,045 shares of outstanding common stock on March 10, 1998 and is listed on
the New York Stock Exchange. AP&P Delaware has issued $130 million of 13% Senior
Subordinated Notes ("Notes") which trade on the over the counter market. The
Company is a holding company with no operations and owns 100% of the outstanding
common shares of WR Acquisition, Inc. ("WR Acquisition"). WR Acquisition is also
a holding company with no operations which owns 100% of the outstanding common
shares of AP&P Delaware. AP&P Delaware is the operating company in which all the
operations of the Company take place. There are no differences between the
Company and AP&P Delaware except as just described. The Company has followed
full push-down accounting for the financial statements of AP&P Delaware such
that the only differences between the two registrants relate to the capital
structure just described. The management of the Company has determined that it
would not be meaningful to the holders of the Company's common stock or to the
holders of AP&P Delaware's Notes to receive Annual Reports on Form 10-K which
are different and, as a result, the Company has elected to file only one Form
10-K and provide only one set of consolidated financial statements for both
registrants to its shareholders in this annual report. On file with the
Securities and Exchange Commission and available on request, is the same Form
10-K which includes consolidated financial statements for AP&P Delaware.
ITEM 1. BUSINESS
GENERAL
The Company is one of the larger manufacturers and marketers of paper-based
office products (excluding copy paper) in the $60 billion to $70 billion North
American office products industry. The Company offers a broad product line
including nationally branded and private label writing pads, file folders,
envelopes, machine papers and other office products. Through its Ampad division,
the Company is among the largest manufacturers of pads and other paper-based
writing products, filing supplies, machine papers and retail envelopes to many
of the largest and fastest growing office products distributors. Established in
1888, the Company's Ampad division has been a leading supplier of pads and other
paper-based writing products throughout its history. Acquired in October 1995,
the Company's Williamhouse division is the leading supplier of mill branded,
specialty and commodity business envelopes and machine papers to paper
merchants/distributors. The Company maintains several nationally-recognized
brand names such as Ampad, Century, Embassy, Evidence, Gold Fibre, Huxley,
Karolton, Kent, Peel & Seel, SCM, Williamhouse and World Fibre. The Company's
strategy is to grow by focusing on the largest and fastest growing office
product distribution channels, making acquisitions, introducing new product
lines, broadening product distribution across its channels and maintaining its
position among the lowest-cost manufacturers in the industry. As a result of
this strategy, the Company's net sales have grown at a compound annual rate of
approximately 45% from 1992 to 1997.
Since the mid-1980s, the office products industry has experienced
significant changes in the channels through which office products are
distributed such as the emergence of new channels, including national office
products superstores, national contract stationers and mass merchandisers, and
consolidation within these and other channels. The channels through which office
products are distributed from the manufacturer to the end-user include retail
channels such as national office products superstores, mass merchandisers and
warehouse clubs; commercial channels such as national contract stationers; paper
merchants/distributors; and other channels such as regional distributors, school
campuses and direct mail. The three dominant national superstores (Office Depot,
OfficeMax and Staples) have experienced significant growth. The four largest
paper merchants (Nationwide, xpedx, Unisource and Zellerbach) have experienced
significant growth primarily through consolidation.
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HISTORY
From 1986 to 1992, Ampad operated as a subsidiary of Mead. On July 31,
1992, the Company acquired Ampad from Mead Corporation ("Mead") in an
acquisition led by Bain Capital, Inc. ("Bain Capital") and senior management.
Since the acquisition, management has enhanced the Company's scale, broadened
its product line, expanded upon its national presence and strengthened its
distribution capabilities through acquisition and innovation while
simultaneously delivering higher customer service levels. In July 1994, the
Company acquired the assets and assumed certain liabilities of SCM, one of the
industry leaders in hanging files and writing products. In August 1995, the
Company acquired the file folder and file product lines of American Trading and
Production Corporation's ("Atapco") Globe-Weis office products division. Prior
to the acquisition, Atapco was one of the leading providers of file folders and
hanging files to office product superstores. The acquisitions of the SCM and
Globe-Weis product lines further strengthened the Company's position in the
filing supplies and writing products categories.
In October 1995, the Company acquired WR Acquisition and its wholly owned
subsidiary, Williamhouse-Regency of Delaware, Inc. (collectively referred to as
"Williamhouse") for an aggregate purchase price (including assumption of debt of
approximately $152.9 million) of approximately $300.7 million, plus
reimbursement of certain expenses. Williamhouse is a leading supplier to many of
the largest and fastest growing paper merchants/distributors. The Company's
management identified the Regency Division of Williamhouse as a nonstrategic
asset following the Williamhouse acquisition and, on June 27, 1996, completed
the sale of the Regency Division for approximately $47.9 million in gross
proceeds.
On June 28, 1996, the Company acquired Niagara Envelope Company, Inc.
("Niagara") for an aggregate purchase price of approximately $48.2 million, plus
$5.0 million paid at closing under a one-year consulting services agreement.
Niagara supplies mill branded, specialty and commodity envelopes to paper
merchants/distributors through four manufacturing facilities located near
Buffalo, Chicago, Dallas and Denver. The Company believes that the Niagara
acquisition strengthened the Company's distribution capabilities in the Midwest,
provide additional manufacturing capacity and provide opportunities to achieve
operating improvements through the consolidation of Niagara's operations with
those of the Company.
On February 11, 1997, the Company acquired Shade/Allied, Inc.
("Shade/Allied") for an aggregate purchase price of $49.5 million. Shade/Allied
supplies continuous forms to paper merchants/distributors and retail customers
through four manufacturing facilities located near Green Bay, Seattle, Atlanta
and Philadelphia. The Company believes that the Shade/Allied acquisition will
strengthen its presence in a fourth major product category, machine papers.
Although the Company regularly engages in discussions with companies
regarding potential acquisitions, it currently does not have any agreements or
understandings relating to any future acquisitions. The terms of the Company's
credit agreement currently restrict the Company from any acquisitions of
businesses without the formal approval of the Company's banking group.
The Company's principal executive offices are located at 17304 Preston
Road, Suite 700, Dallas, Texas 75252-5613 and its telephone number is (214)
733-6200.
COMPETITIVE STRENGTHS
The combination of the Company's products and customers distinguishes it as
a leading manufacturer and marketer of paper-based office products (excluding
copy paper) in North America. The Company attributes this position to the
following competitive strengths:
- Market Leader. The Company believes it has achieved market leadership in
core products sold to customers in the largest and fastest growing office
products channels by offering one of the broadest assortments of high
quality products in the industry. Furthermore, the Company enjoys
national brand awareness in many of its product lines, including Ampad,
Century, Embassy, Evidence, Gold Fibre, Huxley, Karolton, Kent, Peel &
Seel, SCM, Williamhouse and World Fibre.
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- Well-Positioned and Diversified Customer Base. The Company believes it
has substantial opportunities for growth within several distribution
channels of the office products industry. The Company has focused on the
largest and fastest growing office products channels which include
customers such as Boise Cascade Office Products, BT Office Products,
Corporate Express, Office Depot, OfficeMax and Staples. The Company's
Williamhouse division maintains particularly strong relationships with
the largest and fastest growing paper merchants/distributors in the
market, including Nationwide, xpedx, Unisource and Zellerbach. The
Company also maintains strong customer relationships across all of the
other office products distribution channels, including mass
merchandisers, warehouse clubs, office products wholesalers and
independent dealers.
- National Scale and Service Capability. The Company's extensive product
line, multiple brands and broad price point coverage provide significant
advantages and economies of scale in selling to and servicing its
customers. The Company believes it has become an increasingly important
strategic partner to its customers as they seek higher value-added
products, simplify their purchasing organizations and consolidate their
relationships among selected national suppliers. The Company's national
presence and network of 20 strategically located manufacturing and
distribution facilities have enabled it to maintain rapid and efficient
order fulfillment standards. In addition, the Company's advanced EDI
capabilities enable it to meet its customers' EDI requirements, executing
automated transactions rapidly, efficiently and accurately.
- Innovation/New Products. The Company has introduced several new products
as part of its marketing strategy to differentiate itself from other
suppliers and enhance profitability. The Company believes that its brand
recognition and presence with its national customers allows it to more
easily introduce new or acquired product lines to those customers.
- Low-Cost Manufacturer. The Company believes it is among the lowest-cost
manufacturers of paper-based office products in the industry. The Company
ensures its low-cost manufacturing position through its paper purchasing
and distribution advantages as well as its maintenance of modern and
efficient manufacturing technology and a high quality work force.
- Purchasing Advantages. The Company has strong relationships with most of
the country's largest paper mills, many of which have been conducting
business with the Company for more than 30 years. The Company is one of
the largest purchasers of the principal paper grades used in its
manufacturing operations. In addition, the Company has the largest number
of designated mill relationships which involve some of the largest and
most recognized paper mill brands such as Hammermill, Hopper, Neenah and
Strathmore.
GROWTH STRATEGY
The Company's strategy is to maintain and strengthen its leadership
position by focusing on the following:
- Focus on Rapidly Growing Customers. The Company serves many of the
largest and best positioned customers in the office products market
segment including national office products superstores, mass
merchandisers and warehouse clubs, national contract stationers and
national paper merchants/ distributors. Anticipating further
consolidation in the office products industry, the Company expects that
its national scope and broad product line will be increasingly important
in meeting the needs of its customers. The Company will continue to
target those customers driving consolidation in the office products
industry.
- Continue to Introduce New Products. New, higher value-added products give
the Company a greater selection to offer its customers and improve
product line profitability for both the Company and its customers. The
Company plans to differentiate itself from other suppliers and improve
profitability through product innovation, differentiation and line
extensions.
- Pursue Complementary Product Line and Strategic Acquisitions. The office
products industry is highly fragmented despite continuing consolidation
among its manufacturers. The Company has been leading consolidation among
manufacturers of writing products, filing supplies, envelopes and machine
papers.
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The Company believes that there are significant opportunities to acquire
companies in both its existing and complementary product lines.
- Broaden Product Distribution. The Company's market presence and
distribution strengths position it to sell new or acquired product lines
across its distribution channels, including national office products
superstores, national contract stationers, office product wholesalers and
mass merchandisers. As an important part of its growth strategy, for
example, the Company has successfully introduced the envelope product
lines acquired in the Williamhouse and Niagara acquisitions, previously
distributed primarily through paper merchants/distributors, to the Ampad
division's distribution channels under the Ampad and private label names.
PRODUCTS AND SERVICES
Pads and Other Paper-Based Writing Products. The Company believes it is one
of the larger manufacturers and marketers of paper-based writing products
(excluding copy paper) in North America, offering more than 700 SKUs of writing
pads, notebooks and specialty papers. Many of the Company's writing products are
available in multiple sizes, grades of paper (including recycled), and colors
and with glued, perforated tops or wire binding. All writing products are
offered under the Ampad brand name or a retailer's private label. The Company
has created innovative packaging, especially for sale through warehouse clubs
(bulk and crate packaging), superstores and mass merchandisers.
Filing Supplies. The Company is one of the three largest manufacturers of
filing supplies in North America. The product line includes more than 500 SKUs
of filing supplies including file folders, hanging files, index cards and
expandable folders under the SCM and Globe-Weis brand names. The Company has
been expanding its market share in filing supplies by focusing its sales efforts
on large retail customers and contract stationers, where its writing products
enjoy the leading market share position.
Envelopes. The Company is among the largest manufacturers of envelopes
serving the paper merchant/ distributor and office products superstore channels
and sold over 19 billion envelopes in 1997. The Company's broad envelope product
line includes products manufactured from mill branded paper, which is paper
unique in color and texture to a particular mill, typically with an identifying
watermark. The Company is the designated envelope manufacturer for 30 mill
brands, which is approximately twice as many as its nearest competitor. These
brands include the Hammermill, Strathmore and Beckett divisions of International
Paper Company, the Hopper division of Georgia Pacific Corporation, the Neenah
division of Kimberly-Clark Corporation and the Gilbert division of Mead.
The Company also produces a wide variety of standard size and specialty
envelopes made from commodity paper and Tyvek(R) (a high density polyurethane
based product made by Du Pont), including booklet and catalog mailing envelopes,
envelopes closable by metal clasp or button-and-string, Peel & Seel (pressure
sensitive adhesion) envelopes, and giant, X-ray and remittance envelopes. The
Company offers in excess of 30,000 SKUs of envelopes (which the Company believes
is more than any of its competitors), providing its customers with a wide choice
of paper grades, colors and sizes.
Machine Papers. The Company also manufactures machine papers, a product
category defined by the Company which includes inkjet papers, printed formats,
fine papers, such as cotton content and laid papers, as well as continuous
forms.
Invitations and Announcements. The Company also manufactures invitations
and announcements, Christmas and holiday cards, and presentation folders. These
products are sold principally to paper merchants/distributors, personalizing
businesses (including the former Regency Division), and other wholesale outlets
throughout the United States. The Company offers a wide variety of such
products, primarily made from the same mill branded grades of paper used in
manufacturing envelopes.
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The following chart illustrates the Company's principal products and
customers and selected brands in its primary business segments:
<TABLE>
<CAPTION>
AMPAD DIVISION WILLIAMHOUSE DIVISION
-------------- ---------------------
<S> <C> <C>
Products
- -- Pads and Notebooks -- Business Envelopes
- -- Filing Supplies -- Invitations
- -- Retail envelopes -- Announcements
- -- Machine Papers -- Christmas and Holiday
- -- Christmas and Holiday Cards
Cards
-- Machine Papers
Customers
- -- Office Products -- Paper Merchants/Distributors
Superstores
- -- Contract Stationers -- Jobbers
- -- Wholesalers -- Personalizing Businesses
- -- Buying Groups
Selected Brands
- -- Ampad(R) -- Century(TM)
- -- Embassy(R) -- Huxley(TM)
- -- Evidence(R) -- Karolton(R)
- -- Globe-Weis(R) -- Kent(R)
- -- SCM(TM) -- Peel & Seel(R)
- -- World Fibre(TM) -- Williamhouse(TM)
</TABLE>
SALES, DISTRIBUTION AND MARKETING
The Company markets its broad range of products to a wide variety of
customers. In 1997, one customer, Staples, Inc., accounted for 11.7% of the
Company's net sales.
The Company markets its writing products, filing supplies, retail envelopes
and machine papers through virtually every channel of distribution for
paper-based office products including the largest mass merchant retailers,
office product superstores, warehouse clubs, major contract stationers, paper
merchants/distributors and other traditional outlets for office supplies such as
office product wholesalers, independent dealers, buying groups and mail order
firms.
The Company sells its business envelopes and machine papers principally to
paper merchants/distributors and other wholesale outlets throughout the United
States, primarily through an in-house sales force. In addition, mill branded
products are sold directly to personalizing businesses (including the former
Regency Division). The Company currently employs sales representatives
throughout the United States and sells products to over 2,000 paper
merchants/distributors in the United States and Canada. The Williamhouse
acquisition provides the Company with the ability to manufacture and distribute
retail envelopes directly to the Ampad division customers under the Ampad and
private label names.
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The following chart illustrates some of the Company's key customers:
<TABLE>
<CAPTION>
KEY CUSTOMERS
-------------
<S> <C> <C>
Office Products Superstores: Mass Merchandisers: Paper Merchants/Distributors:
Office Depot Wal-Mart Nationwide
Office Max ResourceNet
Staples Unisource
Zellerbach
Contract Stationers: Office Products Wholesalers: Warehouse Clubs:
Boise Cascade Office Products S.P. Richards Sam's Warehouse Club
BT Office Products United Stationers
Corporate Express
Office Depot*
Staples*
U.S. Office Products
</TABLE>
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* Contract stationers division
RAW MATERIAL
The Company's principal raw material is paper. Certain commodity grades
utilized by the Company have shown considerable price volatility since 1992.
This volatility negatively impacted the Company's earnings in 1994 as a result
of the Company's inability to implement price changes in many of its product
lines without giving its customers advance notification. Beginning in January
1995, the Company adopted new pricing policies enabling it to set product prices
consistent with the Company's cost of paper at the time of shipment. From May
1997 through October 1997, all but one of the key commodity grades of paper
utilized by the Company increased in cost between 6% and 18%. Due to strategic
customer considerations and competitive market conditions, the Company did not
begin to recover a significant portion of the increases in paper costs affecting
both its divisions until December 1997. The Company continued to implement sales
pricing increases during the first quarter of 1998. Paper price volatility is
expected to continue to have an effect on net sales and cost of sales and there
is no assurance that the Company will not be materially affected by future
fluctuations in the price of paper. Fluctuations in paper prices can have an
effect on quarterly comparisons of the results of operations and financial
condition of the Company.
The Company has strong relationships with most of the country's largest
paper mills, many of which have been doing business with the Company for more
than 30 years. The Company is one of the largest purchasers of the principal
paper grades used in its manufacturing operations. In addition, the Company has
the largest number of designated mill relationships, which involve some of the
largest and most recognized paper mill brands such as Hammermill, Hopper, Neenah
and Strathmore. The Company believes that these relationships afford it certain
paper purchasing advantages, including stable supply and favorable pricing
arrangements. While these relationships are stable, all but one of the
designated manufacturer arrangements are oral and terminable at will at the
option of either party. There can be no assurance that any of the supplier or
designated manufacturer relationships will not be terminated in the future.
While the Company has been able to obtain sufficient paper supplies during paper
shortages and otherwise, the Company is subject to the risk that it will be
unable to purchase sufficient quantities of paper to meet its production
requirements during times of tight supply.
COMPETITION
The markets for the Company's products are highly competitive. Competition
is based largely on a company's ability to offer a broad range of products on a
regional or national scale at competitive prices and to
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deliver these products on a timely basis. The Company has many local and
regional competitors. The markets in which the Company operates have become
increasingly characterized by a limited number of large companies selling under
recognized trade names. These larger companies, including the Company, have the
economies of scale, national presence, management information systems and
breadth of product line required by the major customers. In addition to branded
product lines, manufacturers also produce private-label products, especially in
the context of broader supply relationships with office product superstores and
contract stationers.
The writing products industry is fragmented, ranging from large national
manufacturers to localized jobbers and printers. A few manufacturers, including
the Company, have developed strong brand name recognition for a limited number
of product lines. Other national companies include Mead, the Stuart Hall
division of Newell Co., Pen-Tab Industries, and the Tops division of Wallace
Computer Services.
In the filing supplies segment, the Company's key domestic competitors
include Esselte AB and Smead Manufacturing.
In the machine papers segment, the Company's key domestic competitors are
CST/Bowater, Moore Business Forms and Willamette Industries.
Envelope manufacturers compete in three distinct channels. In the paper
merchant/distributor channel, where the Company competes, manufacturers sell a
wide variety of mill branded, specialty and commodity envelope products to paper
merchants/distributors. The Company's principal competitor in this channel is
New York/National Envelope Group of National Envelope Corporation, a private
company. Another competitor in this channel is Murray Envelope Corp. In the
direct channel, manufacturers sell customized envelopes directly to high volume
corporate users and mass mailers. MailWell is the leading company in this
channel. In the office products channel, manufacturers including Westvaco and
Quality Park produce commodity mailing envelopes for retail sale.
INTELLECTUAL PROPERTY
The Company registers some of its material trademarks, tradenames and
copyrights and has acquired patent protection for some of its proprietary
processes. In the opinion of management, the Company has current trademark
rights to conduct its business as now constituted. The Company has the right to
use the Globe-Weis(R) name on a non-exclusive basis through August 1998,
pursuant to the Company's purchase of certain file folder and hanging file
assets from Atapco. The Company does not expect that the loss of the right to
use the Globe-Weis(R) name will have a material adverse effect on its results of
operations.
EMPLOYEES
As of March 1, 1998, the Company employed a total of 4,520 full-time
persons, including 4,386 manufacturing, sales and administrative personnel and
134 corporate staff members. All the Company's operations are non-union except
for the operations at the facilities located in Scottdale, Pennsylvania;
Appleton, Wisconsin; and Holland, New York which have, in total, 1,253 employees
participating in collective bargaining agreements. The collective bargaining
contracts covering the Company's employees will expire as follows: the Scottdale
contract expires April 30, 1998 and covers 892 employees; the Holland contract
expires December 7, 2000 and covers 187 employees; and the Appleton contract
expires March 31, 2000 and covers 174 employees. With the exception of a strike
at the Company's Indiana plant, as described below, there have been no work
stoppages at any Company facility during the last five years. The Company is in
the process of negotiating with the union representing the Scottdale union
employees and expects a satisfactory outcome from the negotiations for both the
union employees and the Company. If the Scottdale union employees were to go on
strike, the Company has developed contingency plans for this event. However, the
Company is not currently able to predict whether the effect of such strike will
negatively affect the operating results of the Company during the next year. The
Company believes that its relations with its employees and unions are
satisfactory.
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In July 1994, the Company acquired the writing products and filing supplies
assets of SCM. Work rules and associated costs at SCM's plant in Indiana were
less favorable than those at other plants of the Company. As a result of
management's effort to bring the labor agreement at the Indiana plant more in
line with market labor agreements, a labor strike occurred on September 1, 1994.
Consequently, the Company closed the Indiana plant on February 15, 1995 and
moved the equipment to other facilities operated by the Company. By July 1995,
all machinery and equipment previously operated in Indiana was available for
production in other facilities of the Company.
BACKLOG
The Company does not consider backlog to be a significant factor is its
business. Customer orders are generally received between one week and three
months in advance of shipment dates and are satisfied with on hand finished
goods inventory or completed manufacturing within the customers delivery
deadlines.
SEASONALITY
The majority of the Company's business is not seasonal in nature. The sale
of invitations, announcements, Christmas and holiday cards and presentation
folders is directly affected by the timing of holidays and school schedules.
Sales of these products will typically be highest during the third and fourth
quarters of any year.
ITEM 2. PROPERTIES
PROPERTIES AND FACILITIES
As of February 28, 1998, the Company operated manufacturing, distribution,
office and warehouse space in the United States with a total floor area of
approximately 4,929,000 square feet. Of this footage, approximately 1,896,000
square feet are leased and approximately 3,033,000 square feet are owned. The
Company has five facilities in California, Mississippi, New Jersey, and New York
which aggregate approximately 310,000 square feet which are being subleased to
third parties. The Company's lease agreements for these facilities expire from
1998 through 2009.
To provide a cost efficient supply of products to its customers, the
Company maintains centralized management of nationwide manufacturing and
distribution facilities. Since 1992, the Company has consolidated 32
manufacturing and distribution facilities into 20 facilities. The Company's
management continually evaluates the potential consolidation of manufacturing
and distribution facilities. All of the Company's owned facilities are pledged
as collateral under the Company's bank credit agreement. The Company believes
that substantially all of its property and equipment is in good condition and
that it has sufficient capacity to meet its
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current and projected manufacturing and distribution needs in the foreseeable
future. The following table describes the principal properties of the Company as
of February 28, 1998:
<TABLE>
<CAPTION>
BUSINESS OWNED OR EXPIRATION OF SQUARE
LOCATION DIVISION(1) LEASED LEASE(2) FEET
-------- ----------- -------- -------------------- -------
<S> <C> <C> <C> <C> <C>
California City of Industry.................... W Owned -- 85,000
City of Industry.................... W Leased 2008(a)(f) 105,000
Colorado Denver.............................. W Leased 2001(a) 55,000
Georgia Gainesville......................... A Owned -- 70,000
Illinois Mattoon............................. A Leased month-to-month 29,200
Mattoon............................. A Owned -- 261,800
Mattoon............................. A Leased 3 month renewable 25,200
term
Mattoon............................. A Leased 1996(a) 58,900
Chicago............................. W Leased 2000(a) 170,000
Chicago............................. W Owned (b) 200,000
Chicago............................. W Owned -- 126,000
Massachusetts Westfield........................... A Owned -- 128,000
Holyoke............................. A Owned (b) 572,416
Mississippi Kosciusko........................... A Leased 1997(a)(c) 70,600
New Jersey Bloomfield.......................... W Leased 2003 94,000
New York New York City....................... W Leased 1997 5,000
Holland............................. W Owned -- 168,000
Ohio Miamisburg.......................... W Leased 1998 177,000
Pennsylvania Scottdale........................... W Owned -- 400,000
Mt. Pleasant........................ W Leased 1999(a) 11,000
Lancaster........................... A Leased 2001 105,000
Tennessee Morristown.......................... W Owned -- 255,000
Texas Dallas.............................. Corporate Leased 2003 580,000
Office
Dallas.............................. W Owned -- 105,000
Corsicana........................... W Owned -- 250,000
Utah Salt Lake City...................... A Leased 2007(b)(d) 370,000
Washington Kent................................ W Leased 1999(b) 40,000
Wisconsin DePere.............................. A Owned (b) 98,500
Appleton............................ W Owned (b) 313,000
</TABLE>
- ---------------
(1) "A" indicates operations associated with the Company's Ampad division and
"W" indicates operations associated with the Company's Williamhouse
division.
(2) (a) Lease or sublease contains an extension or renewal option.
(b) Two or more properties owned at this location.
(c) Sublease contains option to assume prime lease.
(d) Lease contains a right of first refusal.
(f) Lease contains an option to purchase.
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
On March 10, 1998, the Company, certain of its officers and directors,
certain former controlling stockholders and certain investment banking firms
that participated in the Company's IPO were named in a civil action filed in the
United States district Court in the Northern District of Texas, Dallas Division.
The complaint, a purported class action on behalf of purchasers of the Company's
common stock between July 2, 1996 and December 17, 1997, alleges violations of
the federal securities laws for the failure to disclose certain facts about the
Company's operations in connection with the Company's IPO and in certain
periodic reports.
18
<PAGE> 11
The complaint seeks unspecified damages and any other relief permitted by law.
The Company believes that the allegations in the complaint are without merit,
and the Company intends to rigorously defend itself.
The Company is a party to various other litigation matters incidental to
the conduct of its business. Management does not believe that the outcome of any
of these matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and regulations
impose limitations on the discharge of pollutants and establish standards for
management of waste. While there can be no assurance that the Company is at all
times in complete compliance with all such requirements, the Company has made
and will continue to make capital and other expenditures to comply with such
requirements. The Company spent approximately $100,000 and $839,000 in 1996 and
1997, respectively, on environmental capital projects, primarily for the
acquisition of waste paper baling and vacuum systems to improve the collection
of paper waste at its plants. The Company estimates that its environmental
capital expenditures will be approximately $50,000 to $100,000 in each of 1998
and 1999. As is the case with manufacturers in general, if a release of
hazardous substances occurs on or from the Company's properties or any
associated offsite disposal location, or if contamination from prior activities
is discovered at any of the Company's properties, the Company may be held liable
and the amount of such liability could be material.
The City of Industry, California facility of the Company's Williamhouse
division is located within an area of regional groundwater contamination
designated as the San Gabriel Valley National Priority List Area. The Company
does not believe its operations have contributed to the contamination and to
date the Company has not received a notice of potential liability with respect
to that site. The Company is aware that one of Niagara's and two of
Shade/Allied's facilities has been the subject of certain soil and groundwater
investigations and that the prior owner of the Niagara and the prior owner of
one of the Shade/Allied facilities have indemnified the Company for certain
environmental liabilities associated with historical use of the property. The
Company currently believes that any environmental liabilities associated with
such facilities would not be material or have been adequately covered by
agreements with the former owners
The Company's Ampad division has been named a potentially responsible party
("PRP") under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), at five waste disposal sites. The
Company settled its liability at four of these sites as a de minimis party. At
the Spectron site in Elkton, Maryland, the Company paid approximately $1,300 in
1989 as a de minimis settlement for an initial removal action at the site. In
1995, the Company received a notice of a remedial action at the site, and based
upon its allocation in 1989, expects to be eligible for a de minimis or de
micromis settlement. The Company is aware that Niagara has been named a PRP at
the Envirotek II site in Tonawanda, New York with respect to which Niagara
expects to be eligible for a de minimis settlement. Although the Company
endeavors to manage its wastes carefully, because CERCLA liability is strict and
retroactive, it is possible that in the future the Company may be identified as
a PRP with respect to other waste disposal sites.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders of the
Company during the quarter ended December 31, 1997.
19
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
The common stock of the Company is listed on the New York Stock Exchange
under the symbol "AGP". The quarterly high and low prices for the common stock
since the Company's initial public offering of common stock on July 2, 1996 is
shown below.
<TABLE>
<CAPTION>
QUARTER ENDED LOW PRICE HIGH PRICE
------------- --------- ----------
<S> <C> <C>
September 30, 1996.......................................... $13.375 $24.750
December 31, 1996........................................... $18.375 $22.625
March 31, 1997.............................................. $15.000 $26.000
June 30, 1997............................................... $13.125 $19.250
September 30, 1997.......................................... $11.625 $24.813
December 31, 1997........................................... $ 7.813 $14.625
</TABLE>
As of March 10, 1998, there were approximately 7,600 holders of common
stock. The Company has not sold any unregistered securities during the last
fiscal year.
DIVIDEND POLICY
Except as described below, the Company has not declared or paid any cash or
other dividends on its common stock and does not expect to pay dividends for the
foreseeable future. Instead, the Company currently intends to retain earnings to
reduce indebtedness and support its growth strategy. As a holding company, the
ability of the Company to pay dividends in the future is dependent upon the
receipt of dividends or other payments from its principal operating subsidiary,
AP&P Delaware. The payment of dividends by AP&P Delaware to the Company for
purposes of paying dividends to holders of common stock is prohibited by the
bank credit agreement and restricted by the indenture related to the Notes. Any
future determination to pay dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other factors, the Company's
results of operations, financial condition, capital requirements and contractual
restrictions.
In October 1995, the Company declared a stock dividend on its outstanding
capital stock of one share of preferred stock for each ten shares of Class P
common stock and common stock (the "Preferred Stock Dividend"). In December
1995, the Company paid a cash dividend on its then outstanding Class P common
stock equal to approximately $6.11 per share (after giving effect to the
recapitalization of the Company). Immediately thereafter, all outstanding shares
of Class P common stock were converted on a share-for-share basis into shares of
existing common stock. Prior to such conversion, the Class P common stock was
entitled to a preferential payment upon any distribution by the Company to its
holders of capital stock (whether by dividend, liquidating distribution or
otherwise) equal to the original cost of such shares plus an amount which
accrued on a daily basis at a rate of 15.0% per annum on such cost and the
amount so accrued in prior quarters (the "Preference Amount"). The cash dividend
returned such Preference Amount to the holders of the Class P common stock.
20
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data set forth below for the
years ended December 31, 1995, 1996 and 1997 have been derived from, and are
qualified by reference to, the audited consolidated financial statements of the
Company included elsewhere in this Form 10-K. The selected historical
consolidated financial data set forth for the years ended December 31, 1993 and
1994 have been derived from the Company's audited financial statements not
included in this Form 10-K. The selected historical consolidated financial data
set forth below should be read in conjunction with, and is qualified by
reference to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the audited consolidated financial statements and
accompanying notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
THE COMPANY
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Net sales......................................... $109,095 $127,744 $257,160 $583,859 $687,335
Cost of sales(2).................................. 93,309 120,695 209,633 458,449 590,388
-------- -------- -------- -------- --------
Gross profit...................................... 15,786 7,049 47,527 125,410 96,947
Selling and marketing expenses.................... 4,920 5,059 6,254 16,964 21,905
General and administrative expenses............... 5,240 4,867 10,447 24,374 27,502
Goodwill and intangible asset amortization........ -- 114 879 4,488 6,110
Losses on sales of trade accounts receivable...... -- -- 423 1,823 2,954
Management fees and services(3)................... 605 575 542 3,880 4,871
Nonrecurring compensation charge(4)............... -- -- 27,632 -- --
-------- -------- -------- -------- --------
Income (loss) from operations..................... 5,021 (3,566) 1,350 73,881 33,605
Interest expense.................................. 3,320 4,560 13,657 42,968 37,843
Other (income) expense............................ (167) (90) (735) (1,153) (389)
-------- -------- -------- -------- --------
Income (loss) before income taxes................. 1,868 (8,036) (11,572) 32,066 (3,849)
Provision for (benefit from) income taxes......... 64 (488) (6,538) 13,852 642
-------- -------- -------- -------- --------
Income (loss) before extraordinary item........... 1,804 (7,548) (5,034) 18,214 (4,491)
Extraordinary loss from extinguishment of debt,
net of income tax benefit....................... -- -- (9,652) (19,995) --
-------- -------- -------- -------- --------
Net income (loss)................................. $ 1,804 $ (7,548) $(14,686) $ (1,781) $ (4,491)
======== ======== ======== ======== ========
Net income (loss) per share(5):
Basic:
Before extraordinary item..................... $ 0.25 $ (1.03) $ (0.69) $ 1.05 $ (0.16)
Extraordinary item............................ -- -- (1.32) (1.15) --
-------- -------- -------- -------- --------
Net income (loss)............................. $ 0.25 $ (1.03) $ (2.01) $ (0.10) $ (0.16)
======== ======== ======== ======== ========
Diluted:
Before extraordinary item..................... $ 0.25 $ 0.99
Extraordinary item............................ -- (1.09)
-------- --------
Net income (loss)............................. $ 0.25 $ (0.10)
======== ========
Weighted average number of common shares and
common share equivalents outstanding(5):
Basic........................................... 7,307 7,307 7,307 17,408 27,431
Diluted......................................... 7,307 18,426
OTHER DATA:
Depreciation and amortization..................... $ 159 $ 942 $ 4,248 $ 14,253 $ 18,639
Capital expenditures.............................. $ 1,656 $ 942 $ 5,640 $ 15,109 $ 23,095
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ 8,248 $ 1,170 $108,845 $ 77,857 $152,819
Total assets...................................... $ 47,893 $ 68,233 $504,356 $509,417 $638,401
Long-term debt, less current maturities........... $ 10,806 $ 19,889 $443,794 $269,812 $398,577
Stockholders' equity (deficit)(6)................. $ 4,815 $ (2,733) $(66,421) $104,599 $100,666
</TABLE>
21
<PAGE> 14
- ---------------
(1) The Company has completed the following acquisitions during the periods
presented. All such acquisitions have been accounted following the purchase
method of accounting. The results of operations for each of the businesses
acquired are included in the Company's results of operations from the date
of acquisition through the end of the year in which the acquisition occurred
and in each subsequent year presented.
- Effective July 5, 1994, the Company acquired the assets and assumed
certain liabilities of SCM.
- Effective August 16, 1995, the Company acquired the inventory and certain
equipment of the file folder and hanging file product lines of the
Globe-Weis office products division of Atapco.
- Effective October 31, 1995, the Company acquired Williamhouse. The
Personalizing Division of Williamhouse was identified as a non-strategic
asset at the date of the acquisition and was reflected as an asset held
for sale in the consolidated balance sheet through June 27, 1996, when it
was sold. As such, the operating results of the Personalizing Division
are excluded from the results of operations from the date of the
Williamhouse acquisition.
- Effective June 28, 1996, the Company acquired Niagara.
- Effective February 11, 1997, the Company acquired Shade/Allied.
(2) Inventory cost is determined using the LIFO method of valuation.
(3) Includes $2.5 million both in 1996 and 1997 related to a one-year consulting
agreement with the former president and major shareholder of Niagara which
ended in 1997.
(4) Includes non-cash stock option compensation charges of $24.3 million
directly related to the Williamhouse acquisition as well as other
non-recurring cash and non-cash charges aggregating $3.3 million.
(5) In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share, and
the provisions of Securities and Exchange Commission Staff Accounting
Bulletin No. 98. Basic earnings per share are computed using the actual
weighted average number of outstanding common shares for each period after
giving effect to the Company's 8.1192-for-one stock split prior to the
Company's initial public offering. However, changes in the Company's capital
structure at the time of the initial public offering relative to preferred
stock and preferred stock option conversions to common stock and common
stock options are not presented retroactively. Diluted earnings per share
are based on the weighted average number of outstanding common shares and
give effect to the exercise of common stock options. Diluted earnings per
share are not presented for years in which the Company incurred losses as
the earnings per share information would be anti-dilutive.
(6) For 1995, includes $4.5 million to pay the liquidation preference, including
the return of original cost, of the Company's Class P common stock and $70.6
million to redeem a portion of its preferred stock.
22
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is one of the largest manufacturers and marketers of nationally
branded and private label paper-based office products (excluding copy paper) in
the $60 billion to $70 billion North American office products industry. The
Company offers a broad assortment of products including writing pads, file
folders, envelopes, machine papers and other paper-based products. Through its
Ampad division, the Company is among the largest suppliers of pads and other
paper-based writing products, filing supplies, machine papers and retail
envelopes to many of the largest and fastest growing office products
distributors. Through its Williamhouse division, the Company is the leading
supplier of mill branded, specialty and commodity business envelopes to paper
merchants and distributors. The Company believes that its future operating
results will not be directly comparable to its historical operating results
because of its strategic acquisitions. The Company's business has not generally
been seasonal in nature. Certain factors which have affected, and may affect
prospectively, the operating results of the Company are discussed below.
Strategic Acquisitions. On October 31, 1995, the Company acquired
Williamhouse, a leading supplier of envelopes to many of the largest and fastest
growing distributors, for an aggregate purchase price (including assumption of
debt) of approximately $300.7 million plus reimbursement of certain expenses to
the sellers. On June 28, 1996, the Company acquired Niagara, a national supplier
of envelopes to fast growing distributors, for an aggregate purchase price of
approximately $53.2 million, including costs of the acquisition and a $5 million
one year consulting agreement with Niagara's former president. With these
acquisitions, the Company became the largest supplier of envelopes to the
national paper merchants. The Williamhouse acquisition was financed through the
Company's old bank credit agreement and the assumption of senior subordinated
notes. The Niagara acquisition was financed with proceeds from the sale of the
Personalizing Division of Williamhouse.
On February 11, 1997, the Company acquired Shade/Allied, a national
supplier of machine papers, principally continuous computer forms. The purchase
price of $50.7 million was financed with borrowings under the Company's bank
credit agreement. Shade/Allied's products are distributed by both the Ampad and
Williamhouse divisions and the manufacturing plants are integrated into the
Ampad division. This acquisition provided the Company with a more significant
position in a fourth product category.
On August 16, 1995, the Company acquired the file folder and hanging file
product lines of Atapco's Globe-Weis office products division. Atapco was one of
the leading providers of file folders and hanging files to office products
superstores. The aggregate acquisition consideration of $20.0 million, including
fees and expenses, was financed through the incurrence of bank debt and seller
notes. The Globe-Weis acquisition further strengthened the Company's position in
the filing supplies and writing products categories.
Purchase Accounting Effects. The Company's acquisitions have been accounted
for using the purchase accounting method. The acquisitions have currently
affected, and will prospectively affect, the Company's results of operations in
certain significant respects. The aggregate acquisition costs (including
assumption of debt) are allocated to the net assets acquired based on the fair
market value of such net assets. The allocations of the purchase price result in
an increase in the historical book value of certain assets such as property,
plant and equipment and intangible assets, including goodwill, which results in
incremental annual depreciation and amortization expense each year.
Raw Material. The Company's principal raw material is paper. Certain
commodity grades utilized by the Company have shown considerable price
volatility since 1992. This volatility negatively impacted the Company's
earnings in 1994 as a result of the Company's inability to implement price
changes in many of its product lines without giving its customers advance
notification. Beginning in January 1995, the Company adopted new pricing
policies enabling it to set product prices consistent with the Company's cost of
paper at the time of shipment. From May 1997 through October 1997, all but one
of the key commodity grades of paper utilized by the Company increased in cost
between 6% and 18%. Due to strategic customer considerations and competitive
market conditions, the Company did not begin to recover a significant portion of
the increases in paper costs affecting both its divisions until December 1997.
The Company continued to
23
<PAGE> 16
implement sales pricing increases during the first quarter of 1998. Paper price
volatility is expected to continue to have an effect on net sales and cost of
sales and there is no assurance that the Company will not be materially affected
by future fluctuations in the price of paper. Fluctuations in paper prices can
have an effect on quarterly comparisons of the results of operations and
financial condition of the Company.
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of net sales for each year in the three year period
ended December 31, 1997. The Company's historical results of operations for each
of these periods are significantly affected by the results for the following
businesses acquired by the Company: (i) the results of Globe-Weiss which was
acquired August 16, 1995; (ii) Williamhouse which was acquired on October 31,
1995; (iii) Niagara which was acquired on June 28, 1996; and (iv) Shade/Allied
which was acquired on February 11, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................. 100.0% 100.0% 100.0%
===== ===== =====
Gross profit.............................................. 18.5 21.5 14.1
Selling and marketing expenses............................ 2.5 2.9 3.2
General and administrative expenses....................... 4.0 4.2 4.0
Goodwill amortization..................................... 0.3 0.8 0.9
Losses on sales of accounts receivable.................... 0.2 0.3 0.4
Management fees and services.............................. 0.2 0.6 0.7
Non-recurring compensation charge......................... 10.7 -- --
----- ----- -----
Income (loss) from operations............................. 0.6 12.7 4.9
Interest expense, net..................................... (5.3) (7.4) (5.5)
Other income.............................................. 0.3 0.2 0.1
----- ----- -----
Income (loss) before taxes................................ (4.4) 5.5 (0.5)
Provision for (benefit from) income taxes................. (2.5) 2.4 0.1
----- ----- -----
Income (loss) before extraordinary item................... (1.9) 3.1 (0.6)
Extraordinary loss from extinguishment of debt, net of
income tax benefit..................................... (3.8) (3.4) --
----- ----- -----
Net loss.................................................. (5.7)% (0.3)% (0.6)%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased from $583.9 million in 1996 to $687.3 million in 1997,
an increase of $103.4 or 17.7%. Of this sales increase, $67.4 million is due to
the acquisition of Shade/Allied and $50.1 million is due to the inclusion of a
full year of sales from the acquisition of Niagara. Excluding sales generated by
the Shade/Allied and Niagara acquisitions, sales from the Ampad division
increased $14.6 million and sales from the Williamhouse division declined $28.5
million. The increase in sales from the Ampad division is due primarily to
increased sales volume with the office products superstores and mass market
retail customers. The sales decline for the Williamhouse division is primarily
due to lower average selling prices in 1997 due to competitive market conditions
during the year and partly to lower volumes of envelopes sold.
Gross profit decreased from $125.4 million, or 21.5% of net sales, in 1996
to $96.9 million, or 14.1% of net sales, in 1997. This $28.5 million decrease is
primarily due to increased paper, material and labor costs which the Company did
not recover. During 1997, the Company's gross profit in the Ampad division was
negatively affected by sales price incentives provided to the division's rapidly
growing office superstores and mass merchants. Additionally, the Company's gross
profit in the Williamhouse division was negatively affected by competitive
market sales pricing conditions. These factors combined with higher material and
labor costs led to significantly lower gross profit in 1997 than in 1996. During
1997, the Company incurred approximately $2.8 million in one-time costs relating
to training personnel on new equipment, the training
24
<PAGE> 17
time needed to expand to 24 hour 7 day shifts and the move to the new Salt Lake
facility. Additionally, the Company incurred $1.2 million in fixed costs in 1997
for former Shade/Allied and Williamhouse plants which were closed during 1997
and will not recur in 1998.
During the fourth quarter of 1997, the Company announced that it would
incur additional charges due to annual revisions to the LIFO reserve and
revisions to cost of sales estimates primarily for the Williamhouse division.
These revisions resulted in $13.4 million of additional operating costs. Such
revisions for the Williamhouse division reflected the effects of higher paper
costs.
Selling and marketing expenses increased from $17.0 million in 1996 to
$21.9 million in 1997, or $4.9 million. Of this increase, $1.1 million is
attributable to the acquisition of Shade/Allied and the retention of a portion
of their sales force and customer service personnel and $3.1 million is
primarily attributable to the Niagara acquisition and the integration of its
sales force and customer service personnel into the Williamhouse division. The
remainder of the increase is attributable to the Ampad division, primarily due
to increased sales commissions associated with higher sales.
General and administrative expenses increased from $24.4 million in 1996 to
$27.5 million in 1997, or $3.1 million. Of this increase, $0.8 million is
attributable to the acquisition of Shade/Allied and the remainder is
attributable to increases in corporate expenses associated with the
centralization of certain functions in Dallas. During 1997, the Company incurred
$2.2 million of expenses related to Shade/Allied which will not recur in 1998.
Losses on sales of accounts receivable increased from $1.8 million in 1996
to $3.0 million in 1997 due to a higher average level of accounts receivable
sold to the third party trust during 1997. Following the acquisition of Niagara
in June 1996, the maximum amount of accounts receivable which the Company could
sell to the third party trust at any point in time was raised from $45 million
to $60 million. During 1997, the average level of accounts receivable sold to
the trust was higher than in 1996 and, as a result the losses on sales of
accounts receivable were higher. The losses on sales of accounts receivable
represent the Company's cost of using the third party trust to provide off
balance sheet financing of trade accounts receivable.
Goodwill and intangible asset amortization expense increased from $4.5
million in 1996 to $6.1 million in 1997, an increase of $1.6 million, due
primarily to a full year of amortization of goodwill associated with the
acquisition of Niagara and ten and one-half months of amortization of goodwill
associated with the acquisition of Shade/Allied.
Management fees and services expense for the year ended December 31, 1996
amounted to $3.9 million as compared to $4.9 million for the year ended December
31, 1997. The change in management fees is due primarily to the capitalization
of $0.8 million in Bain Capital fees in 1996 related to the acquisition of
Shade/ Allied.
Interest expense decreased from $43.0 million in 1996 to $37.8 million in
1997, representing a decrease of $5.2 million. Such decrease was due primarily
to the refinancing of the Company's credit agreement in July 1996, which
resulted in lower effective interest rates generating an interest savings of
$5.1 million, and the repayment of $70.0 million in senior subordinated notes in
August 1996, which led to an interest expense reduction of approximately $5.5
million. These savings were offset by $3.4 million additional interest expense
due to increases in long-term debt associated with the acquisition of
Shade/Allied and approximately $2.5 million additional interest expense as a
result of the Company's investment in working capital and net increase in
capital expenditures.
The income tax provision for the year ended December 31, 1997 reflects an
effective income tax provision rate of 16.7% as compared with the effective
income tax rate of 43.2% for the year ended December 31, 1996. In 1997, the
Company's loss before income taxes was relatively low, $3.8 million, in
comparison to the amount of expenses which are not deductible, $5.4 million.
Such expenses primarily consist of goodwill amortization, certain travel and
entertainment costs and life insurance for certain current and former employees.
As a result, the Company has taxable income for tax reporting purposes versus a
loss for financial reporting purposes and, therefore, the Company has incurred a
tax provision for 1997. The Company
25
<PAGE> 18
paid $4.5 million in income taxes during 1997, received an income tax refund of
$3.3 million in January 1998 and expects a refund of $0.8 million in state
income taxes during the second half of 1998.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 increased by $326.7 million,
or 127.0%, to $583.9 million from $257.2 million for the year ended December 31,
1995. Of this net sales increase, $274.8 million is related to the acquisition
of Williamhouse and Niagara and $35.2 million is related to the acquisition of
Globe-Weis. Ampad division net sales increased by $16.7 million during 1996
compared to 1995 due to higher sales to the fast growing customer channels such
as superstores, mass merchant stores and contract stationers.
Gross profit for the year ended December 31, 1996 increased by $77.9
million, or 164.0%, to $125.4 million from $47.5 million for the year ended
December 31, 1995. Approximately $69.5 million of the increase in gross profit
is attributable to the acquisition of Williamhouse and Niagara. Gross profit
margin increased to 21.5% for the year ended December 31, 1996 from 18.5% for
the year ended December 31, 1995. The increase in gross profit margin is
primarily attributable to higher margins of the Williamhouse division.
Selling and marketing expenses increased from $6.3 million in 1995 to $17.0
million in 1996, an increase of $10.7 million. Of this increase, $9.1 million is
due to the acquisition of Williamhouse and Niagara and $1.6 million is due to
increased selling and marketing expense for the Ampad division resulting from a
higher level of sales in this division.
General and administrative expenses increased from $10.4 million in 1995 to
$24.4 million in 1996, an increase of $14.0 million. Of this increase, $8.5
million is associated with the acquisition of Williamhouse and Niagara. The
remainder is associated with the implementation of a corporate infrastructure as
the Company expanded in size.
Goodwill and intangible asset amortization increased from $0.9 million in
1995 to $4.5 million in 1996, or an increase of $3.6 million, as a result of the
acquisitions of Williamhouse in October 1995 and Niagara in June 1996.
Losses on sales of accounts receivable increased from $0.4 million to $1.8
million in 1996 due primarily to having the accounts receivable securitization
facility in place for a full year in 1996. Such charge represents the losses on
sales of trade accounts receivable from the Company to a third party trust and
represents the cost to the Company of using an off balance sheet financing
facility for trade accounts receivable.
Management fees and services increased $3.3 million in 1996 due to the
amortization of a consulting agreement with a former shareholder of Niagara and
an increase in Bain Capital's management fees.
Interest expense for the year ended December 31, 1996 increased $29.3
million to $43.0 million from $13.7 million for the year ended December 31,
1995. The increase is attributable primarily to higher levels of outstanding
debt for a full year as a result of the acquisition of Williamhouse and
Globe-Weis. The increase in interest expense was partially offset by a reduction
of approximately $3.4 million in interest expense following the redemption of
$70.0 million of the senior subordinated notes in August 1996.
The income tax provision for year ended December 31, 1996 reflects an
effective tax rate of 43.2% versus an effective tax benefit rate of 56.5% for
the year ended December 31, 1995. The effective tax rate for 1996 reflects a 40%
combined statutory federal and state income tax rate adjusted for nondeductible
expenses, primarily goodwill amortization. The effective tax rate for the year
ended December 31, 1995 differs from the federal statutory income tax rate of
35% due to state income taxes and the reversal of a valuation allowance on
deferred tax assets relating to the realizability of the Company's net operating
loss carryforward.
Extraordinary item in 1996 represents an after tax loss on extinguishment
of debt of $20.0 million ($33.0 million pretax) recognized as a result of the
redemption of $70.0 million of senior subordinated notes with a portion of the
net proceeds from the initial public offering and the write off of a portion of
the unamortized deferred financing costs related to the Notes and all of the
deferred financing costs associated with the old bank credit agreement and the
old accounts receivable facility.
26
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operating activities in 1997 amounted to $62.4 million and
consisted of (i) cash generated from the net loss, after adding back non-cash
charges of $21.1 million, (ii) cash used to fund increases in accounts
receivable of $17.3 million relating to higher sales in 1997 than in 1996.,
(iii) cash used to fund increases in inventories of $44.2 million manufactured
in anticipation of higher sales (iv) an increase in accounts payable of $4.6
million and (v) a decrease in accrued expenses of $22.0 million due primarily to
changes in acquisition integration cost reserves ($8.2 million), reduced
incentive compensation due to payment of bonuses earned in 1996 and no bonus
compensation for 1997 ($4.6 million) and reductions in customer incentive
liabilities due to the timing of the payments to customers ($8.5 million).
Charges to the acquisition integration cost reserves consisted primarily of
plant closing, lease termination and severance costs associated with facilities
which have been closed and consolidated into the Company's existing operations.
Cash provided by operating activities for the year ended December 31, 1996 was
$23.2 million compared to cash provided by operating activities of $4.7 million
for the year ended December 31, 1995. The increase in cash provided by operating
activities is primarily due to higher net sales and earnings of the Company in
1996. The net cash provided for the year ended December 31, 1995 resulted
primarily from an increase of $5.0 million in accounts payable, an increase in
accrued expenses of $4.9 million, a decrease in inventories and increased
margins on sales.
Cash used in investing activities for the year ended December 31, 1997 was
due to the acquisition of Shade/Allied for $50.7 million and purchases of
property and equipment for $23.1 million, offset by proceeds from sales of
equipment and a closed plant for $4.1 million. Cash used in investing activities
for the year ended December 31, 1996 and 1995 was $16.2 million and $131.3
million, respectively. The use of cash for the year ended December 31, 1996 was
principally due to the Niagara acquisition ($53.0 million, net of cash received)
and purchases of equipment ($14.6 million), offset by proceeds from the sale of
the Regency Division and other assets held for sale ($49.3 million). The use of
cash for the year ended December 31, 1995, was due to the Williamhouse
acquisition ($122.7 million), the Globe-Weis acquisition ($7.0 million) and
purchase of equipment ($3.9 million).
Cash was provided by financing activities in 1997 by increased borrowing
under the Company's revolving credit agreement of $130.4 million offset by $2.3
million in payments on industrial revenue bonds and capitalized lease
obligations. At the end of 1997, the Company had sold an additional $6 million
of accounts receivable to the third party trust. Cash used in financing
activities for the year ended December 31, 1996 was $23.0 million as compared to
a cash provision from financing activities of $144.9 million for the year ended
December 31, 1995. During the year ended December 31, 1996, the Company (i)
completed its initial public offering of 12.5 million shares of common stock for
$172.8 million in net proceeds after deducting offering fees and expenses, (ii)
refinanced its accounts receivable facility with a new $60.0 million facility,
(iii) refinanced its bank credit agreement, (iv) redeemed $70.0 million of
senior subordinated notes, (v) repaid $95.8 million of debt incurred under the
old bank credit agreement, (vi) paid $7.7 million in redemption premiums on the
Notes, (vii) repaid $10 million under the new accounts receivable facility with
proceeds from the sale of the Regency Division, (viii) borrowed $54 million
under the new accounts receivable facility and (ix) repaid WR seller notes for
$25 million Cash provided by financing activities for the year ended December
31, 1995 was $144.9 million primarily due to periodic financings incurred in
connection with the various acquisitions.
In February 1998, the Company and its banking group agreed to an increase
in the size of the revolving credit agreement from $300.0 million to $330.0
million for a period of one year. After such time, the level of debt available
under such credit agreement will be reduced to $300.0 million. In December 1997
and February 1998, certain covenants in the credit agreement were also modified
at the end of 1997 and for a one year period ending in February 1999. The
Company will not be subject to a consolidated debt to EBITDA ratio until the
first quarter of 1999. Interest coverage ratios will be measured quarterly
beginning January 1, 1998. Unless approved by the banking group, the Company
will be restricted to $15.0 million in net capital expenditures for 1998 and
will be restricted from any acquisitions. The interest cost incurred by the
Company will vary each quarter in 1998 depending on the Company's consolidated
debt to EBITDA ratio at the beginning of each quarter. The Company paid a fee of
$1.1 million to its banking group as part of the amendment to the credit
agreement.
27
<PAGE> 20
The ability of the Company to "comply with the covenants in the credit
agreement," meet its debt service obligations and reduce its total debt will be
dependent upon the future performance of the Company and its subsidiaries which,
in turn, will be subject to general economic conditions and to financial,
business and other factors, including factors beyond the Company's control. "The
operating results for the month of January 1998 were lower than management's
expectations due to the timing of the implementation of price increases and
product line rationalization. As a result, the Company is uncertain whether its
operating performance for the first quarter of 1998 will be in full compliance
with covenants in its credit agreement. In the event the Company does not meet
the covenants, the Company will need to seek waiver from its banking group. A
portion of the consolidated debt of the Company bears interest at floating
rates; therefore, its financial condition is and will continue to be affected by
changes in prevailing interest rates. The Company has entered into an interest
rate protection agreement to minimize the impact from a rise in interest rates.
Management believes that based on current levels of operations and
anticipated internal growth, cash flow from operations, together with other
available sources of funds including borrowings under the bank credit agreement
and the accounts receivable facility and available cash on hand at December 31,
1997 of $4.9 million, will be adequate for 1998 to make required payments of
principal and interest on the Company's indebtedness, to fund anticipated
capital expenditures of $13 million in 1998, and to meet working capital
requirements.
The amount of debt available under the Company's current credit agreement
decreases by $30.0 million in February 1999 and by an additional $50.0 million
in July 1999. Based on the Company's current level of operating results and the
expected operating results in 1998 and 1999, the Company expects that the
reduction of $30.0 million in February 1999 will not have a significant effect
on its operations. However, the reduction in available borrowing of $50.0
million at the end of 1999 may require the Company to explore other financing
alternatives, including but not limited to a refinancing of its bank debt,
raising new private or public debt, raising additional public equity capital,
reducing the level of capital expenditures, reducing operating costs and selling
certain assets. In the event that the Company is not able to successfully
complete the financing alternatives just described, the Company and its banking
group would be required to negotiate revisions to the terms of the credit
agreement.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for each of the three years in the period ended December
31, 1997.
NEWLY ISSUED ACCOUNTING STANDARDS
During the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). Such
adoption resulted in a new presentation of earnings per share amounts as either
"basic" or "diluted." Basic earnings per share is calculated as net income
divided by the number of outstanding shares of common stock. Diluted earnings
per share is calculated in a manner similar to the "primary" earnings per share
previously presented by the Company. Diluted earnings per share is calculated as
net income divided by the number of outstanding shares of common stock, as
adjusted for common stock options. The Company has restated its quarterly
earnings per share to present such information in accordance with the new
accounting standard.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 ("SAB 98") which requires the Company to present
historical earnings per share for pre-IPO periods even if such information,
historically, was not considered meaningful, in order to be consistent with SFAS
128. However, in accordance with SAB 98, changes in the Company's capital
structure at the time of the initial public offering relative to preferred stock
and preferred stock options conversion to common stock and common stock options
are not presented retroactively. In addition, the number of common shares issued
during the Company's initial public offering is not retroactively restated. The
weighted average common shares outstanding under the basic and diluted methods
described in the preceding paragraph reflect only common stock or common stock
options actually outstanding for the periods presented. The 8.1192-for-one
28
<PAGE> 21
common stock split by the Company at the time of its initial public offering has
been retroactively restated for all periods presented.
Two new accounting standards, Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income, and No. 131, Disclosures About Segments
of an Enterprise and Related Information, will take effect during the first
quarter of 1998. The Company does not expect that the adoption of such new
accounting standards will have any significant effects on the Company's reported
financial information.
COMPUTER SYSTEMS AND YEAR 2000
The Company has reviewed its current hardware and software systems,
including existing interfaces with vendors and customers, and has determined
that arrival of the year 2000 will not require any significant changes or
modifications to the Company's existing systems.
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form
10-K to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which are
other than statements of historical facts. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such subsequent forward-looking statements, whether written or oral and
whether made by or on behalf of the Company, are also expressly qualified by
these cautionary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risks and uncertainties which
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. The forward-looking statements contained
herein are based on various assumptions, many of which are based, in turn, upon
further assumptions. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis, including without limitation, management's examination of historical
operating trends, data contained in the Company's records and other data
available from third parties, but there can be no assurance that management's
expectations, beliefs or projections will result or be achieved or accomplished.
In addition to the other factors and matters discussed elsewhere herein, the
following are important factors that, in the view of the Company, could cause
actual results to differ materially from those discussed in the forward-looking
statements:
1. Changes in economic conditions, in particular those which affect the
retail and wholesale office product markets.
2. Changes in the availability and/or price of paper, in particular if
increases in the price of paper are not passed along to the Company's
customers.
3. Changes in senior management or control of the Company.
4. Inability to obtain new customers or retain existing ones.
5. Significant changes in competitive factors, including product pricing
conditions, affecting the Company.
6. Governmental/regulatory actions and initiatives, including, those
affecting financings.
7. Significant changes from expectations in actual capital expenditures
and operating expenses.
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and
other investments.
9. Significant changes in rates of interest, inflation or taxes.
10. Significant changes in the Company's relationship with its employees
and the potential adverse effects if labor disputes or grievance were
to occur.
29
<PAGE> 22
11. Changes in accounting principles and/or the application of such
principles to the Company.
The foregoing factors could affect the Company's actual results and could
cause the Company's actual results during 1998 and beyond to be materially
different from any anticipated results expressed in any forward-looking
statement made by or on behalf of the Company.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after date hereof.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) of the Exhibit Index for a listing of the Company's
financial statements included with this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This section is not applicable as there were no changes in or disagreements
with the Company's independent accountants on accounting and financial
disclosure for the period covered by this Form 10-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This item is incorporated by reference from the Company's 1998 Proxy
Statement where the information can be found on pages 2 to 3.
ITEM 11. EXECUTIVE COMPENSATION
This item is incorporated by reference from the Company's 1998 Proxy
Statement where the information can be found on pages 10 to 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated by reference from the Company's 1998 Proxy
Statement where the information can be found on pages 7 to 9.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference from the Company's 1998 Proxy
Statement where the information can be found on pages 5 to 6.
30
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(a) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMERICAN PAD & PAPER COMPANY AND SUBSIDIARIES
Responsibility for the Consolidated Financial Reports....... 34
Report of Independent Accountants........................... 34
Consolidated Balance Sheets at December 31, 1996 and 1997... 35
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... 36
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... 37
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1995, 1996, and 1997..... 38
Notes to Consolidated Financial Statements.................. 39
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. AND
SUBSIDIARIES
Report of Independent Accountants........................... 60
Consolidated Balance Sheets at December 31, 1996 and 1997... 61
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... 62
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996, and 1997......................... 63
Consolidated Statements of Stockholders' Equity years ended
December 31, 1995, 1996, and 1997......................... 64
Notes to Consolidated Financial Statements.................. 65
</TABLE>
ITEM 14(a)(2) FINANCIAL STATEMENT SCHEDULES
The information required by this item is included in the consolidated
financial statements or is omitted because the schedules are not applicable to
the Company.
ITEM 14(b) REPORTS ON FORM 8-K
The Company filed one Current Report on Form 8-K on January 9, 1998,
relating to the Company's press release dated December 17, 1997 describing the
expected operating results for the fourth quarter of 1997 and all of 1997.
ITEM 14(b) EXHIBITS
See Exhibit Index which follows on pages 81 to 82.
31
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrants have duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, as of March 18,
1998.
AMERICAN PAD & PAPER COMPANY
AMERICAN PAD & PAPER COMPANY OF
DELAWARE, INC.
as Registrants
/s/ CHARLES G. HANSON III
------------------------------------
Charles G. Hanson III
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below as of March 18, 1998 by the following persons
on behalf of the registrants and in the capacities indicated.
<TABLE>
<S> <C>
/s/ RUSSELL M. GARD
- -----------------------------------------------------
Russell M. Gard
President, Chief Operating Officer and Director
/s/ ROBERT C. GAY
- -----------------------------------------------------
Robert C. Gay
Director
/s/ MARC B. WOLPOW
- -----------------------------------------------------
Marc B. Wolpow
Director
/s/ SCOTT R. WATTERSON
- -----------------------------------------------------
Scott R. Watterson
Director
/s/ GREGORY M. BENSON
- -----------------------------------------------------
Gregory M. Benson
Director, Interim Chief Financial Officer and
Principal Financial Officer
/s/ JONATHAN S. LAVINE
- -----------------------------------------------------
Jonathan S. Lavine
Director
/s/ HERBERT M. KOHN
- -----------------------------------------------------
Herbert M. Kohn
Director
/s/ WILLIAM W. SOLOMON, JR.
- -----------------------------------------------------
William W. Solomon, Jr.
Vice President -- Controller
Principal Accounting Officer
</TABLE>
32
<PAGE> 25
AMERICAN PAD & PAPER COMPANY
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Responsibility for the Consolidated Financial Reports....... 34
Report of Independent Accountants........................... 34
Consolidated Balance Sheets at December 31, 1996 and 1997... 35
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... 36
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... 37
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1995, 1996 and
1997...................................................... 38
Notes to Consolidated Financial Statements.................. 39
</TABLE>
33
<PAGE> 26
RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL REPORTS
Company management is responsible for the preparation, accuracy and
integrity of the consolidated financial statements and other financial
information included in this Annual Report. This responsibility includes
preparing the statements in accordance with generally accepted accounting
principles and necessarily includes estimates that are based on management's
best judgments.
To help ensure the accuracy and integrity of Company financial data,
management maintains internal controls, which are designed to provide reasonable
assurance that transactions are executed as authorized, that they are accurately
recorded, and that assets are properly safeguarded. Internal financial and
operations management monitors these controls. It is essential for all Company
employees to conduct their business affairs in keeping with the highest ethical
standards as outlined in our code of conduct policy. Careful selection of
employees, and appropriate divisions of responsibility, also help us to achieve
our control objectives.
The financial statements have been audited by the Company's independent
accountants, Price Waterhouse LLP. Their report is also shown on this page.
The Board of Directors, acting through its Audit Committee composed
entirely of outside directors, oversees the adequacy of the Company's control
environment. The Audit Committee meets periodically with representatives of
Price Waterhouse LLP and internal financial management to review accounting,
control, auditing and financial reporting matters. The independent accountants
also have full and free access to meet privately with the Audit Committee.
<TABLE>
<S> <C>
Charles G. Hanson III Gregory M. Benson
Chief Executive Officer Interim Chief Financial Officer
</TABLE>
---------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
American Pad & Paper Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) on page 31 present fairly, in all material respects,
the financial position of American Pad & Paper Company and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Dallas, Texas
March 16, 1998
34
<PAGE> 27
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... $ 2,290 $ 4,855
Accounts receivable....................................... 57,054 74,203
Inventories............................................... 105,667 154,359
Income taxes receivable................................... -- 4,059
Prepaid expenses and other current assets................. 4,739 1,402
Deferred income taxes..................................... 10,754 11,992
--------- ---------
Total current assets.............................. 180,504 250,870
Property and equipment...................................... 133,090 151,390
Intangible assets........................................... 192,431 233,698
Other....................................................... 3,392 2,443
--------- ---------
Total assets...................................... $ 509,417 $ 638,401
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 2,171 $ 1,538
Accounts payable.......................................... 44,932 56,356
Accrued expenses.......................................... 55,041 40,157
Income taxes payable...................................... 503 --
--------- ---------
Total current liabilities......................... 102,647 98,051
Long-term debt.............................................. 269,812 398,577
Deferred income taxes....................................... 30,981 39,477
Other....................................................... 1,378 1,630
--------- ---------
Total liabilities................................. 404,818 537,735
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 150 shares authorized, no shares issued
and outstanding........................................ -- --
Common stock, voting, $.01 par value, 75,000 shares
authorized, 27,400 and 27,436 shares issued and
outstanding, respectively.............................. 274 274
Additional paid-in capital................................ 300,721 301,279
Accumulated deficit....................................... (196,396) (200,887)
--------- ---------
Total stockholders' equity........................ 104,599 100,666
--------- ---------
Total liabilities and stockholders' equity........ $ 509,417 $ 638,401
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 28
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................ $257,160 $583,859 $687,335
Cost of sales............................................ 209,633 458,449 590,388
-------- -------- --------
Gross profit........................................... 47,527 125,410 96,947
-------- -------- --------
Operating expenses:
Selling and marketing.................................. 6,254 16,964 21,905
General and administrative............................. 10,447 24,374 27,502
Losses on sales of accounts receivable................. 423 1,823 2,954
Amortization of goodwill and intangible assets......... 879 4,488 6,110
Management fees and services........................... 542 3,880 4,871
Nonrecurring compensation charge....................... 27,632 -- --
-------- -------- --------
46,177 51,529 63,342
-------- -------- --------
Income from operations................................... 1,350 73,881 33,605
Other income (expense):
Interest............................................... (13,657) (42,968) (37,843)
Other income, net...................................... 735 1,153 389
-------- -------- --------
Income (loss) before income taxes and extraordinary
item................................................... (11,572) 32,066 (3,849)
Provision (benefit) for income taxes..................... (6,538) 13,852 642
-------- -------- --------
Income (loss) before extraordinary item.................. (5,034) 18,214 (4,491)
Extraordinary loss from extinguishment of debt (net of
income tax benefits of $6,434 and $13,009,
respectively).......................................... (9,652) (19,995) --
-------- -------- --------
Net loss................................................. $(14,686) $ (1,781) $ (4,491)
======== ======== ========
Basic earnings per share:
Income (loss) before extraordinary item................ $ (0.69) $ 1.05 $ (0.16)
Extraordinary item..................................... (1.32) (1.15) --
-------- -------- --------
Net loss............................................... $ (2.01) $ (0.10) $ (0.16)
======== ======== ========
Diluted earnings per share:
Income before extraordinary item....................... $ 0.99
Extraordinary item..................................... (1.09)
--------
Net loss............................................... $ (0.10)
========
Weighted average shares outstanding:
Basic.................................................. 7,307 17,408 27,431
Diluted................................................ 18,426
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE> 29
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (14,686) $ (1,781) $ (4,491)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation............................................ 3,369 9,765 12,529
Amortization of goodwill and intangible assets.......... 879 4,488 6,110
Noncash portion of nonrecurring compensation charge..... 25,998 -- --
Extraordinary loss on extinguishment of debt............ 9,652 19,995 --
Amortization of debt issuance costs..................... 1,538 3,790 2,529
(Gain) loss on sale of assets........................... (140) (94) 86
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable................................... (22,025) (25,625) (17,300)
Refundable income taxes............................... 101 3,657 (4,059)
Inventories........................................... 2,256 (2,030) (44,186)
Prepaid expenses and other............................ 905 1,721 598
Income tax asset, net................................. (13,141) 13,361 642
Accounts payable...................................... 4,979 1,819 4,553
Accrued expenses...................................... 4,877 (4,294) (22,049)
Other assets and liabilities.......................... 147 (1,556) 2,629
--------- -------- --------
Net cash provided by (used in) operating
activities........................................ 4,709 23,216 (62,409)
--------- -------- --------
Cash flows from investing activities:
Purchase of stock and net assets of businesses, including
acquisition costs....................................... (129,701) (52,964) (50,677)
Purchases of property and equipment....................... (3,919) (14,609) (23,095)
Proceeds from sale of assets.............................. 140 2,056 4,056
Net cash generated from assets held for sale.............. 2,213 49,277 --
--------- -------- --------
Net cash used in investing activities............... (131,267) (16,240) (69,716)
--------- -------- --------
Cash flows from financing activities:
Net repayments under line of credit....................... (22,767) -- --
Proceeds from long-term debt.............................. 430,052 192,773 130,400
Repayment of long-term debt............................... (186,546) (380,317) (2,268)
Redemption premiums and penalties included in
extraordinary loss...................................... (10,812) (7,700) --
Debt issuance costs....................................... (35,032) (9,584) --
Redemption of preferred stock............................. (61,478) -- --
Redemption of Class P common stock........................ (4,464) -- --
Redemption of preferred stock options..................... (9,188) -- --
Proceeds from old accounts receivable facility............ 45,000 -- --
Repayment of old accounts receivable facility............. -- (45,000) --
Net proceeds from new accounts receivable facility........ -- 54,000 6,000
Proceeds from exercise of preferred stock options and
management stock purchase plan.......................... 130 -- 558
Proceeds from initial public offering, net................ -- 172,801 --
--------- -------- --------
Net cash provided by (used in) financing
activities........................................ 144,895 (23,027) 134,690
--------- -------- --------
Net increase (decrease) in cash............................. 18,337 (16,051) 2,565
Cash, beginning of year..................................... 4 18,341 2,290
--------- -------- --------
Cash, end of year........................................... $ 18,341 $ 2,290 $ 4,855
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................ $ 9,127 $ 38,785 $ 34,292
========= ======== ========
Income taxes............................................ $ 99 $ 470 $ 4,519
========= ======== ========
Supplemental disclosure of noncash investing activity:
Notes payable issued in consideration of purchase price... $ 36,115 $ -- $ --
========= ======== ========
Notes payable issued to purchase equipment................ $ 1,721 $ 500 $ --
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE> 30
AMERICAN PAD & PAPER COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
PREFERRED STOCK COMMON STOCK EARNINGS
------------------ --------------- PAID-IN (ACCUMULATED)
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ --------- ------ ------ -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994... -- $ -- 7,307 $ 73 $ 2,927 $ (5,733) $ (2,733)
Preferred stock dividend....... 90 175,365 -- -- (2,933) (172,432) --
Grant of stock options......... -- -- -- -- 25,998 -- 25,998
Redemption of preferred
stock........................ (32) (61,478) -- -- -- -- (61,478)
Accrual of preferential
distribution on Class P
common stock................. -- -- -- -- 1,764 (1,764) --
Redemption of Class P common
stock........................ -- -- -- -- (4,464) -- (4,464)
Redemption of preferred stock
options...................... -- -- -- -- (9,188) -- (9,188)
Proceeds from exercise of
preferred stock options...... -- -- -- -- 130 -- 130
Net loss....................... -- -- -- -- -- (14,686) (14,686)
--- --------- ------ ---- -------- --------- --------
BALANCE AT DECEMBER 31, 1995... 58 113,887 7,307 73 14,234 (194,615) (66,421)
Conversion of preferred stock
to common stock.............. (58) (113,887) 7,593 76 113,811 -- --
Proceeds from initial public
offering of common stock..... -- -- 12,500 125 172,676 -- 172,801
Net loss....................... -- -- -- -- -- (1,781) (1,781)
--- --------- ------ ---- -------- --------- --------
BALANCE AT DECEMBER 31, 1996... -- -- 27,400 274 300,721 (196,396) 104,599
Common stock sold under the
management stock purchase
plan......................... -- -- 36 -- 558 -- 558
Net loss....................... -- -- -- -- -- (4,491) (4,491)
--- --------- ------ ---- -------- --------- --------
BALANCE AT DECEMBER 31, 1997... -- $ -- 27,436 $274 $301,279 $(200,887) $100,666
=== ========= ====== ==== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE> 31
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AND PERCENTAGE AMOUNTS)
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS
Organization and Basis of Presentation
American Pad & Paper Company (formerly Ampad Holding Corporation and
referred to hereafter as the "Company") was incorporated on June 2, 1992 as a
holding company to acquire all of the outstanding stock of Ampad Corporation
("Ampad"), the surviving entity from the merger between Ampad Acquisition
Corporation and Ampad. The Company had no operations through July 31, 1992.
On October 3, 1995, the Company agreed to acquire in a merger transaction
all of the outstanding stock of WR Acquisition, Inc. ("WR"). In a series of
transactions, the Company exchanged 100% of the stock of its wholly owned
subsidiary, Ampad, for newly issued shares of WR. WR then contributed Ampad to
its wholly owned subsidiary, Williamhouse-Regency of Delaware, Inc., renamed
American Pad & Paper Company of Delaware, Inc. (referred to hereafter on a
pre-October 31, 1995 basis as "Williamhouse-Regency" and on a post-October 31,
1995 basis as "AP&P Delaware"), in exchange for a right to receive $140 million
of merger consideration. The Company, principally using bank borrowings by AP&P
Delaware aggregating $245 million, funded WR's right to receive the merger
consideration. WR in turn repurchased 100% of the WR shares not owned by the
Company. The Company accounted for the transaction as a purchase of the stock of
WR. As a result of the transactions, the Company now owns 100% of WR, which in
turn owns 100% of AP&P Delaware.
The financial statements of the Company include the historical accounts and
operations of the Company and AP&P Delaware. Included in the historical accounts
and operations of AP&P Delaware are the accounts and operations of Ampad, the
envelope operations of Williamhouse and Niagara, and the computer form
operations of Shade/Allied since their respective dates of acquisition.
Additionally, the consolidated financial statements include the accounts of
Notepad Funding Corporation ("Notepad"), a special purpose corporation utilized
in the accounts receivable facility. All significant intercompany balances have
been eliminated.
American Pad & Paper Company of Delaware, Inc.
The Company's wholly owned subsidiary, AP&P Delaware, is the issuer of 13%
Senior Subordinated Notes ("Notes"). Terms of the Notes require, among other
matters, that AP&P Delaware provide annual audited and quarterly unaudited
financial statements to the holders of the publicly traded notes. The Company is
providing the holders of the Notes with its quarterly and annual consolidated
financial statements as well as its periodic reports as filed with the
Securities and Exchange Commission. The Company believes that providing such
consolidated financial statements satisfies the financial information and debt
compliance reporting needs of the holders of the Notes.
There are no material differences between the financial statements of the
Company and of AP&P Delaware. The composition of the AP&P Delaware's
stockholders' equity at December 31, 1997 consists of one hundred shares of
$0.01 par value common stock, paid in capital of $202,357 and an accumulated
deficit of $101,691 and, in total, is equal to the stockholders' equity of the
Company.
Business
The Company is among the larger manufacturers and marketers of paper-based
office products in North America. The Company operates in one business segment,
converting paper into office products and offers a broad assortment of products
through two complementary divisions: Ampad (writing pads, file folders, retail
envelopes, machine papers, and other paper-based office products) and
Williamhouse (business envelopes and machine papers). The Company's products are
distributed through large mass merchant retailers, office product superstores,
warehouse clubs, major contract stationers, office products wholesalers, paper
merchants, and independent dealers. Substantially all sales are to customers
within the United States.
39
<PAGE> 32
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma Information
The pro forma information included in these financial statements and notes
is unaudited.
Quarterly Financial Information
The quarterly financial information included in these financial statements
is unaudited and includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position, its results of operations and its cash flows. Operating results for
any particular quarter are not necessarily indicative of results for the full
fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
consolidated financial statements are as follows:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid, interest-bearing instruments with
an original maturity of three months or less to be cash equivalents.
Revenue Recognition
The Company recognizes revenue upon shipment of the product. All risks and
rewards of ownership pass to the customer upon shipment. Damaged or defective
products may be returned to the Company for replacement or credit. The Company
also offers sales volume rebates or contractual allowance payments to customers
based on their level of sales activity or period of time customers agree to sell
the Company's products, which aggregate period shall not exceed three years. The
effects of returns, discounts and other incentives are estimated and recorded at
the time of shipment. Volume rebates and allowances are estimated and recorded
based on sales activity or period of time customers agree to sell the Company's
products.
Concentration of Credit Risk
The Company sells its products into various wholesale and retail channels,
primarily for the commercial office products marketplace. Management believes
its credit policies are prudent and reflect normal industry terms and business
risks. The Company performs periodic credit evaluations of its customers and
does not require collateral. Historically, the Company has not experienced
significant losses related to individual customers or groups of customers in any
particular industry or geographic area. An allowance is maintained at a level
that management believes is sufficient to cover potential credit losses
including potential losses on receivables sold.
40
<PAGE> 33
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories, which consist primarily of paper and converted paper products,
are stated at the lower of cost or market. Cost is determined by the last-in,
first-out (LIFO) method. Costs include material, labor and overhead.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the individual
assets. Significant repairs or betterments, which extend the useful life of an
asset, are capitalized and depreciated over the asset's remaining useful life.
Goodwill and Intangible Assets
Goodwill represents the cost in excess of fair value of the net assets of
companies acquired in purchase transactions. Goodwill is amortized using the
straight-line method over periods ranging from 20 to 40 years. Intangible assets
represent trade names acquired in the WR and Shade/Allied acquisitions and are
amortized using the straight-line method. Trade names in the aggregate gross
amount of $31,700 and $6,200 for WR and $5,610 for Shade/Allied, are amortized
over 40, 15 and 40 years, respectively. Amortization expense was $879 in 1995,
$4,488 in 1996 and $6,110 in 1997.
Long-Lived Assets
It is the Company's policy to periodically review the net realizable value
of its long-lived assets, including goodwill and intangible assets, through an
assessment of the estimated future cash flows related to such assets. In the
event that assets are found to be carried at amounts which are in excess of
estimated gross future cash flows, then the assets will be adjusted for
impairment to a level commensurate with a discounted cash flow analysis of the
underlying assets. Based upon its most recent analysis, the Company does not
believe an impairment of long-lived assets exists at December 31, 1997.
Debt Issuance Costs
Costs associated with debt issuances are capitalized and amortized to
interest expense using the effective interest method over the terms of the
related debt agreements.
Income Taxes
The Company accounts for income taxes following the liability method, which
prescribes an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
Deferred tax assets are recognized, net of any valuation allowance, for
deductible temporary differences and tax operating loss and credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances. The Company periodically reviews the realizability
of its deferred tax assets and, as needed, records valuation allowances when
realizability of the deferred tax asset is not likely.
Derivatives
Premiums paid for interest rate cap agreements are amortized as interest
expense over the term of the agreement. Amounts receivable under the interest
rate cap agreement are recorded as a reduction of interest expense.
41
<PAGE> 34
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
Carrying values of cash, accounts receivable, accounts payable and accrued
expenses approximate fair value due to the short-term maturities of these assets
and liabilities. The carrying value of senior bank debt bearing interest at
floating rates approximates fair value. The carrying value at December 31, 1997
of the Notes of $130,000 compares to the Notes' fair value of $140,400 based on
quoted market rates, as determined at the end of 1997.
Earnings Per Share
Basic earnings per share is computed as the quotient of net income (loss)
divided by the weighted average actual number of outstanding shares of common
stock at the end of a year. Diluted earnings per share is computed as the
quotient of net income (loss) divided by the number of outstanding shares of
common stock as adjusted for common stock options. The difference between basic
and diluted weighted average shares is due to 1,018 dilutive common stock
options granted through 1996. The adjustment for common stock options is
calculated by assuming that all dilutive options are exercised, that the
proceeds from such exercise are used to repurchase shares of the Company's stock
at the average price of the common stock during the period and the Company will
also generate proceeds and repurchase shares from the tax benefits associated
with the assumed exercise of the common stock options. Options to purchase 50
shares of common stock at a weighted average exercise price of $20.94 per share
were outstanding during the second half of 1996 but were not included in the
computation of diluted earnings per share because the exercise price of these
options was greater than the average market price of the common stock. Dilutive
earnings per share and weighted average shares outstanding are not presented in
1995 and 1997 due to the losses incurred and the anti-dilutive effect of the
common stock options. In accordance with Statement of Financial Accounting
Standards No. 128, Earnings Per Share, all periods presented in the financial
statements have been restated to adopt this new earnings per share presentation.
In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 98, the weighted average number of outstanding common shares and
common stock options is calculated based on the historical timing of the common
stock transactions. The historical numbers do not reflect retroactive treatment
of the Company's initial public offering of common stock or the conversion of
preferred stock and preferred stock options; however, the Company's
8.1192 -- for -- one stock split in 1996 has been retroactively reflected in the
Company's financial statements.
Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements,
none of which have an effect on net income (loss), have been reclassified to
conform to the presentation in the 1997 consolidated financial statements.
3. ACQUISITIONS
Shade/Allied, Inc.
Effective February 11, 1997, the Company acquired all of the outstanding
common and preferred stock of Shade/Allied, Inc., ("Shade/Allied"). This
acquisition was accounted for under the purchase method of accounting.
Accordingly, the aggregate acquisition cost was allocated to the net assets
acquired based on the fair value of such net assets. The aggregate acquisition
costs totaled $50,677, consisting of cash of $49,486 and direct acquisition
costs of $1,191. The Company financed this acquisition with proceeds from the
Company's bank credit agreement. The aggregate acquisition costs have been
allocated to the assets acquired and liabilities assumed as follows: accounts
receivable of $4,585; inventory of $5,760; prepaid and other assets of $129;
property and equipment of $14,444; identifiable intangible assets of $5,610;
other long term assets of
42
<PAGE> 35
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$725; accounts payable of $6,871; accrued liabilities of $7,164; income taxes
payable of $215; deferred income tax payable of $6,676; and pension liability of
$1,051. The aggregate acquisition costs exceeded fair market value of net assets
acquired by $41,401. Accordingly, goodwill was recorded and is being amortized
over 40 years. The operating results of the acquisition have been included in
the accompanying consolidated financial statements since the date of
acquisition.
Niagara Envelope Company, Inc.
Effective June 28, 1996, the Company acquired the stock of Niagara Envelope
Company, Inc. ("Niagara"). This acquisition was accounted for under the purchase
method of accounting. Accordingly, the aggregate acquisition cost was allocated
to the net assets acquired based on the fair value of such net assets. The
aggregate acquisition costs totaled $48,202 and consisted of cash of $45,175 and
direct acquisition costs of $3,027. Additionally, the Company paid $5,000 at
closing under a one-year consulting service agreement. The Company principally
financed the acquisition through proceeds from the sale of the Personalizing
division described below. The aggregate acquisition costs have been allocated to
the assets acquired and liabilities assumed as follows: cash of $238; accounts
receivable of $10,946; inventories of $11,878; prepaid and other assets of
$1,572; management services agreement of $5,000; property and equipment of
$26,824; deferred income tax liability of $2,227; accounts payable of $6,064;
accrued expenses of $10,464; other noncurrent liabilities of $381; and assumed
debt of $3,900. The aggregate acquisition costs exceeded fair market value of
the net assets acquired by $19,780. Accordingly, goodwill was recorded and is
being amortized over 40 years. The operating results of this acquisition have
been included in the accompanying consolidated financial statements since the
date of acquisition. In both 1996 and 1997, the Company recorded $2,500 as
management fees and services for the amortization of the consulting service
agreement.
WR Acquisition, Inc./Williamhouse-Regency
The Company acquired WR Acquisition, Inc. and its wholly owned subsidiary
Williamhouse-Regency of Delaware, Inc. through a merger transaction effective
October 31, 1995. The transaction was accounted for under the purchase method of
accounting. Accordingly, the aggregate acquisition cost was allocated to the net
assets acquired based on the fair market value of such net assets. The aggregate
acquisition cost totaled $147,853 and consisted of cash of $140,000 and direct
acquisition costs of $7,853. The acquisition was entirely financed through the
Company's bank credit agreement and an off-balance sheet accounts receivable
facility. The aggregate acquisition costs have been allocated to the assets
acquired and liabilities assumed as follows: accounts receivable of $39,174;
inventories of $49,496; prepaid expenses and other assets of $8,699; net assets
held for sale of $41,179; property and equipment of $81,682; identifiable
intangible assets of $37,900; deferred income tax liability of $24,340; accounts
payable of $17,518; accrued expenses of $40,518; noncurrent liabilities of
$2,019 and assumed debt of $152,905. The aggregate acquisition costs exceeded
fair market value of the net assets acquired by $127,023. Accordingly, goodwill
was recorded and is being amortized over 40 years. The operating results of AP&P
Delaware have been included in the accompanying consolidated financial
statements since the date of acquisition. The businesses acquired included the
Williamhouse division, a manufacturer of a wide range of mill branded, specialty
and commodity envelopes; and the Personalizing division, which provides custom
imprinting services.
The Personalizing stationery and invitations division acquired in the
acquisition was identified by management at the date of acquisition as a
nonstrategic asset held for sale. The purchase price allocated to the net assets
acquired included the expected proceeds from sale plus the net cash flows
expected to be generated from the Personalizing division from the date of
acquisition through the expected date of sale (the holding period), offset by
interest expense incurred during the holding period on debt incurred to finance
the purchase of the Personalizing division. On June 27, 1996, the Personalizing
division was sold for net proceeds of $47,890. The net proceeds from the sale
exceeded the carrying amount of the asset held for sale by $1,599. As such, the
preliminary purchase price allocation was adjusted resulting in a $959 addition
to goodwill. During
43
<PAGE> 36
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the six month period ended June 30, 1996, the Personalizing division had
operating income of $2,369 and interest carrying costs of $1,884, which have
been excluded from the condensed consolidated statement of operations and
included as adjustments to the carrying amount of the net assets held for sale
through the date of sale.
Globe-Weis
Effective August 16, 1995, the Company acquired the inventories and certain
equipment of the file folder and hanging file folder product lines of
Globe-Weis's ("Globe") office products division from Globe's parent. For
financial reporting purposes, this acquisition was accounted for under the
purchase method of accounting. Accordingly, the aggregate acquisition cost was
allocated to the net assets acquired based on the fair value of such net assets.
The aggregate acquisition costs totaled $19,958 and consisted of cash and seller
issued notes of $17,869 and direct acquisition and financing costs of $2,089.
The Company principally financed the acquisition through its financing
arrangement with a commercial lender and notes issued to the seller. The
allocation of the aggregate acquisition costs was as follows: inventories of
$11,546, equipment of $6,747, and debt issuance costs of $1,665. The operating
results of this acquisition have been included in the accompanying consolidated
financial statements since the date of acquisition.
Strategic Assimilation of Acquisitions
Certain costs are expected to be incurred in connection with the Company's
separate strategic plans to integrate and consolidate certain plant,
administrative, sales and corporate functions of Williamhouse, Niagara and
Shade/Allied and the associated net reduction of approximately 500 employees.
Such costs, aggregating $27,500, include lease termination expenses, severance
and contractual change of control benefits, the liabilities that were included
in the purchase price allocation within accrued expenses. The remaining $8,534
in accrued acquisition integration costs is intended to cover the costs of
closing and integrating six manufacturing facilities and one distribution
facility which are expected to be completed during the next two to three years.
Pro Forma Results of Operations
The following summary for the year ended December 31, 1996 presents the
results of operations on a pro forma basis, as if the Niagara and Shade/Allied
acquisitions had occurred as of January 1, 1996 (with appropriate adjustments
for amortization of intangible assets, interest expense, elimination of
duplicate selling and administrative expenses and the related income tax
effects). The summary for the year ended December 31, 1995 presents the results
of operations as if the Niagara, WR and Globe acquisitions had occurred as of
January 1, 1995 (with appropriate adjustments for amortization of intangible
assets, interest expense, elimination of duplicate selling and administrative
expenses and the related income tax effects). As Shade/Allied was acquired
effective February 11, 1997, the pro forma results for the year ended December
31, 1997 are not materially different from the actual results and therefore are
not reported here. The pro forma operating results are for illustrative purposes
only and do not purport to be indicative of the actual results
44
<PAGE> 37
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which would have occurred had the transaction been consummated as of those
earlier dates, nor are they indicative of results of operations which may occur
in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Net sales................................................... $617,869 $730,801
======== ========
Income before income taxes.................................. $ 5,758 $ 41,257
======== ========
Net income.................................................. $ 3,678 $ 23,434
======== ========
Diluted earnings per share.................................. $ 0.50 $ 1.27
======== ========
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Accounts receivable -- trade................................ $56,431 $72,975
Accounts receivable -- other................................ 2,839 4,022
Less allowance for doubtful accounts and reserves for
customer deductions, returns and cash discounts........... (2,216) (2,794)
------- -------
$57,054 $74,203
======= =======
</TABLE>
The Company originally sold an undivided ownership interest in a revolving
pool of trade accounts receivable for $45,000 in October 1995. On May 24, 1996,
the Company entered into a new $60,000 accounts receivable facility with similar
terms. At December 31, 1996 and 1997, $54,000 and $60,000 of accounts receivable
were sold respectively under this facility. The accompanying balance sheets
exclude the sold accounts receivable. The full amount of the allowance for
doubtful accounts has been retained because the Company has retained
substantially the same risk of credit loss as if the receivables had not been
sold through the recourse provision of the receivable sale agreement. Under the
agreement, the maximum amount of the purchaser's investment is subject to change
based on the level of eligible receivables and restrictions on concentrations of
receivables. The total cost of the program was $423 in 1995, $1,823 in 1996 and
$2,954 in 1997. The agreement expires in 2000.
Bad debt expense for 1995, 1996 and 1997 was immaterial.
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Raw material and semi-finished goods........................ $ 41,505 $ 54,285
Work in process............................................. 4,695 5,600
Finished goods.............................................. 58,607 100,480
-------- --------
104,807 160,365
LIFO reserve................................................ 860 (6,006)
-------- --------
$105,667 $154,359
======== ========
</TABLE>
45
<PAGE> 38
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the WR, Niagara, and Shade/Allied acquisitions, total
inventories for financial accounting purposes were written up by $15,845 to fair
market value including reversal of $7,339 related to historical LIFO reserves.
Since the Company is on the LIFO method of accounting, such write-up formed the
historical base year cost for the acquired inventories and will not impact the
statement of operations unless a decrement of base inventory quantities occurs.
There were no liquidations of LIFO inventories in 1997. Liquidation of LIFO
layers in 1995 and 1996 was not material.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES IN -------------------
YEARS 1996 1997
--------------- -------- --------
<S> <C> <C> <C>
Land............................................... $ 6,749 $ 6,768
Buildings.......................................... 40 30,532 30,697
Machinery and equipment............................ 3-12 96,790 116,005
Office furniture and fixtures...................... 3-7 8,263 9,431
Construction in progress........................... 5,060 15,322
-------- --------
147,394 178,223
Less accumulated depreciation and amortization..... 14,304 26,833
-------- --------
$133,090 $151,390
======== ========
</TABLE>
In connection with the WR, Niagara, and Shade/Allied acquisitions, acquired
property, plant and equipment was appraised at $45,647 in excess of (less than)
historical book value including $1,298, $(541) and $32,903 allocated to land,
buildings and machinery and equipment in 1995, respectively, $(1,328) and $6,684
allocated to buildings and machinery and equipment in 1996, respectively, and
$(34), $(3,146), and $9,811 allocated to land, buildings, and machinery and
equipment in 1997, respectively.
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Goodwill.................................................... $146,006 $189,861
Intangible assets, principally tradenames................... 38,233 44,284
Debt issuance costs......................................... 18,369 18,369
-------- --------
202,608 252,514
Less accumulated amortization............................... 10,177 18,816
-------- --------
$192,431 $233,698
======== ========
</TABLE>
46
<PAGE> 39
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Acquisition integration costs............................... $12,695 $ 8,534
Sales volume discounts...................................... 20,184 11,634
Salaries, wages and benefits................................ 8,738 4,242
Interest.................................................... 4,171 5,927
Other....................................................... 9,253 9,820
------- -------
$55,041 $40,157
======= =======
</TABLE>
9. BORROWINGS
Long-term debt of the Company, which was incurred entirely by AP&P
Delaware, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Senior bank debt............................................ $129,000 $259,400
13% Senior Subordinated Notes due 2005...................... 130,000 130,000
Industrial revenue bonds.................................... 10,140 8,340
Capitalized lease obligations............................... 2,843 2,375
-------- --------
271,983 400,115
Less current portion........................................ 2,171 1,538
-------- --------
$269,812 $398,577
======== ========
</TABLE>
Future maturities of long-term debt at December 31, 1997 are $1,538 in
1998, $10,423 in 1999, $51,034 in 2000, $200,993 in 2001, $965 in 2002, and
$135,162 thereafter.
Senior Bank Debt
Contemporaneously with the Company's initial public offering of common
stock, the Company refinanced and retired all remaining indebtedness under the
old bank credit agreement and entered into a new bank credit agreement. The new
bank credit agreement, as amended, is a revolving credit facility with a maximum
availability of $330,000 with the following principal terms. Loans are made
directly to AP&P Delaware and are guaranteed by the Company and each of its
subsidiaries, other than Notepad. Loans made under the new bank credit agreement
bear interest at a rate per annum, equal to, at the Company's option, the base
rate, plus an applicable margin, or a Eurodollar rate plus an applicable margin,
as such terms are defined in the agreement and amendments. The applicable margin
for base rate loans varies from .5% to 1.5% and the applicable margin for
Eurodollar rate loans varies from 1.5% to 2.5%, each based on the Company's
leverage ratio and the type of loan. Availability under the new bank credit
agreement is subject to an unused commitment fee, which is a percentage of the
unutilized revolving loan commitment. The percentage varies from .3% to .5%
based on the Company's leverage ratio.
Availability under the new bank credit agreement as amended is reduced to
the extent of the net proceeds of sales of assets by the Company, the net
proceeds of an issuance of debt by the Company or 50% of the net proceeds of an
issuance of equity by the Company. Availability will be reduced by $80,000 in
1999 and $50,000 in 2000. The new bank credit agreement terminates in 2001.
47
<PAGE> 40
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The new bank credit agreement and amendments require the Company to meet
certain financial tests, including minimum levels of EBITDA (earnings before
interest, taxes, depreciation, amortization and noncash charges, as defined in
the agreement), minimum interest coverage and maximum leverage ratio. The
agreement also contains covenants, which, among other things, limit the
incurrence of additional indebtedness, transactions with affiliates, asset
sales, acquisitions, mergers, and other matters customarily restricted in such
agreements. In addition no dividends may be paid prior to March 31, 1999, the
Company will not incur capital expenditures during 1998 in excess of $15,000 and
future acquisitions require the written consent of the banks. The new bank
credit agreement contains customary events of default, including payment
defaults, breach of representations and warranties, covenant defaults,
cross-defaults to certain other indebtedness, certain events of bankruptcy and
insolvency, ERISA, judgment defaults, failure of any guaranty or security
agreement supporting the bank credit agreement to be in full force and effect,
and change of control.
The new bank credit agreement requires the Company to continue its interest
rate cap covering a portion of the outstanding balance under the old bank credit
agreement. In January 1996, the Company entered into a four-year agreement that
entitles the Company to receive from the counterpart on a quarterly basis the
amount, if any, by which LIBOR exceeds 6.5% for the first two years of the
agreement and 7.5% for the last two years on a notional principal amount of
$100,000. The counterpart to this agreement is a large financial institution.
The new bank credit agreement is guaranteed by the Company and all its
subsidiaries, except for Notepad, and is secured by substantially all the assets
of AP&P Delaware and a pledge of all capital stock of AP&P Delaware and its
subsidiaries.
Senior Subordinated Notes
AP&P Delaware issued $200,000 of 13% Senior Subordinated Notes ("Notes")
through a private placement in December 1995. In June 1996, AP&P Delaware
completed an exchange of the privately held notes for publicly held notes with
substantially identical terms. The Notes are unsecured and subordinated to all
senior bank debt. Interest is payable semi-annually on May 15 and November 15.
The Notes are redeemable on and after November 15, 2000, at AP&P Delaware's
option, at redemption prices ranging from 106.5% of the face value of the notes
in 2000 to 100% of the face value of the notes in 2003 or thereafter.
Additionally, at any time on or prior to November 15, 1998, AP&P Delaware may,
at its option, use the proceeds of public equity offerings of the Company or
AP&P Delaware to redeem up to 35% of the Notes at redemption prices ranging from
111% to 113% of the face value of the Notes. Subsequent to the Company's initial
public offering of common stock in July 1996, AP&P Delaware repaid $70,000 of
the Notes.
The Notes are fully and unconditionally guaranteed by all subsidiaries of
AP&P Delaware, except for Notepad, on a joint, several and senior subordinated
basis, however, no guarantee from the Company exists. The Notes contain
restrictive covenants which, among other things, limit dividends, repurchase of
capital stock and investments, incurrence of additional indebtedness,
transactions with affiliates and other matters customarily restricted in such
agreements.
On December 1, 1995, $200,000 of proceeds were received from the Notes and
were used to repurchase $100,000 of publicly-held notes of Williamhouse-Regency
assumed in the WR Acquisition and redeem preferred stock, preferred stock
equivalents, and Class P common stock in the aggregate amount of $75,000.
Other
At December 31, 1997, the Company had outstanding various industrial
revenue bonds in the aggregate amount of $8,340. The industrial revenue bonds
bear interest at rates ranging from 3.2% to 4.8%. Aggregate annual principal
payments ranging from $345 to $1,175 are due through 2010. The Company
guarantees
48
<PAGE> 41
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payment of principal and interest on the industrial revenue bonds. Letters of
credit secure the industrial revenue bonds.
At December 31, 1996 and 1997, letters of credit in the aggregate amount of
$15,826 and $12,996, respectively, were outstanding.
The Company incurred fees related to financing transactions of
approximately $8,620 in 1996 which have been deferred and are being amortized
using the effective interest method over the respective lives of the agreements.
An extraordinary after-tax loss on extinguishment of debt of $19,995
($33,004 pre-tax) is reflected in the consolidated statement of operations for
the year ended December 31, 1996 as a result of $7,700 of prepayment penalties
associated with the repayment of $70,000 of Notes and the write off of $25,304
of unamortized deferred financing costs in connection with such Notes and with
the Company's old bank credit agreement. An extraordinary after-tax loss on
extinguishment of debt of $9,652 ($16,086 pretax) is reflected in the
consolidated statement of operations for the year ended December 31, 1995 as a
result of $10,812 of prepayment penalties associated with the repurchase of
Williamhouse-Regency's $100,000 of notes and Ampad's bank debt and the write-off
of $5,274 of unamortized deferred financing costs in connection with
Williamhouse-Regency's notes redemption and Ampad's debt refinancings.
10. STOCKHOLDERS' EQUITY, STOCK OPTIONS AND NONRECURRING COMPENSATION CHARGE
Effective July 2, 1996, the Company sold 12,500 shares of common stock in
an initial public offering. The net proceeds to the Company from the offering,
which were received on July 8, 1996, amounted to $172,801 after deducting
underwriting discounts, legal and accounting fees, registration and travel
expenses. The Company used proceeds from the initial public offering and working
capital to: (i) repay $95,800 on the indebtedness incurred under the old bank
credit agreement, (ii) redeem $70,000 principal amount of the 13% Notes from the
holders thereof on a pro rata basis, and (iii) pay $7,700 in redemption premium
on such Notes.
Prior to the completion of the initial public offering, the Company's
shareholders approved an 8.1192-for-one stock split for all of the then
outstanding common stock shares and common stock options. Concurrently with the
stock split, all of the outstanding preferred stock and preferred stock options
were converted into shares of common stock and common stock options,
respectively, using a conversion price determined by dividing the preferred
stock liquidation value of $1,948.50 per share by the initial public offering
price per share of $15. All common stock share amounts have been restated to
reflect the stock split; however, the common stock share amounts have not been
restated to reflect the conversion of preferred stock and preferred stock
options.
The preferred stock has no dividend rights and, except as required by law,
is nonvoting. As of December 31, 1995, after giving effect to satisfaction of
its preferred redemption values, the Company's Class P common stock was also
converted on a share-for-share basis into common stock.
At January 1, 1995, options for 1,026 shares of common stock had been
issued to certain members of the Company's management under the 1992 Key
Employee Stock Option Plan (the "1992 Plan") in two separate tranches -- "Core"
stock options for 758 shares and "Performance" stock options for 268 shares. The
exercise price of all options equaled or exceeded the fair market value at date
of grant. In connection with the WR acquisition effective October 31, 1995, the
Company's equity was recapitalized via a stock dividend of one share of
preferred stock for every ten shares of common stock and Class P common stock
and options to purchase common stock. Concurrently, preferred stock options were
granted to holders of common stock options and the respective exercise prices
were adjusted to maintain option holders' pro rata economic interests pursuant
to antidilution provisions included in the existing stock option plans.
49
<PAGE> 42
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The issuance of the preferred stock options was considered additional
consideration to restore the option holders' economic position as a result of
the recapitalization, which was directly related to the WR acquisition. Receipt
of such consideration resulted in a nonrecurring, noncash compensation charge
equal to the excess of fair market value over the exercise price of the
preferred stock options of $24,265 with a corresponding credit being recorded to
additional paid-in capital. The adjustment to the underlying common stock
option's prices did not result in additional compensation expense in accordance
with generally accepted accounting principles.
Additionally, options for 66 shares of common stock and 105 shares of
preferred stock were granted to certain members of management in December 1995.
The exercise prices of $0.007 per common share and $.028 per preferred share
were below the fair market value of the respective classes of stock at date of
grant, resulting in a noncash compensation charge equal to the aggregate excess
of fair market value over the exercise price, or $1,733, with a corresponding
credit being recorded to additional paid-in capital.
The Company awarded additional compensation to executives and nonexecutives
of $1,634 in 1995 in recognition of the significant transactions consummated
during the year. The Company does not expect this additional compensation to be
awarded in future years.
STOCK OPTIONS
1992 Key Employees Stock Option Plan. On July 31, 1992, the Board of
Directors of the Company adopted the Ampad Holding Corporation 1992 Key
Employees Stock Option Plan, which authorized grants of stock options and the
sale of common stock to current or future employees, directors, consultants or
advisers of the Company or its subsidiaries. During 1992, 1994 and 1995, the
Company granted options to purchase 2,839 shares of common stock to three of its
officers, who were also stockholders, at weighted average purchase prices
ranging from $.007 to $1.65 per share. Currently, all options granted pursuant
to the 1992 Stock Plan are exercisable and expire 15 months after the
termination of the option holder's employment with the Company or any of its
subsidiaries. On June 22, 1996 the Board of Directors terminated the 1992 Stock
Plan.
1996 Stock Plan. On June 22, 1996, the Company adopted the 1996 Key
Employees Stock Incentive Plan. The 1996 Stock Plan provides for the granting to
employees and other key individuals who perform services for the Company the
following types of incentive awards: options to purchase common stock, stock
appreciation rights with respect to the common stock, restricted shares of
common stock, performance grants and other types of awards that the Compensation
Committee deems to be consistent with the purposes of the 1996 Stock Plan. The
1996 Stock Plan affords the Company flexibility in tailoring incentive
compensation to support corporate and business objectives, and to anticipate and
respond to changing business environments and competitive compensation
practices.
An aggregate of 1,500 shares of common stock of the Company has been
reserved for issuance under the 1996 Stock Plan. Except for any other
adjustments made by the Board of Directors relating to a stock split or certain
other changes in the number of shares of common stock, or to reflect
extraordinary corporate transactions, further increases in the number of shares
authorized for issuance under the 1996 Stock Plan must be approved by the
stockholders of the Company. Stock options granted during 1996 under the Stock
Plan generally have a maximum term of ten years and vest over four years. The
Company granted options to purchase 742 shares of common stock at a weighted
average purchase price of $15 per share.
Non-Employee Director Plan. On June 22, 1996, the Company adopted the
Non-Employee Director Stock Option Plan. Pursuant to the Non-Employee Director
Plan, each director (other than directors who are employees of the Company) will
receive a one-time option grant to purchase 25 shares of common stock upon
effectiveness of the Non-Employee Director Plan or, for new directors, upon
initial election or appointment to the Board. In addition, each director will
receive an annual grant of options to purchase 2 shares of common stock
beginning on the latter of the date of such director's fourth anniversary of
being elected to the Board or four years from the initial public offering date.
The initial one-time grants will vest over three years with 50%
50
<PAGE> 43
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
vesting in the first year and 25% in the remaining two years. The annual grants
will vest in three equal installments. The exercise price for all options
granted under the non-Employee Director plan will be at fair market value as of
the time of such grant. Options granted under the non-Employee Director plan
would generally terminate ten years after the date such options become
exercisable. An aggregate of 350 shares of common stock has been reserved for
issuance under the non-Employee Director Plan. During 1996, the Company granted
options to purchase 125 shares of common stock to the Company's non-employee
directors at a weighted average purchase price of $17.38 per share.
Stock Purchase Plan. On June 22, 1996, the Company adopted the Management
Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan is designed to
provide equity incentives to selected members of the Company's management,
including employee Directors and executive officers. The Compensation Committee
upon the recommendation of the Company's Chief Executive Officer will select the
eligible participants. Under the Purchase Plan, eligible participants will be
able to elect to purchase shares of common stock in lieu of up to 25% of their
annual incentive bonuses. The common stock will be sold under the Purchase Plan
at a 25% discount from the fair market value on the date of purchase. An
aggregate of 250 shares of common stock has been reserved and 36 shares were
issued in February 1997.
For the three years ended December 31, 1997, stock option activity is as
follows:
<TABLE>
<CAPTION>
SHARES SUBJECT AVERAGE EXERCISE
TO OPTION PRICE
-------------- ----------------
<S> <C> <C>
Balance, December 31, 1994............................... 1,026 $ 0.11
Stock options granted.................................... 1,813 $ 0.14
Redemption of preferred stock options.................... (612) $ 0.03
-----
Balance, December 31, 1995............................... 2,227 $ 0.16
Stock options granted.................................... 867 $15.34
-----
Balance, December 31, 1996............................... 3,094 $ 4.41
Stock options forfeited.................................. (80) $15.00
-----
Balance, December 31, 1997............................... 3,014 $ 4.13
=====
</TABLE>
As of December 31, 1997, the following information is presented for stock
options outstanding.
<TABLE>
<CAPTION>
OPTIONS
---------------------------------------------------------------
OUTSTANDING EXERCISABLE
----------------------------------- -------------------------
EXERCISE PRICE AVERAGE AVERAGE EXERCISE AVERAGE EXERCISE
RANGE SHARES LIFE PRICE SHARES PRICE
-------------- ------ ------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$.007 to $1.65.................... 2,227 4.5 $ 0.16 2,227 $ 0.16
$15.00............................ 662 8.6 $15.00 130 $15.00
$15.00 to $21.38.................. 125 8.7 $17.38 63 $17.38
</TABLE>
The average life is the average contractual life of the outstanding options
in years. The average fair value of common stock options granted in 1996 was
$8.835 per share. There were no options granted in 1997.
In 1996, the Company adopted the disclosure-only option under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
("SFAS No. 123").
On a pro forma basis, if the Company had recorded compensation expense in
1996 and 1997 for the stock options granted in accordance with the accounting
provisions of SFAS No. 123, the pro forma net income (loss) before extraordinary
item would have been $17,820 and $(5,757), respectively, the basic pro forma net
income (loss) per share before extraordinary item would have been $1.02 and
$(0.21), respectively; and the diluted pro forma net income (loss) per share
before extraordinary item for 1996 would have been $0.97.
51
<PAGE> 44
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant assumptions used to estimate the fair value of the stock
options granted in 1996 include risk free rates of return ranging from 6.26% to
6.94%, an expected option life of 10 years, an expected volatility of 27% and no
expected dividend payments.
11. PENSION PLAN AND 401(K) PLAN
The Company is a sponsor of two qualified defined benefit pension plans and
a supplemental non-qualified benefit pension plan, which were assumed as part of
its acquisitions. The Company's liabilities under such plans are included in
other liabilities in the consolidated balance sheet.
The Company maintains retirement plans (401(k) plan) for the benefit of all
employees who meet minimum age and service requirements. Company contributions
to the plans may be made at the discretion of the board of directors.
Contributions to the plans were approximately $568, $1,239, and $1,225 for the
years ended December 31, 1995, 1996 and 1997, respectively.
12. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- ----
<S> <C> <C> <C>
Current
Federal................................................ $ -- $ -- $ --
State.................................................. 169 491 --
-------- -------- ----
169 491 --
Deferred provision (benefit)............................. (6,707) 13,361 642
-------- -------- ----
Provision (benefit) for income taxes before extraordinary
item................................................... (6,538) 13,852 642
Deferred benefit relating to extraordinary item.......... (6,434) (13,009) --
-------- -------- ----
Provision (benefit) for income taxes..................... $(12,972) $ 843 $642
======== ======== ====
</TABLE>
Reconciliation between the statutory U.S. federal income tax (benefit) rate
and the Company's effective income tax (benefit) rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
----- ---- -----
<S> <C> <C> <C>
Federal income tax rate.................................. (35.0)% 35.0% (35.0)%
Adjustment to valuation allowance........................ (15.3) -- --
Goodwill and intangible amortization..................... .2 3.3 45.2
State taxes, net......................................... (5.0) 4.9 2.1
Other, net............................................... (1.4) -- 4.4
----- ---- -----
Effective tax rate....................................... (56.5)% 43.2% 16.7%
===== ==== =====
</TABLE>
For the year ended December 31, 1996, the Company's statutory income tax
benefit rate of 35.0% differed from the Company's effective income tax rate,
including extraordinary item, of 89.8% due to the following reasons: goodwill
and intangible asset amortization accounted for 113.6%; other nondeductible
expenses accounted for 11.8%; state income taxes accounted for (5.0)% and other
items accounted for 4.4%. For the year ended December 31, 1995, the Company's
statutory income tax benefit rate of 35.0% differed from the Company's effective
income tax benefit rate, including extraordinary item, of 46.9% due to the
following reasons: state income taxes accounted for (5.0)%; release of a
deferred tax asset valuation allowance accounted for (6.4)% and other items
accounted for (0.5)%.
52
<PAGE> 45
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary tax differences affected and categorized by financial statement
line item are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accrued expenses.......................................... $ 9,066 $ 4,896
Accounts receivable and allowances........................ 361 6
Inventory valuation....................................... (7,763) (6,687)
Net operating losses and tax credits...................... 9,090 13,777
-------- --------
Current deferred tax asset, net................... $ 10,754 $ 11,992
======== ========
Noncurrent deferred tax assets (liabilities):
Tradenames and intangibles................................ $(14,609) $(16,347)
Property and equipment, net............................... (24,405) (30,780)
Noncash compensation expense credited
to paid-in-capital..................................... 6,776 --
Other accrued liabilities................................. 1,257 7,650
-------- --------
Noncurrent deferred tax liability, net............ $(30,981) $(39,477)
======== ========
</TABLE>
The effect on the income tax provision related to the valuation allowance
was a benefit of $1,769 for the year ended December 31, 1995. Deferred tax
assets valuation allowances recorded in prior years were reversed in 1995 as a
result of management's assessment of future realizability of deferred tax
assets.
At December 31, 1997, the Company had net operating losses available to
reduce future taxable income of approximately $30,900. These net operating
losses expire in the years 2007 through 2012. If certain substantial changes in
the Company's ownership should occur, there would be an annual limitation on the
amount of the carryforwards that can be utilized. In addition, the Company has
approximately $1,406 of alternative minimum tax credit carried forward. The
acquisition of WR resulted in a change in control of WR. Consequently the
utilization of these credits in future periods are subject to limitation.
13. COMMITMENTS AND CONTINGENCIES
Commitments
The Company is obligated under noncancelable operating leases for office
space and machinery and equipment, which expire at various times through 2016.
Annual minimum lease commitments under these leases amount to $5,886 in 1998,
$5,007 in 1999, $3,813 in 2000, $3,249 in 2001, $2,911 in 2002 and $25,853
thereafter for an aggregate of $46,719.
Total rent expense was approximately $1,888, $3,551, $6,572 for 1995, 1996
and 1997 respectively.
Litigation
On March 10, 1998, the Company, certain of its officers and directors,
certain former controlling stockholders and certain investment banking firms
that participated in the Company's IPO were named in a civil action filed in the
United States District Court in the Northern District of Texas, Dallas Division.
The complaint, a purported class action on behalf of purchasers of the Company's
Common Stock between July 2, 1996 and December 17, 1997, alleges violation of
the federal securities laws for failure to disclose certain facts about the
Company's operations in connection with the Company's IPO and in certain
periodic reports. The complaint seeks unspecified damages and any other relief
permitted by law. The Company believes that the allegations in the complaint are
without merit, and the Company intends to rigorously defend itself.
53
<PAGE> 46
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There are various other outstanding claims against the Company arising in
the normal course of business. The Company believes that these claims are
without merit and that any losses which might ultimately be sustained by the
Company would not be material to the financial position, results of operations,
or cash flows of the Company.
Environmental Matters
The Company is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and regulations
impose limitations on the discharge of pollutants and establish standards for
management of waste. While there can be no assurance that the Company is at all
times in complete compliance with all such requirements, the Company has made
and will continue to make capital and other expenditures to comply with such
requirements.
The Company had been named a potentially responsible party under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, at five waste disposal sites. The Company settled its
liability at four of these sites as a de minimis party. The Company expects to
be eligible for a de minimis settlement at the remaining site.
14. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1995, 1996 and 1997, the Company expensed
$542, $1,380 and $2,371, respectively, for management and directors' fees and
out of pocket expenses to the principal shareholders (Bain Capital). Unpaid fees
of $500 and $553 are included in accrued expenses in the consolidated balance
sheets at December 31, 1996 and 1997 respectively. In June 1996, the Company
revised its management services agreement with Bain Capital, pursuant to which,
for four years, the Company will pay Bain Capital an aggregate annual fee of no
less than $2,000 plus a fee of 1% for completed acquisition transactions.
In 1996, the Company paid Bain Capital $3,000 in fees in connection with
the new bank credit agreement, which were included in debt issuance costs paid,
$550 and $750, respectively, in fees in connection with the acquisition of
Niagara and Shade/Allied, which were included as part of the purchase price, and
$2,091 in connection with the Company's initial public offering of common stock.
In 1995, the Company paid $7,000 to Bain Capital for services relating to the WR
acquisition and the related financing of the transaction. Of this amount, $4,300
was included in deferred financing fees and $2,700 was a direct acquisition
expense allocated to the net assets acquired. The Company also paid $450 to Bain
Capital relating to the Globe-Weis acquisition, which was included in deferred
financing fees.
The Company had an outstanding note receivable of $324 and $270 at December
31, 1996 and 1997, respectively, from its executive vice president which is due
in 2000.
On January 9, 1998, the Company's Interim Chief Financial Officer, who is
also a director, exercised stock options to purchase 288 shares for $10. In
December 1997, the Company's Board of Directors approved a loan for up to $1.0
million for the same individual due in three years at a rate of approximately
6.25%, fully secured by the 288 shares of common stock. This individual intends
to draw on this note by the end of March 1998. In January 1998, the Company's
Board of Directors approved an extension of 18 months to exercise 299 common
stock options after this individual is no longer a director for the Company.
15. OTHER INFORMATION
Substantially all of the Company's operations are conducted within the
United States.
Two customers accounted for 27% of the Company's net sales for 1995 and one
customer accounted for 11% and 12% of the Company's net sales in 1996 and 1997,
respectively.
54
<PAGE> 47
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The Company's historical unaudited quarterly results of operations for each
of the years ended December 31, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 -- QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- --------------- -----------
<S> <C> <C> <C> <C>
Net sales............................ $120,108 $114,099 $173,606 $176,046
Gross profit......................... 23,528 24,931 36,037 40,914
Net income before extraordinary
item............................... 133 691 6,925 10,465
Net income (loss).................... 133 (609) (11,770) 10,465
Basic EPS -- net income per share
before extraordinary item.......... $ 0.02 $ 0.09 $ 0.25 $ 0.38
Basic EPS -- net income (loss) per
share.............................. 0.02 (0.09) (0.43) 0.38
Diluted EPS -- net income per share
before extraordinary item.......... $ 0.02 $ 0.09 $ 0.24 $ 0.36
Diluted EPS -- net income (loss) per
share.............................. 0.02 (0.07) (0.41) 0.36
</TABLE>
<TABLE>
<CAPTION>
1997 -- QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30(1) DECEMBER 31
-------- -------- --------------- -----------
<S> <C> <C> <C> <C>
Net sales............................ $149,834 $167,160 $176,462 $193,879
Gross profit......................... 30,999 32,821 26,824 6,303
Net income (loss).................... 3,988 4,708 951 (14,138)
Basic EPS -- net income (loss) per
share.............................. $ 0.15 $ 0.17 $ 0.03 $ (0.52)
Diluted EPS -- net income (loss) per
share.............................. $ 0.14 $ 0.16 $ 0.03 n/a
</TABLE>
- ---------------
(1) Quarterly data reflects restatement from data previously filed on Form 10-Q
for the third quarter ended September 30, 1997. The Company previously
reported earnings per share of $0.06 per share for the quarter ended
September 30, 1997. The results presented above for the third quarter
reflects certain adjustments which should have been reported in the earnings
for that quarter.
55
<PAGE> 48
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARY
The 13% senior subordinated notes are guaranteed by Shade/Allied, Inc., a
wholly owned subsidiary of American Pad & Paper Company of Delaware, Inc.
("Delaware"). The subsidiary guaranty is full, unconditional and joint and
several. The Company is not a guarantor of the senior subordinated notes.
Separate financial statements of the guarantor subsidiary are not presented
because management has determined that they would not be material to investors.
However, condensed consolidating financial information as of December 31, 1997
and for the year then ended is presented. Shade/Allied was acquired by Delaware
on February 11, 1997 and, as a result, the year ended December 31, 1997 is the
first period in which the Company's historical results include the results of
operations of Shade/Allied and is the first period where Shade/Allied was a
guarantor subsidiary. The condensed consolidating financial information is as
follows:
CONDENSED CONSOLIDATING BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------
THE GUARANTOR NONGUARANTOR CONSOLIDATED
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
--------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash....................................... $ 4,853 $ 2 $ -- $ -- $ 4,855
Accounts receivable........................ 8,812 434 64,957 -- 74,203
Intercompany receivable (payable).......... 40,054 (13,468) (26,586) -- --
Inventories................................ 146,006 8,353 -- -- 154,359
Prepaid expenses and other current
assets................................... 1,351 32 19 -- 1,402
Income taxes -- deferred and receivable.... 16,051 -- -- -- 16,051
--------- -------- -------- -------- ---------
Total current assets................. 217,127 (4,647) 38,390 -- 250,870
Property, plant and equipment................ 137,798 13,592 -- -- 151,390
Investment in subsidiaries................... 88,862 -- -- (88,862) --
Intangible assets............................ 187,415 45,933 350 -- 233,698
Other........................................ 2,443 -- -- -- 2,443
--------- -------- -------- -------- ---------
Total assets......................... $ 633,645 $ 54,878 $ 38,740 $(88,862) $ 638,401
========= ======== ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt.......... $ 1,538 $ -- $ -- $ -- $ 1,538
Accounts payable........................... 53,512 2,844 -- -- 56,356
Accrued expenses........................... 38,245 1,478 434 -- 40,157
Income taxes payable....................... -- -- -- -- --
--------- -------- -------- -------- ---------
Total current liabilities............ 93,295 4,322 434 -- 98,051
Long-term debt............................... 398,577 -- -- -- 398,577
Deferred income taxes........................ 39,477 -- -- -- 39,477
Other liabilities............................ 1,630 -- -- -- 1,630
--------- -------- -------- -------- ---------
Total liabilities.................... 532,979 4,322 434 -- 537,735
--------- -------- -------- -------- ---------
Stockholders' equity:
Common stock............................... 274 30 10 (40) 274
Additional paid-in capital................. 301,279 50,648 35,399 (86,047) 301,279
Retained earnings (accumulated deficit).... (200,887) (122) 2,897 (2,775) (200,887)
--------- -------- -------- -------- ---------
Total stockholders' equity........... 100,666 50,556 38,306 (88,862) 100,666
--------- -------- -------- -------- ---------
Total liabilities and stockholders'
equity............................. $ 633,645 $ 54,878 $ 38,740 $(88,862) $ 638,401
========= ======== ======== ======== =========
</TABLE>
56
<PAGE> 49
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THE GUARANTOR NONGUARANTOR CONSOLIDATED
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
-------- ---------- ------------ ------------ ------------
A2YEAR ENDED DECEMBER 31, 1997
<S> <C> <C> <C> <C> <C>
Net sales....................... $659,033 $64,777 $ -- $(36,475) $687,335
Cost of sales................... 565,451 61,412 -- (36,475) 590,388
-------- ------- ------- -------- --------
Gross profit.................. 93,582 3,365 -- -- 96,947
Operating expenses:
Selling and marketing......... 20,800 1,105 -- -- 21,905
General and administrative.... 26,750 752 -- -- 27,502
Loss on sale of accounts
receivable................. 5,336 -- (2,382) -- 2,954
Amortization of intangible
assets..................... 5,032 1,078 -- -- 6,110
Management fees and
services................... 4,871 -- -- -- 4,871
-------- ------- ------- -------- --------
Income from operations.......... 30,793 430 2,382 -- 33,605
Other income (expense)
Interest...................... (37,723) -- (120) -- (37,843)
Other income, net............. 389 -- -- -- 389
-------- ------- ------- -------- --------
Income (loss) before income
taxes......................... (6,541) 430 2,262 -- (3,849)
Provision for income taxes...... (814) 552 904 -- 642
-------- ------- ------- -------- --------
Income (loss) before equity in
earnings of subsidiaries...... (5,727) (122) 1,358 -- (4,491)
Equity in earnings of
subsidiaries.................. 1,236 -- -- (1,236) --
-------- ------- ------- -------- --------
Net income (loss)............... $ (4,491) $ (122) $ 1,358 $ (1,236) $ (4,491)
======== ======= ======= ======== ========
</TABLE>
57
<PAGE> 50
AMERICAN PAD & PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------
THE GUARANTOR NONGUARANTOR CONSOLIDATED
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities......... $(62,493) $ 76 $ 8 $ -- $(62,409)
Investing activities:
Purchase of business,
including acquisition
costs..................... (50,677) -- -- -- (50,677)
Purchases of property, plant
and equipment............. (23,019) (76) -- -- (23,095)
Proceeds from sale of
assets.................... 4,056 -- -- -- 4,056
-------- ---- --- ------ --------
Net cash used in
investing
activities......... (69,640) (76) -- -- (69,716)
-------- ---- --- ------ --------
Financing activities:
Proceeds from long-term
debt...................... 130,400 -- -- -- 130,400
Repayment of long-term
debt...................... (2,268) -- -- -- (2,268)
Net proceeds of new accounts
receivable financing...... 6,000 6,000
Other........................ 566 -- (8) -- 558
-------- ---- --- ------ --------
Net cash provided by
(used in) financing
activities......... 134,698 -- (8) -- 134,690
-------- ---- --- ------ --------
Increase in cash............... 2,565 -- -- 2,565
Cash, beginning of period...... 2,288 2 -- -- 2,290
-------- ---- --- ------ --------
Cash, end of period............ $ 4,853 $ 2 $-- $ -- $ 4,855
======== ==== === ====== ========
</TABLE>
58
<PAGE> 51
AMERICAN PAD & PAPER COMPANY OF DELAWARE
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Accountants........................... 60
Consolidated Balance Sheets at December 31, 1996 and 1997... 61
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... 62
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... 63
Consolidated Statements of Changes in Stockholder's Equity
for the years ended December 31, 1995, 1996 and 1997...... 64
Notes to Consolidated Financial Statements.................. 65
</TABLE>
59
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
American Pad & Paper Company of Delaware, Inc.
(a wholly owned subsidiary of American Pad & Paper Company)
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) on page 31 present fairly, in all material respects,
the financial position of American Pad & Paper Company of Delaware, Inc. and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Dallas, Texas
March 16, 1998
60
<PAGE> 53
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
-------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... $ 2,290 $ 4,855
Accounts receivable....................................... 57,054 74,203
Inventories............................................... 105,667 154,359
Income taxes receivable................................... -- 4,059
Prepaid expenses and other current assets................. 4,739 1,402
Deferred income taxes..................................... 10,754 11,992
-------- ---------
Total current assets.............................. 180,504 250,870
Property and equipment...................................... 133,090 151,390
Intangible assets........................................... 192,431 233,698
Other....................................................... 3,392 2,443
-------- ---------
Total assets...................................... $509,417 $ 638,401
======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 2,171 $ 1,538
Accounts payable.......................................... 44,932 56,356
Accrued expenses.......................................... 55,041 40,157
Income taxes payable...................................... 503 --
-------- ---------
Total current liabilities......................... 102,647 98,051
Long-term debt.............................................. 269,812 398,577
Deferred income taxes....................................... 30,981 39,477
Other....................................................... 1,378 1,630
-------- ---------
Total liabilities................................. 404,818 537,735
-------- ---------
Commitments and contingencies
Stockholder's equity:
Common stock, voting, $.01 par value, 1,000 shares
authorized, one hundred shares issued and
outstanding............................................ -- --
Additional paid-in capital................................ 201,799 202,357
Accumulated deficit....................................... (97,200) (101,691)
-------- ---------
Total stockholder's equity........................ 104,599 100,666
-------- ---------
Total liabilities and stockholder's equity........ $509,417 $ 638,401
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
61
<PAGE> 54
AMERICAN PAD & PAPER COMPANY OF DELAWARE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales.................................................. $257,160 $583,859 $687,335
Cost of sales.............................................. 209,633 458,449 590,388
-------- -------- --------
Gross profit............................................. 47,527 125,410 96,947
-------- -------- --------
Operating expenses:
Selling and marketing.................................... 6,254 16,964 21,905
General and administrative............................... 10,447 24,374 27,502
Losses on sales of accounts receivable................... 423 1,823 2,954
Amortization of goodwill and intangible assets........... 879 4,488 6,110
Management fees and services............................. 542 3,880 4,871
Nonrecurring compensation charge......................... 27,632 -- --
-------- -------- --------
46,177 51,529 63,342
-------- -------- --------
Income from operations..................................... 1,350 73,881 33,605
Other income (expense):
Interest................................................. (13,657) (42,968) (37,843)
Other income, net........................................ 735 1,153 389
-------- -------- --------
Income (loss) before income taxes and extraordinary item... (11,572) 32,066 (3,849)
Provision (benefit) for income taxes....................... (6,538) 13,852 642
-------- -------- --------
Income (loss) before extraordinary item.................... (5,034) 18,214 (4,491)
Extraordinary loss from extinguishment of debt (net of
income tax benefits of $6,434 and $13,009,
respectively)............................................ (9,652) (19,995) --
-------- -------- --------
Net loss................................................... $(14,686) $ (1,781) $ (4,491)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
62
<PAGE> 55
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (14,686) $ (1,781) $ (4,491)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation........................................... 3,369 9,765 12,529
Amortization of goodwill and intangible assets......... 879 4,488 6,110
Noncash portion of nonrecurring compensation charge.... 25,998 -- --
Extraordinary loss on extinguishment of Debt........... 9,652 19,995 --
Amortization of debt issuance costs.................... 1,538 3,790 2,529
(Gain) loss on sale of assets.......................... (140) (94) 86
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable.................................. (22,025) (25,625) (17,300)
Refundable income taxes.............................. 101 3,657 (4,059)
Inventories.......................................... 2,256 (2,030) (44,186)
Prepaid expenses and other........................... 905 1,721 598
Income tax asset, net................................ (13,141) 13,361 642
Accounts payable..................................... 4,979 1,819 4,553
Accrued expenses..................................... 4,877 (4,294) (22,049)
Other assets and liabilities......................... 147 (1,556) 2,629
--------- --------- --------
Net cash provided by (used in) operating
activities...................................... 4,709 23,216 (62,409)
--------- --------- --------
Cash flows from investing activities:
Purchase of stock and net assets of businesses, including
acquisition costs...................................... (129,701) (52,964) (50,677)
Purchases of property and equipment....................... (3,919) (14,609) (23,095)
Proceeds from sale of assets.............................. 140 2,056 4,056
Net cash generated from assets held for sale.............. 2,213 49,277 --
--------- --------- --------
Net cash used in investing activities............. (131,267) (16,240) (69,716)
--------- --------- --------
Cash flows from financing activities:
Net repayments under line of credit....................... (22,767) -- --
Proceeds from long-term debt.............................. 430,052 192,773 130,400
Repayment of long-term debt............................... (186,546) (380,317) (2,268)
Redemption premiums and penalties included in
extraordinary loss..................................... (10,812) (7,700) --
Debt issuance costs....................................... (35,032) (9,584) --
Redemption of preferred stock............................. (61,478) -- --
Redemption of Class P common stock........................ (4,464) -- --
Redemption of preferred stock options..................... (9,188) -- --
Proceeds from old accounts receivable facility............ 45,000 -- --
Repayment of old accounts receivable facility............. -- (45,000) --
Net proceeds from new accounts receivable facility........ -- 54,000 6,000
Proceeds from exercise of preferred stock options and
management stock purchase plan......................... 130 -- 558
Proceeds from initial public offering, net................ -- 172,801 --
--------- --------- --------
Net cash provided by (used in) financing
activities...................................... 144,895 (23,027) 134,690
--------- --------- --------
Net increase (decrease) in cash............................. 18,337 (16,051) 2,565
Cash, beginning of year..................................... 4 18,341 2,290
--------- --------- --------
Cash, end of year........................................... $ 18,341 $ 2,290 $ 4,855
========= ========= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................... $ 9,127 $ 38,785 $ 34,292
Income taxes........................................... $ 99 $ 470 $ 4,519
--------- --------- --------
Supplemental disclosure of noncash investing activity:
Notes payable issued in consideration of purchase price... $ 36,115 $ -- $ --
Notes payable issued to purchase equipment................ $ 1,721 $ 500 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
63
<PAGE> 56
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS
STOCK PAID-IN (ACCUMULATED
AMOUNT CAPITAL DEFICIT) TOTAL
------ -------- ------------ --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994................... $-- $ 3,000 $ (5,733) $ (2,733)
Grant of AP&P stock options to management...... -- 25,998 -- 25,998
Dividend to AP&P............................... -- (75,000) (75,000)
Net loss....................................... -- -- (14,686) (14,686)
--- -------- --------- --------
BALANCE AT DECEMBER 31, 1995................... -- 28,998 (95,419) (66,421)
Capital contribution by AP&P................... 172,801 -- 172,801
Net loss....................................... -- -- (1,781) (1,781)
--- -------- --------- --------
BALANCE AT DECEMBER 31, 1996................... -- 201,799 (97,200) 104,599
Capital contribution by 1996................... -- 558 -- 558
Net loss....................................... -- -- (4,491) (4,491)
--- -------- --------- --------
BALANCE AT DECEMBER 31,1997.................... $-- $202,357 $(101,691) $100,666
=== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
64
<PAGE> 57
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AND PERCENTAGE AMOUNTS)
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS
Organization and Basis of Presentation
American Pad & Paper Co. of Delaware, Inc. ("Delaware") is a wholly owned
subsidiary of American Pad & Paper Company ( "AP&P") (formerly Ampad Holding
Corporation and referred to hereafter as the "Company"). AP&P was incorporated
on June 2, 1992 as a holding company to acquire all of the outstanding stock of
Ampad Corporation ("Ampad"), the surviving entity from the merger between Ampad
Acquisition Corporation and Ampad. The Company had no operations through July
31, 1992.
On October 3, 1995, the Company agreed to acquire in a merger transaction
all of the outstanding stock of WR Acquisition, Inc. ("WR"). In a series of
transactions, the Company exchanged 100% of the stock of its wholly owned
subsidiary, Ampad, for newly issued shares of WR. WR then contributed Ampad to
its wholly owned subsidiary, Williamhouse-Regency of Delaware, Inc., renamed
American Pad & Paper Company of Delaware, Inc. (referred to hereafter on a
pre-October 31, 1995 basis as "Williamhouse-Regency" and on a post-October 31,
1995 basis as "Delaware"), in exchange for a right to receive $140 million of
merger consideration. The Company, principally using bank borrowings by Delaware
aggregating $245 million, funded WR's right to receive the merger consideration.
WR in turn repurchased 100% of the WR shares not owned by the Company. The
Company accounted for the transaction as a purchase of the stock of WR. As a
result of the transactions, the Company now owns 100% of WR, which in turn owns
100% of Delaware.
The financial statements of Delaware include the historical accounts and
operations of Delaware and the accounts and operations of Ampad, the envelope
operations of Williamhouse and Niagara, and the computer form operations of
Shade/Allied since their respective dates of acquisition. Additionally, the
consolidated financial statements include the accounts of Notepad Funding
Corporation ("Notepad"), a special purpose corporation utilized in the accounts
receivable facility. All significant intercompany balances have been eliminated.
American Pad & Paper Company
AP&P is a holding company whose common stock is publicly traded on the New
York Stock Exchange under the symbol "AGP" with no operations other then its
investment in Delaware. Except for the preferred and common stock shares of AP&P
issued, authorized and outstanding, and the related capital contributions by
AP&P and dividends to AP&P, there are no material differences between the
financial statements of the Company and of AP&P Delaware. AP&P has followed full
push-down accounting in the presentation of the consolidated financial
statements of Delaware.
Business
Delaware is among the larger manufacturers and marketers of paper-based
office products in North America. Delaware operates in one business segment,
converting paper into office products and offers a broad assortment of products
through two complementary divisions: Ampad (writing pads, file folders, retail
envelopes, machine papers, and other paper-based office products) and
Williamhouse (business envelopes and machine papers). Delaware's products are
distributed through large mass merchant retailers, office product superstores,
warehouse clubs, major contract stationers, office products wholesalers, paper
merchants, and independent dealers. Substantially all sales are to customers
within the United States.
Pro Forma Information
The pro forma information included in these financial statements and notes
is unaudited.
65
<PAGE> 58
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Quarterly Financial Information
The quarterly financial information included in these financial statements
is unaudited and includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of Delaware's financial position,
its results of operations and its cash flows. Operating results for any
particular quarter are not necessarily indicative of results for the full fiscal
year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
consolidated financial statements are as follows:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Delaware considers all highly liquid, interest-bearing instruments with an
original maturity of three months or less to be cash equivalents.
Revenue Recognition
Delaware recognizes revenue upon shipment of the product. All risks and
rewards of ownership pass to the customer upon shipment. Damaged or defective
products may be returned to Delaware for replacement or credit. Delaware also
offers sales volume rebates or contractual allowance payments to customers based
on their level of sales activity or period of time customers agree to sell
Delaware's products, which aggregate period shall not exceed three years. The
effects of returns, discounts and other incentives are estimated and recorded at
the time of shipment. Volume rebates and allowances are estimated and recorded
based on sales activity or period of time customers agree to sell Delaware's
products.
Concentration of Credit Risk
Delaware sells its products into various wholesale and retail channels,
primarily for the commercial office products marketplace. Management believes
its credit policies are prudent and reflect normal industry terms and business
risks. Delaware performs periodic credit evaluations of its customers and does
not require collateral. Historically, Delaware has not experienced significant
losses related to individual customers or groups of customers in any particular
industry or geographic area. An allowance is maintained at a level that
management believes is sufficient to cover potential credit losses including
potential losses on receivables sold.
Inventories
Inventories, which consist primarily of paper and converted paper products,
are stated at the lower of cost or market. Cost is determined by the last-in,
first-out (LIFO) method. Costs include material, labor and overhead.
66
<PAGE> 59
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the individual
assets. Significant repairs or betterments, which extend the useful life of an
asset, are capitalized and depreciated over the asset's remaining useful life.
Goodwill and Intangible Assets
Goodwill represents the cost in excess of fair value of the net assets of
companies acquired in purchase transactions. Goodwill is amortized using the
straight-line method over periods ranging from 20 to 40 years. Intangible assets
represent trade names acquired in the WR and Shade/Allied acquisitions and are
amortized using the straight-line method. Trade names in the aggregate gross
amount of $31,700 and $6,200 for WR and $5,610 for Shade/Allied, are amortized
over 40, 15 and 40 years, respectively. Amortization expense was $879 in 1995,
$4,488 in 1996 and $6,110 in 1997.
Long-Lived Assets
It is Delaware's policy to periodically review the net realizable value of
its long-lived assets, including goodwill and intangible assets, through an
assessment of the estimated future cash flows related to such assets. In the
event that assets are found to be carried at amounts which are in excess of
estimated gross future cash flows, then the assets will be adjusted for
impairment to a level commensurate with a discounted cash flow analysis of the
underlying assets. Based upon its most recent analysis, Delaware does not
believe an impairment of long-lived assets exists at December 31, 1997.
Debt Issuance Costs
Costs associated with debt issuances are capitalized and amortized to
interest expense using the effective interest method over the terms of the
related debt agreements.
Income Taxes
Delaware accounts for income taxes following the liability method, which
prescribes an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the future tax consequences of events
that have been recognized in Delaware's financial statements or tax returns.
Deferred tax assets are recognized, net of any valuation allowance, for
deductible temporary differences and tax operating loss and credit
carryforwards. Deferred tax expense represents the change in the deferred tax
asset or liability balances. Delaware periodically reviews the realizability of
its deferred tax assets and, as needed, records valuation allowances when
realizability of the deferred tax asset is not likely.
Derivatives
Premiums paid for interest rate cap agreements are amortized as interest
expense over the term of the agreement. Amounts receivable under the interest
rate cap agreement are recorded as a reduction of interest expense.
Fair Value of Financial Instruments
Carrying values of cash, accounts receivable, accounts payable and accrued
expenses approximate fair value due to the short-term maturities of these assets
and liabilities. The carrying value of senior bank debt bearing interest at
floating rates approximates fair value. The carrying value at December 31, 1997
of the Notes of $130,000 compares to the Notes' fair value of $140,400 based on
quoted market rates, as determined at the end of 1997.
67
<PAGE> 60
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share
Earnings per share are not presented because Delaware's common stock is not
publicly traded.
Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements,
none of which have an effect on net income (loss), have been reclassified to
conform to the presentation in the 1997 consolidated financial statements.
3. ACQUISITIONS
Shade/Allied, Inc.
Effective February 11, 1997, Delaware acquired all of the outstanding
common and preferred stock of Shade/Allied, Inc., ("Shade/Allied"). This
acquisition was accounted for under the purchase method of accounting.
Accordingly, the aggregate acquisition cost was allocated to the net assets
acquired based on the fair value of such net assets. The aggregate acquisition
costs totaled $50,677, consisting of cash of $49,486 and direct acquisition
costs of $1,191. Delaware financed this acquisition with proceeds from
Delaware's bank credit agreement. The aggregate acquisition costs have been
allocated to the assets acquired and liabilities assumed as follows: accounts
receivable of $4,585; inventory of $5,760; prepaid and other assets of $129;
property and equipment of $14,444; identifiable intangible assets of $5,610;
other long term assets of $725; accounts payable of $6,871; accrued liabilities
of $7,164; income taxes payable of $215; deferred income tax payable of $6,676;
and pension liability of $1,051. The aggregate acquisition costs exceeded fair
market value of net assets acquired by $41,401. Accordingly, goodwill was
recorded and is being amortized over 40 years. The operating results of the
acquisition have been included in the accompanying consolidated financial
statements since the date of acquisition.
Niagara Envelope Company, Inc.
Effective June 28, 1996, Delaware acquired the stock of Niagara Envelope
Company, Inc. ("Niagara"). This acquisition was accounted for under the purchase
method of accounting. Accordingly, the aggregate acquisition cost was allocated
to the net assets acquired based on the fair value of such net assets. The
aggregate acquisition costs totaled $48,202 and consisted of cash of $45,175 and
direct acquisition costs of $3,027. Additionally, Delaware paid $5,000 at
closing under a one-year consulting service agreement. Delaware principally
financed the acquisition through proceeds from the sale of the Personalizing
division described below. The aggregate acquisition costs have been allocated to
the assets acquired and liabilities assumed as follows: cash of $238; accounts
receivable of $10,946; inventories of $11,878; prepaid and other assets of
$1,572; management services agreement of $5,000; property and equipment of
$26,824; deferred income tax liability of $2,227; accounts payable of $6,064;
accrued expenses of $10,464; other noncurrent liabilities of $381; and assumed
debt of $3,900. The aggregate acquisition costs exceeded fair market value of
the net assets acquired by $19,780. Accordingly, goodwill was recorded and is
being amortized over 40 years. The operating results of this acquisition have
been included in the accompanying consolidated financial statements since the
date of acquisition. In both 1996 and 1997, Delaware recorded $2,500 as
management fees and services for the amortization of the consulting service
agreement.
WR Acquisition, Inc./Williamhouse-Regency
The Company acquired WR Acquisition, Inc. and its wholly owned subsidiary
Williamhouse-Regency of Delaware, Inc. through a merger transaction effective
October 31, 1995. The transaction was accounted for under the purchase method of
accounting. Accordingly, the aggregate acquisition cost was allocated to the net
assets acquired based on the fair market value of such net assets. The aggregate
acquisition cost totaled
68
<PAGE> 61
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$147,853 and consisted of cash of $140,000 and direct acquisition costs of
$7,853. The acquisition was entirely financed through the Company's bank credit
agreement and an off-balance sheet accounts receivable facility. The aggregate
acquisition costs have been allocated to the assets acquired and liabilities
assumed as follows: accounts receivable of $39,174; inventories of $49,496;
prepaid expenses and other assets of $8,699; net assets held for sale of
$41,179; property and equipment of $81,682; identifiable intangible assets of
$37,900; deferred income tax liability of $24,340; accounts payable of $17,518;
accrued expenses of $40,518; noncurrent liabilities of $2,019 and assumed debt
of $152,905. The aggregate acquisition costs exceeded fair market value of the
net assets acquired by $127,023. Accordingly, goodwill was recorded and is being
amortized over 40 years. The operating results of Delaware have been included in
the accompanying consolidated financial statements since the date of
acquisition. The businesses acquired included the Williamhouse division, a
manufacturer of a wide range of mill branded, specialty and commodity envelopes;
and the Personalizing division, which provides custom imprinting services.
The Personalizing stationery and invitations division acquired in the
acquisition was identified by management at the date of acquisition as a
nonstrategic asset held for sale. The purchase price allocated to the net assets
acquired included the expected proceeds from sale plus the net cash flows
expected to be generated from the Personalizing division from the date of
acquisition through the expected date of sale (the holding period), offset by
interest expense incurred during the holding period on debt incurred to finance
the purchase of the Personalizing division. On June 27, 1996, the Personalizing
division was sold for net proceeds of $47,890. The net proceeds from the sale
exceeded the carrying amount of the asset held for sale by $1,599. As such, the
preliminary purchase price allocation was adjusted resulting in a $959 addition
to goodwill. During the six month period ended June 30, 1996, the Personalizing
division had operating income of $2,369 and interest carrying costs of $1,884,
which have been excluded from the condensed consolidated statement of operations
and included as adjustments to the carrying amount of the net assets held for
sale through the date of sale.
Globe-Weis
Effective August 16, 1995, Delaware acquired the inventories and certain
equipment of the file folder and hanging file folder product lines of
Globe-Weis's ("Globe") office products division from Globe's parent. For
financial reporting purposes, this acquisition was accounted for under the
purchase method of accounting. Accordingly, the aggregate acquisition cost was
allocated to the net assets acquired based on the fair value of such net assets.
The aggregate acquisition costs totaled $19,958 and consisted of cash and seller
issued notes of $17,869 and direct acquisition and financing costs of $2,089.
Delaware principally financed the acquisition through its financing arrangement
with a commercial lender and notes issued to the seller. The allocation of the
aggregate acquisition costs was as follows: inventories of $11,546, equipment of
$6,747, and debt issuance costs of $1,665. The operating results of this
acquisition have been included in the accompanying consolidated financial
statements since the date of acquisition.
Strategic Assimilation of Acquisitions
Certain costs are expected to be incurred in connection with Delaware's
separate strategic plans to integrate and consolidate certain plant,
administrative, sales and corporate functions of Williamhouse, Niagara and
Shade/Allied and the associated net reduction of approximately 500 employees.
Such costs, aggregating $27,500, include lease termination expenses, severance
and contractual change of control benefits, the liabilities that were included
in the purchase price allocation within accrued expenses. The remaining $8,534
in accrued acquisition integration costs is intended to cover the costs of
closing and integrating six manufacturing facilities and one distribution
facility which are expected to be completed during the next two to three years.
69
<PAGE> 62
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma Results of Operations
The following summary for the year ended December 31, 1996 presents the
results of operations on a pro forma basis, as if the Niagara and Shade/Allied
acquisitions had occurred as of January 1, 1996 (with appropriate adjustments
for amortization of intangible assets, interest expense, elimination of
duplicate selling and administrative expenses and the related income tax
effects). The summary for the year ended December 31, 1995 presents the results
of operations as if the Niagara, WR and Globe acquisitions had occurred as of
January 1, 1995 (with appropriate adjustments for amortization of intangible
assets, interest expense, elimination of duplicate selling and administrative
expenses and the related income tax effects). As Shade/Allied was acquired
effective February 11, 1997, the pro forma results for the year ended December
31, 1997 are not materially different from the actual results and therefore are
not reported here. The pro forma operating results are for illustrative purposes
only and do not purport to be indicative of the actual results which would have
occurred had the transaction been consummated as of those earlier dates, nor are
they indicative of results of operations which may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Net sales................................................... $617,869 $730,801
======== ========
Income before income taxes.................................. $ 5,758 $ 41,257
======== ========
Net income.................................................. $ 3,678 $ 23,434
======== ========
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Accounts receivable -- trade................................ $56,431 $72,975
Accounts receivable -- other................................ 2,839 4,022
Less allowance for doubtful accounts and reserves for
customer deductions, returns and cash discounts........... (2,216) (2,794)
------- -------
$57,054 $74,203
======= =======
</TABLE>
Delaware originally sold an undivided ownership interest in a revolving
pool of trade accounts receivable for $45,000 in October 1995. On May 24, 1996,
Delaware entered into a new $60,000 accounts receivable facility with similar
terms. At December 31, 1996 and 1997, $54,000 and $60,000 of accounts receivable
were sold respectively under this facility. The accompanying balance sheets
exclude the sold accounts receivable. The full amount of the allowance for
doubtful accounts has been retained because Delaware has retained substantially
the same risk of credit loss as if the receivables had not been sold through the
recourse provision of the receivable sale agreement. Under the agreement, the
maximum amount of the purchaser's investment is subject to change based on the
level of eligible receivables and restrictions on concentrations of receivables.
The total cost of the program was $423 in 1995, $1,823 in 1996 and $2,954 in
1997. The agreement expires in 2000.
Bad debt expense for 1995, 1996 and 1997 was immaterial.
70
<PAGE> 63
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Raw material and semi-finished goods........................ $ 41,505 $ 54,285
Work in process............................................. 4,695 5,600
Finished goods.............................................. 58,607 100,480
-------- --------
104,807 160,365
LIFO reserve................................................ 860 (6,006)
-------- --------
$105,667 $154,359
======== ========
</TABLE>
In connection with the WR, Niagara, and Shade/Allied acquisitions, total
inventories for financial accounting purposes were written up by $15,845 to fair
market value including reversal of $7,339 related to historical LIFO reserves.
Since Delaware is on the LIFO method of accounting, such write-up formed the
historical base year cost for the acquired inventories and will not impact the
statement of operations unless a decrement of base inventory quantities occurs.
There were no liquidations of LIFO inventories in 1997. Liquidation of LIFO
layers in 1995 and 1996 was not material.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES IN --------------------
YEARS 1996 1997
--------------- -------- --------
<S> <C> <C> <C>
Land............................................. $ 6,749 $ 6,768
Buildings........................................ 40 30,532 30,697
Machinery and equipment.......................... 3-12 96,790 116,005
Office furniture and fixtures.................... 3-7 8,263 9,431
Construction in progress......................... 5,060 15,322
-------- --------
147,394 178,223
Less accumulated depreciation and
amortization................................ 14,304 26,833
-------- --------
$133,090 $151,390
======== ========
</TABLE>
In connection with the WR, Niagara, and Shade/Allied acquisitions, acquired
property, plant and equipment was appraised at $45,647 in excess of (less than)
historical book value including $1,298, $(541) and $32,903 allocated to land,
buildings and machinery and equipment in 1995, respectively, $(1,328) and $6,684
allocated to buildings and machinery and equipment in 1996, respectively, and
$(34), $(3,146), and $9,811 allocated to land, buildings, and machinery and
equipment in 1997, respectively.
71
<PAGE> 64
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Goodwill.................................................... $146,006 $189,861
Intangible assets, principally tradenames................... 38,233 44,284
Debt issuance costs......................................... 18,369 18,369
-------- --------
202,608 252,514
Less accumulated amortization............................... 10,177 18,816
-------- --------
$192,431 $233,698
======== ========
</TABLE>
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Acquisition integration costs............................... $12,695 $ 8,534
Sales volume discounts...................................... 20,184 11,634
Salaries, wages and benefits................................ 8,738 4,242
Interest.................................................... 4,171 5,927
Other....................................................... 9,253 9,820
------- -------
$55,041 $40,157
======= =======
</TABLE>
9. BORROWINGS
Long-term debt of Delaware, which was incurred entirely by Delaware,
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Senior bank debt............................................ $129,000 $259,400
13% Senior Subordinated Notes due 2005...................... 130,000 130,000
Industrial revenue bonds.................................... 10,140 8,340
Capitalized lease obligations............................... 2,843 2,375
-------- --------
271,983 400,115
Less current portion........................................ 2,171 1,538
-------- --------
$269,812 $398,577
======== ========
</TABLE>
Future maturities of long-term debt at December 31, 1997 are $1,538 in
1998, $10,423 in 1999, $51,034 in 2000, $200,993 in 2001, $965 in 2002, and
$135,162 thereafter.
Senior Bank Debt
Contemporaneously with the Company's initial public offering of common
stock, Delaware refinanced and retired all remaining indebtedness under the old
bank credit agreement and entered into a new bank credit agreement. The new bank
credit agreement, as amended, is a revolving credit facility with a maximum
availability of $330,000 with the following principal terms. Loans are made
directly to Delaware and are guaranteed by the Company and each of its
subsidiaries, other than Notepad. Loans made under the new bank
72
<PAGE> 65
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit agreement bear interest at a rate per annum, equal to, at Delaware's
option, the base rate, plus an applicable margin, or a Eurodollar rate plus an
applicable margin, as such terms are defined in the agreement and amendments.
The applicable margin for base rate loans varies from .5% to 1.5% and the
applicable margin for Eurodollar rate loans varies from 1.5% to 2.5%, each based
on Delaware's leverage ratio and the type of loan. Availability under the new
bank credit agreement is subject to an unused commitment fee, which is a
percentage of the unutilized revolving loan commitment. The percentage varies
from .3% to .5% based on Delaware's leverage ratio.
Availability under the new bank credit agreement as amended is reduced to
the extent of the net proceeds of sales of assets by Delaware, the net proceeds
of an issuance of debt by Delaware or 50% of the net proceeds of an issuance of
equity by the Company or Delaware. Availability will be reduced by $80,000 in
1999 and $50,000 in 2000. The new bank credit agreement terminates in 2001.
The new bank credit agreement and amendments require Delaware to meet
certain financial tests, including minimum levels of EBITDA (earnings before
interest, taxes, depreciation, amortization and noncash charges, as defined in
the agreement), minimum interest coverage and maximum leverage ratio. The
agreement also contains covenants, which, among other things, limit the
incurrence of additional indebtedness, transactions with affiliates, asset
sales, acquisitions, mergers, and other matters customarily restricted in such
agreements. In addition no dividends may be paid prior to March 31, 1999,
Delaware will not incur capital expenditures during 1998 in excess of $15,000
and future acquisitions require the written consent of the banks. The new bank
credit agreement contains customary events of default, including payment
defaults, breach of representations and warranties, covenant defaults,
cross-defaults to certain other indebtedness, certain events of bankruptcy and
insolvency, ERISA, judgment defaults, failure of any guaranty or security
agreement supporting the bank credit agreement to be in full force and effect,
and change of control.
The new bank credit agreement requires Delaware to continue its interest
rate cap covering a portion of the outstanding balance under the old bank credit
agreement. In January 1996, Delaware entered into a four-year agreement that
entitles Delaware to receive from the counterpart on a quarterly basis the
amount, if any, by which LIBOR exceeds 6.5% for the first two years of the
agreement and 7.5% for the last two years on a notional principal amount of
$100,000. The counterpart to this agreement is a large financial institution.
The new bank credit agreement is guaranteed by the Company and all its
subsidiaries, except for Notepad, and is secured by substantially all the assets
of Delaware and a pledge of all capital stock of Delaware and its subsidiaries.
Senior Subordinated Notes
Delaware issued $200,000 of 13% Senior Subordinated Notes ("Notes") through
a private placement in December 1995. In June 1996, Delaware completed an
exchange of the privately held notes for publicly held notes with substantially
identical terms. The Notes are unsecured and subordinated to all senior bank
debt. Interest is payable semi-annually on May 15 and November 15. The Notes are
redeemable on and after November 15, 2000, at Delaware's option, at redemption
prices ranging from 106.5% of the face value of the notes in 2000 to 100% of the
face value of the notes in 2003 or thereafter. Additionally, at any time on or
prior to November 15, 1998, Delaware may, at its option, use the proceeds of
public equity offerings of the Company or Delaware to redeem up to 35% of the
Notes at redemption prices ranging from 111% to 113% of the face value of the
Notes. Subsequent to the Company's initial public offering of common stock in
July 1996, Delaware repaid $70,000 of the Notes.
The Notes are fully and unconditionally guaranteed by all subsidiaries of
Delaware, except for Notepad, on a joint, several and senior subordinated basis,
however, no guarantee from the Company exists. The Notes contain restrictive
covenants which, among other things, limit dividends, repurchase of capital
stock and
73
<PAGE> 66
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investments, incurrence of additional indebtedness, transactions with affiliates
and other matters customarily restricted in such agreements.
On December 1, 1995, $200,000 of proceeds were received from the Notes and
were used to repurchase $100,000 of publicly-held notes of Williamhouse-Regency
assumed in the WR Acquisition and redeem preferred stock, preferred stock
equivalents, and Class P common stock in the aggregate amount of $75,000.
Other
At December 31, 1997, Delaware had outstanding various industrial revenue
bonds in the aggregate amount of $8,340. The industrial revenue bonds bear
interest at rates ranging from 3.2% to 4.8%. Aggregate annual principal payments
ranging from $345 to $1,175 are due through 2010. Delaware guarantees payment of
principal and interest on the industrial revenue bonds. Letters of credit secure
the industrial revenue bonds.
At December 31, 1996 and 1997, letters of credit in the aggregate amount of
$15,826 and $12,996, respectively, were outstanding.
Delaware incurred fees related to financing transactions of approximately
$8,620 in 1996 which have been deferred and are being amortized using the
effective interest method over the respective lives of the agreements.
An extraordinary after-tax loss on extinguishment of debt of $19,995
($33,004 pre-tax) is reflected in the consolidated statement of operations for
the year ended December 31, 1996 as a result of $7,700 of prepayment penalties
associated with the repayment of $70,000 of Notes and the write off of $25,304
of unamortized deferred financing costs in connection with such Notes and with
the Company's old bank credit agreement. An extraordinary after-tax loss on
extinguishment of debt of $9,652 ($16,086 pretax) is reflected in the
consolidated statement of operations for the year ended December 31, 1995 as a
result of $10,812 of prepayment penalties associated with the repurchase of
Williamhouse-Regency's $100,000 of notes and Ampad's bank debt and the write-off
of $5,274 of unamortized deferred financing costs in connection with
Williamhouse-Regency's notes redemption and Ampad's debt refinancings.
10. STOCKHOLDER'S EQUITY, CAPITAL CONTRIBUTION AND NONRECURRING COMPENSATION
CHARGE
Effective July 2, 1996, the Company sold 12,500 shares of common stock in
an initial public offering. The net proceeds to the Company from the offering,
which were received on July 8, 1996 and contributed to Delaware, amounted to
$172,801 after deducting underwriting discounts, legal and accounting fees,
registration and travel expenses. Delaware used proceeds from the initial public
offering and working capital to: (i) repay $95,800 on the indebtedness incurred
under the old bank credit agreement, (ii) redeem $70,000 principal amount of the
13% Notes from the holders thereof on a pro rata basis, and (iii) pay $7,700 in
redemption premium on such Notes.
At January 1, 1995, the Company issued preferred stock options to
management and such issuance was considered additional consideration to the
option holders, which was directly related to the WR acquisition. Delaware
recorded a nonrecurring, noncash compensation charge equal to the excess of fair
market value over the exercise price of the preferred stock options of $24,265
with a corresponding credit being recorded to additional paid-in capital.
Additionally, options for 66 shares of common stock of the Company and 105
shares of preferred stock of the Company were granted to certain members of
management in December 1995. The exercise prices of each common share and each
preferred share were below the fair market value of the respective classes of
stock at date of grant, resulting in a noncash compensation charge equal to the
aggregate excess of fair market value over the exercise price, or $1,733, with a
corresponding credit being recorded to additional paid-in capital.
74
<PAGE> 67
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Delaware awarded additional compensation to executives and nonexecutives of
$1,634 in 1995 in recognition of the significant transactions consummated during
the year. Delaware does not expect this additional compensation to be awarded in
future years.
11. PENSION PLAN AND 401(K) PLAN
Delaware is a sponsor of two qualified defined benefit pension plans and a
supplemental non-qualified benefit pension plan, which were assumed as part of
its acquisitions. Delaware's liabilities under such plans are included in other
liabilities in the consolidated balance sheet.
Delaware maintains retirement plans (401(k) plans) for the benefit of all
employees who meet minimum age and service requirements. Delaware contributions
to the plans may be made at the discretion of the board of directors.
Contributions to the plans were approximately $568, $1,239, and $1,225 for the
years ended December 31, 1995, 1996 and 1997, respectively.
12. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- ----
<S> <C> <C> <C>
Current
Federal.............................................. $ -- $ -- $ --
State................................................ 169 491 --
-------- -------- ----
169 491 --
Deferred provision (benefit)........................... (6,707) 13,361 642
-------- -------- ----
Provision (benefit) for income taxes before
extraordinary item................................... (6,538) 13,852 642
Deferred benefit relating to extraordinary item........ (6,434) (13,009) --
-------- -------- ----
Provision (benefit) for income taxes................... $(12,972) $ 843 $642
======== ======== ====
</TABLE>
Delaware is included in AP&P's consolidated income tax return and records
income taxes as if it were a separate reporting company.
Reconciliation between the statutory U.S. federal income tax (benefit) rate
and Delaware's effective income tax (benefit) rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------ ----- ------
<S> <C> <C> <C>
Federal income tax rate................................. (35.0)% 35.0% (35.0)%
Adjustment to valuation allowance....................... (15.3) -- --
Goodwill and intangible amortization.................... .2 3.3 45.2
State taxes, net........................................ (5.0) 4.9 2.1
Other, net.............................................. (1.4) -- 4.4
------ ----- ------
Effective tax rate...................................... (56.5)% 43.2% 16.7%
====== ===== ======
</TABLE>
For the year ended December 31, 1996, Delaware's statutory income tax
benefit rate of 35.0% differed from Delaware's effective income tax rate,
including extraordinary item, of 89.8% due to the following reasons: goodwill
and intangible asset amortization accounted for 113.6%; other nondeductible
expenses accounted for 11.8%; state income taxes accounted for (5.0)% and other
items accounted for 4.4%. For the year ended
75
<PAGE> 68
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, the statutory income tax benefit rate of 35.0% differed from
Delaware's effective income tax benefit rate, including extraordinary item, of
46.9% due to the following reasons: state income taxes accounted for (5.0)%;
release of a deferred tax asset valuation allowance accounted for (6.4)% and
other items accounted for (0.5)%.
Temporary tax differences affected and categorized by financial statement
line item are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accrued expenses............................................ $ 9,066 $ 4,896
Accounts receivable and allowances.......................... 361 6
Inventory valuation......................................... (7,763) (6,687)
Net operating losses and tax credits........................ 9,090 13,777
-------- --------
Current deferred tax asset, net............................. $ 10,754 $ 11,992
======== ========
Noncurrent deferred tax assets (liabilities):
Tradenames and intangibles.................................. $(14,609) $(16,347)
Property and equipment, net................................. (24,405) (30,780)
Noncash compensation expense credited to paid-in-capital.... 6,776 --
Other accrued liabilities................................... 1,257 7,650
-------- --------
Noncurrent deferred tax liability, net...................... $(30,981) $(39,477)
======== ========
</TABLE>
The effect on the income tax provision related to the valuation allowance
was a benefit of $1,769 for the year ended December 31, 1995. Deferred tax
assets valuation allowances recorded in prior years were reversed in 1995 as a
result of management's assessment of future realizability of deferred tax
assets.
At December 31, 1997, Delaware had net operating losses available to reduce
future taxable income of approximately $30,900. These net operating losses
expire in the years 2007 through 2012. If certain substantial changes in
Delaware's ownership should occur, there would be an annual limitation on the
amount of the carryforwards that can be utilized. In addition, Delaware has
approximately $1,406 of alternative minimum tax credit carried forward. The
acquisition of WR resulted in a change in control of WR. Consequently the
utilization of these credits in future periods are subject to limitation.
13. COMMITMENTS AND CONTINGENCIES
Commitments
Delaware is obligated under noncancelable operating leases for office space
and machinery and equipment, which expire at various times through 1998. Annual
minimum lease commitments under these leases amount to $5,702 in 1998, $4,799 in
1999, $3,855 in 2000, $3,228 in 2001, $2,911 in 2002 and $25,853 thereafter for
an aggregate of $46,719.
Total rent expense was approximately $1,888, $3,551, $6,572 for 1995, 1996
and 1997 respectively.
Litigation
On March 10, 1998, the Company, certain of its officers and directors,
certain former controlling stockholders and certain investment banking firms
that participated in the Company's IPO were named in a civil action filed in the
United States District Court in the Northern District of Texas, Dallas Division.
The complaint, a purported class action on behalf of purchasers of the Company's
common stock between July 2, 1996 and December 17, 1997, alleges violation of
the federal securities laws for failure to disclose certain facts about the
Company's operations in connection with the Company's IPO and in certain
periodic reports. The
76
<PAGE> 69
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
complaint seeks unspecified damages and any other relief permitted by law. The
Company believes that the allegations in the complaint are without merit, and
the Company intends to rigorously defend itself.
There are various other outstanding claims against Delaware arising in the
normal course of business. Delaware believes that the claims are without merit
and that any losses which might ultimately be sustained by Delaware would not be
material to the financial position, results of operations, or cash flows of
Delaware.
Environmental Matters
Delaware is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and regulations
impose limitations on the discharge of pollutants and establish standards for
management of waste. While there can be no assurance that Delaware is at all
times in complete compliance with all such requirements, Delaware has made and
will continue to make capital and other expenditures to comply with such
requirements.
Delaware had been named a potentially responsible party under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, at five waste disposal sites. Delaware settled its liability at four of
these sites as a de minimis party. Delaware expects to be eligible for a de
minimis settlement at the remaining site.
14. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1995, 1996 and 1997, Delaware expensed
$542, $1,380 and $2,371, respectively, for management and directors' fees and
out of pocket expenses to the principal shareholders (Bain Capital). Unpaid fees
of $500 and $553 are included in accrued expenses in the consolidated balance
sheets at December 31, 1996 and 1997 respectively. In June 1996, the Company and
Delaware revised their management services agreement with Bain Capital, pursuant
to which, for four years, Delaware will pay Bain Capital an aggregate annual fee
of no less than $2,000 plus a fee of 1% for completed acquisition transactions.
In 1996, Delaware paid Bain Capital $3,000 in fees in connection with the
new bank credit agreement, which were included in debt issuance costs paid, $550
and $750, respectively, in fees in connection with the acquisition of Niagara
and Shade/Allied, which were included as part of the purchase price, and $2,091
in connection with the Company's initial public offering of common stock. In
1995, Delaware paid $7,000 to Bain Capital for services relating to the WR
acquisition and the related financing of the transaction. Of this amount, $4,300
was included in deferred financing fees and $2,700 was a direct acquisition
expense allocated to the net assets acquired. The Company also paid $450 to Bain
Capital relating to the Globe-Weis acquisition, which was included in deferred
financing fees.
The Company had an outstanding note receivable of $324 and $270 at December
31, 1996 and 1997, respectively. from its executive vice president which is due
in 2000.
On January 9, 1998, the Company's Interim Chief Financial Officer, who is
also a director, exercised stock options to purchase 288 shares for $10. In
December 1997, the Company's Board of Directors approved a loan for up to $1.0
million for the same individual due in three years at a rate of approximately
6.25%, fully secured by the 288 shares of common stock. This individual intends
to draw on this note by the end of March 1998. In January 1998, the Company's
Board of Directors approved an extension of 18 months to exercise 299 common
stock options after this individual is no longer a director for the Company.
15. OTHER INFORMATION
Substantially all of Delaware's operations are conducted within the United
States.
Two customers accounted for 27% of Delaware's net sales for 1995 and one
customer accounted for 11% and 12% of the Company's net sales in 1996 and 1997,
respectively.
77
<PAGE> 70
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY RESULTS OF OPERATIONS
Delaware's historical unaudited quarterly results of operations for each of
the years ended December 31, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 -- QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales......................... $120,108 $114,099 $173,606 $176,046
Gross profit...................... 23,528 24,931 36,037 40,914
Net income before extraordinary
item............................ 133 691 6,925 10,465
Net income (loss)................. 133 (609) (11,770) 10,465
</TABLE>
<TABLE>
<CAPTION>
1997 -- QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30(1) DECEMBER 31
-------- -------- --------------- -----------
<S> <C> <C> <C> <C>
Net sales......................... $149,834 $167,160 $176,462 $193,879
Gross profit...................... 30,999 32,821 26,824 6,303
Net income (loss)................. 3,988 4,708 951 (14,138)
</TABLE>
- ---------------
(1) Quarterly data reflects restatement from data previously filed on Form 10-Q
for the quarter ended September 30, 1997. Delaware previously reported net
income of $1,647 for the third quarter ended September 30, 1997. The results
presented above for the third quarter reflect certain adjustments which
should have been reported in the earnings for that quarter.
17. CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARY
The 13% senior subordinated notes are guaranteed by Shade/Allied, Inc., a
wholly owned subsidiary of Delaware. The subsidiary guaranty is full,
unconditional and joint and several. Delaware is not a guarantor of the senior
subordinated notes. Separate financial statements of the guarantor subsidiary
are not presented because management has determined that they would not be
material to investors. However, condensed consolidating financial information as
of December 31, 1997 and for the year then ended is presented. Shade/Allied was
acquired by Delaware on February 11, 1997 and, as a result, the year ended
December 31, 1997 is the first period in which Delaware's historical results
include the results of operations of Shade/Allied
78
<PAGE> 71
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and is the first period where Shade/Allied was a guarantor subsidiary. The
condensed consolidating financial information is as follows:
CONDENSED CONSOLIDATING BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
DELAWARE SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
--------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash......................... $ 4,853 $ 2 $ -- $ -- $ 4,855
Accounts receivable.......... 8,812 434 64,957 -- 74,203
Intercompany receivable
(payable)................. 40,054 (13,468) (26,586) -- --
Inventories.................. 146,006 8,353 -- -- 154,359
Prepaid expenses and other
current assets............ 1,351 32 19 -- 1,402
Income taxes -- deferred and
receivable................ 16,051 -- -- -- 16,051
--------- -------- -------- -------- ---------
Total current
assets............. 217,127 (4,647) 38,390 -- 250,870
Property, plant and
equipment.................... 137,798 13,592 -- -- 151,390
Investment in subsidiaries..... 88,862 -- -- (88,862) --
Intangible assets.............. 187,415 45,933 350 -- 233,698
Other.......................... 2,443 -- -- -- 2,443
--------- -------- -------- -------- ---------
Total assets......... $ 633,645 $ 54,878 $ 38,740 $(88,862) $ 638,401
========= ======== ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt...................... $ 1,538 $ -- $ -- $ -- $ 1,538
Accounts payable............. 53,512 2,844 -- -- 56,356
Accrued expenses............. 38,245 1,478 434 -- 40,157
Income taxes payable......... -- -- -- -- --
--------- -------- -------- -------- ---------
Total current
liabilities........ 93,295 4,322 434 -- 98,051
Long-term debt................. 398,577 -- -- -- 398,577
Deferred income taxes.......... 39,477 -- -- -- 39,477
Other liabilities.............. 1,630 -- -- -- 1,630
--------- -------- -------- -------- ---------
Total liabilities.... 532,979 4,322 434 -- 537,735
--------- -------- -------- -------- ---------
Stockholders' equity:
Common stock................. -- 30 10 (40) --
Additional paid-in capital... 202,357 50,648 35,399 (86,047) 202,357
Retained earnings
(accumulated deficit)..... (101,691) (122) 2,897 (2,775) (101,691)
--------- -------- -------- -------- ---------
Total stockholders'
equity............. 100,666 50,556 38,306 (88,862) 100,666
--------- -------- -------- -------- ---------
Total liabilities and
stockholders'
equity............. $ 633,645 $ 54,878 $ 38,740 $(88,862) $ 638,401
========= ======== ======== ======== =========
</TABLE>
79
<PAGE> 72
AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
DELAWARE SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales........................... $659,033 $64,777 $ -- $(36,475) $687,335
Cost of sales....................... 565,451 61,412 -- (36,475) 590,388
-------- ------- ------- -------- --------
Gross profit...................... 93,582 3,365 -- -- 96,947
Operating expenses:
Selling and marketing............. 20,800 1,105 -- -- 21,905
General and administrative........ 26,750 752 -- -- 27,502
Loss on sale of accounts
receivable..................... 5,336 -- (2,382) -- 2,954
Amortization of intangible
assets......................... 5,032 1,078 -- -- 6,110
Management fees and services...... 4,871 -- -- -- 4,871
-------- ------- ------- -------- --------
Income from operations.............. 30,793 430 2,382 -- 33,605
Other income (expense)
Interest.......................... (37,723) -- (120) -- (37,843)
Other income, net................. 389 -- -- -- 389
-------- ------- ------- -------- --------
Income (loss) before income taxes... (6,541) 430 2,262 -- (3,849)
Provision for income taxes.......... (814) 552 904 -- 642
-------- ------- ------- -------- --------
Income (loss) before equity in
earnings of subsidiaries.......... (5,727) (122) 1,358 -- (4,491)
Equity in earnings of
subsidiaries...................... 1,236 -- -- (1,236) --
-------- ------- ------- -------- --------
Net income (loss)................... $ (4,491) $ (122) $ 1,358 $ (1,236) $ (4,491)
======== ======= ======= ======== ========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
DELAWARE SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities.............. $(62,493) $ 76 $ 8 $-- $(62,409)
Investing activities:
Purchase of business, including
acquisition costs.............. (50,677) -- -- -- (50,677)
Purchases of property, plant and
equipment...................... (23,019) (76) -- -- (23,095)
Proceeds from sale of assets...... 4,056 -- -- -- 4,056
-------- ----- ---- --- --------
Net cash used in investing
activities.............. (69,640) (76) -- -- (69,716)
-------- ----- ---- --- --------
Financing activities:
Proceeds from long-term debt...... 130,400 -- -- -- 130,400
Repayment of long-term debt....... (2,268) -- -- -- (2,268)
Net proceeds of new accounts
receivable financing........... 6,000 6,000
Other............................. 566 -- (8) -- 558
-------- ----- ---- --- --------
Net cash provided by (used
in) financing
activities.............. 134,698 -- (8) -- 134,690
-------- ----- ---- --- --------
Increase in cash.................... 2,565 -- -- -- 2,565
Cash, beginning of period........... 2,288 2 -- -- 2,290
-------- ----- ---- --- --------
Cash, end of period................. $ 4,853 $ 2 $ -- $-- $ 4,855
======== ===== ==== === ========
</TABLE>
80
<PAGE> 73
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 -- Stock Purchase Agreement, dated May 29, 1996, by and
among American Pad & Paper Company of Delaware, Inc.,
Niagara Envelope Company, Inc. and the person named
therein.(1)
3.1(i) -- Restated Certificate of Incorporation of the Company(3)
3.1(ii) -- Amended and Restricted By-laws of the Company.(3)
4.1 -- Indenture, dated as of December 1, 1995, among American
Pad & Paper Company of Delaware, Inc., the Subsidiary
Guarantors and the Trustee (including Form of Note).(2)
4.2 -- Purchase Agreement, dated as of November 17, 1994, among
American Pad & Paper Company of Delaware, Inc., the
Subsidiary Guarantors and the Initial Purchasers.(1)
4.3 -- Registration Rights Agreement dated as of December 1,
1995, among American Pad & Paper Company of Delaware,
Inc., the Subsidiary Guarantors and the Initial
Purchasers named therein.(1)
4.7 -- Notepad Funding Receivables Master Trust Pooling and
Servicing Agreement, dated October 31, 1995, among APPC,
Notepad Funding Corporation and Manufacturers and Traders
Trust Company (the "Pooling and Service Agreement").(1)
4.8 -- Series 1995-1 Supplement to the Pooling and Service
Agreement, dated October 31, 1995.(1)
4.9 -- Revolving Certificate Purchase Agreement, dated October
31, 1995 among APPC, Notepad Funding Corporation, Bankers
Trust Company and the Purchasers described therein.(1)
4.10 -- Receivables Purchase Agreement, dated October 31, 1995,
among APP., Notepad Funding Corporation and certain
subsidiaries.(1)
4.11 -- Credit Agreement, dated as of July 8, 1996, among the
Company, WR Acquisition, Inc., American Pad & Paper
Company of Delaware, Inc., various Lending Institutions,
Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas,
N.A., The Bank of Nova Scotia and the First National Bank
of Boston, as Co-Agents and Bankers Trust Company, as
Agent(3)
4.12 -- Security Agreement, dated as of July 8, 1996, among the
Company, WR Acquisition, Inc., American Pad & Paper
Company of Delaware, Inc., certain other subsidiaries of
American Pad & Paper Company, and Bankers Trust Company,
as Collateral Agent.(3)
4.13 -- Pledge Agreement, dated as of July 8, 1996, among the
Company, WR Acquisition, Inc., American Pad & Paper
Company of Delaware, Inc., the Lenders from time to time
party thereto, and Bankers Trust Company, as Agent.(3)
4.14 -- Form of Revolving and Swingline Note of American Pad &
Paper Company of Delaware, Inc.(3)
4.15 -- Subsidiary Guaranty, dated as of July 8, 1996, among each
of the Company's subsidiaries named therein and Bankers
Trust Company, as Agent for the Bank.(3)
4.16 -- Second Amendment to the Credit Agreement, dated as of
December 18, 1997, among the Company, WR Acquisition,
Inc., American Pad & Paper Company of Delaware, Inc.,
various Lending Institutions, Bank of Tokyo-Mitsubishi
Trust Company, Bank One, Texas, N.A., The Bank of Nova
Scotia and the First National Bank of Boston, as
Co-Agents and Bankers Trust Company, as Agent.
4.17 -- Third Amendment to the Credit Agreement, dated as of
February 11, 1998, among the Company, WR Acquisition,
Inc., American Pad & Paper Company of Delaware, Inc.,
various Lending Institutions, Bank of Tokyo-Mitsubishi
Trust Company, Bank One, Texas, N.A., The Bank of Nova
Scotia and the First National Bank of Boston, as
Co-Agents and Bankers Trust Company, as Agent.
10.1 -- Agreement and Plan of Merger, dated as of October 3,
1995, among the Company, WHR Acquisition, Inc. and WR
Acquisition, Inc.(1)
10.2 -- Amendment No. 1 to WHR Merger Agreement, dated as of
October 31, 1995, among the Company, WHR Acquisition,
Inc. and WR Acquisition, Inc.(1)
10.3 -- Stock Purchase Agreement, dated as of October 30, 1995,
among WR Acquisition, Inc. and the Company(1)
</TABLE>
81
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.4 -- Tax Sharing Agreement, dated as of October 30, 1995,
among American Pad & Paper Company of Delaware, Inc. and
the Subsidiary Guarantors.(1)
10.5 -- Agreement and Plan of Merger, dated as of October 31,
1995, among Williamhouse Regency of Delaware, Inc. and
Ampad Corporation.(1)
10.6 -- Amended and Restricted Advisory Agreement, dated as of
October 31, 1995, among American Pad & Paper Company of
Delaware, Inc. and Bain Capital, Inc.(4)
10.7 -- Ampad Holding Corporation 1992 Key Employees Stock Option
Plan.(1)
10.12 -- Asset Purchase Agreement, dated as of June 29, 1994, by
and between Huxley Envelope corp., The Kent Paper Co.,
Inc. and Williamhouse of California, Inc.(2)
10.13 -- Lease Agreement for City of Industry, California.(1)
10.14 -- Lease Agreement for Dubuque, Iowa(1)
10.15 -- Lease Agreement for Miamisburg, Ohio.(1)
10.16 -- Lease Agreement for North Salt Lake City, Utah.(1)
10.17 -- Lease Agreement for Tacoma, Washington.(1)
10.18 -- Change of Control Agreement between WR Acquisition, Inc.
and certain officers of American Pad & Paper Company of
Delaware, Inc.(1)
10.19 -- Registration Rights Agreement, dated as of July 31, 1992,
between the Company and the stockholders named
therein.(2)
10.20 -- 1996 Key Employee Stock Incentive Plan(3)
10.21 -- 1996 Non-Employee Director Stock Option Plan.(3)
10.22 -- Employment Agreement between the Company and Charles
Hanson, III.(2)(A)
10.23 -- Employment Agreement between the Company and Russell
Gard.(2)(A)
10.24 -- Amended and Restated Advisory Agreement between American
Pad & Paper Company and Bain Capital, Inc.(2)
10.25 -- Management Stock Purchase Plan .(3)
10.26 -- Employment Agreement between the Company and Timothy
Needham.(2)(A)
10.27 -- Agreement and Plan of Merger by and between Shade/Allied,
Inc. and American Pad & Paper Company of Delaware,
Inc.(6)
10.28 -- Indemnification Agreement by and between the Company and
its officers and directors(8).
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Price Waterhouse LLP.
27.1 -- Financial Data Schedule -- American Pad & Paper Company
27.2 -- Financial Data Schedule -- American Pad & Paper Company
of Delaware, Inc.
</TABLE>
- ---------------
The exhibits listed above are filed with the Securities and Exchange Commission
in this Form 10-K or are incorporated by reference as follows: (1) Same-numbered
exhibit to the Registration Statement on Form S-1 of American Pad & Paper of
Delaware, Inc. (File No. 333-3006); (2) Same-numbered exhibit to the
Registration Statement on Form S-1 of American Pad & Paper Company (File No.
333-4000); (3) Exhibits to the Quarterly Report on Form 10-Q of the registrants
for the quarter ended June 30, 1996; (4) Exhibits to the Quarterly Report on
Form 10-Q of the registrants for the quarter ended September 30, 1996; (5)
Exhibits to the Annual Report on Form 10-K of the registrants for the year ended
December 31, 1996; (6) Exhibits to the Quarterly Report on Form 10-Q of the
registrants for the quarter ended March 31, 1997; (7) Exhibits to the Quarterly
Report on Form 10-Q of the registrants for the quarter ended June 30, 1997 and
(8) Exhibits to the Quarterly Report on Form 10-Q of the registrants for the
quarter ended September 30, 1997.
(A) These agreements constitute management compensation contracts for the
individuals named.
82
<PAGE> 1
EXHIBIT 4.16
SECOND AMENDMENT
SECOND AMENDMENT (this "Amendment"), dated as of December 18,
1997, 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 (the "Credit Agreement"); and
WHEREAS, the Borrower has requested that the Banks provide the
amendment provided for herein and the Banks have agreed to provide such
amendment on the terms and conditions set forth herein;
NOW, THEREFORE, it is agreed:
1. Section 8.10 of the Credit Agreement is hereby amended by
inserting the following proviso at the end thereof:
"; provided that notwithstanding the foregoing, for the Test
Period ending December 31, 1997, the Borrower will not permit
Consolidated EBITDA to be less than $72,000,000."
2. Section 8.11 of the Credit Agreement is hereby amended by
inserting the following proviso at the end thereof:
"; provided that notwithstanding the foregoing, for the Test
Period ending December 31, 1997, the Borrower will not permit
the Interest Coverage Ratio to be less than 2.00:1.00."
<PAGE> 2
3. Section 8.12 of the Credit Agreement is hereby amended by
inserting the following proviso at the end thereof:
"; provided that notwithstanding the foregoing, for the period
from the Amendment Effective Date under and as defined in the
Second Amendment to this Agreement, dated as of December 18,
1997, to and including March 30, 1998, the Borrower will not
permit the Leverage Ratio to be more than 6.20:1.00."
4. In order to induce the Banks to enter into this Amendment,
each of Holdings, WR Acquisition and the Borrower hereby represents and warrants
that (i) no Default or Event of Default exists as of the Amendment Effective
Date (as defined below) after giving effect to this Amendment and (ii) on the
Amendment Effective Date, both before and after giving effect to this Amendment,
all representations and warranties contained in the Credit Agreement and in the
other Credit Documents are true and correct in all material respects.
5. 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.
6. 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.
7. 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.
8. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK.
* * *
-2-
<PAGE> 3
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
hereof.
AMERICAN PAD & PAPER COMPANY
By:
-----------------------------------
Title:
WR ACQUISITION, INC.
By:
-----------------------------------
Title:
AMERICAN PAD & PAPER COMPANY
OF DELAWARE, INC.
By:
-----------------------------------
Title:
BANKERS TRUST COMPANY
By:
-----------------------------------
Title:
<PAGE> 4
ABN AMRO BANK N.V.
By
-----------------------------------
Title:
BANK LEUMI TRUST CO. OF NEW YORK
By
-----------------------------------
Title:
THE BANK OF NEW YORK
By
-----------------------------------
Title:
THE BANK OF NOVA SCOTIA
By
-----------------------------------
Title:
BANK OF SCOTLAND
By
-----------------------------------
Title:
<PAGE> 5
BANK OF TOKYO - MITSUBISHI
TRUST COMPANY
By
-----------------------------------
Title:
BANK ONE, TEXAS, N.A.
By:
-----------------------------------
Title:
BANQUE PARIBAS
By
-----------------------------------
Title:
By
-----------------------------------
Title:
CHRISTIANIA BANK OG
KREDITKASSE, NEW YORK
BRANCH
By
-----------------------------------
Title:
By
-----------------------------------
Title:
CIBC INC.
<PAGE> 6
By
-----------------------------------
Title:
BANKBOSTON, N.A.
By
-----------------------------------
Title:
GUARANTY FEDERAL BANK,
F.S.B.
By
-----------------------------------
Title:
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By
-----------------------------------
Title:
THE LONG TERM CREDIT BANK
OF JAPAN, LIMITED, NEW
YORK BRANCH
By
-----------------------------------
Title:
<PAGE> 7
SANWA BUSINESS CREDIT
CORPORATION
By
-----------------------------------
Title:
SOCIETE GENERALE
By
-----------------------------------
Title:
BANK POLSKA KASA OPIEKI, S.A.
By
-----------------------------------
Title:
LEHMAN COMMERCIAL PAPER, INC.
By
-----------------------------------
Title:
<PAGE> 1
EXHIBIT 4.17
THIRD AMENDMENT
THIRD AMENDMENT (this "Amendment"), dated as of February 6,
1998, among American Pad & Paper Company ("Holdings"), WR Acquisition, Inc. ("WR
Acquisition"), American Pad & Paper Company of Delaware, Inc. (the "Borrower"),
the lending institutions party to the Credit Agreement referred to below (each a
"Bank" and, collectively, the "Banks"), Bank of Tokyo-Mitsubishi Trust Company,
Bank One Texas, N.A., The Bank of Nova Scotia and The First National Bank of
Boston, as Co-Agents (the "Co-Agents"), and Bankers Trust Company, as Agent (the
"Agent"). All capitalized terms used herein and not otherwise defined herein
shall have the respective meanings provided such terms in the Credit Agreement.
W I T N E S S E T H :
WHEREAS, Holdings, WR Acquisition, the Borrower, the Banks,
the Co-Agents and the Agent are party to a Credit Agreement, dated as of July 8,
1996 (as amended, modified and supplemented prior to the date hereof, the
"Credit Agreement"); and
WHEREAS, the Borrower has requested that the Banks provide the
amendment provided for herein and the Banks have agreed to provide such
amendment on the terms and conditions set forth herein;
NOW, THEREFORE, it is agreed:
1. (a) On the Amendment Effective Date (as hereinafter
defined), but subject to Section 1(b) of this Amendment, the Revolving Loan
Commitment of each Bank shall be modified to be the amount set forth opposite
the name of such Bank on Annex I hereto. In connection with the foregoing, on
the Amendment Effective Date, the Borrower shall, in coordination with the Agent
and the Banks, repay outstanding Revolving Loans of certain Banks and incur
additional Revolving Loans from other Banks, in each case if necessary so that
the Banks participate in each Borrowing of Revolving Loans pro rata on the basis
of their Revolving Loan Commitments (after giving effect to this Section 1(a)).
It is hereby agreed that the breakage costs incurred by the Banks in connection
with the repayment of Revolving Loans contemplated by this Section 1(a), if any,
shall be for the account of the Borrower. On the Amendment Effective Date, but
subject to Section 1(b)
<PAGE> 2
of this Amendment, Annex I to the Credit Agreement shall be deemed amended to
read as set forth in Annex I attached hereto to give effect to the foregoing.
(b) Notwithstanding anything to the contrary contained herein
or in the Credit Agreement, on January 31, 1999, the Revolving Loan Commitment
increases effected pursuant to Section 1(a) above shall terminate and,
accordingly, on such date the Revolving Loan Commitment of each Bank whose
Revolving Loan Commitment increased as a result of Section 1(a) above (each such
Bank, a "Designated Bank") (and/or its assignees, as set forth below) shall be
reduced by an amount (such amount for each Designated Bank, the "Scheduled
1/31/99 Reduction") equal to such increase (which reduction shall be in addition
to any other reductions to the Total Revolving Loan Commitment occurring after
the Amendment Effective Date and on or prior to January 31, 1999). In the event
that on or after the Amendment Effective Date and prior to January 31, 1999, any
Designated Bank effects an assignment of all or part of its Revolving Loan
Commitment, such Designated Bank shall be required to give notice thereof to the
Agent, which notice shall specify the portion (if any) of such Designated Bank's
Scheduled 1/31/99 Reduction being transferred to such assignee. After giving
effect to any such assignment, the respective assignee shall constitute a
Designated Bank to extent of the portion of the Scheduled 1/31/99 Reduction
transferred to such assignee. In connection with the foregoing, on January 31,
1999, the Borrower shall, in coordination with the Agent and the Banks, repay
outstanding Revolving Loans of certain Banks and incur additional Revolving
Loans from other Banks, in each case if necessary so that the Banks participate
in each Borrowing of Revolving Loans pro rata on the basis of their Revolving
Loan Commitments (after giving effect to the reduction to the Revolving Loan
Commitment of each Designated Bank occurring on such date pursuant to this
Section 1(b)). It is hereby agreed that the breakage costs incurred by the Banks
in connection with the repayment of Revolving Loans contemplated by this Section
1(b), if any, shall be for the account of the Borrower.
2. Notwithstanding anything to the contrary contained in the
Credit Agreement (including, without limitation, Section 8.02(q) thereof), prior
to March 31, 1999, the Borrower will not make any Permitted Acquisitions without
the prior written consent of the Required Banks.
3. Notwithstanding anything to the contrary contained in
Section 8.07(vi) of the Credit Agreement, prior to March 31, 1999, no Dividends
may be paid pursuant to Section 8.07(vi) of the Credit Agreement without the
prior written consent of the Required Banks.
4. Notwithstanding anything to the contrary contained in
Section 8.09 of the Credit Agreement, Holdings and its Subsidiaries will not
make Capital Expenditures during the fiscal year ending December 31, 1998 in
excess of $15,000,000 in the aggregate.
5. Section 8.10 of the Credit Agreement is hereby amended to
read in its entirety as follows:
<PAGE> 3
8.10 Minimum Consolidated EBITDA. The Borrower will not permit
Consolidated EBITDA (i) for the fiscal quarter ending March 31, 1998,
to be less than $13,000,000, (ii) for the two fiscal quarters ending
June 30, 1998 (taken as one accounting period), to be less than
$28,000,000, (iii) for the three fiscal quarters ending September 30,
1998 (taken as one accounting period), to be less than $48,000,000,
(iv) for the fiscal year ending December 31, 1998, to be less than
$72,000,000 and (v) for any Test Period ending on or after March 31,
1999, to be less than $75,000,000.
6. 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 (i) for the fiscal quarter ending March 31,
1998, to be less than 1.15:1.00, (ii) for the two fiscal quarters
ending June 30, 1998 (taken as one accounting period), to be less than
1.25:1.00, (iii) for the three fiscal quarters ending September 30,
1998 (taken as one accounting period), to be less than 1.40:1.00, (iv)
for the fiscal year ending December 31, 1998, to be less than 1.60:1.00
and (v) for any Test Period ending on or after March 31, 1999, to be
less than 2.50:1.00.
7. Section 8.12 of the Credit Agreement 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 on or after January 31, 1999, to be more than
4.00:1.00.
8. Notwithstanding anything to the contrary contained in the
Credit Agreement (including, without limitation, Section 8.13 thereof), prior to
March 31, 1999, Holdings will not, and will not permit any of its Subsidiaries
to, make (or give any notice in respect of) any voluntary or optional payment 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 purposes of paying when due) any Senior
Subordinated Note.
9. The following definitions 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 1.50%, less the then applicable Interest Reduction
Discount, if any.
"Applicable Eurodollar Margin" shall mean a percentage per
annum equal to 2.50%, less the then applicable Interest Reduction
Discount, if any.
-3-
<PAGE> 4
"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) or
(D) 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 Date (the "Test Date"), the applicable conditions set forth in
clause (A), (B), (C) or (D) below, as the case may be, are met:
(A) 0.25% 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
6.00:1.00 and the conditions set forth in clause (B),
(C) or (D) below, as the case may be, are not
satisfied;
(B) 0.50% 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
5.00:1.00 and the conditions set forth in clause (C)
or (D) below, as the case may be, are not satisfied;
(C) 0.75% 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
4.00:1.00 and the condition set forth in clause (D)
below is not satisfied; or
(D) 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
3.50:1.00.
Notwithstanding anything contained above in this definition,
(i) the Interest Reduction Discount shall be zero at all times prior to
the first Start Date to occur after March 31, 1998 and (ii) the
Interest Reduction Discount shall be zero at any time when an Event of
Default shall exist.
10. In order to induce the Banks to enter into this
Amendment, the Borrower hereby agrees to pay to the Agent, for the account of
each Bank whose Revolving Loan Commitment is increasing as a result of this
Amendment, the following non-refundable fees (each such fee being in addition to
and not creditable against any other fee and each such fee being due and payable
on the first Business Day following the Amendment Effective Date):
(i) a fee equal to 0.25% of such Bank's Revolving Loan Commitment
immediately prior to the Amendment Effective Date; and
-4-
<PAGE> 5
(ii) a fee equal to 1% of the amount by which such Bank's Revolving
Loan Commitment is increasing as a result of this Amendment.
11. In order to induce the Banks to enter into this Amendment,
each of Holdings, WR Acquisition and the Borrower hereby represents and warrants
that (i) no Default or Event of Default exists as of the Amendment Effective
Date (as defined below) after giving effect to this Amendment and (ii) on the
Amendment Effective Date, both before and after giving effect to this Amendment,
all representations and warranties contained in the Credit Agreement and in the
other Credit Documents are true and correct in all material respects.
12. This Amendment shall become effective on the date (the
"Amendment Effective Date") when:
(a) each of Holdings, WR Acquisition, the Borrower, the
Required Banks and each Bank whose Revolving Loan Commitment is
increasing as a result of this Amendment 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;
(b) the Borrower shall have delivered to the Agent a new
Revolving Note for each Bank whose Revolving Loan Commitment is
increasing as a result of this Amendment, reflecting its increased
Revolving Loan Commitment, which Revolving Note shall be issued in
exchange for the Revolving Note currently held by such Bank; and
(c) the Borrower shall have delivered to the Agent a certified
copy of resolutions duly adopted by the Borrower authorizing the
increase in the Total Revolving Loan Commitment contemplated by this
Amendment.
13. 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.
14. 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-
<PAGE> 6
15. 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.
* * *
-6-
<PAGE> 7
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:
-----------------------------------
Title:
WR ACQUISITION, INC.
By:
-----------------------------------
Title:
AMERICAN PAD & PAPER COMPANY
OF DELAWARE, INC.
By:
-----------------------------------
Title:
BANKERS TRUST COMPANY, individually
and as Agent
By:
-----------------------------------
Title:
<PAGE> 8
ABN AMRO BANK
By
-----------------------------------
Title:
By
-----------------------------------
Title:
BANK LEUMI TRUST CO. OF NEW YORK
By
-----------------------------------
Title:
THE BANK OF NEW YORK
By
-----------------------------------
Title:
THE BANK OF NOVA SCOTIA
By
-----------------------------------
Title:
BANK OF SCOTLAND
By
-----------------------------------
Title:
<PAGE> 9
BANK OF TOKYO - MITSUBISHI
TRUST COMPANY
By
-----------------------------------
Title:
BANK ONE, TEXAS, N.A.
By:
-----------------------------------
Title:
BANQUE PARIBAS
By
-----------------------------------
Title:
By
-----------------------------------
Title:
CHRISTIANIA BANK OG
KREDITKASSE, NEW YORK
BRANCH
By
-----------------------------------
Title:
By
-----------------------------------
Title:
<PAGE> 10
CIBC INC.
By
-----------------------------------
Title:
BANKBOSTON, N.A.
By
-----------------------------------
Title:
GUARANTY FEDERAL BANK,
F.S.B.
By
-----------------------------------
Title:
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By
-----------------------------------
Title:
THE LONG-TERM CREDIT BANK
OF JAPAN, LIMITED, NEW
YORK BRANCH
By
-----------------------------------
Title:
<PAGE> 11
SANWA BUSINESS CREDIT
CORPORATION
By
-----------------------------------
Title:
SOCIETE GENERALE
By
-----------------------------------
Title:
BANK POLSKA KASA OPIEKI, S.A.
By
-----------------------------------
Title:
LEHMAN COMMERCIAL PAPER, INC.
By
-----------------------------------
Title:
<PAGE> 12
ANNEX I
LIST OF BANKS AND COMMITMENTS
<TABLE>
<CAPTION>
Bank Revolving Loan Commitment
- ---- -------------------------
<S> <C>
ABN AMRO Bank N.V. 11,000,000
Bankers Trust Company 38,500,000
Bank Leumi Trust Co. of New York 5,500,000
The Bank of Nova Scotia 33,000,000
The Bank of New York 11,000,000
Bank One, Texas, N.A. 33,000,000
Bank Polska Kasa Opieki, S.A. 5,500,000
Bank of Scotland 16,500,000
Bank of Tokyo-Mitsubishi Trust Company 16,500,000
Banque Paribas 11,000,000
Christiania Bank OG Kreditkasse 11,000,000
CIBC, Inc. 22,000,000
BankBoston 33,000,000
Guaranty Federal Bank, F.S.B. 22,000,000
The Industrial Bank of Japan 5,500,000
The Long Term Credit Bank of Japan Limited 11,000,000
Sanwa Business Credit Corporation 16,500,000
Societe Generale 22,000,000
Lehman Commercial Paper, Inc. 5,500,000
------------
Total: $330,000,000
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANTS
(EFFECTIVE DECEMBER 31, 1997)
STATE OF
DESCRIPTION INCORPORATION
----------- -------------
Subsidiary of American Pad & Paper Company
(Registrant)
WR Acquisition, Inc. Delaware
Subsidiary of WR Acquisition, Inc. (not a Registrant)
American Pad & Paper Company of Delaware, Inc. Delaware
Subsidiaries of American Pad & Paper Company of
Delaware, Inc. Delaware
Shade/Allied, Inc. Wisconsin
Notepad Funding Corporation Delaware
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-17617) of American Pad & Paper Company of our
report dated March 16, 1998 appearing on page 34 of this Form 10-K.
PRICE WATERHOUSE LLP
Dallas, Texas
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
HISTORICAL FINANCIAL STATEMENTS OF AMERICAN PAD AND PAPER COMPANY INCLUDED IN
THE COMPANY'S 1998 FORM 10-K 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> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 638,401
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 274
<OTHER-SE> 100,392
<TOTAL-LIABILITY-AND-EQUITY> 638,401
<SALES> 0
<TOTAL-REVENUES> 687,335
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 642
<INCOME-CONTINUING> (4,491)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,491)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
HISTORICAL FINANCIAL STATEMENTS OF AMERICAN PAD AND PAPER COMPANY OF DELAWARE,
INC. INCLUDED IN THE COMPANY'S 1998 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000817647
<NAME> AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 638,401
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 100,666
<TOTAL-LIABILITY-AND-EQUITY> 638,401
<SALES> 0
<TOTAL-REVENUES> 687,335
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 642
<INCOME-CONTINUING> (4,491)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,491)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
